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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-36568
HEALTHEQUITY, INC.
(Exact name of registrant as specified in its charter)
Delaware52-2383166
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
15 West Scenic Pointe Drive
Suite 100
Draper, Utah 84020
(Address of principal executive offices) (Zip code)

(801) 727-1000
(Registrant's telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.0001 per shareHQYThe NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
 Emerging growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of September 1, 2020, there were 76,863,514 shares of the registrant's common stock outstanding.



Table of Contents
HealthEquity, Inc. and subsidiaries
Form 10-Q quarterly report

Table of contents
Page
Part I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
Part II. OTHER INFORMATION
Item 1.
Item 1A.
Item 6.


-2-


Part I. Financial information
Item 1. Financial statements

HealthEquity, Inc. and subsidiaries
Condensed consolidated balance sheets
(in thousands, except par value)July 31, 2020January 31, 2020
(unaudited)
Assets
Current assets
Cash and cash equivalents$268,910 $191,726 
Accounts receivable, net of allowance for doubtful accounts of $1,954 and $1,216 as of July 31, 2020 and January 31, 2020, respectively
70,235 70,863 
Other current assets43,982 34,711 
Total current assets383,127 297,300 
Property and equipment, net34,528 33,486 
Operating lease right-of-use assets95,095 83,178 
Intangible assets, net783,106 783,279 
Goodwill1,333,808 1,332,631 
Deferred tax asset59 18 
Other assets34,658 35,089 
Total assets$2,664,381 $2,564,981 
Liabilities and stockholders’ equity
Current liabilities
Accounts payable$11,708 $3,980 
Accrued compensation36,435 50,121 
Accrued liabilities37,424 46,372 
Current portion of long-term debt54,688 39,063 
Operating lease liabilities13,521 12,401 
Total current liabilities153,776 151,937 
Long-term liabilities
Long-term debt, net of issuance costs952,898 1,181,615 
Operating lease liabilities, non-current79,304 68,017 
Other long-term liabilities8,210 2,625 
Deferred tax liability129,857 130,492 
Total long-term liabilities1,170,269 1,382,749 
Total liabilities1,324,045 1,534,686 
Commitments and contingencies (see Note 6)
Stockholders’ equity
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively
  
Common stock, $0.0001 par value, 900,000 shares authorized, 76,872 and 71,051 shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively
8 7 
Additional paid-in capital1,127,136 818,774 
Accumulated earnings213,192 211,514 
Total stockholders’ equity1,340,336 1,030,295 
Total liabilities and stockholders’ equity$2,664,381 $2,564,981 
See accompanying notes to condensed consolidated financial statements.

-3-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of operations and
comprehensive income (loss) (unaudited)
Three months ended July 31,Six months ended July 31,
(in thousands, except per share data)2020201920202019
Revenue
Service revenue$103,805 $26,282 $215,076 $53,090 
Custodial revenue46,909 43,614 93,808 85,566 
Interchange revenue25,325 16,727 57,166 35,019 
Total revenue176,039 86,623 366,050 173,675 
Cost of revenue
Service costs65,246 19,745 136,259 40,394 
Custodial costs4,998 4,209 10,043 8,332 
Interchange costs4,011 4,229 9,890 8,756 
Total cost of revenue74,255 28,183 156,192 57,482 
Gross profit101,784 58,440 209,858 116,193 
Operating expenses
Sales and marketing12,167 8,391 23,622 17,361 
Technology and development30,654 11,645 61,732 22,550 
General and administrative20,493 9,262 39,491 17,971 
Amortization of acquired intangible assets19,077 1,494 37,779 2,985 
Merger integration10,365 2,784 23,135 2,784 
Total operating expenses92,756 33,576 185,759 63,651 
Income from operations9,028 24,864 24,099 52,542 
Other income (expense)
Interest expense(8,895)(67)(21,158)(130)
Other income (expense), net(824)(1,061)(1,588)22,602 
Total other income (expense)(9,719)(1,128)(22,746)22,472 
Income (loss) before income taxes(691)23,736 1,353 75,014 
Income tax provision (benefit)(543)4,370 (325)13,826 
Net income (loss) and comprehensive income (loss)$(148)$19,366 $1,678 $61,188 
Net income per share:
Basic$0.00 $0.30 $0.02 $0.97 
Diluted$0.00 $0.30 $0.02 $0.94 
Weighted-average number of shares used in computing net income per share:
Basic72,343 64,220 71,669 63,289 
Diluted72,343 65,583 72,971 64,785 
See accompanying notes to condensed consolidated financial statements.
-4-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of stockholders’ equity (unaudited)
Three months ended July 31,Six months ended July 31,
(in thousands)2020201920202019
Total stockholders' equity, beginning balance$1,040,650 $529,299 $1,030,295 $477,079 
Common stock:
Beginning balance7 6 7 6 
Issuance of common stock upon exercise of stock options, and for restricted stock    
Other issuance of common stock1 1 1 1 
Ending balance8 7 8 7 
Additional paid-in capital:
Beginning balance827,303 315,621 818,774 305,223 
Issuance of common stock upon exercise of stock options, and for restricted stock1,618 2,281 2,751 6,651 
Other issuance of common stock286,777 458,494 286,777 458,494 
Stock-based compensation11,438 7,590 18,834 13,618 
Ending balance1,127,136 783,986 1,127,136 783,986 
Accumulated earnings
Beginning balance213,340 213,672 211,514 171,850 
Net income (loss)(148)19,366 1,678 61,188 
Ending balance213,192 233,038 213,192 233,038 
Total stockholders' equity, ending balance$1,340,336 $1,017,031 $1,340,336 $1,017,031 
See accompanying notes to condensed consolidated financial statements.

-5-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited)
Six months ended July 31,
(in thousands)20202019
Cash flows from operating activities:
Net income$1,678 $61,188 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization56,106 9,722 
Stock-based compensation18,834 13,618 
Amortization of debt issuance costs2,533 31 
Gains on marketable equity securities (27,285)
Other non-cash items1,925  
Deferred taxes(568)7,868 
Changes in operating assets and liabilities:
Accounts receivable(152)(1,689)
Other assets(3,187)(4,962)
Operating lease right-of-use assets5,563 1,286 
Accounts payable6,047 (1,083)
Accrued compensation(13,854)(5,926)
Accrued liabilities and other current liabilities(6,017)4,942 
Operating lease liabilities, non-current(5,723)(1,210)
Other long-term liabilities5,477 331 
Net cash provided by operating activities68,662 56,831 
Cash flows from investing activities:
Purchases of property and equipment(8,987)(3,492)
Purchases of software and capitalized software development costs(21,787)(9,518)
Acquisition of intangible member assets(24,922)(1,736)
Purchases of marketable securities (53,845)
Net cash used in investing activities(55,696)(68,591)
Cash flows from financing activities:
Proceeds from follow-on equity offering, net of payments for offering costs287,318 458,881 
Principal payments on long-term debt(215,625) 
Settlement of client-held funds obligation, net(10,292) 
Proceeds from exercise of common stock options2,817 6,564 
Net cash provided by financing activities64,218 465,445 
Increase in cash and cash equivalents77,184 453,685 
Beginning cash and cash equivalents191,726 361,475 
Ending cash and cash equivalents$268,910 $815,160 
See accompanying notes to condensed consolidated financial statements.
-6-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited) (continued)
Six months ended July 31,
(in thousands)20202019
Supplemental cash flow data:
Interest expense paid in cash$17,659 $101 
Income taxes paid in cash, net of refunds received798 9,119 
Supplemental disclosures of non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable or accrued liabilities$1,104 $3 
Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation1,262 487 
Purchases of intangible member assets58 6,500 
Additions to goodwill due to measurement period adjustments1,177  
Exercise of common stock options receivable66 87 
Follow-on equity offering costs accrued during the period540 386 
Debt issuance costs accrued during the period 345 
See accompanying notes to condensed consolidated financial statements.
-7-

Table of Contents

HealthEquity, Inc. and subsidiaries
Notes to condensed 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.
Principles of consolidation
The condensed consolidated financial statements include the accounts of HealthEquity and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of presentation
The accompanying condensed consolidated financial statements as of July 31, 2020 and for the three and six months ended July 31, 2020 and 2019 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2020. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Follow-on equity offering
In July 2020, the Company closed a follow-on public offering of 5,290,000 shares of common stock at a public offering price of $56.00 per share, less the underwriters' discount. The Company received net proceeds of approximately $286.8 million after deducting underwriting discounts and commissions of approximately $8.9 million and other offering expenses payable by the Company of approximately $0.6 million. The Company used $200.0 million of such proceeds to repay debt under its term loan facility.
Significant accounting policies
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
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.
-8-

Table of Contents
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.
Note 2. Net income per share
The following table sets forth the computation of basic and diluted net income per share:
Three months ended July 31,Six months ended July 31,
(in thousands, except per share data)2020201920202019
Numerator (basic and diluted):
Net income (loss)$(148)$19,366 $1,678 $61,188 
Denominator (basic):
Weighted-average common shares outstanding72,343 64,220 71,669 63,289 
Denominator (diluted):
Weighted-average common shares outstanding72,343 64,220 71,669 63,289 
Weighted-average dilutive effect of stock options and restricted stock units 1,363 1,302 1,496 
Diluted weighted-average common shares outstanding72,343 65,583 72,971 64,785 
Net income per share:
Basic $0.00 $0.30 $0.02 $0.97 
Diluted$0.00 $0.30 $0.02 $0.94 

For the three months ended July 31, 2020 and 2019, approximately 2.1 million and 0.3 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
For the six months ended July 31, 2020 and 2019, approximately 0.6 million and 0.3 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
Note 3. 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. Consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the Acquisition date. The initial allocation of the consideration paid was based on a preliminary valuation and is subject to potential 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.




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The following table summarizes the Company's current allocation of the consideration paid in the Acquisition:
(in millions)Initial AllocationAdjustmentsUpdated Allocation
Cash and cash equivalents$406.8 $(14.5)$392.3 
Other current assets56.5 1.0 57.5 
Property, plant, and equipment26.6  26.6 
Operating lease right-of-use assets42.5  42.5 
Intangible assets715.3  715.3 
Goodwill1,330.5 (1.3)1,329.2 
Other assets5.9  5.9 
Client-held funds obligation(237.5)17.1 (220.4)
Other current liabilities(69.1)(3.4)(72.5)
Other long-term liabilities(26.7) (26.7)
Deferred tax liability(128.7)1.1 (127.6)
Total consideration paid$2,122.1 $ $2,122.1 
Adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters.
Note 4. Supplemental financial statement information
Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income components consist of the following:
Property and equipment
Property and equipment consisted of the following as of July 31, 2020 and January 31, 2020:
(in thousands)July 31, 2020January 31, 2020
Leasehold improvements$22,112 $19,240 
Furniture and fixtures9,194 7,929 
Computer equipment26,621 22,074 
Property and equipment, gross57,927 49,243 
Accumulated depreciation(23,399)(15,757)
Property and equipment, net$34,528 $33,486 
Depreciation expense for the three months ended July 31, 2020 and 2019 was $4.1 million and $1.0 million, respectively, and $8.0 million and $1.8 million for the six months ended July 31, 2020 and 2019, respectively.
Contract balances
The Company does not recognize revenue in advance of invoicing its customers 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. As of July 31, 2020 and January 31, 2020, the balance of deferred revenue was $11.5 million and $3.7 million, respectively. The balances are related to cash received in advance for an interchange revenue arrangement, other up-front fees and other commuter deferred revenue, and are generally recognized within twelve months, with the exception of the interchange arrangement, which is recognized over a term of approximately ten years. During the three and six months ended July 31, 2020, approximately $0.6 million and $1.4 million of revenue, respectively, was recognized that was included in the balance of deferred revenue as of January 31, 2020.





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Leases
The components of operating lease costs were as follows:
Three months ended July 31,Six months ended July 31,
(in thousands)2020201920202019
Operating lease expense$3,925 1,086 8,249 2,160 
Sublease income(450) (900) 
Net operating lease expense$3,475 $1,086 $7,349 $2,160 
Supplemental cash flow information related to the Company's operating leases was as follows:
Six months ended July 31,
(in thousands)20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$6,468 $1,829 
Operating lease right-of-use assets obtained in exchange for new operating lease obligations$17,480 $199 
Other income (expense), net
Other income (expense), net, consisted of the following:
Three months ended July 31,Six months ended July 31,
(in thousands)2020201920202019
Interest income$76 $1,884 $676 $3,227 
Gain on equity securities 3,774  27,285 
Acquisition gains (costs)28 (6,596)(66)(7,780)
Other expense(928)(123)(2,198)(130)
Total other income (expense), net$(824)$(1,061)$(1,588)$22,602 

Note 5. Intangible assets and goodwill
Intangible assets
The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of July 31, 2020 and January 31, 2020:
(in thousands)July 31, 2020January 31, 2020
Amortizable intangible assets:
Software and software development costs$100,908 $76,221 
Acquired HSA portfolios117,750 92,770 
Acquired customer relationships601,381 601,381 
Acquired developed technology96,925 96,925 
Acquired trade names12,300 12,300 
Amortizable intangible assets, gross929,264 879,597 
Accumulated amortization(146,946)(98,851)
Total amortizable intangible assets, net782,318 780,746 
Acquired in process software development costs788 2,533 
Total intangible assets, net$783,106 $783,279 
During the three months ended July 31, 2020 and 2019, the Company expensed a total of $10.3 million and $3.8 million, respectively, and $20.6 million and $7.7 million for the six months ended July 31, 2020 and 2019, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.
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Amortization expense for the three months ended July 31, 2020 and 2019 was $24.5 million and $4.0 million, respectively, and $48.1 million and $7.9 million for the six months ended July 31, 2020 and 2019, respectively.
Goodwill
During the three months ended July 31, 2020, goodwill increased by $1.2 million due to measurement period adjustments. There were no additional changes to the goodwill carrying value during the three and six months ended July 31, 2020 and 2019.
Note 6. Commitments and contingencies
Commitments
The Company’s principal commitments consist of a term loan facility, operating lease obligations for office space, data storage facilities, and other leases, a processing services agreement with a vendor, and contractual commitments related to network infrastructure, equipment, and certain maintenance agreements under long-term, non-cancelable commitments. Except for the $200 million principal prepayment on our term loan facility, there were no material changes during the three and six months ended July 31, 2020, outside of the ordinary course of business, in our commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.
Contingencies
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 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.
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 and 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.

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
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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.
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.
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.
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.
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 7. Income taxes
The Company follows FASB Accounting Standards Codification 740-270, Income Taxes - Interim Reporting, for the computation and presentation of its interim period tax provision. Accordingly, management estimated the effective annual tax rate and applied this rate to the year-to-date pre-tax book income to determine the interim benefit or provision for income taxes. For the three and six months ended July 31, 2020, the Company recorded an income tax benefit of $0.5 million and $0.3 million, respectively. This resulted in an effective income tax benefit rate of 78.6% and 24.0% for the three and six months ended July 31, 2020, respectively, compared with an effective income tax expense rate of 18.4% for each of the three and six months ended July 31, 2019. For the three and six months ended July 31, 2020 and 2019, the net impact of discrete tax items caused a 62.9 and 57.4 percentage point benefit and a 4.8 and 4.6 percentage point benefit, respectively, to the effective income tax rate primarily due to the excess tax benefit on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax book income. Due to significantly lower pre-tax book income during the six months ended July 31, 2020, such excess tax benefit had a greater impact on the effective income tax rate.
As of July 31, 2020 and January 31, 2020, the Company’s total gross unrecognized tax benefit was $9.8 million and $9.4 million, respectively. As of July 31, 2020 and January 31, 2020, a net unrecognized tax benefit of $0.6 million and $0.5 million, respectively, was recorded in the condensed consolidated balance sheets. If recognized, $9.0 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of July 31, 2020.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is not currently under examination with any jurisdiction. As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2000.
Note 8. Indebtedness
As of July 31, 2020, long-term debt consisted of the following:
(in millions)July 31, 2020
Term loan facility$1,026.6 
Less: unamortized loan issuance costs (1)19.0 
Long-term debt, net of issuance costs$1,007.6 
(1) In addition to the $19.0 million of unamortized issuance costs related to the term loan facility, $5.7 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the July 31, 2020 condensed consolidated balance sheet.

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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; 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 $350.0 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 July 31, 2020.
Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of HealthEquity, either (i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25% to 2.25% or (ii) an alternate base rate plus a margin ranging from 0.25% to 1.25%, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of July 31, 2020, the stated interest rate was 2.16% and the effective interest rate was 2.70%. The Company is also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20% to 0.40%, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement.
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$23.4 
202262.5 
202370.3 
2024101.6 
2025 (1)768.8 
Total principal payments$1,026.6 
(1) The amount required to be repaid in 2025 reflects the $200.0 million prepayment made in July 2020 with proceeds from the follow-on offering.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.00 to 1.00, which steps down to 4.50 to 1.00 beginning with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $100.0 million), and (ii) a minimum interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00. The Company was in compliance with all covenants under the Credit Agreement as of July 31, 2020, and for the period then ended.
The obligations of HealthEquity under the Credit Agreement are required to be unconditionally guaranteed by WageWorks and each of the Company's subsequently acquired or organized direct and indirect domestic subsidiaries and are secured by security interests in substantially all assets of HealthEquity and the guarantors, in each case, subject to certain customary exceptions.



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Note 9. 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 July 31,Six months ended July 31,
(in thousands)2020201920202019
Cost of revenue$2,065 $1,010 $3,528 $1,869 
Sales and marketing1,818 1,158 2,776 2,166 
Technology and development2,493 1,930 5,410 3,429 
General and administrative5,062 3,492 7,120 6,154 
Total stock-based compensation expense$11,438 $7,590 $18,834 $13,618 
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 July 31, 2020, 6.4 million shares were available for grant under the Incentive Plan.
WageWorks Incentive Plan. At the closing of the Acquisition, and in accordance with the merger agreement related to the Acquisition, certain RSUs with respect to WageWorks common stock, granted under WageWorks, Inc. 2010 Equity Incentive Plan (the "WageWorks Incentive Plan"), were replaced by the Company and converted into RSUs with respect to 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
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, 20202,040 
$0.10 - 82.39
$30.35 5.90$74,009 
Granted16 $66.06$66.06 
Exercised(116)
$0.10 - 44.53
$23.65 
Forfeited(7)
$25.45 - 44.53
$34.31 
Outstanding as of July 31, 20201,933 
$0.10 - 82.39
$31.04 5.40$43,958 
Vested and expected to vest as of July 31, 20201,933 $31.04 5.40$43,958 
Exercisable as of July 31, 20201,596 $26.12 5.00$41,916 





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Restricted stock units and restricted stock awards
A summary of RSU and RSA activity is as follows:
RSUs and PRSUsRSAs and PRSAs
(in thousands, except weighted-average grant date fair value)SharesWeighted-average grant date fair valueSharesWeighted-average grant date fair value
Outstanding as of January 31, 20201,380 $63.33 235 $61.91 
Granted1,166 57.00 14 74.81 
Vested(416)53.84 (10)62.80 
Forfeited(222)68.35 (32)62.41 
Outstanding as of July 31, 20201,908