UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ý☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 20182022
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36568
(Exact name of registrant as specified in its charter)
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| Delaware | | 7389 | | 52-2383166 |
(State or other jurisdiction of
incorporation or organization)
| | (Primary Standard Industrial
Classification Code Number)
| | (I.R.S. Employer
Identification Number)
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15 West Scenic Pointe Drive
Suite 100
Draper, Utah 84020
(801) 727-1000
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: |
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| Title of each class | Trading symbol | Name of each exchange on which registered |
| Common stock, par value $0.0001 per share | HQY | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None.None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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): |
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| Large accelerated filer | þ☑ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ☑
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant on July 31, 2017,30, 2021, based on the closing price of $45.87$73.98 for shares of the registrant’s common stock as reported by the NASDAQ Global Select Market was approximately $2.3$6.1 billion. For purposes of determining whether a stockholder was an affiliate of the registrant at July 31, 2017,30, 2021, the registrant assumed that a stockholder was an affiliate of the registrant at July 31, 201730, 2021 if such stockholder (i) beneficially owned 10% or more of the registrant’s capital stock, as determined based on public filings, and/or (ii) was an executive officer or director, or was affiliated with an executive officer or director of the registrant, at July 31, 2017.30, 2021. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 28, 2018,March 21, 2022, there were 60,952,04283,821,764 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement related to its 20182022 annual meeting of shareholdersstockholders (the "2018"2022 Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 20182022 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
HealthEquity, Inc. and subsidiaries
Form 10-K annual report
Table of contents
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| | Page |
| | PagePart I. |
Part I. |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Part II. |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
Part III.Item 9C. | | |
| Part III. |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| Part IV. |
| Item 15. | | |
| Item 16. | | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements that involve risks and uncertainties, including in the sections entitled “Business,” “Risk factors,” and “Management’s discussion and analysis of financial condition and results of operations.” Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, goals, and expectations concerning our markets and market position, future operations, expenses and other results of operations, margins, profitability, tax rates, capital expenditures, liquidity and capital resources, and other financial and operating information. When used in this discussion, the words “may,” “believes,” “intends,” “seeks,” “anticipates,” “plans,” “estimates,” “expects,” “should,” “assumes,” “continues,” “could,” “will,” “future”“future,” and the negative of these or similar terms and phrases are intended to identify forward-looking statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to be correct. Some of these expectations may be based upon assumptions, data or judgments that prove to be incorrect. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties, and other factors. Although it is not possible to identify all of these risks and factors, they include, among others, the risks related to the following:
our ability to compete effectivelyidentified in a rapidly evolving healthcare industry;
our dependence on the continued availability and benefits of tax-advantaged health savings accounts;
the significant competition we face and may face in the future, including from those with greater resources than us;
cybersecurity breaches of our platform and other data interruptions, including resulting costs and liabilities, reputational damage and loss of business;
the current uncertain healthcare environment, including changes in healthcare programs and expenditures and related regulations;
our ability to comply with current and future privacy, healthcare, tax, investment advisor and other laws applicable to our business;
our reliance on partners and third party vendors for distribution and important services;
our ability to successfully identify, acquire and integrate additional portfolio purchases or acquisition targets;
our ability to develop and implement updated features for our platform and successfully manage our growth;
our ability to protect our brand and other intellectual property rights;
our reliance on our management team and key team members; and
other risks and factors listed under “Risk factors” and elsewhere in this report.
Item 1A. Risk Factors - Risk Factors Summary.
Unless the context otherwise indicates or requires, the terms “we,” “our,” “us,” “HealthEquity,” and the “Company,” as used in this Annual Report on Form 10-K, refer to HealthEquity, Inc. and its subsidiaries as a combined entity, except where otherwise stated or where it is clear that the terms mean only HealthEquity, Inc. exclusive of its subsidiaries.
Part I
Item 1. Business
Company overview
We are a leader and an innovator in the high growth category ofproviding technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions. Our platform provides an ecosystem whereWe use our innovative technology to manage consumers' tax-advantaged health savings accounts (“HSAs”) and other consumer-directed benefits (“CDBs”) offered by employers, including flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”), and to administer Consolidated Omnibus Budget Reconciliation Act (“COBRA”), commuter and other benefits. As part of our services, we and our subsidiaries provide consumers can access their tax-advantagedwith healthcare savings, comparebill evaluation and payment processing services, personalized benefit information, including information on treatment options and comparative pricing, evaluateaccess to remote and pay healthcare bills, receive personalized benefit and clinical information,telemedicine benefits, the ability to earn wellness incentives, and make educated investment choicesadvice to grow their tax-advantaged healthcare savings. We can integrate with any health plan or banking institution to be the independent and trusted partner that enables consumers as they seek to manage, save and spend their healthcare dollars. We believe the secular shift to greater consumer responsibility for healthcare costs will require a significant portion of consumers under the approximately 190 million under-ageage of 65 consumers with private health insurance in the United States to use a platformofferings such as ours.
The core of our ecosystemofferings is the health savings account, or HSA, a financial account through which consumers spend and save long termlong-term for healthcare expenses on a tax-advantaged basis. As of January 31, 2022, we administered 7.2 million HSAs, with balances totaling $19.6 billion, which we call HSA Assets, as well as 7.2 million complementary CDBs. We refer to the aggregate number of HSAs forand other CDBs that we administer as Total Accounts, of which we servehad 14.4 million as custodian as our HSA Members.of January 31, 2022.
We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients primarily through relationships with benefits brokers and advisors, integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners, and a sales force that calls on Clients directly. As of January 31, 2018, we2022, our platforms were the integrated HSA platform for 124 health plan and administrator partners and for employees at more than 40,000 employer clients. Our customers include individuals, employers of all sizes, health plans, and administrators. We refer to our individual customers as our members, our health plan and administrator customers as our Health Plan and Administratorwith 185 Network Partners, and our employer clients as our Employer Partners. Our Health Plan and Administrator Partners and Employer Partners collectively constitute our Network Partners. As of January 31, 2018, we had over 3.4 million HSAs on our platform. Management estimates that this represents over 7.5 million lives. During the years ended January 31, 2018, 2017 and 2016, we addedserve approximately 723,000, 703,000 and 751,000 new HSA Members, representing approximately 1.6 million, 1.5 million and 1.7 million lives, respectively.120,000 Clients.
We have developedincreased our share of the growing HSA market from 4% in December 2010 to 18% as of December 2021, measured by HSA Assets. According to Devenir, we are the largest HSA provider by accounts and second largest by assets as of December 2021. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and a differentiated focus on the consumer to facilitate the transition to a more consumer-centric approach to healthcare saving and spending.service-driven culture. Our solution is deployed as a cloud-based platform that is accessible to our customers through the Internet and on mobile devices and is hosted on private servers, whichproprietary technology allows us to scale on demand. Corehelp consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security.
Our ability to our technologyassist consumers is a configurable framework and open platform that we believe provides us greater functionality and flexibility than generic technologies usedenhanced by our legacy competitorscapacity to securely share data in both directions with others in the health, benefits, and requires less investmentretirement ecosystems. Our commuter benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and timeparking providers. These strengths reflect our “DEEP Purple” culture of remarkable service to configurecustomers and customize to our customers’ needs.
We are able to seamlessly integrate third-party applicationsteammates, achieved by driving excellence, ethics, and process into our platform, which has afforded us an advantage in an expanding consumer healthcare landscape. A growing number of companies are attempting to integrate into the consumer's daily healthcare spending experience by leveraging our platform. These companies offer functions such as price transparency, benefits enrollment, population health, wellness, analytics, health insurance and investment services, and are looking to reach the consumer at the critical "save" and "spend" moment. In an effort to capitalize on this opportunity,everything we continue to expand the number of ecosystem partners with whom our platform is integrated.do.
Our business model provides strong visibility into our future operating performance. Asperformance, with the vast majority of our accounts opened before the beginningstart of the past several fiscal years, we had approximately 90% visibility into the revenue of the subsequentour fiscal year.
We earn monthlyrevenue primarily from three sources: service, custodial, and interchange. We earn service revenue primarily through contracts with our Network Partners and our custodial agreements with individual members.mainly from fees paid by Clients on a recurring per-account per-month basis. We earn custodial revenue primarilymainly from HSA Assets held at our custodialmembers’ direction in federally insured cash assets that are deposited with our FDIC-insured custodial depository bank partnersdeposits, insurance contracts or invested in an annuity contract with our insurance company partner. In addition, we earn recordkeeping fees in respectmutual funds, and from investment of assets held with our investments partner and we earn fees for investment advisory services through our registered investment advisor subsidiary.Client-held funds. We also earn interchange revenue which is primarily interchangemainly from fees charged topaid by merchants on payments made withthat our members make using our physical payment cards viaand on our virtual payment networks. Monthly servicesystem. See “Key components of our results of operations” for additional information on our sources of revenue, custodial revenue,including the adverse impacts caused by the ongoing COVID-19 pandemic.
Recent acquisitions
WageWorks acquisition. On August 30, 2019, we completed our acquisition of WageWorks, Inc. (the "WageWorks Acquisition") and interchange revenue are recurringpaid approximately $2.0 billion in nature, providing strong visibility intocash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under our future business.prior term loan facility and approximately $816.9 million of cash on hand.
The key strategy of the WageWorks Acquisition was to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs. WageWorks’ historic strength of selling to employers directly and through health
benefits brokers and advisors complemented our distribution through Network Partners. With WageWorks’ CDB capabilities, we provide employers with a single partner for both HSAs and other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite Group. For Clients that partner with us in this way, we believe we can produce more value by encouraging both CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings available through other CDBs.
As of January 31, 2022, we had substantially completed our multi-year integration effort and achieved approximately $80 million in annualized ongoing net synergies. We anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader service offerings and as we continue to drive member engagement.
Luum acquisition. In March 2021, we bolstered our commuter offering by acquiring 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). The aggregate purchase price for the acquisition consisted of $56.2 million in cash. Luum provides employers with various commuter services, including access to real-time commute data, to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.
Fifth Third Bank HSA portfolio acquisition. On April 27, 2021, we signed an agreement to acquire the Fifth Third Bank, National Association ("Fifth Third") HSA portfolio, which consisted of $490.0 million of HSA Assets held in approximately 160,000 HSAs in exchange for a purchase price of $60.8 million in cash. This acquisition closed on September 29, 2021.
Further acquisition. On September 7, 2021, we signed an amended agreement to acquire the Further business (other than Further's voluntary employee beneficiary association business), a leading provider of HSA and other CDB administration services, with approximately 580,000 HSAs and $1.9 billion of HSA Assets, for $455 million in cash (the "Further Acquisition"). This acquisition closed on November 1, 2021.
HealthSavings HSA portfolio acquisition. On December 4, 2021, we signed an agreement to acquire the Health Savings Administrators, L.L.C. (“HealthSavings”) HSA portfolio, which consisted of $1.3 billion of HSA Assets held in approximately 87,000 HSAs in exchange for a purchase price of $60 million in cash. This acquisition closed on March 2, 2022.
Our products and services
Healthcare saving and spending platform. Technology platforms. We offer amultiple cloud-based platform,platforms, accessed by our members online via a desktop or mobile device, through which individuals can make health saving and spending decisions, pay healthcare bills, compare treatment options and prices, receive personalized benefit and clinical information, earn wellness incentives, grow their savings and make investment choices. The platform providesplatforms provide users with access to services we provide as well as services provided by third parties selected by us or by our Network Partners.
Among other features, theour HSA platform includes the capability to present to users medical bills upon adjudication by a health plan, including details such as the amount paid by insurance, specific nature of the medical service provided, and diagnostic code. Users of theour HSA platform can pay these bills from an account of ours or from any bank account, online, via a mobile device, or using our payment card. All users of theour HSA platform gain access to our healthcare consumer specialists, available every hour of every day, via a toll-free telephone number or email. Our specialists can assist users with such tasks as contacting a medical provider to dispute a bill, negotiating a payment schedule, optimizing the use of tax-advantaged accounts to reduce medical spending or selecting from among medical plans offered by an employer or health plan.
We acquired several other technology platforms as part of the WageWorks Acquisition. These additional technology platforms are designed to be highly scalable based on an on-demand delivery model that Clients and members may access through a standard web browser on any internet-enabled device, including computers, smart phones, and other mobile devices such as tablet computers. Our on-demand delivery model for these platforms eliminates the need for our Clients to install and maintain hardware and software in order to support CDB programs and enables us to rapidly implement product enhancements across our entire user base. We acquired an additional technology platform as part of the Luum Acquisition, which provides Clients with various commuter services, including access to real-time commute data, to help Clients design and implement flexible return-to-office and hybrid-workplace strategies and benefits.
We are working to phase out certain technology platforms that we acquired in the WageWorks Acquisition, which requires us to migrate certain Clients to one of our remaining technology platforms. We expect to complete these migrations during the fiscal year ending January 31, 2023.
Health savings accounts. The Medicare Modernization Act of 2003 created HSAs, a tax-exempt trust or custodial account managed by a custodian that is a bank, an insurance company, or a non-bank custodian
specifically authorized by the Internal Revenue Service, or IRS, as meeting certain ownership, capitalization, expertise, and governance requirements. We are an IRS approvedIRS-approved non-bank custodian of our members' HSAs, designated to serve as both a passive and non-passive non-bank custodian of HSAs.
To be eligible to contribute to an HSA, an individual must be covered under a high deductible healthcare plan, or HDHP, have no additional health coverage, not be enrolled in Medicare, and not be claimed as a dependent on someone else’s tax return. HSAs have several tax-advantaged benefits, which we call the "triple tax savings": (1) individuals can claim a tax deduction for contributions they make to their HSAs, and contributions that their employers make to their HSAs may be excluded from their gross income for purposes of federal and most state income and employment tax; (2) the interest or earnings on the assets in the account, including reinvestment, accumulate without being subject to tax; and (3) distributions may be tax free if they are used to pay qualified medical expenses. There is no requirement to provide receipts to us to substantiate HSA distributions to members, whether made through our payment card or directly from our online HSA platform. Additionally, taxable distributions other than for qualified medical expenses are permitted without penalty (although subject to income tax) after age 65. Balances remain in the account until used, i.e., there is no “use or lose” requirement. An HSA is owned by the account holder; it remains the account holder’s property upon a change of employment, health plan or retirement.
Investment platform and advisory services. We offer a mutual fund investment platform and access to an online-only automated investment advisory service to all of our members whose account balances exceed a stated threshold. These services are entirely elective to the member. The advisory service is delivered through a web-based tool, Advisor,TM, which is offered and managed by HealthEquity Advisors, LLC, our SEC-registered investment adviser subsidiary. HealthEquity Advisors, LLC provides investment advice to its clients exclusively through the AdvisorTM tool on an interactive website. Members who utilize our mutual fund investment platform or subscribe for AdvisorTM services pay asset-based fees, which include the cost of the advisory service and all trading commissions and other expenses associated with transactions made through these online tools.
AdvisorTM provides investment education guidance and management, including maintaining HSA cash (liquidity) in amounts directed by the member, targeting risk appropriate portfolio diversification, and mutual fund selection.
We offer investors access to three levels of serviceservice:
•Self-driven: For members who do not subscribe for Advisor, we provide a mutual fund investment platform to investors:invest HSA balances. Neither we nor Advisor provides advice to members in respect of investments among funds on the platform;
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• | Self-driven: For members who do not subscribe for AdvisorTM, we provide a mutual fund investment platform to invest HSA balances. Neither we nor AdvisorTM provides advice to members in respect of investments among funds on the platform;•GPS powered by HealthEquity Advisors, LLC: Advisor provides guidance and advice, but the member makes the final investment decisions and implements portfolio allocation and investment advice through the HealthEquity platform; and •AutoPilot powered by HealthEquity Advisors, LLC: Advisor manages the account and implements portfolio allocation and investment advice automatically for the member. |
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• | GPS: AdvisorTM provides guidance and advice, but the member makes the final investment decisions and implements portfolio allocation and investment advice through the HealthEquity platform; and
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• | Auto-pilot: AdvisorTM manages the account and implements portfolio allocation and investment advice automatically for the member.
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Regardless of the level of service selected, members are responsible for their proportionate share of fees and expenses payable by the underlying mutual funds and other investment vehicles in which they invest.
Reimbursement arrangements. Reimbursement arrangements, or RAs, include health reimbursement arrangements, or HRAs, andHealthcare flexible spending arrangements, or FSAs. An RAaccounts. Healthcare FSAs are employer-sponsored CDBs that enable employees to set aside pre-tax dollars to pay for eligible healthcare expenses that are not generally covered by insurance, such as co-pays, deductibles and over-the-counter medical products, as well as vision expenses, orthodontia, and medical devices. Healthcare FSAs can be customized by employers so they have the freedom to determine what eligible expenses may be administeredreimbursed under these arrangements. Our employer Clients also realize payroll tax (i.e., FICA and Medicare) savings on the pre-tax contributions made by any third-their employees.
The IRS imposes a limit, indexed to inflation, on pre-tax dollar employee contributions made to healthcare FSAs. The IRS also allows a carryover of up to 20% of the indexed contribution limit that does not count against or otherwise affect the indexed salary reduction limit applicable to each plan year. Employers are able to contribute additional amounts in excess of this statutory limit and may choose to do so in an effort to mitigate the impact of rising healthcare costs on their employees.
Dependent care flexible spending accounts. We also administer FSA programs for dependent care plans. These plans allow employees to set aside pre-tax dollars to pay for eligible dependent care expenses, which typically include child care or day care expenses but may also include expenses incurred from adult and elder care. Current laws and regulations impose a statutory limit on the amount of pre-tax dollars employees can contribute to dependent care FSAs with no carryover allowed. Like healthcare FSAs, employers can also contribute funds to employees’ dependent care FSAs; however, these are subject to the statutory annual limit on total contributions. As
with healthcare FSAs, employers realize payroll tax savings on the pre-tax dependent care FSA contributions made by their employees.
party administration, or TPA, firm. Most HSA custodians are not TPAs,HealthEquity administers the United States Office of Personnel Management's (“OPM”) Federal Flexible Spending Account Program (“FSAFEDS”). This relationship provides eligible federal government employees access to our advanced technology platforms and most TPAs are not HSA custodians. We are among onlypremium service capabilities.
Health reimbursement arrangements. Under HRAs, employers provide their employees with a few firmsspecified amount of reimbursement funds that are ableavailable to administer HSAshelp employees defray their out-of-pocket healthcare expenses, such as deductibles, co-insurance and RAsco-payments. HRAs may only be funded by employers and there is no limitation on how much employers may contribute; however, similar to other CDBs that are funded with pre-tax dollars, employers are required to establish the same technology platform.
RAs are employer sponsored accounts that employees can useprograms in such a way as to reimburse qualified medicalprevent discrimination in favor of highly compensated employees. HRAs must either be considered an excepted benefit (for example, a dental-only HRA or dependent care expenses. Before paymenta vision-only HRA), a retiree HRA or be integrated with another group health plan. HRAs can be made,customized by employers so employers have the freedom to determine what expenses must be substantiated using electronic claims fromare eligible for reimbursement under these arrangements. At the end of the plan year, employers have the option to allow all or a portion of the unused funds to roll over and accumulate year-to-year if not spent. All amounts paid by employers into HRAs are deductible for tax purposes by the employer and tax-free to the employee.
COBRA. We offer COBRA continuation services to employer clients to meet the employer’s obligation to make available continuation of coverage for participants who are no longer eligible for the employer’s COBRA covered benefits, which include medical, dental, vision, HRAs and certain healthcare FSAs. COBRA requires employers to make health plan, data gleaned from operationcoverage available for qualified beneficiaries for a period of up to 36 months post-termination. As part of our payment card where permitted, or submission of receipts or other documentation by the employee. Like HSAs, amounts allocated to RAs and reimbursements from RAs may be excluded from employees’ gross income for federal and most state income and employment tax purposes. RAs are not portable, however; any value remaining upon termination of employment is forfeited (subject to COBRA). In addition, FSAs are subject to “use or lose” restrictions that limit to $500 the amount that may be rolled over from year to year. As of January 31, 2018, we had approximately 559,000 RAs on our platform.
HealthEquity retirement. Through our subsidiary HealthEquity Retirement Services, LLC,COBRA program, we offer ERISA plan administrationa direct billing service where former employee participants pay us directly as opposed to their employers for coverage they elect to continue. We handle the accounting and investmentcustomer services (with partnered advisorsfor such terminated employees, as well as interfacing with the carrier regarding the employees’ eligibility for participation in the COBRA program. The American Rescue Plan Act of 2021 provided a temporary 100% subsidy of COBRA premium payments for eligible individuals who lost coverage due to an involuntary termination for up to six months, which ended September 30, 2021.
Commuter Programs. We administer pre-tax commuter benefit programs. Employers are permitted to provide employees with commuter benefits including qualified transit (which includes vanpooling) and record keepers) that canparking. The maximum monthly federal (and sometimes state) tax free exclusion is indexed for inflation. For 2022, the maximum pre-tax monthly limits are $280 for qualified transit and $280 for qualified parking.
The Luum technology platform provides employers with various commuter services, including access to real-time commute data, to help reduce the cost, risk,them design and work of managing a 401(k) or similar retirement plan. In addition to these plan services, we are able to connect third party retirement solutions to our HSA platform, allowing users to manage their HSAimplement flexible return-to-office and 401(k) balances from a single convenient dashboard, with a common set of investment options to enhance financial literacyhybrid-workplace strategies and help optimize health and wealth savings.benefits.
Our technology
Technology solution. Our proprietary technology is deployed as a cloud-based solution that is accessible to customers online and through the web andour mobile devices.app. We utilize a multi-tenant architecture that allows changes made for one Network Partner to be extended to all others. This architecture provides operating leverage by reducing costs and improving efficiencies, enabling us to maximize the utilization of our infrastructure capacity with a reduction in required maintenance. We are continually improvingincreasing investment in our technology and devoting resourcescommunications systems to our technology. During the years ended January 31, 2018, 2017,support new opportunities and 2016, we capitalized software development costs of $8.1 million, $7.7 millionenhance security, privacy, and $5.6 million, respectively. In addition, we incurred $12.2 million, $10.0 million and $7.6 million, respectively, in software development costs primarily related to the post-implementation and operation stages of our proprietary software.platform infrastructure.
Our solution is hosted via cloud-based services and on a virtual private cloud with an ability to scale on demand. This allows us to quickly support our current and projected growth. We utilize tworegional cloud failover and multiple redundant third-party data centers to ensure continuous access and data availability. The data centers are purpose-built facilities for hosting mission critical systems with multiple built-in redundancy layers to minimize service disruptions and meet industry-standard measures.
Data security and protection. Due to the sensitive nature of our customers’ data that we hold, we have a heightened focus on data security and protection. We maintain administrative, technical, and physical safeguards designed to protect confidential data. Our Risk and Security team identifies security risks by working with state and federal law enforcement, security information-sharing organizations, and 24/7 system surveillance through internal and external detection and response teams.
In the event a security risk is detected, or a breach occurs, we are prepared with appropriate response protocols based on National Institute of Standards & Technology ("NIST") guidelines. Our Security Incident Response Plan defines roles and responsibilities, incident severity levels, key contacts, post-incident steps, and guidelines for
testing. Our procedures cover response steps for phishing attacks, ransomware, data breaches, and major vulnerabilities. Lastly, we have implemented industry-standard processes, policiesan organic threat model that evaluates our security controls to help protect against attacker tactics, techniques, and tools through all levels ofprocedures.
To help ensure our software developmentapproach to customer privacy and network administration, reducingsecurity is effective and in line with industry standards, we follow risk management standards established by the risk of vulnerabilities in our system.Statement on Standards for Attestation Engagements 18 (SSAE-18) and Service and Organization Controls (SOC 1 and 2) reporting.
Our competitive landscape
We view our competition in terms of direct and indirect competitors. Our direct competitors are HSA custodians that includeand other CDB providers. Many of these are state or federally chartered banks insuranceand other financial institutions for which we believe benefits administration services are not a core business. Some of our direct competitors (including healthcare service companies such as United Health Group's Optum, Webster Bank, and non-bank trustees approved bywell-known retail investment companies, such as Fidelity Investments) are in a position to devote more resources to the IRS as meeting certain ownership, capitalization, expertisedevelopment, sale and governance requirements. Oursupport of their products and services than we have at our disposal. In addition, numerous indirect competitors, areincluding benefits administration and payment technology and service providers, that workpartner with banks and other HSA custodians to marketcompete with us. Our Network Partners may also choose to offer competitive services directly, as some health plans and/or employers.
We believe that the primary competitive factors in the market for technology platforms that empower healthcare consumers are: integration with the broader healthcare system; level of consumer educationhave done. Our success depends on our ability to predict and support; breadth of product offering; flexibility of technologyreact quickly to meet partner requirements; brand strength and reputation; and price. We believe that many of our large financial competitors may view their HSA businesses as non-core and have historically under-invested in developing these businesses. Many of our competitors have not incorporated personal health information into their offerings, as this would require significant upfront investment in technology, training, and segregation of business operations from other bank or custodial operations, as well as integration with data sources such as health plans and pharmacy benefits managers. We believe competitors within the technology, payments or benefits administration service provider sector are limited from expanding their presence in this area due to regulatory requirements for capital adequacy and demonstrated expertise in custodial operations. However, we experience significant competition from banks, insurance companies, and other financial institutions that have greater resources than us,industry and the intensity of competition may increase over time.
competitive dynamics.
Our competitive strengths and strategy
We believe we are well-positioned to benefit from the transformation of the healthcare benefits market. Our platform istechnology platforms are aligned with a healthcare environment that rewards consumer engagement and fosters an integrated consumer experience.
Leadership and first-mover advantage. Leadership. We have established a defensible leadership position in the HSA industry through our first-mover advantage, focus on innovation, and differentiated capabilities. Our leadership position is evidenced by the tripling ofincrease in our market share (measured by custodial assets)HSA Assets), from 4% in December 2010 to 13%18% in December 2017,2021, as noted by the 20172021 Devenir HSA Research Report, which indicates we are the thirdsecond largest HSA custodian by market share.share measured by HSA Assets.
Complete solution for managing consumer healthcare saving and spending. Our members utilize our platformplatforms in a number of ways and in varying frequencies. For example, our members utilize our HSA platform to evaluate and pay healthcare bills through the member portal, which allows members to pay their healthcare providers, receive reimbursements and learn of savings opportunities for prescription drugs. Members also utilize the platform’s mobile app to view and pay claims on-the-go, including uploading medical and insurance documentation to the platform with their mobile phone cameras. During
Bundled solution for HSAs and complementary CDBs. We are the year ended January 31, 2018,largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration. Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs. With our platform experienced 36.3 million logonsCDB capabilities, we can provide employers with a single partner for both HSAs and on average, every month 22%complementary CDBs, which is preferred by the vast majority of employers, according to research conducted for us by Aite Group. We believe that the combination of HSA and complementary CDB offerings significantly strengthens our members signed into our platform.value proposition to employers, health benefits brokers and consultants, and Network Partners as a leading single-source provider.
Proprietary and integrated technology platform. solution. We have a proprietary cloud-based technology platform,solution, developed and refined during more than a decade of operations and acquired through the WageWorks Acquisition, which we believe is highly differentiated in the marketplace for a number of key reasons:
•Purpose-built technology: Our platformsolution was designed specifically to serve the needs of healthcare consumers, health plans and employers. We believe it providesthey provide greater functionality and flexibility than the technologies used by our competitors, many of which were originally developed for banking, benefits administration or retirement services. We believe we are one of few providers with a platformsolution that encompassesencompass all of the core functionality of healthcare saving and spending in a singleintegrated, secure, and compliant system,systems, including custodial administration of individual savings and investment accounts, card and electronic funds transaction processing, benefits enrollment and eligibility, electronic and paper medical claims processing, medical bill presentment, tax-advantaged reimbursement account and health incentive administration, HSA trust administration, online investment advice, and sophisticated analytics.
•Data integration: Our technology platformsolution allows us to integrate data from disparate sources, which enables us to seamlessly incorporate personal health information, clinical insight, and individually tailored strategies into the consumer experience. We currently have more than 2,68020,000 distinct integrations with health plans, pharmacy benefit managers, employers, and other benefits provider systems. Many of our partners’ systems rely on custom data models, non-standard formats, complex business rules, and security protocols that are difficult or expensive to change.
•Configurability: Our flexible technology platformsolution enables us to create a unique solution for each of our Network Partners. For example, a HealthEquity team member can readily configure more than 250 product attributes, including integration with a partner’s chosen healthcare price transparency or wellness tools, single sign on, sales and broker support sites, branding, member communication, custom fulfillment and payment card, savings options and interest rates, fees, and mutual fund investment choices. We currently have more than 1,500 unique partner configurations of our offerings in use.
Differentiated consumer experience. We have designed our solutionssolution and support services to deliver a differentiated consumer experience, which is a function of our culture and technology. We believe this provides a significant competitivean advantage relative to legacy competitors whom we believe prioritize transaction processing and benefits administration.
•Culture: We call our culture “DEEP Purple,” which we define as driving excellence, ethics, and process while providing remarkable service. Our DEEP Purple culture is a significant factor in our ability to attract and retain customers and to nimbly address nimbly opportunities in the rapidly changing healthcare sector.
•Technology: Our technology helps us to deliver on our commitment to DEEP Purple. We tailor the content of our platformplatforms and the guidance of our experts to be timely, personal, and relevant to each member. For example, our technology generates health savings strategies that are delivered to our members when they interact with our platformplatforms or call us. We employ individuals which we refer to as Member Education Specialists, who provide real-time assistance to our members via telephone.
telephone, email, or chat.
our strategy and commitment to DEEP Purple, our team members work directly with our Network Partners to engage with consumers, educating them about the benefits of our HSAs and our other products and providing personalized guidance.
We believe our DEEP Purple culture drives our success. Our commitment to DEEP Purple has been rewarded with consumer loyalty scores that far exceed those of most banks and traditional health insurers.
Large and diversified channel access. We believe our differentiated distribution platform providesplatforms provide a competitive advantage by efficiently enabling us to reach a growing consumer market. Our platformsolution is built on a business-to-business-to-consumer, or B2B2C, channel strategy, whereby we rely on ourwork with Network Partners and Clients to reach consumers instead ofin addition to marketing our services to these potential members directly. Reaching the consumer is critical in order for us to increase the number of our HSA Members.members.
We work directly with our Network Partners and Clients to reach the consumer in various ways. Our Health Planhealth plan and Administrator Partnersadministrator partners collectively employ thousands of sales representatives and account managers who promote both the Health Planhealth plan and Administrators Partner’sadministrators partner’s health insurance products, such as HDHPs, and our HSAs. Our Employer PartnersClients collectively employ thousands of human resources professionals who are tasked with explaining the benefits of our HSAs to their employees. Our sales and account management teams work with and train the sales representatives and account management teams of our Network Partners and the human resource professionals of our Network PartnersClients on the benefits of enrolling in, contributing to, and saving and spending through our HSAs, and our Network Partners and Clients then convey these benefits to prospective members. As a result of this collaboration, we develop relationships with each member who enrolls in an HSA with us. This personalized engagement with our members constitutes our B2B2C channel strategy.
Scalable operating model. We believe that our technologymodel is scalable because our products and services are accessed primarily through our cloud-based technology platform, which is cloud based.platforms. After initial on-boarding and a period of education, our service costs for any given customer typically decline over time. Our opportunity to earn high-margin revenue from existing HSA Membersmembers grows over time because our HSA Members’members’ balances typically grow, increasing custodial revenue without significant incremental cost to us.
Strong customer retention rates. Retention of our HSA Membersmembers has been consistentstrong over time. Retention rates for the years ended January 31, 2018, 2017 and 2016 were 97.6%, 95.5% and 97.4%, respectively. Individually owned trust accounts, including HSAs, have inherently high switching costs, as switching requires a certain amount of effort on the part of the account holder and may result in closure fees. We believe that our retention rates are also high due to our technologyHSA platform’s integration with the broader healthcare system used by our HSA members and our customer engagement and focus on the consumer experience.
Selectively pursue strategic acquisitions. We have a successful history of acquiringhistorically acquired HSA portfolios and businesses that strengthen our platform.business. We expect to continue this growth strategy and regularly evaluate opportunities. During the year ended January 31, 2018, we acquired two HSA portfolios. We have
developed an internal capability to source, evaluate, and integrate acquisitions that have created value for shareholders.stockholders. We believe the nature of our competitive landscape provides significant acquisition opportunities. Many of our competitors view their HSA businesses as non-core functions. We believe they may look to divest these assets and, in certain cases, be limited from making acquisitions due to depository capital requirements.
Government regulation
Our business is subject to extensive, complex, and rapidly changing federal and state laws and regulations.
IRS regulations
We are subject to applicable IRS regulations, which lay the foundation for tax savings and eligible expenses under the HSAs, HRAs, and FSAs we administer. The IRS issues guidance regarding these regulations regularly. In addition, we are subject to conflict of interest and other prohibited transaction rules that are enforced through excise taxes under the Internal Revenue Code. Although the excise taxes are enforced by the IRS, the underlying rules are promulgated by the Department of Labor.
In February 2006, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as a passive non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders. In July 2017, HealthEquity, Inc. received designation by the U.S. Department of Treasury to act as both a passive and non-passive non-bank custodian, which allows HealthEquity, Inc. to hold custodial assets for individual account holders and use discretion to direct investment of such assets held. As a passive and non-passive non-bank custodian, the Company must maintain net worth (assets minus liabilities) greater than 2% of passive custodial funds held at each calendarfiscal year-end and 4% of the non-passive custodial funds held at each calendarfiscal year-end in order to take on additional custodial assets. As of DecemberJanuary 31, 2017,2022, the Company's year-end for trust and tax purposes, the net worth of the Company exceeded the required thresholds.
Privacy and data security regulations
In the provision of HSA custodial services and directed TPA services for RAs,FSAs and HRAs, we are subject to the Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act or GLBA), the Health Insurance Portability and Accountability Act of 1996 (HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act), and similar state laws.
GLBA imposes financial privacy and security requirements on financial institutions that relate to the collection, storage, use, and disclosure of an account holder’s nonpublic personal information. Nonpublic personal information includes information that is collected or generated in the course of offering a financial product or service. For example, nonpublic personal information includes information submitted by a prospective account holder in an application, an account holder’s name and contact information, and transaction information. Because part of our business is the administration of financial products such as HSAs, we are required under the Consumer Financial Protection Bureau’s financial privacy rule under GLBA to send a notice of privacy practices to account holders and to comply with restrictions on the disclosure of nonpublic personal information to non-affiliated third parties. We are also required under GLBA to establish reasonable administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of nonpublic personal information pursuant to the Federal Trade Commission’s safeguards rule. Violations of GLBA can result in civil and criminal penalties.
HIPAA covered entities and their business associates are required to adhere to HIPAA privacy and security standards. Covered entities include most healthcare providers, health plans, and healthcare clearinghouses. Because we perform services (such as RAFSA services) for covered entities that include processing protected health information, we are a business associate and subject to HIPAA. The two rules that most significantly affect our business are: (i) the Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule; and (ii) the Security Standards for the Protection of Electronic Protected Health Information, or the Security Rule. The Privacy Rule restricts the use and disclosure of protected health information, and requires us to safeguard that information and provide certain rights to individuals with respect to that information. The Security Rule establishes requirements for safeguarding protected health information transmitted or stored electronically. Both civil and criminal penalties apply for violating HIPAA, which may be enforced by both the Department of Health and Human Services’ Office for Civil Rights and state attorneys general. Violations of HIPAA may also subject us to contractual remedies under the terms of agreements with covered entities.
StatesVarious states also have laws and regulations that impose additional restrictions on our collection, storage, and use of personally identifiable information. Privacy regulation in particular has become a priority issue in many states, including California, which in 2018 enacted the California Consumer Privacy Act ("CCPA") broadly regulating California residents’ personal information and we striveproviding California residents with various rights to adhereaccess and control
their data. Additional privacy requirements are applicable to all such applicable laws.us as a result of the California Privacy Rights Act of 2020, which significantly modified the CCPA by expanding consumers’ rights with respect to certain sensitive personal information.
ERISA
Our private-sector clients’ FSAs, HRAs, and 401(k)COBRA continuation insurance, and other account-based retirement plans are covered by the Employee Retirement Income Security Act of 1974, as amended, or ERISA, which governs “employee benefits plans.” Title I of ERISA does not generally apply to HSAs. ERISA generally imposes extensive reporting requirements on employers, as well as an obligation to provide various disclosures to covered employees and beneficiaries; and employers and third-party administrators that have authority or discretion over management, administration, or investment of plan assets are subject to fiduciary responsibility under ERISA. ERISA's requirements affect our RAFSAs, HRAs, and 401(k) businesses, including HealthEquity Retirement Services, LLC.COBRA administration businesses. The Department of Labor can bring enforcement actions or assess penalties against employers, investment advisers, administrators, and other service providers for failing to comply with ERISA’s requirements. Participants and beneficiaries may also file lawsuits against employers, investment advisers, administrators, and other service providers under ERISA.
Department of Labor
The Department of Labor, or the DOL, regulates plans that are subject to ERISA, including health FSAs, HRAs, and 401(k) and other retirement plans.plans, as well as COBRA administration. The DOL also issues guidance related to fiduciary responsibility and prohibited transactions under ERISA and the Internal Revenue Code that affect administration of HSAs (as well as health FSAs, HRAs, and retirement plans).
The DOL issues regulations, technical releases, and other guidance that apply to employee benefit plans, and tax-favored savings arrangements (including HSAs) and COBRA administration, generally. In addition, in response to a request by an individual or an organization, the DOL’s Employee Benefits Security Administration may issue an advisory opinion that interprets and applies ERISA and/or corresponding prohibited transaction rules under the Internal Revenue Code to a specific situation, including issues related to consumer-centric healthcare accounts and retirement plans.
In April 2016, the DOL issued a new regulation that expanded the types of conduct and communication that are treated as fiduciary investment advice, resulting in increased responsibility for service providers to retirement
accounts and HSAs. The rule became effective in June 2017, subject to a transition period and delayed applicability of certain elements of the rule until July 1, 2019. The DOL is currently studying the regulation’s impacts and considering whether to make changes. We have updated certain procedures to comply with the rule. However, in March 2018, the rule was vacated by the Fifth Circuit Court of Appeals, and accordingly its future is uncertain.
Healthcare reform
In March 2010, the federal government enacted significant reforms to healthcare benefits through the Affordable Care Act. The legislation amended various provisions in many federal laws, including the Internal Revenue Code and ERISA. The reforms included new excise taxes that incentivize employers to provide health benefits (including HSA-compatible benefits) to all full-time employees and new coverage mandates for health plans. The new rules directly affect health FSAs and HRAs and have an indirect effect on HSAs. Further changes to the Affordable Care Act and related healthcare regulation remain under consideration.consideration, including "Medicare for all" plans.
Investment Advisers Act of 1940
Our subsidiary HealthEquity Advisors, LLC is an SEC-registered investment adviser that provides web-only automated investment advisory services to members. As an SEC-registered investment adviser, it must comply with the requirements of the Investment Advisers Act of 1940, or the Advisers Act, and related Securities and Exchange Commission, or SEC, regulations and is subject to periodic inspections by the SEC staff. Such requirements relate to, among other things, fiduciary duties to clients, disclosure obligations, recordkeeping and reporting requirements, marketing restrictions limitations on agency cross and principal transactions between the adviser and its clients, and general anti-fraud prohibitions. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. Failure to comply with the Advisers Act or other federal and state securities and regulations could result in investigations, sanctions, profit disgorgement, fines or other similar consequences.
Intellectual property
Intellectual property is important to our success. We have registered our trademark “HealthEquity” with the U.S. Patent and Trademark Office and maintain trademark rights to the mark “Building Health Savings.”
We also rely on trademarks and other forms of intellectual property rights and measures, including trade secrets, know-how and other unpatented proprietary processes, and nondisclosure agreements, to maintain and protect proprietary aspects of our products and technologies. We require our team members and consultants to execute confidentiality agreements in connection with their employment or consulting relationships with us. We also require our team members and consultants to disclose and assign to us all inventions conceived during the term of their employment or engagement while using our property or which relate to our business.
Geographic areas
Our sole geographic market is the U.S.
EmployeesHuman capital
HealthEquity is comprised of people dedicated to empowering consumers to connect health and wealth by delivering remarkable service. We refer to our employeesculture as “DEEP Purple,” which stands for Driving Excellence, Ethics and Process while providing remarkable service to our teamclients and members. We believe that our DEEP Purple culture is a key differentiator that drives the success of our company through, among other things, attracting and retaining top talent. DEEP Purple is the essence of our company, and we invest a lot of time and energy to support and maintain it.
Our board of directors and its committees provide oversight on certain human capital matters. The Talent, Compensation and Culture Committee of our board of directors acts on behalf of the board to review and determine executive compensation plans, policies and programs, oversee the Company’s culture and related strategies, programs and risks, and oversee the Company’s talent management, development and retention efforts and related strategies, programs, and risks, including with respect to diversity and inclusion.
As of January 31, 2018,2022, we had 1,0273,688 full-time team members and 27 part-time team members, including 7172,297 in service delivery, 143655 in technology and development, and 167763 in sales and marketing, and general and administrative.administrative positions. As January 31, 2022, our team members had the following demographic characteristics:
| | | | | | | | | | | |
| Executive
Leadership Team | People Leaders | All HealthEquity
Team Members |
| Women | 29 | % | 54 | % | 68 | % |
| Men | 71 | % | 46 | % | 32 | % |
| Under age 30 | 0 | % | 5 | % | 18 | % |
| Between ages 30 and 50 | 43 | % | 63 | % | 56 | % |
| Over age 50 | 57 | % | 32 | % | 26 | % |
| People of color | 14 | % | 22 | % | 34 | % |
Diversity and inclusion
As an employer, we celebrate the diversity of our team members and strive for consistent inclusion. We considerstrive to make HealthEquity a place where diversity of thought, culture, orientation, identity, and experience enhance every aspect of what we do. We recognize the value of diversity and inclusion in our relationshipbusiness practices. We believe that justice, equity, diversity, and inclusion ("JEDI") in the workplace are key to team members feeling they can bring their true authentic self to their work environment and that this translates to higher productivity, increased motivation and improved performance.
At the heart of our JEDI efforts is the "Created Equal program". Led by a diverse council, Created Equal promotes JEDI initiatives and our teammate-led business resource groups, which we call "Connections" groups.
We believe that a diverse workforce is critical to our success, and we continue to focus on the hiring, retention and advancement of women and underrepresented populations. Our recent efforts have focused on three areas: inspiring authenticity through an inclusive and diverse culture; identifying diverse organizations to expand our candidate pool; and strategically partnering with our Connections groups to accelerate our JEDI efforts.
Health, Safety and Wellness
HealthEquity also seeks to ensure that team members have the working conditions they need to succeed. The health and well-being of our team members at work are foremost among our concerns. We encourage our team members to be good. Nonefollow common sense safety practices and correct any unsafe condition or report it to their supervisor. We are committed to maintaining a safe workplace free from unlawful drugs and alcohol in accordance with applicable law and free from harassment. HealthEquity supports these measures through extensive training as well as formal grievance procedures and policies.
In response to the COVID-19 pandemic, we have prioritized the health and safety of our team members. This includes having the majority of our team members work from home, while implementing additional safety measures for team members continuing critical on-site work. In addition, the Company has established a conditionally based paid leave policy to support team members who have been directly impacted by COVID-19. HealthEquity has also helped team members maintain a healthy work-life balance and juggle competing needs during the pandemic by supporting flexible work schedules. HealthEquity has maintained a strong focus to support the holistic health of our
team members, offering a variety of recurring sessions addressing their mental, emotional, and physical health and that of their dependents.
In September 2021, the President of the United States signed an executive order, and related guidance was published that, together, require certain COVID-19 precautions for federal contractors, including mandatory COVID-19 vaccines for employees of federal contractors (subject to medical and religious exemptions) (the “Vaccine Mandate”). While the Vaccine Mandate has been stayed by the courts, we are represented byclassified as a labor union or partyfederal contractor due to a collective bargaining agreement.number of our agreements and believe we will be subject to the Vaccine Mandate if it is reinstated. HealthEquity’s compliance with the Vaccine Mandate has and could continue to result in increased team member attrition and absenteeism. Regardless of the Vaccine Mandate, HealthEquity has strongly encouraged all team members to work with their medical provider to get vaccinated against COVID-19. In addition to providing practical education on the vaccine, HealthEquity has held multiple town halls for team members to ask questions and receive important information on vaccination.
Equitable Pay Philosophy and Benefits
HealthEquity is proud to be a workplace where hard work is valued and rewarded. We are committed to pay equity, which is being implemented through our Total Rewards program.
Our pay philosophy is intended to foster a program that supports the Company’s mission, values, and culture. We believe that our greatest asset is our people, and our Total Rewards program, which includes salary, incentive pay, equity, retirement, and health benefits, is designed to attract and retain talented team members who drive the Company’s success. The program is intended to be fair and easy to understand so that all team members and their managers understand the goals and outcomes. HealthEquity strives to administer the program in a manner that is applied consistently, equitably, and free of discrimination, as follows:
•Maintaining competitive pay by reviewing market data annually;
•Ensuring that similar jobs are paid equitably across the organization;
•Rewarding team members based on their abilities, competencies, experience, and performance levels;
•Effectively communicating our Total Rewards policies and practices; and
•Complying with all applicable federal, state, and local laws and requirements.
HealthEquity believes in sharing the financial success of the Company and rewarding individual performance through offering participation in a bonus plan to all non-commissioned team members. The bonus pool is funded based on the financial performance of the Company, and team members' performance against objectives determines the individual payouts earned.
To ensure the Total Rewards program is managed in a consistent and equitable way, all positions at HealthEquity are assigned a job and an associated pay grade. That pay grade is determined using a formal job evaluation methodology based on a job’s purpose and key accountabilities described in the job description. These components are the same for all positions across HealthEquity, regardless of level.
We believe in approaching team member health holistically. Our benefits philosophy is rooted in the foundational beliefs that – first – all areas of health are intertwined, and – second – that when team members are thriving in mental, emotional, physical, social, and financial health, they are in the best position to succeed personally and provide remarkable service professionally. Accordingly, HealthEquity provides our team members a variety of comprehensive, consumer-driven healthcare medical plans offered in conjunction with generous HSA contributions from the Company, a 401(k) plan that offers Company contributions, a subsidized dental plan, voluntary vision coverage, paid maternity and parental leaves, and importantly, a holistic wellness plan that supports the continued development of our team members’ mental, physical, financial, emotional, and social health.
Team Member Engagement
HealthEquity also considers team member engagement an important metric of organizational health. We seek team member feedback, measure team member engagement, and measure our team member Net Promoter Score℠, or NPS®, twice a year through a survey. The team member NPS framework surveys team members to generate a total score based on the percentage of those who are promoters (responding with a score of 9 or 10), passives (a score of 7 or 8), and detractors (a score of 0 to 6). Scores are calculated by subtracting the percentage of detractors from the percentage of promoters (the percentage of passives is not used in the formula). Team member NPS scores can range from -100 to 100.
As of January 31, 2022, our team member NPS was 37, based on a participation rate of 89 percent. Out of all responders, 55 percent were promoters, 27 percent were passives, and 18 percent were detractors.
"NPS®" is a registered trademark of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld. Net Promoter Score℠ is a service mark of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld."
Corporate information
HealthEquity, Inc. was incorporated as a Delaware corporation on September 18, 2002. Our principal business office is located at 15 W. Scenic Pointe Dr., Ste. 100, Draper, Utah 84020. Our website address is www.healthequity.com. We do not incorporate the information contained on, or accessible through, our corporate website into this Annual Report on Form 10-K, and you should not consider it to be part of this report.
Where you can find additional information
Our website is located at www.healthequity.com, and our investor relations website is located at ir.healthequity.com. Information on our website is not incorporated into this report. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act are available, free of charge, on our investor relations website as soon as reasonably practicable after we file such material electronically with or furnish it to the SEC. The SEC alsomaintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Further, a copy of this Annual Report on Form 10-K is located at the SEC's Public Reference Room at 100F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk factors
You should carefully consider the risks described below together with the other information set forth in this Annual Report on Form 10-K, which could materially affect our business, financial condition, and future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. If any of the following risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations and financial results:
Risks relating to our business and industry
•The COVID-19 pandemic has materially impacted our business and this impact may continue.
•Our acquisition strategy and the integration of our recent and future acquisitions may not be successful.
•Our management has identified material weaknesses in our internal control over financial reporting that could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.
•Any diminution in, elimination of, or change in the availability of tax benefits for HSAs and other CDBs, or in the use of these accounts, would materially adversely affect us.
•Failure to adequately place and safeguard our custodial assets, or the failure of any of our depository or insurance company partners, could materially and adversely affect our business, financial condition and results of operations.
•A decline in interest rate levels, including an environment of negative interest rates, may reduce our ability to earn income on our HSA Assets and Client-held funds and to attract HSA contributions.
•If we are not successful in adapting to our rapidly evolving industry, our growth may be limited, and our business may be adversely affected.
•We may be unable to compete effectively against our current and future competitors.
•Developments in the rapidly changing healthcare industry could adversely affect our business.
•If our members do not continue to utilize our payment cards, our results of operations, business, and prospects would be materially adversely affected.
Risks relating to our service and culture
•Any failure to offer high-quality customer support services could adversely affect our relationships with our members, Clients, and Network Partners and our operating results.
•We rely on our management team and team members and our business could be harmed if we are unable to retain qualified personnel.
•If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute to our success.
Data security, technological, and intellectual property risks
•Cyber-attacks, including ransomware attacks, or other privacy or data security incidents could materially adversely impact our business.
•Fraudulent and other illegal activity involving our products and services could lead to financial and reputational damage to us and reduce the use and acceptance of our products and services.
•We rely on software licensed from third parties that may be difficult to replace or that could cause errors or failures of our technology platforms that could lead to lost customers or harm to our reputation.
•Developing and implementing new and updated applications, features, and services for our technology platforms may be more difficult than expected, may take longer and cost more than expected, or may result in the platforms not operating as expected.
•Any disruption of service at our facilities or our third-party data centers could interrupt or delay our customers’ access to our products and services.
•Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our products and services.
•Our technology platforms may link to or utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
•Failure to adequately protect our brands and other intellectual property rights, and infringement of the intellectual property rights of others, would negatively impact our business.
•If we are unable to promote our brands effectively, our business may suffer.
•Confidentiality arrangements with team members and others may not adequately prevent disclosure of trade secrets and other proprietary information.
Legal and regulatory risks
•The healthcare regulatory and political framework is uncertain and evolving, and we cannot predict the effect that further healthcare reform and other changes in government programs may have on our business, financial condition, or results of operations.
•Changes in applicable federal and state laws relating to HSAs and other CDBs could materially adversely affect our business.
•We are subject to privacy regulations, including regarding the access, use, and disclosure of personally identifiable information. If we or any of our third-party vendors experience a privacy breach, it could result in substantial financial and reputational harm, including possible criminal and civil penalties.
•Legislative, regulatory, and legal developments involving taxes could adversely affect our results of operations and cash flows.
•Changes in laws and regulations relating to interchange fees on payment card transactions could adversely affect our revenue and results of operations.
•Failure to comply with, or changes in, payment card industry, credit card association or other network rules or standards set by Visa or MasterCard, or changes in card association and debit network fees or products or interchange rates, could materially adversely affect us.
•We are subject to complex regulation, and any compliance failures or regulatory action could adversely affect our business.
•If we are unable to meet or exceed the net worth test required by the IRS, we could be unable to maintain our non-bank custodian status.
Risks relating to our partners and service providers
•If our Network Partners choose to partner with other providers of, or otherwise reduce offering or cease to offer, our products and services, our business could be materially and adversely affected.
•A change in relationship with any of our bank identification number sponsors, or the failure by these sponsors to comply with certain banking regulations, could materially and adversely affect our business.
•Replacing our third-party vendors would be difficult and disruptive to our business.
Growth-related risks
•We may not be able to operate, integrate, and scale our technology effectively to match our business growth.
•Failure to manage future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.
•We may not accurately estimate the impact on our business of developing, introducing, and updating new and existing products and services.
•We may need to record write-downs from future impairments of identified intangible assets and goodwill.
Financing and related risks
•Our substantial debt could limit our ability to fund operations, expose us to interest rate volatility, limit our ability to raise additional capital and have a material adverse effect on our ability to fulfill our obligations under our credit agreement and indenture and to our Network Partners, Clients and members.
•The indenture and the credit agreement contain covenants that impose significant operational and financial restrictions on us, and the failure to comply with these covenants would result in an event of default under these instruments.
•We may be unable to generate or obtain sufficient capital to fund our business and growth strategy.
General Risk Factors
•Our ability to secure insurance may not be sufficient to cover potential liabilities.
•Natural disasters, pandemics or other epidemics (including the current COVID-19 pandemic), acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers.
•Our quarterly operating results may fluctuate significantly from period to period, which could adversely impact the value of our common stock.
•We do not intend to pay regular cash dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
•Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
•The exclusive forum provision in our amended and restated certificate of incorporation could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or team members.
Risks relating to our business and industry
The COVID-19 pandemic has materially impacted our business and this impact may continue.
Our business has been, and may continue to be, materially and adversely affected by the COVID-19 pandemic. The Federal Reserve’s interest rate cut in response to the economic impact of COVID-19 and other interest rate market conditions have caused interest rates to decline significantly. While interest rates have increased somewhat since these actions were taken by the Federal Reserve, the funds that we place with our depository partners in this environment continue to be placed at lower interest rates than we originally expected. We have also seen an increase in regulatory changes related to our products due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes, which changes require substantial time and costs for us to ensure compliance. For example, regulatory changes related to our COBRA product created uncertainty and additional workload on our team members. Further regulatory changes could reduce our operational efficiency and result in additional costs.
Our financial results related to certain of our products have also been adversely affected. For example, we have seen a significant decline in the use of commuter benefits, and decisions by employers to delay return-to-office plans for their employees will further delay the recovery of use of these commuter benefits. In addition, to the extent the "work from home" trend continues after the pandemic, that would further negatively impact the revenue we receive from commuter benefits.
During the initial stages of the pandemic, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue and service revenue. In the event of new lockdowns or restrictions on elective medical procedures, our interchange revenue and service revenue could again be negatively impacted.
As a result of the ongoing pandemic, substantially all of our team members have been working from home. Sales opportunities have been impacted by the lack of travel and in-person meetings, with some opportunities delayed and most now being held virtually. In addition, we have had to support Client open enrollment activities virtually. New COVID-19 variants may result in continued impacts to these activities. We may be unable to meet our service level commitments to our Clients as a result of disruptions to our work force and disruptions to third-party contractors that we rely on to provide our services. The risk of cybersecurity breaches and incidents, and the potential impact of these on our operations, is also higher while our team members log in to our network remotely. The supply chain constraints arising out of the pandemic have impacted our ability to provide our team members the technology they need to work efficiently in a remote environment.
The extent to which the COVID-19 pandemic will continue to negatively impact our business remains highly uncertain and, as a result, may continue to have a material and adverse impact on our business and financial results.
Our acquisition strategy and the integration of our recent and future acquisitions may not be successful.
We have in the past acquired, and, as a key part of our strategy, seek to acquire or invest in, assets, businesses, products, or technologies that we believe could complement or expand our products and services, enhance our technical capabilities, or otherwise offer growth opportunities. There is no assurance that we will be successful in consummating such acquisitions, or even if consummated, realize the anticipated benefits of these or any future acquisitions. The pursuit of potential acquisitions may divert the attention of management and cause us to incur
various expenses related to identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
The success of our acquisitions will depend in part on our ability to realize the anticipated business opportunities from combining the operations of these businesses with our business in an efficient and effective manner. Integration of our acquisitions could take longer than anticipated and could result in the loss of key team members, the disruption of our ongoing business and the acquired business, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with team members, Clients, Network Partners or other third parties, and could harm our financial performance.
Our management team and other team members are spending significant amounts of time on integration efforts relating to the WageWorks Acquisition and the Further Acquisition, which may distract them from their other responsibilities. Integration could also disrupt each company's ongoing businesses, result in tax inefficiencies, or create inconsistencies in standards, controls, information technology systems, procedures, and policies, any of which could adversely affect our ability to maintain relationships with third parties, or our ability to achieve the anticipated benefits of these acquisitions and could harm our financial performance.
Acquisitions also increase the risk of unforeseen legal liability, including for potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses which are not discovered by due diligence during the acquisition process. Generally, if an acquisition fails to meet our expectations, our operating results, business, and financial condition may suffer. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of additional debt, which could adversely affect ourbusiness, results of operations, or financial condition.
We may fail to fully realize the anticipated synergies associated with successfully integrating our acquisitions. Achievement of these anticipated synergies is rapidly evolvingbased on our ability to grow revenue as a combined company, the integration of technology platforms, and realization of the targeted cost synergies expected from each acquisition. Actual operating, technological, strategic, and revenue opportunities, if achieved at all, may be less significant than expected or may take longer or cost more to achieve than anticipated. If we are not able to achieve these objectives and realize the anticipated synergies expected from these acquisitions within the anticipated timing or at all, our business, financial condition, and operating results may be adversely affected.
The Further business is being carved out from the operations of its parent company. As such, the successful integration of the Further business with the Company is dependent on our ability to successfully carve out the Further business from its parent. While we have entered into a transition services agreement in order to effectively carve-out the Further business from its parent, no assurance can be given that the carve-out will be successful.
As part of the WageWorks Acquisition integration process, we are working to migrate certain Clients to different technology platforms, which could result in Client attrition if we are unable to meet Client expectations or if we are unable to meet the technical requirements of our Clients. Clients may also decide to not cooperate with the platform migration process, resulting in delays to and additional costs associated with this process or the loss of those Clients. The challenges associated with the platform migration process may result in Client dissatisfaction, potentially impairing our long-term relationships with our Clients. We may also face challenges in integrating the back-office systems and people associated with these technology platforms.
Our management has identified material weaknesses in our internal control over financial reporting that could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management has determined that our internal control over financial reporting was not effective due to the existence of material weaknesses arising out of the WageWorks Acquisition. See Item 9A - Controls and Procedures. Until fully remediated, these material weaknesses may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner. Although we have developed a plan to address the material weaknesses, we cannot provide a timeframe as to when the remediation will be completed and tested, nor can we assure you that the remediation, integration and testing process will not reveal additional material weaknesses or other deficiencies, so that our internal control over financial reporting and related disclosure controls and procedures are effective. Although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls over financial reporting, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting.
In addition to remediating existing material weaknesses, we expect that the continued integration of the WageWorks, Further and Luum businesses will require modifications to our internal control systems, processes, and information systems. Our ability to remediate existing material weaknesses and integrate acquired companies into our internal controls has been impacted by higher than normal team member turnover, including among owners of certain controls. If we are unable to transition ownership of controls effectively, the effectiveness of our internal controls may be negatively impacted.
We cannot be certain that changes to our internal control over financial reporting will be effective for any period, or on an ongoing basis. If we are unable to accurately report our financial results in a timely manner or are unable to assert that our internal controls over financial reporting are effective, our business, financial condition and results of operations, and the market perception thereof, may be materially adversely affected.
Any diminution in, elimination of, or change in the availability of tax benefits for technology-enabled servicesHSAs and other CDBs, or in the use of these accounts, would materially adversely affect us.
Substantially all of our revenue is earned from tax-advantaged HSAs and other CDBs. The efforts of governmental and third-party payers to raise revenue or contain or reduce healthcare or other costs could include restructuring the tax benefits available through HSAs and other CDBs, which may adversely affect our business, operating results, and financial condition. For example, the federal government or states may seek to raise revenues by enacting tax laws that empower healthcareeliminate the tax deductions available to individuals who contribute to HSAs. We cannot predict if any new tax reforms will ultimately become law, or if enacted, what their terms or the regulations promulgated pursuant to such reforms will be. If the laws or regulations are changed to limit or eliminate the tax benefits available through these accounts, such a change would have a material adverse effect on our business.
We believe that many consumers is relatively immatureare not familiar with, or do not fully appreciate, the tax-advantaged benefits of HSAs and unproven. other CDBs. If our members do not fully use their HSAs or CDBs, or if employers reduce or cease to offer HSAs or other CDB programs, or if the rate of adoption of these accounts decreases, our results of operations, financial condition, business, and prospects would be materially and adversely affected.
Failure to adequately place and safeguard our custodial assets, or the failure of any of our depository or insurance company partners, could materially and adversely affect our business, financial condition and results of operations.
As a non-bank custodian, we rely on our federally insured custodial depository partners and our insurance company partners to hold the vast majority of the HSA Assets that we custody. If any material adverse event were to affect one of our depository partners or our insurance company partners, including a significant decline in its financial condition, a decline in the quality of its service, loss of deposits, its inability to comply with applicable banking, insurance or other regulatory requirements, systems failure or its inability to return principal or pay interest thereon, our business, financial condition and results of operations could be materially and adversely affected.
The HSA Assets held through our insurance company partners are not federally insured. As a result, in the event of a failure of one of our insurance company partners, the HSA Assets held through that partner would be at risk and no assurance can be given that these contractual provisions will be sufficient. Although the members bear the risk of loss with respect to investment of their HSA Assets, we would suffer reputational harm if one of our insurance company partners failed or otherwise breached its obligations to guarantee principal or pay interest thereon, which could in turn lead to financial harm to the Company.
Certain of our arrangements with our depository and insurance company partners require that we keep a minimum amount of HSA Assets with such partner, including sufficient liquid assets. If we fail to comply with those minimum HSA Asset requirements, including as a result of withdrawals by our members, we may be subject to penalties payable to our partners or a reduction in the interest payable. These requirements accordingly restrict our ability to quickly terminate our arrangements with these partners and remove our HSA Assets. Such penalties or reductions, if imposed, could have a material and adverse impact on our business, financial condition and results of operations.
In addition, certain of our insurance company partners have commitments to us with respect to the interest rates paid; however, some of these commitments are conditional upon certain market events and/or satisfaction of our obligations to the partner. A reduction of the interest rate payable, or a requirement that we post collateral in lieu of any such reduction, could have a material and adverse impact on our business, financial condition and results of operations.
In addition to any potential penalties payable, if we were required to change depository or insurance company partners, we cannot accurately predict the success of such change or that the terms of our agreement with the new partner would be as favorable to us as our current agreements.
A decline in interest rate levels, including an environment of negative interest rates, may reduce our ability to earn income on our HSA Assets and Client-held funds and to attract HSA contributions.
We partner with our depository and insurance company partners to hold our HSA Assets and other Client-held funds. We earn a significant portion of our consolidated revenue from fees we earn from our depository and insurance company partners, approximately 27%, 26%, and 34% during the fiscal years ended January 31, 2022, 2021, and 2020, respectively. A decline in prevailing interest rates, such as the current low interest rate environment due to the COVID-19 pandemic, or a negative interest rate environment, has and may continue to negatively affect our business by reducing the yield we realize on our HSA Assets and other Client-held funds. In addition, if we do not offer competitive interest rates on HSA Assets, our members may choose another HSA custodian. Similarly, if the value of the invested HSA Assets we hold declines, whether due to market conditions or other factors, our fees, which are based on a percentage of the asset values, would be adversely affected. Any such scenario could materially and adversely affect our business and results of operations.
If we are not successful in promoting and improving the benefits ofadapting to our platform,rapidly evolving industry, our growth may be limited, and our business may be adversely affected.
The market for our products and services is subject to rapid and significant change and competition. The market for technology-enabled services that empower healthcare consumersadministration of HSAs and other CDBs is characterized by rapid technological change, new product and service introductions, evolving industry standards, changing customer needs, existing competition, and the entrance of non-traditional competitors. In addition, there may be a limited-time opportunity to achieve and maintain a significant share of this market due in part to theour rapidly evolving nature of the healthcare and technology industriesindustry, industry consolidation, and the substantial resources available to our existing and potential competitors. The market for technology-enabled services that empower healthcare consumers is relatively new and unproven, and it is uncertain whether this market will achieve and sustain high levels of demand and market adoption. In order to remain competitive, we are continually involved in a number of projects to develop new services or compete with these new market entrants. These projects carry risks, such as cost overruns, delays in delivery, performance problems, and lack of acceptance by our customers.Clients, Network Partners and members.
Our success depends to a substantial extent on the willingness of consumers to increase their use of technology platformsHSAs and other CDBs, our ability to manage their healthcare saving and spending, the ability of our platform to increase consumer engagement, and our ability to demonstrate the value of our platformservices to our existing customers and potential customers.Clients, Network Partners and members. If our existing customersClients, Network Partners and members do not recognize or acknowledge the benefits of our platformservices or our platform doeswe do not drive consumer engagement, then the market for our products and services might develop more slowly than we expect, which could adversely affect our operating results.
In addition, we have limited insight into industry or broader trends that might develop and affect our business. WeAs such, we might make errors in predicting and reacting to relevant business, legal, and regulatory trends, which could harm our business. If any of these events occur, it could materially adversely affect our business, financial condition or results of operations.
Finally, our competitors may have the ability to devote more financial and operational resources than we can to developing new technologies and services, including services that provide improved operating functionality, and adding features to their existing service offerings. If successful, their development efforts could render our services less desirable, resulting in the loss of our existing customers or a reduction in the fees we earn from our products and services.
Our business is dependent upon the availability of tax-advantaged health accounts to consumers and employers. Any diminution in, elimination of, or change in the availability or use of these accounts would materially adversely affect our results of operations, financial condition, business and prospects.
Substantially all of our revenue is earned from transactions involving tax-advantaged health accounts, such as HSAs, HRAs and FSAs. Based on our experience with our customers, we believe that many consumers are not familiar with, or do not fully appreciate, the tax-advantaged benefits of HSAs and other similar tax-advantaged healthcare savings arrangements. If employers reduce or cease to offer HSA, HRA or FSA programs, the tax benefits for these accounts are reduced, or consumer adoption of these accounts decreases, our results of operations, financial condition, business and prospects would be materially adversely affected.
We may be unable to compete effectively against our current and future competitors, which could have a material adverse effect on our results of operations, financial condition, business and prospects.competitors.
The market for our products and services is highly competitive, rapidly evolving and fragmented.competitive. We view our competition in terms of direct and indirect competitors. Our direct HSA competitors are HSA custodians and administrators that include state or federally chartered banks, such as Webster Bank and Optum Bank, insurance companies, well-known retail investment companies, such as Fidelity Investments, and non-bank custodians approved by the U.S. Treasury as meeting certain ownership, capitalization, expertise and governance requirements, such as Payflex Systems USA, Inc. This market is highly fragmented.Treasury. We also have numerous indirect HSA administration competitors, including benefits administrationadministrators and health plans, that license technology platforms and service providers that workpartner with other HSA custodians to sell intoprovide "white label" HSA offerings. Our other CDB administration competitors include health plans and/insurance carriers, human resources consultants and outsourcers, payroll providers, national CDB specialists, regional third-party administrators, and commercial banks, and these competitors may enter the HSA market or employer channels. expand existing HSA offerings to compete with us.
Increased focus on HSA-favorable healthcare regulatory reforms may create renewed interest and investment by our competitors in their HSA offerings and lead to greater competition, which could make it harder for us to maintain our growth trajectory. Our competitors may also offer reduced fee or no-fee HSAs, which may permit them to increase market share in our market and lead to customerClient and Network Partner attrition or cause us to reduce our fees; and this risk could be compounded if legal requirements or administrative rules are interpreted in a way that makes compliance more onerous for us than for our competitors. Furthermore, if
If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could materially adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative relationships with our current or future Network Partners or other strategic partners, thereby limiting our ability to promote our solution with these parties. Our Health Plan and AdministratorWe have seen an increase in Network Partners may also decidethat have decided to offer HSAs or other CDBs directly whichto their customers, and a continuation of this trend would significantly reduce our channel partner opportunities.
Well-known retail mutual fund companies, such as Fidelity Investments, have entered the HSA and CDB business and gained significant market share. Our market share could decline if Fidelity and other mutual fund companies continue expanding their presence in the market. These investment companies have significant advantages over us in terms of brand name recognition, years of experience managing tax-advantaged retirement accounts (e.g., 401(k) and IRA), highly developed recordkeeping, trust functions, and fund advisory and customer relations management, among others. If we are unable to compete effectively with these mutual fund company competitors, our results of operations, financial condition, business, and prospects could be materially adversely affected.
Many of our competitors, in particular banks, insurance companies, and other financial institutions, have longer operating histories and significantly greater financial, technical, marketing, and other resources than we have. As a result, some of these competitors may be in a position to devote greater resources to the development, promotion, sale, and support of their products and services and have offered, or may in the future offer, a wider range of products and services that may be more attractive toare increasingly desired by potential customers, and they may also use advertising and marketing strategies that (including loss-leaders) that achieve broader brand recognition or acceptance.
In addition, well-known retail mutual fund companies, such as Vanguard, who currently do notFinally, our competitors may have a strong presence or have somewhat limited productsthe ability to devote more financial and operational resources than we can to developing new technologies and services, including services that provide improved operating functionality, and adding features to their existing service offerings. If successful, their development efforts could render our services less desirable, resulting in the market for technology-enabled services that empower healthcare consumers mayloss of our existing customers or a reduction in the future decide to expand theirfees we earn from our products or attempt to grow their presence in the market. These investment companies have significant advantages over us in terms of brand name recognition, years of experience managing tax-advantaged retirement accounts (e.g., 401(k) and IRA), highly developed recordkeeping, trust functions, and fund advisory and customer relations management, among others. If we are unable to compete effectively with new competitors, our results of operations, financial condition, business and prospects could be materially adversely affected.services.
Developments in the rapidly changing healthcare industry could adversely affect our business.
Substantially all of our revenue is derived from healthcare-related saving and spending by consumers, which could be affected by changes affecting the broader healthcare industry, including decreased spending in the industry overall. General reductions in expenditures by healthcare industry participants could result from, among other things:
•government regulation or private initiatives that affect the manner in which healthcare industry participants interact with consumers and the general public;
•consolidation of healthcare industry participants;
•reductions in governmental funding for healthcare; and
•adverse changes in general business or economic conditions affecting healthcare industry participants.
Even if general expenditures by industry participants remain the same or increase, developments in the healthcare industry may result in reduced spending in some or all of the specific market segments that we serve now or in the future. The healthcare industry has changed significantly in recent years, and we expect that significant changes will continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot assure you that the demand for our products and services will continue to exist at current levels or that we will have adequate technical, financial, and marketing resources to react to changes in the healthcare industry.
If our members do not continue to utilize our payment cards, our results of operations, business, and prospects would be materially adversely affected.
We derived 22%17%, 23%15%, and 22%16% of our total revenue during the fiscal years ended January 31, 2018, 20172022, 2021, and 2016,2020, respectively, from interchange fees that are paid to us when our customers utilize our payment cards. These fees represent a percentage of the expenses transacted on each card. The COVID-19 pandemic has had a materially adverse impact on the interchange fees generated due to decreased usage of our payment cards in our commuter product and in healthcare spending. If our customers do not use these payment cards at the rate we expect, if they elect to withdraw funds using a non-revenue generating mechanism such as direct reimbursement, if the impacts of the COVID-19 pandemic continue, or if other alternatives to these payment cards develop, our results of operations, business, and prospects would be materially adversely affected.
Risks relating to our service and culture
Any failure to offer high-quality customer support services could adversely affect our relationships with our members, Clients, and Network Partners and our operating results.
Our customers depend on our support and customer education organizations to educate them about, and resolve technical issues relating to, our products and services. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for education and support services. Increased customer demand for these services, without a corresponding increase in revenue, could increase costs and adversely affect our operating results. We have experienced team member turnover as a result of the ongoing "great resignation"
occurring throughout the American economy, and this has negatively impacted our ability to provide the type of service that is expected by our Network Partners, Clients and members.
A majority of our work force now works remotely, including our member service and Client service teams, and we expect this remote work environment to continue after the COVID-19 pandemic. As a result, it may be more difficult to provide the type of service our members, Clients and Network Partners expect, and it may be more difficult to meet our service level commitments to our Clients.
Our sales process is highly dependent on the reputation of our products, services, and business and on positive recommendations from our existing customers. Further, we use third-party vendors for certain call centers and COBRA claims and transaction processing, including certain offshore vendors for member chat service, which vendors may not provide the same quality of support services for our Clients and members. Any failure to maintain high-quality education and technical support, or a market perception that we do not maintain high-quality education support, could adversely affect our reputation, our ability to sell our products and services to existing and prospective customers and our business and operating results. We promote 24/7/365 education and support along with our proprietary technology platforms. Interruptions or delays that inhibit our ability to meet that standard may hurt our reputation or ability to attract and retain customers.
We rely on our management team and team members and our business could be harmed if we are unable to retain qualified personnel.
Our success depends, in part, on the skills, working relationships and continued services of our executive leadership team and other key personnel. While we have entered into employment agreements with our executive officers, all of our team members are “at-will” employees, and their employment can be terminated by us or them at any time, for any reason, and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable team members, in addition to salary and cash incentives, we provide equity-based awards that vest over time or based on performance. The value to team members of these awards will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us. Volatility or lack of performance in our stock price may affect our ability to attract replacements should key personnel depart.
Our success also depends on our ability to attract, retain, and motivate additional skilled management personnel and other team members. For example, competition for qualified personnel in our field and geographic markets is intense due to the limited number of individuals who possess the skills and experience required by our industry, particularly in the technology-related fields. In addition, we have experienced team member turnover as a result of the ongoing "great resignation" occurring throughout the American economy, and we expect to continue to experience team member turnover in the future. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New team members may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. For example, it has become more difficult for us to hire entry-level team members in our member service and client service teams. If our retention efforts are not successful or our team member turnover rate continues to increase in the future, our business, results of operations and financial condition could be materially and adversely affected.
In September 2021, the President of the United States signed the Vaccine Mandate. While the Vaccine Mandate has been stayed by the courts, we are classified as a federal contractor due to a number of our agreements and believe we will be subject to the Vaccine Mandate if it is reinstated. HealthEquity’s compliance with the Vaccine Mandate has and could continue to result in increased team member attrition, absenteeism, costs associated with preventing team member attrition and absenteeism, and a further material increase in team member attrition, absenteeism or increase in retention costs could have a material and adverse impact on our business, results of operations and financial condition.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contribute to our success.
We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, including through the integration of team members joining us through our acquisitions, we have found it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
Data security, technological, and intellectual property risks
IfCyber-attacks, including ransomware attacks, or other privacy or data security incidents could materially adversely impact our security measures are breached or unauthorized access to data is otherwise obtained, our platform may be perceived as not being secure, our customers may reduce the use of, or stop using, our products and services, we may incur significant liabilities, our reputation may be harmed and we could lose sales and customers.business.
Our proprietary technology platform enablesplatforms enable the exchange of, and access to, sensitive information, and, security breaches could result in the loss of this sensitive information, theft or loss of actual funds, litigation, indemnity obligations to our customers, fines and other liabilities, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our members and Network Partners, damage our reputation and cause a loss of confidence in our products and services. While we have security measures in place, we have experienced limited data privacy incidents in the past. If in the future our security measures are breached or unauthorized access to data is otherwise obtained as a result, we are frequently the target of third-party action, employee errorcyber-attacks or otherwise,other privacy or data security incidents. As one of the largest providers of HSAs and other CDBs, we are an even more attractive target for cyber-attacks, including ransomware attacks, which means we must continue to secure and monitor each of our reputation could be significantly damaged,technology platforms, making sure these platforms are aligned to our businessindustry benchmark security posture. In addition, recent geopolitical events, including the war between Russia and Ukraine, may sufferresult in an increase in cyber-attacks.
The majority of our work force now works remotely, and we could incur substantial liability which could resultexpect this to continue even after the COVID-19 pandemic. This remote work environment increases the risk of cybersecurity breaches and incidents, and the potential impact of these on our operations is also higher while our team members log in loss of sales and customers. If third parties improperly obtain and use the personal information of our customers, we may be required to expend significant resources to resolve these problems. A major breach of our network security and systems could have serious negative consequences for our businesses, including:
possible fines, penalties and damages;
reduced demand for our services;
an unwillingness of consumers and other data owners to provide us with their payment information;
an unwillingness of customers and other data owners to provide us with personal information; and
harm to our reputation and brand.
Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new customers and increase engagement by existing customers, and/or subject us to third-party lawsuits, regulatory fines, contractual liability and/or other action or liability, thereby harming our operating results.
We have incurred, and expect to continue to incur, significant costs to protect against security breaches. We may incur significant additional costs in the future to address problems caused by any actual or perceived security breaches. Cybersecurity breaches could compromise our data and the data of our customers and partners, which may expose us to liability and would likely cause our business and reputation to suffer.remotely.
Our ability to ensure the security of our online platformtechnology platforms and thus sensitive customer and partner information is critical to our operations. We rely on standard Internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. Despite our security measures, our information technology and infrastructure may beis vulnerable to cybersecurity threats, including attacks by hackers and other malfeasance. Any suchSuch security breachbreaches could compromise our networks and result in the information stored or transmitted there to be accessed, publicly disclosed, lost, or stolen. Any suchSuch access, disclosure, or other loss of information could result in legal claims or proceedings leading to liability, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our clients, damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, operations, and competitive position.
A major breach of our network security and systems could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our services, an unwillingness of members, Clients, Network Partners and other data owners to provide us with their payment information, an unwillingness of members and other data owners to provide us with personal information, and harm to our reputation and brand.
TableSecurity breaches could result in the loss of Contentssensitive information, theft or loss of actual funds, litigation, indemnity obligations to our Clients, fines and other liabilities, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our members, Clients and Network Partners, damage our reputation, and cause a loss of confidence in our products and services. If third parties improperly obtain and use the personal information of our members, we may be required to expend significant resources to resolve these problems. While we have security measures in place, we have experienced data privacy incidents in the past, including several incidents in 2018. As a result, or if our security measures are breached again or unauthorized access to data is otherwise obtained as a result of third-party action, team member error or otherwise, our reputation could be significantly damaged, our business may suffer and we could incur substantial liability, which could result in loss of sales, Clients and Network Partners.
We have found that the security measures associated with some of the technology platforms used by WageWorks are not sufficient and improving these security measures has taken and will continue to take significant resources. The continued integration of the WageWorks technology platforms with our technology platforms may create further vulnerabilities in our systems.
Because techniques used to obtain unauthorized access to or sabotage systems change frequently and are generally not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new, or increase engagement by, members, Clients and Network Partners, and subject us to third-party lawsuits, regulatory fines, contractual liability, and other action or liability, thereby harming our operating results.
Fraudulent and other illegal activity involving our products and services including our payment cards, could lead to financial and reputational damage to us and reduce the use and acceptance of our platform.products and services.
Criminals are using increasingly sophisticated methods to capture personal information in order to engage in illegal activities such as counterfeiting and identity theft. Even if we can secure our systems against these activities, we are vulnerable through third parties. We rely upon third parties for some transaction processing services, data feeds, and vendors, which subjects us to risks related to the vulnerabilities of those third parties. For example, we are exposed to risks relating to the theft of payment card numbers housed in a merchant's point of sale systems if our members use our payment cards at a merchant whose systems are compromised. We may make our customersmembers whole for losses sustained when using our payment cards, even in instances where we are not directly responsible
for the underlying cause of such loss. A single significant incident of fraud, or increases in the overall level of fraud, involving our payment cards, our custodial accounts or our reimbursement administration services, could result in financial and reputational damage to us, which could reduce the use and acceptance of our products and services, or cause our customersClients, members and Network Partners to cease doing business with us.
We rely on software licensed from third parties that may be difficult to replace or that could cause errors or failures of our online platformtechnology platforms that could lead to lost customers or harm to our reputation.
We rely on certain cloud-based software licensed from third parties to run our business. This software may not continue to be available to us on commercially reasonable terms and any loss of the right to use any of this software could result in delays in the provisioning of our products and services until equivalent technology is either developed by us, or, if available, is identified, obtained, and integrated, which couldwould likely take a significant amount of time and harm our business. In addition, we have certain service level agreements with certain of our employer clientsClients and Network Partners for which the availability of this software is critical. Any decrease in the availability of our service as a result of errors, defects, a disruption or failure of our licensed software may require us to provide significant fee credits or refunds to our customers. Our software licensed from third parties is also subject to change or upgrade, which may result in our incurring significant costs to implement such changes or upgrades.
Developing and implementing new and updated applications, features, and services for our technology platformplatforms may be more difficult than expected, may take longer and cost more than expected, or may result in the platformplatforms not operating as expected, which may harm our operating results or may not result in sufficient increases in revenue to justify the costs.expected.
Attracting and retaining new customersclients and Network Partners requires us to continue to improve the technology underlying our proprietary technology platformplatforms and requires our technology to operate as expected. In addition, potential clients and Network Partners are increasingly seeking a bundled solution, encompassing a wide range of features. Accordingly, we must continue to develop new and updated applications, features, and services, and maintain existing applications, features, and services. If we are unable to do so on a timely basis or if we are unable to implement new applications, features and services that enhance our customers’members’ and Clients' experience without disruption to our existing onesapplications, features and services, or if we encounter technical obstacles that result in the technology not operating properly, we may lose potential and existing customers.Clients and Network Partners. We rely on a combination of internal development, strategic relationships, licensing, and acquisitions to develop our content offerings, products and healthcare saving and spending services. These efforts may:
•cost more than expected;
•take longer than originally expected;
•require more testing than originally anticipated;
•require significant cost to address or resolve technical defects or obstacles;
•require additional advertising and marketing costs; and
•require the acquisition of additional personnel and other resources.
The revenue opportunities earned from these efforts may fail to justify the amounts spent. In addition, material performance problems, defects or errors in our existing or new software may occur in the future, which may harm our operating results.
Our online platform is hosted from two data centers. Any disruption of service at our facilities or our third-party hosting providersdata centers could interrupt or delay our customers’ access to our products and services, which could harm our operating results.services.
The ability of our team members, members, Health Plan and AdministratorNetwork Partners, and Employer PartnersClients to access our technology platformplatforms is critical to our business. We currently serve our customers from data centers located in Draper, Utah, with a backup site in Austin, Texas. We cannot ensure that the measures we have taken to enable access to our technology platforms will be effective to prevent or minimize interruptions to our operations. Our technology platforms are hosted by third-party data centers. Our facilities and our third-party data centers are vulnerable to interruption or
damage from a number of sources, many of which are beyond our control, including, without limitation:
•extended power loss;
•telecommunications failures from multiple telecommunications providers;
•natural disaster or an act of terrorism;
•software and hardware errors, or failures in our own systems or in other systems;
•network environment disruptions such as computer viruses, hacking and similar problems in our own systems and in other systems;
•theft and vandalism of equipment; and
•actions or events caused by or related to third parties.
We attempt to mitigate these risks through various business continuity efforts, including redundant infrastructure, 24/7/365 system activity monitoring, backup and recovery procedures, use of a secure storage facility for backup
media, separate test systems, and change management and system security measures, but our precautions may not protect against all potential problems. Our data recovery center iscenters are equipped with physical space, power, storage and networking infrastructure and Internet connectivity to support our online platformtechnology platforms in the event of the interruption of services at our primary data center.centers. Even with thisthese data recovery center, however,centers, our operations would be interrupted during the transition process should our primary data center experience a failure. Disruptions at our data centers could cause disruptions to our online platformtechnology platforms and data loss or corruption. We have experienced interruptions and delays in service and availability for data centers, and bandwidth and other technology issues in the past. Frequent or persistent system failures that result in the unavailability of our technology platforms or slower response times could reduce our members', Clients' and Network Partners' ability to access our technology platforms, impair the delivery of our products and services, and harm the perception of our platforms as reliable, trustworthy, and consistent. Any future errors, failure, interruptions or delays experienced in connection with these third-party technologies could delay our customers’ access to our products by members, Clients and Network Partners, which would harm our business. This could damage our reputation, subject us to potential liability or costs related to defending against claims or cause our customersmembers, Clients and strategic partnersNetwork Partners to cease doing business with us, any of which could negatively impact our revenue.financial results.
Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our products and services, which could cause us to lose customers and harm our operating results.services.
Our business depends on the continuing operation of our technology infrastructure and systems. Any damage to or failure of our systems could result in interruptions in our ability to deliver our products and services. Interruptions in our service could reducenegatively impact our revenue and profits,financial results, and our reputation could be damaged if people believe our systems are viewed as unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events.
Any unscheduled interruption in our service would result in an immediate loss of revenue. Frequent or persistent system failures that result in the unavailability ofcould negatively impact our platform or slower response times could reducefinancial results. In addition, our customers’ ability to access our platform, impair our delivery of our products and services and harm the perception of our platform as reliable, trustworthy and consistent. Our insurance policies provide only limited coverage for service interruptions and may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.
We mustOur technology platforms may link to or utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Our technology platforms may incorporate software covered by open source licenses. The terms of various open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unfavorable conditions on us. For example, by the terms of certain open source licenses, we could be required to offer our technology platforms that incorporate the open source software for no cost, that we make publicly available source code for modifications or derivative works that we created based upon, incorporating or using the open source software, and/or that we license such modifications or derivative works under the terms of the particular open source license. If portions of our proprietary software are determined to be subject to an open source license, then the value of our technologies and services could be reduced.
In addition to risks related to license requirements, usage of open source software may be riskier than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could negatively affect our business.
Failure to adequately protect our brandbrands and other intellectual property rights, and infringement of the intellectual property rights related toof others, would negatively impact our products and services and avoid infringing on the proprietary rights of others.business.
We believe that the HealthEquity brand isour brands are critical to the success of our business, and we utilize trademark registration and other means to protect it.these brands. Our business would be harmed if we were unable to protect our brandbrands against infringement and itsthe value of our brands was to decrease as a result.
We rely on a combination of trademark and copyright laws, trade secret protection, and confidentiality and license agreements to protect the intellectual property rights related to our products and services such as our technology platforms, applications and the content on our website. We also rely on intellectual property licensed from third parties. We may unknowingly violate the intellectual property or other proprietary rights of others and, thus, may be subject to claims by third parties. If so, we may be required to devote significant time and resources to defending against these claims or to protecting and enforcing our own rights. As a result of any such dispute, we may have to:
•develop non-infringing technology;
•pay damages;
•enter into royalty or licensing agreements;
•cease providing certain products or services; or
•take other actions to resolve the claims.
Additionally, we have largely relied, and expect to continue to rely, on copyright, trade secret, and trademark laws, as well as generally relying on confidentiality procedures and agreements with our team members, consultants, customers, and vendors, to control access to, and distribution of, technology, software, documentation, and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain, use, or distribute our technology without authorization, particularly in foreign jurisdictions where some of our intellectual property rights may not be protected by intellectual property laws. If this were to occur, we could lose revenue as a result of competition from products infringing or misappropriating our technology and intellectual property and we may be required to initiate litigation to protect our proprietary rights and market position. U.S. copyright, trademark, and trade secret laws offer us only limited protection and the laws of some foreign countries do not protect proprietary rights to the same extent. Accordingly, defense of our trademarksintellectual property and proprietary technology may become an increasingly important issue as we continue to expand our operations.
Policing unauthorized use of our trademarksintellectual property and technology is difficult and the steps we take may not prevent misappropriation of the trademarksintellectual property or technology on which we rely. If competitors are able to use our trademarksintellectual property or technology without recourse, our ability to compete would be harmed and our business would be materially and adversely affected. We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others.
The loss of our intellectual property or the inability to secure or enforce our intellectual property rights or to defend successfully against an infringement action could harm our business, results of operations, financial condition, and prospects.
If we failare unable to develop further brand awareness cost-effectively,promote our brands effectively, our business may suffer.
We believe that developing and maintaining awareness ofpromoting our brandbrands in a cost-effectivean effective manner is critical to achieving widespread acceptance of our products and services, and attracting new customers and strategic partners.partners, and integrating acquired businesses and Clients. Brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand.brands. If we fail to successfully promote and maintain our brand,brands, or incur substantial expenses in doing so, we may fail to attract or retain a sufficient number of customersClients and strategic partnersNetwork Partners necessary for us to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our products and services.services, or to fully and effectively integrate our acquisitions.
We currently own several web domain names that are critical to the operation of our business. The acquisition and maintenance of domain names, or Internet addresses, is generally regulated by governmental agencies and their designees. The regulation of domain names in the U.S. is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or otherwise decrease the value of our brands, trademarks and other proprietary rights. We may not be able to successfully implement our business strategy of establishing strong branding if we cannot prevent others from using similar domain names or trademarks. This failure could impair our ability to increase our market share and revenue.
Confidentiality arrangements with team members and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our team members, independent contractors, advisersadvisors, customers, and customers.other partners. These arrangements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert trade secret rights against such parties. The loss of trade secret protection could make it easier for third parties to compete with our products and services by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
If we cannot protect our domain name, our ability to successfully promote our brand will be impaired.
We currently own the web domain name www.healthequity.com, which is critical to the operation of our business. The acquisition and maintenance of domain names, or Internet addresses, is generally regulated by governmental agencies and their designees. The regulation of domain names in the U.S. is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not be able to successfully implement our business strategy of establishing a strong brand for HealthEquity if we cannot prevent others from using similar domain names or trademarks. This failure could impair our ability to increase our market share and revenue.
Legal and regulatory risks
The healthcare regulatory and political framework is uncertain and evolving, and we cannot predict the effect that further healthcare reform and other changes in government programs may have on our business, financial condition, or results of operations.operations.
Healthcare laws and regulations are rapidly evolving and may change significantly in the future, which could adversely affect our financial condition and results of operations. For example,In addition, proposals to implement a single payer or "Medicare for all" system in the Affordable Care Act, which includesU.S. or in individual states, if adopted, could have a variety of healthcare reform provisions and requirements that may become effective at varying times through 2022, substantially changes the way healthcare is financed by both governmental and private insurers, and may significantly impactmaterial adverse effect on our industry. Further changes to the Afforable Care Act and related healthcare regulation remain under consideration.business. The full impact of recent healthcare reform and other changes in the healthcare industry and in healthcare spending is unknown and may be affected by President Biden's administration and a Democratically controlled Congress. Accordingly, we are unable to predict accurately what effect the Affordable Care Act or other healthcare reform measures that may be adopted in the future will have on our business.
Changes in applicable federal and state laws relating to the tax benefits available through tax-advantaged healthcare accounts such as HSAs wouldand other CDBs could materially adversely affect our business.
The effortsHSAs and other CDBs exist as a result of governmentalprovisions in the Internal Revenue Code and third-party payersother laws and regulations. Changes to raise revenuethe regulatory landscape impacting our products may require substantial time and costs for us to ensure our products are compliant. For example, regulatory changes related to our FSA and COBRA products enacted in the wake of the COVID-19 pandemic created uncertainty and additional workload on our team members and resulted in additional costs. In addition, federal or contain or reducestate governments could impose laws that limit the costs of healthcare as well as legislative and regulatory proposals aimed at changing the U.S. healthcare system,eligibility requirements for our products, which could include restructuringlimit our ability to grow or cause us to lose existing members, or such governments could change the tax benefits available through HSAs, FSAs, and similar tax-advantaged healthcare accounts, may adversely affecteligibility requirements we must meet to maintain the licenses we need to offer our business, operating results, and financial condition. For example, the federal government or states may seek to raise revenues by enacting tax laws that eliminate the tax deductions available to individuals who contribute to HSAs. Our business is substantially dependent on the tax benefits available through HSAs. products. We cannot predict if any new healthcare reforms will ultimately become law, or if enacted, what their terms or the regulations promulgated pursuant to such reforms will be. If the laws or regulations are changed to limit or eliminate the tax benefits available through these accounts,be, and such a change wouldreforms could have a material adverse effect on our business.
We are subject to privacy regulations, including regarding the access, use, and disclosure of personally identifiable information. If we or any of our third-party vendors experience a privacy breach, of personally identifiable information, it could result in substantial financial and reputational harm, including possible criminal and civil penalties.
State and federal laws and regulations govern the collection, dissemination, access, and use of personally identifiable information, including HIPAA and HITECH, which govern the treatment of protected health information, and the Gramm-Leach Bliley Act, which governs the treatment of nonpublic personal information. In the provision of services to our customers, we and our third-party vendors may collect, access, use, maintain, and transmit personally identifiable information in ways that are subject to many of these laws and regulations. IfAlthough we or any of our third-party vendors experience a breachhave implemented measures to comply with these privacy laws, rules, and regulations, we have experienced data privacy incidents. Any further unauthorized disclosure of personally identifiable information itexperienced by us or our third-party vendors could result in substantial financial and reputational harm, including possible criminal and civil penalties. In many cases, we are subject to HIPAA and other privacy regulations because we are a business associate providing services to covered entities; as a result, the covered entities direct HIPAA compliance matters in the event of a security breach, which complicates our ability to address harm caused by the breach. In addition, our increased offering of CDBs means we now obtain substantially more HIPAA data. Additionally, as we have in connection with prior security incidents, we may be required to report breaches to partners, regulators, state attorney generals, and impacted individuals depending on the severity of the breach, our role, legal requirements, and contractual obligations. Although we have implemented measures
Privacy regulation has become a priority issue in many states, and as such the regulatory environment is continually changing. For example, the California Consumer Privacy Act ("CCPA") became effective on January 1, 2020. The CCPA requires companies, such as ours, that process information on California residents to complymake new disclosures to consumers about their data collection, use, and sharing practices, and allows consumers to opt out of certain data sharing with third parties and provides a new cause of action for data breaches. We expect further privacy requirements to be applicable to us as a result of the recently passed California Privacy Rights Act, as it significantly modifies the CCPA by expanding consumers’ rights with respect to certain sensitive personal information. Other governmental authorities are also considering legislative and regulatory proposals concerning data protection.
Continued compliance with current and potential new privacy laws, rules, and regulations we have experienced limitedand meeting consumer expectations with respect to the control of personal data privacy issues in recent years. Continued compliance with privacy laws, rules and regulations in a rapidly changing technology environment could result in higher compliance and technology costs for us.us, as well as costly penalties in the event we are deemed to not be in compliance with such laws, rules, and regulations.
Legislative, regulatory, and legal developments involving taxes could adversely affect our results of operations and cash flows.
We are subject to U.S. federal and state income, payroll, property, sales and use, and other types of taxes in numerous jurisdictions. Significant judgment is required in determining our provisions for income taxes. Changes in tax rates, enactments of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxes. For example, recent tax proposals have included proposals to increase the U.S. corporate income tax rate and impose a new alternative minimum tax on book income. If these or similar taxpayer unfavorable proposals are ultimately enacted, they could materially impact our tax provision, cash tax liability and effective tax rate.
We do not collect sales and use taxes in all jurisdictions in which our customers are located, other than from sales of certain commuter services, based on our belief that such taxes are generally not applicable to our services. Sales and use tax laws and rates vary by jurisdiction and such laws are subject to interpretation. In those jurisdictions and in those cases where we do believe sales taxes are applicable, we collect and file timely sales tax returns. Currently, such sales taxes apply to certain commuter services, but otherwise are minimal to the rest of our services. Jurisdictions in which we do not collect sales and use taxes may assert that such taxes are applicable, which could result in the assessment of such taxes, interest, and penalties, and we could be required to collect such taxes in the future. Such additional sales and use tax liability could adversely affect the results of our operations.
Changes in laws and regulations relating to interchange fees on payment card transactions wouldcould adversely affect our revenue and results of operations.
Existing laws and regulations limit the fees or interchange rates that can be charged on payment card transactions. For example, the Federal Reserve Board has the power to regulate payment card interchange fees and has issued a rule setting a cap on the interchange fee an issuer can receive from a single payment card transaction. Our HSA-linked payment cards are exempt from this rule, (althoughalthough we are subject to a general requirement of reasonable compensation for services rendered).rendered. To the extent that our payment cards lose their exempt status, the interchange rates applicable to transactions involving our payment cards could be impacted, which would decrease our revenue and profit and could have a material adverse effect on our financial condition and results of operations.
Failure to comply with, or changes in, payment card industry, credit card association or other network rules or standards set by Visa or MasterCard, or changes in card association and debit network fees or products or interchange rates, could materially adversely affect us.
TableWe, and the banks that issue our prepaid debit cards, are subject to Payment Card Industry Data Security Standards and Visa and MasterCard association rules that could subject us to a variety of Contentsfines or penalties that may be levied by the card associations or networks for acts or omissions by us or businesses that work with us, including card processors. Failure to comply with these rules and standards could result in significant fines, other penalties, or the termination of our interchange revenue agreements. The termination of the card association registrations held by us or any of the banks that issue our cards, or any changes in card association or other debit network rules or standards, including interpretation and implementation of existing rules, participants deciding to use PIN networks, standards or guidance that increase the cost of doing business or limit our ability to provide our products and services, or limit our ability to receive interchange fees, could have a material adverse effect on our results of operations, financial condition, business, and prospects. In addition, from time-to-time, card associations increase the organization or processing fees that they charge, which could increase our operating expenses, reduce our profit margin and materially adversely affect our results of operations, financial condition, business, and prospects.
Our investment advisory, custodial, and retirement servicesWe are subject to complex regulation, and any compliance failures or regulatory action could adversely affect our business.
Our business, including HSAs and many of the CDBs we administer and our investment adviser and trust company subsidiaries, is subject to extensive, complex, and frequently changing federal and state laws and regulations, including IRS, Health and Human Services (“HHS”), and Department of Labor (“DOL”) regulations; ERISA, HIPAA, HITECH, and other privacy and data security regulations; the Advisers Act; state banking laws; state third-party administrator laws, and the Patient Protection and Affordable Care Act.
Our subsidiary HealthEquity Advisors, LLC is an SEC-registered investment adviser that provides automated web-only investment advisory services. As such, it must comply with the requirements of the Advisers Act and related SEC regulations and is subject to periodic inspections by the SEC staff. Such requirements relate to, among other things, fiduciary duties to clients, disclosure obligations, recordkeeping and reporting requirements, marketing restrictions, limitations on agency cross and principal transactions between the adviser and its clients, and general
anti-fraud prohibitions. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations.
Our subsidiary HealthEquity Trust Company is a non-depository trust company and subject to regulation and supervision by the Wyoming Division of Banking.
Compliance with regulatory requirements may divert internal resources and take significant time and effort. Any claim of non-compliance, regardless of merit or ultimate outcome, could subject us to investigation by the HHS, the DOL, the SEC, the Wyoming Division of Banking, or other regulatory authorities. This in turn could result in additional claims or class action litigation brought on behalf of our members, Clients or Network Partners, any of which could result in substantial cost to us and divert management’s attention and other resources away from our operations. Furthermore, investor perceptions of us may suffer, and this could cause a decline in the market price of our common stock. Our compliance processes may not be sufficient to prevent assertions that we failed to comply with any applicable law, rule or regulation. In addition, all of our business areis subject, to varying degrees, to fiduciary and other service provider obligations under ERISA,, the Internal Revenue Code, and underlying regulations. A failure to comply could subject us to disgorgement of profits, excise taxes, civil penalties, private lawsuits, and other costs, including reputational harm.
If we are unable to meet or exceed the net worth test required by the IRS, we could be unable to maintain our non-bank custodian status, which would have a material adverse impact on our ability to operate our business.status.
As a non-bank custodian, we are required to comply with Treasury Regulations Section 1.408-2(e), or the Treasury Regulations, including the net worth requirements set forth therein. If we should fail to comply with the Treasury Regulations’ non-bank custodian requirements, including the net worth requirements, such failure would materially and adversely affect our ability to maintain our current custodial accounts and grow by adding additional custodial accounts, and it could result in the institution of procedures for the revocation of our authorization to operate as a non-bank custodian.
Risks relating to our partners and service providers
Our distribution model relies on the cooperation of our Network Partners. If our Network Partners choose to partner with other providers of, technology-enabled services that empower healthcare consumers, including HSAor otherwise reduce offering or cease to offer, our products and services, our business could be materially and adversely affected.
Our business depends on our Network Partners’ willingness to partner with us to offer their customers and/or employees our products and services. In particular, certain of our Health Plan and AdministratorNetwork Partners enjoy significant market share in various geographic regions. In certain geographies, we have multiple Network Partners that may be competing against each other for the same business, which may result in our inability to bid for certain business or could result in us upsetting a Network Partner that we choose not to partner with in a certain bid or that expects us to bid exclusively with them. If these Health Plan and AdministratorNetwork Partners choose to instead partner with our competitors, or otherwise reduce offering, or cease to offer, our products and services, our results of operations, business, and prospects could be materially adversely affected.
We rely on a single bank identification number sponsor for our payment cards, and aA change in relationship with this sponsorany of our bank identification number sponsors, or itsthe failure by these sponsors to comply with certain banking regulations, could materially and adversely affect our business.
We rely on a singlelimited number of bank identification number or BIN, sponsor("BIN") sponsors in relation to the payment cards we issue. A BIN sponsor is a bank or credit union that provides the BIN that allows a prepaid card program to run on one of the major card brand networks (e.g.(e.g., VISA, MasterCard, Discover or American Express). Our BIN sponsor enablessponsors enable us to link the payment cards that we offer our members to the VISA network,and Mastercard networks, thereby allowing our members to use our payment cards to pay for healthcare-related expenses with a “swipe” of the card. If any material adverse event were to affect our BIN sponsor,sponsors, including a significant decline in itsthe financial condition of any of our BIN sponsors, a decline in the quality of its service itsprovided by our BIN sponsors, the inability of our BIN sponsors to comply with applicable banking and financial service regulatory requirements or industry standards, systems failure or itsthe inability of our BIN sponsors to pay us fees, our business, financial condition, and results of operations could be materially and adversely affected because we may be forced to reduce the availability of, or eliminate entirely, our payment card offering.offering, which would materially impact our interchange revenue. In addition, we do not have a long-term contractcontracts with our BIN sponsor,sponsors, and itour BIN sponsors may increase the fees it
chargescharged to us or terminate its relationship with us.our relationship. If we were required to change BIN sponsors, we could not accurately predict the success of such change or that the terms of our agreement with a new BIN sponsor would be as favorable to us, especially in light of the recent increased regulatory scrutiny of the payment card industry, which has rendered the market for BIN sponsor services less competitive.
Replacing our FDIC-insured custodial depository bank partners for certain custodial account services from which we earn fees. A business failure in any FDIC-insured custodial depository bank partner would materially and adversely affect our business.
As a non-bank custodian, we rely on our FDIC-insured custodial bank partners to hold and invest our custodial cash assets. If any material adverse event were to affect one of our FDIC-insured custodial depository bank partners, including a significant decline in its financial condition, a decline in the quality of its service, loss of deposits, its inability to comply with applicable banking and financial services regulatory requirements, systems failure or its inability to pay us fees, our business, financial condition and results of operations could be materially and adversely affected. If we were required to change custodial depository banking partners, we could not accurately predict the success of such change or that the terms of our agreement with a new banking partner would be as favorable to us as our current agreements, especially in light of the consolidation in the banking industry, which has rendered the market for FDIC-insured retail banking services less competitive.
We receive important services from third-party vendors. Replacing themvendors would be difficult and disruptive to our business.
We have entered into contracts with third-party vendors to provide critical services relating to our business, including the redesign of our technology platforms, fraud management and other customer verification services, transaction processing and settlement, telephony services, call centers and card production. In addition, WageWorks uses third-party vendors for its COBRA transaction processing and also uses one of our competitors for card processing and other services. In the event that these service providers fail to maintain adequate levels of support, do not provide high quality service, increase the fees they charge us, discontinue their lines of business, terminate our contractual arrangements or cease or reduce operations, we may suffer additional costs and be required to pursue new third-party relationships, which could harm our reputation, materially disrupt our operations and our ability to provide our products and services, and could divert management’s time and resources. IfA transition to a new vendor could take a significant amount of time and resources and, if we are unable to complete a transition to a new provider on a timely basis, or at all, we could be forced to temporarily or permanently discontinue certain services, such as our payment card services, which could disrupt services to our customers and adversely affect our business, financial condition, and results of operations. We may also be unable to establish comparable new third-party relationships on as favorable terms or at all, which could materially and adversely affect our business, financial condition, and results of operations.
AcquisitionIn the event the stay of the Vaccine Mandate is lifted, the Vaccine Mandate would require that certain of our third-party vendors also require their employees to be vaccinated. While we continue to evaluate the impact of the Vaccine Mandate on our third-party vendors, compliance with the Vaccine Mandate could result in certain key third-party vendors terminating their arrangements with us or in increased employee turnover at our third-party vendors, delays in performance by our third-party vendors, or increased costs for us. Such impacts could have a material and growth-relatedadverse impact on our business, results of operations and financial condition.
Growth-related risks
We have in the past completed acquisitions and may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations and harm our operating results.
We have in the past acquired, and we may in the future acquire or invest in, assets, businesses, products or technologies that we believe could complement or expand our products and services, enhance our technical capabilities or otherwise offer growth opportunities. There is no assurance that we will realize the anticipated benefits of these or any future acquisitions. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.
There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate oroperate, integrate, the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition, and our management may be distracted from operating our business. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, without limitation:
unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs, which would be recognized as a current period expense;
inability to earn sufficient revenue to offset acquisition or investment costs;
the inability to maintain relationships with customers and partners of the acquired business;
the difficulty of incorporating acquired technology and rights into our platform and of maintaining quality and security standards consistent with our brand;
the need to integrate or implement additional controls, procedures and policies;
harm to our existing business relationships with customers and strategic partners as a result of the acquisition;
the diversion of management’s time and resources from our core business;
the potential loss of key team members;
use of resources that are needed in other parts of our business and diversion of management and employee resources;
our ability to coordinate organizations that are geographically diverse and that have different business cultures;
our inability to comply with the regulatory requirements applicable to the acquired business;
the inability to recognize acquired revenue in accordance with our revenue recognition policies; and
use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition.
Acquisitions also increase the risk of unforeseen legal liability, including for potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses which are not discovered by due diligence during the acquisition process. Generally, if an acquisition fails to meet our expectations, our operating results, business and financial condition may suffer. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our business, results of operations or financial condition. Even if we are successful in completing and integrating an acquisition, the acquisition may not perform as we expect or enhance the value of our business as a whole.
We must be able to operate and scale our technology effectively to match our business growth.
Our ability to continue to provide our products and services to a growing number of customers, as well as to enhance our existing products and services, attract new customers and strategic partners, and offer new products and services, and continue the integration of acquired businesses into our business, is dependent on our information technology systems. If we are unable to manage the technology associated with our business effectively, we could experience increased costs, reductions in system availability, and customer loss. We are currently investing in a significant upgrading of the capacity and performancemodernization of our proprietary technology platforms to support new opportunities and enhance security, privacy, and platform and database design to ensure continued performance at scale, to reduce spending on maintenance activities and to enable us to execute technology innovation more quickly.infrastructure. If we are unsuccessful in implementing these upgrades to our platform,technology platforms, we may be unable to adequately meet the needs of our customers and/or implement technology-based innovation in response to a rapidly changing market, which could harm our reputation and adversely impact our business, financial condition, and results of operations.
Failure to manage future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.
The continued rapid expansion and development of our business may placehas placed a significant strain upon our management and administrative, operational, and financial infrastructure. As of January 31, 2018,2022, we had approximately 3.47.2 million HSA MembersHSAs and $6.8$19.6 billion in custodialHSA assets representing growth of 24%25% and 35%37%, respectively, from January 31, 2017. For the year ended January 31, 2018, our total revenue and Adjusted EBITDA were approximately $229.5 million and $84.7 million, respectively, which represents year-over-year annual growth rates of approximately 29% and 35%, respectively. See “Key financial and operating metrics” for the definition of Adjusted EBITDA and a reconciliation of net income, the most comparable GAAP measure, to Adjusted EBITDA. While to date we believe we have effectively managed the effect on our operations resulting from the rapid growth of our business, our2021. Our growth strategy contemplates further increasing the number of our HSA MembersHSAs, CDBs and our custodial assetsHSA Assets at relatively higher growth rates than industry averages. However, the rate at which we have been able to attractadd new HSAs, CDBs and HSA MembersAssets in the past may not be indicative of the rate at which we will be able to attract additional HSA Membersgrow in the future.
Our success depends in part upon the ability of our executive officers to manage growth effectively. Our ability to grow also depends upon our ability to successfully hire, train, supervise, and manage new team members, obtain financing for our capital needs, expand our systems effectively, control increasing costs, allocate our human resources optimally, maintain clear lines of communication between our operational functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational, and financial infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations or that we will be able to manage growth effectively
or to achieve further growth at all. If our business does not continue to grow or if we fail to effectively manage any future growth, our business, financial condition, and results of operations could be materially and adversely affected.
We plan to extend and expand our products and services and introduce new products and services, and we may not accurately estimate the impact on our business of developing, introducing, and updating thesenew and existing products and services on our business.services.
We intend to continue to invest in technology and development to create new and enhanced products and services to offer our customers and to enhance the capabilities of our platform’s compatibilities.platforms. We may not be able to anticipate or manage new risks and obligations or legal, compliance, or other requirements that may arise in these areas. The anticipated benefits of such new and improved products and services may not outweigh the costs and resources associated with their development. Some new services may be received negatively by our existing and/or potential customers and strategic partners and have to be put on hold or canceled entirely.
Our ability to attract and retain new customer revenue from existing customers will depend in large part on our ability to enhance and improve our existing products and services and to introduce new products and services. The success of any enhancement or new product or service depends on several factors, including the timely completion, introduction, and market acceptance of the enhancement or new product or service. Any new product or service we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to earn significant revenue. If we are unable to successfully develop or acquire new products or services or enhance our existing products or services to meet member or network partner requirements, our results of operations, financial condition, business or prospects may be materially adversely affected.
We have recorded a significant amount of intangible assets. We may need to record write-downs from future impairments of identified intangible assets and goodwill, which could adversely affect our costs and business operations.goodwill.
Our consolidated balance sheet includes significant intangible assets, including approximately $4.7 million$1.65 billion in goodwill and $83.6$973.1 million in intangible assets, together representing approximately 24%84% of our total assets as of January 31, 2018.2022. The determination of related estimated useful lives and whether these assets are impaired involves significant judgments. We test our goodwill for impairment each fiscal year, but we also test goodwill and other intangible assets for impairment at any time when there is a change in circumstances that indicates that the carrying value of these assets may be impaired. Any future determination that these assets are carried at greater than their fair value could result in substantial non-cash impairment charges, which could significantly impact our reported operating results.
Risks relatingFinancing and related risks
Our substantial debt could limit our ability to fund operations, expose us to interest rate volatility, limit our ability to raise additional capital and have a material adverse effect on our ability to fulfill our obligations under our Credit Agreement and Indenture and to our serviceNetwork Partners, Clients and culturemembers.
AnyWe are party to a credit agreement (the "Credit Agreement") among the Company, as borrower, each lender from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the Swing Line Lender (as defined in the Credit Agreement), and each L/C Issuer (as defined therein) party thereto. Our Credit Agreement consists of (i) a five-year senior secured term loan A facility in the aggregate principal amount of $350 million (the "Term Loan Facility") 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 $1 billion. We have also issued $600 million of 4.50% unsecured Senior Notes due 2029 (the "Notes"). Under the Credit Agreement, we have the right to request additional commitments for new term loans and increases to then-existing term loans and revolving credit commitments in an amount up to the sum of (i) $300 million, plus (ii) an unlimited additional amount so long as the pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) does not exceed 3.85 to 1.00 (assuming any such new or increased revolving commitments are fully borrowed). We also have the right to incur additional debt from time to time, subject to the restrictions contained in the Credit Agreement and the indenture under which the Notes were issued (the "Indenture"). The substantial debt we have outstanding, combined with our other financial obligations and contractual commitments, has important consequences, including the following:
•our level of debt may make it more difficult for us to satisfy our obligations with respect to our debt, and any failure to offer high-quality customer support servicescomply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the Credit Agreement or the Indenture and the agreements governing such other debt;
•we will be required to use a substantial portion of our cash flow from operations to pay principal and interest on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, strategic acquisitions, investments and alliances and other general corporate requirements;
•our interest expense could increase if interest rates increase because any outstanding borrowings under our Credit Facilities will be based on variable interest rates;
•the interest rate on our Revolving Credit Facility is based on LIBOR, and although the Credit Agreement provides an alternative mechanism for determining the applicable interest rate when LIBOR is no longer
available, the interest rates we pay may be adversely affected as a result of potential disruptions in connection with the LIBOR phase-out;
•the interest rate on our Revolving Credit Facility will depend on the level of our specified financial ratios, and therefore could increase if such specified financial ratios increase;
•such substantial debt could leave us vulnerable to general economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;
•our debt service obligations could limit our flexibility to plan for, or react to, changes in our business and the industry in which we operate;
•our level of debt may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, strategic acquisitions, investments and joint ventures and other general corporate requirements;
•our level of debt may prevent us from raising the funds necessary to repurchase all of the Notes tendered to us upon the occurrence of a change of control, which would constitute an event of default under the Indenture; and
•a potential failure to comply with the financial and other restrictive covenants in any of our debt instruments, which, among other things, require us to maintain specified financial ratios, could, if not cured or waived, have a material adverse effect on our ability to fulfill our obligations under the Notes and on our business and prospects generally.
The Indenture and the Credit Agreement contain covenants that impose significant operational and financial restrictions on us, and the failure to comply with these covenants would result in an event of default under these instruments.
The Indenture and the Credit Agreement impose on us operating and other restrictions. These restrictions affect, and in many respects limit or prohibit, among other things, our ability to:
•incur additional debt and issue certain capital stock;
•create liens;
•make investments or acquisitions;
•enter into transactions with affiliates;
•sell assets;
•guarantee debt;
•declare or pay dividends or other distributions to shareholders;
•repurchase equity interests;
•redeem debt that is subordinated in right of payment to certain debt instruments;
•enter into agreements that restrict dividends or other payments from subsidiaries; and
•consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.
The terms of the Revolving Credit Facility in the Credit Agreement also require us to achieve and maintain compliance with specified financial ratios. The restrictions contained in the Credit Agreement:
•limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and
•adversely affect our relationshipsability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in our interest.
A breach of any of these restrictive covenants or our inability to comply with the required financial ratios would result in a default under some or all of the debt agreements. During the occurrence and continuance of a default, lenders under our customersCredit Facilities may elect to declare all outstanding borrowings, together with accrued interest and strategic partnersother fees, to be immediately due and payable, which would result in an event of default under the Indenture. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. Additionally, our Credit Agreement contains a cross-default provision, which generally causes a default or event of default under the Credit Agreement upon a qualifying default or event of default under any other debt instrument (including under the Indenture) and the Indenture contains a cross-acceleration provision. If we areunable to repay outstanding borrowings when due, the lenders under our Credit Facilities will also have the right to proceed against the collateral granted to them to secure the debt. If lenders under the Credit Facilities accelerate the debt thereunder, then the obligations under the Notes would be accelerated. We cannot provide assurance that, if the indebtedness under our Credit Facilities or the Notes were to be accelerated, our assets would be sufficient to repay in full that indebtedness and our operating results.
Our customers dependother indebtedness. If not cured or waived, such acceleration could have a material adverse effect on our supportbusiness and customer education organizations to educate them about, and resolve technical issues relating to, our products and services. prospects.
We may be unable to respond quickly enough to accommodate short-term increases in customer demand for education and support services. Increased customer demand for these services, without a corresponding increase in revenue, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the reputation of our products, services and business and on positive recommendations from our existing customers. Any failure to maintain high-quality education and technical support,generate or a market perception that we do not maintain high-quality education support, could adversely affect our reputation, our ability to sell our products and services to existing and prospective customers and our business and operating results. We promote 24/7/365 education and support along with our proprietary technology platform. Interruptions or delays that inhibit our ability to meet that standard may hurt our reputation or ability to attract and retain customers.
We rely on our management team and key team members and our business could be harmed if we are unable to retain qualified personnel.
Our success depends, in part, on the skills, working relationships and continued services of our founder and senior management team and other key personnel. While we have entered into offer letters or employment agreements with certain of our executive officers, all of our team members are “at-will” employees, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable team members, in addition to salary and cash incentives, we provide stock options and other equity-based awards that vest over time or based on performance. The value to team members of these awards will be significantly affected by movements in our stock price that are beyond our control
and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us. Volatility or lack of performance in our stock price may affect our ability to attract replacements should key personnel depart.
Our success also depends on our ability to attract, retain, and motivate additional skilled management personnel. Although we have not historically experienced unique difficulties attracting qualified team members, we could experience such problems in the future. For example, competition for qualified personnel in our field is intense due to the limited number of individuals who possess the skills and experience required by our industry. In addition, we have experienced employee turnover and expect to continue to experience employee turnover in the future. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New team members may not become as productive as we expect, and we may be unable to hire or retainobtain sufficient numbers of qualified individuals. If our retention efforts are not successful or our employee turnover rate increases in the future, our business will be harmed.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, and our business may be harmed.
We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
Financing, tax and related risks
We may require significant capital to fund our business and our inability to generate and obtain such capital could harm our business, operating results, financial condition, and prospects.growth strategy.
To fund our expanding business and growth strategy, we must have sufficient working capital to continue to make significant investments in our service offerings, advertising, technology, and other activities. As a result, in addition to the revenuecash flow from operations we earngenerate from our business, we may need additional equity or debt financing to provide the funds required for these endeavors. If such financing is not available on satisfactory terms or at all, we may be unable to operate or expand our business in the manner and at the rate desired. DebtFor example, the Credit Agreement may make it more challenging to incur additional debt, as it includes prohibitions against incurring additional debt without approval from our existing lenders, and other lenders may not be willing to take on the risk of adding to our existing leverage, In addition, debt financing increases expenses, may contain additional covenants that restrict the operation of our business and must be repaid regardless of operating results. Equity financing, or debt financing that is convertible into equity, could result in additional dilution to our existing stockholders, and any new securities we issue could have rights, preferences, and privileges superior to those associated with our common stock. Furthermore, the current economic environment may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all.
Our inability to generate or obtain the financial resources needed to fund our business and growth strategies may require us to delay, scale back or eliminate some or all of our operations or the expansion of our business, which may have a material adverse effect on our business, operating results, financial condition, and prospects.
A decline in interest rate levels may reduce our ability to earn income on our custodial cash assets and to attract HSA contributions, which would adversely affect our profitability.
As a non-bank custodian, we partner with FDIC-insured custodial depository banks to hold our custodial cash assets. We earn a significant portion of our consolidated revenue from fees we earn from our FDIC-insured custodial depository bank partners. For example, during the years ended January 31, 2018, 2017 and 2016, we earned an increasing portion (approximately 38%, 33% and 30%, respectively) of our total revenue from custodial revenue. A decline in prevailing interest rates may negatively affect our business by reducing the yield we realize on our custodial cash assets. In addition, if we do not offer competitive interest rates, our members may choose another HSA custodian. Any such scenario could materially and adversely affect our business and results of operations.
Covenants in our debt agreements could adversely affect our liquidity and financial condition.
Our revolving credit facility, or credit agreement, with JPMorgan Chase Bank, N.A., provides for a secured revolving credit facility for a term of five years. Our credit agreement is required to be guaranteed by our material domestic subsidiaries, and it is secured by substantially all of our assets as well as substantially all assets of any subsidiary that becomes a guarantor. The credit agreement contains restrictive financial and other covenants which affect, among other things, the manner in which we may structure or operate our business. A failure by us to comply with our contractual obligations under the credit agreement, including restrictive, financial and other covenants, could result in a variety of material adverse consequences, including the acceleration of our indebtedness under the credit agreement and the exercise of remedies by our creditors thereunder. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under the credit agreement, either upon maturity or if accelerated upon an event of default, or that we would be able to refinance or restructure the payments becoming due on the credit agreement. Also, the lenders under the credit agreement could foreclose upon all or substantially all of the assets securing our obligations thereunder.General risk factors
Our ability to secure insurance may not be sufficient to cover potential liabilities.
We maintain various forms of liability insurance coverage, including coverage for errors and omissions, fiduciary, cybersecurity, employment practices, and directors and officers insurance. It is possible, however, that claims could exceed the amount of our applicable insurance coverage, if any, or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time-consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may affect the current market acceptance of our products and services, any of which could materially adversely affect our reputation and our business.
We are subject to taxes in numerous jurisdictions. Legislative, regulatory and legal developments involving income taxes could adversely affect our results of operations and cash flows.
We are subject to U.S. federal, U.S. state income, payroll, property, sales and use, and other types of taxes in numerous jurisdictions. Significant judgment is required in determining our provisions for income taxes. Changes in tax rates, enactments of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxes. As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, the reduction in the corporate income tax rate reduced the value of our existing deferred tax assets and consequently we recorded a provisional charge of $458,000 in the fiscal year ending January 31, 2018 related to this item. Other significant provisions of this tax reform are effective as of January 1, 2018, including, but not limited to: a limitation on the deductibility of net interest expense, changes in the deductibility of certain meals and entertainment business expenses, as well as moving expenses, transportation expenses, and other fringe benefits, and changes in the deductibility of certain employee remuneration in excess of $1 million. While we have applied these provisions in our accounting for income taxes using our interpretations and available guidance, the net impact of tax reform remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulationsNatural disasters, pandemics or other guidance promulgated byepidemics (including the U.S. Internal Revenue Service as well as state governments and may adversely affect our earnings.
If one or more jurisdictions successfully assert that we should have collected or in the future should collect additional sales and use taxes on our fees, we could be subject to additional liability with respect to past or future sales and the results of our operations could be adversely affected.
We do not collect sales and use taxes in all jurisdictions in which our customers are located, based on our belief that such taxes are not applicable. Sales and use tax laws and rates vary by jurisdiction and such laws are subject to interpretation. In those jurisdictions and in those cases where we do believe sales taxes are applicable, we collect and file timely sales tax returns. Currently, such taxes are minimal. Jurisdictions in which we do not collect sales and use taxes may assert that such taxes are applicable, which could result in the assessment of such taxes, interest and penalties, and we could be required to collect such taxes in the future. This additional sales and use tax liability could adversely affect the results of our operations.
Actscurrent COVID-19 pandemic), acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.customers.
Natural disasters, pandemics or other epidemics (including the current COVID-19 pandemic) acts of war (including the current war between Russia and Ukraine), terrorist attacks, and the escalation of military activity in response to such attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions, and job losses. Such events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist attacks and the national and international responses to such threats could affect the business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our business, financial condition, and results of operations.
Risks relating to owning our common stock
If we are unable to maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act, or Sarbanes-Oxley, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on internal controls over financial reporting. Sarbanes-Oxley also requires that our management report on internal controls over financial reporting be attested to by our independent registered public accounting firm.
If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of Sarbanes-Oxley in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
Our quarterly operating results may fluctuate significantly from period to period, which could adversely impact the value of our common stock.
Our quarterly operating results, including our revenue, gross profit, net income, and cash flows, and certain non-GAAP measures such as EBITDA and Adjusted EBITDA, may vary significantly in the future, which could cause our stock price to decline rapidly, may lead analysts to change their long-term models for valuing our common stock, could cause short-term liquidity issues, may impact our ability to retain or attract key personnel or cause other unanticipated issues. If our quarterly operating results or guidance fall below the expectations of research analysts or investors, the price of our common stock could decline substantially. Our quarterly operating expenses and operating results may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.
The market price of our common stock may be volatile.
The stock market in general has been highly volatile. As a result, the market price and trading volume for our common stock may also be highly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. Factors that could cause the market price of our common stock to fluctuate significantly include:
our operating and financial performance and prospects and the performance of other similar companies;
our quarterly or annual earnings or those of other companies in our industry;
conditions that impact demand for our products and services;
the public’s reaction to our press releases, financial guidance and other public announcements, and filings with the SEC;
changes in earnings estimates or recommendations by securities or research analysts who track our common stock;
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
strategic actions by us or our competitors, such as acquisitions or restructurings;
any data breaches or interruptions in our services;
changes in government and other regulations, particularly those relating to the benefits of HSAs;
changes in accounting standards, policies, guidance, interpretations or principles;
arrival and departure of key personnel;
sales of common stock by us, our investors or members of our Board and management team; and
changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, telecommunications failure, cyber attack, civil unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events.
Any of these factors may result in large and sudden changes in the trading volume and market price of our common stock and may prevent you from being able to sell your shares at or above the price you paid for your shares of our common stock. Following periods of volatility in the market price of a company’s securities, stockholders often file securities class-action lawsuits against such company. Our involvement in a class-action lawsuit could divert our senior management’s attention and, if adversely determined, could have a material and adverse effect on our business, financial condition and results of operations.
We do not intend to pay regular cash dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have no current plans to declare and pay any cash dividends for the foreseeable future. We currently intend to retain all our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in our common stock will depend
upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Future offerings of debt or equity securities, which may rank senior to our common stock, may adversely affect the market price of our common stock.
If we decide to issue debt securities in the future, which would rank senior to shares of our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any equity securities or convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their shareholdings in us.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us difficult; even if such events would be beneficial to the interests of our stockholders. These provisions include the inability of our stockholders to act by written consent and certain advance notice procedures with respect to stockholder proposals and nominations for candidates for the election of directors. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Accordingly, our board of directors could rely upon these or other provisions in our governing documents and Delaware law to prevent or delay a transaction involving a change in control of our company, even if doing so would benefit our stockholders.
OurThe exclusive forum provision in our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or team members.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim for breach of a fiduciary duty owed by any of our directors and officers to us or our stockholders, any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other team members, which may discourage such lawsuits against us and our directors, officers, and other team members. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Item 1B. Unresolved staff comments
None.
Item 2. Properties
We do not currently own any of our facilities. Our principal executive offices are located in Draper, Utah, where weUtah. We lease approximately 187,000 square feet of office space under a lease that expires in March 2027. We also lease approximately 3,000 square feet ofadditional office space in Overland Park, Kansas underCalifornia, New York, Texas, Wisconsin, and Washington. However, since a lease that expiresmajority of our work force is now permanently working remotely, most of our office space (other than a portion of our Texas office space and one building in February 2019Draper) is no longer used and lease additional space at data centers located in Draper, Utah and Austin, Texas, pursuantwe have subleased, or are seeking opportunities to leases expiring in July 2020 and November 2020, respectively. We believe that our current facilities are sufficient to meet our current needs.sublease, these offices.
Item 3. Legal proceedings
From time-to-time, we may be subject to various legal proceedings and claims that arise in the normal course of our business activities. AsOur wholly owned subsidiary, WageWorks, is party to certain pending material litigation and other legal proceedings. Except for such matters, as of the date of this Annual Report on Form 10-K, we arewere not a party to any litigation whereby the outcome of such litigation, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations, prospects, cash flows or financial position or brand.position. For a description of these legal proceedings, see Note 7—Commitments and contingencies of the Notes to consolidated financial statements.
Item 4. Mine safety disclosures
Not applicable.
Part II.
Item 5. Market for registrant's common equity, related stockholder matters and issuer purchases of equity securities
Market information
Our common stock began trading publiclyis listed on the NASDAQ Global Select Market under the symbol "HQY" on July 31, 2014. Prior to that time, there was no public market for our common stock.
.
Holders
As of February 28, 2018,March 21, 2022, there were approximately 2716 holders of record of our common stock. This stockholder figure does not include a substantially greater number of holders whose shares are held of record by banks, brokers, and other financial institutions.
Stock price
The following table sets forth the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market for the indicated periods:
|
| | | | | | | | |
|
| Price Range | |
| Fiscal year ended January 31, 2018: |
| High |
|
| Low |
|
| Fourth Quarter |
| $ | 55.31 |
|
| $ | 42.92 |
|
| Third Quarter |
| $ | 52.87 |
|
| $ | 40.21 |
|
| Second Quarter |
| $ | 54.50 |
|
| $ | 43.51 |
|
| First Quarter |
| $ | 47.91 |
|
| $ | 37.62 |
|
|
| | | | | | | | |
|
| Price Range | |
| Fiscal year ended January 31, 2017: |
| High |
|
| Low |
|
| Fourth Quarter |
| $ | 49.25 |
|
| $ | 30.34 |
|
| Third Quarter |
| $ | 38.80 |
|
| $ | 28.12 |
|
| Second Quarter |
| $ | 31.69 |
|
| $ | 22.26 |
|
| First Quarter |
| $ | 26.75 |
|
| $ | 15.80 |
|
Dividend policy
We have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, and other factors that our board of directors may deem relevant.
Securities authorized for issuance under equity compensation plans
For information regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12 of this Annual Report on Form 10-K.
Performance graph
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph compares the cumulative total return of our common stock with the total return of the NASDAQ Composite Index (the "NASDAQ Composite"), and the Russell 3000 Index (the "Russell 3000") from JulyJanuary 31, 2014 (the date our common stock commenced trading on the NASDAQ Global Select Market)2017 through January 31, 2018.2022. The chart assumes $100 was invested on JulyJanuary 31, 20142017 in the common stock of HealthEquity, Inc., the NASDAQ Composite and the Russell 3000, and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
Use of proceeds from sale of registered equity securities
On August 5, 2014, we closed our initial public offering of 10,465,000 shares of common stock sold by us. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-196645), which was declared effective by the SEC on July 30, 2014. JP Morgan & Chase Co. and Wells Fargo acted as the lead underwriters. The public offering price of the shares sold in the offering was $14.00 per share. The total gross proceeds from the offering to us were approximately $146.5 million. After deducting underwriting discounts and commissions of approximately $10.2 million and offering expenses payable by us of approximately $3.7 million, we received approximately $132.6 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus (dated July 30, 2014) filed with the SEC on August 1, 2014 pursuant to Rule 424(b) of the Securities Act. In connection with the completion of our initial public offering, we paid a previously declared cash dividend of $50.0 million on shares of our common stock outstanding on August 4, 2014. In addition,
we paid a cash dividend of $347,000 on shares of our outstanding series D-3 redeemable convertible preferred stock accrued through the date of conversion of such shares into common stock, which occurred on August 4, 2014.
On May 11, 2015, we closed our public offering of 972,500 shares of common stock sold by us. The offer and sale of all of the shares in the public offering were registered under the Securities Act pursuant to registration statements on Form S-1 (File Nos. 333-203190 and 333-203888), which became effective on May 5, 2015. Wells Fargo acted as the lead underwriter. The public offering price of the shares sold in the offering was $25.90 per share. Certain selling stockholders sold 3,455,000 shares of common stock in the offering, including 380,000 shares of common stock which were issued upon the exercise of outstanding options. The Company received net proceeds of approximately $23.5 million after deducting underwriting discounts and commissions of approximately $1.0 million and other offering expenses payable by the Company of approximately $688,000. The Company did not receive any proceeds from the sale of shares by the selling stockholders other than $222,000 representing the exercise price of the options that were exercised by certain selling stockholders in connection with the offering. We paid all of the expenses related to the registration and offering of the shares sold by the selling stockholders, other than underwriting discounts and commissions relating to those shares. Other than these expenses, we made no payments directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates. There has been no material change in the planned use of proceeds from our public offering as described in our final prospectus (dated May 5, 2015) filed with the SEC on May 6, 2015 pursuant to Rule 424(b) of the Securities Act.
During the year ended January 31, 2016, the Company used funds received from the offerings to acquire the rights to be the custodian of the Bancorp and M&T Bank HSA portfolios for approximately $34.2 million and approximately $6.2 million, respectively.
During the year ended January 31, 2018, the Company used funds received from the offerings to acquire the rights to be custodian of two HSA portfolios for approximately $6.4 million and $8.0 million in cash, respectively, the assets of BenefitGuard LLC, a 401(k) provider that offers plan administrator and named fiduciary services for 401(k) employer sponsors, for approximately $2.9 million, and the rights to be the sole administrator of a portfolio of HSA Members for $3.3 million.
The remainder of the funds received have been invested in registered money market accounts and mutual funds.
Unregistered sales of equity securities
None.
Purchases of equity securities by the issuer and affiliated purchasers
None.
Item 6. Selected financial dataReserved
The following selected consolidated financial data is derived from our consolidated financial statements. As our operating results are not necessarily indicative of future operating results, this data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7. Management’s discussion and analysis of financial condition and results of operations.
|
| | | | | | | | | | | | | | | | | | | |
| |
| Year ended January 31, | |
| (in thousands, except for per share data) | 2018 |
| 2017 |
| 2016 |
| 2015 | | 2014 |
|
| Consolidated statements of operations data: |
|
|
|
|
|
|
| |
|
| Revenue | $ | 229,525 |
|
| $ | 178,370 |
|
| $ | 126,786 |
|
| $ | 87,855 |
| | $ | 62,015 |
|
| Cost of revenue | 94,609 |
|
| 72,015 |
|
| 54,188 |
|
| 39,882 |
| | 29,213 |
|
| Gross profit | 134,916 |
|
| 106,355 |
|
| 72,598 |
|
| 47,973 |
| | 32,802 |
|
| Operating expenses | 80,498 |
|
| 65,143 |
|
| 46,455 |
|
| 31,100 |
| | 21,278 |
|
| Income from operations | 54,418 |
|
| 41,212 |
|
| 26,143 |
|
| 16,873 |
| | 11,524 |
|
| Other expense | (2,229 | ) |
| (1,092 | ) |
| (589 | ) |
| (1,109 | ) | | (6,150 | ) |
| Income before income taxes | 52,189 |
|
| 40,120 |
|
| 25,554 |
|
| 15,764 |
| | 5,374 |
|
Income tax provision (1) | 4,827 |
|
| 13,744 |
|
| 8,941 |
|
| 5,598 |
| | 4,141 |
|
| Net income | $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| $ | 10,166 |
| | $ | 1,233 |
|
| Net income (loss) attributable to common stockholders: |
|
|
|
|
|
|
| | |
| Basic | $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| $ | 12,058 |
| | $ | (7,132 | ) |
| Diluted | $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| $ | 10,901 |
| | $ | (7,132 | ) |
| Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
| | |
| Basic | $ | 0.79 |
|
| $ | 0.45 |
|
| $ | 0.29 |
|
| $ | 0.39 |
| | $ | (1.26 | ) |
| Diluted | $ | 0.77 |
|
| $ | 0.44 |
|
| $ | 0.28 |
|
| $ | 0.21 |
| | $ | (1.26 | ) |
| Weighted-average number of shares used in computing net income per share attributable to common stockholders: |
|
|
|
|
|
|
| | |
| Basic | 60,304 |
|
| 58,615 |
|
| 56,719 |
|
| 31,181 |
| | 5,651 |
|
| Diluted | 61,854 |
|
| 59,894 |
|
| 58,863 |
|
| 51,856 |
| | 5,651 |
|
| Consolidated balance sheet data: |
|
|
|
|
|
|
| | |
| Cash, cash equivalents and marketable securities | $ | 240,269 |
|
| $ | 180,359 |
|
| $ | 123,775 |
|
| $ | 111,005 |
| | $ | 13,917 |
|
| Working capital | 244,906 |
|
| 185,116 |
|
| 130,942 |
|
| 115,888 |
| | 14,327 |
|
| Total assets | 369,159 |
|
| 279,136 |
|
| 219,795 |
|
| 158,769 |
| | 55,090 |
|
| Total liabilities | 22,885 |
|
| 17,196 |
|
| 16,338 |
|
| 14,674 |
| | 21,082 |
|
| Total redeemable convertible preferred stock | — |
|
| — |
|
| — |
|
| — |
| | 46,714 |
|
| Total stockholders' equity (deficit) | $ | 346,274 |
|
| $ | 261,940 |
|
| $ | 203,457 |
|
| $ | 144,095 |
| | $ | (12,706 | ) |
(1) For the year ended January 31, 2018, the Company recorded excess tax benefits of $14.1 million within its provision for income taxes in the consolidated statements of operations and comprehensive income due to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.
Item 7. Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk factors” included under Part I, Item 1A and elsewhere in this report. See “Special note regarding forward-looking statements.”statements” on page 1 of this Annual Report.
Overview
We are a leader and an innovator in the high-growth category ofproviding technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions. Our platform provides an ecosystem whereWe use our innovative technology to manage consumers' tax-advantaged HSAs and other CDBs offered by employers, including FSAs and HRAs, and to administer COBRA, commuter and other benefits. As part of our services, we and our subsidiaries provide consumers can access their tax-advantagedwith healthcare savings, comparebill evaluation and payment processing services, personalized benefit information, including information on treatment options and comparative pricing, evaluateaccess to remote and pay healthcare bills, receive personalized benefit and clinical information,telemedicine benefits, the ability to earn wellness incentives, and make educated investment choicesadvice to grow their tax-advantaged healthcare savings.
The core of our ecosystemofferings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis. As of January 31, 2022, we administered 7.2 million HSAs, with balances totaling $19.6 billion, which we call HSA Assets, as well as 7.2 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 14.4 million as of January 31, 2022.
We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients primarily through relationships with benefits brokers and advisors, integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners, and a sales force that calls on Clients directly. As of January 31, 2022, our platforms were integrated with 185 Network Partners, and we serve approximately 120,000 Clients.
We have increased our share of the growing HSA market from 4% in December 2010 to 18% as of December 2021, measured by HSA Assets. According to Devenir, we are the integratedlargest HSA platform for 124 Health Planprovider by accounts and Administrator Partnerssecond largest by assets as of December 2021. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and over 40,000 employer clients.service-driven culture. Our proprietary technology allows us to help consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security.
SinceOur ability to assist consumers is enhanced by our inceptioncapacity to securely share data in 2002,both directions with others in the health, benefits, and retirement ecosystems. Our commuter benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers. These strengths reflect our “DEEP Purple” culture of remarkable service to customers and teammates, achieved by driving excellence, ethics, and process into everything we have been committed to developing technology solutions that empower healthcare consumers. In 2003, we began offering live 24/7/365 consumer support from health saving and spending experts. In 2005, we integrated HSAs with our first health plan partner, and in 2006, we were authorized to act as an HSA custodian by the U.S. Department of the Treasury. In 2009, we integrated HSAs with multiple health plans of a single large employer, began delivering integrated wellness incentives through an HSA, and partnered with a private health insurance exchange as its preferred HSA partner. In 2011, we integrated HSAs, RAs, and investment accounts on one website, and in 2013, our registered investment advisor subsidiary began delivering HSA-specific investment advice online. In 2015, we launched our HSA Optimizer, which helps HSA members optimize their accounts based on their individual preferences and goals. In 2016, we launched a new feature which provides account holders advance access to funds.do.
We earn revenue primarily from three sources: service, revenue, custodial, revenue and interchange revenue.interchange. We earn service revenue mainly from fees paid by providing monthly account servicesClients on our platform, primarily through contracts with our Network Partners, and custodial agreements with individual members.a recurring per-account per-month basis. We earn custodial revenue mainly from custodialHSA Assets held at our members’ direction in federally insured cash assets deposited with our FDIC-insured custodial depository bank partners and with ourdeposits, insurance company partner, and recordkeeping fees we earn in respect ofcontracts or mutual funds, in which our members invest.and from investment of Client-held funds. We also earn interchange revenue mainly from interchange fees that we earnpaid by merchants on payments that our members make using our physical payment cards and on our virtual payment cards.system. See “Key components of our results of operations” for additional information on our sources of revenue, including the adverse impacts caused by the ongoing COVID-19 pandemic.
Recent acquisitions
WageWorks acquisition. On August 30, 2019, we completed the WageWorks Acquisition and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under our prior term loan facility and approximately $816.9 million of cash on hand.
The key strategy of the WageWorks Acquisition was to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs. WageWorks’ historic strength of selling to employers directly and through health benefits brokers and advisors complemented our distribution through Network Partners. With WageWorks’ CDB capabilities, we provide employers with a single partner for both HSAs and other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite Group. For Clients that partner with us in this way, we believe we can produce more value by encouraging both CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings available through other CDBs.
As of January 31, 2022, we had substantially completed our multi-year integration effort and achieved approximately $80 million in annualized ongoing net synergies. We anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader service offerings and as we continue to drive member engagement. Non-recurring merger integration costs to achieve these synergies were approximately $127 million resulting from investment in technology we use to provide our services and to run our back-office systems, integration of technology, and rationalization of cost of operations. Merger integration expenses attributable to the WageWorks Acquisition were substantially completed as of January 31, 2022, with the exception of ongoing lease expense related to certain WageWorks offices that have been permanently closed, less any related sublease income, professional fees associated with the remediation of remaining material weaknesses, and costs associated with remaining platform migrations.
Luum acquisition. In March 2021, we bolstered our commuter offering through the Luum Acquisition, in which we acquired 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum. The aggregate purchase price for the acquisition consisted of $56.2 million in cash. Luum provides employers with various commuter services, including access to real-time commute data, to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.
Fifth Third Bank HSA portfolio acquisition. On April 27, 2021, we signed an agreement to acquire the Fifth Third HSA portfolio, which consisted of $490.0 million of HSA Assets held in approximately 160,000 HSAs in exchange for a purchase price of $60.8 million in cash. This acquisition closed on September 29, 2021.
Further acquisition. On September 7, 2021, we signed an amended agreement to acquire the Further business (other than Further's voluntary employee beneficiary association business), a leading provider of HSA and other CDB administration services, with approximately 580,000 HSAs and $1.9 billion of HSA Assets, for $455 million in cash. This acquisition closed on November 1, 2021. We expect merger integration expenses attributable to the Further Acquisition totaling approximately $55 million to be incurred over a period of approximately three years from the acquisition date.
HealthSavings HSA portfolio acquisition. On December 4, 2021, we signed an agreement to acquire the HealthSavings HSA portfolio, which consisted of $1.3 billion of HSA Assets held in approximately 87,000 HSAs in exchange for a purchase price of $60 million in cash. This acquisition closed on March 2, 2022.
Key factors affecting our performance
We believe that our future performance and future success arewill be driven by a number of factors, including those identified below. Each of these factors presents both significant opportunities and significant risks to our future performance. See also "Results of operations - Revenue" for information relating to the ongoing COVID-19 pandemic and also the section entitled “Risk factors” included in Part 1, Item 1A of this Annual Report on Form 10-K.10-K and our other reports filed with the SEC.
Our acquisition and integration strategy
We have historically acquired HSA portfolios and businesses that strengthen our service offerings. We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have developed an internal capability to source, evaluate, and integrate acquired HSA portfolios. We intend to continue to pursue acquisitions of complementary assets and businesses that we believe will strengthen our service offering, and our success depends in part on our ability to successfully integrate acquired businesses and HSA portfolios with our business in an efficient and effective manner and to realize anticipated synergies.
Structural change in U.S. private health insurance
Substantially all of ourWe derive revenue is derivedprimarily from healthcare-related saving and spending by consumers in the United States,U.S., which is impactedare driven by changes affectingin the broader healthcare industry, inincluding the U.S.structure of health insurance. The healthcare industryaverage premium for employer-sponsored health insurance has changed significantlyrisen by 22% since 2016 and 47% since 2011, resulting in recent years, and we expect that significant changes will continue to occur that will result in
increased participation in HDHPsHSA-qualified health plans and other consumer-centricHSAs and increased consumer cost-sharing in health plans. In particular, weinsurance more generally. We believe that continued growth in healthcare costs and related factors will spur HDHPcontinued growth in HSA-qualified health plans and HSA growth; however,HSAs and may encourage policy changes making HSAs or similar vehicles available to new populations such as individuals in Medicare. However, the timing and impact of these and other developments in theU.S. healthcare industryare uncertain. Moreover, changes in healthcare policy, such as "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to predict, and changespredict.
Trends in U.S. healthcaretax law
Tax law has a profound impact on our business. Our offerings to members, Clients, and Network Partners consist primarily of services enabled, mandated, or advantaged by provisions of U.S. tax law and regulations. Changes in tax policy could adverselyare speculative, and may affect our business.business in ways that are difficult to predict.
Our client base
Attracting and penetrating network partners
We created ourOur business model to take advantage of the changing dynamics of the U.S. private health insurance market. Our model is based on a B2B2C distribution strategy, meaning thatwhereby we rely on our Employerwork with Network Partners and Health Plan and Administrator PartnersClients to reach potential membersconsumers to increase the number of our members with HSA Members.accounts and complementary CDBs. We believe that there are significant opportunities to expand the scope of services that we provide to our current Clients.
Broad distribution footprint
We believe we have a diverse distribution footprint to attract new Clients and Network Partners. Our success dependssales force calls on enterprise and regional employers in large part on our ability to further penetrate our existingindustries across the U.S., as well as potential Network Partners from among health plans, benefits administrators, and retirement plan record keepers.
Product breadth
We are the largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration. Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs. With our CDB capabilities, we can provide employers with a single partner for both HSAs and complementary CDBs, which is preferred by adding newthe vast majority of employers, according to research conducted for us by Aite Group. We believe that the combination of HSA Members from these partners and adding newcomplementary CDB offerings significantly strengthens our value proposition to employers, health benefits brokers and consultants, and Network Partners.Partners as a leading single-source provider.
Our innovativeproprietary technology platform
We believe that innovations incorporated in our technology, thatwhich enable us to better assist consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits, differentiate us from our competitors and drive our growth in revenue, HSA Members, Network Partners and custodial assets. Similarly,growth. We built on these innovations underpinby combining our abilityHSA offering with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to provide a differentiated consumer experience in a cost-effective manner. For example, we are currently undertaking a significant update of our proprietary platform’s architecture, which will allow us to improve our transaction processing capabilitiessolutions set and related platform infrastructure to support continued account and transaction growth.leadership position within the HSA sector. We intend to continue to invest in our technology development to enhance our platform’s capabilities and infrastructure.infrastructure, while maintaining a focus on data security and the privacy of our customers' data. For example, we are making significant investments in the architecture and infrastructure of the technology that we use to provide our services to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement.
Our “DEEP Purple” service culture
The newsuccessful healthcare consumer needs education and guidance delivered by people as well as by technology. We believe that our "DEEP Purple" culture, which we define as driving excellence, ethics, and process while providing remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly, opportunities in the rapidly changing healthcare sector. We make significant efforts to promote and foster DEEP Purple within our workforce. We invest in and intend to continue to invest in human capital through technology-enabled training, career development, and advancement opportunities.
Interest rates
As a non-bank custodian, we contracthold custodial HSA cash assets pursuant to agreements with FDIC-insured custodial depository bank partnersfederally insured banks and ancredit unions, which we collectively call our Depository Partners (our "Basic Rates" offering), and also in annuity contracts or other similar arrangements with our insurance company partner to hold custodial cash assets on behalf of our members, and wepartners (our "Enhanced Rates" offering). We earn a significantmaterial portion of our total revenue from interest rates offeredpaid to us by these partners.
The contract termslengths of our agreements with Depository Partners typically range from three to five years and may have either fixed or variable interest rates. As our custodial assets increase and existing agreements expire, we seek to enter into new contracts with FDIC-insured custodial depository bank partners, therate terms. The terms of which arenew and renewing agreements with our Depository Partners may be impacted by the then-prevailing interest rate environment. Theenvironment, which in turn is driven by macroeconomic factors and government policies over which we have no control. Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members.
HSA members who elect to place their HSA cash into our Enhanced Rates offering receive a higher yield compared to Basic Rates. An increase in the percentage of HSA cash held in our Enhanced Rates offering also positively impacts our custodial revenues, as we generally receive a higher yield on HSA cash held with insurance company partners compared to cash held with Depository Partners. As with our Depository Partners, yields paid by our insurance company partners may be impacted by the prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control. Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members.
We believe that diversification of deposits among bankDepository Partners and insurance company partners, and varied contract terms, substantially reducesand other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigatesmitigate the short-term impact of a sustained increaseincreases or declinedeclines in prevailing interest rates on our custodial revenue. AOver longer periods, sustained declineshifts in prevailing interest rates may negatively affect our business by reducing the size of the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize. Conversely, a sustained increase in prevailing interest rates can increase our yield over time. An increase in our yield would increase ourrealize on custodial revenue as a percentage of total revenue. In addition, as our yield increases, we expect the spread to grow between the interest offered to us by our custodial depository bank partnersassets and the interest retained by our members, thus increasingmembers.
Although interest rates have increased somewhat, we expect our profitability. However, we maycustodial revenue to continue to be required to increaseadversely affected by the interest retainedrate cuts by the Federal Reserve associated with the COVID-19 pandemic, the lack of demand from Depository Partners for deposits, and other market conditions that have caused the interest rates offered by our members in a rising prevailingDepository Partners to decline significantly.
Interest on our Term Loan Facility changes frequently due to variable interest rate environment. Changesterms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.rates.
Our competition and industry
Our direct competitors are HSA custodians.custodians and other CDB providers. Many of these are state or federally chartered banks and other financial institutions for which we believe technology-based healthcarebenefits administration services are not a core business. CertainSome of our direct competitors have chosen to exit the market despite increased demand for these services. This has created,(including healthcare service companies such as United Health Group's Optum, Webster Bank, and we believe will continue to create, opportunities for us to leverage our technology platform and capabilities to increase our market share. However, some of our direct competitorswell-known retail investment companies, such as Fidelity Investments) are in a position should they choose, to devote more resources to the development, sale, and support of their products and services than we have at our disposal. Our other CDB administration competitors include health insurance carriers, human resources consultants and outsourcers, payroll providers, national CDB specialists, regional third-party administrators, and commercial banks. In addition, numerous indirect competitors, including benefits administration technology and service providers, partner with banks and other HSA custodians to compete with us. Our Health Plan and AdministratorNetwork Partners may also choose to offer technology-based healthcarecompetitive services directly, as some health plans have done. Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics.
As a result of the COVID-19 pandemic, we have seen a significant decline in the use of commuter benefits due to many of our members working from home during the outbreak or other impacts from the outbreak, which has negatively impacted both our interchange revenue and service revenue, and this "work from home" trend, or hybrid work environments, may continue after the pandemic. We have also seen a decline in interchange revenue across all other products. The extent to which the COVID-19 pandemic will negatively impact our business remains highly uncertain and cannot be accurately predicted.
Regulatory environment
Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, and IRS regulations, the Employee Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the provision of health insurance and provide the tax advantages associated with our services, play a pivotal role in determining our market opportunity. Privacy and data
security-related laws such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, laws governing the provision of investment advice to consumers, such as the Investment Advisers Act of 1940, or the Advisers Act, the USA PATRIOT Act, anti-money laundrylaundering laws, and the Federal Deposit Insurance Act, all play a similar role in determining our competitive landscape. In addition, state-level regulations also have significant implications for our business in some cases. For example, our subsidiary HealthEquity Trust Company is regulated by the Wyoming Division of Banking, and several states are considering, or have already passed, new fiduciary rulesprivacy regulations that can affect our business. Various states also have laws and regulations that impose additional restrictions on our collection, storage, and use of personally identifiable information. Privacy regulation in particular has become a priority issue in many states, including
California, which in 2018 enacted the California Consumer Privacy Act broadly regulating California residents’ personal information and providing California residents with various rights to access and control their data, and the new California Privacy Rights Act. We have also seen an increase in regulatory changes related to our services due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes. Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success.
Our acquisition strategy
We haveOn March 21, 2021, the American Rescue Plan Act of 2021 was signed into law, which provided a successful historytemporary 100% subsidy of acquiring complementary assets and businesses that strengthen our platform. We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have developed an internal capability to source, evaluate and integrate acquisitions that have created valueCOBRA premium payments for shareholders. We believe the nature of our competitive landscape provides a significant acquisition opportunity. Many of our competitors view their HSA businesses as non-core functions. We believe more of them will look to divest these assets and, in certain cases, be limited from making acquisitionseligible individuals who lost coverage due to depository capital requirements. We intendan involuntary termination or a reduction of hours for up to continuesix months, which ended September 30, 2021.
On February 18, 2022, President Biden formally continued the National Emergency Concerning COVID-19, which tolls certain deadlines related to pursue acquisitionsCOBRA and other CDBs and increases the complexity of complementary assets and businesses that we believe will strengthen our platform.properly administering these programs. Each national emergency declaration generally lasts for one year unless the President announces an earlier termination.
Key financial and operating metrics
Our management regularly reviews a number of key operating and financial metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies, and evaluate forward-looking projections and trends affecting our business. We discuss certain of these key financial metrics, including revenue, below in the section entitled “Key components of our results of operations.” In addition, we utilize other key metrics as described below.
For a discussion related to key financial and operating metrics for fiscal year 2021 compared to fiscal year 2020, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2021 Form 10-K, filed with the SEC on March 31, 2021.
Total Accounts
The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated: | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | January 31, 2022 | | January 31, 2021 | | % Change |
| HSAs | 7,207 | | | 5,782 | | | 25 | % |
| New HSAs from sales - Quarter-to-date | 472 | | | 370 | | | 28 | % |
| New HSAs from sales - Year-to-date | 918 | | | 687 | | | 34 | % |
| New HSAs from acquisitions - Year-to-date | 740 | | | — | | | n/a |
| HSAs with investments | 455 | | | 333 | | | 37 | % |
| CDBs | 7,192 | | | 7,028 | | | 2 | % |
| Total Accounts | 14,399 | | | 12,810 | | | 12 | % |
| Average Total Accounts - Quarter-to-date | 14,326 | | | 12,659 | | | 13 | % |
| Average Total Accounts - Year-to-date | 13,450 | | | 12,604 | | | 7 | % |
The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from them. The number of our HSAs increased by approximately 1.4 million, or 25%, from January 31, 2021 to January 31, 2022, primarily driven by new HSAs from sales, HSAs acquired through the Further Acquisition, and the acquisition of Fifth Third's HSA Membersportfolio. The number of our CDBs increased by 0.2 million, or 2%, from January 31, 2021 to January 31, 2022, primarily driven by CDBs acquired through the Further Acquisition, partially offset by a decrease in FSA accounts and also commuter benefit accounts that are currently suspended due to the COVID-19 pandemic and fewer workers being required to commute to an office. The suspended commuter accounts continue to be administered on our platform and can be reinstated at any time. We have excluded the suspended commuter accounts from our account totals because they are currently not generating revenue for the Company.
HSA Assets
The following table sets forth our HSA MembersAssets as of and for the periods indicated: | | | | | | | | | | | | | | | | | |
| (in millions, except percentages) | January 31, 2022 | | January 31, 2021 | | % Change |
| HSA cash with yield (1) | $ | 12,934 | | | $ | 9,875 | | | 31 | % |
| HSA cash without yield (2) | 9 | | | 244 | | | (96) | % |
| Total HSA cash | 12,943 | | | 10,119 | | | 28 | % |
| HSA investments with yield (1) | 6,668 | | | 4,078 | | | 64 | % |
| HSA investments without yield (2) | 7 | | | 138 | | | (95) | % |
| Total HSA investments | 6,675 | | | 4,216 | | | 58 | % |
| Total HSA Assets | 19,618 | | | 14,335 | | | 37 | % |
| Average daily HSA cash with yield - Year-to-date | 10,465 | | | 8,599 | | | 22 | % |
| Average daily HSA cash with yield - Quarter-to-date | $ | 12,084 | | | $ | 9,060 | | | 33 | % |
(1)HSA Assets that generate custodial revenue. |
| | | | | | | | | | |
| | | | | % change from |
| % change from |
|
| January 31, 2018 |
| January 31, 2017 |
| January 31, 2016 |
| 2017 to 2018 |
| 2016 to 2017 |
|
| HSA Members | 3,402,889 |
| 2,746,132 |
| 2,140,631 |
| 24 | % | 28 | % |
| Average HSA Members - Year-to-date | 2,951,790 |
| 2,339,091 |
| 1,600,327 |
| 26 | % | 46 | % |
| Average HSA Members - Quarter-to-date | 3,188,927 |
| 2,519,382 |
| 1,850,843 |
| 27 | % | 36 | % |
| HSA Members with investments | 121,614 |
| 65,906 |
| 44,680 |
| 85 | % | 48 | % |
HSA Members is critical because our service revenue is driven by the amount we charge per HSA Member.
The number of our HSA Members increased by approximately 657,000, or 24%, from January 31, 2017 to January 31, 2018, and by approximately 606,000, or 28%, from January 31, 2016 to January 31, 2017.
The increase in the number of our HSA Members in these periods was primarily driven by the addition of new Network Partners and further penetration into existing Network Partners. In addition, during the year ended January 31, 2018, we acquired the rights to be custodian of First Interstate Bancsystem and Alliant Credit Union portfolios consisting of approximately 14,000 and 40,000 HSA Members, respectively. During the year ended January 31, 2016, we acquired the rights to be the custodian of the Bancorp Bank and M&T Bank HSA portfolios consisting of approximately 160,000 and 35,000 HSA Members, respectively, the latter of which transitioned to our platform during the year ended January 31, 2017.
Custodial assets
The following table sets forth our custodial assets for the periods indicated:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | % change from |
|
| % change from |
|
| (in thousands, except percentages) |
| January 31, 2018 |
|
| January 31, 2017 |
|
| January 31, 2016 |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Custodial cash |
| $ | 5,489,617 |
|
| $ | 4,380,487 |
|
| $ | 3,278,628 |
|
| 25 | % |
| 34 | % |
| Custodial investments |
| 1,288,693 |
|
| 658,580 |
|
| 405,878 |
|
| 96 | % |
| 62 | % |
| Total custodial assets |
| $ | 6,778,310 |
|
| $ | 5,039,067 |
|
| $ | 3,684,506 |
|
| 35 | % |
| 37 | % |
| Average daily custodial cash - Year-to-date |
| $ | 4,571,341 |
|
| $ | 3,661,058 |
|
| $ | 2,326,506 |
|
| 25 | % |
| 57 | % |
| Average daily custodial cash - Quarter-to-date |
| $ | 4,876,438 |
|
| $ | 3,854,518 |
|
| $ | 2,682,827 |
|
| 27 | % |
| 44 | % |
Our custodial assets,Assets, which are our HSA Members'members' assets for which we are the custodian or administrator, or from which we generate custodial revenue, consist of the following components: (1) custodial(i) HSA cash, deposits, which areincludes cash deposits with our FDIC-insured custodial depository bank partners, (2) custodialDepository Partners or other custodians and cash deposits investedplaced in angroup annuity contractcontracts with our insurance company partnerpartners, and (3) members'(ii) HSA investments in mutual funds through our custodial investment fund partner.partners. As of January 31, 2022, we had substantially completed the transition of HSA cash without yield to HSA cash with yield. Measuring our custodial assetsHSA Assets is important because our custodial revenue is directly affected by average daily custodial balances.balances for HSA Assets that are revenue generating.
Our total custodial assetsTotal HSA cash increased by $1.7$2.8 billion, or 35%28%, from January 31, 20172021 to January 31, 2018. Our total custodial assets2022, due primarily to HSA cash transferred to us as part of the Further Acquisition, HSA contributions, new HSAs from sales, and acquisitions of HSA portfolios, partially offset by transfers to HSA investments.
HSA investments increased by $1.4$2.5 billion, or 58%, from January 31, 2021 to January 31, 2022, due primarily to transfers from HSA cash and appreciation of invested balances.
Total HSA Assets increased by 5.3 billion, or 37%, from January 31, 20162021 to January 31, 2017. The increase in total custodial assets in these periods was driven by additional custodial assets2022, due primarily to HSA contributions, new HSAs from our existingsales, HSA Members and new custodial assets from new HSA Members added during the fiscal year. In addition, during the year ended January 31, 2018, we acquired the rightsAssets transferred to be custodian of First Interstate Bancsystem and Alliant Credit Union portfolios consisting of approximately $55.0 million and $109.0 million of custodial assets, respectively.
During the year ended January 31, 2016, we acquired the rights to be the custodianus as part of the Bancorp Bank and M&T BankFurther Acquisition, acquisitions of HSA portfolios, consistingand appreciation of approximately $390.0 millioninvested balances.
Client-held funds | | | | | | | | | | | | | | | | | |
| (in millions, except percentages) | January 31, 2022 | | January 31, 2021 | | % Change |
| Client-held funds (1) | $ | 897 | | | $ | 986 | | | (9) | % |
| Average daily Client-held funds - Year-to-date (1) | 842 | | | 847 | | | (1) | % |
| Average daily Client-held funds - Quarter-to-date (1) | 822 | | | 848 | | | (3) | % |
(1)Client-held funds that generate custodial revenue.
Client-held funds are interest-earning deposits from which we generate custodial revenue. These deposits are amounts remitted by Clients and $63.0 millionheld by us on their behalf to pre-fund and facilitate administration of custodial assets, respectively,CDBs. We deposit the latterClient-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. Client-held funds fluctuate depending on the timing of which transitioned to our platform duringfunding and spending of CDB balances and the year ended January 31, 2017.number of CDBs we administer.
Adjusted EBITDA
We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, and certain other non-cash statement of operationsnon-operating items. We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses, and serves as a basis for comparison against other companies in our industry.
The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for each of the periods indicated: | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 |
| Net income (loss) | $ | (44,289) | | | $ | 8,834 | |
| Interest income | (1,501) | | | (1,045) | |
| Interest expense | 36,572 | | | 34,881 | |
| Income tax benefit | (22,452) | | | (4,694) | |
| Depreciation and amortization | 54,397 | | | 39,839 | |
| Amortization of acquired intangible assets | 82,791 | | | 76,064 | |
| Stock-based compensation expense | 52,750 | | | 42,863 | |
| Merger integration expenses | 64,805 | | | 45,990 | |
| Acquisition costs (1) | 10,832 | | | 1,118 | |
| Gain on equity securities | (1,692) | | | — | |
| Other (2) | 3,802 | | | (3,055) | |
| Adjusted EBITDA | $ | 236,015 | | | $ | 240,795 | |
(1)For the fiscal year ended January 31, 2022, acquisition costs included $0.3 million of stock-based compensation expense. |
| | | | | | | | | | | | |
|
| Year ended January 31, | |
| (in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Net income |
| $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| Interest income |
| (734 | ) |
| (531 | ) |
| (414 | ) |
| Interest expense |
| 274 |
|
| 275 |
|
| 91 |
|
| Income tax provision |
| 4,827 |
|
| 13,744 |
|
| 8,941 |
|
| Depreciation and amortization |
| 11,089 |
|
| 8,889 |
|
| 6,393 |
|
| Amortization of acquired intangible assets |
| 4,863 |
|
| 4,297 |
|
| 2,208 |
|
| Stock-based compensation expense |
| 14,310 |
|
| 8,398 |
|
| 5,883 |
|
| Other (1) |
| 2,689 |
|
| 1,348 |
|
| 910 |
|
| Adjusted EBITDA |
| $ | 84,680 |
|
| $ | 62,796 |
|
| $ | 40,625 |
|
| |
(1) | For the years ended January 31, 2018, 2017 and 2016, Other consisted of non-income based taxes of $439, $358 and $334, acquisition-related costs of $2,197, $631 and $471, and other costs of $53, $359 and $105, respectively. |
The following table further sets forth our Adjusted EBITDA:
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, | |
| % change from |
|
| % change from |
|
| (in thousands, except percentages) | 2018 |
|
| 2017 |
|
| 2016 |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Adjusted EBITDA | $ | 84,680 |
|
| $ | 62,796 |
|
| $ | 40,625 |
|
| 35 | % |
| 55 | % |
| As a percentage of revenue | 37 | % |
| 35 | % |
| 32 | % |
|
|
|
|
revenue: | | | | | | | | | | | | | | | | | | |
| | Year ended January 31, | | |
| (in thousands, except percentages) | | 2022 | | 2021 | | % Change |
| Adjusted EBITDA | | $ | 236,015 | | | $ | 240,795 | | | (2) | % |
| As a percentage of revenue | | 31 | % | | 33 | % | | |
Our Adjusted EBITDA increaseddecreased by $21.9$4.8 million, or 35%2%, from $62.8$240.8 million for the fiscal year ended January 31, 20172021 to $84.7$236.0 million for the fiscal year ended January 31, 2018.2022. The increasedecrease in Adjusted EBITDA was primarily driven by the overall growth of our business, including a $13.2 million, or 32%,decrease in average annualized yield on HSA cash with yield and an increase in income from operations.
Our Adjusted EBITDA increased by $22.2 million, or 55%, from $40.6 million for the year ended January 31, 2016 to $62.8 million for the year ended January 31, 2017. The increase in Adjusted EBITDA was driven by the overall growth of our business, including a $15.1 million, or 58%, increase in income from operations.service costs.
Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
Key components of our results of operations
Revenue
The following table sets forth our revenue for the periods indicated:
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, | |
| % change from |
|
| % change from |
|
| (in thousands, except percentages) | 2018 |
|
| 2017 |
|
| 2016 |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Service revenue | $ | 91,619 |
|
| $ | 77,254 |
|
| $ | 61,608 |
|
| 19 | % |
| 25 | % |
| Custodial revenue | 87,160 |
|
| 59,593 |
|
| 37,755 |
|
| 46 | % |
| 58 | % |
| Interchange revenue | 50,746 |
|
| 41,523 |
|
| 27,423 |
|
| 22 | % |
| 51 | % |
| Total revenue | $ | 229,525 |
|
| $ | 178,370 |
|
| $ | 126,786 |
|
| 29 | % |
| 41 | % |
We earngenerate revenue from three primary sources: service revenue, custodial revenue, and interchange revenue.
Service revenue. We earn service revenue from the fees we charge our Network Partners, employer clientsClients, and individual members for the administration services we provide in connection with the HSAs and RAsother CDBs we offer. With respect to our Network Partners and Clients, our fees are generally based on a fixed tiered structure for the duration of our agreement with the relevant Network Partnerservice agreement and are paid to us on a monthly basis. We recognize revenue on a monthly basis as services are rendered underto our written service agreements.members and Clients.
Custodial revenue. We earn custodial revenue primarily from our custodial cash assetsHSA Assets deposited with our FDIC-insured custodial depository bank partnersDepository Partners and with our insurance company partner, andpartners, recordkeeping fees we earn in respect of mutual funds in which our members invest. As a non-bank custodian, weinvest, and Client-held funds deposited with our Depository Partners. We deposit our custodialHSA cash with our various bank partnersDepository Partners pursuant to contracts that (i) typically have terms upranging from three to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant bank partner,Depository Partner, and (iii) have minimum and maximum required deposit balances. HSA cash placed with our insurance company partners is placed in group annuity contracts or similar arrangements. We deposit the Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. We earn custodial revenue on our custodial cashHSA Assets and Client-held funds that is based on the interest rates offered to us by these bankDepository Partners and insurance company partners. In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA assetsAssets in mutual funds through our custodial investment partner. We receiveearn a recordkeeping fee, relatedcalculated as a percentage of
custodial investments. As of January 31, 2022, we had substantially completed the transition of HSA cash without yield to such custodial investments.HSA cash with yield.
Interchange revenue. We earn interchange revenue each time one of our members uses one of our physical payment cards or virtual platforms to make a qualified purchase. This revenue is collected each time a member “swipes” our payment card to pay a healthcare-related expense.expenses. We recognize interchange revenue monthly based on reports received from third parties, namely, the card-issuing bankbanks and the card processor.processors.
Cost of revenue
Cost of revenue includes costs related to servicing member accounts, managing customerClient and partnerNetwork Partner relationships and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations (such as office rent, supplies, and other overhead expenses), new member and participant supplies, and other operating costs related to servicing our members. Other components of cost of revenue include interest retained by members on custodialHSA cash and interchange costs incurred in connection with processing card transactions for our members.
Service costs. Service costsinclude the servicing costs described above. Additionally, for new accounts, we incur on-boarding costs associated with the new accounts, such as new member welcome kits, the cost associated with issuance of new payment cards, and costs of marketing materials that we produce for our Network Partners.
Custodial costs. Custodial costs are comprised of interest retained by our HSA Membersmembers, in respect of HSA cash with yield, and fees we pay to banking consultants whom we use to help secure agreements with our FDIC-insured custodial depository banking partners.Depository Partners. Interest retained by HSA Membersmembers is calculated on a tiered basis. The interest rates retained by HSA Membersmembers can change based on a formula or upon required notice.
Interchange costs. Interchange costs are comprised of costs we incur in connection with processing payment transactions initiated by our members. Due to the substantiation requirement on RA-linkedFSA/HRA-linked payment card transactions, which is the requirement that we confirm each purchase involves a qualified medical expense as defined under applicable law, payment card costs are higher for RAFSA/HRA card transactions. In addition to fixed per card fees, we are assessed additional transaction costs determined by the amount of the transaction.
Gross profit and gross margin
Our gross profit is our total revenue minus our total cost of revenue, and our gross margin is our gross profit expressed as a percentage of our total revenue. Our gross margin has been and will continue to be affected by a number of factors, including interest rates, the amount we charge our partnersNetwork Partners, Clients, and members, interest rates,the mix of our sources of revenue, how many services we deliver per account, and payment processing costs per account. We expect our annual gross margin to remain relatively steady over the near term, although our gross margin could fluctuate from period to period depending on the interplay of these factors.
Operating expenses
Sales and marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including sales commissions for our direct sales force, external agent/broker commission expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense allocations.
Technology and development. Technology and development expenses include personnel and related expenses for software engineering,development and delivery, licensed software, information technology, data management, product, and product development.security. Technology and development expenses also include software engineering services, the costs of operating our on-demand technology infrastructure, depreciation, amortization of capitalized software development costs, stock-based compensation, and common expense allocations.
General and administrative. General and administrative expenses include personnel and related expenses of, and professional fees incurred by our executive, finance, legal, internal audit, corporate development, compliance, and people departments. They also include depreciation, amortization, stock-based compensation, and common expense allocations.
Amortization of acquired intangible assets. Amortization of acquired intangible assets results primarily from our acquisition of intangible member assets.assets acquired in connection with business combinations. The assets include acquired customer relationships, acquired developed technology, and acquired trade names and trademarks, which we amortize over the assets' estimated useful lives, estimated to be 7-15 years, 2-5 years, and 3 years, respectively. We also acquired these intangible member assetsHSA portfolios from third-party custodians. We amortize these assets over the assets’ estimated useful life of 15 years. We also acquired other intangible assets, which are 401(k) customer relationships, in connection with an acquisition of a business. We amortize these assets over the assets' estimated useful life of 10 years. We evaluate our acquired intangible assets for impairment at least each year,annually, or at a triggering event.
Merger integration. Merger integration expenses include personnel and related expenses, including severance, professional fees, legal expenses, and facilities and technology expenses directly related to integration activities to merge operations as a result of acquisitions.
Interest expense net
OtherInterest expense primarily consists of accrued interest expense and amortization of deferred financing costs associated with our credit facility,long-term debt. Interest on our Term Loan Facility changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.
Other income (expense), net
Other income (expense), net, consists of acquisition costs, interest income earned on corporate cash and other miscellaneous taxes,income and acquisition-related expenses.expense.
Income tax provision (benefit)
We are subject to federal and state income taxes in the United States based on a calendar taxJanuary 31 fiscal year which differs from our fiscal year-end for financial reporting purposes.end. We use the asset and liability method to account for income taxes, under which current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. As of January 31, 2018, we recorded a net non-current deferred tax asset.
Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. Due to the positive evidence of historical profits coupled with forecasted profitability, no valuation allowance was required asAs of January 31, 2018.2022, we have recorded a valuation allowance on certain state deferred tax assets and maintained an overall net federal and state deferred tax liability on our consolidated balance sheet.
The Company evaluates its tax positions in accordance with Accounting Standards Codification (“ASC”) 740-10-25, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return.
Results of operations
For a discussion related to the results of operations and liquidity and capital resources for fiscal year 2021 compared to fiscal year 2020, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2021 Form 10-K, filed with the SEC on March 31, 2021.
Revenue
The following table sets forth our revenue for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended January 31, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | $ change | | % change |
| Service revenue | $ | 426,910 | | | $ | 430,966 | | | $ | (4,056) | | | (1) | % |
| Custodial revenue | 202,817 | | | 190,933 | | | 11,884 | | | 6 | % |
| Interchange revenue | 126,829 | | | 111,671 | | | 15,158 | | | 14 | % |
| Total revenue | $ | 756,556 | | | $ | 733,570 | | | $ | 22,986 | | | 3 | % |
Service revenue
revenue. The $14.4$4.1 million, or 19%1%, increasedecrease in service revenue from the year ended January 31, 2017 to the year ended January 31, 2018 was primarily due to lower average service fees per account, largely offset by new revenue from acquired businesses and HSA portfolios and an increase in the number of our HSA Members, partially offsetrevenue related to COBRA benefits administration, which was primarily driven by the lower service revenue per HSA Member described below. temporary subsidy of COBRA premium payments available under the American Rescue Plan Act of 2021.
Custodial revenue. The $15.6$11.9 million, or 25%, increase in service revenue from the year ended January 31, 2016 to the year ended January 31, 2017 was also primarily due to an increase in the number of our HSA Members. The number of our HSA Members increased by approximately 657,000, or 24%, from January 31, 2017 to January 31, 2018, and by approximately 606,000, or 28%, from January 31, 2016 to January 31, 2017.
Service revenue per HSA Member decreased by approximately 6% from the year ended January 31, 2017 to the year ended January 31, 2018, and 14% from the year ended January 31, 2016 to the year ended January 31, 2017. Our service revenue tier structure incentivizes Network Partners to add HSA Members by charging a lower rate as additional HSA Members are added. Accordingly, as Network Partners add more HSA Members, the service revenue per HSA Member will continue to decrease. Additionally, as RAs grow less rapidly than HSAs, service revenue per HSA Member will decrease. The decrease in service revenue per HSA Member was partially offset by an increase in custodial revenue per HSA Member described below.
Custodial revenue
The $27.6 million, or 46%, increase in custodial revenue was primarily due to the $1.9 billion, or 22%, increase in the average daily balance of HSA cash with yield. The increase was partially offset by a decrease in average annualized yield from 2.06% for the fiscal year ended January 31, 20172021 to 1.75% for the fiscal year ended January 31, 20182022, which was primarily due to an increase in average daily custodial cash of $910.3 million, or 25%, and an increase in the yield on average custodial cash from 1.58% in the year ended January 31, 2017 to 1.83% in the year ended January 31, 2018.
The $21.8 million, or 58%, increase in custodial revenue from the year ended January 31, 2016part to the year ended January 31, 2017 was primarily dueinterest rate cuts made by the Federal Reserve in response to an increase in average daily custodialthe COVID-19 pandemic, and by transfers from HSA cash to HSA investments.
Custodial revenue as a percentage of our total revenue continues to increase primarily due to our entry into new custodial depository agreements with higher interest rates payable on average cash balances deposited thereunder, and also due to average daily custodial cash assets growing at a faster rate than the number of HSA Members, which is evidenced by an increase in custodial cash per HSA, which was $1,613, $1,595, and $1,532 asAs of January 31, 2018, 20172022, we had substantially completed the transition of HSA cash without yield to HSA cash with yield. This cash was placed with our Depository Partners and 2016, respectively.insurance company partners at prevailing interest rates, which we expect will generate additional custodial revenue.
Custodial revenue per HSA Member increased by approximately 16% from the year ended January 31, 2017 to the year ended January 31, 2018, and approximately 8% from the year ended January 31, 2016 to the year ended January 31, 2017, primarily due to the higher yield and higher average custodial cash balances.
Interchange revenue
revenue. The $9.2$15.2 million, or 22%14%, increase in interchange revenue from the year ended January 31, 2017was primarily due to increased spend per account compared to the year ended January 31, 2018 wasCOVID-19 pandemic lows and an increase in accounts.
Total revenue. Total revenue increased by $23.0 million, or 3%, due to an overall increasethe increases in the number of our HSA Membersinterchange and payment activity,custodial revenues, partially offset by the lowerdecrease in service revenue.
Impact of COVID-19.Our business has been adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by the COVID-19 pandemic and related societal changes. Although interest rates have increased from their pandemic lows, rates remain significantly below the levels seen before the pandemic, which reduces the yield on funds placed with our Depository Partners and insurance company partners in this environment from the yield we would have received before the pandemic. Our financial results related to certain of our products have also been adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak, and the "work from home" trend, or a new hybrid work environment, may continue after the pandemic. In particular, the increased spread of COVID-19 in early 2022 and the associated decisions by employers to delay return-to-office plans for their employees will further delay the recovery of use of these commuter benefits. During the initial stages of the COVID-19 pandemic, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue per HSA Member described below.and service revenue, and the recent increase in COVID-19 cases has negatively impacted our interchange revenue and service revenue. In addition, we continuedare required to see a trend toward more HSA spending through payment card transaction swipessupport our Clients' open enrollment activities virtually. Our compliance with the Vaccine Mandate has resulted in, and less by checkscould continue to result in, increased team member attrition, absenteeism, and ACH or electronic reimbursements, which increasedassociated costs. We may be unable to meet our interchange revenue.
The $14.1 million, or 51%, increase in interchange revenue from the year ended January 31, 2016service level commitments to the year ended January 31, 2017 was due to an overall increase in the number of our HSA Members and payment activity.
Interchange revenue per HSA Member decreased by approximately 3% from the year ended January 31, 2017 to the year ended January 31, 2018, primarily due to a decrease in payment activity per HSA Member. Interchange revenue per HSA Member increased by approximately 4% from the year ended January 31, 2016 to the year ended January 31, 2017,Clients as a result of disruptions to our efforts increase card spendwork force and disruptions to third-party contracts that we rely on to provide our services. The extent to which the COVID-19 pandemic and any longer lasting impacts on the usage of our services will continue to negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our platform.
Total revenue
Total revenue per HSA Member increased by 2% from the year ended January 31, 2017 to the year ended January 31, 2018, due to the increase in custodial revenue per HSA Member, largely offset by the decreases in service revenuebusiness and interchange revenue per HSA Member. Total revenue per HSA Member decreased by 4% from the year ended January 31, 2016 to the year ended January 31, 2017, due to decreases in service revenue per HSA Member partially offset by increases in custodial and interchange revenue per HSA Member.
financial results.
Cost of revenue
The following table sets forth our cost of revenue for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended January 31, | | | | |
| (in thousands, except percentages) | | 2022 | | 2021 | | $ change | | % change |
| Service costs | | $ | 290,302 | | | $ | 280,214 | | | $ | 10,088 | | | 4 | % |
| Custodial costs | | 21,867 | | | 19,574 | | | 2,293 | | | 12 | % |
| Interchange costs | | 20,681 | | | 18,448 | | | 2,233 | | | 12 | % |
| Total cost of revenue | | $ | 332,850 | | | $ | 318,236 | | | $ | 14,614 | | | 5 | % |
|
| | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year ended January 31, | |
| % change from |
|
| % change from |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Service costs | $ | 70,426 |
|
| $ | 51,868 |
|
| $ | 39,418 |
|
| 36 | % |
| 32 | % |
| Custodial costs | 11,400 |
|
| 9,767 |
|
| 6,522 |
|
| 17 | % |
| 50 | % |
| Interchange costs | 12,783 |
|
| 10,380 |
|
| 8,248 |
|
| 23 | % |
| 26 | % |
| Total cost | $ | 94,609 |
|
| $ | 72,015 |
|
| $ | 54,188 |
|
| 31 | % |
| 33 | % |
Service costs
costs. The $18.6$10.1 million, or 36%4%, increase in service costs from the year ended January 31, 2017 to the year ended January 31, 2018 was primarily due to an increase in personnel costs to support the higher volume of total accounts being serviced. The $18.6 million increase includes $11.0 millionin average Total Accounts and our efforts related to the hiringtemporary subsidy of additional personnel to implement and support our new Network Partners and HSA Members, increased activation and processing costsCOBRA premium payments available under the American Rescue Plan Act of $4.4 million related to account and card activation, monthly processing of statements and other communications, as well as fraud prevention measures, stock compensation of $814,000, depreciation and amortization of $614,000, general overhead allocation of $748,000 and $1.2 million in other expenses.2021.
Custodial costs. The $12.5$2.3 million, or 32%, increase in service costs from the year ended January 31, 2016 to the year ended January 31, 2017 was due to the higher volume of total accounts being serviced. The $12.5 million increase includes $6.1 million related to the hiring of additional personnel to implement and support our new Network Partners and HSA Members, increased activation and processing costs of $2.9 million related to account and card activation as well as monthly processing of statements and other communications, stock compensation of $692,000, depreciation and amortization of $495,000, general overhead allocation of $1.6 million and $393,000 in other expenses.
Custodial costs
The $1.6 million, or 17%12%, increase in custodial costs from the year ended January 31, 2017 to the year ended January 31, 2018 was due to an increase in the average daily custodialbalance of HSA cash with yield, which increased from $3.66$8.6 billion for the fiscal year ended January 31, 20172021 to $4.57$10.5 billion duringfor the fiscal year ended January 31, 2018, which was2022 and an associated increase in interest retained by HSA members, partially offset by a decrease in custodial costslower average annualized rate of interest retained by HSA members on average custodialHSA cash with yield, which decreased from 0.27%0.19% for the fiscal year ended January 31, 20172021 to 0.25%0.17% for the fiscal year ended January 31, 2018.2022.
Interchange costs. The $3.2$2.2 million, or 50%, increase in custodial costs from the year ended January 31, 2016 to the year ended January 31, 2017 was due to an increase in average daily custodial cash from $2.33 billion for the year ended January 31, 2016 to $3.64 billion during the year ended January 31, 2017, which was partially offset by a decrease in custodial costs on average custodial cash from 0.28% for the year ended January 31, 2016 to 0.27% for the year ended January 31, 2017.
Interchange costs
The $2.4 million, or 23%12%, increase in interchange costs from the year ended January 31, 2017was due to increased spend per account compared to the year ended January 31, 2018,COVID-19 pandemic lows and the $2.1 million, or 26%, increase from the year ended January 31, 2016 to the year ended January 31, 2017, was a result of the overallan increase in payment activity, which is attributable to the growth in HSA Members.accounts.
CostTotal cost of revenue
revenue. As we continue to add HSA Members,Total Accounts, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members. We expect our cost of revenue to increase as a percentage of our total revenue, primarily due to the inclusion of Further's results of operations and expected increases in stock-based compensation. Cost of revenue will continue to be affected by a number of different factors, including our ability to implement new technology inscale our Member Education Center as well as scaling ourservice delivery, Network Partner implementation, and account management functions.
functions, realized synergies, and the impact of the COVID-19 pandemic.
Operating expenses
The following table sets forth our operating expenses for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended January 31, | | | | |
| (in thousands, except percentages) | 2022 | | 2021 | | $ change | | % change |
| Sales and marketing | $ | 58,605 | | | $ | 49,964 | | | $ | 8,641 | | | 17 | % |
| Technology and development | 157,364 | | | 124,809 | | | 32,555 | | | 26 | % |
| General and administrative | 84,379 | | | 84,493 | | | (114) | | | 0 | % |
| Amortization of acquired intangible assets | 82,791 | | | 76,064 | | | 6,727 | | | 9 | % |
| Merger integration | 64,805 | | | 45,990 | | | 18,815 | | | 41 | % |
| Total operating expenses | $ | 447,944 | | | $ | 381,320 | | | $ | 66,624 | | | 17 | % |
|
| | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | Year ended January 31, | |
| % change from |
|
| % change from |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2017 to 2018 |
|
| 2016 to 2017 |
|
| Sales and marketing | $ | 23,139 |
|
| $ | 18,320 |
|
| $ | 13,302 |
|
| 26 | % |
| 38 | % |
| Technology and development | 27,385 |
|
| 22,375 |
|
| 16,832 |
|
| 22 | % |
| 33 | % |
| General and administrative | 25,111 |
|
| 20,151 |
|
| 14,113 |
|
| 25 | % |
| 43 | % |
| Amortization of acquired intangible assets | 4,863 |
|
| 4,297 |
|
| 2,208 |
|
| 13 | % |
| 95 | % |
| Total operating expenses | $ | 80,498 |
|
| $ | 65,143 |
|
| $ | 46,455 |
|
| 24 | % |
| 40 | % |
Sales and marketing
marketing. The $4.9$8.6 million, or 26%17%, increase in sales and marketing expenses from the year ended January 31, 2017was primarily due to the year ended January 31, 2018 primarily consisted ofan increase in marketing expenses from increased staffing and sales commissions of $2.7 million, increased stock-based compensation expense of $1.1 million, increasedmarketing collateral costs and increases in team member and partner commissions of $345,000, and an increase in other expenses of $703,000.
The $5.0 million, or 38%, increase in sales and marketing expenses from the year ended January 31, 2016 to the year ended January 31, 2017 primarily consisted of increased staffing and sales commissions of $2.3 million, increased partner commissions of $928,000, increased travel and marketing expenses of $862,000, increased promotion discounts of $418,000, and an increase in other expenses of $502,000.commissions.
We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the size offocus on our salescross-selling program and marketing organization and expand into new markets.campaigns. On an annual basis, we expect our sales and marketing expenses to remain steadycontinue to increase as a percentage of our total revenue, overprimarily due to the near term.inclusion of Further's results of operations and expected increases in stock-based compensation. However, our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.
In addition, we expect the adoption of the new revenue standard to have a material impact on total sales and marketing expenses. We expect to capitalize incremental contract acquisition costs, such as sales commissions included in sales and marketing expenses in the consolidated statement of operations, and amortize these costs over the average economic life of an HSA Member. The Company's current practice is to fully expense sales commissions when the member is added to the Company's platform.
Technology and development
development. The $5.0$32.6 million, or 22%26%, increase in technology and development expenses from the year ended January 31, 2017was primarily due to the year ended January 31, 2018 resulted primarily from the hiring of additional personnel of $4.4 million, increasedincreases in amortization, stock-based compensation, and depreciation of $1.6 million, stock compensation of $1.4 million, and other expenses of $81,000, which were partially offset by a decrease in professional services of $2.0 million and an increase in capitalized engineering costs of $341,000 associated with the development and enhancement of our proprietary technology platform.
The $5.5 million, or 33%, increase in technology and development expenses for the year ended January 31, 2016 to the year ended January 31, 2017 resulted primarily from the hiring of additional personnel of $3.4 million, increased amortization and depreciation of $1.9 million, information technology expenses of $1.1 million, stock compensation of $889,000, professional services of $726,000, and other expenses of $548,000, which were offset by an increase in capitalized engineering costs of $2.1 million associated with the development and enhancement of our proprietary technology platform, and redeployment of resources from technology and development to general and administrative of $855,000.personnel-related expenses.
We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary system.technology. On an annual basis, we expect our technology and development expenses to continue to increase as a percentage of our total revenue.revenue, primarily due to the inclusion of Further's results of operations, expected increases in stock-based compensation, and our growth initiatives. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses.
General and administrative
administrative. The $5.0$0.1 million, or 25%, increaseless than one percent, decrease in general and administrative expenses from the year ended January 31, 2017 to the year ended January 31, 2018 was primarily attributabledue to the hiring of additional personnel of $3.3 million,
increased stock compensation of $2.6 milliondecreases in personnel-related expenses and other expenses of $1.1 million, which wereprofessional fees, partially offset by a decreaseincreases in professional services of $2.0 million.
The $6.0 million, or 43%, increase in generalcredit losses on trade receivables and administrative expenses from the year ended January 31, 2016 to the year ended January 31, 2017 was primarily attributable to the hiring of additional personnel of $2.4 million, increased professional fees of $1.1 million, stock compensation of $922,000 and other expenses of $814,000, and redeployment of resources from technology and development to general and administrative of $855,000.stock-based compensation.
We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, accounting, insurance, and investor relationsaccounting functions that we continue to incur as a public company, as well as other costs associated with continuingwe continue to grow our business.business and the increased cost of cybersecurity and directors and officers insurance. On an annual basis, we expect our general and administrative expenses to remain steadyincrease as a percentage of our total revenue.revenue, primarily due to the inclusion of Further's results of operations, expected increases in stock-based compensation, and our growth initiatives. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.
Amortization of acquired intangible assets
assets. The $566,000 and $2.1$6.7 million increase in amortization of acquired intangible assets was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Further Acquisition commencing November 1, 2021 and the Luum Acquisition commencing March 8, 2021. The remainder of the increase was due to amortization of acquired HSA portfolios.
Merger integration. The $64.8 million in merger integration expense for the yearsfiscal year ended January 31, 20182022 was primarily due to personnel and 2017, respectively, wasrelated expenses, including expenses incurred in conjunction with the migration of accounts, severance, professional fees, technology-related, and facilities expenses directly related to the WageWorks Acquisition, including $11.2 million of impairment losses on right-of-use assets, and additional integration expenses incurred related to the Further Acquisition. Merger integration expenses of approximately $127 million attributable to the HSA portfolio asset acquisitionsWageWorks Acquisition were substantially completed as of January 31, 2022, with the exception of ongoing lease expense related to certain WageWorks offices that have been permanently closed, less any related sublease income, professional fees associated with the remediation of remaining material weaknesses, and costs associated with remaining platform migrations. We expect merger integration expenses attributable to the Further Acquisition totaling approximately $55 million to be incurred over a period of approximately three years from the acquisition date.
Interest expense
The $36.6 million in interest expense for the fiscal year ended January 31, 2022 consisted primarily of interest accrued on our long-term debt and amortization of debt discount and issuance costs, as well as a $4.0 million loss on extinguishment of debt recorded during the fiscal year ended January 31, 2022 as a result of the refinancing of our prior credit facility. We expect interest expense to increase, primarily from the inclusion of a business. On an annual basis,full year of interest expense we expect total amortizationwill incur on the $600.0 million aggregate principal amount of acquired intangible assets to remain steady.the Notes, which were outstanding for approximately four months during the fiscal year ended January 31, 2022. The interest rate on our Term Loan Facility and Revolving Credit Facility is variable and, accordingly, we may incur additional expense if interest rates increase in future periods.
Other expenseincome (expense), net
The change in other income and expense,(expense), net, forfrom income of $5.0 million during the fiscal year ended January 31, 2018 is primarily attributable2021 to an increase in ongoing acquisition-related activity costs.
The change in other income and expense net forof $5.9 million during the fiscal year ended January 31, 2017 is2022 was primarily attributabledue to ana $9.7 million increase in ongoing acquisition-related activityacquisition costs and interest expense.a $1.2 million decrease in other income, net.
Income tax provision (benefit)
Income tax provision forFor the fiscal years ended January 31, 2018, 2017,2022 and 2016 was $4.8 million, $13.72021, we recorded an income tax benefit of $22.5 million and $8.9$4.7 million, respectively. The decreaseincrease in income tax provision during the year ended January 31, 2018 compared to the year ended January 31, 2017benefit was primarily the result of current year pre-tax book loss, a $14.1 million decrease related tocorresponding increase in benefit for state income taxes, an increase in research and development tax credits, and an increase in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes, pursuant to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting as well as an increase in federal and state income taxes driven by an increase in income before income taxes netted with a decrease. The increase in income tax provision during the year ended January 31, 2017 compared to the year ended January 31, 2016 was primarily the result of an increase in federal and state income taxes driven by an increase in income before income taxes netted with an increase in research and development credits claimed.expense.
Our effective income tax benefit rate for the fiscal years ended January 31, 2018, 20172022 and 20162021 was 9.2%, 34.3%,33.6% and 35.0%113.4%, respectively. The difference between the effective income tax rate and the U.S. federal statutory income tax rate for each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense, due to the adoption of ASU 2016-09,changes in valuation allowance, and other discrete items. The decrease in the effective tax benefit rate for the fiscal year ended January 31, 20182022 compared to the fiscal year ended January 31, 20172021 was primarily the result of excess tax benefits on stock-based compensation expense. The decrease in the effective tax rate for the year ended January 31, 2017 compareddue to the year ended January 31, 2016 was primarily the result of an increase in research and development credits.
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, reduced the statutory federal income tax rate from a top rate of 35% to 21% effective January 1, 2018. Refer to Note 8. Income Taxes, within the notes to the consolidated financial statements for further discussion of the impact of this tax reform on our consolidated financial statements.benefit items relative to the larger pre-tax book loss and smaller pre-tax book income, respectively.
Seasonality
Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations. ARevenue results are seasonally impacted due to ancillary service fees, timing of HSA contributions, and timing of card spend. Cost of revenue is seasonally impacted as a significant number of new and existing Network Partners bring us new HSA MembersHSAs and CDBs beginning in January of each year concurrent with the start of many employers’ benefit plan years. Before we realize any revenue from these new HSA Members,accounts, we incur costs related to implementing and supporting our new Network Partners and new HSA Members.accounts. These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center. These expenses begin to ramp up during our third fiscal quarter, with the majority of expenses incurred in our fourth fiscal quarter.
We also experience higher operating expenses in our fourth fiscal quarter due to sales commissions for new accounts activated in January. Beginning in the year ended January 31, 2019, the Company will adopt ASU 2014-09, Revenue from Contracts with Customers. As a result of this adoption, the Company will capitalize incremental contract acquisition costs, such as sales commissions, and amortize these costs over the average economic life of a member.
Liquidity and capital resources
Cash and marketable securitiescash equivalents overview
As of January 31, 2018, ourOur principal sourcesources of liquidity wasare our current cash and marketable securitiescash equivalents balances, collections from our service, custodial, and interchange revenue activities, and availability under our credit facility.Revolving Credit Facility. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, principal and interest payments on our long-term debt, and capital expenditures.
As of January 31, 20182022 and 2017,January 31, 2021, cash and cash equivalents and marketable securities were $240.3$225.4 million and $180.4$328.8 million, respectively.
Capital resources
AsWe maintain a result of our follow-on offering in May 2015, we received net proceeds of approximately $23.5 million from the sale of 972,500 shares of our common stock.
On September 9, 2015, we filed a shelf“shelf” registration statement on Form S-3 on file with the SEC. ThisA shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to, working capital, sales and marketing activities, general and administrative matters, and capital expenditures, and repayment of indebtedness, and
if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.
In the first quarter of fiscal year 2022, we closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $80.30 per share, less the underwriters' discount. We received net proceeds of $456.6 million after deducting underwriting discounts and commissions of $4.6 million and other offering expenses of approximately $0.5 million.
On September 30, 2015,October 8, 2021, we completed our offering of $600.0 million aggregate principal amount of 4.50% Senior Notes due 2029. In addition, on October 8, 2021, we entered into the Credit Agreement, which includes a $100.0five-year senior secured term loan A facility, in an aggregate principal amount of $350.0 million, credit facility.and a Revolving Credit Facility, in an aggregate principal amount of up to $1.0 billion, which may be used for working capital and general corporate purposes, including the financing of acquisitions and other investments. The credit facility has a termnet proceeds from the issuance of five years. The new credit facility contains covenants and events of default customary for facilities of this type. There were nothe Notes together with borrowings under the facility asCredit Agreement and $31.8 million of cash on hand, were used to repay the outstanding borrowings under our prior credit agreement. For a description of the terms of the Credit Agreement, refer to Note 8—Indebtedness. As of January 31, 2018.2022, there were no amounts outstanding under the Revolving Credit Facility. We were in compliance with all covenants under the Credit Agreement as of January 31, 2018.2022, and for the period then ended.
Use of cash
We used $50.2 million of the net proceeds from the follow-on public offering to acquire 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum, and used an additional $60.8 million to acquire the Fifth Third Bank HSA portfolio. We used the remaining net proceeds from the offering, and other cash on hand, for the Further Acquisition.
Capital expenditures for the fiscal years ended January 31, 2018, 2017,2022 and 20162021 were $15.8 million, $12.7$71.6 million and $9.3$64.6 million, respectively. We expect to continue our current level of increased capital expenditures during the fiscal year ending January 31, 20192023 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary system.systems. Costs to improve the architecture of our proprietary systemsystems include software engineering services, computer hardware, and personnel and related costs for software engineering.engineering and outsourced software engineering services.
We believe our existing cash, cash equivalents, and marketable securities,Revolving Credit Facility will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months. To the extent these current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may need to raise additional funds through public or private equity or debt financing. In the event that additional financing is required, we may not be able to raise it on favorable terms, if at all.
The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods: | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 |
| Net cash provided by operating activities | $ | 140,995 | | | $ | 181,619 | |
| Net cash used in investing activities | $ | (639,247) | | | $ | (96,964) | |
| Net cash provided by financing activities | $ | 394,863 | | | $ | 52,422 | |
| Increase (decrease) in cash and cash equivalents | (103,389) | | | 137,077 | |
| Beginning cash and cash equivalents | 328,803 | | | 191,726 | |
| Ending cash and cash equivalents | $ | 225,414 | | | $ | 328,803 | |
|
| | | | | | | | | | | | |
|
| Year ended January 31, | |
| (in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Net cash provided by operating activities |
| $ | 81,702 |
|
| $ | 45,591 |
|
| $ | 26,541 |
|
| Net cash used in investing activities |
| (36,748 | ) |
| (13,054 | ) |
| (90,552 | ) |
| Net cash provided by financing activities |
| 14,564 |
|
| 23,776 |
|
| 36,647 |
|
| Increase (decrease) in cash and cash equivalents |
| 59,518 |
|
| 56,313 |
|
| (27,364 | ) |
| Beginning cash and cash equivalents |
| 139,954 |
|
| 83,641 |
|
| 111,005 |
|
| Ending cash and cash equivalents |
| $ | 199,472 |
|
| $ | 139,954 |
|
| $ | 83,641 |
|
Cash flows provided byfrom operating activities. Net cash provided by operating activities during the fiscal year ended January 31, 20182022 resulted primarily from our net incomeloss of $47.4$44.3 million, adjusted for the following non-cash items: depreciation and amortization expense of $16.0$137.2 million, stock-based compensation expense of $52.8 million, impairment of right-of-use assets of $11.2 million, amortization of debt issuance costs of $4.4 million, and stock-based compensationa loss on extinguishment of $14.3debt of $4.0 million, and changes in deferred taxes of $4.3 million, accrued compensation of $3.8 million, other long-term liabilities of $939,000, and amortization of deferred financing costs, bad debt expense, changes in inventories and accrued liabilities and other totaling $1.1 million. These werepartially offset by changesa change in accounts receivablethe fair value of $4.7contingent consideration of $2.1 million, a gain on equity securities of $1.7 million, and other assetsnon-cash items and accounts payable of $1.3working capital changes totaling $20.6 million.
Net cash provided by operating activities during the fiscal year ended January 31, 20172021 resulted primarily from our net income of $26.4$8.8 million, adjusted for the following non-cash items:plus depreciation and amortization expense of $13.2$115.9 million, stock-based compensation expense of
$42.9 million, and stock-based compensation of $8.4 million, and changes in accrued liabilities of $1.7 million, other long-term liabilities of $1.2 million, accrued compensation of $946,000, and accounts payable, amortization of deferred financingdebt issuance costs bad debt expense, and inventories totaling of $698,000. These were offset by changes in deferred income taxes of $2.9 million, accounts receivable of $2.7$5.1 million, and other assets of $1.3non-cash items and working capital changes totaling $8.9 million.
Net cash provided by operating activities during the year ended January 31, 2016 resulted primarily from our net income of $16.6 million adjusted for the following non-cash items: depreciation and amortization of $8.6 million and stock-based compensation of $5.9 million, changes in accrued compensation of $2.5 million, and accounts payable of $1.0 million. These were offset by changes in accounts receivable of $5.2 million, deferred income taxes of $2.2 million, and accrued liabilities, other long-term liabilities and other assets of $742,000.
Cash flows used infrom investing activities. We continued to increase our purchases of software and capitalized software development costs due to continued growth. During the years ended January 31, 2018, 2017 and 2016, purchases of software and capitalized software development costs were $10.4 million, $9.0 million, and $6.9 million, respectively. We also increased our purchases of property and equipment to $5.5 million, $3.6 million and $2.4 million, respectively, due to our continued growth.
Net cashCash used in investing activities during the fiscal year ended January 31, 2018 was primarily2022 resulted from $504.5 million used for the resultacquisitions of Luum and Further, $62.7 million in software and capitalized software development, $65.5 million in the acquisitions of the acquisition of the right to be the custodian of the First Interstate Bancsystem and Alliant Credit UnionFifth Third HSA portfolio acquisitions for $6.4and other intangible member assets, and $8.9 million in purchases of property and $8.0equipment, partially offset by $2.4 million respectively, as well as our acquisition of proceeds from the rights to be the sole administratorsale of a portfolio of HSA Members for $3.3 million and an acquisition of a business for $2.9 million.equity securities.
Net cashCash used in investing activities during the fiscal year ended January 31, 2016 was primarily the result2021 resulted from $51.5 million in software and capitalized software development, $32.4 million in acquisitions of the acquisition of the right to be the custodian of the Bancorpintangible member assets, and M&T HSA portfolios totaling $40.5$13.1 million thein purchases of marketable securities of $40.3 million,property and a $500,000 investment in a limited partnership that engages in the development of technology-based financial healthcare products.equipment.
Cash flows provided byfrom financing activities. Cash flowNet cash provided by financing activities during the fiscal year ended January 31, 20182022 resulted primarily from $938.1 million of net proceeds associated withfrom the issuance of long-term debt, $456.6 million of net proceeds from our follow-on public offering of 5,750,000 shares of common stock, and the exercise of stock options of $14.6$9.8 million. These items were partially offset by $1.0 billion of principal payments on our long-term debt, a $6.0 million payment of contingent consideration, and $0.5 million used in the settlement of Client-held funds obligations.
Cash flowNet cash provided by financing activities during the fiscal year ended January 31, 20172021 resulted primarily from $286.8 million of net proceeds associated withfrom our July 2020 follow-on public offering of 5,290,000 shares of common stock and the exercise of stock options of $7.1 million, and the associated tax benefits of $16.6 million.
Cash flow used in financing activities during the year ended January 31, 2016 resulted primarily from our follow-on offering, from which we received net proceeds of $23.5 million from the sale of 972,500 shares of our common stock, proceeds associated with the exercise of stock options of $1.9 million, and the associated tax benefits of $11.6$8.6 million. These items were partially offset by deferred financing costs paid$239.1 million of $317,000principal payments on our long-term debt and $3.9 million used in conjunction with the credit agreement entered into during the year.settlement of Client-held funds obligations.
Contractual obligations
We lease office space, data storage facilities, equipmentSee Note 7—Commitments and certain maintenance requirements under long-term non-cancelable operating leases. Future minimum lease payments required under non-cancelable obligations as of January 31, 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
|
| Payment due by period | |
| (in thousands) |
| Less than
1 year |
|
| 1-3
years |
|
| 3-5
years |
|
| More than
5 years |
|
| Total |
|
| Office lease obligations |
| $ | 3,904 |
|
| $ | 7,944 |
|
| $ | 8,501 |
|
| $ | 17,034 |
|
| $ | 37,383 |
|
| Data storage and equipment lease obligations |
| 343 |
|
| 301 |
|
| 68 |
|
| — |
|
| 712 |
|
| Processing services agreement |
| 825 |
|
| 1,650 |
|
| — |
|
| — |
|
| 2,475 |
|
| Telephony services |
| 288 |
|
| — |
|
| — |
|
| — |
|
| 288 |
|
| Other |
| 856 |
|
| 2,252 |
|
| 1,396 |
|
| — |
|
| 4,504 |
|
| Total |
| $ | 6,216 |
|
| $ | 12,147 |
|
| $ | 9,965 |
|
| $ | 17,034 |
|
| $ | 45,362 |
|
Office lease obligations—On May 15, 2015, the Company entered into a lease agreement to expand its headquarters in Draper, Utah. The lease providescontingencies for the new landlord to construct a building at its cost. The lease commenced upon the substantial completion and delivery of the building to the Company on July 1, 2016 and has an initial term of 129 months thereafter, with an option for the Company to extend the lease for two additional five-year periods. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $1.0 million, with 2.5% annual increases. In conjunction with the aforementioned lease, the Company entered into an amended and restated lease agreement for its existing office space at its headquarters in Draper, Utah. The lease commenced on July 1, 2015 and has an initial term of 129 months thereafter, with an option for the Company to extend the lease for two additional five-year periods. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $1.6 million, with 2.5% annual increases.
On September 16, 2016, the Company amended its lease to expand its current office space. The term of the lease commenced on July 1, 2016 and will expire on March 31, 2027. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $569,000, with 2.5% annual increases.
On May 31, 2017, the Company entered into an amendment to its lease agreement, dated May 15, 2015, to expand its current office space. The term of the lease commenced on January 1, 2018 and will expire on March 31, 2027. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $513,000, with annual increases ranging from 2.5% to 3.1%.
Lease expense for office space for the years ended January 31, 2018, 2017 and 2016 totaled $4.3 million, $3.3 million and $2.1 million, respectively. The Company also leases office space in Overland Park, Kansas, which expires in February 2019.
Data storage and equipment lease obligations—The data storage and equipment leases relate toinformation about our offsite data storage facility and office equipment leases. All of these leases expire during the year ended January 31, 2020.
Telephony services—The telephony service agreement relates to our 24/7/365 member support center. The agreement expires in September 2019.
Processing services agreement—The Company's processing services agreement with a vendor expires December 31, 2020 and requires the Company to pay a minimum processing fee based on the processing year of the agreement. The Company may terminate the agreement beginning January 1, 2020 by providing 180 days’ written notice.
If the processing agreement is terminated prior to December 31, 2020, the Company is required to pay the vendor a termination fee, equal to 75% of the aggregate value of the minimum processing fees for the remaining years of the agreement, plus a portion of the account-boarding incentive fee.
For each of the years ended January 31, 2018, 2017 and 2016, the Company exceeded the minimum amounts required under the agreement.
The Company also has agreements with several entities for access to technology and software. The agreements are based on usage, and there are no minimum required monthly payments.
contractual obligations.
Off-balance sheet arrangements
Except as disclosed in the notes toAs of January 31, 2022, other than outstanding letters of credit issued under our financial statements,Revolving Credit Facility, we dodid not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements. The majority of the standby letters of credit expire within one year. However, in the ordinary course of business, we will continue to renew or modify the terms of the letters of credit to support business requirements. The letters of credit are contingent liabilities, supported by our Revolving Credit Facility, and are not reflected on our consolidated balance sheets.
Critical accounting policies and significant management estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptionsjudgments that affect the reported amounts of assets, liabilities, revenue, costsrevenues, and expenses and related disclosures.expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable underin the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that there are several accounting policies that are critical to understanding our business and prospects for future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management’s judgment and estimates. These significant policies and our procedures related to these policies are described in detail below.
Revenue recognition
We earn revenue primarily from three sources: service revenue, custodial revenue and interchange revenue. We recognize revenue when the following criteria are met: (1) collectability is reasonably assured; (2) delivery has occurred; (3) persuasive evidence of an arrangement exists; and (4) there is a fixed or determinable fee.
Service revenue: We charge our Network Partners or individual members a monthly service fee once a member account is set up on our system. We recognize revenue on the monthly service fees in the month during which we service each member account. In addition, we earn fees paid by employer partners and plan participants in connection with plan administrator and fiduciary services for 401(k) employer sponsors. The fees are paid on a quarterly basis and revenue is recognized in the month in which it is earned.
Custodial revenue: We earn interest on custodial cash. This interest is earned from various FDIC-insured bank partners and from an annuity contract with our insurance company partner with whom we deposit our members’ HSA cash assets. We also receive certain administrative and recordkeeping fees for custodial investments from our investment partners and customers. We recognize this revenue in the month in which it is earned.
Interchange revenue: We earn interchange revenue from card transaction “swipes” by our members when our members use our payment cards to pay healthcare-related claims and expenses. We recognize this revenue in the month in which it is earned.
Marketable securities
Marketable securities consist primarily of mutual funds invested in corporate bonds, U.S. government agency securities, U.S. treasury bills, commercial paper, certificates of deposit, municipal notes, and bonds with original maturities beyond three months at the time of purchase. Marketable securities are classified as available-for-sale, held-to-maturity, or trading at the date of purchase. We classify marketable securities, including securities with maturities beyond twelve months, as current assets in the consolidated balance sheets. All marketable securities are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income, net of the related tax effect. We evaluate marketable securities to assess whether those with unrealized loss positions are other-than-temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other expense, net in the consolidated statements of operations and comprehensive income.
Capitalized software development costs
We account for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification, or ASC, 350-40, “Internal-Use Software.” Costs incurred during operation and post-implementation stages are charged to expense. Costs incurred that are directly attributable to developing or obtaining software for internal use incurred in the application development stage are capitalized. Management’s judgment is required in determining the point when various projects enter the stages at which costs may be
capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized.
AcquisitionsValuation of long-lived assets including goodwill and intangible assets
To determine whether an acquisition qualifies as a business combination or an asset acquisition, we make certain judgments, which include assessment ofWe allocate the inputs, processes, and outputs associated with the acquired group of assets. If we determine that the acquisition consists of inputs, as well as processes that when applied to those inputs have the ability to create outputs, the acquisition is determined to be a business combination. In instances where the acquired group of assets does not include sufficient inputs and processes to produce outputs, the acquisition is determined to be an asset acquisition. Under the asset acquisition method of accounting, the Company is required to fair value of purchase consideration to the assets transferred. The cost of thetangible assets acquired, is allocated to the individualliabilities assumed, and intangible assets acquired based on their relativeestimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and doesliabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not give riselimited to, goodwill.
If an acquisition qualifiesdiscount rates and revenue growth rates, net of attrition, related to acquired customer relationships. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a business combination, the related transaction costsresult, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are recorded as an expense in the consolidated statements of operations and comprehensive income. If an acquisition qualifies as an asset acquisition, the related transaction costs are capitalized and subsequently amortized over the useful life, whereas any indefinite lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the acquired assets.measurement period, any subsequent adjustments are recorded to earnings.
GoodwillWe review goodwill for impairment at least annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the accompanying consolidated financial statements.
Long-lived assets, including property and equipment and intangible assets
We apply ASC 805, ‘‘Business Combinations,’’ and ASC 350, ‘‘Intangibles—Goodwill and Other’’ to account are reviewed for goodwill and intangible assets. In accordance with these standards, we amortize all finite lived intangible assets over their respective estimated useful lives, while goodwill has an indefinite life and is not amortized. We review finite lived intangible assets subject to amortization forpossible impairment whenever events or circumstances indicate that the associated carrying amount of such assets may not be recoverable. GoodwillThe evaluation is not amortized but is tested for impairment at least annually or more frequently whenever a triggering event or change in circumstances occurs,performed at the reporting unit level. Welowest level for which identifiable cash flows are requiredlargely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to recognize an impairment charge ifthe future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the reporting unit exceeds itscarrying amount of such assets is reduced to fair value.
Prior to our initial public offering, management used all available information to make this fair value determination, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets and observed market multiples of operating cash flows and net income. After the consummation of our initial public offering, our stock price and associated market capitalization were also considered in the determination of reporting unit fair value. In addition, if the estimated fair value of the reporting unit is less than the book value (including the goodwill), further management judgment must be applied in determining the fair values of individual assets and liabilities. No impairments for goodwill or other intangible assets were We have not recorded any significant impairment charges during the years ended January 31, 2018, 2017 and 2016. However, a lower fair value estimate in the future could result in impairment. A prolonged or significant decline in our stock price could provide evidence of a need to record a material impairment of goodwill.
Income taxes
We account for income taxes and the related accounts under the liability method as set forth in the authoritative guidance for accounting for income taxes. Under this method, current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may not be realized in future years.
We use the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes. We have also elected to exclude the indirect tax effects of share-based compensation deductions in computing the income tax provision recorded within the Consolidated Statement of Operations and Comprehensive Income. Also, we use the portfolio approach in releasing income tax effects from accumulated other comprehensive income.
We recognize the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon settlement. We recognize interest and penalties, if any, related to unrecognized tax benefits as a component of other income (expense) in the Statements of Operations and Comprehensive Income. Significant judgment is required to evaluate uncertain tax positions. Changes in facts and circumstances could have a material impact on our effective tax rate and results of operations. In light of the recently enacted Tax Cuts and Jobs Act, refer to Note 8. Income Taxes, within the notes to the consolidated financial statements for further discussion of the impact of this tax reform on our consolidated financial statements.
Stock-based compensation
Stock options.We award time-based and performance-based stock options to team members, directors, and executive officers. Stock-based compensation costs related to stock options granted are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. With respect to time-based stock options, the grant date fair value of stock-based awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the award. With respect to performance-based stock options, stock compensation expense is recognized over the requisite service period using the graded-vesting attribution method when it is probable that the performance condition will be achieved. Each reporting period, we evaluate the probability of achieving the performance criteria and of the number of shares that are expected to vest; compensation expense is then adjusted to reflect the number of shares expected to vest. Accordingly, the expense recognized is an estimate that may change over time as key assumptions are updated. We expect to continue to grant stock options in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions to estimate the fair value of stock-based awards. If we had made different assumptions, our stock-based compensation expense, net income and net income per share of common stock could have been significantly different. These assumptions include:
Expected volatility: As we do not have adequate length of trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historical price volatility for industry peers based on daily price observations. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
Expected term: The expected term represents the period that our stock-based awards are expected to be outstanding. We use the "simplified" method to estimate the expected term as determined under Staff Accounting Bulletin No. 110 due to the lack of option exercise history as a public company.
Risk-free interest rate: The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
Expected dividend yield: We have never declared or paid any cash dividends to our common stockholders and do not presently plan to pay any cash dividends in the foreseeable future, other than in connection with the special dividend described in Item 5- Market for registrant's common equity, related stockholders matters and issuer purchases of equity securities. Consequently, we used an expected dividend yield of zero.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:
|
| | | | | | | | | |
| |
| Year ended January 31, | |
| |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Expected dividend yield |
| — | % |
| — | % |
| — | % |
| Expected stock price volatility |
| 37.79% - 38.01% |
|
| 38.01% - 38.37% |
|
| 38.29% - 40.29% |
|
| Risk-free interest rate |
| 1.18% - 2.07% |
|
| 1.18% - 2.18% |
|
| 1.47% - 1.80% |
|
| Expected life of options |
| 4.50 - 6.25 years |
|
| 4.50 - 6.25 years |
|
| 5.43 - 6.25 years |
|
We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective basis.
The estimated fair value of a stock option using the Black-Scholes option-pricing model is impacted significantly by changes in a company’s stock price. For example, all other assumptions being equal, the estimated fair value of a stock option will increase as the closing price of a company’s stock increases, and vice versa. Prior to the closing of the IPO, we were a private company and, as such, we were required to estimate the fair value of our common stock. In the absence of a public trading market, we determined a reasonable estimate of the then-current fair value of our common stock for purposes of granting stock-based compensation based on multiple criteria. We estimated the fair value of our common stock utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation", or the AICPA Practice Aid. After closing of the IPO, the fair value of our common stock is no longer an estimate as it is based upon the closing price of our stock on the NASDAQ Market on the date of grant.
Restricted stock units.Restricted stock units and performance-based RSUs are valued based on the current value of the Company's closing stock price on the date of grant, less the present value of future expected dividends discounted at the risk-free interest rate. Expense for restricted stock units is recognized on a straight-line basis over the requisite service period. Expense for performance-based RSUs is recognized when it is considered probable that the performance conditions will be met.
Self insurance
We are self-insured for medical and dental benefits for all qualifying employees. The medical plan carries a stop-loss policy which will protect from individual claims during the plan year exceeding $110,000. We record estimates of costs of claims incurred but not reported based on an analysis of historical data and independent estimates.presented.
Recent accounting pronouncements
See Note 1. 1—Summary of business and significant accounting policies within the financial statements included in this Form 10-K for further discussion.
Item 7A. Quantitative and qualitative disclosures about market risk
Market risk
Concentration of market risk. We derive a substantial portion of our revenue from providing services to tax-advantaged healthcare account holders. A significant downturn in this market or changes in state and/or federal laws impacting the preferential tax treatment of healthcare accounts such as HSAs could have a material adverse effect on our results of operations. During the fiscal years ended January 31, 2018, 2017,2022, 2021, and 2016,2020, no one customer
accounted for greater than 10% of our total revenue. We monitor market and regulatory changes regularly and make adjustments to our business if necessary.
Inflation. Inflationary factors may adversely affect our operating results. AlthoughtAlthough we do not believe that inflation has had a material impact on our financial position or results of operations to date, athe current high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of expenses as a percentage of revenue if our revenue does not correspondingly increase with inflation.
Concentration of credit risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents and marketable securities.equivalents. We maintain our cash and cash equivalents and marketable securities in bank and other depository accounts, which at times,frequently may exceed federally insured limits. Our cash and cash equivalents and marketable securities as of January 31, 20182022 were $240.3$225.4 million, the vast majority of which $750,000 was not covered by federal depository insurance. We have not experienced any material losses in such accounts and believe we are not exposed to any significant credit risk with respect to our cash and cash equivalents, and marketable securities.equivalents. Our accounts receivable balance as of January 31, 20182022 was $21.6$87.4 million. We have not experienced any significant write-offs to our accounts receivable and believe that we are not exposed to significant
credit risk with respect to our accounts receivable.receivable; however, the extent to which the ongoing COVID-19 pandemic will negatively impact our credit risk remains highly uncertain and cannot be accurately predicted. We continue to monitor our credit risk and place our cash and cash equivalents and marketable securities with reputable financial institutions.
Interest rate risk
Custodial cash assets.Our custodial cash assets consistsHSA Assets and Client-held funds.HSA Assets consist of custodial HSA funds we hold in custody on behalf of our members. As of January 31, 2018,2022, we had custodial cashheld in custody HSA Assets of approximately $5.5$19.6 billion. As a non-bank custodian, we contract with FDIC-insured custodial depository bank partnersour Depository Partners and an insurance company partnerpartners to hold custodial cash assets on behalf of our members, and we earn a significant portion of our total revenue from interest rates offeredpaid to us by these partners. Custodial cash assets held by our insurance company partners are held in group annuity contracts or similar arrangements. The contract termslengths of our agreements with Depository Partners typically range from three to five years and have either fixed or variable interest rates. As our custodial assetsHSA Assets increase and existing agreementscontracts with Depository Partners expire, we seek to enter into new contracts with FDIC-insured custodial depository bank partners,Depository Partners, the terms of which are impacted by the then-prevailing interest rate environment. The diversification of depositsHSA Assets placed among bankour Depository Partners and insurance company partners, and varied contract terms, substantially reduces our exposure to short-term fluctuations in prevailing interest rates and mitigates the short-term impact of a sustained increase or decline in prevailing interest rates on our custodial revenue. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize. Conversely, a sustained increase in prevailing interest rates can increase our yield. An increase in our yield would increase our custodial revenue as a percentage of total revenue. In addition, asif our yield increases, we expect the spread to growalso increase between the interest offered to us by our custodial depository bankDepository Partners and insurance company partners and the interest retained by our members, thus increasing our profitability. However, we may be required to increase the interest retained by our members in a rising prevailing interest rate environment. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.control, such as the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic.
Client-held funds are interest earning deposits from which we generate custodial revenue. As of January 31, 2022, we held Client-held funds of $897 million. These deposits are amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of our other CDBs. These deposits are held with Depository Partners. We deposit the Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the yield available to us and thus the amount of the custodial revenue we can realize from Client-held funds. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.
Cash and cash equivalents and marketable securities. We consider all highly liquid investments purchased with an original maturity of three months or less to be unrestricted cash equivalents. Our unrestricted cash and cash equivalents are held in institutions in the U.S. and include deposits in a money market account that is unrestricted as to withdrawal or use. As of January 31, 2018,2022, we had unrestricted cash and cash equivalents of $199.5$225.4 million. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our cash and cash equivalents as a result of changes in interest rates.
Long-term debt. As of January 31, 2018,2022, we had marketable securities of $40.8 million. Marketable securities are recorded at their estimated fair value. We do not enter into investments for trading or speculative purposes.$350.0 million outstanding under our Term Loan Facility and no amounts drawn under our Revolving Credit Facility. Our marketable securities are exposed to market risk due to a fluctuation inoverall interest rate sensitivity under these credit facilities is primarily influenced by any amounts borrowed and the prevailing interest rates whichon these instruments. The interest rate on our Term Loan Facility and Revolving Credit Facility is variable and was 1.88% at January 31, 2022. Accordingly, we may affect the fair market value of our marketable securities. However, because we classify our marketable securities as "available-for-sale," no gains or losses are recognized in net income due to changes inincur additional expense if interest rates unless such securities are sold prior to maturity or declinesincrease in fair value are determined to be other-than-temporary.
future periods. For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at January 31, 2022 would result in approximately $3.5 million of additional interest expense over the next 12 months. The interest rate on our $600 million of unsecured Senior Notes due 2029 is fixed at 4.50%.
Item 8. Financial statements and Supplementary Data
HealthEquity, Inc. and subsidiaries
Index to consolidated financial statements
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of HealthEquity, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of HealthEquity, Inc. and its subsidiaries (the “Company”) as of January 31, 20182022 and 2017,2021, and the related consolidated statements of operations and comprehensive income (loss), of stockholders'stockholders’ equity and of cash flows for each of the three years in the period ended January 31, 2018,2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31, 2018,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 20182022 and 2017,2021, and the results of theirits operations and theirits cash flows for each of the three years in the period ended January 31, 20182022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of January 31, 2018,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) ineffective controls around the contract-to-cash life cycle of service fees, including ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements that require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, availability of customer contracts, and reviews of non-standard contracts and (ii) ineffective controls related to information technology general controls (ITGCs) in the areas of logical access and change-management over certain information technology systems that supported its financial reporting processes. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's report on internal control over financial reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'smanagement's report on internal control over financial reporting.referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s report on internal control over financial reporting, management has excluded Fort Effect Corp, d/b/a Luum (Luum) and the Further business from its assessment of internal control over financial reporting as of January 31, 2022 because they were acquired by the Company in purchase business combinations during fiscal 2022. We have also excluded Luum and Further from our audit of internal control over financial reporting. Luum and Further are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting collectively represent approximately 1% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended January 31, 2022.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Service Revenue Recognition
As described in Note 1 to the consolidated financial statements, the Company's primary sources of revenue are service, custodial, and interchange revenue. The Company’s service revenue was $427 million for the year ended January 31, 2022. To generate service revenue, the Company administers its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services. All of these services are consumed as they are received. The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations.
The principal consideration for our determination that performing procedures relating to service revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to revenue recognition after consideration of the material weaknesses that were identified as described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section above.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the recognition of service revenue for a sample of revenue transactions by obtaining confirmation from customers or obtaining and inspecting source documents, including invoices, sales contracts, and cash receipts.
Valuation of Customer Relationships Relating to the Acquisition of Further
As described in Notes 1 and 3 to the consolidated financial statements, on November 1, 2021, the Company completed its acquisition of the Further business (other than Further’s voluntary employee beneficiary association business) for $455 million. Identifiable intangible assets acquired as part of the acquisition were $172 million, including customer relationships, developed technology, and in-process software development costs. Customer relationships make up $146 million of the identifiable intangible assets acquired. Acquired customer relationships are valued utilizing the discounted cash flow method, a form of the income approach. As disclosed by management, significant estimates in valuing acquired customer relationships include, but are not limited to, discount rates and revenue growth rates, net of attrition.
The principal considerations for our determination that performing procedures relating to the valuation of customer relationships relating to the acquisition of Further is a critical audit matter are (i) the significant judgment by management when determining the fair value of the customer relationships intangible asset acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to discount rates and revenue growth rates, net of attrition; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to acquisition accounting, including controls over management’s valuation of the customer relationships intangible asset. These procedures also included, among others, (i) reading the purchase agreement; (ii) testing management’s process for determining the fair value of the customer relationships, (iii) evaluating the appropriateness of the discounted cash flow method; (iv) testing the completeness and accuracy of certain underlying data used in the discounted cash flow method; and (v) evaluating the reasonableness of the significant assumptions used by management related to discount rates and revenue growth rates, net of attrition. Evaluating management’s significant assumptions related to revenue growth rates, net of attrition, involved evaluating whether the significant assumptions used by management were reasonable considering (i) the past performance of the Further business; (ii) consistency with external market and industry data; and (iii) whether the significant assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s discounted cash flow method and (ii) the reasonableness of management’s significant assumptions related to discount rates and revenue growth rates, net of attrition.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
March 28, 201831, 2022
We have served as the Company’s auditor since 2013.
HealthEquity, Inc. and subsidiaries
Consolidated Balance Sheets
|
| | | | | | | |
| (in thousands, except par value) | January 31, 2018 |
|
| January 31, 2017 |
|
| Assets |
|
|
|
| Current assets |
|
|
|
| Cash and cash equivalents | $ | 199,472 |
|
| $ | 139,954 |
|
| Marketable securities, at fair value | 40,797 |
|
| 40,405 |
|
| Total cash, cash equivalents and marketable securities | 240,269 |
|
| 180,359 |
|
| Accounts receivable, net of allowance for doubtful accounts of $208 and $75 as of January 31, 2018 and 2017, respectively | 21,602 |
|
| 17,001 |
|
| Inventories | 215 |
|
| 592 |
|
| Other current assets | 3,310 |
|
| 2,867 |
|
| Total current assets | 265,396 |
|
| 200,819 |
|
| Property and equipment, net | 7,836 |
|
| 5,170 |
|
| Intangible assets, net | 83,635 |
|
| 65,020 |
|
| Goodwill | 4,651 |
|
| 4,651 |
|
| Deferred tax asset | 5,461 |
|
| 1,615 |
|
| Other assets | 2,180 |
|
| 1,861 |
|
| Total assets | $ | 369,159 |
|
| $ | 279,136 |
|
| Liabilities and stockholders’ equity |
|
|
|
| Current liabilities |
|
|
|
| Accounts payable | $ | 2,420 |
|
| $ | 3,221 |
|
| Accrued compensation | 12,549 |
|
| 8,722 |
|
| Accrued liabilities | 5,521 |
|
| 3,760 |
|
| Total current liabilities | 20,490 |
|
| 15,703 |
|
| Long-term liabilities |
|
|
|
| Other long-term liabilities | 2,395 |
|
| 1,456 |
|
| Deferred tax liability | — |
|
| 37 |
|
| Total long-term liabilities | 2,395 |
|
| 1,493 |
|
| Total liabilities | 22,885 |
|
| 17,196 |
|
| Commitments and contingencies (see note 6) |
|
|
|
| Stockholders’ equity |
|
|
|
| Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of January 31, 2018 and 2017 | — |
|
| — |
|
| Common stock, $0.0001 par value, 900,000 shares authorized, 60,825 and 59,538 shares issued and outstanding as of January 31, 2018 and 2017, respectively | 6 |
|
| 6 |
|
| Additional paid-in capital | 261,237 |
|
| 232,114 |
|
| Accumulated other comprehensive loss, net | (269 | ) |
| (165 | ) |
| Accumulated earnings | 85,300 |
|
| 29,985 |
|
| Total stockholders’ equity | 346,274 |
|
| 261,940 |
|
| Total liabilities and stockholders’ equity | $ | 369,159 |
|
| $ | 279,136 |
|
| | | | | | | | | | | |
| (in thousands, except par value) | January 31, 2022 | | January 31, 2021 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 225,414 | | | $ | 328,803 | |
| Accounts receivable, net of allowance for doubtful accounts of $6,228 and $4,239 as of January 31, 2022 and 2021, respectively | 87,428 | | | 72,767 | |
| Other current assets | 38,495 | | | 58,607 | |
| Total current assets | 351,337 | | | 460,177 | |
| Property and equipment, net | 23,372 | | | 29,106 | |
| Operating lease right-of-use assets | 63,613 | | | 89,508 | |
| Intangible assets, net | 973,137 | | | 767,003 | |
| Goodwill | 1,645,836 | | | 1,327,193 | |
| Other assets | 49,807 | | | 37,420 | |
| Total assets | $ | 3,107,102 | | | $ | 2,710,407 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 27,541 | | | $ | 1,614 | |
| Accrued compensation | 47,136 | | | 50,670 | |
| Accrued liabilities | 57,589 | | | 75,880 | |
| Current portion of long-term debt | 8,750 | | | 62,500 | |
| Operating lease liabilities | 12,171 | | | 14,037 | |
| Total current liabilities | 153,187 | | | 204,701 | |
| Long-term liabilities | | | |
| Long-term debt, net of issuance costs | 922,077 | | | 924,217 | |
| Operating lease liabilities, non-current | 65,232 | | | 74,224 | |
| Other long-term liabilities | 14,185 | | | 8,808 | |
| Deferred tax liability | 99,846 | | | 119,729 | |
| Total long-term liabilities | 1,101,340 | | | 1,126,978 | |
| Total liabilities | 1,254,527 | | | 1,331,679 | |
| Commitments and contingencies (see Note 7) | 0 | | 0 |
| Stockholders’ equity | | | |
| Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of January 31, 2022 and 2021 | — | | | — | |
| Common stock, $0.0001 par value, 900,000 shares authorized, 83,780 and 77,168 shares issued and outstanding as of January 31, 2022 and 2021, respectively | 8 | | | 8 | |
| Additional paid-in capital | 1,676,508 | | | 1,158,372 | |
| Accumulated earnings | 176,059 | | | 220,348 | |
| Total stockholders’ equity | 1,852,575 | | | 1,378,728 | |
| Total liabilities and stockholders’ equity | $ | 3,107,102 | | | $ | 2,710,407 | |
The accompanying notes are an integral part of the consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Operations and Comprehensive Income
|
| | | | | | | | | | | |
| (in thousands, except per share data) | Year ended January 31, | |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Revenue |
|
|
|
|
|
| Service revenue | $ | 91,619 |
|
| $ | 77,254 |
|
| $ | 61,608 |
|
| Custodial revenue | 87,160 |
|
| 59,593 |
|
| 37,755 |
|
| Interchange revenue | 50,746 |
|
| 41,523 |
|
| 27,423 |
|
| Total revenue | 229,525 |
|
| 178,370 |
|
| 126,786 |
|
| Cost of revenue |
|
|
|
|
|
| Service costs | 70,426 |
|
| 51,868 |
|
| 39,418 |
|
| Custodial costs | 11,400 |
|
| 9,767 |
|
| 6,522 |
|
| Interchange costs | 12,783 |
|
| 10,380 |
|
| 8,248 |
|
| Total cost of revenue | 94,609 |
|
| 72,015 |
|
| 54,188 |
|
| Gross profit | 134,916 |
|
| 106,355 |
|
| 72,598 |
|
| Operating expenses |
|
|
|
|
|
| Sales and marketing | 23,139 |
|
| 18,320 |
|
| 13,302 |
|
| Technology and development | 27,385 |
|
| 22,375 |
|
| 16,832 |
|
| General and administrative | 25,111 |
|
| 20,151 |
|
| 14,113 |
|
| Amortization of acquired intangible assets | 4,863 |
|
| 4,297 |
|
| 2,208 |
|
| Total operating expenses | 80,498 |
|
| 65,143 |
|
| 46,455 |
|
| Income from operations | 54,418 |
|
| 41,212 |
|
| 26,143 |
|
| Other expense |
|
|
|
|
|
| Other expense, net | (2,229 | ) |
| (1,092 | ) |
| (589 | ) |
| Total other expense | (2,229 | ) |
| (1,092 | ) |
| (589 | ) |
| Income before income taxes | 52,189 |
|
| 40,120 |
|
| 25,554 |
|
| Income tax provision | 4,827 |
|
| 13,744 |
|
| 8,941 |
|
| Net income | $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| Net income per share: |
|
|
|
|
|
| Basic | $ | 0.79 |
|
| $ | 0.45 |
|
| $ | 0.29 |
|
| Diluted | $ | 0.77 |
|
| $ | 0.44 |
|
| $ | 0.28 |
|
| Weighted-average number of shares used in computing net income per share: |
|
|
|
|
|
| Basic | 60,304 |
|
| 58,615 |
|
| 56,719 |
|
| Diluted | 61,854 |
|
| 59,894 |
|
| 58,863 |
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
| Net income | $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| Other comprehensive loss: |
|
|
|
|
|
|
|
|
| Unrealized loss on available-for-sale marketable securities, net of tax | (59 | ) |
| (67 | ) |
| (98 | ) |
| Comprehensive income | $ | 47,303 |
|
| $ | 26,309 |
|
| $ | 16,515 |
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands, except per share data) | 2022 | | 2021 | | 2020 |
| Revenue | | | | | |
| Service revenue | $ | 426,910 | | | $ | 430,966 | | | $ | 262,868 | |
| Custodial revenue | 202,817 | | | 190,933 | | | 181,892 | |
| Interchange revenue | 126,829 | | | 111,671 | | | 87,233 | |
| Total revenue | 756,556 | | | 733,570 | | | 531,993 | |
| Cost of revenue | | | | | |
| Service costs | 290,302 | | | 280,214 | | | 170,863 | |
| Custodial costs | 21,867 | | | 19,574 | | | 17,563 | |
| Interchange costs | 20,681 | | | 18,448 | | | 17,658 | |
| Total cost of revenue | 332,850 | | | 318,236 | | | 206,084 | |
| Gross profit | 423,706 | | | 415,334 | | | 325,909 | |
| Operating expenses | | | | | |
| Sales and marketing | 58,605 | | | 49,964 | | | 43,951 | |
| Technology and development | 157,364 | | | 124,809 | | | 77,576 | |
| General and administrative | 84,379 | | | 84,493 | | | 60,561 | |
| Amortization of acquired intangible assets | 82,791 | | | 76,064 | | | 34,704 | |
| Merger integration | 64,805 | | | 45,990 | | | 32,111 | |
| Total operating expenses | 447,944 | | | 381,320 | | | 248,903 | |
| Income (loss) from operations | (24,238) | | | 34,014 | | | 77,006 | |
| Other expense | | | | | |
| Interest expense | (36,572) | | | (34,881) | | | (24,772) | |
| Other income (expense), net | (5,931) | | | 5,007 | | | (9,079) | |
| Total other expense | (42,503) | | | (29,874) | | | (33,851) | |
| Income (loss) before income taxes | (66,741) | | | 4,140 | | | 43,155 | |
| Income tax provision (benefit) | (22,452) | | | (4,694) | | | 3,491 | |
| Net income (loss) and comprehensive income (loss) | $ | (44,289) | | | $ | 8,834 | | | $ | 39,664 | |
| Net income (loss) per share: | | | | | |
| Basic | $ | (0.53) | | | $ | 0.12 | | | $ | 0.59 | |
| Diluted | $ | (0.53) | | | $ | 0.12 | | | $ | 0.58 | |
| Weighted-average number of shares used in computing net income (loss) per share: | | | | | |
| Basic | 83,133 | | | 74,235 | | | 67,026 | |
| Diluted | 83,133 | | | 75,679 | | | 68,453 | |
The accompanying notes are an integral part of the consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Stockholders’ Equity
|
| | | | | | | | | | | | | | | | | |
| Stockholders’ equity | |
| Common stock | | Additional
paid-in
capital |
| Accumulated compre-
hensive loss |
| Accumulated earnings
(deficit) |
| Total
stockholders'
equity |
|
| (in thousands, except exercise prices) | Shares |
| Amount |
|
| Balance as of January 31, 2015 | 54,802 |
| $ | 5 |
| $ | 157,094 |
| $ | — |
| $ | (13,004 | ) | $ | 144,095 |
|
| Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of 1,951 options at $0.98 per share | 1,951 |
| 1 |
| 1,914 |
| — |
| — |
| 1,915 |
|
| Issuance of common stock | 973 |
| — |
| 23,492 |
| — |
| — |
| 23,492 |
|
| Stock-based compensation | — |
| — |
| 5,883 |
| — |
| — |
| 5,883 |
|
| Tax benefit on stock options exercised | — |
| — |
| 11,557 |
| — |
| — |
| 11,557 |
|
| Other comprehensive loss, net of tax | — |
| — |
| — |
| (98 | ) | — |
| (98 | ) |
| Net income | — |
| — |
| — |
| — |
| 16,613 |
| 16,613 |
|
| Balance as of January 31, 2016 | 57,726 |
| $ | 6 |
| $ | 199,940 |
| $ | (98 | ) | $ | 3,609 |
| $ | 203,457 |
|
| Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock upon exercise of options, and for restricted stock units | 1,812 |
| — |
| 7,142 |
| — |
| — |
| 7,142 |
|
| Stock-based compensation | — |
| — |
| 8,398 |
| — |
| — |
| 8,398 |
|
| Tax benefit on stock options exercised | — |
| — |
| 16,634 |
| — |
| — |
| 16,634 |
|
| Other comprehensive loss, net of tax | — |
| — |
| — |
| (67 | ) | — |
| (67 | ) |
| Net income | — |
| — |
| — |
| — |
| 26,376 |
| 26,376 |
|
| Balance as of January 31, 2017 | 59,538 |
| $ | 6 |
| $ | 232,114 |
| $ | (165 | ) | $ | 29,985 |
| $ | 261,940 |
|
| Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock upon exercise of options, and for restricted stock units | 1,287 |
| — |
| 14,564 |
| — |
| — |
| 14,564 |
|
| Stock-based compensation | — |
| — |
| 14,310 |
| — |
| — |
| 14,310 |
|
| Cumulative effect from adoption of ASU 2016-09 | — |
| — |
| 249 |
| — |
| 7,908 |
| 8,157 |
|
| Adoption of ASU 2018-02 | — |
| — |
| — |
| (45 | ) | 45 |
| — |
|
| Other comprehensive loss, net of tax | — |
| — |
| — |
| (59 | ) | — |
| (59 | ) |
| Net income | — |
| — |
| — |
| — |
| 47,362 |
| 47,362 |
|
| Balance as of January 31, 2018 | 60,825 |
| $ | 6 |
| $ | 261,237 |
| $ | (269 | ) | $ | 85,300 |
| $ | 346,274 |
|
The accompanying notes are an integral part of the consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows |
| | | | | | | | | | | |
| Year ended January 31, | |
| (in thousands) | 2018 |
|
| 2017 |
|
| 2016 |
|
| Cash flows from operating activities: |
|
|
|
|
|
| Net income | $ | 47,362 |
|
| $ | 26,376 |
|
| $ | 16,613 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| Depreciation and amortization | 15,952 |
|
| 13,186 |
|
| 8,601 |
|
| Deferred taxes | 4,306 |
|
| (2,891 | ) |
| (2,178 | ) |
| Stock-based compensation | 14,310 |
|
| 8,398 |
|
| 5,883 |
|
| Bad debt expense | 133 |
|
| 35 |
|
| 24 |
|
| Amortization of deferred financing costs and loss on other investments | 87 |
|
| 68 |
|
| 23 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable | (4,734 | ) |
| (2,728 | ) |
| (5,174 | ) |
| Inventories | 377 |
|
| 28 |
|
| 5 |
|
| Other assets | (760 | ) |
| (1,343 | ) |
| (107 | ) |
| Accounts payable | (581 | ) |
| 567 |
|
| 1,011 |
|
| Accrued compensation | 3,827 |
|
| 946 |
|
| 2,475 |
|
| Accrued liabilities | 484 |
|
| 1,729 |
|
| (383 | ) |
| Other long-term liabilities | 939 |
|
| 1,220 |
|
| (252 | ) |
| Net cash provided by operating activities | 81,702 |
|
| 45,591 |
|
| 26,541 |
|
| Cash flows from investing activities: |
|
|
|
|
|
| Purchase of marketable securities | (483 | ) |
| (379 | ) |
| (40,291 | ) |
| Purchase of property and equipment | (5,458 | ) |
| (3,645 | ) |
| (2,376 | ) |
| Purchase of software and capitalized software development costs | (10,380 | ) |
| (9,030 | ) |
| (6,896 | ) |
| Acquisition of intangible member assets | (17,545 | ) |
| — |
|
| (40,489 | ) |
| Acquisition of a business | (2,882 | ) |
| — |
|
| — |
|
| Purchases of other investments | — |
|
| — |
|
| (500 | ) |
| Net cash used in investing activities | (36,748 | ) |
| (13,054 | ) |
| (90,552 | ) |
| Cash flows from financing activities: |
|
|
|
|
|
| Proceeds from follow-on offering, net of payments for offering costs | — |
|
| — |
|
| 23,492 |
|
| Proceeds from exercise of common stock options | 14,564 |
|
| 7,142 |
|
| 1,915 |
|
| Tax benefit from exercise of common stock options | — |
|
| 16,634 |
|
| 11,557 |
|
| Deferred financing costs paid | — |
|
| — |
|
| (317 | ) |
| Net cash provided by financing activities | 14,564 |
|
| 23,776 |
|
| 36,647 |
|
| Increase (decrease) in cash and cash equivalents | 59,518 |
|
| 56,313 |
|
| (27,364 | ) |
| Beginning cash and cash equivalents | 139,954 |
|
| 83,641 |
|
| 111,005 |
|
| Ending cash and cash equivalents | $ | 199,472 |
|
| $ | 139,954 |
|
| $ | 83,641 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional
paid-in
capital | | Accumulated earnings | | Total
stockholders'
equity |
| (in thousands) | Shares | | Amount | | | |
| Balance as of January 31, 2019 | 62,446 | | | $ | 6 | | | $ | 305,223 | | | $ | 171,850 | | | $ | 477,079 | |
| Issuance of common stock: | | | | | | | | | |
| Issuance of common stock upon exercise of options, and for restricted stock | 842 | | | — | | | 11,438 | | | — | | | 11,438 | |
| Other issuance of common stock | 7,763 | | | 1 | | | 462,269 | | | — | | | 462,270 | |
| Stock-based compensation | — | | | — | | | 39,844 | | | — | | | 39,844 | |
| Net income | — | | | — | | | — | | | 39,664 | | | 39,664 | |
| Balance as of January 31, 2020 | 71,051 | | | $ | 7 | | | $ | 818,774 | | | $ | 211,514 | | | $ | 1,030,295 | |
| Issuance of common stock: | | | | | | | | | |
| Issuance of common stock upon exercise of options, and for restricted stock | 827 | | | — | | | 9,956 | | | — | | | 9,956 | |
| Other issuance of common stock | 5,290 | | | 1 | | | 286,779 | | | — | | | 286,780 | |
| Stock-based compensation | — | | | — | | | 42,863 | | | — | | | 42,863 | |
| Net income | — | | | — | | | — | | | 8,834 | | | 8,834 | |
| Balance as of January 31, 2021 | 77,168 | | | $ | 8 | | | $ | 1,158,372 | | | $ | 220,348 | | | $ | 1,378,728 | |
| Issuance of common stock: | | | | | | | | | |
| Issuance of common stock upon exercise of options, and for restricted stock | 862 | | | — | | | 8,746 | | | — | | | 8,746 | |
| Other issuance of common stock | 5,750 | | | — | | | 456,640 | | | — | | | 456,640 | |
| Stock-based compensation | — | | | — | | | 52,750 | | | — | | | 52,750 | |
| Net loss | — | | | — | | | — | | | (44,289) | | | (44,289) | |
| Balance as of January 31, 2022 | 83,780 | | | $ | 8 | | | $ | 1,676,508 | | | $ | 176,059 | | | $ | 1,852,575 | |
The accompanying notes are an integral part of the consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows (continued)
|
| | | | | | | | | | | |
| Year ended January 31, | |
| (in thousands) | 2018 |
|
| 2017 |
|
| 2016 |
|
| Supplemental cash flow data: |
|
|
|
|
|
| Interest expense paid in cash | $ | (203 | ) |
| $ | (213 | ) |
| $ | (51 | ) |
| Income taxes paid in cash, net of refunds received | 27 |
|
| 863 |
|
| 1,356 |
|
| Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
| Acquisition of intangible member assets accrued at period end | 1,409 |
|
| — |
|
| — |
|
| Purchase price adjustment of acquired intangible members assets | — |
|
| — |
|
| 104 |
|
| Purchases of property and equipment included in accounts payable or accrued liabilities at period end | — |
|
| 25 |
|
| 45 |
|
| Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end | 3 |
|
| 330 |
|
| 127 |
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (44,289) | | | $ | 8,834 | | | $ | 39,664 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 137,188 | | | 115,904 | | | 55,352 | |
| Stock-based compensation | 52,750 | | | 42,863 | | | 39,844 | |
| Impairment of right-of-use assets | 11,246 | | | — | | | — | |
| Amortization of debt issuance costs | 4,448 | | | 5,102 | | | 2,711 | |
| Loss on extinguishment of debt | 4,049 | | | — | | | — | |
| Change in fair value of contingent consideration | (2,147) | | | — | | | — | |
| Gains on equity securities | (1,677) | | | — | | | (27,570) | |
| Other non-cash items | 1,232 | | | 1,753 | | | 728 | |
| Deferred taxes | (23,430) | | | (5,132) | | | 3,665 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (11,204) | | | (413) | | | (4,029) | |
| Other assets | 7,464 | | | (24,839) | | | (12,577) | |
| Operating lease right-of-use assets | 15,235 | | | 11,150 | | | 6,218 | |
| Accrued compensation | (3,657) | | | 771 | | | 4,550 | |
| Accounts payable, accrued liabilities, and other current liabilities | (2,178) | | | 30,422 | | | 1,920 | |
| Operating lease liabilities, non-current | (9,412) | | | (10,803) | | | (5,383) | |
| Other long-term liabilities | 5,377 | | | 6,007 | | | (83) | |
| Net cash provided by operating activities | 140,995 | | | 181,619 | | | 105,010 | |
| Cash flows from investing activities: | | | | | |
| Acquisitions, net of cash acquired | (504,533) | | | — | | | (1,644,575) | |
| Purchases of software and capitalized software development costs | (62,708) | | | (51,500) | | | (25,654) | |
| Acquisition of intangible member assets | (65,465) | | | (32,371) | | | (9,134) | |
| Purchases of property and equipment | (8,908) | | | (13,093) | | | (7,286) | |
| Purchases of equity securities | — | | | — | | | (53,845) | |
| Proceeds from sale of equity securities | 2,367 | | | — | | | — | |
| Net cash used in investing activities | (639,247) | | | (96,964) | | | (1,740,494) | |
| Cash flows from financing activities: | | | | | |
| Principal payments on long-term debt | (1,003,125) | | | (239,063) | | | (7,813) | |
| Proceeds from long-term debt | 950,000 | | | — | | | 1,250,000 | |
| Payment of debt issuance costs | (11,920) | | | — | | | (30,504) | |
| Proceeds from follow-on equity offering, net of payments for offering costs | 456,640 | | | 286,779 | | | 458,495 | |
| Settlement of client-held funds obligation, net | (486) | | | (3,862) | | | (215,790) | |
| Proceeds from exercise of common stock options | 9,754 | | | 8,568 | | | 11,347 | |
| Payment of contingent consideration | (6,000) | | | — | | | — | |
| Net cash provided by financing activities | 394,863 | | | 52,422 | | | 1,465,735 | |
| Increase (decrease) in cash and cash equivalents | (103,389) | | | 137,077 | | | (169,749) | |
| Beginning cash and cash equivalents | 328,803 | | | 191,726 | | | 361,475 | |
| Ending cash and cash equivalents | $ | 225,414 | | | $ | 328,803 | | | $ | 191,726 | |
The accompanying notes are an integral part of the consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Consolidated Statements of Cash Flows (continued) | | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
| Supplemental cash flow data: | | | | | |
| Interest expense paid in cash | $ | 16,107 | | | $ | 27,686 | | | $ | 21,806 | |
| Income tax payments (refunds), net | (5,632) | | | (6,022) | | | 9,277 | |
| Supplemental disclosures of non-cash investing and financing activities: | | | | | |
| Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation | 4,640 | | | 1,930 | | | 1,742 | |
| Purchases of property and equipment included in accounts payable or accrued liabilities | 1,414 | | | 160 | | | 487 | |
| Purchases of intangible member assets included in accounts payable or accrued liabilities | 1,692 | | | — | | | — | |
| Decrease in goodwill due to measurement period adjustments, net | 19 | | | 5,438 | | | — | |
| Exercise of common stock options receivable | 470 | | | 1,478 | | | — | |
| Equity-based acquisition consideration | — | | | — | | | 3,776 | |
The accompanying notes are an integral part of the consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies
Business
HealthEquity, Inc. ("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002,2002. HealthEquity is a leader in administering health savings accounts (“HSAs”) and was organizedcomplementary consumer-directed benefits (“CDBs”), which empower consumers to offer a full range of innovative solutionsaccess tax-advantaged healthcare savings while also providing corporate tax advantages for managing health care accounts (Health Savings Accounts ("HSAs"), Health Reimbursement Arrangements ("HRAs"), and Flexible Spending Accounts ("FSAs")) for health plans, insurance companies, and third-party administrators.employers.
In February 2006, HealthEquity Inc. received designation by the U.S. Department of Treasury to act as a passive non-bank custodian, which allows HealthEquity Inc. to hold custodial assets for individual account holders. On July 24, 2017, HealthEquity Inc. received designation by the U.S. Department of Treasury to act as both a passive and non-passive non-bank custodian, which allows HealthEquity Inc. to hold custodial assets for individual account holders and use discretion to direct investment of such assets held. As a passive and non-passive non-bank custodian according to Treasury Regulations section 1.408-2(e)(5)(ii)(B), the Company must maintain net worth (assets minus liabilities) greater than the sum of 2% of passive custodial funds held at each calendarfiscal year-end and 4% of the non-passive custodial funds held at each calendarfiscal year-end in order to take on additional custodial assets.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.GAAP. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements, except for the new accounting pronouncements, which were adopted during the year ended January 31, 2018 as described below.statements.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Follow-on equity offering
In the first quarter of fiscal year 2022, the Company closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $80.30 per share, less the underwriters' discount. The Company received net proceeds of $456.6 million after deducting underwriting discounts and commissions of $4.6 million and other offering expenses of approximately $0.5 million.
Principles of consolidation—
The consolidatedCompany consolidates entities in which the Company has a controlling financial statements include the accountsinterest, which includes all of HealthEquity, Inc. and its wholly owned subsidiaries, HealthEquity Trust Company, HEQ Insurance Services, Inc., HealthEquity Advisors, LLCdirect and HealthEquity Retirement Services, LLC (collectively referred to as the "Company").
During the year ended January 31, 2015, the Company and an unrelated company formed a limited partnership for investment in and the management of early stage companies in the healthcare industry. The Company has a 22% ownership interest in such partnership that is accounted for using the equity method of accounting. The investment was approximately $206,000 as of January 31, 2018 and is included in other assets on the accompanying consolidated balance sheets.
During the year ended January 31, 2016, the Company purchased an approximate 2% ownership interest in a limited partnership that engages in the development of technology-based financial healthcare products. The Company determined there was no significant influence and therefore the investment was accounted for using the cost method of accounting. Under the cost method of accounting, the fair value of an investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The investment was $500,000 as of January 31, 2018 and is included in other assets on the accompanying consolidated balance sheet.
During the year ended January 31, 2017, the Company formed HealthEquity Trust Company, a Wyoming corporation and non-depository trust company, to act as the master custodian of all investment assets held in HSAs administered by the Company.
During the year ended January 31, 2018, the Company formed HealthEquity Retirement Services, LLC, a Delaware limited liability company, to acquire and own the assets of BenefitGuard LLC and provide ERISA plan fiduciary services.
indirect subsidiaries. All significant intercompany balancesaccounts and transactions have been eliminated.eliminated in consolidation.
Segments—
The Company operates in one1 segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States of America.
HealthEquity, Inc.Cash and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Cash, cash equivalents—
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents were held in institutions in the U.S. and include deposits in a money market account that was unrestricted as to withdrawal or use.
Marketable securities—Marketable securities consist primarilyClient-held funds
Many of mutualthe Company's client services agreements with employers (referred to as "Clients") provide that Clients remit funds invested in corporate bonds, U.S. government agency securities, U.S. treasury bills, commercial paper, certificates of deposit, municipal notes, and bonds with original maturities beyond three months at the time of purchase. Marketable securities are classified as available-for-sale, held-to-maturity, or trading at the date of purchase. As of January 31, 2018, all marketable securities have been classified as available-for-sale. The Company may sell these securities at any time for use in current operations or for other purposes even if they have not yet reached maturity. As a result,to the Company classifies its marketable securities, including securitiesto 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 maturities beyond twelve months, as current assetscorporate cash, and accordingly are not included in cash and cash equivalents on the accompanyingCompany's consolidated balance sheets. All marketable securities are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income, net
Accounts receivable—
On February 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments using the modified retrospective transition method. Accounts receivable represent monies due to the Company for monthly service revenue, custodial revenue and interchange revenue. As of January 31, 2018, accounts receivable consisted of $7.9 million of service revenue, $9.0 million of custodial revenue, and $4.7 million of interchange revenue. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivable amounts.expected credit losses from trade receivables considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including macroeconomic variables, the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition.
Investments
Marketable equity securities were strategic equity investments with readily determinable fair values for which the Company did not have the ability to exercise significant influence. These securities were accounted for at fair value and were classified as investments on the consolidated balance sheets. All gains and losses on these investments, realized and unrealized, were recognized in other income (expense), net in the consolidated statements of operations and comprehensive income (loss). As of January 31, 20182022 and 2017,2021, the Company had allowanceno marketable equity securities.
Non-marketable equity securities were strategic equity investments without readily determinable fair values for doubtful accountswhich the Company did not have the ability to exercise significant influence. These securities were accounted for using the measurement alternative and were classified as other assets on the consolidated balance sheets. All gains and losses on these investments, realized and unrealized, were recognized in other income (expense), net on the consolidated statements of $208,000operations and $75,000,comprehensive income (loss). As of January 31, 2022 and 2021, the Company had no non-marketable equity securities and an immaterial balance of non-marketable equity securities, respectively.
Inventories—Inventories consist of new member and participant supplies and are recorded at the lower of cost or market using an average cost basis.
Other assets—
Other assets consist primarily of contract costs, debt issuance costs, prepaid expenditures, income tax receivables, inventories, and various other assets. Amounts expected to be recouped or recognized over a period of twelve months or less have been classified as current in the accompanying consolidated balance sheets.
Leases
The Company determines if a contract contains a lease at inception or any modification of the contract. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a specified period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
Leases with an expected term of 12 months or less at commencement are not accounted for on the balance sheet. All operating lease expense is recognized on a straight-line basis over the expected lease term. Certain leases also include obligations to pay for non-lease services, such as utilities and common area maintenance. The services are accounted for separately from lease components, and the Company allocates payments to the lease and other services components based on estimated stand-alone prices.
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.
Property and equipment—
Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of individual assets. The useful life for leasehold improvements is the shorter of the estimated useful life or the term of the lease ranging from 3-5 years. The useful life used for computing depreciation for all other asset classes is described below: |
| | | | |
Computer Equipmentequipment | 3-5 years |
Furniture and Fixturesfixtures | 5 years |
Maintenance and repairs are expensed when incurred, and improvements that extend the economic useful life of an asset are capitalized. Gains and losses on the disposal of property and equipment are reflected in operating expenses.
Capitalized software development costs—We accountIntangible assets, net
Intangible assets are carried at cost and amortized, typically, on a straight-line basis over their estimated useful lives. The useful life used for computing amortization for all intangible asset classes is described below: | | | | | |
| Software and software development costs | 3 years |
| Acquired customer relationships | 7-15 years |
| Acquired developed technology | 2-5 years |
| Acquired trade names and trademarks | 3 years |
| Acquired HSA portfolios | 15 years |
The Company accounts for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, “Internal-Use Software.”Internal-Use Software. Costs incurred during operation and post-implementation stages are charged to expense. Costs incurred during the application development stage that are directly attributable to developing or obtaining software for internal use incurred in the application development stage are capitalized. Management’s judgment is required in determining the point when various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. See Note 5—Intangible Assets
Acquired customer relationships, developed technology, and Goodwill for additional information.
HealthEquity, Inc.the income approach. The useful lives of acquired customer relationships were estimated based on discount rates and subsidiaries
Notesrevenue growth rates, net of attrition. The useful lives of developed technology and trade names were estimated based on expected obsolescence. The Company expenses the assets straight-line over the useful lives, and determined that this amortization method is appropriate to consolidated financial statements
Note 1. Summaryreflect the pattern over which the economic benefits of business and significant accounting policies (continued)
Intangible assets, net—Intangiblethese acquired assets are carried at cost and amortized, typically, on a straight-line basis over their estimated useful lives, which is 3-5 years for capitalized software development costs and acquired technology rights, 10 years for 401(k) customer relationships, or other intangible assets, and 15 years for certain acquiredrealized.
Acquired HSA intangible member assets. The acquired intangible member assets are the result of various acquisitions of HSA portfolios. A significant portion of the purchase price from each acquisition has been allocated to the acquired HSA assets, which consistsportfolios consist of the contractual rights to administer the activities related to the individual health savings accountsHSAs acquired. The Company analyzedused its HSA customer relationship period assumption and the historical attrition and depletion rates of member accounts and determinedto determine that an average useful life of 15 years and the use of a straight-line amortization method are appropriate to reflect the pattern over which the economic benefits of existing member assets are realized.
The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. There have been no impairment charges recorded in any of the periods presented in the accompanying consolidated financial statements. See Note 5—Intangible Assets and Goodwill for additional information.
Goodwill—
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment annually on January 31 or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s impairment tests are based on a single operating segment and reporting unit structure. The goodwill impairment test involves a two-step process. The first step involves comparingqualitative assessment to compare a reporting unit's fair value to its carrying value. If it is determined that it is more likely than not that a reporting unit's fair value is less than its carrying value, a quantitative comparison is made between the Company's market capitalization toand the carrying value of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. Anan impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.
The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the accompanying consolidated financial statements.Self-insurance
Self insurance—The Company is self-insured for medical insurance up to certain annual stop-loss limits. The Company establishes a liability as of the balance sheet date for claims, both reported and incurred but not reported, using currently available information as well as historical claims experience, and as determined by an independent third party.
Other long-term liabilities—The Company recognizes rental expense for its office lease on a straight-line basis over the lease term.
Other long-term liabilities includesconsists of long-term deferred rent, which represents the difference between actual operating lease payments due and straight-line rent expense. The excess is recorded as a deferred credit in the early periods of the lease, when cash payments are generally lower than straight-line rent expense, and is reduced in the later periods of the lease when payments begin to exceed the straight-line expense.
Follow-on offering—On May 11, 2015, the Company closed its follow-on public offering and sold 972,500 shares of common stock at a public offering price of $25.90 per share, less the underwriters' discount. Certain selling stockholders sold 3,455,000 shares of common stock in the offering, including 380,000 shares of common stock which were issued upon the exercise of outstanding options. The Company received net proceeds of approximately $23.5 million after deducting underwriting discounts and commissions of approximately $1.0 millionrevenue and other offering expenses payable by the Company of approximately $688,000. The Company did not receive any proceeds from the sale of shares by the selling stockholders other than $222,000 representing the exercise price of the options that were exercised in connection with the offering.
Capital structure—On July 14, 2014, the Company's board of directors approved an amended and restated certificate of incorporation, pursuant to which the total number of shares of all classes of capital stockliabilities that the Company is authorizeddoes not expect to issue is 1,000,000,000 shares, including 900,000,000 shares of common stock and 100,000,000 shares of preferred stock, par value $0.0001 per share. The amended and restated certificate of incorporation was filed with the Secretary of State of the State of Delaware and became effective on August 5, 2014 in connection with the completion of the initial public offering.
settle within one year.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Revenue recognition—
The Company recognizes revenue when persuasive evidencecontrol of an arrangement exists, services have been provided, the price ofpromised goods or services is fixedtransferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or determinable, and collection is reasonably assured. The Company earns revenue primarily from service revenue, custodial revenue, interchange revenue.services.
The Company earns servicedetermines revenue fromrecognition through the fees paid by health plan partners, employer partners or individual members for administration services provided in connection with the tax-advantaged HSAs, HRAs and FSAs the Company administers. These fees are generally based on a tiered structure fixed for the durationfollowing steps:
•identification of the contract, agreementor contracts, with health plana customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or employer partners,as, the Company satisfies a performance obligation.
Disaggregation of revenue.The Company's primary sources of revenue are service, custodial, and interchange revenue and are disclosed in the consolidated statements of operations and comprehensive income (loss). All of the Company's sources of revenue are deemed to be revenue contracts with customers. Each revenue source is affected differently by economic factors as it relates to the nature, amount, timing and uncertainty.
Costs to obtain a contract.ASC 606, Revenue from contracts with customers, requires capitalizing the costs of obtaining a contract when those costs are expected to be recovered.
In order to determine the amortization period for sales commissions contract costs, the Company applied the portfolio approach. Accordingly, the amortization period of the assets has been determined to be the average economic life of an HSA or other CDB relationship, which is typically threeestimated to five years.be 15 years and 7 years, respectively. Amortization of capitalized sales commission contract costs is included in sales and marketing expenses in the consolidated statements of operations and comprehensive income (loss). The feesCompany has applied the practical expedient which allows an entity to account for incremental costs of obtaining a contract at a portfolio level. The Company has also applied the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less.
Performance obligations.ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria.
Service revenue. The Company administers its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services. All of these services are paidconsumed as they are received. The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis and revenue is recognized monthly as services are rendered under the Company’s written service agreements. In addition, the Company earns service revenue from fees paid by employer partners and plan participants in connection with plan administrator and named fiduciary services for 401(k) employer sponsors. The fees are paid on a quarterly basis and revenue is recognized in the month in which it is earned.satisfies its performance obligations.
Custodial revenue. The Company earns custodial revenue primarily from HSA custodial assets on behalfdeposited with depository partners or placed in group annuity contracts or similar arrangements with insurance company partners, recordkeeping fees earned in respect of its customers. Asmutual funds in which HSA members invest, and Client-held funds deposited with depository partners. In addition, once a non-bank custodian, the Company depositsmember’s HSA cash with various custodial financial institutions having contract terms from threebalance reaches a certain threshold, the member is able to five years and eitherinvest his or her HSA assets in mutual funds through a fixed or variable interest rate. These deposits are eligible for FDIC insurance for each individual HSA. The Company also invests HSA cash in an annuity contract with a insurance company partner. HSA investment balances are deposited with the custodial investment partner, from whomwhich the Company receives an administrativeearns a recordkeeping fee, calculated as a percentage of custodial investments. The deposit of funds represents a service that is simultaneously received and recordkeeping fee.consumed by the depository partners, insurance company partners, and investment partner. The Company recognizes thiscustodial revenue each month, in an amount that reflects the consideration it expects to be entitled to in exchange for the service.
Interchange revenue. The Company satisfies its interchange performance obligation each time payments are made with its cards via payment networks. The Company recognizes interchange revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, in the month in which it is earned.the payment transaction occurs.
Contract balances. The Company earns interchangedoes not recognize revenue from card transactions when members are paying their healthcare claims using a card issued by the Company.until its right to consideration is unconditional and therefore has no related contract assets. The Company recognizes thisrecords 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.
Significant judgments. The Company makes no significant judgments in determining the month in which it is earned. Amounts collected in excessamount or timing of revenue recognizedrecognition. The Company has estimated the average economic life of an HSA or CDB member
relationship, which has been determined to be the amortization period for the period are recorded as deferred revenue and reported as accrued liabilities and other long-term liabilities on the consolidated balance sheet.capitalized sales commissions contract costs.
Cost of revenue—
The Company incurs cost of revenue related to servicing member accounts, managing customer and partner relationships, and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations, new member and participant supplies, and other operating costs of the Company’s related member account servicing departments. Other components of the Company’s cost of revenue sold include interest retained by members on custodial assets held and interchange costs incurred in connection with processing card transactions initiated by members.
Stock-based compensation—For
The Company grants stock-based awards, which consist of stock options, grantedrestricted stock units ("RSUs") and restricted stock awards ("RSAs"), to certain team members, theexecutive officers, and directors. The Company recognizes compensation expense for all stock-based awards based on the grant date estimated fair value. The value of the portion of the award thatExpense for stock-based awards is ultimately expected to vest isgenerally recognized as expense ratablyon a straight-line basis over the requisite service period.period, and is reversed as pre-vesting forfeitures occur. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock-based awardsstock options on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables.
Stock-based compensation expense related to stock options granted to non-team members The fair value of RSUs and RSAs is recognized based on the faircurrent value of the Company's closing stock options, determined usingprice on the Black-Scholes option pricing model, as they are earned. The awards generally vest overdate of grant less the time periodpresent value of future expected dividends discounted at the Company expects to receive services from the non-employee.risk-free interest rate.
For stock-based awards with performance conditions, we evaluatethe Company evaluates the probability of achieving the performance criteria and of the number of shares that are expected to vest, and compensation expense is then adjusted to reflect the number of shares expected to vest and the requisite service period. For awards with performance conditions, compensation expense is recognized using the graded-vesting attribution method in accordance with the provisions of FASB ASC Topic 718, Compensation—Stock Compensation ("Topic 718"). Compensation expense related to stock-based awards with market conditions is recorded on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied.
Upon the exercise of a stock option or release of an RSU/RSA, common shares are issued from authorized, but not outstanding, common stock.
Stock-based compensationInterest Expense
Interest expense related to restricted stock units is recognized based on the current valueprimarily consists of the Company's closing stock price on the dateaccrued interest expense and amortization of grant less the present value of future expected dividends discounted at the risk-free interest rate. Expense for restricted stock units is recognized on a straight-line basis over the requisite service period.deferred financing costs associated with our long-term debt.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
Income tax provision— (benefit)
The Company accounts for income taxes and the related accounts under the asset and liability method as set forth in the authoritative guidance for accounting for income taxes.ASC 740, Income Taxes. Under this method, current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may not be realized in future years. After weighing both the positive and negative evidence, the Company believes that it is more likely than not that all deferred tax assets will be realized as of January 31, 2018.
The Company uses the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes.The Company has also elected to exclude the indirect tax effects of share-based compensation deductions in computing the income tax provision recorded within the Consolidated Statement of Operations and Comprehensive Income. Also, we use the portfolio approach in releasing income tax effects from accumulated other comprehensive income.
The Company recognizes the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as a component of other expenseincome (expense), net in the Consolidated Statementsconsolidated statements of Operationsoperations and Comprehensive Income. Significant judgment is required to evaluate uncertain tax positions.comprehensive income (loss). Changes in facts and circumstances could have a material impact on the Company’s effective tax rate and results of operations.
Comprehensive income—Comprehensive income is defined as a change in equity
Asset acquisitions—During the years ended January 31, 2018, the
The Company acquired theroutinely acquires rights to be the custodian of two HSA portfolios, and rights to act as sole administratorin which substantially all of one portfolio. During the year ended January 31, 2016,fair value of the Companygross portfolio assets acquired the rights to be the custodian of two HSA portfolios. The purchasedis concentrated in a group of similar HSA assets for the transactions did not include workforce or any processes and therefore didthe acquisitions do not constitute a business. Accordingly, the acquisitions wereare accounted for under the asset acquisition method of accounting in accordance with ASC 805-50, Business Combinations—Related Issues.Issues. Under the asset acquisition method of accounting, the Company is required to fair value the assets transferred. The cost of the assets acquired, including transaction costs incurred in conjunction with an asset acquisition, is allocated to the individual assets acquired based on their relative fair values and does not give rise to goodwill. The purchase price was allocated to acquired intangible member assets. Furthermore, transaction costs that are incurred in conjunction with an asset
Business combination
Consideration paid for the acquisition areof a business as defined by ASC 805-10 is allocated to the tangible and intangible assets acquired intangible member assets.and liabilities assumed based on their fair values as of the acquisition date.
Business combinations—Acquisition-related expenses incurred in conjunction with the acquisition of a business as defined by ASC 805-10 are recognized in earnings in the period in which they are incurred and are included in other expense,income (expense), net on the consolidated statementstatements of operations. During the years ended January 31, 2018, 2017operations and 2016, the Company incurred an expense of $2.2 million, $631,000, and $471,000, respectively, for acquisition-related activity. There were no such business combinations during the years ended January 31, 2017 and 2016.comprehensive income (loss).
Concentration of market risk—The Company derives a substantial portion of its revenue from providing services for healthcare accounts. A significant downturn in this market or changes in state and/or federal laws impacting the preferential tax treatment of healthcare accounts could have a material adverse effect on the Company’s results of
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
operations. For the years ended January 31, 2018, 2017 and 2016, no one customer accounted for greater than 10% of revenue or accounts receivable.
Concentration of credit risk—Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash. The Company maintains its cash and cash equivalents in bank and other depository accounts, which, at times, may exceed federally insured limits. The Company’s cash and cash equivalents held in banks as of January 31, 2018 was $199.5 million, of which $750,000 was covered by federal depository insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. The Company’s accounts receivable balance as of January 31, 2018 was $21.6 million. The Company has not experienced any significant write-offs to accounts receivable and believes that it is not exposed to significant credit risk with respect to accounts receivable.
Interest rate risk—The Company has entered into depository agreements with financial institutions for its custodial cash deposits. The contracted interest rates were negotiated at the time the depository agreements were executed. A significant reduction in prevailing interest rates may make it difficult for the Company to continue to place custodial deposits at the current contracted rates.
Use of estimates—
The preparation of financial statements in conformity with generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made estimates for the allowance for doubtful accounts, capitalized software development costs, evaluating goodwill and long-lived assets for impairment, useful lives of property and equipment and intangible assets, accrued compensation, accrued liabilities, grant date fair value of stock options and performance restricted stock units and restricted stock awards, and income taxes. Actual results could differ from those estimates.
RecentRecently adopted accounting pronouncements—In February 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives companies the option to reclassify between accumulated other comprehensive income ("AOCI") and retained earnings the income tax rate differential that has become stranded in AOCI as a result of the enactment of the Tax Cuts and Jobs Act and the revaluation of certain deferred tax assets and liabilities at the new federal income tax rate of 21%. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has elected to early adopt this ASU in the fourth quarter of fiscal year 2018. As a result of adopting this standard, the reclassification of the income tax effects of this tax reform resulted in an increase to retained earnings and a decrease to AOCI in the amount of $45,000 related to the decrease in the federal corporate tax rate. The Company's policy is to use the portfolio approach in releasing income tax effects from AOCI.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU requires excess tax benefits and tax deficiencies to be recognized in the Statement of Operations and Comprehensive Income, which were previously presented as a component of stockholders' equity, on a prospective basis. In addition, any excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable are to be recorded on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. This ASU also requires cash flows related to excess tax benefits to be classified as an operating activity on the statement of cash flows prospectively. Finally, this ASU no longer allows tax benefits to be included in the assumed proceeds when applying the treasury stock method for computing diluted weighted-average common shares outstanding, which results in share-based awards having a more dilutive effect on net income per diluted share.None.
The Company adopted this ASU during the three months ended April 30, 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense are reflected in our consolidated statements of operations and comprehensive income as a component of the provision for income taxes rather than additional paid-in capital on a prospective basis. For the year ended January 31, 2018, the Company recorded excess tax benefits of $14.1 million within our provision for income taxes in the consolidated statements of operations and comprehensive income. In addition, any excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable are to be recorded on a modified retrospective basis
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption, which resulted in an increase of $8.1 million to our retained earnings as of February 1, 2017.
For presentation requirements, the Company elected to prospectively apply the change in the presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation are classified as operating activities on the consolidated statements of cash flows for year ended January 31, 2018. Prior period classification of cash flows related to excess tax benefits were not adjusted. Further, the Company elected to adopt the forfeiture provisions of this ASU, which allows the Company to account for forfeitures as they occur. The adoption of the forfeiture provisions had no material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities is a business. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The new guidance is required to be applied on a prospective basis. The Company adopted this ASU during the three months ended July 31, 2017. The adoption had no material impact on the Company's consolidated financial statements.
RecentRecently issued accounting pronouncements—On May 28, 2014, the FASB issued ASU 2014-09 and related subsequent amendments, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB voted to defer the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The adoption of the preceding standard is not expected to have a material impact on the Company's revenue.yet adopted
The Company expects to capitalize incremental contract acquisition costs, such as sales commissions included in sales and marketing expenses in the consolidated statement of operations, and amortize these costs over the average economic life of an HSA Member. The Company's current practice is to expense sales commissions when the member is added to the Company's platform. The Company expects the adoption to have a significant impact on its consolidated financial statements. The Company will use the cumulative effect transition method and does not plan to early adopt these pronouncements.None.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The amendments in this ASU revise an entity's accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for the presentation of certain fair value changes for financial liabilities measured at fair value. The Company does not plan to early adopt. The Company expects to recognize its unrealized holding gains and losses on its marketable securities in other expense, net on the consolidated statement of operations, rather than through other comprehensive income.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure for both parties to a contract (i.e. lessees and lessors). ASC 842 supersedes the previous leases standard, ASC 840 leases. This ASU is effective for financial statements issued for reporting periods beginning after December 15, 2018 and requires a modified retrospective transition, and provides for certain practical expedients; early adoption is permitted. The Company does not plan to early adopt and is currently evaluating the potential effect of this ASU on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost be presented at the net amount expected to be collected. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company does not plan to early adopt this ASU. The Company believes the adoption of this ASU will have an immaterial impact on its consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 1. Summary of business and significant accounting policies (continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which provides guidance on the classification of certain cash receipts and cash payments. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company believes the adoption of this ASU will not have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which updates the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company will adopt this ASU during the three months ended April 30, 2018 and believes the adoption of this ASU will have an immaterial impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. This ASU is effective for fiscal years beginning 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 believes the adoption this ASU will not have a material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about changes to the terms or conditions of a share-based payment award. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standard should be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a significant impact on its 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) | | Year ended January 31, | |
| | 2018 |
| | 2017 |
| | 2016 |
|
| Numerator (basic and diluted): | |
| |
| |
|
| Net income | | $ | 47,362 |
| | $ | 26,376 |
| | $ | 16,613 |
|
| Denominator (basic): | |
| |
| |
|
| Weighted-average common shares outstanding | | 60,304 |
| | 58,615 |
| | 56,719 |
|
| Denominator (diluted): | |
| |
| |
|
| Weighted-average common shares outstanding | | 60,304 |
| | 58,615 |
| | 56,719 |
|
| Weighted-average dilutive effect of stock options and restricted stock units | | 1,550 |
| | 1,279 |
| | 2,144 |
|
| Weighted-average common shares outstanding | | 61,854 |
| | 59,894 |
| | 58,863 |
|
| Net income per share: | |
| |
| |
|
| Basic | | $ | 0.79 |
| | $ | 0.45 |
| | $ | 0.29 |
|
| Diluted | | $ | 0.77 |
| | $ | 0.44 |
| | $ | 0.28 |
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands, except per share data) | 2022 | | 2021 | | 2020 |
| Numerator (basic and diluted): | | | | | |
| Net income (loss) | $ | (44,289) | | | $ | 8,834 | | | $ | 39,664 | |
| Denominator (basic): | | | | | |
| Weighted-average common shares outstanding | 83,133 | | | 74,235 | | | 67,026 | |
| Denominator (diluted): | | | | | |
| Weighted-average common shares outstanding | 83,133 | | | 74,235 | | | 67,026 | |
| Weighted-average dilutive effect of stock options and restricted stock units | — | | | 1,444 | | | 1,427 | |
| Diluted weighted-average common shares outstanding | 83,133 | | | 75,679 | | | 68,453 | |
| Net income (loss) per share: | | | | | |
| Basic | $ | (0.53) | | | $ | 0.12 | | | $ | 0.59 | |
| Diluted | $ | (0.53) | | | $ | 0.12 | | | $ | 0.58 | |
For the fiscal years ended January 31, 2018, 20172022, 2021 and 2016, approximately 602,000,1.42020, 1.8 million, 0.6 million, and 791,0000.3 million shares, respectively, attributable to outstanding 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.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 3. Cash,Business combinations
WageWorks Acquisition
On August 30, 2019, the Company closed the acquisition of WageWorks, Inc. (the "WageWorks Acquisition") for $51.35 per share in cash, equivalentsor $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 WageWorks Acquisition was accounted for under the acquisition method of accounting for business combinations. The consideration paid was allocated to the tangible and marketable securities
Cash, cash equivalentsintangible assets acquired and marketable securitiesliabilities assumed based on their fair values as of January 31, 2018 consistedthe acquisition date. The initial allocation of the following:consideration paid was based on a preliminary valuation and was subject to adjustment during the measurement period (up to one year from the acquisition date). The purchase price allocation was finalized in the third quarter of fiscal year 2021.
|
| | | | | | | | | | | | | | | |
| (in thousands) | Cost basis |
|
| Gross unrealized gains |
|
| Gross unrealized losses |
|
| Fair value |
|
| Cash and cash equivalents | $ | 199,472 |
|
| $ | — |
|
| $ | — |
|
| $ | 199,472 |
|
| Marketable securities: |
|
|
|
|
|
|
|
| Mutual funds | 41,153 |
|
| 270 |
|
| (626 | ) |
| 40,797 |
|
| Total cash, cash equivalents and marketable securities | $ | 240,625 |
|
| $ | 270 |
|
| $ | (626 | ) |
| $ | 240,269 |
|
Cash, cash equivalents and marketable securities as of January 31, 2017 consisted of the following:
|
| | | | | | | | | | | | | | | |
| (in thousands) | Cost basis |
|
| Gross unrealized gains |
|
| Gross unrealized losses |
|
| Fair value |
|
| Cash and cash equivalents | $ | 139,954 |
|
| $ | — |
|
| $ | — |
|
| $ | 139,954 |
|
| Marketable securities: |
|
|
|
|
|
|
|
| Mutual funds | 40,670 |
|
| 207 |
|
| (472 | ) |
| 40,405 |
|
| Total cash, cash equivalents and marketable securities | $ | 180,624 |
|
| $ | 207 |
|
| $ | (472 | ) |
| $ | 180,359 |
|
The following table summarizes the Company's allocation of the consideration paid in the WageWorks Acquisition: | | | | | | | | | | | | | | | | | |
| (in millions) | Initial Allocation | | Adjustments | | Updated Allocation |
| Cash and cash equivalents | $ | 406.8 | | | $ | (14.5) | | | $ | 392.3 | |
| Other current assets | 56.5 | | | 2.5 | | | 59.0 | |
| Property, plant, and equipment | 26.6 | | | — | | | 26.6 | |
| Operating lease right-of-use assets | 42.5 | | | — | | | 42.5 | |
| Intangible assets | 715.3 | | | — | | | 715.3 | |
| Goodwill | 1,330.5 | | | (8.0) | | | 1,322.5 | |
| Other assets | 5.9 | | | — | | | 5.9 | |
| Client-held funds obligation | (237.5) | | | 17.2 | | | (220.3) | |
| Other current liabilities | (69.1) | | | (3.7) | | | (72.8) | |
| Other long-term liabilities | (26.7) | | | — | | | (26.7) | |
| Deferred tax liability | (128.7) | | | 6.5 | | | (122.2) | |
| Total consideration paid | $ | 2,122.1 | | | $ | — | | | $ | 2,122.1 | |
Adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters.
Pro forma information
The unaudited pro forma results presented below include the effects of the WageWorks 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 WageWorks 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 basissavings 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 WageWorks 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 include the alignment of accounting policies, the effect of fair value adjustments related to the WageWorks Acquisition, associated tax effects and the impact of the borrowings to finance the WageWorks Acquisition and related expenses. | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) (unaudited) | 2020 | | 2019 |
| Revenue | $ | 798,253 | | | $ | 765,801 | |
| Net income | $ | 23,101 | | | $ | 6,419 | |
Luum acquisition
On March 8, 2021, the Company acquired 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). Luum provides employers with various commuter services, including access to real-time commute data to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits. The aggregate purchase price consisted of $50.2 million in cash, and up to $20.0 million in additional payments which were contingent on Luum achieving certain revenue targets during the two-year period following
the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024. The Company recorded an $8.1 million liability representing its best estimate of the fair value of the marketable securities by contractual maturitycontingent consideration as of Januarythe acquisition date. The fair value of this contingent consideration was determined using a Monte Carlo valuation model based on Level 3 inputs, with any changes in the fair value recorded as other income (expense), net, in the consolidated statement of operations and comprehensive income (loss). On October 31, 2018:2021, the Company entered into an amendment to the purchase agreement to pay $6.0 million in satisfaction of the contingent consideration liability, and recognized income of $2.1 million resulting from the change in fair value of the contingent consideration.
The Luum Acquisition was accounted for under the acquisition method of accounting for business combinations. The 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 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. |
| | | | | | | |
| (in thousands) | Cost basis |
|
| Fair value |
|
| One year or less | $ | 25,664 |
|
| $ | 25,590 |
|
| Over one year and less than five years | 15,489 |
|
| 15,207 |
|
| Total | $ | 41,153 |
|
| $ | 40,797 |
|
| | | | | | | | | | | | | | | | | |
| (in thousands) | Estimated fair value | | Adjustments | | Updated Allocation |
| Cash and cash equivalents | $ | 626 | | | $ | — | | | $ | 626 | |
| Other current assets | 1,469 | | | — | | | 1,469 | |
| Intangible assets | 23,900 | | | — | | | 23,900 | |
| Goodwill | 36,374 | | | (19) | | | 36,355 | |
| Other assets | 100 | | | — | | | 100 | |
| Current liabilities | (597) | | | — | | | (597) | |
| Deferred tax liability | (3,566) | | | 19 | | | (3,547) | |
| Total consideration paid | $ | 58,306 | | | $ | — | | | $ | 58,306 | |
Unrealized losses from marketable securities are primarilyThe Luum Acquisition resulted in $36.4 million of goodwill. The preliminary goodwill recognized is attributable to changeseveral strategic, operational, and financial benefits expected from the Luum Acquisition, including an expanded commuter offering beyond traditional pre-tax commuter benefits and additional cross-selling opportunities. The adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters. The goodwill created in interest rates.the Luum Acquisition is not expected to be deductible for tax purposes.
The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows:
| | | | | | | | | | | |
| ($ in thousands) | Fair value | | Estimated life
(in years) |
| Customer relationships (1) | $ | 12,400 | | | 7.0 |
| Developed technology (1) | 10,900 | | | 5.0 |
| Trade names & trademarks (1) | 600 | | | 3.0 |
| Total acquired intangible assets | $ | 23,900 | | | 6.0 |
(1) The Company doespreliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach.
The pro forma effects of the Luum Acquisition would not believematerially impact the Company's reported results for any remaining unrealized losses represent other-than-temporary impairmentsperiod presented, and as a result no pro forma financial information is presented.
Further acquisition
On November 1, 2021, the Company completed its acquisition of the Further business (other than Further's voluntary employee beneficiary association business) for $455 million (the "Further Acquisition"). Further is a leading provider of HSA and other CDB administration services. The parties also entered into related agreements ancillary to the Further Acquisition, including a transition services agreement.
The Further Acquisition was accounted for under the acquisition method of accounting for business combinations. The 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 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 evaluationcurrent allocation of available evidencethe consideration paid: | | | | | |
| (in thousands) | Estimated fair value |
| Current assets | $ | 2,667 | |
| Intangible assets | 172,183 | |
| Goodwill | 282,287 | |
| Current liabilities | (2,137) | |
| Total consideration paid | $ | 455,000 | |
The Further Acquisition resulted in $282.3 million of goodwill. The preliminary goodwill recognized is attributable to several strategic, operational, and financial benefits expected from the Further Acquisition, including an enhanced ability to drive growth with health plans, custodial and interchange revenue synergies based on current contractual relationships, and operational cost synergies resulting from increased scale in service delivery. The goodwill created in the Further Acquisition is not expected to be deductible for tax purposes.
The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows:
| | | | | | | | | | | |
| ($ in thousands) | Fair value | | Estimated life
(in years) |
| Customer relationships (1) | $ | 146,000 | | | 15.0 |
| Developed technology (1) | 25,000 | | | 5.0 |
| Identified intangible assets subject to amortization | 171,000 | | | 13.5 |
| In-process software development costs | 1,183 | | | n/a |
| Total acquired intangible assets | $ | 172,183 | | | |
(1) The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of January 31, 2018. the income approach.
The pro forma effects of the Further Acquisition would not materially impact the Company's reported results for any period presented, and as a result no pro forma financial information is presented.
Note 4. Supplemental financial statement information
Selected consolidated balance sheet and consolidated statement of operations and comprehensive income (loss) components consist of the following:
Allowance for doubtful accounts
As of January 31, 2018, marketable securities with2022 and 2021, the Company had an unrealized loss positionallowance for more than twelve consecutive months weredoubtful accounts of $6.2 million and $4.2 million, respectively. During the fiscal years ended January 31, 2022, 2021, and 2020, the Company recorded credit losses from trade receivables of $3.3 million, $3.4 million, and $1.0 million, respectively.
Costs to obtain a contract
As of January 31, 2022 and 2021, the net amount capitalized as follows:contract costs was $39.3 million and $27.5 million, respectively, which is included in other current assets and other assets. Amortization of capitalized contract costs during the fiscal years ended January 31, 2022, 2021, and 2020 was $4.3 million, $2.4 million, and $1.9 million, respectively.
|
| | | | | | | | | | | | | | | |
| Less than one year | |
| Greater than one year | |
| (in thousands) | Fair value |
|
| Unrealized losses |
|
| Fair value |
|
| Unrealized losses |
|
| Mutual funds | $ | 25,590 |
|
| $ | (243 | ) |
| $ | 15,207 |
|
| $ | (383 | ) |
Note 4. Property and equipment
Property and equipment consisted of the following as of January 31, 20182022 and 2017:
|
| | | | | | | | |
| (in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
| Leasehold improvements |
| $ | 2,292 |
|
| $ | 860 |
|
| Furniture and fixtures |
| 4,785 |
|
| 3,129 |
|
| Computer equipment |
| 8,174 |
|
| 7,194 |
|
| Property and equipment, gross |
| 15,251 |
|
| 11,183 |
|
| Accumulated depreciation |
| (7,415 | ) |
| (6,013 | ) |
| Property and equipment, net |
| $ | 7,836 |
|
| $ | 5,170 |
|
| | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
| Leasehold improvements | $ | 18,573 | | | $ | 22,271 | |
| Furniture and fixtures | 8,417 | | | 9,230 | |
| Computer equipment | 31,982 | | | 28,592 | |
| Property and equipment, gross | 58,972 | | | 60,093 | |
| Accumulated depreciation | (35,600) | | | (30,987) | |
| Property and equipment, net | $ | 23,372 | | | $ | 29,106 | |
Depreciation expense for the fiscal years ended January 31, 2018, 20172022, 2021 and 20162020 was $2.8$14.7 million, $2.0$16.0 million and $1.5$8.9 million, respectively.
Contract balances
As of January 31, 2022 and 2021, the balance of deferred revenue was $10.5 million and $4.1 million, respectively. The balances are related to cash received in advance for interchange and custodial revenue arrangements, other up-front fees and other commuter deferred revenue. The Company expects to recognize approximately 47% of its balance of deferred revenue as revenue over the next 12 months and the remainder thereafter. Revenue recognized during the fiscal year that was included in the beginning balance of deferred revenue was $1.3 million. The Company expects to satisfy its remaining obligations for these arrangements.
Other income (expense), net
Other income (expense), net, consisted of the following: | | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Interest income | $ | 1,501 | | | $ | 1,045 | | | $ | 5,905 | |
| Gain on equity securities | 1,692 | | | — | | | 27,760 | |
| Acquisition costs | (10,832) | | | (1,118) | | | (40,810) | |
| Other income (expense) | 1,708 | | | 5,080 | | | (1,934) | |
| Total other income (expense), net | $ | (5,931) | | | $ | 5,007 | | | $ | (9,079) | |
Interest expense
Based on the application of ASC 470-50, Debt - Modifications and Extinguishments, the Company recorded a $4.0 million loss on extinguishment of debt during the year ended January 31, 2022, which is included within interest expense in the consolidated statements of operations and comprehensive income (loss) for the year ended January 31, 2022.
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 9 years, often with 1 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.
The components of operating lease costs were as follows: | | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Operating lease expense | $ | 14,762 | | | $ | 16,073 | | | $ | 9,059 | |
| Sublease income | (1,836) | | | (1,799) | | | (750) | |
| Net operating lease cost | $ | 12,926 | | | $ | 14,274 | | | $ | 8,309 | |
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Weighted average lease term and discount rate were as follows: | | | | | | | | | | | |
| January 31, 2022 | | January 31, 2021 |
| Weighted average remaining lease term | 8.32 years | | 9.02 years |
| Weighted average discount rate | 4.29 | % | | 4.32 | % |
Lease liabilities were as follows: | | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
| Gross lease liabilities | $ | 92,529 | | | $ | 107,150 | |
| Less: imputed interest | (15,126) | | | (18,889) | |
| Present value of lease liabilities | 77,403 | | | 88,261 | |
| Less: current portion of lease liabilities | (12,171) | | | (14,037) | |
| Lease liabilities, non-current | $ | 65,232 | | | $ | 74,224 | |
As of January 31, 2022, the Company had an additional operating lease for office space that had not yet commenced with aggregate undiscounted lease payments of $4.5 million. This operating lease will commence in fiscal year 2023 and has a lease term of approximately 9 years.
Supplemental cash flow information related to the Company's operating leases was as follows: | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 14,742 | | | $ | 12,941 | |
| Right-of-use assets obtained in exchange for lease obligations | $ | 586 | | | $ | 17,480 | |
During the fiscal year ended January 31, 2022, the Company recorded impairment losses on right-of-use assets of $11.2 million, which are included within merger integration expense in the consolidated statement of operations and comprehensive income (loss). The impairment losses related primarily to a right-of-use asset acquired through the WageWorks Acquisition, which had a carrying value of $14.8 million prior to impairment and no corresponding lease liability. During the year ended January 31, 2022, the right-of-use asset met the criteria to be classified as held-for-sale and an impairment loss of $10.9 million was recognized. The remaining carrying value of $3.9 million was included within other current assets on the Company's consolidated balance sheet as of January 31, 2022. On March 24, 2022, the Company completed the sale of the asset for $3.9 million.
Note 5. 6. Intangible assets and goodwill
Asset acquisitions
During the year ended January 31, 2018, the Company acquired the right to act as custodian of a portfolio of HSA Members for $6.4 million. The cost, including transaction costs, was allocated to acquired intangible member assets as of January 31, 2018. The Company has determined the acquired intangible member assets to have a useful life of 15 years. The assets are being amortized using the straight-line amortization method, which has been determined appropriate to reflect the pattern over which the economic benefits of existing member assets are realized.
During the year ended January 31, 2018, the Company acquired the rights to be the sole administrator of a portfolio of HSA Members for $3.3 million.
During the year ended January 31, 2018, the Company acquired the right to act as custodian of a portfolio of HSA Members for $9.3 million, of which $8.0 million cash had been paid as of January 31, 2018. The remaining $1.3 million relates to a contingent payment that may be earned upon the achievement of certain targets. The cost, including transaction costs, was allocated to acquired intangible member assets. The Company has determined the acquired intangible member assets to have a useful life of 15 years. The assets are being amortized using the straight-line amortization method, which has been determined appropriate to reflect the pattern over which the economic benefits of existing member assets are realized.
During the year ended January 31, 2016, the Company acquired the rights to be custodian of the Bancorp and M&T HSA portfolios for $34.2 million and $6.2 million, respectively. The costs, including transaction costs, were allocated to acquired intangible member assets as of January 31, 2016. The Company has determined the acquired intangible member assets to have a useful life of 15 years. The assets are being amortized using the straight-line amortization method, which has been determined appropriate to reflect the pattern over which the economic benefits of existing member assets are realized.
Acquisition of a business
To increase its product offering, during the year ended January 31, 2018, the Company acquired the assets of BenefitGuard LLC, pursuant to a definitive asset purchase agreement, for a purchase price of $2.9 million cash. BenefitGuard LLC is a 401(k) provider that offers plan administrator and named fiduciary services for 401(k) employer sponsors. The Company accounted for the acquisition of assets of BenefitGuard LLC as an acquisition of a business under ASC 805. The preliminary purchase price allocation resulted in customer relationships, or other intangible assets, of $2.9 million. The Company has determined the other intangible assets to have a useful life of 10 years. The asset will be amortized using the straight-line amortization method, which has been determined appropriate to reflect the pattern over which the economic benefits will be realized. The financial impact of this acquisition, including pro forma financial results, was immaterial to the Company's consolidated statement of operations for the year ended January 31, 2018.
Software development
During the years ended January 31, 2018, 2017 and 2016, the Company capitalized software development costs of $8.1 million, $7.7 million and $5.6 million, respectively, related to significant enhancements and upgrades to its proprietary system.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 5. Intangible assets and goodwill (continued)
The gross carrying amount and associated accumulated amortization of intangible assets iswere as follows as of January 31, 2018 and January 31, 2017:
|
| | | | | | | | |
| (in thousands) | | January 31, 2018 |
| | January 31, 2017 |
|
| Amortized intangible assets: | |
| |
|
| Capitalized software development costs | | $ | 31,993 |
| | $ | 23,925 |
|
| Software | | 8,863 |
| | 7,041 |
|
| Other intangible assets | | 2,882 |
| | — |
|
| Acquired intangible member assets | | 83,915 |
| | 64,962 |
|
| Intangible assets, gross | | 127,653 |
| | 95,928 |
|
| Accumulated amortization | | (44,018 | ) | | (30,908 | ) |
| Intangible assets, net | | $ | 83,635 |
| | $ | 65,020 |
|
| | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
| Software and software development costs | $ | 192,050 | | | $ | 127,005 | |
| Acquired HSA portfolios | 192,298 | | | 125,141 | |
| Acquired customer relationships | 759,781 | | | 601,381 | |
| Acquired developed technology | 132,825 | | | 96,925 | |
| Acquired trade names | 12,900 | | | 12,300 | |
| Intangible assets, gross | 1,289,854 | | | 962,752 | |
| Accumulated amortization | (316,717) | | | (195,749) | |
| Intangible assets, net | $ | 973,137 | | | $ | 767,003 | |
During the fiscal years ended January 31, 2018, 20172022 and 2016,2021, the Company expensed a total of $12.2 million, $10.0capitalized $67.2 million and $7.6$32.4 million, respectively, in software development costs primarily related to acquire the post-implementation and operation stagesrights to act as a custodian of its proprietary software.HSA portfolios.
Amortization expense for the fiscal years ended January 31, 2018, 20172022, 2021, and 20162020 was $13.2$122.5 million, $11.2$99.9 million and $7.1$46.5 million, respectively. Estimated amortization expense for the years ending January 31 is as follows: | | | | | |
| Year ending January 31, (in thousands) | |
| 2023 | $ | 137,139 | |
| 2024 | 120,589 | |
| 2025 | 93,822 | |
| 2026 | 71,863 | |
| 2027 | 67,368 | |
| Thereafter | 482,356 | |
| Total | $ | 973,137 | |
|
| | | |
| Year ending January 31, (in thousands) |
|
| 2019 | $ | 13,290 |
|
| 2020 | 10,821 |
|
| 2021 | 7,705 |
|
| 2022 | 6,011 |
|
| 2023 | 5,883 |
|
| Thereafter | 39,925 |
|
| Total | $ | 83,635 |
|
AllThe Company’s annual goodwill impairment test resulted in no impairment charges in any of the Company’speriods presented in the accompanying consolidated financial statements. During the fiscal year ended January 31, 2022, goodwill was generated fromincreased by $318.6 million due to the acquisitionacquisitions of First Horizon MSaver, Inc. on August 11, 2011.Luum and Further. During the fiscal year ended January 31, 2021, goodwill decreased by $5.4 million due to measurement period adjustments related to the WageWorks Acquisition. There have beenwere no other changes to the goodwill carrying value during the fiscal years ended January 31, 20182022 and 2017.2021.
Note 6. 7. Commitments and contingencies
Property, colocation, equipment, and license agreements—Commitments
The Company leases office space, data storage facilities, equipment and certain maintenance agreements under long-term, non-cancelable operating leases. Future minimum leasefollowing table summarizes the payments required under non-cancelabledue by fiscal year for our outstanding contractual obligations as of January 31, 20182022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by fiscal year |
| (in thousands) | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
4.50% Senior Notes due 2029 (1) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 600,000 | | | $ | 600,000 | |
| Term Loan Facility (1) | 8,750 | | | 17,500 | | | 17,500 | | | 26,250 | | | 280,000 | | | — | | | 350,000 | |
| Interest on long-term debt obligations (2) | 33,951 | | | 33,708 | | | 33,467 | | | 32,965 | | | 30,764 | | | 72,975 | | | 237,830 | |
| Operating lease obligations (3) | 12,527 | | | 10,501 | | | 10,849 | | | 11,094 | | | 11,344 | | | 40,671 | | | 96,986 | |
| HealthSavings portfolio acquisition (4) | 60,000 | | | — | | | — | | | — | | | — | | | — | | | 60,000 | |
| Other contractual obligations (5) | 25,243 | | | 13,191 | | | 6,137 | | | 5,516 | | | 6,500 | | | — | | | 56,587 | |
| Total | $ | 140,471 | | | $ | 74,900 | | | $ | 67,953 | | | $ | 75,825 | | | $ | 328,608 | | | $ | 713,646 | | | $ | 1,401,403 | |
(1)As of January 31, 2022, our outstanding combined principal of $950.0 million is presented net of debt issuance costs on our consolidated balance sheets. The debt issuance costs are not included in the table above.
(2)Estimated interest payments assume the stated interest rates applicable to the Notes and Term Loan Facility as follows:of January 31, 2022, which were 4.50% and 1.88% per annum, respectively.
(3)We lease office space and data storage facilities, and we have other non-cancelable operating leases expiring at various dates through 2030. These amounts exclude contractual sublease income of $2.2 million, which is expected to be received through March 2023. |
| | | | | | | | | | | | |
| Year ending January 31, (in thousands) |
| Office lease |
|
| Other agreements |
|
| Total |
|
| 2019 |
| $ | 3,904 |
|
| $ | 2,312 |
|
| $ | 6,216 |
|
| 2020 |
| 3,848 |
|
| 2,069 |
|
| 5,917 |
|
| 2021 |
| 4,096 |
|
| 2,134 |
|
| 6,230 |
|
| 2022 |
| 4,198 |
|
| 1,460 |
|
| 5,658 |
|
| 2023 |
| 4,303 |
|
| 4 |
|
| 4,307 |
|
| Thereafter |
| 17,034 |
|
| — |
|
| 17,034 |
|
| Total |
| $ | 37,383 |
|
| $ | 7,979 |
|
| $ | 45,362 |
|
Office lease obligations—(4)On May 15, 2015,March 2, 2022, the Company entered into a lease agreement to expandcompleted its headquarters in Draper, Utah. The lease provided for the new landlord to construct a building at their cost. The lease commenced upon the substantial completion and deliveryacquisition of the building to the Company on July 1, 2016 and has an initial termHealth Savings Administrators, L.L.C. ("HealthSavings") HSA portfolio for $60 million in cash.
(5)Other contractual obligations consist of 129 months thereafter, with an option for the Company to extend the lease for two additional five-year periods. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $1.0 million,
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 6. Commitments and contingencies (continued)
with 2.5% annual increases. In conjunction with the aforementioned lease, the Company entered into an amended and restated lease agreement for its existing office space at its headquarters in Draper, Utah. The lease commenced on July 1, 2015 and has an initial term of 129 months thereafter, with an option for the Company to extend the lease for two additional five-year periods. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $1.6 million, with 2.5% annual increases. As a result of the foregoing transaction, the deferred rent balance of approximately $470,000 was reversed during the year ended January 31, 2016.
On September 16, 2016, the Company entered into an amendment to its lease agreement, dated May 15, 2015, by and between the Company and its landlord to expand its current office space. The term of the lease commenced on July 1, 2016 and will expire on March 31, 2027. The Company is responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $569,000, with 2.5% annual increases.
On May 31, 2017, the Company entered into an amendment to its lease agreement, dated May 15, 2015, to expand its current office space. The term of the lease commenced on January 1, 2018 and will expire on March 31, 2027. The Company will be responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately $513,000, with annual increases ranging from 2.5% to 3.1%.
Lease expense for office space for the years ended January 31, 2018, 2017 and 2016 totaled $4.3 million, $3.3 million and $2.1 million, respectively. Expense for other agreements for the years ended January 31, 2018, 2017 and 2016 totaled $460,000, $307,000 and $249,000, respectively.
Data storage and equipment lease obligations—The data storage and equipment leases relate to our offsite data storage facility and office equipment leases. All of these leases expire during the year ended January 31, 2020.
Telephony services—The telephony service agreement relates to our 24/7/365 member support center. The agreement expires in September 2019.
Processing services agreement—During the year ended January 31, 2016, the Company amended its merchant processing services agreement with a vendor. The agreement expires December 31, 2020agreements, telephony services, and requires the Company to pay a dollar minimum processing fee based on the processing year of the agreement. The Company may terminate the agreement beginning January 1, 2020 by providing 180 days’ written notice.other contractual commitments.
If the processing agreement is terminated prior to December 31, 2020, the Company is required to pay the vendor a termination fee, equal to 75% of the aggregate value of the minimum processing fees for the remaining years of the agreement, plus a portion of the account on-boarding incentive fee.Contingencies
For each of the years ended January 31, 2018, 2017 and 2016, the Company exceeded the minimum amounts required under the agreement.
The Company has an agreement with an entity for access to its software. The agreement contains minimum required payments.
The Company also has agreements with several entities for access to technology and software. The agreements are based on usage, and there are no minimum required monthly payments.
Contingencies—In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Indemnification—Legal matters
In accordanceApril 2021, WageWorks exercised its right to terminate a lease for office space in Mesa, Arizona that had not yet commenced, with aggregate lease payments of $63.1 million and a term of approximately 11 years, following the
landlord's failure to fulfill its obligations under the lease agreement. Because the lease had not yet commenced, the Company had not recognized a right-of-use asset, operating lease liability, or any rent expense associated with the Company’slease. WageWorks' right to terminate the lease agreement was disputed by the landlord, Union Mesa 1, LLC (“Union Mesa”). On November 5, 2021, Union Mesa notified WageWorks that it was in default of the lease for failure to pay rent, which Union Mesa claimed was due beginning in November 2021, and on November 24, 2021 drew $2.8 million, the full amount under the letter of credit that WageWorks had posted to secure its obligations under the lease. The Company recorded the $2.8 million draw as merger integration expense in the consolidated statement of operations and comprehensive income (loss). On December 1, 2021, WageWorks filed a lawsuit against Union Mesa in the Superior Court of the State of Arizona in and for the County of Maricopa. On January 4, 2022, WageWorks filed an amended complaint in the Superior Court. Pursuant to the lawsuit, WageWorks seeks declaratory judgment that the lease was properly terminated and restated Certificaterecourse against Union Mesa for breach of Incorporationcontract, breach of the duty of good faith and fair dealing, and conversion, including return of the funds drawn under the letter of credit. On January 31, 2022, Union Mesa filed a motion to dismiss for the conversion cause of action, but has not yet responded to WageWorks' other claims raised in the amended complaint.
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 restated bylaws,20(a) of the Company has indemnification obligations toSecurities 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 alleged 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. The class action settled for $30.0 million. During the fiscal year ended January 31, 2022, WageWorks contributed $5.0 million and its insurers paid the remaining $25.0 million. The court granted final approval of the settlement and entered a final judgment on August 20, 2021. This matter is now closed.
On June 22, 2018 and September 6, 2018, 2 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, fees and costs. Plaintiffs in the Superior Court action filed an amended consolidated complaint on October 28, 2019, naming as defendants certain events or occurrences, subjectformer 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. On June 24, 2020, the court granted the defendants’ motion to certain limits, while they are serving atdismiss the Company’s requestamended complaint. The plaintiffs subsequently filed a notice of appeal. On October 28, 2021, the court of appeal dismissed the appeal pursuant to the release in such capacity. There have been no claimsthe class action settlement discussed above. The District Court action is currently stayed.
WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to datethese indemnification agreements, is covering the defense fees and costs of its former directors and officers in the Company has a director and officer insurance policy that may enable it to recover a portion of any amounts paid for future claims.legal proceedings described above.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 6. Commitments and contingencies (continued)
Litigation—The Company may from time to time beand its subsidiaries are involved in legalvarious other litigation, governmental proceedings arising fromand claims, not described above, that arise in the normal course of business. ThereIt is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, or the impact that such litigation, proceedings and claims will have on the Company’s financial position, results of operations, and cash flows.
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 noprobable 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 pending or threatened legal proceedingsadverse 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
Long-term debt consisted of the following: | | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
4.50% Senior Notes due 2029 | $ | 600,000 | | | $ | — | |
| Term Loan Facility | 350,000 | | | — | |
| Prior Term Loan Facility | — | | | 1,003,125 | |
| Principal amount | 950,000 | | | 1,003,125 | |
| Less: unamortized discount and issuance costs (1) | 19,173 | | | 16,408 | |
| Total debt, net | 930,827 | | | 986,717 | |
| Less: current portion of long-term debt | 8,750 | | | 62,500 | |
| Long-term debt, net | $ | 922,077 | | | $ | 924,217 | |
(1)In addition to the $19.2 million and $16.4 million of unamortized discount and issuance costs related to long-term debt as of January 31, 20182022 and 2017.2021, respectively, $4.4 million and $5.0 million of unamortized issuance costs related to our Revolving Credit Facility (as defined below) are included within other assets on the consolidated balance sheets as of January 31, 2022 and January 31, 2021, respectively.
Note 7. Indebtedness
4.50% Senior Notes due 2029
On September 30, 2015,October 8, 2021, the Company completed its offering of $600.0 million aggregate principal amount of its 4.50% Senior Notes due 2029 (the “Notes”). The Notes were issued under an indenture (the “Indenture”), dated October 8, 2021, among the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee.
The net proceeds from the issuance of the Notes together with borrowings under the Credit Agreement (as defined below) and cash on hand, were used to repay the outstanding borrowings under the Prior Credit Agreement (as defined below).
The Notes are guaranteed by each of the Company’s existing, wholly owned domestic subsidiaries that guarantees its obligations under the Credit Agreement and are required to be guaranteed by any of the Company’s future subsidiaries that guarantee its obligations under the Credit Agreement or certain of its other indebtedness. The Notes will mature on October 1, 2029. Interest on the Notes will be payable on April 1 and October 1 of each year, beginning on April 1, 2022. As of January 31, 2022, the balance of accrued interest on the Notes was $8.7 million, which is included within accrued liabilities on the Company's consolidated balance sheet. The effective interest rate on the Notes is 4.72%.
The Notes are unsecured senior obligations of the Company and rank equally in right of payment to all of its existing and future senior unsecured debt and senior in right of payment to all of its future subordinated debt.
The Notes are redeemable at the Company’s option, in whole or in part, at any time on or after October 1, 2024, at a redemption price if redeemed during the 12 months beginning (i) October 1, 2024 of 102.250%, (ii) October 1, 2025 of 101.125%, and (iii) October 1, 2026 and thereafter of 100.000%, in each case of the principal amount of the Notes being redeemed, and together with accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may also redeem some or all of the Notes before October 1, 2024 at a redemption price equal to 100% of the principal amount of the Notes, plus the applicable “make-whole” premium as of, and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time prior to October 1, 2024, the Company may redeem up to 40% of the aggregate principal amount of the Notes issued under the Indenture on one or more occasions in an aggregate amount equal to the net cash proceeds of one or more equity offerings at a redemption price equal to 104.500% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. Furthermore, the Company may be required to make an offer to purchase the Notes upon the sale of certain assets or upon specific kinds of changes of control.
The Indenture contains covenants that impose significant operational and financial restrictions on the Company; however, these covenants generally align with the covenants contained in the Credit Agreement. See "Credit Agreement" below for a description of these covenants.
Credit Agreement
On October 8, 2021, the Company entered into a new credit agreement (the “Credit Agreement”) among the Company, as borrower, each lender from time to time party thereto (the “Lenders”), JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the “Agent”) and the Swing Line Lender (as defined in the Credit Agreement), and each L/C Issuer (as defined therein) party thereto, pursuant to which the Company established:
(i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $350.0 million, the proceeds of which were used to refinance the Company’s existing senior secured credit facility as described below (the "Credit Agreement"“Refinancing”). The, to pay fees and expenses incurred in connection with the Refinancing and the establishment of the Credit Agreement providesFacilities (as defined below) and for working capital and general corporate purposes of the Company and its subsidiaries, including the financing of acquisitions and other investments; 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 thean aggregate principal amount of $100.0up to $1.0 billion (with a $25 million sub-limit for a termthe issuance of five years. Theletters of credit), the proceeds of borrowingswhich may be used for working capital and general corporate purposes of the Company and its subsidiaries, including the financing of acquisitions and other investments.
Subject to the terms and conditions set forth in the Credit Agreement (including obtaining additional commitments from one or more new or existing lenders), the Company may in the future incur additional loans or commitments under the Credit Agreement in an aggregate principal amount of up to $300 million, plus an additional amount so long as the Company’s pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) would not exceed 3.85 to 1.00 as of the date such loans or commitments are incurred.
Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of the Company, either (i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25% to 2.25% or (ii) an alternate base rate plus a margin ranging from 0.25% to 1.25%, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of January 31, 2022, the stated interest rate was 1.88% and the effective interest rate was 2.63%. 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 will amortize in equal quarterly installments in an aggregate annual amount equal to the following percentage of the original principal amount of the Term Loan Facility: (i) 2.5% for the first year after October 8, 2021; (ii) 5.0% for each of the second and third years after October 8, 2021; (iii) 7.5% for the fourth year after October 8, 2021; and (iv) 10.0% for the fifth year after October 8, 2021. In addition, the Term Loan Facility is required to be mandatorily prepaid with 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries, subject to customary exceptions and thresholds, including to the extent such proceeds are reinvested in assets useful in the business of the Company and its subsidiaries within 450 days following receipt (or committed to be reinvested within such 450-day period and reinvested within 180 days after the end of such 450-day period). The loans under the Credit Facilities may be used for general corporate purposes. No amounts have been drawnprepaid, and the commitments thereunder may be reduced, by the Company without penalty or premium, subject to the reimbursement of customary “breakage costs.”
The Credit Agreement contains significant, customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company and its subsidiaries 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 5.00 to 1.00 beginning with the fiscal quarter ended January 31, 2022, and (ii) a minimum consolidated interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00 beginning with the fiscal quarter ended January 31, 2022. The Company was in compliance with all covenants under the Credit Agreement as of January 31, 2018.2022, and for the period then ended.
BorrowingsThe repayment obligation under the Credit Agreement bearmay be accelerated upon the occurrence of an event of default thereunder, including, among other things, failure to pay principal, interest equalor fees on a timely basis, material inaccuracy of any representation or warranty, failure to at the Company's option, a) an adjusted LIBOR ratecomply with covenants, cross-default to other material debt, material judgments, change of control and certain insolvency or b) a customary base rate,bankruptcy-related events, in each case, with an applicable spreadsubject to be determined based on the Company's leverage ratio as of the most recent fiscal quarter. The applicable spread for borrowing under the Credit Agreement will range from 1.50% to 2.00% with respect to adjusted LIBOR rate borrowings and 0.50% to 1.00% with respect to customary base rate borrowings. Additionally, the Company pays a commitment fee ranging from 0.20% to 0.30% on the daily amount of the unused commitments under the Credit Agreement payable in arrears at the end of each fiscal quarter. During the years ended January 31, 2018 and 2017, the Company incurred $274,000 and $275,000, respectively, of interest expense associated with the Credit Agreement.any certain grace and/or cure periods.
The Company's material subsidiaries are required to guarantee the obligations of the Company under the Credit Agreement. The obligationsAgreement are required to be unconditionally guaranteed by each of the CompanyCompany’s existing or subsequently acquired or organized direct and the guarantors under the Credit Agreementindirect domestic subsidiaries and the guarantees are
secured by security interests in substantially all assets of the Company and the guarantors, in each case, subject to certain customary exclusions and exceptions.
ThePrior Credit Agreement requires
On August 30, 2019, the Company entered into a credit agreement (the "Prior Credit Agreement”) that provided for:
(i) a five-year senior secured term loan A facility (the “Prior Term Loan Facility”), in an aggregate principal amount of $1.25 billion; and
(ii) a five-year senior secured revolving credit facility (the “Prior Revolving Credit Facility” and, together with the Prior Term Loan Facility, the “Prior Credit Facilities”), in an aggregate principal amount of up to maintain$350.0 million. No amounts were drawn under the Prior Revolving Credit Facility.
Borrowings under the Prior Credit Facilities bore interest at an annual rate equal to, at the option of HealthEquity, either (i) LIBOR (adjusted for reserves) plus a total leverage ratio of not more than 3.00margin ranging from 1.25% to 1.00 as2.25% 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 Prior Credit Agreement. The Company was also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the end of each fiscal quarter andPrior Revolving Credit Facility at a minimum interest coverage ratio of at least 3.00rate ranging from 0.20% to 1.00 as of0.40%, with the end of each fiscal quarter. In addition,applicable rate also determined by reference to a leverage-based pricing grid set forth in the Prior Credit Agreement.
The Prior Credit Agreement includescontained customary representations and warranties, affirmative and negative covenants, and events of default. The restrictive covenants include customary restrictions on the Company's ability to incur additional indebtedness; make investments, loans or advances; grant or incur liens on assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make dividend payments.covenants. The Company was in compliance with theseall covenants as ofunder the Prior Credit Agreement during the fiscal year ended January 31, 2018.2022.
InThe obligations of HealthEquity under the Prior Credit Agreement were required to be unconditionally guaranteed by WageWorks and Fort Effect Corp and were secured by security interests in substantially all assets of HealthEquity and the guarantors, subject to certain customary exceptions.
On October 8, 2021, in connection with the entry into the Credit Agreement, the Company incurred $317,000 in financing costs, which are deferredrepaid all outstanding obligations under the Prior Credit Agreement and are being amortized using the straight-line method, which approximates the effective interest method, over the life of the agreement.terminated all commitments thereunder.
Note 8. 9. Income taxes
The Incomeincome tax provision (benefit) consisted of the following: | | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 628 | | | $ | 181 | | | $ | (448) | |
| State | 239 | | | 258 | | | 274 | |
| Total current tax provision (benefit) | $ | 867 | | | $ | 439 | | | $ | (174) | |
| Deferred: | | | | | |
| Federal | $ | (21,197) | | | $ | (1,630) | | | $ | 3,538 | |
| State | (2,122) | | | (3,503) | | | 127 | |
| Total deferred tax provision (benefit) | $ | (23,319) | | | $ | (5,133) | | | $ | 3,665 | |
| Total income tax provision (benefit) | $ | (22,452) | | | $ | (4,694) | | | $ | 3,491 | |
|
| | | | | | | | | | | | |
| | Year ended January 31, | |
| (in thousands) | | 2018 |
| | 2017 |
| | 2016 |
|
| Current: | |
| |
| |
|
| Federal | | $ | 392 |
| | $ | 14,848 |
| | $ | 9,876 |
|
| State | | 130 |
| | 1,823 |
| | 1,226 |
|
| Total current tax provision | | $ | 522 |
| | $ | 16,671 |
| | $ | 11,102 |
|
| Deferred: | |
| |
| |
|
| Federal | | $ | 4,068 |
| | $ | (2,308 | ) | | $ | (1,772 | ) |
| State | | 237 |
| | (619 | ) | | (389 | ) |
| Total deferred tax (benefit) provision | | $ | 4,305 |
| | $ | (2,927 | ) | | $ | (2,161 | ) |
| Total income tax provision | | $ | 4,827 |
| | $ | 13,744 |
| | $ | 8,941 |
|
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
Total income tax provision (benefit) differed from the amounts computed by applying the U.S. federal statutory income tax rate of 34% to income before income tax provisiontaxes as a result of the following:
|
| | | | | | | | | | | | |
|
| Year ended January 31, | |
| (in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Federal income tax provision at the statutory rate |
| $ | 17,744 |
|
| $ | 13,641 |
|
| $ | 8,688 |
|
| State income tax provision, net of federal tax benefit |
| 1,241 |
|
| 742 |
|
| 541 |
|
| Non-deductible or non-taxable items |
| 143 |
|
| 87 |
|
| 56 |
|
| Excess tax benefits on stock-based compensation expense, net |
| (14,136 | ) |
| — |
|
| — |
|
| Federal research and development credit |
| (729 | ) |
| (907 | ) |
| (371 | ) |
| Deferred tax rate adjustment due to tax reform |
| 458 |
|
| — |
|
| — |
|
| Current statutory rate differential due to tax reform |
| (308 | ) |
| — |
|
| — |
|
| Change in uncertain tax position reserves, net of indirect benefits |
| 191 |
|
| 246 |
|
| 96 |
|
| Other items, net |
| 223 |
|
| (65 | ) |
| (69 | ) |
| Total income tax provision |
| $ | 4,827 |
|
| $ | 13,744 |
|
| $ | 8,941 |
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Federal income tax provision (benefit) at the statutory rate | $ | (14,016) | | | $ | 869 | | | $ | 9,063 | |
| State income tax provision (benefit), net of federal tax provision (benefit) | (3,733) | | | (99) | | | 960 | |
| Other non-deductible or non-taxable items, net | (165) | | | 469 | | | 798 | |
| Excessive employee remuneration | 1,214 | | | 1,186 | | | 2,117 | |
| Excess tax benefits on stock-based compensation expense, net | (5,098) | | | (2,983) | | | (4,815) | |
| Federal research and development credits | (4,218) | | | (2,195) | | | (2,296) | |
| Change in uncertain tax position reserves, net of indirect benefits | 836 | | | 511 | | | 491 | |
| Non-deductible acquisition-related costs | — | | | — | | | 3,032 | |
| Non-taxable gain on investment in subsidiary | — | | | — | | | (5,790) | |
| Reclassification of operating lease right-of-use assets | — | | | 185 | | | — | |
| Change in net operating losses due to measurement period adjustments | — | | | 377 | | | — | |
| Deferred tax rate adjustment due to merger integration | 725 | | | (1,814) | | | 225 | |
| Return-to-provision adjustments | (810) | | | (1,010) | | | (332) | |
| Change in valuation allowance | 3,457 | | | (145) | | | 93 | |
| Other items, net | (644) | | | (45) | | | (55) | |
| Total income tax provision (benefit) | $ | (22,452) | | | $ | (4,694) | | | $ | 3,491 | |
The Company'sCompany’s effective income tax rate for the fiscal years ended January 31, 2018, 20172022, 2021, and 20162020 was 9.2%, 34.3%,an effective income tax benefit rate of 33.6% and 35.0%113.4% and an effective income tax expense rate of 8.1%, respectively. The difference between the effective income tax rate and the U.S. federal statutory income tax rate each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense, changes in valuation allowance, and other items. The decrease in the effective tax benefit rate for the fiscal year ended January 31, 2022 compared to the fiscal year ended January 31, 2021 was primarily due to the adoptionimpact of ASU 2016-09,tax benefit items, such as stock-based compensation expense, credits, and other discrete items.changes to the valuation allowance, relative to the larger pre-tax book loss and smaller pre-tax book income, respectively. The decrease in the effective tax rate for the fiscal year ended January 31, 20182021 compared to the fiscal year ended January 31, 20172020 was primarily the result ofdue to an increase in excess tax benefits on stock-based compensation expense. The decrease in the effectiveexpense, deferred tax rate for the year ended January 31, 2017 comparedadjustments due to the year ended January 31, 2016 was primarily the resultintegration of an increase inWageWorks, and research and development credits.
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, includes a reduction ofcredits recognized in the statutory corporate income tax rate from a top rate of 35% to 21% effective January 1, 2018. The Company is subject to federal and stateprovision for income taxes in the United States based on a calendar year which differs from its January fiscal year-end for financial reporting purposes. For purposes of reconciling the total income tax provision for the fiscal year, the Company applied a federal statutory rate of 34% for the entire fiscal year as this is the rate that applies for the tax year ending December 31, 2017 which comprises 11 months of the fiscal year. Because a 21% federal statutory rate applies for the one month ending January 31, 2018, a reconciling item has been included in the tax rate reconciliation table aboverelative to adjust for the statutory rate reduction that applies to this one-month period. This resulted in a reduction to the income tax provision of $308,000.
Given the significance of the Tax Cuts and Jobs Act, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one-year “measurement period” from the date of enactment date of the Tax Cuts and Jobs Act. The measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
The Company remeasured certain deferred tax assets and liabilities as of December 31, 2017 based on rates at which they are expected to reverse in the future, which is generally the new corporate income tax rate of 21% as enacted by the Tax Cuts and Jobs Act. However, the Company's analysis is incomplete as we are still analyzing certain aspects of the Act and refining our calculations, including state conformity and the impact of state tax rates
pre-tax book income.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
on deferred tax balances, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Based on the best information available, the provisional amount recorded related to the remeasurement of the Company's deferred tax balance resulted in a decrease in net deferred tax assets of $458,000, with a corresponding increase to the income tax provision during the year ending January 31, 2018. The Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company's estimates may also be affected as it gains a more thorough understanding of the enacted tax law changes and as additional future guidance on the effects of the Tax Cuts and Jobs Act is made available.
Other significant provisions of the Tax Cuts and Jobs Act are effective as of January 1, 2018, including, but not limited to: the limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, changes in the deductibility of certain meals and entertainment business expenses, and changes in the deductibility of certain excessive employee remuneration. The Company has applied these provisions to its current income tax provision as it relates to its tax return period beginning January 1, 2018 using reasonable interpretations and available guidance. Further guidance or technical corrections may affect the Company's estimates and the application of these provisions on its income tax provision.
Deferred tax assets and liabilities consisted of the following:
|
| | | | | | | | |
| (in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
| Deferred tax assets: |
|
|
|
|
| Accrued bonuses |
| $ | 489 |
|
| $ | 499 |
|
| Other accrued liabilities |
| 572 |
|
| 559 |
|
| Deferred rent |
| 520 |
|
| 364 |
|
| Stock compensation |
| 5,316 |
|
| 5,061 |
|
| Net operating loss carryforward |
| 666 |
|
| 84 |
|
| Research and development credits |
| 2,882 |
|
| 2,225 |
|
| AMT credits |
| 857 |
|
| 548 |
|
| Other, net |
| 286 |
|
| 449 |
|
| Total gross deferred tax assets |
| $ | 11,588 |
|
| $ | 9,789 |
|
| Deferred tax liabilities: |
|
|
|
|
| Fixed assets: depreciation and gain/loss |
| $ | (1,170 | ) |
| $ | (902 | ) |
| Intangibles: amortization |
| (4,830 | ) |
| (7,252 | ) |
| Other, net |
| (127 | ) |
| (57 | ) |
| Total gross deferred tax liability |
| (6,127 | ) |
| (8,211 | ) |
| Net deferred tax asset |
| $ | 5,461 |
|
| $ | 1,578 |
|
| | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforward | $ | 5,542 | | | $ | 1,653 | |
| Stock compensation | 14,778 | | | 12,600 | |
| Research and development credits | 13,351 | | | 6,274 | |
| Lease liabilities | 19,356 | | | 21,813 | |
| Accruals and reserves | 7,729 | | | 10,591 | |
| Other, net | 3,728 | | | 1,755 | |
| Total gross deferred tax assets | $ | 64,484 | | | $ | 54,686 | |
| Less valuation allowance | (3,561) | | | (104) | |
| Deferred tax assets, net of valuation allowance | 60,923 | | | 54,582 | |
| Deferred tax liabilities: | | | |
| Fixed assets | (1,862) | | | (4,946) | |
| Intangible assets | (119,048) | | | (134,442) | |
| Incremental contract costs | (9,585) | | | (6,385) | |
| Right-of-use assets | (16,923) | | | (22,285) | |
| Goodwill | (11,481) | | | (6,081) | |
| Other, net | (1,870) | | | (172) | |
| Total gross deferred tax liabilities | (160,769) | | | (174,311) | |
| Net deferred tax asset (liability) | $ | (99,846) | | | $ | (119,729) | |
Management considered whether it is more likely than not that some portion or all of the deferred tax assets would be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities projected future taxable income and tax planning strategies in making this assessment and determined that based on the weight of all available evidence, it is more likely than not (a(i.e., a likelihood of more than 50%) that the Company will be able to realize most of its deferred tax assets. Therefore, noHowever, the Company recorded a valuation allowance was requiredof $3.6 million and $0.1 million as of January 31, 2018.2022 and 2021, respectively. The increase in valuation allowance recorded is primarily the result of state research and development tax credits that are not expected to be utilized before expiration.
As of January 31, 2018,2022, the Company had recorded gross federal and state net operating loss carryforwards of $2.6$12.1 million and $2.1$50.1 million, respectively, which begin to expire at various intervals betweenfollowing the tax yearsyear ending DecemberJanuary 31, 2025 and December 31, 2036.2029. As of January 31, 2018,2022, the Company also had federal and state research and development carryforwardscredits of $2.6$10.9 million and $1.5 million, respectively,each, which begin to expire beginning withfollowing the tax yearyears ending December 31, 2019 and 2024, respectively, and federal and state alternative minimum tax credit carryforwards of $856,000 and $2,000, respectively. The state AMT credits do not expire. As a result of the Tax Cuts and Jobs Act, the federal alternative minimum tax was repealed. A provision was enacted which allows the Company to utilize or refund 100% of the remaining AMT credits no later than its tax year beginning in 2021. The
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 8. Income taxes (continued)
Company expects to utilize its AMT credits against income tax in future periods; as a result, the credits have remained classified as deferred tax assets as of January 31, 2018.2032 and 2023, respectively.
As of January 31, 20182022 and 2017,2021, the gross unrecognized tax benefit was $889,000$11.7 million and $674,000,$10.2 million, respectively. If recognized, $811,000$10.8 million and $572,000$9.4 million of the total unrecognized tax benefits would affect the Company's effective tax rate as of January 31, 20182022 and 2017,2021, respectively. Total gross unrecognized tax benefits increased by $215,000$1.4 million in the period from January 31, 20172021 to January 31, 2018. 2022.
A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including the impact of purchase accounting from the Luum Acquisition, is as follows: | | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
| Gross unrecognized tax benefits at beginning of year | $ | 10,206 | | | $ | 9,370 | |
| Gross amounts of increases and decreases: | | | |
| Purchase accounting adjustments | 240 | | | — | |
| Increases as a result of tax positions taken during a prior period | 38 | | | 1 | |
| Increases as a result of tax positions taken during the current period | 1,169 | | | 835 | |
| Gross unrecognized tax benefits at end of year | $ | 11,653 | | | $ | 10,206 | |
|
| | | | | | | | |
| (in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
| Gross unrecognized tax benefits at beginning of year |
| $ | 674 |
|
| $ | 393 |
|
| Gross amounts of increases and decreases: |
|
|
|
|
|
|
| Increases as a result of tax positions taken during a prior period |
| — |
|
| — |
|
| Decreases as a result of tax positions taken during a prior period |
| — |
|
| — |
|
| Increases as a result of tax positions taken during the current period |
| 215 |
|
| 281 |
|
| Decreases as a result of tax positions taken during the current period |
| — |
|
| — |
|
| Decreases resulting from the lapse of the applicable statute of limitations |
| — |
|
| — |
|
| Gross unrecognized tax benefits at end of year |
| $ | 889 |
|
| $ | 674 |
|
Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of Accounting Standards Update No.ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar
Tax Loss, or a Tax Credit Carryforward Exists. The resulting unrecognized tax benefit recorded within the Company's consolidated balance sheet excludes the following amounts that have been netted against the related deferred tax assets or tax receivables accordingly:
|
| | | | | | | | |
| (in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
| Total gross unrecognized tax benefits |
| $ | 889 |
|
| $ | 674 |
|
| Amounts netted against related deferred tax assets |
| (889 | ) |
| (674 | ) |
| Unrecognized tax benefits recorded on the consolidated balance sheet |
| $ | — |
|
| $ | — |
|
| | | | | | | | | | | |
| (in thousands) | January 31, 2022 | | January 31, 2021 |
| Total gross unrecognized tax benefits | $ | 11,653 | | | $ | 10,206 | |
| Amounts netted against related deferred tax assets or tax receivables | (7,097) | | | (9,574) | |
| Unrecognized tax benefits recorded on the consolidated balance sheet | $ | 4,556 | | | $ | 632 | |
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other expenseincome (expense), net in the statement of operations.operations and comprehensive income (loss). During the fiscal years ended January 31, 2018, 2017,2022, 2021, and 2016, respectively,2020, the Company recorded a decreasepenalties and interest of $0, $0$0.7 million, $0.2 million, and $8,000 in interest and penalties$0.1 million, respectively, related to unrecognized tax benefits. As of January 31, 20182022 and 2017, no2021, the Company recorded accrued interest and penalties were recorded.of $1.5 million and $0.8 million, respectively.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is not currently under examination with any jurisdiction. Theby the IRS and the state of Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes, net operating losses, and/or tax credit carryforwards. As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by federal and various state taxingone or more jurisdictions for tax years after 2003.2001.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. 10. Stock-based compensation
The following table shows a summary of stock-based compensation in the Company's consolidated statements of operations and comprehensive income (loss) during the years presented: | | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Cost of revenue | $ | 11,258 | | | $ | 7,996 | | | $ | 4,792 | |
| Sales and marketing | 7,001 | | | 6,986 | | | 4,694 | |
| Technology and development | 13,132 | | | 10,772 | | | 7,649 | |
| General and administrative | 21,359 | | | 17,109 | | | 12,972 | |
| Merger integration | — | | | — | | | 1,603 | |
| Other expense, net | 342 | | | — | | | 13,714 | |
| Total stock-based compensation expense | $ | 53,092 | | | $ | 42,863 | | | $ | 45,424 | |
|
| | | | | | | | | | | | |
| | Year ended January 31, | |
| (in thousands) | | 2018 |
| | 2017 |
| | 2016 |
|
| Cost of revenue | | $ | 2,594 |
| | $ | 1,780 |
| | $ | 1,088 |
|
| Sales and marketing | | 2,030 |
| | 914 |
| | 903 |
|
| Technology and development | | 3,318 |
| | 1,903 |
| | 1,014 |
|
| General and administrative | | 6,368 |
| | 3,801 |
| | 2,878 |
|
| Total stock-based compensation expense | | $ | 14,310 |
| | $ | 8,398 |
| | $ | 5,883 |
|
| | | | | | | | | | | | | | | | | |
| Year ended January 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Stock options | $ | 1,816 | | | $ | 4,499 | | | $ | 6,612 | |
| Restricted stock units | 37,693 | | | 28,040 | | | 25,781 | |
| Performance restricted stock units | 12,948 | | | 6,270 | | | 4,862 | |
| Restricted stock awards | 155 | | | 1,335 | | | 655 | |
| Performance restricted stock awards | 138 | | | 2,719 | | | 1,934 | |
| Total non-cash stock-based compensation expense | 52,750 | | | 42,863 | | | 39,844 | |
| Acquisition awards exchanged for cash | 342 | | | — | | | 5,580 | |
| Total stock-based compensation expense | $ | 53,092 | | | $ | 42,863 | | | $ | 45,424 | |
Stock optionsaward plans
Incentive Plan. The Company currently 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 optionsawards to the directors and team members of the Company to purchase up to an aggregate of 2.6 million shares of common stock.
In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing
through and including February 1, 2024, by 3% of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors. As of January 31, 2018, 1.82022, 7.4 million shares were available for grant under the Incentive Plan.
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-based awards.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)(1) the expected life of the option, 2)(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)(3) risk-free interest rate, and 4)(4) expected dividends.
No options were granted during the fiscal year ended January 31, 2022. The weighted-average fair value of options granted during the fiscal years ended January 31, 2021 and 2020 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 years ended January 31, 2018, 2017 and 2016 arewere as follows: | | | | | | | | | | | | | | | | | |
| | Year ended January 31, |
| | 2022 | | 2021 | | 2020 |
| Expected dividend yield | n/a | | 0% | | 0% |
| Expected stock price volatility | n/a | | 37.97% | | 35.98% - 36.53% |
| Risk-free interest rate | n/a | | 1.39% | | 2.21% - 2.43% |
| Expected life of options | n/a | | 5.18 years | | 4.95 - 5.09 years |
|
| | | | | | | | | |
| | | Year ended January 31, | |
| | | 2018 |
| | 2017 |
| | 2016 |
|
| Expected dividend yield | | — | % | | — | % | | — | % |
| Expected stock price volatility | | 37.79% - 38.01% |
| | 38.01% - 38.37% |
| | 38.29% - 40.29% |
|
| Risk-free interest rate | | 1.18% - 2.07% |
| | 1.18% - 2.18% |
| | 1.47% - 1.80% |
|
| Expected life of options | | 4.50 - 6.25 years |
| | 4.50 - 6.25 years |
| | 5.43 - 6.25 years |
|
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
The determination of the fair value of stock options on the date of grant using the Black-Scholes option pricing model is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatility is determined using a weighted average volatility of publicly traded peer companies. The Company expects that it will begin using itscompanies and the Company's own historical volatility in addition to the volatility of publicly traded peer companies, as its share price history grows over time.volatility. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options. The dividend yield of zero is based on the fact that the Company expectshas no current plans to invest cash in operations. The Company uses the "simplified" method to estimate expected term as determined under Staff Accounting Bulletin No. 110 due to the lack of option exercise history as a public company.pay dividends on its common stock.
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, 2017 | | 4,716 |
| | $0.10 - 44.53 | | $ | 18.36 |
| | 7.60 | | $ | 131,529 |
|
| Granted | | 420 |
| | $41.28 - 51.44 | | $ | 42.72 |
| |
| |
|
| Exercised | | (1,272 | ) | | $0.10 - 46.40 | | $ | 11.45 |
| |
| |
|
| Forfeited | | (165 | ) | | $3.50 - 46.40 | | $ | 33.39 |
| |
| |
|
| Outstanding as of January 31, 2018 | | 3,699 |
| | $0.10 - 51.44 | | $ | 22.83 |
| | 7.26 | | $ | 102,796 |
|
| Vested and expected to vest as of January 31, 2018 | | 3,699 |
| |
| | $ | 22.83 |
| | 7.26 | | $ | 102,796 |
|
| Exercisable as of January 31, 2018 | | 1,125 |
| |
| | $ | 16.57 |
| | 6.49 | | $ | 38,319 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021 | 1,674 | | | $1.25 - 82.39 | | $ | 31.46 | | | 5.00 | | $ | 87,164 | |
| Exercised | (442) | | | $1.25 - 44.53 | | $ | 19.81 | | | | | |
| Outstanding as of January 31, 2022 | 1,232 | | | $1.25 - 82.39 | | $ | 35.64 | | | 4.20 | | $ | 25,719 | |
| Vested and expected to vest as of January 31, 2022 | 1,232 | | | | | $ | 35.64 | | | 4.20 | | $ | 25,719 | |
| Exercisable as of January 31, 2022 | 1,148 | | | | | $ | 33.09 | | | 4.00 | | $ | 25,719 | |
The aggregate intrinsic value in the tablestable above represents the difference between the estimated fair value of common stock and the exercise price of outstanding, in-the-money stock options.
A summary The total intrinsic value of stock options grantedexercised during the fiscal years ended January 31, 2022, 2021 and exercised is as follows:
|
| | | | | | | | | | | | |
| | Year ended January 31, | |
| (in thousands, except weighted-average fair value) | | 2018 |
| | 2017 |
| | 2016 |
|
| Stock options granted | | 420 |
| | 1,399 |
| | 1,093 |
|
| Weighted-average fair value at date of grant | | $ | 42.72 |
| | $ | 28.85 |
| | $ | 27.34 |
|
| Total intrinsic value of stock options exercised | | $ | 44,823 |
| | $ | 50,094 |
| | $ | 51,773 |
|
As of January 31, 2018 and 2017, 1.1 million and 1.5 million of all outstanding options were exercisable, respectively. The options are valued at their estimated fair market value as of the date of the grant.
As of January 31, 2018,2022, the weighted-average vesting period of non-vested stock-optionsawards expected to vest approximates 2.0is approximately 0.7 years; the amount of compensation expense the Company expects to recognize for stock options vesting in future periods approximates $17.6is approximately $1.1 million.
Performance options. During the year ended January 31, 2015, the Company granted 1.5 million performance-based stock options, respectively, to certain key team members under the Incentive Plan, which vest upon the achievement of certain performance criteria. The performance-based stock options vest upon the attainment of the following performance criteria: (a) 10% of the stock options vest upon attainment of at least $34.5 million in Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") for the year ended January 31, 2016, (b) 20% of the stock options vest upon the attainment of an annual growth rate of Adjusted EBITDA per share of common stock of 30% for the year ended January 31, 2017, (c) 30% of the stock options vest upon the attainment of an annual growth rate of Adjusted EBITDA per share of common stock of 30% for the year ended January 31, 2018, and (d) 40% of the stock options vest upon the attainment of an annual growth rate of Adjusted EBITDA per share of common stock of 25% for the year ended January 31, 2019. During the year ended January 31, 2016, the
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 9. Stock-based compensation (continued)
Company achieved the $34.5 million Adjusted EBITDA performance criteria and as such, 10% of the performance-based stock options outstanding as of January 31, 2016 became vested. During the year ended January 31, 2017, the Company achieved the annual growth rate of Adjusted EBITDA per share of common stock of 30% and as such 20% of the performance-based stock options outstanding as January 31, 2017 became vested. Subsequent to the year ended January 31, 2017, the two remaining vesting criteria were amended to vest based upon the attainment of a compound annual growth rate of Adjusted EBITDA per share of common stock of 35% as compared to the year ended January 31, 2016 Adjusted EBTIDA target of $34.5 million, or $0.61 per common share. During the year ended January 31, 2018, the Company achieved the third performance criteria and as such 30% of the performance-based stock options outstanding as of January 31, 2018 became vested.
During the years ended January 31, 2018, 2017 and 2016, the Company recorded compensation expense of $1.4 million, $1.7 million and $2.5 million, respectively, related to the performance-based options based on the Company's probability assessment of attaining its Adjusted EBITDA targets, and Adjusted EBITDA per common share growth rates.
Restricted stock units and restricted stock awards
The Company grants restricted stock units ("RSUs")RSUs and RSAs to certain team members, officers, and directors under the 2014 Equity Incentive Plan. RSUs and RSAs vest upon service-based criteria and performance-based criteria. Generally, service-based RSUs and RSAs vest over a four-year period in equal annual installments commencing upon the first anniversary of the grant date. RSUs and RSAs are valued based on the current value of the Company's closing stock price on the date of grant less the present value of future expected dividends discounted at the risk-free interest rate. Stock-based compensation expense related toThe weighted-average fair value of RSUs excluding PRSUs, forgranted during the fiscal years ended January 31, 20182022, 2021 and 20172020 was $3.3 million$64.87, $56.93 and $233,000,$65.20 per share, respectively.
Performance restricted stock units. In March 2017,units and awards. During the fiscal year ended January 31, 2020, the Company awarded 146,964 performance-based RSUs ("PRSUs") with an estimated grant date fair value of $6.1 million. Vesting of the129,963 PRSUs is dependent upon the achievement of certain financial criteria and cliff vest on January 31, 2020.(the “FY20 PRSUs”). The Company recordsrecorded stock-based compensation related to the FY20 PRSUs when it iswas considered probable that the performance conditions willwould be met. In March 2020, the Compensation Committee modified the vesting conditions of the FY20 PRSUs by basing the first year of the award solely on the Company’s revenue CAGR for the first year, exclusive of the revenue recognized through the WageWorks Acquisition, and measured using the original revenue CAGR targets set by the Compensation Committee in respect of such awards. As a result, one-third of the FY20 PRSUs were deemed by the Compensation Committee to be earned at target; however, despite this determination, and in order to encourage retention of our executive officers, our executive officers were required to remain employed until the remaining performance conditions for the FY20 PRSUs were certified by the Compensation Committee. The remaining two-thirds of the FY20 PRSUs vested based on the Company’s net cash provided by operating activities (as defined under GAAP) relative to target given the importance of the Company believes it is probably thatgenerating sufficient cash flow to service the additional indebtedness incurred in connection with the WageWorks Acquisition. The modification affected 12 team members and resulted in incremental stock-based compensation expense of $6.6 million, which was recognized over the remaining service period, adjusted for the level of achievement of the performance conditions and any forfeitures. Prior to the modification, the Company did not believe the FY20 PRSUs willwere likely to vest, at least in part.and as a result, $2.9 million of previously recorded stock-based compensation expense was reversed during the three months ended April 30, 2020. The vestingmodified performance conditions for the second and third tranches allowed for a range of PRSUs will ultimately rangevesting from 0% to 150% of the number of shares underlying the PRSU grant200% based on the level of achievement of the new performance goals. Duringconditions. The Company's actual net cash provided by operating activities for the fiscal year ended January 31, 2018,2022 was below the threshold level of achievement, and for the fiscal year ended January 31, 2021 was 163% of the target level of achievement. Previously recorded stock-based compensation expense associated with FY20 PRSUs that did not vest was reversed during the fiscal year ended January 31, 2022 when it was no longer considered probable that the performance conditions would be met. The FY20 PRSUs cliff vested upon approval by the Compensation Committee, which occurred in March 2022.
During the fiscal year ended January 31, 2021, the Company awarded 277,950 PRSUs subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2023. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was approximately $20.8 million. Compensation expense is recorded compensationif the service condition is met regardless of whether the market condition is satisfied. The market condition allows for a range of vesting from 0% to 200% based on the level of performance achieved. The PRSUs cliff vest upon approval by the Compensation Committee.
During the fiscal year ended January 31, 2022, the Company awarded 249,750 PRSUs subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2024. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was approximately $22.4 million. Compensation expense is recorded if the service condition is met regardless of $1.8 million relatedwhether the market condition is satisfied. The market condition allows for a range of vesting from 0% to PRSUs.200% based on the level of performance achieved. The PRSUs cliff vest upon approval by the Compensation Committee.
A summary of all restricted stock unitthe RSU and RSA activity is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| RSUs and PRSUs | | RSAs and PRSAs |
| (in thousands, except weighted-average grant date fair value) | Shares | | Weighted-average grant date fair value | | Shares | | Weighted-average grant date fair value |
| Outstanding as of January 31, 2021 | 1,832 | | | $ | 60.41 | | | 193 | | | $ | 61.77 | |
| Granted | 1,827 | | | 64.87 | | | — | | | — | |
| Vested | (482) | | | 59.60 | | | (116) | | | 61.77 | |
| Forfeited | (437) | | | 62.81 | | | (75) | | | 61.77 | |
| Outstanding as of January 31, 2022 | 2,740 | | | $ | 63.15 | | | 2 | | | $ | 61.72 | |
During the fiscal years ended January 31, 2022, 2021 and 2020 the aggregate intrinsic value of RSUs and RSAs vested was $40.9 million, $31.8 million, and $25.0 million, respectively. |
| | | | | | | |
| (in thousands, except weight-average grant date fair value) | | Shares |
| | Weighted-average grant date fair value |
|
| Unvested at January 31, 2017 | | 10 |
| | $ | 26.93 |
|
| Granted | | 468 |
| | 44.61 |
|
| Vested | | (15 | ) | | 36.74 |
|
| Forfeitures | | (12 | ) | | 46.41 |
|
| Unvested at January 31, 2018 | | 451 |
| | $ | 44.10 |
|
Total unrecorded stock-based compensation expense as of January 31, 20182022 associated with RSUs includingand PRSUs was $15.1$123.0 million,, which is expected to be recognized over a weighted-average period of 2.9 years.2.5 years. Total unrecorded stock-based compensation expense as of January 31, 2022 associated with RSAs and PRSAs was less than $0.1 million, which is expected to be recognized over a weighted-average period of 0.2 years.
Note 10. 11. Fair value
Fair value measurements—Fair value measurements are made at a specific point in time, based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 10. Fair value (Continued)
obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:
•Level 1—quoted prices in active markets for identical assets or liabilities;
•Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3—unobservable inputs based on the Company’s own assumptions.
Cash and cash equivalents are considered Level 1 instruments and are valued based on publicly available daily net asset values. Level 1 instruments consist primarily of highly liquid mutual funds.
The following tables summarizes the assets measured at fair value on a recurring basis and indicates the level within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value:
|
| | | | | | | | | | | | |
| | January 31, 2018 | |
| (in thousands) | | Level 1 |
| | Level 2 |
| | Level 3 |
|
| Marketable securities: | |
|
| |
| |
|
| Mutual funds | | $ | 40,797 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | |
| | January 31, 2017 | |
| (in thousands) | | Level 1 |
| | Level 2 |
| | Level 3 |
|
| Marketable securities: | |
|
| |
| |
|
| Mutual funds | | $ | 40,405 |
| | $ | — |
| | $ | — |
|
The carrying valuevalues of financial instruments including cash and cash equivalents and certain non-trade receivables approximate fair values as of January 31, 2018 due to the short-term nature of these instruments.
The Company has classified cashNotes are valued based upon quoted market prices and cash equivalents as Level 1 and certain non-trade receivables asare considered Level 2 instruments because the markets in which the Notes trade are not considered active markets. As of January 31, 2022, the fair value of the Notes was $588.4 million.
The Term Loan Facility is considered a Level 2 instrument and recorded at book value in the Company's consolidated financial statements. The Term Loan Facility reprices frequently due to variable interest rate terms and entails no significant changes in credit risk. As a result, the fair value of the Term Loan Facility approximates carrying value.
The Prior Term Loan Facility was considered a Level 2 instrument and recorded at book value in the Company's consolidated financial statements. The Prior Term Loan Facility repriced frequently due to variable interest rate terms and entailed no significant changes in credit risk. As a result, the fair value of the Prior Term Loan Facility approximated carrying value.
The contingent consideration liability resulting from the Luum Acquisition was determined using a Monte Carlo valuation model based on Level 3 inputs. The estimate of fair value of the contingent consideration obligation required subjective assumptions to be made regarding revenue growth rates, discount rates, peer revenue volatilities, and probabilities assigned to various potential business result scenarios and was determined using probability assessments with respect to the likelihood of achieving certain revenue targets. The fair value measurement was based on inputs unobservable in the market and thus represented a level 3 measurement. On October 31, 2021, the Company entered into an amendment to the purchase agreement to pay $6.0 million in satisfaction of the contingent consideration liability, and accordingly, the liability was transferred out of Level 3 as it was no longer measured at fair value. For further information, see Note 3—Business combination.
The following table reconciles the change in the fair value hierarchy.of the contingent consideration during the fiscal year ended January 31, 2022:
| | | | | |
| (in thousands) | Carrying amount |
| Balance as of January 31, 2021 | $ | — | |
| Contingent consideration recognized at acquisition | 8,147 | |
| Change in fair value recognized in the consolidated statement of operations and comprehensive income (loss) | (2,147) | |
| Payments | (6,000) | |
| Balance as of January 31, 2022 | $ | — | |
Note 11. 12. Employee benefits
The Company has established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All non-seasonal team members over the age of 21 are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 3.5% of eligible earnings. Employer contributions vest 25% each year of employment. 401(k) plan administrativematching contribution expense was $25,000, $15,000$7.1 million, $6.5 million and $16,000$3.7 million for the fiscal years ended January 31, 2018, 20172022, 2021 and 2016, respectively. Employer matching contribution expense was $1.4 million, $916,000 and $626,000 for the years ended January 31, 2018, 2017 and 2016,2020, respectively.
Beginning on January 1, 2017, theThe Company is self-insured for medical and dental benefits for all qualifying employees. The medical plan carries a stop-loss policy which will protect from individual claims during the plan year exceeding $110,000.$350,000. The Company records estimates of costs of claims incurred based on an analysis of historical data and independent estimates. The Company's liability for self-insured medical claims is included in accrued compensation in its consolidated balance sheet and was $1.7$3.9 million and $3.5 million as of January 31, 2018.2022 and 2021, respectively.
Note 13. Subsequent events
On March 2, 2022, the Company completed its acquisition of the Health Savings Administrators, L.L.C. HSA portfolio for $60 million in cash.
HealthEquity, Inc. and subsidiaries
Notes to consolidated financial statements
Note 12. Supplementary quarterly financial data (unaudited)
|
| | | | | | | | | | | | |
| Three months ended | |
| (in thousands, except for per share amounts) | January 31, 2018 |
| October 31, 2017 |
| July 31, 2017 |
| April 30, 2017 |
|
| Total revenue | $ | 60,436 |
| $ | 56,789 |
| $ | 56,879 |
| $ | 55,421 |
|
| Total cost of revenue | 28,790 |
| 23,062 |
| 21,077 |
| 21,680 |
|
| Gross profit | 31,646 |
| 33,727 |
| 35,802 |
| 33,741 |
|
| Total operating expenses | 23,212 |
| 20,165 |
| 19,307 |
| 17,814 |
|
| Total other expense | (1,706 | ) | (395 | ) | (38 | ) | (90 | ) |
| Income tax provision (benefit) | 823 |
| 2,685 |
| (489 | ) | 1,808 |
|
| Net income | $ | 5,905 |
| $ | 10,482 |
| $ | 16,946 |
| $ | 14,029 |
|
| Net income per share: |
|
|
|
|
Basic (1) | $ | 0.10 |
| $ | 0.17 |
| $ | 0.28 |
| $ | 0.23 |
|
Diluted (1) | $ | 0.09 |
| $ | 0.17 |
| $ | 0.27 |
| $ | 0.23 |
|
|
|
|
|
|
| Three months ended | |
| (in thousands, except for per share amounts) | January 31, 2017 |
| October 31, 2016 |
| July 31, 2016 |
| April 30, 2016 |
|
| Total revenue | $ | 46,814 |
| $ | 43,358 |
| $ | 44,185 |
| $ | 44,013 |
|
| Total cost of revenue | 22,585 |
| 17,467 |
| 15,631 |
| 16,332 |
|
| Gross profit | 24,229 |
| 25,891 |
| 28,554 |
| 27,681 |
|
| Total operating expenses | 18,048 |
| 16,849 |
| 15,815 |
| 14,431 |
|
| Total other expense | (158 | ) | (256 | ) | (37 | ) | (641 | ) |
| Income tax provision | 1,961 |
| 2,778 |
| 4,469 |
| 4,536 |
|
| Net income | $ | 4,062 |
| $ | 6,008 |
| $ | 8,233 |
| $ | 8,073 |
|
| Net income per share: |
|
|
|
|
| Basic | $ | 0.07 |
| $ | 0.10 |
| $ | 0.14 |
| $ | 0.14 |
|
Diluted (1) | $ | 0.07 |
| $ | 0.10 |
| $ | 0.14 |
| $ | 0.14 |
|
(1) Net income per share amounts do not sum to equal full year total due to changes in the number of shares outstanding during the periods and rounding.
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management,Management, with the participation of ourthe Company’s Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated the effectiveness of ourthe Company’s disclosure controls and procedures as of January 31, 2018,2022, the end of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensureprovide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on such evaluation, our Chief Executive OfficerCEO and Chief Financial Officerour CFO have concluded that as of January 31, 2018, our2022, the Company's disclosure controls and procedures were not effective atbecause of the reasonable assurance level.material weaknesses in internal control over financial reporting described below.
Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses described below, management has concluded that the consolidated financial statements included elsewhere in this Annual Report on Form 10-K present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.
In accordance with interpretive guidance issued by SEC staff, companies are allowed to exclude acquired businesses from the assessment of internal control over financial reporting during the first year after completion of an acquisition and from the assessment of disclosure controls and procedures to the extent subsumed in such internal control over financial reporting. In accordance with this guidance, as the Company acquired Luum on March 8, 2021, and Further on November 1, 2021, management's evaluation and conclusion as to the effectiveness of the Company's disclosure controls and procedures as of January 31, 2022 excluded the portion of disclosure controls and procedures that are subsumed by internal control over financial reporting of Luum and Further. The balances resulting from these acquisitions represented less than 1% of assets and approximately 3% of revenues, excluding the effects of purchase accounting, of the Company's consolidated total assets and consolidated total revenues as of and for the fiscal year ended January 31, 2022.
Management's report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in RuleRules 13a-15(f) and 15d-15(f) of the Exchange Act. OurThe Company’s internal control over financial reporting wasis designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation ofassessed the effectiveness of ourthe Company’s internal control over financial reporting as of January 31, 2018. In making this assessment, we used2022 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013)(“COSO Framework”).
Based on this evaluation under the frameworkthat assessment, management has concluded that, as of January 31, 2022, due to material weaknesses in Internal Control - Integrated Framework (2013) issued by the COSO, management concludedinternal control over financial reporting the Company’s internal control over financial reporting was effectivenot effective.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
In accordance with interpretive guidance issued by SEC staff, management has excluded Luum and Further from its assessment of internal control over financial reporting as of January 31, 2018.2022, as the Company acquired Luum and Further during the fiscal year ended January 31, 2022. The balances resulting from these acquisitions represented less than 1% of assets and approximately 3% of revenues, excluding the effects of purchase accounting, of the Company's consolidated total assets and consolidated total revenues as of and for the fiscal year ended January 31, 2022.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has also audited the effectiveness of the Company’s internal control over financial reporting as of January 31, 2018.2022. Its report appears in Part II, Item 8 of this Annual Report on Form 10-K.
ChangesAs previously disclosed, management identified certain deficiencies in the Company’s internal control over financial reporting that aggregated to material weaknesses in the following areas:
There wasA. Contract to Cash Process
The Company did not have effective controls around the contract-to-cash life cycle of service fees, including ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements that require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, availability of customer contracts, and reviews of non-standard contracts.
B. Information Technology General Controls
The Company did not have effective controls related to information technology general controls ("ITGCs") in the areas of logical access and change management over certain information technology systems that supported its financial reporting processes. The Company’s business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.
These material weaknesses resulted in material misstatements of WageWorks' historical financial statements, which preceded the WageWorks Acquisition, and could result in a misstatement of our account balances or disclosures that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.
Remediation of Previously Reported Material Weakness
As previously reported, the WageWorks subsidiary had material weaknesses related to its risk assessment, information and communication, control activities, and monitoring components of the COSO Framework. Additionally, WageWorks had a material weakness related to inadequate process level and monitoring controls in the area of accounting close and financial reporting.
During the year ended January 31, 2022, the Company completed the following remedial actions designed to address the previously identified material weaknesses in the COSO Framework components:
•incorporated certain WageWorks processes into the Company’s existing entity-level controls;
•performed its recurring risk assessment and scoping of key systems and business processes, including a risk assessment at the financial statement assertion level to ensure that the level of precision of relevant controls is adequate to address the identified risks;
•dedicated certain senior finance, accounting, operational, and IT leadership team members to work on remediation efforts and appointed third-party internal controls advisors to assist with such efforts;
•implemented a periodic assessment to monitor business changes impacting accounting processes and controls;
•reported periodic updates of the remediation plan progress to the Audit and Risk Committee of the Company's board of directors;
•formalized documentation underlying processes and controls to promote knowledge and information transfer across functions and upon personnel changes; and
•monitored the operating effectiveness of the existing entity-level controls.
During the year ended January 31, 2022, the Company completed the following remedial actions designed to address the previously identified material weaknesses in accounting close and financial reporting:
•incorporated certain WageWorks processes into the Company’s process-level controls, including, but not limited to, those that address the monitoring of the accounting close cycle and enhanced the evaluation of accounting policies;
•redesigned certain processes and controls in conjunction with the enterprise resource planning (“ERP”) system migration described below;
•enhanced the design of existing controls, where applicable, and implemented additional controls to further strengthen the control environment;
•formalized the assessment of the relevancy of information and data used in key controls, including the design or augmentation of controls to incorporate the review of the accuracy and completeness of such items; and
•monitored the operating effectiveness of the process-level and redesigned controls.
Management evaluated the design and operating effectiveness of the entity level and process level controls associated with the remediation activities above. Management has concluded that such controls are operating effectively, and that the previously reported material weaknesses in the COSO Framework components and accounting close and financial reporting have been remediated as of January 31, 2022.
Ongoing Integration and Remediation Efforts
In response to the material weakness "A. Contract to Cash Process", management has taken the following actions:
•continued to execute its plan to consolidate service platforms related to the contract-to-cash cycle, which will reduce a significant number of manual business process controls;
•enhanced the design of existing controls including information and data used in controls, where applicable, and are implementing additional controls to further strengthen the control environment; and
•implemented a process to assess the design and monitor the operating effectiveness of the new and redesigned controls.
In response to the material weakness "B. Information Technology General Controls", management has taken the following actions:
•continued to execute its plan to consolidate service platforms, which will reduce the number of ITGCs in the area of logical access and change management;
•enhanced the design of existing controls, where applicable, and implemented additional controls to further strengthen the control environment; and
•implemented a process to assess and enhance the design and monitor the operating effectiveness of controls related to logical access and change management for relevant applications and systems.
As part of our integration efforts, we have migrated all of our material operations to a single ERP system for the consolidated Company which enhanced our business and financial processes and standardized our information systems. We have re-assessed risks in response to the ERP system migration and the associated changes to underlying processes. We redesigned certain controls in response to the current risks and evaluated the operating effectiveness of the redesigned controls.
As we continue to evaluate operating effectiveness and monitor improvements to our internal control over financial reporting, we may take additional measures to address control deficiencies or modify the remediation plans described above.
Changes in Internal Control Over Financial Reporting
Other than as described above, there were no changechanges in ourthe Company’s internal control over financial reporting identified in connection with the evaluation required by RuleRules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended January 31, 20182022 that has materially affected, or is reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Item 9B. Other information
None.
Item 9C. Disclosure regarding foreign jurisdictions that prevent inspections
Not applicable.
PART III.
Item 10. Directors, executive officers and corporate governance
The information required by this Item 10 of Form 10-K is found in our 20182022 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company's 20182022 Annual Meeting of Stockholders is incorporated by reference to our 20182022 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year to which this report relates.
Code of business conduct and ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our team members, officers and directors, including our Chief Executive Officer, Chief Financial Officer, and other executive and senior financial officers. The full text of our Code of Business Conduct and Ethics is posted on our website at www.healthequity.com in the Corporate Governance section of our Investor Relations webpage. We intend to post any amendments to our Code of Business Conduct and Ethics, and any waivers of our Code of Business Conduct and Ethics for directors and executive officers, on the same website.
Item 11. Executive compensation
The information required by this Item 11 of Form 10-K is incorporated by reference in our 20182022 Proxy Statement.
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters
The information required by this Item 12 of Form 10-K is incorporated by reference in our 20182022 Proxy Statement.
Item 13. Certain relationships and related transactions, and director independence
The information required by this Item 13 of Form 10-K is incorporated by reference in our 20182022 Proxy Statement.
Item 14. Principal accounting fees and services
The information required by this Item 14 of Form 10-K is incorporated by reference in our 20182022 Proxy Statement.
Part IV.
Item 15. Exhibits, financial statement schedules
(a) Documents filed as part of this report
(1) All financial statements
|
| | | | |
| Index to consolidated financial statements | Page |
| |
| |
| |
| |
| |
| |
(2) Financial statement schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
(3) Exhibits required by Item 601 of Regulation S-K
Exhibit Index | | | | | | | | | | | | | | | | | | | | |
| | | Incorporated by reference |
Exhibit
no. | | Description | Form | File No. | Exhibit | Filing Date |
| 3.1 | | | 8-K | 001-36568 | 3.2 | July 6, 2018 |
| 3.2 | | | 8-K | 001-36568 | 3.4 | July 6, 2018 |
| 4.1 | | | 10-K | 001-36568 | 4.1 | March 31, 2020 |
| 4.2 | | | S-1/A | 333-196645 | 4.1 | July 16, 2014 |
| 4.3 | | | S-1 | 333-196645 | 4.2 | June 10, 2014 |
| 4.4 | | | 8-K | 001-36568 | 4.1 | October 12, 2021 |
| 10.1 | | | S-1/A | 333-196645 | 10.1 | July 16, 2014 |
| 10.2† | | | S-1 | 333-196645 | 10.2 | June 10, 2014 |
| 10.3† | | | S-1/A | 333-196645 | 10.3 | July 16, 2014 |
| 10.4† | | | 8-K | 001-36568 | 10.3 | August 30, 2019 |
| 10.5† | | | 10-Q | 001-36568 | 10.4 | December 6, 2018 |
| 10.6† | | | 10-K | 001-36568 | 10.30 | March 28, 2019 |
| 10.7† | | | 8-K | 001-36568 | 10.2 | August 30, 2019 |
| 10.8† | | | S-1 | 333-173709 | 10.3 | July 19, 2011 |
| 10.9† | | | S-1 | 333-196645 | 10.23 | June 10, 2014 |
| 10.10† | | | S-1 | 333-196645 | 10.24 | June 10, 2014 |
| 10.11† | | | 10-Q | 001-36568 | 10.2 | June 4, 2020 |
| 10.12† | | | S-1 | 333-196645 | 10.25 | June 10, 2014 |
| 10.13† | | | S-1 | 333-196645 | 10.26 | June 10, 2014 |
| 10.14† | | | 10-Q | 001-36568 | 10.1 | September 9, 2020 |
| 10.15† | | | 8-K | 001-36568 | 10.1 | April 1, 2021 |
| 10.16† | | | 10-Q | 001-36568 | 10.1 | September 6, 2018 |
| 10.17+ | | | | | | |
|
| | | | | | |
| | | | Incorporate by reference |
Exhibit no. | | Description | Form | File No. | Exhibit | Filing Date |
| 3.1 | | | S-1/A | 333-196645 | 3.2 | July 16, 2014 |
| 3.2 | | | S-1/A | 333-196645 | 3.4 | July 16, 2014 |
| 4.1 | | | S-1/A | 333-196645 | 4.1 | July 16, 2014 |
| 4.2 | | | S-1 | 333-196645 | 4.2 | June 10, 2014 |
| 10.1 | | | S-1/A | 333-196645 | 10.1 | July 16, 2014 |
| 10.2† | | | S-1 | 333-196645 | 10.2 | June 10, 2014 |
| 10.3† | | | S-1/A | 333-196645 | 10.3 | July 16, 2014 |
| 10.4† | | | S-1 | 333-196645 | 10.4 | June 10, 2014 |
| 10.5† | | | S-1 | 333-196645 | 10.5 | June 10, 2014 |
| 10.6† | | | S-1 | 333-196645 | 10.6 | June 10, 2014 |
| 10.7† | | | S-1 | 333-196645 | 10.7 | June 10, 2014 |
| 10.8† | | | S-1 | 333-196645 | 10.8 | June 10, 2014 |
| 10.9† | | | S-1 | 333-196645 | 10.12 | June 10, 2014 |
| 10.11† | | | S-1 | 333-196645 | 10.13 | July 16, 2014 |
| 10.12† | | | S-1 | 333-196645 | 10.23 | June 10, 2014 |
| 10.13† | | | S-1 | 333-196645 | 10.24 | June 10, 2014 |
| 10.14† | | | S-1 | 333-196645 | 10.25 | June 10, 2014 |
| 10.15† | | | S-1 | 333-196645 | 10.26 | June 10, 2014 |
| 10.16† | | | S-1 | 333-196645 | 10.27 | July 16, 2014 |
| 10.17 | | | 10-Q | 001-36568 | 10.1 | June 11, 2015 |
| 10.18 | | | 10-Q | 001-36568 | 10.2 | June 11, 2015 |
| 10.19† | | | 10-Q | 001-36568 | 10.1 | September 10, 2015 |
| 10.20† | | | 8-K | 001-36568 | 10.1 | September 30, 2015 |
| | | | | | | | | | | | | | | | | | | | |
| | | Incorporated by reference |
Exhibit
no. | | Description | Form | File No. | Exhibit | Filing Date |
| 10.18+ | | | | | | |
| 10.19 | | | 10-Q | 001-36568 | 10.1 | June 11, 2015 |
| 10.20 | | | 10-Q | 001-36568 | 10.2 | June 11, 2015 |
| 10.21 | |
| 10-Q | 001-36568 | 10.1 | December 8, 2016 |
| 10.22 | |
| 10-Q | 001-36568 | 10.1 | June 8, 2017 |
| 10.23 | |
| 10-Q | 001-36568 | 10.2 | December 8, 2016 |
| 10.24 | |
| 10-Q | 001-36568 | 10.2 | June 8, 2017 |
| 10.25 | | | 10-K | 001-36568 | 10.31 | March 28, 2019 |
| 10.26 | | | 10-Q | 001-36568 | 10.1 | December 6, 2018 |
| 10.27 | | | 10-Q | 001-36568 | 10.2 | December 6, 2018 |
| 10.28 | | | 10-Q | 001-36568 | 10.3 | December 6, 2018 |
| 10.29† | | | S-1 | 333-173709 | 10.1 | July 19, 2011 |
| 10.30 | | | 8-K | 001-36568 | 10.1 | October 12, 2021 |
| 10.31 | | | 8-K | 001-36568 | 2.1 | April 27, 2021 |
| 10.32 | | | 8-K | 001-36568 | 2.1 | September 8, 2021 |
| 10.33+ | | | | | | |
| 21.1+ | | | | | | |
| 23.1+ | | | | | | |
| 24.1+ | | | | | | |
|
| | | | | | |
| | | | Incorporate by reference |
Exhibit no. | | Description | Form | File No. | Exhibit | Filing Date |
| 10.21 | | | 8-K | 001-36568 | 10.1 | October 6, 2015 |
| 10.22 | | | 8-K | 001-36568 | 10.1 | October 26, 2015 |
| 10.23 | |
| 10-Q | 001-36568 | 10.2 | December 8, 2016 |
| 10.24 | |
| 10-Q | 001-36568 | 10.2 | June 8, 2017 |
| 10.25+ | | | | | | |
| 21.1 | | | 10-Q | 001-36568 | 21.1 | June 8, 2017 |
| 23.1+ | | | | | | |
| 24.1+ | | | | | | |
| 31.1+ | | | | | | |
| 31.2+ | | | | | | |
| 32.1*# | | | | | | |
| 32.2*# | | | | | | |
| 101.INS†† | | XBRL Instance document | | | | |
| 101.SCH†† | | XBRL Taxonomy schema linkbase document | | | | |
| 101.CAL†† | | XBRL Taxonomy calculation linkbase document | | | | |
| 101.DEF†† | | XBRL Taxonomy definition linkbase document | | | | |
| 101.LAB†† | | XBRL Taxonomy labels linkbase document | | | | |
| 101.PRE†† | | XBRL Taxonomy presentation linkbase document | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | |
+ | | Filed herewithIncorporated by reference |
*Exhibit
no. | | Furnished herewithDescription | Form | File No. | Exhibit | Filing Date |
#31.1+ | | | | | | |
| 31.2+ | | | | | | |
| 32.1*# | | | | | | |
| 32.2*# | | | | | | |
| 101.INS†† | | XBRL Instance document | | | | |
| 101.SCH†† | | XBRL Taxonomy schema linkbase document | | | | |
| 101.CAL†† | | XBRL Taxonomy calculation linkbase document | | | | |
| 101.DEF†† | | XBRL Taxonomy definition linkbase document | | | | |
| 101.LAB†† | | XBRL Taxonomy labels linkbase document | | | | |
| 101.PRE†† | | XBRL Taxonomy presentation linkbase document | | | | |
| 104 | | The cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2022, formatted in Inline XBRL. | | | | |
| | | | | | | | |
| + | | Filed herewith |
| * | | Furnished herewith |
| # | | These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing the registrant makes under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. |
| † | | Indicates management contract or compensatory plan. |
††
| | In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
| ** | | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. HealthEquity hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC. |
Item 16. Form 10-K Summary
Not applicable.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Draper, State of Utah on this 28th31st day of March, 2018.
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| | | | | | | | | | |
| HEALTHEQUITY, INC. |
Date: March 28, 201831, 2022 | By: | | /s/ Jon Kessler |
| Name: | | Jon Kessler |
| Title: | | President and Chief Executive Officer |
Power of attorney
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below hereby constitutes and appoints Jon Kessler and Darcy Mott,Tyson Murdock, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, with full power of each to act alone, with full powers of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or her or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | | | | | | | |
| Date: March 31, 2022 | By: | | /s/ Robert Selander |
| Name: | | Robert Selander |
| Title: | | Chairman of the Board, Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Robert W. Selander |
| Name: | | Robert W. Selander |
| Title: | | Chairman of the Board, Director |
| | | |
Date: March 28, 2018 | By: | | /s/ Jon Kessler |
| Name: | | Jon Kessler |
| Title: | | President and Chief Executive Officer (Principal Executive Officer), Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Darcy MottTyson Murdock |
| Name: | | Darcy MottTyson Murdock |
| Title: | | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Frank A. Corvino |
| Name: | | Frank A. Corvino |
| Title: | | Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Adrian T. Dillon |
| Name: | | Adrian T. Dillon |
| Title: | | Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Evelyn Dilsaver |
| Name: | | Evelyn Dilsaver |
| Title: | | Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Frank T. MediciDebra McCowan |
| Name: | | Frank T. MediciDebra McCowan |
| Title: | | Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Stuart Parker |
| Name: | | Stuart Parker |
| Title: | | Director |
| | | |
| Date: March 31, 2022 | By: | | /s/ Stephen D.Neeleman |
| Name: | | Stephen Neeleman, M.D. |
| Name:Title: | | Stephen D. Neeleman, M.D.Vice Chairman and Director |
| Title: | | Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Ian Sacks |
| Name: | | Ian Sacks |
| Title: | | Director |
| | | |
Date: March 28, 201831, 2022 | By: | | /s/ Gayle Wellborn |
| Name: | | Gayle Wellborn |
| Title: | | Director |
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