What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-31 · 193 added, 217 removed, 300 unchanged (58% of the section changed)

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As of January 31, 2021, we administered 5.8 million HSAs, with balances totaling $14.3 billion, which we call HSA Assets.

During the years ended January 31, 2020 and 2019, we added approximately 1.5 million and 679,000 new HSAs, respectively.

During the fiscal years ended January 31, 2021 and 2020, we added approximately 0.7 million and 1.5 million new HSAs, respectively, which reflects in 2019 the WageWorks Acquisition.

Also, as of January 31, 2021, we administered 7.0 million complementary CDBs.

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We reach Clients primarily through a sales force that calls on Clients directly, relationships with benefits brokers and advisors, and integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners.

As of January 31, 2020, our platforms were integrated with 165 Network Partners, serving more than 100,000 Clients.

We have grown our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2019, including by 3% as a result of the acquisition of WageWorks on August 30, 2019.

As of January 31, 2021, our platforms were integrated with 174 Network Partners, and we serve approximately 100,000 Clients.

We have increased our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2020, measured by HSA Assets.

According to Devenir, today we are the largest HSA provider by accounts and second largest by assets.

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We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-driven culture.

Our proprietary technology is designed to help consumers optimize the value of their HSAs and other CDBs, as they gain confidence and skill in their management of financial responsibility for lifetime healthcare.

Our ability to engage consumers is enhanced by our platforms’ capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems, which we call Ecosystem Partners.

Our proprietary technology is designed 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.

Our ability to engage consumers is enhanced by our platforms’ capacity to securely share data in 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.

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We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and virtual platforms.

See “Key components of our results of operations” for additional information on our sources of revenue, including regarding the adverse impacts caused by the ongoing COVID-19 pandemic.

Acquisition of WageWorks

On August 30, 2019, we completed the Acquisition of WageWorks and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under a new term loan facility and approximately $816.9 million of cash on hand.

We expect the Acquisition 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

WageWorks’ strength of selling to employers directly and through health benefits brokers and advisors complements our distribution through health plans, benefit administrators and retirement record-keeping partners.

With WageWorks’ CDB capabilities, we are working to 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 by increasing their account balances in other CDBs.

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.

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 a new term loan facility and approximately $816.9 million of cash on hand.

As a result of the WageWorks Acquisition, WageWorks Inc.

became a wholly owned subsidiary of HealthEquity, Inc.

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.

Accordingly, we believe that there are significant opportunities to expand the scope of services that we provide to our Clients.

The Acquisition has significantly increased the number of our Total Accounts, HSA Assets, Client-held funds, Adjusted EBITDA, total revenue, total cost of revenue, operating expenses, and other financial results.

The WageWorks Acquisition has significantly increased the number of our Total Accounts, HSA Assets, Client-held funds, Adjusted EBITDA, total revenue, total cost of revenue, operating expenses, and other financial results.

These increases impact the comparability of the period-over-period results described in this report.

Key factors affecting our performance

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Each of these factors presents both significant opportunities and significant risks to our future performance.

See "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 and our other reports filed with the SEC.

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 and our other reports filed with the SEC.

WageWorks integration

On August 30, 2019, we completed the Acquisition of WageWorks.

We are now pursuing a multi-year integration effort that we expect will produce long-term cost savings and revenue synergies.

We have identified near-term opportunities, estimated to be approximately $50 million in annualized ongoing net synergies to be achieved by the end of fiscal 2021.

On August 30, 2019, we completed the WageWorks Acquisition.

We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies.

We have identified opportunities of approximately $80 million in annualized ongoing net synergies to be achieved by the end of the fiscal year ending January 31, 2022, of which approximately $60 million were achieved as of January 31, 2021.

Furthermore, we anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader platform and service offerings and as we continue to drive member engagement.

We estimate non-recurring costs to achieve these synergies of approximately $80 million to $100 million realized within 24 to 36 months of the closing of the Acquisition, resulting from investment in technology platforms, back-office systems and platform integration, as well as rationalization of cost of operations.

We estimate non-recurring costs to achieve these synergies of approximately $100 million incurred by the end of fiscal year 2022, resulting from investment in technology platforms, back-office systems and platform integration, as well as rationalization of cost of operations.

As of January 31, 2021, we had incurred a total of approximately $78 million of non-recurring merger integration costs related to the WageWorks Acquisition.

Structural change in U.S.

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healthcare are uncertain.

Moreover, changes in healthcare policy, such as proposed "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to predict.

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.

Trends in U.S.

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Our client base

Our business model is based on a B2B2C distribution strategy, meaning that we attract Clients and Network Partners to reach consumers to increase the number of our members with HSA accounts and complementary CDBs.

We believe our current Clients represent a significant opportunity for us, as fewer than 5% presently partner with us for both HSAs and our complementary CDB offerings.

Our business model is based on a B2B2C distribution strategy, whereby we work with Network Partners and Clients to reach consumers to increase the number of our members with HSA 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 sales force calls on enterprise, commercial, and regional employers in industries across the U.S., as well as potential Network Partners from among health plans, benefits administrators, and retirement plan record keepers.

Our sales force calls on enterprise and regional employers in industries across the U.S., as well as potential Network Partners from among health plans, benefits administrators, and retirement plan record keepers.

Product breadth

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Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs.

With our newly acquired CDB capabilities, we can provide employers with a single partner for both HSAs and complementary CDBs, which is preferred by the vast majority of employers, according to research conducted for us by Aite Group.

With our CDB capabilities, we can provide employers with a single partner for both HSAs and 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 value proposition to employers, health benefits brokers and consultants, and Network Partners as a leading single-source provider.

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We believe that innovations incorporated in our technology that enable 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.

We plan to build on these innovations by combining our HSA platform with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership position within the HSA sector.

We are building on these innovations by combining our HSA platform with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership position within the HSA sector.

We intend to continue to invest in our technology development to enhance our platforms' capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data.

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We earn a material portion of our total revenue from interest paid to us by these partners.

The lengths of our agreements with Depository Partners generally range from three to five years and may have fixed or variable interest rate terms.

The lengths of our agreements with Depository Partners typically range from three to five years and may have fixed or variable interest rate terms.

The terms of new and renewing agreements may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control.

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Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members.

We expect our custodial revenue to be adversely affected by the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to decline significantly and, as a result, funds that we place with our Depository Partners in this environment will receive lower interest rates than we originally expected.

We expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to decline significantly.

Interest on our long-term debt 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.

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Many of these are state or federally chartered banks and other financial institutions for which we believe technology-based healthcare services are not a core business.

Certain of our direct competitors have chosen to exit the market despite increased demand for these services.

This has created, and we believe will continue to create, opportunities for us to leverage our technology platforms and capabilities to increase our market share.

However, some of our direct competitors (including well-known mutual fund companies such as Fidelity Investments and healthcare service companies such as United

Health Group's Optum) 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.

Some of our direct competitors (including healthcare service companies such as United Health Group's Optum, Webster Bank, and well-known retail investment companies, such as Fidelity Investments ) are in a position to devote more resources to the development, sale, and support of their products and services than we have at our disposal.

In addition, numerous indirect competitors, including benefits administration technology and service providers, partner with banks and other HSA custodians to compete with us.

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Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics.

As a result of the outbreak of the COVID-19 virus, we have seen some impact on sales opportunities, with some opportunities delayed or now being held virtually.

We may also see a negative impact on the financial results related to certain of our products, such as commuter benefits, due to many of our members working from home during the outbreak or other impacts from the outbreak.

The extent to which the COVID-19 virus will negatively impact our business is highly uncertain and cannot be accurately predicted.

As a result of the COVID-19 pandemic, we have seen an adverse impact on sales opportunities, with some opportunities delayed and most now being held virtually.

As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected.

Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs and reduce overall demand for our products.

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 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 is highly uncertain and cannot be accurately predicted.

Regulatory environment

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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.

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.

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

In addition to the WageWorks acquisition, we have a successful history of acquiring HSA portfolios from competitors who have chosen to exit the industry and complementary assets and businesses that strengthen our platform.

We have a successful history of acquiring HSA portfolios and businesses that strengthen our platform.

We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities.

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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 2019 compared to fiscal 2018, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2019 Form 10-K, filed with the SEC on March 28, 2019.

For a discussion related to key financial and operating metrics for fiscal year 2020 compared to fiscal year 2019, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, filed with the SEC on March 31, 2020.

Total Accounts

The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated:

% change from

(in thousands, except percentages) January 31, 2020 January 31, 2019 2019 to 2020

(in thousands, except percentages) January 31, 2021 January 31, 2020 % Change

HSAs 5,782 5,344 8 %

Average HSAs - Year-to-date 4,517 3,608 25 %

Average HSAs - Quarter-to-date 5,179 3,813 36 %

New HSAs from Sales - Year-to-date 724 674 7 %

New HSAs from Acquisitions - Year-to-date 757 5 n/a

New HSAs from sales - Quarter-to-date 370 379 (2) %

Active HSAs 4,348 3,241 34 %

New HSAs from sales - Year-to-date 687 724 (5) %

New HSAs from acquisitions - Year-to-date — 757 (100) %

HSAs with investments 333 220 51 %

CDBs 7,437 572 n/a

CDBs 7,028 7,437 (5) %

Total Accounts 12,810 12,781 0 %

Average Total Accounts - Year-to-date 8,013 4,194 91 %

Average Total Accounts - Quarter-to-date 12,659 12,603 0 %

Average Total Accounts - Year-to-date 12,604 8,013 57 %

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 34%, from January 31, 2019 to January 31, 2020, primarily driven by the HSAs acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions, which contributed approximately 757,000 HSAs.

The remainder of the increase was due to further penetration into existing Network Partners and the addition of new Network Partners.

The number of our CDBs increased by approximately 6.9 million from January 31, 2019 to January 31, 2020, primarily driven by the CDBs acquired through the Acquisition of WageWorks.

HSAs are individually owned portable healthcare accounts.

As HSA members transition between employers or health plans, they may no longer be enrolled in an HDHP that qualifies them to continue to make contributions to their HSA.

If these HSA members deplete their custodial balance, we may consider the corresponding HSA no longer an Active HSA.

We define an Active HSA as an HSA that (i) is associated with a Network Partner or a Client, in each case as of the end of the applicable period;

or (ii) has held a custodial balance at any point during the previous twelve month period.

Active HSAs increased by approximately 1.1 million, or 34%, from January 31, 2019 to January 31, 2020, primarily driven by the HSAs acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions.

The remainder of the increase was due to further penetration into existing Network Partners and the addition of new Network Partners.

The number of our HSAs increased by approximately 0.4 million, or 8%, from January 31, 2020 to January 31, 2021, due to further penetration into existing Network Partners and the addition of new Network Partners and Clients.

The number of our CDBs decreased by approximately 0.4 million, or 5%, from January 31, 2020 to January 31, 2021, driven primarily by 0.8 million commuter benefit accounts that are currently suspended due to the COVID-19 pandemic and associated local government restrictions around the country.

The suspended commuter accounts continue to be administered on our platform and can be reinstated at any time.

We chose to exclude the suspended commuter accounts from our account totals because they are currently not generating revenue for the Company.

The following table sets forth our HSA Assets as of and for the periods indicated:

% change from

(in millions, except percentages) January 31, 2020 January 31, 2019 2019 to 2020

HealthEquity HSA cash (custodial revenue) (1) $ 7,244 $ 6,428 13 %

WageWorks HSA cash (custodial revenue) (2) 1,057 — n/a

WageWorks HSA cash (no custodial revenue) (3) 383 — n/a

(in millions, except percentages) January 31, 2021 January 31, 2020 % Change

HSA cash with yield (1) $ 9,875 $ 8,301 19 %

HSA cash without yield (2) 244 383 (36) %

Total HSA cash 10,119 8,684 17 %

HealthEquity HSA investments (custodial revenue) (1) 2,495 1,670 49 %

WageWorks HSA investments (no custodial revenue) (3) 362 — n/a

HSA investments with yield (1) 4,078 2,495 63 %

HSA investments without yield (2) 138 362 (62) %

Total HSA investments 4,216 2,857 48 %

Total HSA Assets 14,335 11,541 24 %

Average daily HealthEquity HSA cash - Year-to-date 6,523 5,586 17 %

Average daily HealthEquity HSA cash - Quarter-to-date $ 6,788 $ 5,837 16 %

(1) HSA Assets administered by HealthEquity that generate custodial revenue.

These amounts exclude HSA Assets administered by WageWorks.

(2) HSA Assets administered by WageWorks that generate custodial revenue.

(3) HSA Assets administered by WageWorks that do not generate custodial revenue.

Average daily HSA cash with yield - Year-to-date 8,599 6,937 24 %

Average daily HSA cash with yield - Quarter-to-date $ 9,060 $ 7,791 16 %

(1) HSA Assets that generate custodial revenue.

(2) HSA Assets that do not generate custodial revenue.

Our HSA Assets, which are our HSA members' assets for which we are the custodian or administrator, or from which we generate custodial revenue, consist of the following components:

(i) cash deposits, which are deposits with our Depository Partners or custodians of HSAs administered by WageWorks, (ii) custodial cash deposits invested in an annuity contract with our insurance company partner, and (iii) investments in mutual funds through our custodial investment fund partners.

We are working to transition WageWorks HSA cash to HealthEquity HSA cash in fiscal 2021.

(i) cash deposits, which are deposits with our Depository Partners or other custodians, (ii) custodial cash deposits invested in annuity contracts with our insurance company partners, and (iii) investments in mutual funds through our custodial investment fund partners.

We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.

Measuring our HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating.

Our total HSA Assets increased by $3.4 billion, or 43%, from January 31, 2019 to January 31, 2020, including $1.7 billion of HSA Assets acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions and $1.7 billion from existing HSA members and new HSA members.

Our HSA investment assets increased by $1.2 billion, or 71%, from January 31, 2019 to January 31, 2020, reflecting the Acquisition of WageWorks and our strategy of helping our HSA members build wealth and invest for retirement.

Total HSA cash increased by $1.4 billion, or 17%, from January 31, 2020 to January 31, 2021, due primarily to HSA contributions, new HSAs, and decreased spending per HSA, partially offset by transfers to HSA investments.

Our HSA investment assets increased by $1.4 billion, or 48%, from January 31, 2020 to January 31, 2021, due primarily to transfers from HSA cash and appreciation of invested balances.

Our total HSA Assets increased by 2.8 billion, or 24%, from January 31, 2020 to January 31, 2021, due primarily to HSA contributions, new HSAs, decreased spending per HSA, and appreciation of invested balances.

Client-held funds

% change from

(in millions, except percentages) January 31, 2020 January 31, 2019 2019 to 2020

Client-held funds (custodial revenue) (1) $ 779 $ — n/a

Average daily Client-held funds - Year-to-date (1) 382 — n/a

Average daily Client-held funds - Quarter-to-date (1) 727 — n/a

(in millions, except percentages) January 31, 2021 January 31, 2020 % Change

Client-held funds (1) $ 986 $ 779 27 %

Average daily Client-held funds - Year-to-date (1) 847 382 122 %

Average daily Client-held funds - Quarter-to-date (1) 848 727 17 %

(1) Client-held funds that generate custodial revenue.

The Company did not hold material Client-held funds prior to the Acquisition.

Our Client-held funds are interest earning deposits from which we generate custodial revenue.

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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.

Our total Client-held funds increased by $779.0 million from January 31, 2019 to January 31, 2020, due to the Acquisition of WageWorks.

Client-held funds fluctuate depending on the timing of funding and spending of CDB balances.

Adjusted EBITDA

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Interest expense 34,881 24,772

Income tax provision 3,491 1,919

Income tax provision (benefit) (4,694) 3,491

Depreciation and amortization 39,839 20,648

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Acquisition costs (2) 1,118 40,810

(Gain) loss on marketable equity securities (27,760) 102

Gain on marketable equity securities — (27,760)

Other (3) (3,055) 3,811

Adjusted EBITDA $ 240,795 $ 196,453

(1) For the year ended January 31, 2020, merger integration expenses include $1.6 million of stock-based compensation expense related to post-Acquisition integration activities.

(2) For the year ended January 31, 2020, acquisition costs include $13.7 million of stock-based compensation expense related to awards that were accelerated in connection with the Acquisition.

(3) For the years ended January 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $1.9 million and $1.5 million, and other costs of $1.9 million and $1.3 million, respectively.

(1) For the fiscal year ended January 31, 2020, merger integration expenses included $1.6 million of stock-based compensation expense related to post-WageWorks Acquisition integration activities.

(2) For the fiscal year ended January 31, 2020, acquisition costs included $13.7 million of stock-based compensation expense related to awards that were accelerated in connection with the WageWorks Acquisition.

(3) For the fiscal year ended January 31, 2021, Other consisted of amortization of incremental costs to obtain a contract of $2.0 million, offset by other income, net, of $5.1 million.

For the fiscal year ended January 31, 2020, Other consisted of amortization of incremental costs to obtain a contract of $1.9 million and other costs of $1.9 million.

The following table further sets forth our Adjusted EBITDA as a percentage of revenue:

Year ended January 31, % change from

(in thousands, except percentages) 2020 2019 2019 to 2020

Year ended January 31,

(in thousands, except percentages) 2021 2020 % Change

Adjusted EBITDA $ 240,795 $ 196,453 23 %

As a percentage of revenue 33 % 37 %

Our Adjusted EBITDA increased by $78.1 million, or 66%, from $118.4 million for the year ended January 31, 2019 to $196.5 million for the year ended January 31, 2020.

The increase in Adjusted EBITDA was driven by the overall growth of our business and by the Acquisition.

Our Adjusted EBITDA increased by $44.3 million, or 23%, from $196.5 million for the fiscal year ended January 31, 2020 to $240.8 million for the fiscal year ended January 31, 2021.

The increase in Adjusted EBITDA was driven by the inclusion of WageWorks' results of operations for the full period, increased efficiency, and the overall growth of our business.

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

Acquisition of WageWorks

As the Acquisition closed on August 30, 2019, only five months of WageWorks' results of operations are included in our consolidated results of operations.

Accordingly, the results of operations attributable to WageWorks may not be directly comparable to WageWorks' results of operations reported by WageWorks prior to the Acquisition.

WageWorks Acquisition

As the WageWorks Acquisition closed on August 30, 2019, WageWorks' results of operations are included in our consolidated results of operations for the fiscal year ended January 31, 2021, but are only included in our consolidated results of operations for approximately five months out of the fiscal year ended January 31, 2020.

In addition, the results of operations attributable to WageWorks may not be directly comparable to WageWorks' results of operations reported by WageWorks prior to the WageWorks Acquisition.

We generate revenue from three primary sources:

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Custodial revenue.

We earn custodial revenue primarily from our HSA Assets deposited with our Depository Partners and with our insurance company partner, Client-held funds deposited with our Depository Partners, and recordkeeping fees we earn in respect of mutual funds in which our members invest.

We deposit the HealthEquity HSA cash with our Depository Partners pursuant to contracts that (i) generally have terms ranging 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 Depository Partner, and (iii) have minimum and maximum required deposit balances.

We earn custodial revenue primarily from our HSA Assets deposited with our Depository Partners and with our insurance company partners, Client-held funds deposited with our Depository Partners, and recordkeeping fees we earn in respect of mutual funds in which our members invest.

We deposit HSA cash with our Depository Partners pursuant to contracts that (i) typically have terms ranging 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 Depository Partner, and (iii) have minimum and maximum required deposit balances.

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.

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We earn a recordkeeping fee, calculated as a percentage of custodial investments.

We are working to transition WageWorks HSA cash to HealthEquity HSA cash in fiscal 2021.

We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.

Interchange revenue.

We earn interchange revenue each time one of our members uses one of our payment cards to make a purchase.

We earn interchange revenue each time one of our members uses one of our physical payment cards or virtual platforms to make a purchase.

This revenue is collected each time a member “swipes” our payment card to pay expenses.

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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 HealthEquity HSA cash and interchange costs incurred in connection with processing card transactions for our members.

Other components of cost of revenue include interest retained by members on HSA cash and interchange costs incurred in connection with processing card transactions for our members.

Service costs.

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Custodial costs.

Custodial costs are comprised of interest retained by our HSA members, in respect of HealthEquity HSA cash, and fees we pay to banking consultants whom we use to help secure agreements with our Depository Partners.

Custodial costs are comprised of interest retained by our HSA members, in respect of HSA cash with yield, and fees we pay to banking consultants whom we use to help secure agreements with our Depository

Interest retained by HSA members is calculated on a tiered basis.

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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 Network Partners, Clients, and members, how many services we deliver per account, and payment processing costs per account.

Our gross margin has been and will continue to be affected by a number of factors, including interest rates, the amount we charge our Network Partners, Clients, and members, the mix of our sources of revenue, how many services we deliver per account, and payment processing costs per account.

Operating expenses

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Amortization of acquired intangible assets results primarily from intangible 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 10-15 years, 2-5 years, and 3 years, respectively.

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 10-15 years, 2-5 years, and 3 years, respectively.

We also acquired intangible HSA portfolios from third-party custodians.

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Merger integration.

Merger integration expenses include personnel and related expenses, including severance, professional fees, and technology-related expenses directly related to the integration activities to merge operations as a result of the Acquisition.

Merger integration expenses include personnel and related expenses, including severance, professional fees, and facilities and technology expenses directly related to integration activities to merge operations as a result of the WageWorks Acquisition.

Merger integration expenses for the year ended January 31, 2021 also include the estimated net cost to settle a legal matter related to the WageWorks Acquisition described in Note 7—Commitments and contingencies.

Interest expense

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Interest on our long-term debt 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 expense, net

Other expense, net, primarily consists of acquisition costs, gains and losses on marketable equity securities, and non-income-based taxes, less interest income earned on corporate cash.

Income tax provision

We are subject to federal and state income taxes in the United States based on a calendar tax year which differs from our fiscal year-end for financial reporting purposes.

Other income (expense), net

Other income (expense), net, primarily consists of acquisition costs, gains and losses on marketable equity securities, non-income-based taxes, a gain resulting from a legal matter described in Note 7—Commitments and contingencies, and interest income earned on corporate cash.

Income tax provision (benefit)

As of December 31, 2019, we were subject to federal and state income taxes in the United States based on a calendar tax year-end;

however, beginning January 31, 2020, we began reporting federal and state income taxes using a January 31 year-end, consistent with our financial reporting fiscal year.

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

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.

Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.

As of January 31, 2020, we have recorded an overall net deferred tax liability with the exception of an insignificant amount of federal capital losses recorded as a net deferred tax asset on our consolidated balance sheet.

As of January 31, 2021, we have recorded an overall net deferred tax liability.

The Company evaluates its tax positions in accordance with 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 2019 compared to fiscal 2018, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2019 Form 10-K, filed with the SEC on March 28, 2019.

Impact of WageWorks Acquisition

The comparability of our operating results is impacted by the WageWorks Acquisition on August 30, 2019.

As the WageWorks Acquisition closed on August 30, 2019, WageWorks' results of operations are included in our consolidated results of operations for the entire fiscal year ended January 31, 2021, but are only included in our consolidated results of operations for approximately five months during the fiscal year ended January 31, 2020.

Revenue and expense attributable to WageWorks generally is not separately identifiable due to the integration of WageWorks into our existing operations.

For a discussion related to the results of operations and liquidity and capital resources for fiscal year 2020 compared to fiscal year 2019, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, filed with the SEC on March 31, 2020.

The following table sets forth our revenue for the periods indicated:

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Service revenue.

The $162.3 million, or 161%, increase in service revenue was primarily due to the inclusion of WageWorks' financial results following the Acquisition, which contributed $154.5 million of the increase.

The remainder of the increase resulted from the increase in the number of HSAs, partially offset by lower service revenue per average HSA.

The number of our HSAs increased by approximately 1.4 million, or 34%, due in part to approximately 757,000 acquired HSAs.

The remainder of the increase was due to further penetration into existing Network Partners and the addition of new Network Partners.

Service revenue as a percentage of our total revenue increased primarily due to the inclusion of WageWorks' financial results, whose total revenue is comprised primarily of service revenue, following the Acquisition.

The $168.1 million, or 64%, increase in service revenue was primarily due to the inclusion for the full period of service revenue associated with the CDBs added through the WageWorks Acquisition, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs.

Custodial revenue.

The $55.7 million, or 44%, increase in custodial revenue was primarily due to an increase in average daily HealthEquity HSA cash of $937.0 million, or 17%, and an increase in the yield on average custodial cash from 2.15% in the year ended January 31, 2019 to 2.38% in the year ended January 31, 2020.

The inclusion of WageWorks' financial results following the Acquisition contributed $9.2 million of custodial revenue in the year ended January 31, 2020.

Custodial revenue as a percentage of our total revenue decreased primarily due to the inclusion of WageWorks' financial results following the Acquisition, which included relatively less custodial revenue.

In fiscal 2021, we intend to move the majority of WageWorks HSA cash to HealthEquity HSA cash.

This cash will be placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial revenue.

The $9.0 million, or 5%, increase in custodial revenue was primarily due to an increase in the average daily balance of HSA cash with yield of $1.7 billion, or 24%.

The increase was partially offset by a decrease in yield from 2.44% for the fiscal year ended January 31, 2020 to 2.06% for the fiscal year ended January 31, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic and due to the lower yield on HSA cash with yield added through the WageWorks Acquisition.

We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.

This cash is being placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial revenue.

Interchange revenue.

The $26.7 million, or 44%, increase in interchange revenue was primarily due to the inclusion of WageWorks' financial results following the Acquisition, which contributed $21.0 million of the increase.

The remainder of the increase resulted from the increase in the number of our HSAs and payment activity, partially offset by the lower interchange revenue per HSA described below.

The $24.4 million, or 28%, increase in interchange revenue was primarily due to the inclusion for the full period of interchange revenue associated with the CDBs added through the WageWorks Acquisition and an increased average interchange rate.

The increase was partially offset by a decrease in spend per CDB, primarily with respect to FSA and commuter benefit accounts, as well as lower healthcare spending partially attributable to the restrictions imposed by local governments around the country in connection with the COVID-19 pandemic.

Total revenue.

Total revenue increased by $244.8 million, or 85%, primarily due to the inclusion of WageWorks' financial results following the Acquisition and related realized net synergies, which together contributed $184.7 million.

We expect our business to be adversely affected by the recent outbreak of the COVID-19 virus, including as a result of the associated interest rate cuts by the Federal Reserve and other market conditions that have caused interest rates to decline significantly and, as a result, funds that we place with our depository partners in this environment will receive lower interest rates than we originally expected.

Sales opportunities have also been impacted, with some opportunities delayed or now being held virtually.

We may be unable to meet our service level commitments to our clients as a results of disruptions to our work force and disruptions to third part contracts that we rely on to provide our services.

Our financial results related to certain of our products may be adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak or other impacts from the outbreak.

Clients may be unable to pay fees required under contracts and exercise "force majeure" or similar clauses, which would negatively impact our financial results.

The extent to which the COVID-19 virus will negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our business and financial results.

Total revenue increased by $201.6 million, or 38%, primarily due to the inclusion for the full period of WageWorks' results of operations and related realized net revenue synergies.

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, including as a result of the associated interest

rate cuts by the Federal Reserve and other market conditions that have caused interest rates to decline significantly, which reduces the yield on funds placed with our Depository Partners in this environment.

Sales opportunities have also been impacted, with some opportunities delayed and most now being held virtually.

In addition, we are required to support our Clients' open enrollment activities virtually.

As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected.

Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs.

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 contracts that we rely on to provide our services.

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 other impacts from the outbreak, and the "work from home" trend may continue after the pandemic.

Clients may be unable to pay fees required under contracts and exercise "force majeure" or similar defenses, which would negatively impact our financial results.

The extent to which the COVID-19 pandemic will continue to negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our business and financial results.

Cost of revenue

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Service costs.

The $94.0 million, or 122%, increase in service costs was primarily due to the inclusion of WageWorks' financial results following the Acquisition, which contributed $80.6 million of the increase.

The remainder of the increase resulted from a higher volume of total accounts being serviced, including $7.8 million related to the hiring of additional personnel to implement and support our new Network Partners, Clients, and HSA members, increased stock-based compensation expense of $2.0 million, and increases in other expenses of $2.7 million.

The $109.4 million, or 64%, increase in service costs was primarily due to the inclusion for the full period of WageWorks' results of operations and the resulting higher volume of accounts being serviced, including additional hiring of personnel to implement and support our new Network Partners, Clients, and HSAs, increases in stock-based compensation expense, and increases in other expenses.

Custodial costs.

The $3.4 million, or 24%, increase in custodial costs was due to an increase in average daily HealthEquity HSA cash from $5.6 billion for the year ended January 31, 2019 to $6.5 billion during the year ended January 31, 2020.

The $2.0 million, or 11%, increase in custodial costs was due to an increase in the average daily balance of HSA cash with yield, which increased from $6.9 billion for the fiscal year ended January 31, 2020 to $8.6 billion for the fiscal year ended January 31, 2021.

The increase was partially offset by a lower average interest rate paid on HSA cash with yield, which decreased from 0.22% for the fiscal year ended January 31, 2020 to 0.19% for the fiscal year ended January 31, 2021.

Interchange costs.

The $2.6 million, or 17%, increase in interchange costs resulted from an overall increase in payment activity, attributable to the growth in average Total Accounts, and the inclusion of WageWorks’ financial results, which contributed $1.3 million to the increase.

The $0.8 million, or 4%, increase in interchange costs was primarily due to an overall increase in average Total Accounts, which increased primarily due to the inclusion for the full period of accounts added through the WageWorks Acquisition, partially offset by a decrease in card spend per account as a result of the local government restrictions in response to the COVID-19 pandemic.

Total cost of revenue.

As we continue to add HSAs and other CDBs, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members.

Cost of revenue will continue to

be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation and account management functions.

As we continue to add Total Accounts, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members.

Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, account management functions, and the impact of the COVID-19 pandemic.

Operating expenses

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Amortization of acquired intangible assets 76,064 34,704 41,360 119 %

Merger integration 32,111 — 32,111 n/a

Merger integration 45,990 32,111 13,879 43 %

Total operating expenses $ 381,320 $ 248,903 $ 132,417 53 %

Sales and marketing.

The $14.5 million, or 49%, increase in sales and marketing expenses was due in large part to the inclusion of WageWorks’ financial results following the Acquisition, which contributed $7.1 million of the increase.

The remainder of the increase consisted of increased staffing and sales commissions of $3.6 million, increased stock-based compensation expense of $1.2 million, increased partner commissions of $1.4 million, and an increase in other expenses of $1.2 million.

We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the size of our sales and marketing organization and expand into new markets.

On an annual basis, we expect our sales and marketing expenses to remain steady as a percentage of our total revenue.

The $6.0 million, or 14%, increase in sales and marketing expenses was primarily due to the inclusion for the full period of WageWorks' results of operations, which resulted in increased staffing, increases in other expenses, and higher stock-based compensation expense, partially offset by increased efficiencies.

We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns.

On an annual basis, we expect our sales and marketing expenses to increase as a percentage of our total revenue.

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.

Technology and development.

The $42.5 million, or 121%, increase in technology and development expenses was primarily due to the inclusion of WageWorks’ financial results following the Acquisition, which contributed $25.9 million of the increase.

The remainder of the increase resulted from the hiring of additional personnel of $8.9 million, increased outside contractors and professional services of $9.9 million, increased technology expense of $1.6 million, increased amortization and depreciation of $1.2 million, stock compensation of $1.8 million, and other expenses of $1.0 million, which were partially offset by an increase in capitalized engineering costs of $9.3 million associated with the development and enhancement of our proprietary technology platforms.

The $47.2 million, or 61%, increase in technology and development expenses was primarily due to the inclusion for the full period of WageWorks' results of operations, which resulted in increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases, which were partially offset by increases in capitalized development and operating efficiencies.

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 platforms.

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General and administrative.

The $27.5 million, or 83%, increase in general and administrative expenses was primarily due to the inclusion of WageWorks’ financial results following the Acquisition, which contributed $19.7 million of the increase.

The remainder of the increase was as a result of increases in hiring of additional personnel of $2.0 million, increased stock compensation of $3.4 million, increased professional fees of $1.5 million and increased other expenses of $0.9 million.

The $23.9 million, or 40%, increase in general and administrative expenses was primarily due to the inclusion for the full period of WageWorks' results of operations, which resulted in increased personnel-related expense, increases in professional fees, and increased stock-based compensation expense, partially offset by increased efficiencies.

We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, accounting, and insurance functions that we incur as we continue to grow our business, as well as other costs associated with being a public company.

On an annual basis, we expect our general and administrative expenses to remain steady as a percentage of our total revenue over the near term pursuant to our growth initiatives.

On an annual basis, we expect our general and administrative expenses to remain relatively steady as a percentage of our total revenue over the near term pursuant to 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.

The $28.8 million increase in amortization of acquired intangible assets was primarily a result of the identified intangible assets acquired as part of the Acquisition of WageWorks.

The $41.4 million increase in amortization of acquired intangible assets was due to the inclusion for the full period of amortization related to identified intangible assets acquired through the WageWorks Acquisition.

Merger integration.

The $32.1 million in merger integration expense for the year ended January 31, 2020 was due to personnel and related expenses, including severance, professional fees, and technology-related expenses directly related to the Acquisition.

We expect integration expenses totaling $80 million to $100 million in the aggregate to continue for 24 to 36 months following the closing of the Acquisition, which closed on August 30, 2019.

The $46.0 million in merger integration expense for the fiscal year ended January 31, 2021 was due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, severance, professional fees, technology and facilities expenses directly related to the WageWorks Acquisition, and the estimated net cost to settle a legal matter as described in Note 7—Commitments and contingencies.

We expect integration expenses totaling approximately $100 million in the aggregate to be incurred by the end of fiscal year 2022.

As of January 31, 2021, we had incurred a total of approximately $78 million of non-recurring merger integration costs related to the WageWorks Acquisition.

Interest expense

The $24.8 million in interest expense for the year ended January 31, 2020 consists primarily of interest accrued under our term loan facility and amortization of financing costs.

We expect interest expense to decrease as a result of interest rate cuts by the Federal Reserve and principal repayments required pursuant to our credit agreement.

Other expense, net

The $7.5 million increase in other expense, net resulted primarily from an increase in acquisition costs of $38.7 million and an increase in miscellaneous taxes of $0.8 million, offset by an increase in gains on marketable securities of $27.9 million and an increase in interest income of $4.0 million.

Income tax provision

Income tax provision for the years ended January 31, 2020 and 2019 was $3.5 million and $1.9 million, respectively.

The increase in income tax provision was primarily the result of a decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to our pre-tax income and an increase in non-deductible expenses, which were offset by exclusion of the gain in connection with our equity investment in WageWorks that will not be realized for income tax purposes.

Our effective income tax rate for the years ended January 31, 2020 and 2019 was 8.1% and 2.5%, respectively.

The $34.9 million in interest expense for the fiscal year ended January 31, 2021 consists primarily of interest accrued under our term loan facility and amortization of financing costs.

We expect interest expense to decrease as a result of the principal repayments under our term loan facility.

Other income (expense), net

The change in other income (expense), net, from expense of $9.1 million during the fiscal year ended January 31, 2020 to income of $5.0 million during the fiscal year ended January 31, 2021 was primarily due to a $39.7 million decrease in acquisition costs and a $27.8 million non-recurring gain in connection with our equity investment in WageWorks during the fiscal year ended January 31, 2020.

The remainder of the change was due to a non-recurring gain of $6.8 million in connection with a legal matter during the fiscal year ended January 31, 2021, a $4.9 million decrease in interest income, and a $0.3 million decrease in other expenses.

Income tax provision (benefit)

For the fiscal years ended January 31, 2021 and 2020, we recorded an income tax benefit of $4.7 million and an income tax provision of $3.5 million, respectively.

The decrease in income tax provision was primarily the result of an increase in excess tax benefits on stock-based compensation expense, deferred tax rate adjustments due to merger integration, and research and development credits recognized in the provision for income taxes relative to our pre-tax income.

The Company’s effective income tax rate for the fiscal years ended January 31, 2021 and 2020 was an effective income tax benefit rate of 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 due to the adoption of ASU 2016-09, and other discrete items.

The increase in the effective tax rate for the year ended January 31, 2020 was primarily due to a decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to our pre-tax income and an increase in non-deductible expenses, which were offset by exclusion of the gain in connection with our equity investment in WageWorks that will not be realized for income tax purposes.

The decrease in the effective tax rate for the fiscal year ended January 31, 2021 was primarily due to an increase in excess tax benefits on stock-based compensation expense, deferred tax rate adjustments due to merger integration, and research and development credits recognized in the provision for income taxes relative to our pre-tax income.

Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations.

A significant number of new and existing Network Partners bring us new HSAs and CDBs beginning in January of each year concurrent with the start of many employers’ benefit plan years.

Revenue 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 HSAs 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 accounts, we incur costs related to implementing and supporting our new Network Partners and new accounts.

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Cash and cash equivalents overview

As of January 31, 2020, our principal source of liquidity was our current cash and cash equivalents balances, collections from our service, custodial and interchange revenue activities, and availability under our revolving credit facility described below.

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, payments required pursuant to our credit agreement, and capital expenditures.

Our principal sources of liquidity are our current cash and cash equivalents balances, collections from our service, custodial and interchange revenue activities, and availability under our revolving credit facility described below.

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, payments under our term loan facility, and capital expenditures.

As of January 31, 2021 and January 31, 2020, cash and cash equivalents were $328.8 million and $191.7 million, respectively.

Cash and cash equivalents as of January 31, 2021 included $286.8 million of net proceeds we received from our follow-on public offering in July 2020 from the sale of 5,290,000 shares of our common stock, partially offset by $200 million used to prepay long-term debt.

It does not include $456.7 million of net proceeds we received from our follow-on public offering in February and March 2021.

Capital resources

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This 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.

marketing activities, general and administrative matters and capital expenditures, and if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business.

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 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.

On July 12, 2019, the Company closed a follow-on public offering of 7,762,500 shares of common stock at a public offering price of $61.00 per share, less the underwriters' discount.

The Company received net proceeds of approximately $458.5 million after deducting underwriting discounts and commissions of approximately $14.1 million and other offering expenses payable by the Company of approximately $0.9 million.

In connection with the closing of the Acquisition on August 30, 2019, the Company entered into a new $1.60 billion credit agreement, consisting of (i) a five-year senior secured term loan A facility in the aggregate principal amount of $1.25 billion, the net proceeds of which were used by the Company to finance the Acquisition and related transactions, and (ii) a five-year senior secured revolving credit facility in an aggregate principal amount of up to $350.0 million, which may be used for working capital and general corporate purposes, including the financing of acquisitions and other investments.

In July 2020, we 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.

We received net proceeds of $286.8 million after deducting underwriting discounts and commissions of $8.9 million and other offering expenses of $0.6 million.

Our credit agreement includes a five-year senior secured revolving credit facility in an aggregate principal amount of up to $350.0 million, which may be used for working capital and general corporate purposes, including the financing

of acquisitions and other investments.

For a description of the terms of the credit agreement, refer to Note 8—Indebtedness.

We were in compliance with all covenants under the credit agreement as of January 31, 2020.

From February 1, 2019 to April 4, 2019, we acquired approximately 1.6 million shares of common stock of WageWorks for $53.8 million in open market purchases.

On August 30, 2019, the Acquisition closed and we paid approximately $2.0 billion in cash to WageWorks stockholders, which was funded with net borrowings of approximately $1.22 billion, after deducting lender fees of approximately $30.5 million, under the above term loan, and $816.9 million of cash on hand.

Capital expenditures for the years ended January 31, 2020 and 2019 were $32.9 million and $13.8 million, respectively.

We expect to continue our increased capital expenditures during the year ending January 31, 2021 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems.

We were in compliance with all covenants under the credit agreement as of January 31, 2021, and for the period then ended.

We used a portion of the net proceeds from the follow-on public offering in July 2020 to prepay $200 million under our term loan facility, with the remaining proceeds to be used for general corporate purposes, which may include additional prepayments under our term loan facility or potential acquisitions.

Capital expenditures for the fiscal years ended January 31, 2021 and 2020 were $64.6 million and $32.9 million, respectively.

We expect to continue our current level of increased capital expenditures during the fiscal year ending January 31, 2022 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems.

Costs to improve the architecture of our proprietary systems include computer hardware, personnel and related costs for software engineering and outsourced software engineering services.

In addition, as a result of the Acquisition and Company growth, we plan to devote further resources to leasehold improvements and furniture and fixtures for our office space.

We believe our existing cash, cash equivalents, and revolving credit facility will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months.

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Net cash provided by operating activities $ 181,619 $ 105,010

Net cash provided by (used in) investing activities $ (1,740,494) $ 25,652

Net cash used in investing activities $ (96,964) $ (1,740,494)

Net cash provided by financing activities $ 52,422 $ 1,465,735

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Ending cash and cash equivalents $ 328,803 $ 191,726

Cash flows provided by operating activities.

Net cash provided by operating activities during the year ended January 31, 2020 resulted from net income of $39.7 million, plus depreciation and amortization expense of $55.4 million and stock-based compensation expense of $39.8 million, offset by gains on marketable equity securities of $27.8 million and other non-cash items and working capital changes totaling $2.1 million.

Net cash provided by operating activities during the year ended January 31, 2019 resulted from net income of $73.9 million, plus depreciation and amortization expense of $18.2 million, stock-based compensation expense of $21.1 million, and other non-cash items and working capital changes totaling $0.2 million.

Cash flows provided by and used in investing activities.

Net cash used in investing activities during the year ended January 31, 2020 was primarily the result of the Acquisition of WageWorks for $1.64 billion, net of cash acquired, and purchases of marketable equity securities of $53.8 million.

We also continued development of our proprietary systems and other software necessary to support our continued account growth.

Purchases of software and capitalized software development costs for the year ended January 31, 2020 were $25.7 million compared to $10.0 million for the year ended January 31, 2019.

We continued to invest in purchases of intangible member assets, using $9.1 million for portfolio purchases during the year ended January 31, 2020, compared to $1.2 million for the year ended January 31, 2019.

Our purchases of property and equipment were $7.3 million for the year ended January 31, 2020, compared to $3.9 million during the year ended January 31, 2019.

Cash flows provided by financing activities.

Cash flow provided by financing activities during the year ended January 31, 2020 resulted primarily from net borrowings of $1.22 billion, our follow-on offering where we received net proceeds of $458.5 million from the sale of 7,762,500 shares of our common stock, and the exercise of stock options of $11.3 million, offset by $7.8 million of principal payments on our long-term debt and $215.8 million of cash used to settle Client-held funds obligations.

Cash flows provided by financing activities during the year ended January 31, 2019 resulted from proceeds associated with the exercise of stock options of $22.9 million.

Cash flows from operating activities.

Net cash provided by operating activities during the fiscal year ended January 31, 2021 resulted from net income of $8.8 million, plus depreciation and amortization expense of $115.9 million, stock-based compensation expense of $42.9 million, amortization of debt issuance costs of $5.1 million, and other non-cash items and working capital changes totaling $8.9 million.

Net cash provided by operating activities during the fiscal year ended January 31, 2020 resulted from net income of $39.7 million, plus depreciation and amortization expense of $55.4 million, stock-based compensation expense of $39.8 million, and amortization of debt issuance costs of $2.7 million, partially offset by gains on marketable equity securities of $27.6 million and other non-cash items and working capital changes totaling $5.0 million.

Cash flows from investing activities.

Cash used in investing activities during the fiscal year ended January 31, 2021 resulted from $51.5 million in software and capitalized software development, $32.4 million in acquisitions of intangible member assets, and $13.1 million in purchases of property and equipment.

Cash used in investing activities during the fiscal year ended January 31, 2020 resulted from $1.64 billion used in the WageWorks Acquisition, $53.8 million in purchases of marketable equity securities, $25.7 million in software and capitalized software development, $9.1 million in acquisitions of intangible member assets, and $7.3 million in purchases of property and equipment.

Cash flows from financing activities.

Net cash provided by financing activities during the fiscal year ended January 31, 2021 resulted from $286.8 million of net proceeds from our July 2020 follow-on public offering of 5,290,000 shares of common stock and the exercise of stock options of $8.6 million.

These items were partially offset by $239.1 million of principal payments on our long-term debt and $3.9 million used in the settlement of Client-held funds obligations.

Net cash provided by financing activities during the fiscal year ended January 31, 2020 resulted from net borrowings of $1.22 billion under our term loan facility, net proceeds of $458.5 million from the sale of 7,762,500 shares of our

common stock in our July 2019 follow-on offering, and the exercise of stock options of $11.3 million.

These items were partially offset by $215.8 million of cash used to settle Client-held funds obligations.

Contractual obligations

We lease office space, data storage facilities, and other leases, as well as contractual commitments related to network infrastructure and certain maintenance requirements under long-term non-cancelable operating leases.

Future minimum lease payments and other contractual payments required under non-cancelable obligations as of January 31, 2020 are as follows:

Payments due by fiscal year

(in thousands) 2021 2022-2023 2024-2025 Thereafter Total

Long-term debt obligations (1) $ 39,063 $ 132,813 $ 1,070,313 $ — $ 1,242,189

Interest on long-term debt obligations (2) 45,658 84,986 58,730 — 189,374

Operating lease obligations (3) 13,064 35,456 32,023 99,530 180,073

Other contractual obligations (4) 21,912 26,629 1,648 — 50,189

Total $ 119,697 $ 279,884 $ 1,162,714 $ 99,530 $ 1,661,825

(1) As of January 31, 2020, our outstanding principal of $1.24 billion is presented net of debt issuance costs on our consolidated balance sheets.

The debt issuance costs are not included in the table above.

The debt maturity date is August 31, 2024.

(2) Estimated interest payments assume the stated interest rate applicable as of January 31, 2020 of 3.65% per annum on a $1.24 billion outstanding principal amount.

(3) We lease office space, data storage facilities, and other leases under non-cancelable operating leases expiring at various dates through 2031.

(4) Other contractual obligations consist of processing services agreements, telephony services, immaterial capital leases, and other contractual commitments.

Our contractual obligations consist of commitments under operating leases, our credit agreement, and other non-cancellable agreements.

See Note 7—Commitments and contingencies for additional information about our contractual obligations.

Off-balance sheet arrangements

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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.

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.

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.

Valuation of long-lived assets including goodwill, intangible assets and estimated useful lives

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities 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 limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives, and discount rates.

Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, 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 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 measurement period, any subsequent adjustments are recorded to earnings.

We 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.

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Recoverability of these assets is measured by a comparison of the carrying amounts to the 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 carrying amount of such assets is reduced to fair value.

If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value.

We have not recorded any significant impairment charges during the years presented.

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Historically changes in useful lives have not resulted in material changes to our depreciation and amortization expense.

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.

We account for income taxes and the related accounts under the asset and liability method as set forth in 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.

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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.

We have also elected to exclude the indirect tax effects of share-based compensation deductions in computing the income tax provision or benefit 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.

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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 consolidated statements of operations and comprehensive income.

We recognize interest and penalties, if any, related to unrecognized tax benefits as a component of other income (expense), net in the consolidated statements of operations and comprehensive income.

Changes in facts and circumstances could have a material impact on our effective tax rate and results of operations.

Recent accounting pronouncements

Summary of business and significant accounting policies within the financial statements included in this Form 10-K for further discussion.

See Note 1—Summary of business and significant accounting policies within the financial statements included in this Form 10-K for further discussion.

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-K

Item 7. Management’s Discussion and Analysis