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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 October 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 November 25, 2020, there were 76,990,646 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)October 31, 2020January 31, 2020
(unaudited)
Assets
Current assets
Cash and cash equivalents$299,356 $191,726 
Accounts receivable, net of allowance for doubtful accounts of $3,458 and $1,216 as of October 31, 2020 and January 31, 2020, respectively
64,291 70,863 
Other current assets32,383 34,711 
Total current assets396,030 297,300 
Property and equipment, net31,774 33,486 
Operating lease right-of-use assets92,314 83,178 
Intangible assets, net776,311 783,279 
Goodwill1,326,793 1,332,631 
Deferred tax asset21 18 
Other assets34,019 35,089 
Total assets$2,657,262 $2,564,981 
Liabilities and stockholders’ equity
Current liabilities
Accounts payable$6,746 $3,980 
Accrued compensation34,839 50,121 
Accrued liabilities33,380 46,372 
Current portion of long-term debt62,500 39,063 
Operating lease liabilities13,894 12,401 
Total current liabilities151,359 151,937 
Long-term liabilities
Long-term debt, net of issuance costs938,558 1,181,615 
Operating lease liabilities, non-current76,666 68,017 
Other long-term liabilities11,429 2,625 
Deferred tax liability123,993 130,492 
Total long-term liabilities1,150,646 1,382,749 
Total liabilities1,302,005 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 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
8 7 
Additional paid-in capital1,140,268 818,774 
Accumulated earnings214,981 211,514 
Total stockholders’ equity1,355,257 1,030,295 
Total liabilities and stockholders’ equity$2,657,262 $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 October 31,Nine months ended October 31,
(in thousands, except per share data)2020201920202019
Revenue
Service revenue$104,562 $87,620 $319,638 $140,710 
Custodial revenue48,544 46,972 142,352 132,538 
Interchange revenue26,245 22,526 83,411 57,545 
Total revenue179,351 157,118 545,401 330,793 
Cost of revenue
Service costs65,936 52,278 202,195 92,672 
Custodial costs4,762 4,384 14,805 12,716 
Interchange costs4,095 4,421 13,985 13,177 
Total cost of revenue74,793 61,083 230,985 118,565 
Gross profit104,558 96,035 314,416 212,228 
Operating expenses
Sales and marketing12,880 12,654 36,502 30,015 
Technology and development30,758 23,511 92,490 46,061 
General and administrative22,099 19,222 61,590 37,193 
Amortization of acquired intangible assets19,126 13,051 56,905 16,036 
Merger integration8,193 17,675 31,328 20,459 
Total operating expenses93,056 86,113 278,815 149,764 
Income from operations11,502 9,922 35,601 62,464 
Other expense
Interest expense(6,952)(10,225)(28,110)(10,355)
Other expense, net(421)(30,949)(2,009)(8,347)
Total other expense(7,373)(41,174)(30,119)(18,702)
Income (loss) before income taxes4,129 (31,252)5,482 43,762 
Income tax provision (benefit)2,340 (9,918)2,015 3,908 
Net income (loss) and comprehensive income (loss)$1,789 $(21,334)$3,467 $39,854 
Net income (loss) per share:
Basic$0.02 $(0.30)$0.05 $0.61 
Diluted$0.02 $(0.30)$0.05 $0.59 
Weighted-average number of shares used in computing net income (loss) per share:
Basic76,701 70,524 73,358 65,727 
Diluted77,845 70,524 74,665 67,150 
See accompanying notes to condensed consolidated financial statements.
-4-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of stockholders’ equity (unaudited)
Three months ended October 31,Nine months ended October 31,
(in thousands)2020201920202019
Total stockholders' equity, beginning balance$1,340,336 $1,017,031 $1,030,295 $477,079 
Common stock:
Beginning balance8 7 7 6 
Issuance of common stock upon exercise of stock options, and for restricted stock    
Other issuance of common stock  1 1 
Ending balance8 7 8 7 
Additional paid-in capital:
Beginning balance1,127,136 783,986 818,774 305,223 
Issuance of common stock upon exercise of stock options, and for restricted stock1,651 712 4,402 7,363 
Other issuance of common stock2 3,776 286,779 462,270 
Stock-based compensation11,479 17,576 30,313 31,194 
Ending balance1,140,268 806,050 1,140,268 806,050 
Accumulated earnings
Beginning balance213,192 233,038 211,514 171,850 
Net income (loss)1,789 (21,334)3,467 39,854 
Ending balance214,981 211,704 214,981 211,704 
Total stockholders' equity, ending balance$1,355,257 $1,017,761 $1,355,257 $1,017,761 
See accompanying notes to condensed consolidated financial statements.

-5-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited)
Nine months ended October 31,
(in thousands)20202019
Cash flows from operating activities:
Net income$3,467 $39,854 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization85,485 28,791 
Stock-based compensation30,313 31,194 
Amortization of debt issuance costs3,818 1,138 
Gains on marketable equity securities (27,570)
Other non-cash items1,727 139 
Deferred taxes(973)690 
Changes in operating assets and liabilities:
Accounts receivable8,063 (1,901)
Other assets3,309 (4,863)
Operating lease right-of-use assets8,344 3,340 
Accrued compensation(15,251)(8,012)
Accounts payable, accrued liabilities, and other current liabilities(7,936)14,179 
Operating lease liabilities, non-current(8,361)(2,859)
Other long-term liabilities8,712 (50)
Net cash provided by operating activities120,717 74,070 
Cash flows from investing activities:
Purchases of property and equipment(11,388)(5,180)
Purchases of software and capitalized software development costs(37,242)(17,232)
Acquisition of intangible member assets(28,100)(9,070)
Purchases of marketable securities (53,845)
Acquisitions, net of cash acquired (1,630,066)
Net cash used in investing activities(76,730)(1,715,393)
Cash flows from financing activities:
Proceeds from follow-on equity offering, net of payments for offering costs286,779 458,495 
Principal payments on long-term debt(223,438) 
Settlement of client-held funds obligation, net(4,189)(230,928)
Proceeds from exercise of common stock options4,491 7,342 
Proceeds from long-term debt 1,250,000 
Payment of debt issuance costs (30,504)
Net cash provided by financing activities63,643 1,454,405 
Increase (decrease) in cash and cash equivalents107,630 (186,918)
Beginning cash and cash equivalents191,726 361,475 
Ending cash and cash equivalents$299,356 $174,557 
See accompanying notes to condensed consolidated financial statements.
-6-


HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited) (continued)
Nine months ended October 31,
(in thousands)20202019
Supplemental cash flow data:
Interest expense paid in cash$22,849 $249 
Income taxes paid in cash, net of refunds received1,053 9,127 
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 compensation1,346 316 
Intangible member assets included in accounts payable or accrued liabilities289 (151)
Decrease in goodwill due to measurement period adjustments, net5,838  
Exercise of common stock options receivable89 21 
Equity-based acquisition consideration 3,776 
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 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. 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 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 (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,
(in thousands, except per share data)2020201920202019
Numerator (basic and diluted):
Net income (loss)$1,789 $(21,334)$3,467 $39,854 
Denominator (basic):
Weighted-average common shares outstanding76,701 70,524 73,358 65,727 
Denominator (diluted):
Weighted-average common shares outstanding76,701 70,524 73,358 65,727 
Weighted-average dilutive effect of stock options and restricted stock units1,144  1,307 1,423 
Diluted weighted-average common shares outstanding77,845 70,524 74,665 67,150 
Net income (loss) per share:
Basic $0.02 $(0.30)$0.05 $0.61 
Diluted$0.02 $(0.30)$0.05 $0.59 

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.
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 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.





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The following table summarizes the Company's 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 2.5 59.0 
Property, plant, and equipment26.6 — 26.6 
Operating lease right-of-use assets42.5 — 42.5 
Intangible assets715.3 — 715.3 
Goodwill1,330.5 (8.4)1,322.1 
Other assets5.9 — 5.9 
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)
Deferred tax liability(128.7)6.5 (122.2)
Total consideration paid$2,122.1 $ $2,122.1 
Adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters.
Pro forma information
The unaudited pro forma results presented below include the effects of the 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, 2019Nine months ended October 31, 2019
Revenue$194,450 $598,815 
Net income (loss)$(3,286)$34,559 

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 October 31, 2020 and January 31, 2020:
(in thousands)October 31, 2020January 31, 2020
Leasehold improvements$22,310 $19,240 
Furniture and fixtures9,219 7,929 
Computer equipment27,378 22,074 
Property and equipment, gross58,907 49,243 
Accumulated depreciation(27,133)(15,757)
Property and equipment, net$31,774 $33,486 
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.
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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 October 31, 2020 and January 31, 2020, the balance of deferred revenue was $7.0 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 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.
Leases
The components of operating lease costs were as follows:
Three months ended October 31,Nine months ended October 31,
(in thousands)2020201920202019
Operating lease expense$3,777 3,354 12,297 5,515 
Sublease income(450)(249)(1,349)(249)
Net operating lease expense$3,327 $3,105 $10,948 $5,266 
Supplemental cash flow information related to the Company's operating leases was as follows:
Nine months ended October 31,
(in thousands)20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$9,739 $4,575 
Operating lease right-of-use assets obtained in exchange for new operating lease obligations$17,480 $34,394 
Other expense, net
Other expense, net, consisted of the following:
Three months ended October 31,Nine months ended October 31,
(in thousands)2020201920202019
Interest income$174 $2,046 $850 $5,273 
Gain on equity securities 285  27,570 
Acquisition costs(13)(32,932)(79)(40,712)
Other expense(582)(348)(2,780)(478)
Total other expense, net$(421)$(30,949)$(2,009)$(8,347)






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Note 5. Intangible assets and goodwill
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, 2020January 31, 2020
Amortizable intangible assets:
Software and software development costs$116,206 $76,221 
Acquired HSA portfolios121,159 92,770 
Acquired customer relationships601,381 601,381 
Acquired developed technology96,925 96,925 
Acquired trade names12,300 12,300 
Amortizable intangible assets, gross947,971 879,597 
Accumulated amortization(172,276)(98,851)
Total amortizable intangible assets, net775,695 780,746 
Acquired in process software development costs616 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.
Goodwill
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.
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 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.
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.
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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 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 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
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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 files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination with the state of Texas. 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 October 31, 2020, long-term debt consisted of the following:
(in millions)October 31, 2020
Term loan facility$1,018.8 
Less: unamortized loan issuance costs (1)17.7 
Long-term debt, net of issuance costs$1,001.1 
(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; 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 October 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 October 31, 2020, the stated interest rate was 1.65% and the effective interest rate was 2.18%. 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 
202262.5 
202370.3 
2024101.6 
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.
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,
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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.
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 October 31,Nine months ended October 31,
(in thousands)2020201920202019
Cost of revenue$2,209 $1,415 $5,737 $3,285 
Sales and marketing2,035 1,304 4,810 3,469 
Technology and development2,641 2,171 8,051 5,600 
General and administrative4,594 3,332 11,715 9,486 
Merger Integration 1,220  1,220 
Other expense, net 13,714  13,714 
Total stock-based compensation expense$11,479 $23,156 $30,313 $36,774 
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 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.
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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(183)
$0.10 - 44.53
$24.09 
Forfeited(10)
$25.45 - 44.53
$38.02 
Outstanding as of October 31, 20201,863 
$1.25 - 82.39
$31.23 5.10$42,046 
Vested and expected to vest as of October 31, 20201,863 $31.23 5.10$42,046 
Exercisable as of October 31, 20201,584 $26.55 4.70$41,025 
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 
Granted1,220 56.57 14 74.81 
Vested(446)54.78 (10)62.80 
Forfeited(262)66.77 (32)62.41 
Outstanding as of October 31, 20201,892 $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.
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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. 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.
Note 10. Fair value
Fair value measurements are made at a specific point in time, based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1—quoted prices in active markets for identical assets or liabilities;
Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3—unobservable inputs based on the Company’s own assumptions.
Level 1 instruments are valued based on publicly available daily net asset values. Level 1 instruments consist primarily of cash and cash equivalents. The carrying value of cash and cash equivalents approximate fair values as of October 31, 2020 due to the short-term nature of these instruments. 
Our long-term debt is considered a Level 2 instrument and is recorded at book value in our condensed consolidated financial statements. Our long-term debt reprices frequently due to variable interest rate terms and entails no significant changes in credit risk. As a result, we believe the fair value of our long-term debt approximates carrying value.
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Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such statements include, but are not limited to, statements concerning the impact of the ongoing COVID-19 pandemic on the Company, the anticipated synergies and other benefits of the acquisition of WageWorks, health savings accounts and other tax-advantaged consumer-directed benefits, tax and other regulatory changes, market opportunity, our future financial and operating results, our investment and acquisition strategy, our sales and marketing strategy, management’s plans, beliefs and objectives for future operations, technology and development, economic and industry trends or trend analysis, expectations about seasonality, opportunity for portfolio purchases and other acquisitions, operating expenses, anticipated income tax rates, capital expenditures, cash flows and liquidity. These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, this Quarterly Report on Form 10-Q, and our other reports filed with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such events.

Overview
We are a leader and an innovator in providing technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions. Consumers and employers use our platforms to manage tax-advantaged health savings accounts ("HSAs") and other consumer-directed benefits ("CDBs") offered by employers, including flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”), Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, commuter and other benefits, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit information, access remote and telemedicine benefits, earn wellness incentives, and receive investment advice to grow their tax-advantaged healthcare savings.
The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis. As of October 31, 2020, we administered 5.5 million HSAs, with balances totaling $12.4 billion, which we call HSA Assets. Also, as of October 31, 2020, we administered 7.0 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs on our platforms as Total Accounts, of which we had 12.5 million as of October 31, 2020.
We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients primarily through a sales force that calls on Clients directly, relationships with benefits brokers and advisors, and integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners.
We have grown our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2020, including by 2% as a result of the acquisition (the "Acquisition") of WageWorks, Inc. ("WageWorks") on August 30, 2019. According to Devenir, today we are the largest HSA provider by accounts and second largest by assets. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-driven culture. Our proprietary technology is designed to help consumers optimize the value of their HSAs and other CDBs, as they gain confidence and skill in their management of financial responsibility for lifetime healthcare.
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Our ability to engage consumers is enhanced by our platforms' capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems, which we call Ecosystem Partners. Our commuter benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers. These strengths reflect our “DEEP Purple” culture of remarkable service to customers and teammates, achieved by driving excellence, ethics, and process into everything we do.
We earn revenue primarily from three sources: service, custodial, and interchange. We earn service revenue mainly from fees paid by Clients on a recurring per-account per-month basis. We earn custodial revenue mainly from HSA Assets held at our members’ direction in federally insured cash deposits, insurance contracts or mutual funds, and from investment of Client-held funds. We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and virtual platforms. See “Key components of our results of operations” for additional information on our sources of revenue, including regarding the adverse impacts caused by the ongoing COVID-19 pandemic.
Acquisition of WageWorks
On August 30, 2019, we completed the Acquisition of WageWorks and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under a new term loan facility and approximately $816.9 million of cash on hand.
We expect the Acquisition to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs. WageWorks’ historic strength of selling to employers directly and through health benefits brokers and advisors complements our distribution through health plans, benefit administrators and retirement record-keeping partners. With WageWorks’ CDB capabilities, we are working to provide employers with a single partner for both HSAs and other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite Group. For Clients that partner with us in this way, we believe we can produce more value by encouraging both CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings available through other CDBs. Accordingly, we believe that there are significant opportunities to expand the scope of services that we provide to our Clients.
The Acquisition has significantly increased the number of our Total Accounts, HSA Assets, Client-held funds, Adjusted EBITDA, total revenue, total cost of revenue, operating expenses, and other financial results. These increases impact the comparability of the period-over-period results described in this report.
Key factors affecting our performance
We believe that our future performance will be driven by a number of factors, including those identified below. Each of these factors presents both significant opportunities and significant risks to our future performance. See also "Results of Operations - Revenue" for information relating to the ongoing COVID-19 pandemic and also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020, this Quarterly Report on Form 10-Q and our other reports filed with the SEC.
WageWorks integration
On August 30, 2019, we completed the Acquisition of WageWorks. We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies. We have identified opportunities of approximately $80 million in annualized ongoing net synergies to be achieved by the end of the fiscal year ending January 31, 2022, of which approximately $55 million have been achieved as of October 31, 2020. Furthermore, we anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader platform and service offerings and as we continue to drive member engagement. We estimate non-recurring costs to achieve these synergies of approximately $100 million realized within 24 to 36 months of the closing of the Acquisition, resulting from investment in technology platforms, back-office systems and platform integration, as well as rationalization of cost of operations. As of October 31, 2020, we had incurred a total of approximately $63 million of non-recurring merger integration costs related to the Acquisition.
Structural change in U.S. health insurance
We derive revenue primarily from healthcare-related saving and spending by consumers in the U.S., which are driven by changes in the broader healthcare industry, including the structure of health insurance. The average premium for employer-sponsored health insurance has risen by 22% since 2015 and 55% since 2010, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health
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insurance more generally. We believe that continued growth in healthcare costs and related factors will spur continued growth in HSA-qualified health plans and HSAs and may encourage policy changes making HSAs or similar vehicles available to new populations such as individuals in Medicare. However, the timing and impact of these and other developments in U.S. healthcare are uncertain. Moreover, changes in healthcare policy, such as "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to predict.
Trends in U.S. tax law
Tax law has a profound impact on our business. Our offerings to members, Clients, and Network Partners consist primarily of services enabled, mandated, or advantaged by provisions of U.S. tax law and regulations. We believe that the present direction of U.S. tax policy is favorable to our business, as evidenced for example by recent regulatory action and bipartisan policy proposals to expand the availability of HSAs. However, changes in tax policy are speculative, and may affect our business in ways that are difficult to predict.
Our client base
Our business model is based on a B2B2C distribution strategy, meaning that we attract Clients and Network Partners to reach consumers to increase the number of our members with HSA accounts and complementary CDBs. We believe that there are significant opportunities to expand the scope of services that we provide to our current Clients.
Broad distribution footprint
We believe we have a diverse distribution footprint to attract new Clients and Network Partners. Our sales force calls on enterprise and regional employers in industries across the U.S., as well as potential Network Partners from among health plans, benefits administrators, and retirement plan record keepers.
Product breadth
We are the largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration. Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs. With our CDB capabilities, we can provide employers with a single partner for both HSAs and complementary CDBs, which is preferred by the vast majority of employers, according to research conducted for us by Aite Group. We believe that the combination of HSA and complementary CDB offerings significantly strengthens our value proposition to employers, health benefits brokers and consultants, and Network Partners as a leading single-source provider.
Our proprietary technology platforms
We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits differentiate us from our competitors and drive our growth. We are building on these innovations by combining our HSA platform with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership position within the HSA sector. We intend to continue to invest in our technology development to enhance our platforms' capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data. For example, we are making significant investments in our platforms' architecture and related platform infrastructure to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement.
Our “DEEP Purple” service culture
The successful healthcare consumer needs education and guidance delivered by people as well as technology. We believe that our "DEEP Purple" culture, which we define as Driving Excellence, Ethics, and Process while providing remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly, opportunities in the rapidly changing healthcare sector. We make significant efforts to promote and foster DEEP Purple within our workforce. We invest in and intend to continue to invest in human capital through technology-enabled training, career development, and advancement opportunities.
Interest rates
As a non-bank custodian, we contract with federally insured banks, credit unions, and insurance company partners, which we collectively call our Depository Partners, to hold custodial cash assets on behalf of our members. We earn a material portion of our total revenue from interest paid to us by these partners. The lengths of our agreements with Depository Partners typically range from three to five years and may have fixed or variable interest
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rate terms. The terms of new and renewing agreements may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control. Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members. We believe that diversification of Depository Partners, varied contract terms and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue. Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members.
We expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to decline significantly and, as a result, funds that we place with our Depository Partners in this environment will receive lower interest rates than we originally expected.
Interest on our long-term debt changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.
Our competition and industry
Our direct competitors are HSA custodians and other CDB providers. Many of these are state or federally chartered banks and other financial institutions for which we believe technology-based healthcare services are not a core business. Certain of our direct competitors have chosen to exit the market despite increased demand for these services. This has created, and we believe will continue to create, opportunities for us to leverage our technology platforms and capabilities to increase our market share. However, some of our direct competitors (including well-known mutual fund companies such as Fidelity Investments and healthcare service companies such as United Health Group's Optum) are in a position, should they choose, to devote more resources to the development, sale, and support of their products and services than we have at our disposal. In addition, numerous indirect competitors, including benefits administration technology and service providers, partner with banks and other HSA custodians to compete with us. Our Network Partners may also choose to offer competitive services directly, as some health plans have done. Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics.
As a result of the outbreak of the COVID-19 virus, we have seen an adverse impact on sales opportunities, with some opportunities delayed and most now being held virtually. As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected. Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs. We have seen a significant decline in the use of commuter benefits due to many of our members working from home during the outbreak or other impacts from the outbreak, which has negatively impacted both our interchange revenue and service revenue, and this "work from home" trend may continue after the pandemic. We have also seen a decline in interchange revenue across all other products. The extent to which the COVID-19 virus will negatively impact our business is highly uncertain and cannot be accurately predicted.
Regulatory environment
Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, the Employee Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the provision of health insurance and provide the tax advantages associated with our products, play a pivotal role in determining our market opportunity. Privacy and data security-related laws such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, laws governing the provision of investment advice to consumers, such as the Investment Advisers Act of 1940, or the Advisers Act, the USA PATRIOT Act, anti-money laundering laws, and the Federal Deposit Insurance Act, all play a similar role in determining our competitive landscape. In addition, state-level regulations also have significant implications for our business in some cases. For example, our subsidiary HealthEquity Trust Company is regulated by the Wyoming Division of Banking, and several states are considering, or have already passed, new privacy regulations that can affect our business. Various states also have laws and regulations that impose additional restrictions on our collection, storage, and use of personally identifiable information. Privacy regulation in particular has become a priority issue in many states, including California, which in 2018 enacted the California Consumer Privacy Act broadly regulating California residents’ personal information and providing California residents with various rights to access and control their data, and the new California Privacy Rights Act. We have also seen an increase in regulatory changes related to our products due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes. Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success.
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Our acquisition strategy
In addition to the WageWorks acquisition, we have a successful history of acquiring HSA portfolios from competitors who have chosen to exit the industry and complementary assets and businesses that strengthen our platform. We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have developed an internal capability to source, evaluate, and integrate acquired HSA portfolios. We intend to continue to thoughtfully pursue acquisitions of complementary assets and businesses that we believe will strengthen our platform.
Key financial and operating metrics
Our management regularly reviews a number of key operating and financial metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business. We discuss certain of these key financial metrics, including revenue, below in the section entitled “Key components of our results of operations.” In addition, we utilize other key metrics as described below.
Total Accounts
The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated:
(in thousands, except percentages)October 31, 2020October 31, 2019% ChangeJanuary 31, 2020
HSAs5,460 5,031 %5,344 
New HSAs from Sales - Quarter-to-date104 129 (19)%379 
New HSAs from Sales - Year-to-date317 344 (8)%724 
New HSAs from Acquisitions - Year-to-date— 757 (100)%757 
HSAs with investments302 197 54 %220 
CDBs7,060 7,504 (6)%7,437 
Total Accounts12,520 12,535 %12,781 
Average Total Accounts - Quarter-to-date12,084 9,970 21 %12,603 
Average Total Accounts - Year-to-date12,429 6,482 92 %8,013 
The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from them. The number of our HSAs increased by approximately 0.4 million, or 9%, from October 31, 2019 to October 31, 2020, due to further penetration into existing Network Partners and the addition of new Network Partners. The number of our CDBs decreased by approximately 0.4 million, or 6%, from October 31, 2019 to October 31, 2020, driven primarily by a decrease in commuter benefit accounts resulting from the impact of the COVID-19 pandemic and associated local governmental restrictions around the country.
HSAs are individually owned portable healthcare accounts. As HSA members transition between employers or health plans, they may no longer be enrolled in a high deductible health plan that qualifies them to continue to make contributions to their HSA.
HSA Assets
The following table sets forth our HSA Assets as of and for the periods indicated:
(in millions, except percentages)October 31, 2020October 31, 2019% ChangeJanuary 31, 2020
HSA cash with yield (1)$8,759 $7,564 16 %$8,301 
HSA cash without yield (2)258 381 (32)%383 
Total HSA cash9,017 7,945 13 %8,684 
HSA investments with yield (1)3,255 2,188 49 %2,495 
HSA investments without yield (2)168 326 (48)%362 
Total HSA investments3,423 2,514 36 %2,857 
Total HSA Assets12,440 10,459 19 %11,541 
Average daily HSA cash with yield - Year-to-date8,445 6,652 27 %6,937 
Average daily HSA cash with yield - Quarter-to-date$8,672 $7,146 21 %$7,791 
(1) HSA Assets that generate custodial revenue.
(2) HSA Assets that do not generate custodial revenue.
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Our HSA Assets, which are our HSA members' assets for which we are the custodian or administrator, or from which we generate custodial revenue, consist of the following components: (i) cash deposits, which are deposits with our Depository Partners or other custodians, (ii) custodial cash deposits invested in annuity contracts with our insurance company partners, and (iii) investments in mutual funds through our custodial investment fund partners. We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022. Measuring our HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating.
Our total HSA Assets increased by $2.0 billion, or 19%, from October 31, 2019 to October 31, 2020, due primarily to HSA contributions, decreased spending per HSA, and appreciation of invested balances.
Total HSA cash increased by $1.1 billion, or 13%, from October 31, 2019 to October 31, 2020, due primarily to HSA contributions and decreased spending per HSA.
Our HSA investment assets increased by $0.9 billion, or 36%, from October 31, 2019 to October 31, 2020, reflecting our strategy of helping our HSA members build wealth and invest for retirement.
Client-held funds
(in millions, except percentages)October 31, 2020October 31, 2019% ChangeJanuary 31, 2020
Client-held funds (1)$798 $670 19 %$779 
Average daily Client-held funds - Year-to-date (1)847 268 216 %382 
Average daily Client-held funds - Quarter-to-date (1)819 500 64 %727 
(1) Client-held funds that generate custodial revenue.
Our Client-held funds are interest-earning deposits from which we generate custodial revenue. These deposits are amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of CDBs. We deposit the Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. Client-held funds fluctuate depending on the timing of funding and spending of CDB balances.
Adjusted EBITDA
We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on marketable equity securities, and certain other non-operating items. We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses, and serves as a basis for comparison against other companies in our industry.














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The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated:
Three months ended October 31,Nine months ended October 31,
(in thousands)2020201920202019
Net income (loss)$1,789 $(21,334)$3,467 $39,854 
Interest income(174)(2,046)(850)(5,273)
Interest expense6,952 10,225 28,110 10,355 
Income tax provision (benefit)2,340 (9,918)2,015 3,908 
Depreciation and amortization10,253 6,203 28,580 12,940 
Amortization of acquired intangible assets19,126 13,051 56,905 16,036 
Stock-based compensation expense11,479 8,222 30,313 21,840 
Merger integration expenses (1)8,193 17,675 31,328 20,459 
Acquisition costs (2)13 32,932 79 40,712 
Gain on marketable equity securities— (285)— (27,570)
Other (3)1,168 824 4,202 1,854 
Adjusted EBITDA$61,139 $55,549 $184,149 $135,115 
(1)For the three and nine months ended October 31, 2019, includes $1.2 million of stock-based compensation expense from post-Acquisition merger integration activities.
(2)For the three and nine months ended October 31, 2019, includes $13.7 million of stock-based compensation expense from Acquisition-related cash and equity accelerations.
(3)For the three months ended October 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $0.6 million and $0.5 million, non-income-based taxes of $0.4 million and $0.2 million, and other costs of $0.2 million and $0.1 million, respectively. For the nine months ended October 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $1.4 million and $1.4 million, non-income-based taxes of $1.2 million and $0.4 million, and other costs of $1.5 million and $0.1 million, respectively.
The following table further sets forth our Adjusted EBITDA as a percentage of revenue:
Three months ended October 31,Nine months ended October 31,
(in thousands, except percentages)20202019$ Change% Change20202019$ Change% Change
Adjusted EBITDA$61,139 $55,549 $5,590 10 %$184,149 $135,115 $49,034 36 %
As a percentage of revenue34 %35 %34 %41 %
Our Adjusted EBITDA increased by $5.6 million, or 10%, from $55.5 million for the three months ended October 31, 2019 to $61.1 million for the three months ended October 31, 2020. The increase in Adjusted EBITDA was driven by the inclusion of WageWorks' results of operations for the full period of the current year, increased efficiency, and the overall growth of our business.
Our Adjusted EBITDA increased by $49.0 million, or 36%, from $135.1 million for the nine months ended October 31, 2019 to $184.1 million for the nine months ended October 31, 2020. The increase in Adjusted EBITDA was driven by the inclusion of WageWorks' results of operations for the full period of the current year, increased efficiency, and the overall growth of our business.
Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation nor as a substitute for analysis of our results as reported under GAAP.
Key components of our results of operations