What changed in this filing

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Item 1. Financial Statements

2021-06-08 compared with 2020-12-09 · 140 added, 161 removed, 305 unchanged (50% of the section changed)

3 unchanged sentences

Condensed consolidated balance sheets

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

(in thousands, except par value) April 30, 2021 January 31, 2021

Current assets

Cash and cash equivalents $ 736,773 $ 328,803

Accounts receivable, net of allowance for doubtful accounts of $ 3,458 and $ 1,216 as of October 31, 2020 and January 31, 2020, respectively

Accounts receivable, net of allowance for doubtful accounts of $ 4,648 and $ 4,239 as of April 30, 2021 and January 31, 2021, respectively

74,468 72,767

5 unchanged sentences

Goodwill 1,363,568 1,327,193

Deferred tax asset 21 18

Other assets 38,778 37,420

17 unchanged sentences

Stockholders’ equity

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

Common stock, $ 0.0001 par value, 900,000 shares authorized, 76,951 and 71,051 shares issued and outstanding as of October 31, 2020 and January 31, 2020, respectively

Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2021 and January 31, 2021, respectively

Common stock, $ 0.0001 par value, 900,000 shares authorized, 83,377 and 77,168 shares issued and outstanding as of April 30, 2021 and January 31, 2021, respectively

Additional paid-in capital 1,630,529 1,158,372

7 unchanged sentences

comprehensive income (loss) (unaudited)

Three months ended October 31, Nine months ended October 31,

Three months ended April 30,

(in thousands, except per share data) 2021 2020

34 unchanged sentences

Condensed consolidated statements of stockholders’ equity (unaudited)

Three months ended October 31, Nine months ended October 31,

Three months ended April 30,

(in thousands) 2021 2020

20 unchanged sentences

Condensed consolidated statements of cash flows (unaudited)

Nine months ended October 31,

Three months ended April 30,

(in thousands) 2021 2020

Cash flows from operating activities:

Net income $ 3,467 $ 39,854

Adjustments to reconcile net income to net cash provided by operating activities:

Net income (loss) $ ( 2,615 ) $ 1,826

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 31,768 27,507

1 unchanged sentence

Amortization of debt issuance costs 1,228 1,201

Gains on marketable equity securities — ( 27,570 )

Other non-cash items 893 972

10 unchanged sentences

Cash flows from investing activities:

Purchases of property and equipment ( 11,388 ) ( 5,180 )

Acquisitions, net of cash acquired ( 49,533 ) —

Purchases of software and capitalized software development costs ( 15,469 ) ( 11,775 )

Purchases of property and equipment ( 2,490 ) ( 7,511 )

Acquisition of intangible member assets ( 309 ) ( 6,008 )

Purchases of marketable securities — ( 53,845 )

Acquisitions, net of cash acquired — ( 1,630,066 )

Net cash used in investing activities ( 67,801 ) ( 25,294 )

4 unchanged sentences

Proceeds from exercise of common stock options 4,189 1,223

Proceeds from long-term debt — 1,250,000

Payment of debt issuance costs — ( 30,504 )

Net cash provided by financing activities 63,643 1,454,405

Net cash provided by (used in) financing activities 444,853 ( 10,365 )

Increase (decrease) in cash and cash equivalents 407,970 ( 20,633 )

5 unchanged sentences

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

Nine months ended October 31,

Three months ended April 30,

(in thousands) 2021 2020

1 unchanged sentence

Interest expense paid in cash $ 4,988 $ 10,749

Income taxes paid in cash, net of refunds received 1,053 9,127

Income tax payments (refunds), net ( 4,852 ) 733

Supplemental disclosures of non-cash investing and financing activities:

Property and equipment included in accounts payable or accrued liabilities $ 167 $ 168

Software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 1,346 316

Intangible member assets included in accounts payable or accrued liabilities 289 ( 151 )

Decrease in goodwill due to measurement period adjustments, net 5,838 —

Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 3,982 1,537

Purchases of property and equipment included in accounts payable or accrued liabilities 765 968

Contingent consideration recognized at acquisition 8,147 —

Exercise of common stock options receivable 5 —

Equity-based acquisition consideration — 3,776

See accompanying notes to condensed consolidated financial statements.

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Basis of presentation

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

The accompanying condensed consolidated financial statements as of April 30, 2021 and for the three months ended April 30, 2021 and 2020 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting.

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

4 unchanged sentences

Follow-on equity offering

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

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

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

In the first quarter of fiscal year 2022, the Company closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $ 80.30 per share, less the underwriters' discount.

The Company received net proceeds of $ 456.6 million after deducting underwriting discounts and commissions of $ 4.6 million and other offering expenses of approximately $ 0.5 million.

The Company used $ 50.2 million of the net proceeds from the offering to acquire 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum, and intends to use the remaining net proceeds from the offering for general corporate purposes, which may include prepayments under its term loan facility or potential acquisitions, including the acquisitions of Further and the Fifth Third Bank HSA portfolio.

Significant accounting policies

1 unchanged sentence

Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 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 condensed 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 condensed 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 condensed consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

Net income (loss) per share

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

Three months ended October 31, Nine months ended October 31,

Three months ended April 30,

(in thousands, except per share data) 2021 2020

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Diluted $ ( 0.03 ) $ 0.03

For the three months ended October 31, 2020 and 2019, approximately 1.0 million and 3.2 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

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

For the three months ended April 30, 2021 and 2020, 1.9 million and 0.5 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

Business combination

Acquisition of WageWorks

On August 30, 2019, the Company closed the acquisition (the "Acquisition") of WageWorks, Inc.

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

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

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

Acquisition of Luum

On March 8, 2021, the Company acquired 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition").

Luum provides employers with a suite of commute tools as well as real-time commute data to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.

The aggregate purchase price consisted of $ 50.2 million in cash, and up to $ 20.0 million in additional payments which are contingent on Luum achieving certain financial targets during the two-year period following the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024.

The Company recorded an $ 8.1 million liability representing its best estimate of the fair value of the contingent consideration as of the acquisition date.

The fair value of this contingent consideration was determined using a Monte Carlo valuation model based on Level 3 inputs and will be remeasured to fair value quarterly, with any changes in the fair value recorded in the condensed consolidated statement of operations and comprehensive income (loss).

The Luum 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 2021.

The following table summarizes the Company's allocation of the consideration paid in the Acquisition:

(in millions) Initial Allocation Adjustments Updated Allocation

The initial allocation of the consideration paid was based on a preliminary valuation and is subject to adjustment during the measurement period (up to one year from the acquisition date).

Balances subject to adjustment primarily include the valuations of acquired assets (tangible and intangible) and liabilities assumed, as well as tax-related matters.

The Company expects the allocation of the consideration transferred to be finalized within the measurement period.

The following table summarizes the Company's current allocation of the consideration paid:

(in millions) Estimated fair value

Cash and cash equivalents $ 0.6

Other current assets 1.5

Property, plant, and equipment 26.6 — 26.6

Operating lease right-of-use assets 42.5 — 42.5

Intangible assets 23.9

1 unchanged sentence

Other assets 0.1

Client-held funds obligation ( 237.5 ) 17.2 ( 220.3 )

Other current liabilities ( 69.1 ) ( 3.3 ) ( 72.4 )

Other long-term liabilities ( 26.7 ) — ( 26.7 )

Current liabilities ( 0.6 )

Deferred tax liability ( 3.6 )

Total consideration paid $ 58.3

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 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 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 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 (loss) include the alignment of accounting policies, the effect of fair value adjustments related to the Acquisition, associated tax effects and the impact of the borrowings to finance the Acquisition and related expenses.

(in thousands) Three months ended October 31, 2019 Nine months ended October 31, 2019

Revenue $ 194,450 $ 598,815

Net income (loss) $ ( 3,286 ) $ 34,559

The Luum Acquisition resulted in $ 36.4 million of goodwill.

The preliminary goodwill to be recognized is attributable to several strategic, operational, and financial benefits expected from the Luum Acquisition, including an expanded commuter offering beyond traditional pre-tax commuter benefits and additional cross-selling opportunities.

The goodwill created in the Luum Acquisition is not expected to be deductible for tax purposes.

The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows:

($ in millions) Fair value Estimated life

Customer relationships (1) $ 12.4 7.0

Developed technology (1) 10.9 5.0

Trade names & trademarks (1) 0.6 3.0

Total acquired intangible assets $ 23.9 6.0

(1) The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach.

Supplemental financial statement information

Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income components consist of the following:

Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income (loss) components consisted of the following:

Property and equipment

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

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

Property and equipment consisted of the following as of April 30, 2021 and January 31, 2021:

(in thousands) April 30, 2021 January 31, 2021

Leasehold improvements $ 20,172 $ 22,271

4 unchanged sentences

Property and equipment, net $ 27,479 $ 29,106

Depreciation expense for the three months ended October 31, 2020 and 2019 was $ 4.0 million and $ 3.6 million, respectively, and $ 12.0 million and $ 5.4 million for the nine months ended October 31, 2020 and 2019, respectively.

Depreciation expense was $ 3.9 million for each of the three months ended April 30, 2021 and 2020.

Contract balances

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

As of October 31, 2020 and January 31, 2020, the balance of deferred revenue was $ 7.0 million and $ 3.7 million, respectively.

As of April 30, 2021 and January 31, 2021, the balance of deferred revenue was $ 4.4 million and $ 4.1 million, respectively.

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

During the three and nine months ended October 31, 2020, approximately $ 0.4 million and $ 2.2 million of revenue, respectively, was recognized that was included in the balance of deferred revenue as of January 31, 2020.

During the three months ended April 30, 2021, approximately $ 0.6 million of revenue was recognized that was included in the balance of deferred revenue as of January 31, 2021.

The components of operating lease costs were as follows:

Three months ended October 31, Nine months ended October 31,

Three months ended April 30,

(in thousands)

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

Nine months ended October 31,

Three months ended April 30,

(in thousands) 2021 2020

4 unchanged sentences

Other expense, net, consisted of the following:

Three months ended October 31, Nine months ended October 31,

Three months ended April 30,

(in thousands) 2021 2020

Interest income $ 408 $ 600

Gain on equity securities — 285 — 27,570

Acquisition costs ( 5,939 ) ( 94 )

Other expense ( 582 ) ( 348 ) ( 2,780 ) ( 478 )

Other income (expense) 1,901 ( 1,270 )

Total other expense, net $ ( 3,630 ) $ ( 764 )

1 unchanged sentence

Intangible assets

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

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

The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of April 30, 2021 and January 31, 2021:

(in thousands) April 30, 2021 January 31, 2021

Amortizable intangible assets:

6 unchanged sentences

Accumulated amortization ( 223,573 ) ( 195,749 )

Total amortizable intangible assets, net 775,695 780,746

Acquired in process software development costs 616 2,533

Total intangible assets, net $ 776,311 $ 783,279

During the three months ended October 31, 2020 and 2019, the Company expensed a total of $ 10.5 million and $ 6.2 million, respectively, and $ 31.1 million and $ 13.8 million for the nine months ended October 31, 2020 and 2019, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.

Amortization expense for the three months ended October 31, 2020 and 2019 was $ 25.3 million and $ 15.7 million, respectively, and $ 73.5 million and $ 23.6 million for the nine months ended October 31, 2020 and 2019, respectively.

During the three and nine months ended October 31, 2020, goodwill decreased by $ 7.0 million and $ 5.8 million, respectively, due to measurement period adjustments related to the Acquisition of WageWorks.

Amortizable intangible assets, net $ 780,794 $ 767,003

Amortization expense for the three months ended April 30, 2021 and 2020 was $ 27.9 million and $ 23.6 million, respectively.

During the three months ended April 30, 2021, goodwill increased by $ 36.4 million due to the Luum Acquisition.

For further information, see Note 3—Business combination.

There were no other changes to the carrying value of goodwill during the three months ended April 30, 2021.

Commitments and contingencies

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

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

Contingent acquisition consideration.

In connection with the Luum Acquisition, the Company agreed to pay up to $ 20.0 million in additional payments which are contingent on Luum achieving certain financial targets during the two-year period following the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024.

For further information, see Note 3—Business combination.

Fifth Third Bank HSA portfolio acquisition.

In April 2021, the Company entered into a definitive agreement with Fifth Third Bank, National Association ("Fifth Third"), to transition custodianship of Fifth Third’s HSA portfolio to HealthEquity.

The definitive agreement contemplates a $ 60.8 million dollar purchase price for a transfer of approximately 149,000 HSA members and their approximately $ 477.0 million of HSA assets.

The agreement

includes a mechanism to adjust the purchase price based on the amount of HSA assets actually transferred.

The transaction is subject to regulatory approval and satisfaction of other customary closing conditions.

Further acquisition.

In April 2021, the Company entered into a definitive agreement to acquire Further for $ 500 million.

Further is a leading provider of HSA and other CDB administration services, with approximately 550,000 HSAs and $ 1.7 billion of HSA assets.

The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close by September 2021.

Lease termination.

In April 2021, the Company exercised its right to terminate an operating lease that had not yet commenced with aggregate undiscounted lease payments of $ 63.1 million and a term of approximately 11 years following the landlord's failure to fulfill its obligations under the lease agreement.

The Company's right to terminate the lease agreement is disputed by the landlord.

Because the lease had not yet commenced, the Company had not recognized a right-of-use asset, operating lease liability, or any rent expense associated with the lease.

Other commitments.

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

Except for the items noted above, there were no material changes during the three months ended April 30, 2021, outside of the ordinary course of business, in our commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

Contingencies

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Legal matters

WageWorks is pursuing 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 with OPM.

In connection with WageWorks' claims against OPM, OPM has also claimed that an erroneous statement in a certificate signed by a former executive officer constituted a violation of the False Claims Act and moved to dismiss part of WageWorks' claim against OPM as a result.

As with all legal proceedings, no assurance can be provided as to the outcome of these matters or if WageWorks or OPM will be successful.

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.

("WageWorks"), its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018.

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

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 April 30, 2021 condensed consolidated balance sheet.

On May 3, 2021, the Court preliminarily approved the settlement.

The settlement is subject to notice to class members and final 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.

3 unchanged sentences

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 and fees and costs.

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.

2 unchanged sentences

The plaintiffs subsequently filed a notice of appeal.

The District Court action is currently 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 responded to the complaint and filed a motion to dismiss on May 10, 2021, which is pending before the Court.

Plaintiffs seek unspecified damages, costs and expenses.

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

4 unchanged sentences

Attorney’s Office regarding the matter.

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

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, which is included within other expense, net in the condensed consolidated statement of operations and comprehensive income (loss).

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.

While it is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, the Company believes, based on current knowledge, that such litigation, proceedings and claims will not have a material impact on the Company’s financial position, results of operations and cash flows for the period.

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;

1 unchanged sentence

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.

Except with respect to the Securities Class Action, the Company does not believe, based on currently available information, 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.

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

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

For the three and nine months ended October 31, 2020, the Company recorded income tax expense of $ 2.3 million and $ 2.0 million, respectively.

This resulted in an effective income tax expense rate of 56.7 % and 36.8 % for the three and nine months ended October 31, 2020, respectively, compared with an effective income tax benefit rate of 31.7 % and an effective income tax expense rate of 8.9 % for the three and nine months ended October 31, 2019, respectively.

For the three and nine months ended October 31, 2020 and 2019, the net

impact of discrete tax items caused a 6.0 percentage point expense and a 9.6 percentage point benefit and a 1.1 and 8.7 percentage point benefit, respectively, to the effective income tax rate primarily due to the excess tax benefit on stock-based compensation expense and return-to-provision adjustments, which were partially offset by state apportionment changes recognized in the provision for income taxes relative to pre-tax book income.

Due to significantly lower pre-tax book income during the nine months ended October 31, 2020, discrete items had a greater impact on the effective income tax rate than during the nine months ended October 31, 2019.

As of October 31, 2020 and January 31, 2020, the Company’s total gross unrecognized tax benefit was $ 10.0 million and $ 9.4 million, respectively.

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

If recognized, $ 9.2 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of October 31, 2020.

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

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

For the three months ended April 30, 2021, the Company recorded an income tax benefit of $ 3.5 million.

This resulted in an effective income tax benefit rate of 57.1 % for the three months ended April 30, 2021, compared with an effective income tax expense rate of 10.7 % for the three months ended April 30, 2020.

For the three months ended April 30, 2021 and 2020, discrete tax items had an effective tax rate benefit of 33.2 % and 16.8 %, respectively, primarily due to excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.

As of April 30, 2021 and January 31, 2021, the Company’s total gross unrecognized tax benefit was $ 10.5 million and $ 10.2 million, respectively.

If recognized, $ 9.7 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of April 30, 2021.

The Company files income tax returns with U.S.

federal and state taxing jurisdictions and is currently under examination with the state of Texas.

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, net operating losses, and/or tax credit carryforwards.

As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2001.

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

(in millions) October 31, 2020

As of April 30, 2021, long-term debt consisted of the following:

(in millions) April 30, 2021

Term loan facility $ 987.5

1 unchanged sentence

Long-term debt, net of issuance costs $ 972.3

(1) In addition to the $ 17.7 million of unamortized issuance costs related to the term loan facility, $ 5.3 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the October 31, 2020 condensed consolidated balance sheet.

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

(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 Acquisition, to refinance substantially all outstanding indebtedness of HealthEquity and WageWorks and to pay related fees and expenses;

(1) In addition to the $ 15.2 million of unamortized issuance costs related to the term loan facility, $ 4.6 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the April 30, 2021 condensed consolidated balance sheet.

The Company is party to a credit facility (the "Credit Agreement”) that provides for:

(i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $ 1.25 billion;

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

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

No amounts were drawn under the Revolving Credit Facility as of April 30, 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 October 31, 2020, the stated interest rate was 1.65 % and the effective interest rate was 2.18 %.

As of April 30, 2021, the stated interest rate was 1.86 % and the effective interest rate was 2.39 %.

The Company is also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20 % to 0.40 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement.

The loans made under the Term Loan Facility are required to be repaid as described in the following table:

Fiscal year ending January 31, (in millions) Principal payments

Remaining 2021 $ 15.6

2025 (1) 768.8

Total principal payments $ 1,018.8

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

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

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

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

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

The Company was in compliance with all covenants under the Credit Agreement as of April 30, 2021, and for the period then ended.

The obligations of HealthEquity under the Credit Agreement are required to be unconditionally guaranteed by WageWorks and Fort Effect Corp and are secured by security interests in substantially all assets of HealthEquity and the guarantors, subject to certain customary exceptions.

Stock-based compensation

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

Three months ended October 31, Nine months ended October 31,

Three months ended April 30,

(in thousands) 2021 2020

3 unchanged sentences

General and administrative 5,195 2,058

Merger Integration — 1,220 — 1,220

Other expense, net (1) 342 —

Total stock-based compensation expense $ 13,141 $ 7,396

(1) Equity-based awards exchanged for cash in connection with the Luum Acquisition.

Stock award plans

3 unchanged sentences

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 October 31, 2020, 6.4 million shares were available for grant under the Incentive Plan.

WageWorks Incentive Plan.

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

2010 Equity Incentive Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to 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.

As of April 30, 2021, 7.5 million shares were available for grant under the Incentive Plan.

Stock options

8 unchanged sentences

$ 31.46 5.00 $ 87,164

Granted 16 $ 66.06 $ 66.06

Exercised ( 103 ) $ 14.00 - 44.53

Forfeited ( 10 ) $ 25.45 - 44.53

Outstanding as of October 31, 2020 1,863 $ 1.25 - 82.39

Outstanding as of April 30, 2021 1,571 $ 1.25 - 82.39

$ 31.79 4.70 $ 69,562

Vested and expected to vest as of October 31, 2020 1,863 $ 31.23 5.10 $ 42,046

Exercisable as of October 31, 2020 1,584 $ 26.55 4.70 $ 41,025

Vested and expected to vest as of April 30, 2021 1,571 $ 31.79 4.70 $ 69,562

Exercisable as of April 30, 2021 1,463 $ 29.08 4.50 $ 68,694

Restricted stock units and restricted stock awards

6 unchanged sentences

Forfeited ( 36 ) 63.18 ( 73 ) 61.77

Outstanding as of October 31, 2020 1,892 $ 60.51 207 $ 62.66

Performance restricted stock units and awards.

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

The Company records stock-based compensation related to 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 awards by deeming the performance condition related to two-thirds of the awards to be achieved at 100 % and creating a new performance condition related to the remaining one-third of the awards to reflect the state of the Company after the Acquisition of WageWorks.

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

The modification affected 10 team members and did not result in an adjustment to stock-based compensation expense.

The PRSAs cliff vest upon approval by the Compensation Committee.

The modified performance condition for the one-third tranche allows for a range of vesting from 0 % to 200 % based on the level of achievement of the performance condition, and the Company believes it is probable that the PRSAs will vest at least in part.

As the underlying shares were issued at grant date, they are subject to clawback based on actual Company performance.

In March 2019, the Company awarded 129,963 PRSUs.

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

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

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

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

Prior to the modification, the Company did not believe the PRSUs were likely to vest, and as a result, $ 2.9 million of previously recorded stock-based compensation expense was reversed during the three months ended April 30, 2020.

The PRSUs cliff vest upon approval by the Compensation Committee.

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

During the first and second quarters of fiscal 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.

Outstanding as of April 30, 2021 2,735 $ 65.95 4 $ 61.72

Performance restricted stock units.

During the first quarter of fiscal year 2022, the Company awarded 249,750 performance restricted stock units ("PRSUs") subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2024.

The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $ 22.4 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.

The PRSUs cliff vest upon approval by the Compensation Committee of the board of directors.

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

8 unchanged sentences

Level 1 instruments consist primarily of cash and cash equivalents.

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

The carrying value of cash and cash equivalents approximate fair values as of April 30, 2021 due to the short-term nature of these instruments.

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

1 unchanged sentence

As a result, we believe the fair value of our long-term debt approximates carrying value.

The contingent consideration liability resulting from the Luum Acquisition was determined using a Monte Carlo valuation model based on Level 3 inputs.

The estimate of fair value of the contingent consideration obligation requires subjective assumptions to be made regarding the future business results, discount rates, volatilities, and probabilities assigned to various potential business result scenarios and was determined using probability assessments with respect to the likelihood of achieving certain financial targets.

The fair value measurement is based on significant inputs unobservable in the market and thus represents a level 3 measurement.

Changes in current expectations of progress could change the probability of achieving the targets within the measurement periods and result in an increase or decrease in the fair value of the contingent consideration obligation.

For further information, see Note 3—Business combination.

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

What changed 10-Q

Item 1. Financial Statements