What changed in this filing

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Item 1. Financial Statements

2020-09-09 compared with 2020-06-04 · 120 added, 170 removed, 336 unchanged (46% of the section changed)

3 unchanged sentences

Condensed consolidated balance sheets

(in thousands, except par value) April 30, 2020 January 31, 2020

(in thousands, except par value) July 31, 2020 January 31, 2020

Current assets

Cash and cash equivalents $ 268,910 $ 191,726

Accounts receivable, net of allowance for doubtful accounts of $ 1,681 and $ 1,216 as of April 30, 2020 and January 31, 2020, respectively

Accounts receivable, net of allowance for doubtful accounts of $ 1,954 and $ 1,216 as of July 31, 2020 and January 31, 2020, respectively

70,235 70,863

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Stockholders’ equity

Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2020 and January 31, 2020, respectively

Common stock, $ 0.0001 par value, 900,000 shares authorized, 71,398 and 71,051 shares issued and outstanding as of April 30, 2020 and January 31, 2020, respectively

Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively

Common stock, $ 0.0001 par value, 900,000 shares authorized, 76,872 and 71,051 shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively

Additional paid-in capital 1,127,136 818,774

6 unchanged sentences

Condensed consolidated statements of operations and

comprehensive income (unaudited)

Three months ended April 30,

comprehensive income (loss) (unaudited)

Three months ended July 31, Six months ended July 31,

(in thousands, except per share data) 2020 2019 2020 2019

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Total other income (expense) ( 9,719 ) ( 1,128 ) ( 22,746 ) 22,472

Income before income taxes 2,044 51,278

Income tax provision 218 9,456

Net income and comprehensive income $ 1,826 $ 41,822

Income (loss) before income taxes ( 691 ) 23,736 1,353 75,014

Income tax provision (benefit) ( 543 ) 4,370 ( 325 ) 13,826

Net income (loss) and comprehensive income (loss) $ ( 148 ) $ 19,366 $ 1,678 $ 61,188

Net income per share:

8 unchanged sentences

Condensed consolidated statements of stockholders’ equity (unaudited)

Three months ended April 30,

Three months ended July 31, Six months ended July 31,

(in thousands) 2020 2019 2020 2019

3 unchanged sentences

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

Other issuance of common stock 1 1 1 1

Ending balance 8 7 8 7

2 unchanged sentences

Issuance of common stock upon exercise of stock options, and for restricted stock 1,618 2,281 2,751 6,651

Other issuance of common stock 286,777 458,494 286,777 458,494

Stock-based compensation 11,438 7,590 18,834 13,618

2 unchanged sentences

Beginning balance 213,340 213,672 211,514 171,850

Net income 1,826 41,822

Net income (loss) ( 148 ) 19,366 1,678 61,188

Ending balance 213,192 233,038 213,192 233,038

4 unchanged sentences

Condensed consolidated statements of cash flows (unaudited)

Three months ended April 30,

Six months ended July 31,

(in thousands) 2020 2019

19 unchanged sentences

Cash flows from investing activities:

Purchases of marketable securities — ( 53,845 )

Purchases of property and equipment ( 8,987 ) ( 3,492 )

1 unchanged sentence

Acquisition of intangible member assets ( 24,922 ) ( 1,736 )

Purchases of marketable securities — ( 53,845 )

Net cash used in investing activities ( 55,696 ) ( 68,591 )

Cash flows from financing activities:

Proceeds from follow-on equity offering, net of payments for offering costs 287,318 458,881

Principal payments on long-term debt ( 215,625 ) —

Settlement of client-held funds obligation ( 3,776 ) —

Settlement of client-held funds obligation, net ( 10,292 ) —

Proceeds from exercise of common stock options 2,817 6,564

Net cash provided by (used in) financing activities ( 10,365 ) 4,229

Decrease in cash and cash equivalents ( 20,633 ) ( 32,165 )

Net cash provided by financing activities 64,218 465,445

Increase in cash and cash equivalents 77,184 453,685

Beginning cash and cash equivalents 191,726 361,475

Ending cash and cash equivalents $ 268,910 $ 815,160

See accompanying notes to condensed consolidated financial statements.

HealthEquity, Inc.

and subsidiaries

Condensed consolidated statements of cash flows (unaudited) (continued)

Six months ended July 31,

(in thousands) 2020 2019

Supplemental cash flow data:

2 unchanged sentences

Supplemental disclosures of non-cash investing and financing activities:

Purchases of property and equipment included in accounts payable or accrued liabilities $ 1,104 $ 3

Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 1,262 487

Purchases of intangible member assets 58 6,500

Additions to goodwill due to measurement period adjustments 1,177 —

Exercise of common stock options receivable 66 87

Purchases of property and equipment included in accounts payable or accrued liabilities at period end 968 21

Purchases of software and capitalized software development costs included in accounts payable or accrued liabilities at period end 1,537 158

Follow-on equity offering costs accrued during the period 540 386

Debt issuance costs accrued during the period — 345

See accompanying notes to condensed consolidated financial statements.

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HealthEquity, Inc.

was incorporated in the state of Delaware on September 18, 2002.

HealthEquity, Inc.

is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers.

("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002.

HealthEquity is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers.

Principles of consolidation

The condensed consolidated financial statements include the accounts of HealthEquity, Inc., and its direct and indirect subsidiaries.

The condensed consolidated financial statements include the accounts of HealthEquity and its direct and indirect subsidiaries.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of presentation

The accompanying condensed consolidated financial statements as of April 30, 2020 and for the three months ended April 30, 2020 and 2019 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting.

The accompanying condensed consolidated financial statements as of July 31, 2020 and for the three and six months ended July 31, 2020 and 2019 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting.

In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods.

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Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Follow-on equity offering

In July 2020, the Company closed a follow-on public offering of 5,290,000 shares of common stock at a public offering price of $ 56.00 per share, less the underwriters' discount.

The Company received net proceeds of approximately $ 286.8 million after deducting underwriting discounts and commissions of approximately $ 8.9 million and other offering expenses payable by the Company of approximately $ 0.6 million.

The Company used $ 200.0 million of such proceeds to repay debt under its term loan facility.

Significant accounting policies

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The Company adopted the new standard as of February 1, 2020.

The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.

The Company retrospectively adopted the provision related to the classification of taxes partially based on income, and prospectively adopted the provisions related to intraperiod tax allocation and interim recognition of enactment of tax laws.

The adoption of this standard did not have a material effect on the Company’s current- or prior-period condensed consolidated financial statements.

Net income per share

The following table sets forth the computation of basic and diluted net income per share:

Three months ended April 30,

Three months ended July 31, Six months ended July 31,

(in thousands, except per share data) 2020 2019 2020 2019

Numerator (basic and diluted):

Net income $ 1,826 $ 41,822

Net income (loss) $ ( 148 ) $ 19,366 $ 1,678 $ 61,188

Denominator (basic):

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Diluted $ 0.00 $ 0.30 $ 0.02 $ 0.94

For the three months ended April 30, 2020 and 2019, approximately 0.5 million and 0.2 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

For the three months ended July 31, 2020 and 2019, approximately 2.1 million and 0.3 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

For the six months ended July 31, 2020 and 2019, approximately 0.6 million and 0.3 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

Business combination

2 unchanged sentences

("WageWorks") for $ 51.35 per share in cash, or approximately $ 2.0 billion to WageWorks stockholders.

The Company financed the transaction through a combination of $ 816.9 million cash on hand plus net borrowings of approximately $ 1.22 billion, after deducting lender fees of approximately $ 30.5 million, under a term loan facility (see Note 8—Indebtedness).

The Acquisition was accounted for under the acquisition method of accounting for business combinations.

21 unchanged sentences

Property and equipment

Property and equipment consisted of the following as of April 30, 2020 and January 31, 2020:

(in thousands) April 30, 2020 January 31, 2020

Property and equipment consisted of the following as of July 31, 2020 and January 31, 2020:

(in thousands) July 31, 2020 January 31, 2020

Leasehold improvements $ 22,112 $ 19,240

4 unchanged sentences

Property and equipment, net $ 34,528 $ 33,486

Depreciation expense for the three months ended April 30, 2020 and 2019 was $ 3.9 million and $ 0.9 million, respectively.

Depreciation expense for the three months ended July 31, 2020 and 2019 was $ 4.1 million and $ 1.0 million, respectively, and $ 8.0 million and $ 1.8 million for the six months ended July 31, 2020 and 2019, respectively.

Contract balances

2 unchanged sentences

Alternatively, when payment precedes the related services, the Company records a contract liability, or deferred revenue, until its performance obligations are satisfied.

The Company's deferred revenue increased from $ 3.7 million as of January 31, 2020 to $ 4.1 million as of April 30, 2020.

As of July 31, 2020 and January 31, 2020, the balance of deferred revenue was $ 11.5 million and $ 3.7 million, respectively.

The balances are related to cash received in advance for an interchange revenue arrangement, other up-front fees and other commuter deferred revenue, and are generally recognized within twelve months, with the exception of the interchange arrangement, which is recognized over a term of approximately ten years .

Revenue recognized during the three months ended April 30, 2020 that was included in the beginning balance of deferred revenue was $ 0.2 million.

The Company expects to satisfy its remaining obligations for these arrangements.

During the three and six months ended July 31, 2020, approximately $ 0.6 million and $ 1.4 million of revenue, respectively, was recognized that was included in the balance of deferred revenue as of January 31, 2020.

The components of operating lease costs were as follows:

Three months ended July 31, Six months ended July 31,

(in thousands) 2020 2019 2020 2019

Operating lease expense $ 3,925 1,086 8,249 2,160

Sublease income ( 450 ) — ( 900 ) —

Net operating lease expense $ 3,475 $ 1,086 $ 7,349 $ 2,160

Supplemental cash flow information related to the Company's operating leases was as follows:

Six months ended July 31,

(in thousands) 2020 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 6,468 $ 1,829

Operating lease right-of-use assets obtained in exchange for new operating lease obligations $ 17,480 $ 199

Other income (expense), net

Other income (expense), net, consisted of the following:

Three months ended April 30,

Three months ended July 31, Six months ended July 31,

(in thousands) 2020 2019 2020 2019

1 unchanged sentence

Gain on equity securities — 3,774 — 27,285

Acquisition costs ( 94 ) ( 1,184 )

Acquisition gains (costs) 28 ( 6,596 ) ( 66 ) ( 7,780 )

Other expense ( 928 ) ( 123 ) ( 2,198 ) ( 130 )

Total other income (expense), net $ ( 824 ) $ ( 1,061 ) $ ( 1,588 ) $ 22,602

The Company has entered into various non-cancelable operating lease agreements for office space, data storage facilities, and other leases with remaining lease terms of less than 1 year to approximately 11 years, often with one or more Company options to renew.

These renewal terms can extend the lease term from 3 to 10 years and are included in the lease term when it is reasonably certain that the Company will exercise the option.

Amortization and interest expense related to finance leases were not material during the three months ended April 30, 2020 and 2019.

The components of operating lease costs are as follows:

Three months ended April 30,

(in thousands, except for term and percentages) 2020 2019

Operating lease expense $ 4,308 1,074

Sublease income ( 450 ) —

Net operating lease cost $ 3,858 $ 1,074

Weighted average lease term and discount rate are as follows:

As of April 30, 2020

Weighted average remaining lease term 9.47 years

Weighted average discount rate 4.35 %

Maturities of operating lease liabilities as of April 30, 2020 were as follows:

Fiscal year ending January 31, (in thousands) Operating leases

Remaining 2021 $ 9,177

Thereafter 60,429

Total lease payments 117,068

Less imputed interest ( 21,876 )

Present value of lease liabilities $ 95,192

Current $ 13,210

Non-current 81,982

Total lease liabilities $ 95,192

As of April 30, 2020, the Company had an additional operating lease for office space that had not yet commenced with aggregate undiscounted lease payments of $ 63.1 million.

This operating lease will commence in fiscal year 2021 with a lease term of approximately 11 years.

Supplemental cash flow information related to the Company's operating leases was as follows:

Three months ended April 30,

(in thousands, except for term and percentages) 2020 2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 3,297 $ 977

ROU assets obtained in exchange for new operating lease obligations $ 17,480 $ 199

Intangible assets and goodwill

Intangible assets

The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of April 30, 2020 and January 31, 2020:

(in thousands) April 30, 2020 January 31, 2020

The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of July 31, 2020 and January 31, 2020:

(in thousands) July 31, 2020 January 31, 2020

Amortizable intangible assets:

9 unchanged sentences

Total intangible assets, net $ 783,106 $ 783,279

During the three months ended April 30, 2020 and 2019, the Company expensed a total of $ 10.3 million and $ 3.9 million, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.

Amortization expense for the three months ended April 30, 2020 and 2019 was $ 23.6 million and $ 3.9 million, respectively.

There were no changes to the goodwill carrying value during the three months ended April 30, 2020 and 2019.

During the three months ended July 31, 2020 and 2019, the Company expensed a total of $ 10.3 million and $ 3.8 million, respectively, and $ 20.6 million and $ 7.7 million for the six months ended July 31, 2020 and 2019, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.

Amortization expense for the three months ended July 31, 2020 and 2019 was $ 24.5 million and $ 4.0 million, respectively, and $ 48.1 million and $ 7.9 million for the six months ended July 31, 2020 and 2019, respectively.

During the three months ended July 31, 2020, goodwill increased by $ 1.2 million due to measurement period adjustments.

There were no additional changes to the goodwill carrying value during the three and six months ended July 31, 2020 and 2019.

Commitments and contingencies

In addition to the indebtedness described in Note 8 below, the Company’s principal commitments consist of operating lease obligations for office space, data storage facilities, and other leases, a processing services agreement with a vendor, and contractual commitments related to network infrastructure, equipment, and certain maintenance agreements under long-term, non-cancelable commitments.

These commitments as of January 31, 2020 are disclosed in the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2020, and did not change materially during the three months ended April 30, 2020.

The Company’s principal commitments consist of a term loan facility, operating lease obligations for office space, data storage facilities, and other leases, a processing services agreement with a vendor, and contractual commitments related to network infrastructure, equipment, and certain maintenance agreements under long-term, non-cancelable commitments.

Except for the $ 200 million principal prepayment on our term loan facility, there were no material changes during the three and six months ended July 31, 2020, outside of the ordinary course of business, in our commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

Contingencies

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District Court for the Northern District of California (the “Securities Class Action”).

On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs

asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks, its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018.

On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks, its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018.

The complaint also alleges claims under the Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those same defendants, as well as the members of its board of directors at the time of that offering.

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WageWorks was not named as a party in that complaint.

On June 24, 2020, the court granted the defendants’ motion to dismiss the amended complaint.

The plaintiffs subsequently filed a notice of appeal.

WageWorks voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the restatement of WageWorks' financial statements and related independent investigation.

1 unchanged sentence

Attorney’s Office for the Northern District of California also opened an investigation.

WageWorks has provided documents and information to the U.S.

WageWorks has

provided documents and information to the U.S.

Attorney’s Office and continues to cooperate with any inquiries by the U.S.

Attorney’s Office regarding the matter.

Beginning on July 30, 2019, putative class action suits were filed in the U.S.

District Court Courts for the Southern District of New York, the District of Delaware, and the Northern District of California asserting claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks and the former members of its board of directors.

The complaints generally allege disclosure violations in the proxy statement issued by WageWorks in connection with the stockholder vote on the proposed merger with the Company.

After WageWorks issued certain supplemental disclosures, these actions were voluntarily dismissed, but WageWorks may still be required to pay attorneys fees to the plaintiffs' lawyers.

WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to these indemnification agreements, is covering the defense of its former directors and officers in the legal proceedings described above.

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Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations and cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods.

As of April 30, 2020, long-term debt consisted of the following:

(in millions) April 30, 2020

The Company follows FASB Accounting Standards Codification 740-270, Income Taxes - Interim Reporting , for the computation and presentation of its interim period tax provision.

Accordingly, management estimated the effective annual tax rate and applied this rate to the year-to-date pre-tax book income to determine the interim benefit or provision for income taxes.

For the three and six months ended July 31, 2020, the Company recorded an income tax benefit of $ 0.5 million and $ 0.3 million, respectively.

This resulted in an effective income tax benefit rate of 78.6 % and 24.0 % for the three and six months ended July 31, 2020, respectively, compared with an effective income tax expense rate of 18.4 % for each of the three and six months ended July 31, 2019.

For the three and six months ended July 31, 2020 and 2019, the net impact of discrete tax items caused a 62.9 and 57.4 percentage point benefit and a 4.8 and 4.6 percentage point benefit, respectively, to the effective income tax rate primarily due to the excess tax benefit on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax book income.

Due to significantly lower pre-tax book income during the six months ended July 31, 2020, such excess tax benefit had a greater impact on the effective income tax rate.

As of July 31, 2020 and January 31, 2020, the Company’s total gross unrecognized tax benefit was $ 9.8 million and $ 9.4 million, respectively.

As of July 31, 2020 and January 31, 2020, a net unrecognized tax benefit of $ 0.6 million and $ 0.5 million, respectively, was recorded in the condensed consolidated balance sheets.

If recognized, $ 9.0 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of July 31, 2020.

The Company files income tax returns with U.S.

federal and state taxing jurisdictions and is not currently under examination with any jurisdiction.

As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2000.

As of July 31, 2020, long-term debt consisted of the following:

(in millions) July 31, 2020

Term loan facility $ 1,026.6

1 unchanged sentence

Long-term debt, net of issuance costs $ 1,007.6

(1) In addition to the $ 20.3 million of unamortized issuance costs related to the term loan facility, $ 6.0 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the April 30, 2020 condensed consolidated balance sheet.

(1) In addition to the $ 19.0 million of unamortized issuance costs related to the term loan facility, $ 5.7 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the July 31, 2020 condensed consolidated balance sheet.

In connection with the closing of the Acquisition, on August 30, 2019, the Company entered into a credit facility (the "Credit Agreement”) that provided for:

1 unchanged sentence

(ii) a five -year senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”), in an aggregate principal amount of up to $ 350.0 million, which may be used for working capital and general corporate purposes, including acquisitions and other investments.

No amounts were drawn under the Revolving Credit Facility as of April 30, 2020.

No amounts were drawn under the Revolving Credit Facility as of July 31, 2020.

Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of HealthEquity, either (i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25 % to 2.25 % or (ii) an alternate base rate plus a margin ranging from 0.25 % to 1.25 %, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement.

As of April 30, 2020, the stated interest rate was 2.15 % and the effective interest rate was 2.59 %.

As of July 31, 2020, the stated interest rate was 2.16 % and the effective interest rate was 2.70 %.

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.

2 unchanged sentences

Remaining 2021 $ 23.4

2025 (1) 768.8

Total principal payments $ 1,026.6

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.25 to 1.00, which steps down to (x) 5.00 to 1.00 beginning with the fiscal quarter ending July 31, 2020 and (y) 4.50 to 1.00 beginning with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $ 100 million), and (ii) a minimum interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00.

The Company was in compliance with all covenants under the Credit Agreement as of April 30, 2020, and for the period then ended.

(1) The amount required to be repaid in 2025 reflects the $ 200.0 million prepayment made in July 2020 with proceeds from the follow-on offering.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.00 to 1.00, which steps down to 4.50 to 1.00 beginning with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $ 100.0 million), and (ii) a minimum interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00.

The Company was in compliance with all covenants under the Credit Agreement as of July 31, 2020, and for the period then ended.

The obligations of HealthEquity under the Credit Agreement are required to be unconditionally guaranteed by WageWorks and each of the Company's subsequently acquired or organized direct and indirect domestic subsidiaries and are secured by security interests in substantially all assets of HealthEquity and the guarantors, in each case, subject to certain customary exceptions.

The Company follows FASB Accounting Standards Codification 740-270, Income Taxes - Interim Reporting , for the computation and presentation of its interim period tax provision.

Accordingly, management estimated the effective annual tax rate and applied this rate to the year-to-date pre-tax book income to determine the interim provision for income taxes.

For the three months ended April 30, 2020, the Company recorded income tax expense of $ 0.2 million.

This resulted in an effective income tax expense rate of 10.7 % for the three months ended April 30, 2020, compared with an effective income tax expense rate of 18.4 % for the three months ended April 30, 2019.

For the three months ended April 30, 2020 and 2019, the net impact of discrete tax items caused a 16.8 and 4.5 percentage point benefit, respectively, to the effective income tax rate primarily due to the excess tax benefit on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax book income.

Due to significantly lower pre-tax book income during the three months ended April 30, 2020, such excess tax benefit had a greater impact on the effective income tax rate.

As of April 30, 2020 and January 31, 2020, the Company’s total gross unrecognized tax benefit was $ 9.6 million and $ 9.4 million, respectively.

As of April 30, 2020 and January 31, 2020, a net unrecognized tax benefit of $ 0.5 million was recorded in the condensed consolidated balance sheets.

If recognized, $ 8.8 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of April 30, 2020.

The Company files income tax returns with U.S.

federal and state taxing jurisdictions and is not currently under examination with any jurisdiction.

As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2000.

Stock-based compensation

The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income during the periods presented:

Three months ended April 30,

The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income (loss) during the periods presented:

Three months ended July 31, Six months ended July 31,

(in thousands) 2020 2019 2020 2019

4 unchanged sentences

Total stock-based compensation expense $ 11,438 $ 7,590 $ 18,834 $ 13,618

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

Three months ended April 30,

(in thousands) 2020 2019

Stock options $ 1,449 $ 1,783

Performance stock options — —

Restricted stock units 6,509 2,926

Performance restricted stock units ( 1,979 ) 651

Restricted stock awards 872 163

Performance restricted stock awards 545 505

Total stock-based compensation expense $ 7,396 $ 6,028

Stock award plans

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In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing through and including February 1, 2024, by 3 % of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors.

As of April 30, 2020, 6.5 million shares were available for grant under the Incentive Plan.

As of July 31, 2020, 6.4 million shares were available for grant under the Incentive Plan.

WageWorks Incentive Plan.

At the closing of the Acquisition, and in accordance with the merger agreement related to the Acquisition, certain RSUs with respect to WageWorks common stock, granted under WageWorks, Inc.

2010 Equity Incentive Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to 523,318 shares of common stock of the Company.

No additional shares were issued under the WageWorks Incentive Plan, and the period during which the remaining 5,255,027 shares were available to be utilized expired on May 26, 2020.

2010 Equity Incentive Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to 0.5 million shares of common stock of the Company.

No additional shares were issued under the WageWorks Incentive Plan, and the period during which the remaining 5.3 million shares were available to be utilized expired on May 26, 2020.

Stock options

Under the terms of the Incentive Plan, the Company has the ability to grant incentive and nonqualified stock options.

Incentive stock options may be granted only to Company team members.

Nonqualified stock options may be granted to Company executive officers, other team members, directors and consultants.

Such options are to be exercisable at prices, as determined by the board of directors, which must be equal to no less than the fair value of the Company's common stock at the date of the grant.

Stock options granted under the Incentive Plan generally expire 10 years from the date of issuance, or are forfeited 90 days after termination of employment.

Shares of common stock underlying stock options that are forfeited or that expire are returned to the Incentive Plan.

Valuation assumptions.

The Company has adopted the provisions of Topic 718, which requires the measurement and recognition of compensation for all stock-based awards made to team members and directors, based on estimated fair values.

Under Topic 718, the Company uses the Black-Scholes option pricing model as the method of valuation for stock options.

The determination of the fair value of stock-based awards on the date of grant is affected by the fair value of the stock as well as assumptions regarding a number of complex and subjective variables.

The variables include, but are not limited to, 1) the expected life of the option, 2) the expected volatility of the fair value of the Company's common stock over the term of the award estimated by averaging the Company's historical volatility in addition to published volatilities of a relative peer group, 3) risk-free interest rate, and 4) expected dividends.

The weighted-average fair value of options granted during the three months ended April 30, 2020 and 2019 was $ 23.68 and $ 25.97 per share, respectively.

The key input assumptions that were utilized in the valuation of the stock options granted during the periods presented are as follows:

Three months ended April 30,

Expected dividend yield — % — %

Expected stock price volatility 37.97 % 35.98 % - 36.53 %

Risk-free interest rate 1.39 % 2.21 % - 2.43 %

Expected life of options 5.18 years 4.95 - 5.09 years

The Company estimates the expected life of an option using historical option exercise and termination data.

Expected volatility is determined using the weighted average volatility of the Company's historical common stock price in addition to published volatilities of publicly traded peer companies.

The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term of the options.

The dividend yield of zero is based on the fact that the Company expects to invest cash in operations.

A summary of stock option activity is as follows:

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Forfeited ( 7 ) $ 25.45 - 44.53

Outstanding as of April 30, 2020 2,001 $ 0.10 - 82.39

Outstanding as of July 31, 2020 1,933 $ 0.10 - 82.39

$ 31.04 5.40 $ 43,958

Vested and expected to vest as of April 30, 2020 2,001 $ 30.85 5.72 $ 54,009

Exercisable as of April 30, 2020 1,632 $ 25.71 5.29 $ 50,730

The aggregate intrinsic value in the table above represents the difference between the estimated fair value of common stock and the exercise price of outstanding, in-the-money stock options.

The total intrinsic value of options exercised during the three months ended April 30, 2020 and 2019 was $ 2.1 million and $ 9.2 million, respectively.

As of April 30, 2020, the weighted-average vesting period of non-vested options expected to vest was approximately 1.3 years;

the amount of compensation expense the Company expects to recognize for stock options vesting in future periods is approximately $ 6.1 million.

Vested and expected to vest as of July 31, 2020 1,933 $ 31.04 5.40 $ 43,958

Exercisable as of July 31, 2020 1,596 $ 26.12 5.00 $ 41,916

Restricted stock units and restricted stock awards

The Company grants RSUs and RSAs to certain team members, officers, and directors under the Incentive Plan.

RSUs and RSAs vest upon service-based criteria and performance-based criteria.

Generally, service-based RSUs and RSAs vest over a four -year period in equal annual installments commencing upon the first anniversary of the grant date.

RSUs and RSAs are valued based on the current value of the Company's closing stock price on the date of grant less the present value of future expected dividends discounted at the risk-free interest rate.

The weighted-average fair value of RSUs granted during the three months ended April 30, 2020 and 2019 was $ 56.27 and $ 73.02 per share, respectively.

A summary of 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, 2020 1,380 $ 63.33 235 $ 61.91

Granted 1,166 57.00 14 74.81

Vested ( 416 ) 53.84 ( 10 ) 62.80

Forfeited ( 222 ) 68.35 ( 32 ) 62.41

Outstanding as of July 31, 2020 1,908 $ 60.95 207 $ 62.66

Performance restricted stock units and awards.

In March 2017, the Company awarded 146,964 performance-based RSUs ("PRSUs").

The Company records stock-based compensation related to PRSUs when it is considered probable that the performance conditions will be met.

Issuance of the underlying shares occurred during the three months ended April 30, 2020 following approval by the Compensation Committee of the board of directors, based on the level of achievement of the performance goal as measured on January 31, 2020.

The performance conditions allowed for a range of vesting from 0 % to 150 %.

The PRSUs vested at 118.1 %.

In March 2018, the Company awarded 227,760 performance-based RSAs ("PRSAs").

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The underlying shares were issued at 200 % of the target level of achievement at the grant date.

During the three months ended April 30, 2020, the Compensation Committee modified the awards by deeming the performance condition related to two-thirds of the awards to be achieved at 100 % and creating a new performance condition related to the remaining one-third of the awards to reflect the state of the Company after the Acquisition of WageWorks.

In March 2020, the Compensation Committee modified the awards by deeming the performance condition related to two-thirds of the awards to be achieved at 100 % and creating a new performance condition related to the remaining one-third of the awards to reflect the state of the Company after the Acquisition of WageWorks.

The new performance condition is based on the achievement of certain financial criteria measured on January 31, 2021.

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The Company records stock-based compensation related to PRSUs when it is considered probable that the performance conditions will be met.

During the three months ended April 30, 2020, the Compensation Committee modified the awards by deeming the performance condition related to one-third of the awards to be achieved at 100 % and creating new performance conditions related to the remaining two-thirds of the awards to reflect the state of the Company after the Acquisition of WageWorks.

In March 2020, the Compensation Committee modified the awards by deeming the performance condition related to one-third of the awards to be achieved at 100 % and creating new performance conditions related to the remaining two-thirds of the awards to reflect the state of the Company after the Acquisition of WageWorks.

The new performance conditions are based on the achievement of certain financial criteria measured on January 31, 2021 and 2022.

The modification affected 12 team members and will result in incremental stock-based compensation expense of $ 6.6 million, which will be recognized over the remaining service period, adjusted for the level of achievement of the performance conditions and any forfeitures.

The modification affected 12 team members and resulted in incremental stock-based compensation expense of $ 6.6 million, which will be 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 PRSUs were likely to vest, and as a result, $ 2.9 million of previously recorded stock-based compensation expense was reversed during the three months ended April 30, 2020.

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The modified performance conditions for the two-thirds tranche allow for a range of vesting from 0 % to 200 % based on the level of achievement of the new performance conditions, and the Company believes it is probable that the PRSUs will vest at least in part.

During the three months ended April 30, 2020, the Company awarded 257,680 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.

During the six months ended July 31, 2020, 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.

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The PRSUs cliff vest upon approval by the Compensation Committee.

A summary of the 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, 2020 1,380 $ 63.33 235 $ 61.91

Granted 1,085 56.27 14 74.81

Vested ( 296 ) 51.38 ( 10 ) 62.80

Forfeited ( 167 ) 71.72 ( 14 ) 63.31

Outstanding as of April 30, 2020 2,002 $ 60.57 225 $ 62.58

For the three months ended April 30, 2020 and 2019, the aggregate intrinsic value of RSUs and RSAs vested was $ 16.4 million and $ 7.7 million, respectively.

Total unrecorded stock-based compensation expense as of April 30, 2020 associated with RSUs and PRSUs was $ 109.1 million, which is expected to be recognized over a weighted-average period of 3.1 years.

Total unrecorded stock-based compensation expense as of April 30, 2020 associated with RSAs and PRSAs was $ 2.4 million, which is expected to be recognized over a weighted-average period of 0.9 years.

Fair value measurements are made at a specific point in time, based on relevant market information.

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Level 1 instruments consist primarily of cash and cash equivalents.

The carrying value of cash and cash equivalents approximate fair values as of April 30, 2020 due to the short-term nature of these instruments.

The carrying value of cash and cash equivalents approximate fair values as of July 31, 2020 due to the short-term nature of these instruments.

Our long-term debt is considered a Level 2 instrument and is recorded at book value in our condensed consolidated financial statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements