HEALTHEQUITY, INC. 10-K

Item 8. Financial statements and Supplementary Data HealthEquity, Inc. and subsidiaries Index to consolidated financial statements Page Report of Independent Registered Public Accounting Firm 51 Consolidated Balance Sheets as of January 31, 2021 and 2020 54 Consolidated Statements of Operations and Comprehensive Income for the years ended January 31, 2021, 2020 and 2019 55 Consolidated Statements of Stockholders' Equity for the years ended January 31, 2021, 2020 and 2019 56 Consolidated Statements of Cash Flows for the years ended January 31, 2021, 2020 and 2019 57 Notes to consolidated financial statements 59 -50- Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of HealthEquity, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of HealthEquity, Inc. and its subsidiaries (the “Company”) as of January 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date. The material weaknesses related to the following as the WageWorks subsidiary: (i) did not have an effective risk assessment as it did not sufficiently identify and analyze risks arising from changes in the business environment, including risks arising in connection with the integration of acquisitions and financial system implementations, (ii) did not have effective information and communication as it did not establish cross-functional procedures and policies necessary to support the functioning of internal control over financial reporting, and (iii) did not have effective monitoring as it did not implement effective monitoring controls that were responsive to changes in the business or the timely remediation of identified control deficiencies. The material weaknesses in risk assessment, information and communication and monitoring at the WageWorks subsidiary contributed to additional material weaknesses as the WageWorks subsidiary: (a) had inadequate process level and monitoring controls in the area of accounting close and financial reporting specifically, but not exclusively, around the review of account reconciliations, completeness and accuracy of data material to financial reporting, accounting estimates and related cut-off, the establishment, review, and implementation of accounting policies, and the review of the accuracy and completeness of certain manual and complex data feeds into journal entries and reconciliations of high-volume standard transactions, (b) did not have effective controls around the contract-to-cash life cycle of service fees, including ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements that require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, availability of customer contracts, and reviews of non-standard contracts, and (c) did not have effective controls related to information technology general controls (ITGCs) in the areas of logical access and change-management over certain information technology systems that supported its financial reporting processes. WageWorks' business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s report on internal control over financial reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in the year ended January 31, 2020. -51- Table of Contents Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. WageWorks, Inc. Service Revenue Recognition As described in Note 1 to the consolidated financial statements, the Company's primary sources of revenue are service, custodial, and interchange revenue. The Company’s service revenue was $431 million for the year ended January 31, 2021, of which a significant portion relates to WageWorks, Inc. To generate service revenue, the Company hosts its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services. All of these services are consumed as they are received. The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations. -52- Table of Contents The principal consideration for our determination that performing procedures relating to WageWorks, Inc. service revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to revenue recognition in consideration of the material weaknesses identified by the Company in WageWorks, Inc.’s internal control environment relating to risk assessment, information and communication, and monitoring as described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section above. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the recognition of service revenue for a sample of revenue transactions by obtaining confirmation from customers or obtaining and inspecting source documents, including invoices, sales contracts, and cash receipts. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah March 31, 2021 We have served as the Company’s auditor since 2013. -53- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated Balance Sheets (in thousands, except par value) January 31, 2021 January 31, 2020 Assets Current assets Cash and cash equivalents $ 328,803 $ 191,726 Accounts receivable, net of allowance for doubtful accounts of $ 4,239 and $ 1,216 as of January 31, 2021 and 2020, respectively 72,767 70,863 Other current assets 58,607 34,711 Total current assets 460,177 297,300 Property and equipment, net 29,106 33,486 Operating lease right-of-use assets 89,508 83,178 Intangible assets, net 767,003 783,279 Goodwill 1,327,193 1,332,631 Deferred tax asset — 18 Other assets 37,420 35,089 Total assets $ 2,710,407 $ 2,564,981 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 1,614 $ 3,980 Accrued compensation 50,670 50,121 Accrued liabilities 75,880 46,372 Current portion of long-term debt 62,500 39,063 Operating lease liabilities 14,037 12,401 Total current liabilities 204,701 151,937 Long-term liabilities Long-term debt, net of issuance costs 924,217 1,181,615 Operating lease liabilities, non-current 74,224 68,017 Other long-term liabilities 8,808 2,625 Deferred tax liability 119,729 130,492 Total long-term liabilities 1,126,978 1,382,749 Total liabilities 1,331,679 1,534,686 Commitments and contingencies (see Note 7) Stockholders’ equity Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of January 31, 2021 and 2020 — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 77,168 and 71,051 shares issued and outstanding as of January 31, 2021 and 2020, respectively 8 7 Additional paid-in capital 1,158,372 818,774 Accumulated earnings 220,348 211,514 Total stockholders’ equity 1,378,728 1,030,295 Total liabilities and stockholders’ equity $ 2,710,407 $ 2,564,981 The accompanying notes are an integral part of the consolidated financial statements. -54- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated Statements of Operations and Comprehensive Income Year ended January 31, (in thousands, except per share data) 2021 2020 2019 Revenue Service revenue $ 430,966 $ 262,868 $ 100,564 Custodial revenue 190,933 181,892 126,178 Interchange revenue 111,671 87,233 60,501 Total revenue 733,570 531,993 287,243 Cost of revenue Service costs 280,214 170,863 76,858 Custodial costs 19,574 17,563 14,124 Interchange costs 18,448 17,658 15,068 Total cost of revenue 318,236 206,084 106,050 Gross profit 415,334 325,909 181,193 Operating expenses Sales and marketing 49,964 43,951 29,498 Technology and development 124,809 77,576 35,057 General and administrative 84,493 60,561 33,039 Amortization of acquired intangible assets 76,064 34,704 5,929 Merger integration 45,990 32,111 — Total operating expenses 381,320 248,903 103,523 Income from operations 34,014 77,006 77,670 Other expense Interest expense ( 34,881 ) ( 24,772 ) ( 270 ) Other income (expense), net 5,007 ( 9,079 ) ( 1,582 ) Total other expense ( 29,874 ) ( 33,851 ) ( 1,852 ) Income before income taxes 4,140 43,155 75,818 Income tax provision (benefit) ( 4,694 ) 3,491 1,919 Net income and comprehensive income $ 8,834 $ 39,664 $ 73,899 Net income per share: Basic $ 0.12 $ 0.59 $ 1.20 Diluted $ 0.12 $ 0.58 $ 1.17 Weighted-average number of shares used in computing net income per share: Basic 74,235 67,026 61,836 Diluted 75,679 68,453 63,370 The accompanying notes are an integral part of the consolidated financial statements. -55- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated Statements of Stockholders’ Equity Common stock Additional paid-in capital Accumulated compre- hensive loss Accumulated earnings Total stockholders' equity (in thousands) Shares Amount Balance as of January 31, 2018 60,825 $ 6 $ 261,237 $ ( 269 ) $ 85,300 $ 346,274 Issuance of common stock: Issuance of common stock upon exercise of options, and for restricted stock 1,621 — 22,929 — — 22,929 Stock-based compensation — — 21,057 — — 21,057 Cumulative effect from adoption of ASC 606 — — — — 13,007 13,007 Cumulative effect from adoption of ASU 2016-01 — — — 269 ( 356 ) ( 87 ) Net income — — — — 73,899 73,899 Balance as of January 31, 2019 62,446 $ 6 $ 305,223 $ — $ 171,850 $ 477,079 Issuance of common stock: Issuance of common stock upon exercise of options, and for restricted stock 842 — 11,438 — — 11,438 Other issuance of common stock 7,763 1 462,269 — — 462,270 Stock-based compensation — — 39,844 — — 39,844 Net income — — — — 39,664 39,664 Balance as of January 31, 2020 71,051 $ 7 $ 818,774 $ — $ 211,514 $ 1,030,295 Issuance of common stock: Issuance of common stock upon exercise of options, and for restricted stock 827 — 9,956 — — 9,956 Other issuance of common stock 5,290 1 286,779 — — 286,780 Stock-based compensation — — 42,863 — — 42,863 Net income — — — — 8,834 8,834 Balance as of January 31, 2021 77,168 $ 8 $ 1,158,372 $ — $ 220,348 $ 1,378,728 The accompanying notes are an integral part of the consolidated financial statements. -56- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated Statements of Cash Flows Year ended January 31, (in thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 8,834 $ 39,664 $ 73,899 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 115,904 55,352 18,185 Stock-based compensation 42,863 39,844 21,057 Amortization of debt issuance costs 5,102 2,711 60 (Gains) losses on marketable equity securities — ( 27,570 ) 103 Other non-cash items 1,753 728 676 Deferred taxes ( 5,132 ) 3,665 408 Changes in operating assets and liabilities: Accounts receivable ( 413 ) ( 4,029 ) ( 4,066 ) Other assets ( 24,839 ) ( 12,577 ) ( 5,799 ) Operating lease right-of-use assets 11,150 6,218 — Accrued compensation 771 4,550 4,432 Accounts payable, accrued liabilities, and other current liabilities 30,422 1,920 3,894 Operating lease liabilities, non-current ( 10,803 ) ( 5,383 ) — Other long-term liabilities 6,007 ( 83 ) 573 Net cash provided by operating activities 181,619 105,010 113,422 Cash flows from investing activities: Purchases of property and equipment ( 13,093 ) ( 7,286 ) ( 3,869 ) Purchases of software and capitalized software development costs ( 51,500 ) ( 25,654 ) ( 9,978 ) Acquisition of intangible member assets ( 32,371 ) ( 9,134 ) ( 1,195 ) Acquisitions, net of cash acquired — ( 1,644,575 ) — Purchases of marketable securities — ( 53,845 ) ( 728 ) Proceeds from sale of marketable securities — — 41,422 Net cash provided by (used in) investing activities ( 96,964 ) ( 1,740,494 ) 25,652 Cash flows from financing activities: Proceeds from follow-on equity offering, net of payments for offering costs 286,779 458,495 — Principal payments on long-term debt ( 239,063 ) ( 7,813 ) — Proceeds from long-term debt — 1,250,000 — Payment of debt issuance costs — ( 30,504 ) — Settlement of client-held funds obligation ( 3,862 ) ( 215,790 ) — Proceeds from exercise of common stock options 8,568 11,347 22,929 Net cash provided by financing activities 52,422 1,465,735 22,929 Increase (decrease) in cash and cash equivalents 137,077 ( 169,749 ) 162,003 Beginning cash and cash equivalents 191,726 361,475 199,472 Ending cash and cash equivalents $ 328,803 $ 191,726 $ 361,475 The accompanying notes are an integral part of the consolidated financial statements. -57- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated Statements of Cash Flows (continued) Year ended January 31, (in thousands) 2021 2020 2019 Supplemental cash flow data: Interest expense paid in cash $ 27,686 $ 21,806 $ 203 Income tax payments (refunds), net ( 6,022 ) 9,277 587 Supplemental disclosures of non-cash investing and financing activities: Purchases of property and equipment included in accounts payable or accrued liabilities 160 487 37 Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 1,930 1,742 200 Decrease in goodwill due to measurement period adjustments, net 5,438 — — Exercise of common stock options receivable 1,478 — — Equity-based acquisition consideration — 3,776 — The accompanying notes are an integral part of the consolidated financial statements. -58- Table of Contents HealthEquity, Inc. and subsidiaries Notes to consolidated financial statements Note 1. Summary of business and significant accounting policies Business HealthEquity, Inc. ("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002. 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. In February 2006, HealthEquity received designation by the U.S. Department of Treasury to act as a passive non-bank custodian, which allows HealthEquity to hold custodial assets for individual account holders. On July 24, 2017, HealthEquity received designation by the U.S. Department of Treasury to act as both a passive and non-passive non-bank custodian, which allows HealthEquity to hold custodial assets for individual account holders and use discretion to direct investment of such assets held. As a passive and non-passive non-bank custodian according to Treasury Regulations section 1.408-2(e)(5)(ii)(B), the Company must maintain net worth (assets minus liabilities) greater than the sum of 2 % of passive custodial funds held at each fiscal year-end and 4 % of the non-passive custodial funds held at each fiscal year-end in order to take on additional custodial assets. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the consolidated financial statements, except for the new accounting pronouncements adopted during the fiscal year ended January 31, 2021, as described below. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Acquisition of WageWorks, Inc. On August 30, 2019, HealthEquity closed the acquisition of WageWorks, Inc. (the “WageWorks Acquisition”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), for $ 51.35 per share in cash, or approximately $ 2.0 billion to WageWorks stockholders. As a result of the WageWorks Acquisition, HealthEquity gained access to more of the HSA market by expanding its direct distribution to employers and benefits advisors as a single source provider of HSAs and other CDBs, including flexible spending accounts, health reimbursement arrangements, Consolidated Omnibus Budget Reconciliation Act ("COBRA") administration, commuter and other benefits. 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 $ 286.8 million after deducting underwriting discounts and commissions of $ 8.9 million and other offering expenses of $ 0.6 million. The Company used $ 200.0 million of such proceeds to repay debt under its term loan facility. Principles of consolidation The 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. Segments The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States of America. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents were held in institutions in the U.S. and include deposits in a money market account that was unrestricted as to withdrawal or use. -59- Table of Contents Client-held funds Many of the Company's client services agreements with employers (referred to as "Clients") provide that Clients remit funds to the Company to pre-fund Client and employee participant contributions related to flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”, respectively) and commuter accounts. These Client-held funds remitted to the Company do not represent cash assets of the Company to the extent that they are not combined with corporate cash, and accordingly are not included in cash and cash equivalents on the Company's consolidated balance sheets. Accounts receivable On February 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments using the modified retrospective transition method. Accounts receivable represent monies due to the Company for monthly service revenue, custodial revenue and interchange revenue. The Company maintains an allowance for doubtful accounts to reserve for expected credit losses from trade receivables considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including macroeconomic variables, the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition. Investments Marketable equity securities are strategic equity investments with readily determinable fair values for which the Company does not have the ability to exercise significant influence. These securities are accounted for at fair value and were classified as investments on the consolidated balance sheets. All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net in the consolidated statements of operations and comprehensive income. Non-marketable equity securities are strategic equity investments without readily determinable fair values for which the Company does not have the ability to exercise significant influence. These securities are accounted for using the measurement alternative and are classified as other assets on the consolidated balance sheets. All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on the consolidated statements of operations and comprehensive income. Equity method investments are equity securities in investees the Company does not control but over which the Company has the ability to exercise significant influence. Equity method investments are included in other assets on the consolidated balance sheets. The Company's share of the earnings or losses as reported by equity method investees, amortization of basis differences, and related gains or losses, if any, are recognized in other income (expense), net on the consolidated statements of operations and comprehensive income. The Company assesses whether an other-than-temporary impairment loss on equity method investments and an impairment loss on non-marketable equity securities has occurred due to declines in fair value or other market conditions. If any impairment is considered other than temporary for equity method investments or impairment is identified for non-marketable equity securities, the Company will write down the investment to its fair value and record the corresponding charge through other income (expense), net in the consolidated statements of operations and comprehensive income. Other assets Other assets consist primarily of contract costs, debt issuance costs, prepaid expenditures, income tax receivables, inventories, and various other assets. Amounts expected to be recouped or recognized over a period of twelve months or less have been classified as current in the accompanying consolidated balance sheets. Leases The Company adopted ASU 2016-02, Leases (codified as "ASC 842") on February 1, 2019 using the modified retrospective transition method with the adoption date as the date of initial application. Consequently, prior period balances and disclosures have not been restated. The Company determines if a contract contains a lease at inception or any modification of the contract. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a specified period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. -60- Table of Contents Leases with an expected term of 12 months or less at commencement are not accounted for on the balance sheet. All operating lease expense is recognized on a straight-line basis over the expected lease term. Certain leases also include obligations to pay for non-lease services, such as utilities and common area maintenance. The services are accounted for separately from lease components, and the Company allocates payments to the lease and other services components based on estimated stand-alone prices. Operating lease right-of-use ("ROU") assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. As the rate implicit in each lease is not readily determinable, management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Property and equipment Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of individual assets. The useful life for leasehold improvements is the shorter of the estimated useful life or the term of the lease ranging from 3 - 5 years. The useful life used for computing depreciation for all other asset classes is described below: Computer equipment 3 - 5 years Furniture and fixtures 5 years Maintenance and repairs are expensed when incurred, and improvements that extend the economic useful life of an asset are capitalized. Gains and losses on the disposal of property and equipment are reflected in operating expenses. Intangible assets, net Intangible assets are carried at cost and amortized, typically, on a straight-line basis over their estimated useful lives. The useful life used for computing amortization for all intangible asset classes is described below: Software and software development costs 3 years Acquired customer relationships 10 - 15 years Acquired developed technology 2 - 5 years Acquired trade names and trademarks 3 years Acquired HSA portfolios 15 years We account for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software . Costs incurred during operation and post-implementation stages are charged to expense. Costs incurred during the application development stage that are directly attributable to developing or obtaining software for internal use 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. Acquired customer relationships, developed technology, and trade names and trade marks are valued utilizing the discounted cash flow method, a form of the income approach. The useful lives of acquired customer relationships were estimated based on future revenue growth and attrition. The useful lives of developed technology and trade names were estimated based on expected obsolescence. The Company expenses the assets straight-line over the useful lives, and determined that this amortization method is appropriate to reflect the pattern over which the economic benefits of these acquired assets are realized. Acquired HSA portfolios consist of the contractual rights to administer the activities related to the individual HSAs acquired. The Company used its HSA customer relationship period assumption and the historical attrition rates of member accounts to determine that an average useful life of 15 years and the use of a straight-line amortization method are appropriate to reflect the pattern over which the economic benefits of existing member assets are realized. The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. -61- Table of Contents Goodwill Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment annually on January 31 or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s impairment tests are based on a single operating segment and reporting unit structure. The goodwill impairment test involves a qualitative assessment to compare a reporting unit's fair value to its carrying value. If it is determined that it is more likely than not that a reporting unit's fair value is less than its carrying value, a quantitative comparison is made between the Company's market capitalization and the carrying value of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, an impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. Self-insurance The Company is self-insured for medical insurance up to certain annual stop-loss limits. The Company establishes a liability as of the balance sheet date for claims, both reported and incurred but not reported, using currently available information as well as historical claims experience, and as determined by an independent third party. Other long-term liabilities Other long-term liabilities consists of long-term deferred revenue and other liabilities that the Company does not expect to settle within one year. Revenue recognition The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company determines revenue recognition through the following steps: • identification of the contract, or contracts, with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the Company satisfies a performance obligation. Disaggregation of revenue. The Company's primary sources of revenue are service, custodial, and interchange revenue and are disclosed in the consolidated statements of operations and comprehensive income. All of the Company's sources of revenue are deemed to be revenue contracts with customers. Each revenue source is affected differently by economic factors as it relates to the nature, amount, timing and uncertainty. Costs to obtain a contract. ASC 606, Revenue from contracts with customers , requires capitalizing the costs of obtaining a contract when those costs are expected to be recovered. In order to determine the amortization period for sales commissions contract costs, the Company applied the portfolio approach. Accordingly, the amortization period of the assets has been determined to be the average economic life of an HSA or other CDB relationship, which is estimated to be 15 years and 7 years, respectively. Amortization of capitalized sales commission contract costs is included in sales and marketing expenses in the consolidated statements of operations and comprehensive income. The Company has applied the practical expedient which allows an entity to account for incremental costs of obtaining a contract at a portfolio level. The Company has also applied the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. Performance obligations. ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. Service revenue. The Company hosts its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services. All of these services are consumed as they are received. The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations. Custodial revenue. The Company deposits HSA assets and Client-held funds at federally insured custodial depository partners, which we refer to as our Depository Partners, and investment assets with an investment -62- Table of Contents partner. The deposit of funds represents a service that is simultaneously received and consumed by our Depository Partners and investment partner. The Company recognizes custodial revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, each month based on the amount received by its custodial partners and investment partners. Interchange revenue. The Company satisfies its interchange performance obligation each time payments are made with its cards via payment networks. The Company recognizes interchange revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, in the month the payment transaction occurs. Contract balances. The Company does not recognize revenue until its right to consideration is unconditional and therefore has no related contract assets. The Company records a receivable when revenue is recognized prior to payment and the Company has unconditional right to payment. Alternatively, when payment precedes the related services, the Company records a contract liability, or deferred revenue, until its performance obligations are satisfied. Significant judgments. The Company makes no significant judgments in determining the amount or timing of revenue recognition. The Company has estimated the average economic life of an HSA or CDB member relationship, which has been determined to be the amortization period for the capitalized sales commissions contract costs. Cost of revenue The Company incurs cost of revenue related to servicing member accounts, managing customer and partner relationships, and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations, new member and participant supplies, and other operating costs of the member account servicing departments. Other components of the Company’s cost of revenue include interest retained by members on custodial assets held and interchange costs incurred in connection with processing card transactions initiated by members. Stock-based compensation The Company grants stock-based awards, which consist of stock options, restricted stock units ("RSUs") and restricted stock awards ("RSAs"), to certain team members, executive officers, and directors. The Company recognizes compensation expense for stock-based awards based on the grant date estimated fair value. Expense for stock-based awards is generally recognized on a straight-line basis over the requisite service period, and is reversed as pre-vesting forfeitures occur. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock options on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables. The fair value of RSUs and RSAs is 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. For stock-based awards with performance conditions, the Company evaluates the probability of achieving the performance criteria and of the number of shares that are expected to vest, and compensation expense is then adjusted to reflect the number of shares expected to vest and the requisite service period. For awards with performance conditions, compensation expense is recognized using the graded-vesting attribution method in accordance with the provisions of ASC 718, Compensation—Stock Compensation ("Topic 718"). Compensation expense related to stock-based awards with market conditions is recorded on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied. Upon the exercise of a stock option or release of an RSU/RSA, common shares are issued from authorized, but not outstanding, common stock. Interest Expense Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with our credit agreement. Income tax provision (benefit) The Company accounts 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. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for tax credit -63- Table of Contents carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may not be realized in future years. After weighing both the positive and negative evidence, the Company has recorded a valuation allowance with respect to realized capital losses for which the Company does not expect to generate capital gains in order to utilize the capital losses in the future. The Company believes that it is more likely than not that all other deferred tax assets will be realized as of January 31, 2021. The Company uses the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes. The Company has 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, the Company uses the portfolio approach in releasing income tax effects from accumulated other comprehensive income. The Company recognizes the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as a component of other income (expense), net in the consolidated statements of operations and comprehensive income. Changes in facts and circumstances could have a material impact on the Company’s effective tax rate and results of operations. Asset acquisitions The Company routinely acquires rights to be the custodian of HSA portfolios, in which substantially all of the fair value of the gross portfolio assets acquired is concentrated in a group of similar HSA assets and therefore the acquisitions do not constitute a business. Accordingly, the acquisitions are accounted for under the asset acquisition method of accounting in accordance with ASC 805-50, Business Combinations—Related Issues . Under the asset acquisition method of accounting, the Company is required to fair value the assets transferred. The cost of the assets acquired, including transaction costs incurred in conjunction with an asset acquisition, is allocated to the individual assets acquired based on their relative fair values and does not give rise to goodwill. Business combination Consideration paid for the acquisition of a business as defined by ASC 805-10 is allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. Acquisition-related expenses incurred in conjunction with the acquisition of a business are recognized in earnings in the period in which they are incurred and are included in other income (expense), net on the consolidated statements of operations and comprehensive income. Use of estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made estimates for the allowance for doubtful accounts, capitalized software development costs, evaluating goodwill and long-lived assets for impairment, useful lives of property and equipment and intangible assets, accrued compensation, accrued liabilities, grant date fair value of stock options and performance restricted stock units and restricted stock awards, and income taxes. Actual results could differ from those estimates. Recently adopted accounting pronouncements In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost be presented at the net amount expected to be collected. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the -64- Table of Contents new standard as of February 1, 2020 using the modified retrospective transition method. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement . ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted the new standard as of February 1, 2020. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The Company adopted the new standard as of February 1, 2020. The 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 consolidated financial statements. Note 2. Net income per share The following table sets forth the computation of basic and diluted net income per share: Year ended January 31, (in thousands, except per share data) 2021 2020 2019 Numerator (basic and diluted): Net income $ 8,834 $ 39,664 $ 73,899 Denominator (basic): Weighted-average common shares outstanding 74,235 67,026 61,836 Denominator (diluted): Weighted-average common shares outstanding 74,235 67,026 61,836 Weighted-average dilutive effect of stock options and restricted stock units 1,444 1,427 1,534 Diluted weighted-average common shares outstanding 75,679 68,453 63,370 Net income per share: Basic $ 0.12 $ 0.59 $ 1.20 Diluted $ 0.12 $ 0.58 $ 1.17 For the fiscal years ended January 31, 2021, 2020 and 2019, 0.6 million, 0.3 million, and 0.1 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. Note 3. Business combination WageWorks Acquisition On August 30, 2019, the Company closed the WageWorks Acquisition for $ 51.35 per share in cash, or $ 2.0 billion to WageWorks stockholders. The Company financed the transaction through a combination of $ 816.9 million cash on hand plus net borrowings of approximately $ 1.22 billion, after deducting lender fees of approximately $ 30.5 million, under a term loan facility (see Note 8—Indebtedness). The WageWorks Acquisition was accounted for under the acquisition method of accounting for business combinations. Consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. The initial allocation of the consideration paid was based on a preliminary valuation and was subject to adjustment during the measurement period (up to one year from the acquisition date). The purchase price allocation was finalized in the third quarter of fiscal year 2021. -65- Table of Contents The following table summarizes the Company's allocation of the consideration paid in the WageWorks Acquisition: (in millions) Initial Allocation Adjustments Updated Allocation Cash and cash equivalents $ 406.8 $ ( 14.5 ) $ 392.3 Other current assets 56.5 2.5 59.0 Property, plant, and equipment 26.6 26.6 Operating lease right-of-use assets 42.5 42.5 Intangible assets 715.3 715.3 Goodwill 1,330.5 ( 8.0 ) 1,322.5 Other assets 5.9 5.9 Client-held funds obligation ( 237.5 ) 17.2 ( 220.3 ) Other current liabilities ( 69.1 ) ( 3.7 ) ( 72.8 ) Other long-term liabilities ( 26.7 ) ( 26.7 ) Deferred tax liability ( 128.7 ) 6.5 ( 122.2 ) Total consideration paid $ 2,122.1 $ — $ 2,122.1 Adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters. Pro forma information The unaudited pro forma results presented below include the effects of the WageWorks Acquisition as if it had been consummated as of February 1, 2018, with adjustments to give effect to pro forma events that are directly attributable to the WageWorks Acquisition, which include adjustments related to the amortization of acquired intangible assets, interest income and expense, and depreciation. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings from the integration of WageWorks. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the WageWorks Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations. The estimated pro forma revenue and net income include the alignment of accounting policies, the effect of fair value adjustments related to the WageWorks Acquisition, associated tax effects and the impact of the borrowings to finance the WageWorks Acquisition and related expenses. Year ended January 31, (in thousands) (unaudited) 2020 2019 Revenue $ 798,253 $ 765,801 Net income $ 23,101 $ 6,419 Note 4. Supplemental financial statement information Selected consolidated balance sheet and consolidated statement of operations and comprehensive income components consist of the following: Allowance for doubtful accounts As of January 31, 2021 and 2020, the Company had an allowance for doubtful accounts of $ 4.2 million and $ 1.2 million, respectively. During the fiscal years ended January 31, 2021, 2020, and 2019, the Company recorded credit losses from trade receivables of $ 3.4 million, $ 1.0 million, and $ 0.2 million, respectively. Costs to obtain a contract As of January 31, 2021 and 2020, the net amount capitalized as contract costs was $ 27.5 million and $ 21.8 million, respectively, which is included in other current assets and other assets. Amortization of capitalized contract costs during the fiscal years ended January 31, 2021, 2020, and 2019 was $ 2.4 million, $ 1.9 million, and $ 1.5 million, respectively. -66- Table of Contents Property and equipment Property and equipment consisted of the following as of January 31, 2021 and 2020: (in thousands) January 31, 2021 January 31, 2020 Leasehold improvements $ 22,271 $ 19,240 Furniture and fixtures 9,230 7,929 Computer equipment 28,592 22,074 Property and equipment, gross 60,093 49,243 Accumulated depreciation ( 30,987 ) ( 15,757 ) Property and equipment, net $ 29,106 $ 33,486 Depreciation expense for the fiscal years ended January 31, 2021, 2020 and 2019 was $ 16.0 million, $ 8.9 million and $ 3.5 million, respectively. Contract balances As of January 31, 2021 and 2020, the balance of deferred revenue was $ 4.1 million and $ 3.7 million, respectively. The balances are related to cash received in advance for a certain 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 fiscal year that was included in the beginning balance of deferred revenue was $ 2.0 million. The Company expects to satisfy its remaining obligations for these arrangements. Other income (expense), net Other income (expense), net, consisted of the following: Year ended January 31, (in thousands) 2021 2020 2019 Interest income $ 1,045 $ 5,905 $ 1,946 Gain (loss) on equity securities — 27,760 ( 102 ) Acquisition costs ( 1,118 ) ( 40,810 ) ( 2,121 ) Other income (expense) 5,080 ( 1,934 ) ( 1,305 ) Total other income (expense), net $ 5,007 $ ( 9,079 ) $ ( 1,582 ) Note 5. Leases The Company has entered into various non-cancelable operating lease agreements for office space, data storage facilities, and other leases with remaining lease terms of less than 1 year to approximately 10 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 fiscal years ended January 31, 2021, 2020, and 2019. The components of operating lease costs are as follows: Year ended January 31, (in thousands, except for term and percentages) 2021 2020 2019 Operating lease expense $ 16,073 $ 9,059 $ 5,456 Sublease income ( 1,799 ) ( 750 ) — Net operating lease cost $ 14,274 $ 8,309 $ 5,456 Weighted average lease term and discount rate are as follows: January 31, 2021 January 31, 2020 Weighted average remaining lease term 9.02 years 9.41 years Weighted average discount rate 4.32 % 4.35 % -67- Table of Contents As of January 31, 2021, our lease liabilities were as follows: (in thousands) Operating leases Gross lease liabilities $ 107,150 Less: imputed interest ( 18,889 ) Present value of lease liabilities 88,261 Less: current portion of lease liabilities ( 14,037 ) Lease liabilities, non-current $ 74,224 As of January 31, 2021, the Company had additional operating leases for office space that have not yet commenced with aggregate undiscounted lease payments of $ 63.1 million. These operating leases will commence in fiscal year 2022 with leases terms ranging from 3 to 11 years. Supplemental cash flow information related to the Company's operating leases was as follows: Year ended January 31, (in thousands, except for term and percentages) 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 12,941 $ 6,361 Right-of-use assets obtained in exchange for lease obligations $ 17,480 $ 34,196 Note 6. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets is as follows as of January 31, 2021 and January 31, 2020: (in thousands) January 31, 2021 January 31, 2020 Amortizable intangible assets: Software and software development costs $ 127,005 $ 76,221 Acquired HSA portfolios 125,141 92,770 Acquired customer relationships 601,381 601,381 Acquired developed technology 96,925 96,925 Acquired trade names 12,300 12,300 Amortizable intangible assets, gross 962,752 879,597 Accumulated amortization ( 195,749 ) ( 98,851 ) Total amortizable intangible assets, net 767,003 780,746 Acquired in process software development costs — 2,533 Total intangible assets, net $ 767,003 $ 783,279 During the fiscal year ended January 31, 2021, the Company capitalized $ 32.4 million to acquire the rights to act as a custodian of HSA portfolios. -68- Table of Contents Amortization expense for the fiscal years ended January 31, 2021, 2020, and 2019 was $ 99.9 million, $ 46.5 million and $ 14.7 million, respectively. Estimated amortization expense for the years ending January 31 is as follows: Year ending January 31, (in thousands) 2022 $ 103,188 2023 91,824 2024 75,136 2025 58,283 2026 48,532 Thereafter 390,040 Total $ 767,003 Goodwill The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the accompanying consolidated financial statements. During the fiscal year ended January 31, 2021, goodwill decreased by $ 5.4 million due to measurement period adjustments related to the WageWorks Acquisition. During the fiscal year ended January 31, 2020, the Company recorded $ 1.33 billion of goodwill from the WageWorks Acquisition and related measurement period adjustments. There were no other changes to the goodwill carrying value during the fiscal years ended January 31, 2021 and 2020. Note 7. Commitments and contingencies Commitments The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of January 31, 2021: Payments due by fiscal year (in thousands) 2022 2023 2024 2025 2026 Thereafter Total Long-term debt obligations (1) $ 62,500 $ 70,313 $ 101,562 $ 768,750 $ — $ — $ 1,003,125 Interest on long-term debt obligations (2) 19,639 18,451 16,893 8,877 — — 63,860 Operating lease obligations (3) 15,809 18,082 16,094 16,341 16,683 87,235 170,244 Other contractual obligations (4) 21,948 15,645 1,756 402 — — 39,751 Total $ 119,896 $ 122,491 $ 136,305 $ 794,370 $ 16,683 $ 87,235 $ 1,276,980 (1) As of January 31, 2021, our outstanding principal of $ 1.00 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. The amount required to be repaid in fiscal year 2025 reflects the $ 200.0 million prepayment made in July 2020 with proceeds from the follow-on offering. (2) Estimated interest payments assume the stated interest rate applicable as of January 31, 2021 of 1.87 % per annum on a $ 1.00 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. These amounts exclude contractual sublease income of $ 3.7 million, which is expected to be received through February 2023. (4) Other contractual obligations consist of processing services agreements, telephony services, immaterial finance leases, and other contractual commitments. Subsequent to the WageWorks Acquisition, the Company entered into non-cancelable agreements to acquire the rights to administer WageWorks HSAs currently administered by third-party custodians. The remaining amounts due under these agreements are primarily variable in nature based on the number of HSAs transferred. Contingencies In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Legal matters WageWorks previously pursued affirmative claims against the Office of Personnel Management ("OPM") to obtain payment for services provided by WageWorks between March 1, 2016 and August 31, 2016 pursuant to its contract -69- Table of Contents with OPM. On December 18, 2020, the United States Civilian Board of Contract Appeals granted in part WageWorks' motion for summary judgment and denied OPM's motion for summary judgment, ending the dispute in WageWorks' favor. In addition, it was stipulated that OPM would pay WageWorks $ 6.8 million, which is included within other income (expense), net, on the January 31, 2021 consolidated statement of operations and comprehensive income. On March 9, 2018, a putative class action was filed in the U.S. District Court for the Northern District of California (the “Securities Class Action”). On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks, its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018. The complaint also alleges claims under the Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those same defendants, as well as the members of its board of directors at the time of that offering. On February 11, 2021, counsel for all parties involved in this lawsuit signed a term sheet to settle all claims for $ 30.0 million, of which WageWorks will contribute $ 5.0 million and its insurers will pay the remaining $ 25.0 million. The $ 30.0 million settlement and related $ 25.0 million insurance recovery are included within accrued liabilities and other current assets, respectively, on the January 31, 2021 consolidated balance sheet, and the net $ 5.0 million expense is included within merger integration expense on the January 31, 2021 consolidated statement of operations and comprehensive income. The settlement is subject to notice to class members and approval of the Court. On June 22, 2018 and September 6, 2018, two derivative lawsuits were filed against certain of WageWorks’ former officers and directors and WageWorks (as nominal defendant) in the Superior Court of the State of California, County of San Mateo. The actions were consolidated. On July 23, 2018, a similar derivative lawsuit was filed against certain former WageWorks’ officers and directors and WageWorks (as nominal defendant) in the U.S. District Court for the Northern District of California (together, the “Derivative Suits”). The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Class Action described above. The plaintiffs seek unspecified damages, fees and costs. Plaintiffs in the Superior Court action filed an amended consolidated complaint on October 28, 2019, naming as defendants certain former officers and directors of WageWorks and alleging a direct claim of "inseparable fraud/breach of fiduciary duty" on behalf of a class. WageWorks was not named as a party in that complaint. On June 24, 2020, the court granted the defendants’ motion to dismiss the amended complaint. The plaintiffs subsequently filed a notice of appeal. The District Court action is stayed. On February 16, 2021, a complaint was filed in the United States District Court for the Northern District of California against WageWorks, its former Chief Executive Officer, and its former Chief Financial Officer. The allegations in this suit relate to substantially the same facts as those underlying the Securities Class Action described above and the SEC settlement involving the former executives described below. The action alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as common law fraud and negligent misrepresentation. The Company has not yet responded to the complaint. Plaintiffs seek unspecified damages and costs. WageWorks voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the restatement of WageWorks' financial statements and related independent investigation. WageWorks is providing information and documents to the SEC and continues to cooperate with the SEC’s investigation into these matters. The U.S. Attorney’s Office for the Northern District of California also opened an investigation. WageWorks has provided documents and information to the U.S. Attorney’s Office and continues to cooperate with any inquiries by the U.S. Attorney’s Office regarding the matter. On February 2, 2021, the SEC announced charges against two former WageWorks executives and reached a settlement with these former executives. As part of the settlement, the two executives agreed to reimburse WageWorks for a total of $ 2.1 million. WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to these indemnification agreements, is covering the defense fees and costs of its former directors and officers in the legal proceedings described above. The Company and its subsidiaries are involved in various other litigation, governmental proceedings and claims, not described above, that arise in the normal course of business. It is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, or the impact that such litigation, proceedings and claims will have on the Company’s financial position, results of operations, and cash flows. The Company maintains liability insurance coverage that is intended to cover the legal matters described above; however, it is possible that claims may be denied by our insurance carriers or could exceed the amount of our applicable insurance coverage, we may be required by our insurance carriers to contribute to the payment of claims, and our insurance coverage may not continue to be available to us on acceptable terms or in sufficient amounts. -70- Table of Contents As required under GAAP, the Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on currently available information, the Company does not believe that any liabilities relating to these matters are probable or that the amount of any resulting loss is estimable. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations and cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods. Note 8. Indebtedness As of January 31, 2021, long-term debt consisted of the following: (in millions) January 31, 2021 Term loan facility $ 1,003.1 Less: unamortized loan issuance costs (1) 16.4 Long-term debt, net of issuance costs $ 986.7 (1) In addition to the $ 16.4 million of unamortized issuance costs related to the term loan facility, $ 5.0 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the January 31, 2021 consolidated balance sheet. In connection with the closing of the WageWorks Acquisition, on August 30, 2019, the Company entered into a credit facility (the "Credit Agreement”) that provided for: (i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $ 1.25 billion, the proceeds of which were used to finance the WageWorks Acquisition, to refinance substantially all outstanding indebtedness of HealthEquity and WageWorks and to pay related fees and expenses; and (ii) a five-year senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”), in an aggregate principal amount of up to $ 350 million, which may be used for working capital and general corporate purposes, including acquisitions and other investments. No amounts were drawn under the Revolving Credit Facility as of January 31, 2021. 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 January 31, 2021, the stated interest rate was 1.87 % and the effective interest rate was 2.40 %. The Company is also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20 % to 0.40 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. The 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 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 January 31, 2021, 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. -71- Table of Contents Note 9. Income taxes The income tax provision (benefit) consisted of the following: Year ended January 31, (in thousands) 2021 2020 2019 Current: Federal $ 181 $ ( 448 ) $ 1,095 State 258 274 416 Total current tax provision (benefit) $ 439 $ ( 174 ) $ 1,511 Deferred: Federal $ ( 1,630 ) $ 3,538 $ 1,258 State ( 3,503 ) 127 ( 850 ) Total deferred tax provision (benefit) $ ( 5,133 ) $ 3,665 $ 408 Total income tax provision (benefit) $ ( 4,694 ) $ 3,491 $ 1,919 Total income tax provision (benefit) differed from the amounts computed by applying the U.S. federal statutory income tax rate to income before income taxes as a result of the following: Year ended January 31, (in thousands) 2021 2020 2019 Federal income tax expense at the statutory rate $ 869 $ 9,063 $ 15,922 State income tax expense, net of federal tax benefit ( 99 ) 960 1,518 Other non-deductible or non-taxable items, net 469 798 251 Excessive employee remuneration 1,186 2,117 160 Excess tax benefits on stock-based compensation expense, net ( 2,983 ) ( 4,815 ) ( 14,255 ) Federal research and development credits ( 2,195 ) ( 2,296 ) ( 2,252 ) Change in uncertain tax position reserves, net of indirect benefits 511 491 450 Non-deductible acquisition-related costs — 3,032 — Non-taxable gain on investment in subsidiary — ( 5,790 ) — Reclassification of operating lease right-of-use assets 185 — — Change in net operating losses due to measurement period adjustments 377 — — Deferred tax rate adjustment due to merger integration ( 1,814 ) 225 — Return-to-provision adjustments ( 1,010 ) ( 332 ) ( 19 ) Change in valuation allowance ( 145 ) 93 10 Other items, net ( 45 ) ( 55 ) 134 Total income tax provision (benefit) $ ( 4,694 ) $ 3,491 $ 1,919 The Company’s effective income tax rate for the fiscal years ended January 31, 2021, 2020, and 2019 was an effective income tax benefit rate of 113.4 % and an effective income tax expense rate of 8.1 % and 2.5 %, 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 decrease in the effective tax rate for the fiscal year ended January 31, 2021 from the fiscal year ended January 31, 2020 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 pre-tax income. The increase in the effective tax rate for the fiscal year ended January 31, 2020 compared to the fiscal year ended January 31, 2019 was primarily due to a decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to 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. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The CARES Act, among other things, provides various income and payroll tax provisions to provide economic and other relief from the COVID-19 pandemic. The CARES Act did not have a material impact on our income tax expense or effective tax rate for 2020. -72- Table of Contents Deferred tax assets and liabilities consisted of the following: (in thousands) January 31, 2021 January 31, 2020 Deferred tax assets: Net operating loss carryforward $ 1,653 $ 1,147 Stock compensation 12,600 10,764 Research and development credits 6,274 4,693 Lease liabilities 21,813 20,232 Accruals and reserves 10,591 6,854 Other, net 1,755 2,154 Total gross deferred tax assets $ 54,686 $ 45,844 Less valuation allowance ( 104 ) ( 203 ) Deferred tax assets, net of valuation allowance 54,582 45,641 Deferred tax liabilities: Fixed assets ( 4,946 ) ( 4,875 ) Intangible assets ( 134,442 ) ( 142,673 ) Incremental contract costs ( 6,385 ) ( 5,474 ) Right-of-use assets ( 22,285 ) ( 21,068 ) Goodwill ( 6,081 ) ( 1,831 ) Other, net ( 172 ) ( 194 ) Total gross deferred tax liabilities ( 174,311 ) ( 176,115 ) Net deferred tax asset (liability) $ ( 119,729 ) $ ( 130,474 ) Management considered whether it is more likely than not that some portion or all of the deferred tax assets would be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment and determined that based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that the Company will be able to realize most of its deferred tax assets. However, the Company recorded a valuation allowance of $ 0.1 million and $ 0.2 million as of January 31, 2021 and 2020, respectively. The decrease in valuation allowance recorded is primarily the result of state tax credits that are expected to be utilized before expiration, and the remaining valuation allowance as of January 31, 2021 relates to capital loss carryovers. As of January 31, 2021, the Company had no remaining federal net operating loss carryforward and had gross state net operating loss carryforwards of $ 26.9 million which begin to expire at various intervals following the tax year ending January 31, 2028. As of January 31, 2021, the Company also had federal and state research and development credits of $ 5.3 million and $ 8.5 million, respectively, which begin to expire following the tax years ending January 31, 2037 and 2022, respectively. As of January 31, 2021 and 2020, the gross unrecognized tax benefit was $ 10.2 million and $ 9.4 million, respectively. If recognized, $ 9.4 million and $ 8.6 million of the total unrecognized tax benefits would affect the Company's effective tax rate as of January 31, 2021 and 2020, respectively. Total gross unrecognized tax benefits increased by $ 0.8 million in the period from January 31, 2020 to January 31, 2021. A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including the impact of purchase accounting from the WageWorks Acquisition, is as follows: (in thousands) January 31, 2021 January 31, 2020 Gross unrecognized tax benefits at beginning of year $ 9,370 $ 1,693 Gross amounts of increases and decreases: Increases as a result of tax positions taken during a prior period 1 6,888 Decreases as a result of tax positions taken during a prior period — ( 1 ) Increases as a result of tax positions taken during the current period 835 790 Decreases as a result of tax positions taken during the current period — — Decreases resulting from the lapse of the applicable statute of limitations — — Gross unrecognized tax benefits at end of year $ 10,206 $ 9,370 -73- Table of Contents Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . Other unrecognized tax benefits have been netted against existing tax receivable balances where significant overpayments have resulted. The resulting unrecognized tax benefit recorded within the Company's consolidated balance sheet excludes the following amounts that have been netted against the related deferred tax assets or tax receivables accordingly: (in thousands) January 31, 2021 January 31, 2020 Total gross unrecognized tax benefits $ 10,206 $ 9,370 Amounts netted against related deferred tax assets or tax receivables ( 9,574 ) ( 8,914 ) Unrecognized tax benefits recorded on the consolidated balance sheet $ 632 $ 456 The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other income (expense), net in the statement of operations and comprehensive income. During the fiscal years ended January 31, 2021 and 2020, the Company recorded penalties and interest of $ 0.2 million and $ 0.1 million, respectively, related to unrecognized tax benefits. No interest and penalties were recorded related to unrecognized tax benefits during the year ended January 31, 2019. As of January 31, 2021 and 2020, accrued interest and penalties of $ 0.8 million and $ 0.6 million, respectively, were recorded, of which $ 0.5 million related to existing balances from the WageWorks Acquisition recorded through purchase accounting. The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by the IRS and in the states of California and Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses. 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 2001. Note 10. Stock-based compensation The following table shows a summary of stock-based compensation in the Company's consolidated statements of operations and comprehensive income during the years presented: Year ended January 31, (in thousands) 2021 2020 2019 Cost of revenue $ 7,996 $ 4,792 $ 2,837 Sales and marketing 6,986 4,694 3,536 Technology and development 10,772 7,649 5,117 General and administrative 17,109 12,972 9,567 Merger integration — 1,603 — Other expense, net — 13,714 — Total stock-based compensation expense $ 42,863 $ 45,424 $ 21,057 The following table shows stock-based compensation by award type: Year ended January 31, (in thousands) 2021 2020 2019 Stock options $ 4,499 $ 6,612 $ 7,581 Performance stock options — — 681 Restricted stock units 28,040 25,781 7,657 Performance restricted stock units 6,270 4,862 2,419 Restricted stock awards 1,335 655 570 Performance restricted stock awards 2,719 1,934 2,149 Total non-cash stock-based compensation expense 42,863 39,844 21,057 Acquisition awards exchanged for cash — 5,580 — Total stock-based compensation expense $ 42,863 $ 45,424 $ 21,057 -74- Table of Contents Stock award plans Incentive Plan. The Company grants stock options, restricted stock units ("RSUs"), and restricted stock awards ("RSAs") under the HealthEquity, Inc. 2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provided for the issuance of stock awards to the directors and team members of the Company to purchase up to an aggregate of 2.6 million shares of common stock. In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing through and including February 1, 2024, by 3 % of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors. As of January 31, 2021, 6.4 million shares were available for grant under the Incentive Plan. WageWorks Incentive Plan. At the closing of the WageWorks Acquisition, and in accordance with the Merger Agreement, 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 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 fiscal years ended January 31, 2021, 2020 and 2019 was $ 23.68 , $ 25.97 and $ 26.40 per share, respectively. The key input assumptions that were utilized in the valuation of the stock options granted during the fiscal years ended January 31, 2021, 2020 and 2019 are as follows: Year ended January 31, 2021 2020 2019 Expected dividend yield 0 % 0 % 0 % Expected stock price volatility 37.97 % 35.98 % - 36.53 % 36.53 % - 37.84 % Risk-free interest rate 1.39 % 2.21 % - 2.43 % 2.52 % - 2.79 % Expected life of options 5.18 years 4.95 - 5.09 years 5.17 - 6.25 years The Company historically used the "simplified" method to estimate the expected term of an option as determined under Staff Accounting Bulletin No. 110 due to limited option exercise history as a public company. Commencing February 1, 2019, the Company began estimating the expected life of an option using its own historical option exercise and termination data. Expected volatility is determined using weighted average volatility of publicly traded peer companies. During the fiscal year ended January 31, 2019, the Company began using its own historical volatility in addition to the volatility of publicly traded peer companies, as its share price history grows over time. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations. -75- Table of Contents A summary of stock option activity is as follows: Outstanding stock options (in thousands, except for exercise prices and term) Number of options Range of exercise prices Weighted- average exercise price Weighted- average contractual term (in years) Aggregate intrinsic value Outstanding as of January 31, 2020 2,040 $ 0.10 - 82.39 $ 30.35 5.90 $ 74,009 Granted 16 $ 66.06 $ 66.06 Exercised ( 372 ) $ 0.10 - 59.63 $ 26.73 Forfeited ( 10 ) $ 25.45 - 44.53 $ 37.43 Outstanding as of January 31, 2021 1,674 $ 1.25 - 82.39 $ 31.46 5.00 $ 87,164 Vested and expected to vest as of January 31, 2021 1,674 $ 31.46 5.00 $ 87,164 Exercisable as of January 31, 2021 1,447 $ 27.04 4.60 $ 81,764 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 fiscal years ended January 31, 2021, 2020 and 2019 was $ 15.4 million, $ 22.5 million, and $ 65.5 million, respectively. As of January 31, 2021, the weighted-average vesting period of non-vested awards expected to vest is approximately 1.0 year; the amount of compensation expense the Company expects to recognize for stock options vesting in future periods is approximately $ 2.9 million. 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 fiscal years ended January 31, 2021, 2020 and 2019 was $ 56.93 , $ 65.20 and $ 67.69 per share, respectively. Performance restricted stock units and awards. During the first quarter of the fiscal year ended January 31, 2019, the Company awarded 227,760 performance-based restricted stock awards (the “FY19 PRSAs”). The Company records stock-based compensation related to the FY19 PRSAs when it is considered probable that the performance conditions will be met. The underlying shares were issued at 200 % of the target level of achievement at the grant date. In March 2020, the Compensation Committee modified the vesting conditions of the FY19 PRSAs by basing the first two years of the award solely on the Company’s revenue compound annual growth rate (“CAGR”) for the first two years , exclusive of the revenue recognized through the WageWorks Acquisition, and measured using the original revenue CAGR targets set by the Compensation Committee in respect of such awards. As a result, two-thirds of the FY19 PRSAs were deemed by the Compensation Committee to be earned at target; however, despite this determination, and in order to encourage retention of our executive officers, our executive officers were required to remain employed until the remaining performance conditions for the FY19 PRSAs were certified by the Compensation Committee, which occurred in March 2021. The remaining one-third of the FY19 PRSAs were modified to vest based on the Company’s net cash provided by operating activities (as defined under GAAP) relative to target given the importance of the Company generating sufficient cash flow to service the additional indebtedness incurred in connection with the WageWorks Acquisition. The modification affected 10 team members and did not result in an adjustment to stock-based compensation expense. The Company's actual net cash provided by operating activities for the year ended January 31, 2021 was 163 % of the target level of achievement. The FY19 PRSAs cliff vested upon approval by the Compensation Committee in March 2021. During the first quarter of the fiscal year ended January 31, 2020, the Company awarded 129,963 PRSUs (the “FY20 PRSUs”). The Company records stock-based compensation related to the FY20 PRSUs when it is considered probable that the performance conditions will be met. In March 2020, the Compensation Committee modified the vesting conditions of the FY20 PRSUs by basing the first year of the award solely on the Company’s revenue CAGR for the first year, exclusive of the revenue recognized through the WageWorks Acquisition, and measured using the original revenue CAGR targets set by the Compensation Committee in respect of such awards. As a result, one-third of the FY20 PRSUs were deemed by the Compensation Committee to be earned at target; however, despite this determination, and in order to encourage retention of our executive officers, our executive -76- Table of Contents officers must remain employed until the remaining performance conditions for the FY20 PRSUs are certified by the Compensation Committee, which we expect to occur in March 2022. The remaining two-thirds of the FY20 PRSUs will vest based on the Company’s net cash provided by operating activities (as defined under GAAP) relative to target given the importance of the Company generating sufficient cash flow to service the additional indebtedness incurred in connection with the WageWorks Acquisition. The modification affected 12 team members and resulted in incremental stock-based compensation expense of $ 6.6 million, which 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 FY20 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. The FY20 PRSUs cliff vest upon approval by the Compensation Committee. The modified performance conditions for the remaining 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 FY20 PRSUs will vest at least in part. During the first and second quarters of the fiscal year ended January 31, 2021, the Company awarded 277,950 PRSUs subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2023. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was approximately $ 20.8 million. Compensation expense is recorded if the service condition is met regardless of whether the market condition is satisfied. The market condition allows for a range of vesting from 0 % to 200 % based on the level of performance achieved. The PRSUs cliff vest upon approval by the Compensation Committee. 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 1,252 56.93 14 74.81 Vested ( 517 ) 56.63 ( 24 ) 69.72 Forfeited ( 283 ) 66.05 ( 32 ) 62.41 Outstanding as of January 31, 2021 1,832 $ 60.41 193 $ 61.77 During the fiscal years ended January 31, 2021, 2020 and 2019 the aggregate intrinsic value of RSUs and RSAs vested was $ 31.8 million, $ 25.0 million, and $ 6.4 million, respectively. Total unrecorded stock-based compensation expense as of January 31, 2021 associated with RSUs and PRSUs was $ 84.8 million, which is expected to be recognized over a weighted-average period of 2.5 years. Total unrecorded stock-based compensation expense as of January 31, 2021 associated with RSAs and PRSAs was $ 0.2 million, which is expected to be recognized over a weighted-average period of 0.2 years. Note 11. Fair value Fair value measurements are made at a specific point in time, based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1—quoted prices in active markets for identical assets or liabilities; • Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3—unobservable inputs based on the Company’s own assumptions. Level 1 instruments are valued based on publicly available daily net asset values. Level 1 instruments consist primarily of cash and cash equivalents. The carrying value of cash and cash equivalents approximate fair values as of January 31, 2021 due to the short-term nature of these instruments. -77- Table of Contents Our long-term debt is considered a Level 2 instrument and is recorded at book value in our consolidated financial statements. Our long-term debt reprices frequently due to variable interest rate terms and entails no significant changes in credit risk. As a result, we believe the fair value of our long-term debt approximates carrying value. Note 12. Employee benefits The Company has established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All non-seasonal team members over the age of 21 are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 3.5 % of eligible earnings. Employer matching contribution expense was $ 6.5 million, $ 3.7 million and $ 1.8 million for the fiscal years ended January 31, 2021, 2020 and 2019, respectively. The Company is self-insured for medical and dental benefits for all qualifying employees. The medical plan carries a stop-loss policy which will protect from individual claims during the plan year exceeding $ 250,000 . The Company records estimates of costs of claims incurred based on an analysis of historical data and independent estimates. The Company's liability for self-insured medical claims is included in accrued compensation in its consolidated balance sheet and was $ 3.5 million and $ 3.7 million as of January 31, 2021 and 2020, respectively. Note 13. Subsequent events In the first quarter of fiscal year 2022, the Company closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $ 80.30 per share, less the underwriters' discount. The Company received net proceeds of $ 456.7 million after deducting underwriting discounts and commissions of $ 4.6 million and other offering expenses of $ 0.5 million. The Company intends to use the net proceeds from the offering for potential acquisitions, repayment of indebtedness, and other general corporate purposes. On March 8, 2021, the Company acquired 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum for an aggregate purchase price consisting of approximately $ 50.5 million in cash, subject to net working capital and other customary adjustments, and up to $ 20 million in contingent payments payable during the two-year period following the closing of the acquisition. See Note 7—Commitments and contingencies for subsequent events related to legal matters. -78- Table of Contents Item 9. Changes in and disagreements with accountants on accounting and financial disclosure None.