Part I. Financial information
Item 1. Financial statements
HealthEquity, Inc. and subsidiaries
Condensed consolidated balance sheets (unaudited)
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|
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(in thousands, except par value)
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July 31, 2015
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January 31, 2015
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Assets
|
|
|
|
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Current assets
|
|
|
|
|
Cash and cash equivalents
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$
|
108,851
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|
|
$
|
111,005
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|
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Marketable securities, at fair value
|
40,083
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|
|
—
|
|
|
Total cash, cash equivalents and marketable securities
|
148,934
|
|
|
111,005
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|
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Accounts receivable, net of allowance for doubtful accounts of $34 as of July 31, 2015 and $40 as of January 31, 2015
|
10,855
|
|
|
9,054
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|
|
Inventories
|
590
|
|
|
625
|
|
|
Deferred tax asset
|
1,968
|
|
|
1,764
|
|
|
Other current assets
|
5,634
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|
|
2,271
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|
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Total current assets
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167,981
|
|
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124,719
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Property and equipment, net
|
3,157
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|
|
2,577
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Intangible assets, net
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26,598
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|
26,541
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|
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Goodwill
|
4,651
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|
|
4,651
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|
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Other assets
|
529
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|
|
281
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|
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Total assets
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$
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202,916
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|
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$
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158,769
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Liabilities and stockholders’ equity
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Current liabilities
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|
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Accounts payable
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$
|
1,032
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|
|
$
|
1,303
|
|
|
Accrued compensation
|
3,312
|
|
|
5,301
|
|
|
Accrued liabilities
|
2,861
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|
|
2,227
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|
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Total current liabilities
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7,205
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|
|
8,831
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Long-term liabilities
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|
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Other long-term liability
|
145
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|
|
488
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Deferred tax liability
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4,405
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|
5,355
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Total long-term liabilities
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4,550
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|
5,843
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Total liabilities
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11,755
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14,674
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Commitments and contingencies (see note 5)
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Stockholders’ equity
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|
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Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2015 and January 31, 2015, respectively
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—
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|
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—
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|
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Common stock, $0.0001 par value, 900,000 shares authorized, 57,162 and 54,802 shares issued and outstanding as of July 31, 2015 and January 31, 2015, respectively
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6
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5
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Additional paid-in capital
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194,794
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157,094
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Accumulated other comprehensive loss
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(33
|
)
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—
|
|
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Accumulated deficit
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(3,606
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)
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(13,004
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)
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Total stockholders’ equity
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191,161
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|
144,095
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Total liabilities and stockholders’ equity
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$
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202,916
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$
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158,769
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of operations and
comprehensive income (unaudited)
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(in thousands, except per share data)
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Three months ended July 31,
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Six months ended July 31,
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2015
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2014
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2015
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2014
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Revenue:
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Account fee revenue
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$
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14,604
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$
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10,548
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$
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29,001
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$
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20,936
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Custodial fee revenue
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9,031
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5,934
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17,450
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11,361
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Card fee revenue
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6,771
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|
4,233
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13,588
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8,531
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|
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Other revenue
|
88
|
|
|
176
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|
|
305
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|
|
294
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Total revenue
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30,494
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20,891
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60,344
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41,122
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Cost of services:
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Account costs
|
8,316
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|
6,703
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16,705
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13,131
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Custodial costs
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1,512
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|
1,006
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2,935
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1,944
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Card costs
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2,049
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|
1,412
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|
4,151
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|
|
2,817
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|
|
Other costs
|
32
|
|
|
1
|
|
|
62
|
|
|
2
|
|
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Total cost of services
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11,909
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9,122
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23,853
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17,894
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Gross profit
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18,585
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|
11,769
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36,491
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23,228
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Operating expenses:
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Sales and marketing
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2,737
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|
2,321
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5,570
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4,554
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Technology and development
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3,998
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|
2,302
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7,522
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4,488
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General and administrative
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3,943
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1,666
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|
7,101
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|
2,809
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Amortization of acquired intangible assets
|
409
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|
409
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|
818
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|
818
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Total operating expenses
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11,087
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|
6,698
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21,011
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12,669
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Income from operations
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7,498
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|
5,071
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15,480
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10,559
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Other expense:
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Loss on revaluation of redeemable convertible preferred stock derivative
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—
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—
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—
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(735
|
)
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Other expense, net
|
(542
|
)
|
|
(39
|
)
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(647
|
)
|
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(131
|
)
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Total other expense
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(542
|
)
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(39
|
)
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(647
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)
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(866
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)
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Income before income taxes
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6,956
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|
5,032
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|
14,833
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|
9,693
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Income tax provision
|
2,535
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|
2,004
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|
5,435
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3,947
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Net income
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$
|
4,421
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|
|
$
|
3,028
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$
|
9,398
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|
$
|
5,746
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Net income attributable to common stockholders:
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Basic
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$
|
4,421
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$
|
1,565
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$
|
9,398
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|
|
$
|
5,457
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Diluted
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$
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4,421
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$
|
2,591
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$
|
9,398
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$
|
6,481
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Net income per share attributable to common stockholders:
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Basic
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$
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0.08
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$
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0.19
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$
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0.17
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$
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0.70
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Diluted
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$
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0.08
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$
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0.06
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$
|
0.16
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$
|
0.14
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Weighted-average number of shares used in computing net income per share attributable to common stockholders:
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Basic
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56,730
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8,135
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55,909
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7,757
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Diluted
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58,932
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|
41,680
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|
58,318
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|
45,847
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Comprehensive income:
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Net income
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$
|
4,421
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$
|
3,028
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$
|
9,398
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$
|
5,746
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Other comprehensive loss:
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|
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|
|
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Unrealized loss on available-for-sale marketable securities, net of tax
|
(11
|
)
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—
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|
(33
|
)
|
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—
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Comprehensive income
|
$
|
4,410
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$
|
3,028
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|
$
|
9,365
|
|
|
$
|
5,746
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|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Condensed consolidated statements of cash flows (unaudited)
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|
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Six months ended July 31,
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(in thousands)
|
2015
|
|
|
2014
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
$
|
9,398
|
|
|
$
|
5,746
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
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Depreciation and amortization
|
3,665
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|
|
2,643
|
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|
Loss on revaluation of redeemable convertible preferred stock derivative
|
—
|
|
|
735
|
|
|
Deferred taxes
|
(1,133
|
)
|
|
1,847
|
|
|
Stock-based compensation
|
2,771
|
|
|
468
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
(1,801
|
)
|
|
(582
|
)
|
|
Inventories
|
35
|
|
|
22
|
|
|
Other assets
|
(3,611
|
)
|
|
(2,396
|
)
|
|
Accounts payable
|
(277
|
)
|
|
(1,905
|
)
|
|
Accrued compensation
|
(1,989
|
)
|
|
(1,128
|
)
|
|
Accrued liabilities
|
577
|
|
|
(172
|
)
|
|
Other long-term liability
|
(343
|
)
|
|
42
|
|
|
Net cash provided by operating activities
|
7,292
|
|
|
5,320
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of marketable securities
|
(40,137
|
)
|
|
—
|
|
|
Purchase of property and equipment
|
(1,257
|
)
|
|
(1,047
|
)
|
|
Purchase of software and capitalized software development costs
|
(2,982
|
)
|
|
(3,516
|
)
|
|
Net cash used in investing activities
|
(44,376
|
)
|
|
(4,563
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from follow-on offering, net of payments for offering costs
|
23,492
|
|
|
—
|
|
|
Proceeds from exercise of common stock options
|
1,153
|
|
|
2,383
|
|
|
Proceeds from exercise of common stock warrants
|
—
|
|
|
2,343
|
|
|
Tax benefit from exercise of common stock options
|
10,285
|
|
|
2,886
|
|
|
Deferred offering costs
|
—
|
|
|
(1,400
|
)
|
|
Net cash provided by financing activities
|
34,930
|
|
|
6,212
|
|
|
(Decrease) increase in cash and cash equivalents
|
(2,154
|
)
|
|
6,969
|
|
|
Beginning cash and cash equivalents
|
111,005
|
|
|
13,917
|
|
|
Ending cash and cash equivalents
|
$
|
108,851
|
|
|
$
|
20,886
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
Common stock warrants exercised
|
$
|
—
|
|
|
$
|
2,313
|
|
|
Series D-3 redeemable convertible preferred stock dividend
|
$
|
—
|
|
|
$
|
344
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 1.
Summary of business and significant accounting policies
HealthEquity, Inc. was incorporated in the state of Delaware on September 18, 2002, and was organized to offer a full range of innovative solutions for managing health care accounts (Health Savings Accounts, Health Reimbursement Arrangements, and Flexible Spending Accounts) for health plans, insurance companies, and third-party administrators.
Principles of consolidation
—The condensed consolidated financial statements include the accounts of HealthEquity, Inc. and its wholly owned subsidiaries, HEQ Insurance Services, Inc., and HealthEquity Advisors, LLC (collectively referred to as the "Company"). During the year ended January 31, 2015, the Company and an unrelated company formed a limited partnership for investment in and the management of early stage companies in the healthcare industry. The Company has a
22%
ownership interest in such partnership accounted for using the equity method of accounting. The investment was approximately
$281,000
as of
July 31, 2015
and is included in other assets on the accompanying condensed consolidated balance sheet. All significant intercompany balances and transactions have been eliminated.
Basis of presentation
—The accompanying condensed consolidated financial statements as of
July 31, 2015
and for the
three and six
months ended
July 31, 2015
and
2014
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 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 year ended January 31, 2015. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Follow-on offering
—On May 11, 2015, the Company closed its follow-on public offering and sold
972,500
shares of common stock at a public offering price of
$25.90
per share, less the underwriters' discount. Certain selling stockholders sold
3,455,000
shares of common stock in the offering, including
380,000
shares of common stock which were issued upon the exercise of outstanding options. The Company received net proceeds of approximately
$23.5 million
after deducting underwriting discounts and commissions of approximately
$1.0 million
and other offering expenses payable by the Company of approximately
$688,000
. The Company did not receive any proceeds from the sale of shares by the selling stockholders other than
$222,000
representing the exercise price of the options that were exercised in connection with the offering.
Marketable securities
—Marketable securities consist primarily of mutual funds invested in corporate bonds, U.S. government agency securities, U.S. treasury bills, commercial paper, certificates of deposit, municipal notes, and bonds with original maturities beyond three months at the time of purchase. Marketable securities are classified as available-for-sale, held-to-maturity, or trading at the date of purchase. As of
July 31, 2015
, all marketable securities have been classified as available-for-sale. The Company may sell these securities at any time for use in current operations or for other purposes even if they have not yet reached maturity. As a result, the Company classifies its marketable securities, including securities with maturities beyond twelve months, as current assets in the accompanying condensed consolidated balance sheets. All marketable securities are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income. The Company evaluates its marketable securities to assess whether those with unrealized loss positions are other-than-temporarily impaired. The Company considers impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in other expense, net in the condensed consolidated statements of operations and comprehensive income.
Recent accounting pronouncements
—On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
, which requires an
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 1.
Summary of business and significant accounting policies (continued)
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB voted to defer the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption beginning for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on the ongoing financial reporting.
Business combinations
—Acquisition-related expenses are recognized in earnings in the period in which they are incurred. During the three and six months ended July 31, 2015, the Company incurred $
571,000
and
$661,000
, respectively, of acquisition-related expenses which is included in other expense, net on the condensed consolidated statement of operations. There were no business combinations during the three and six months ended July 31, 2015.
Revision of previously issued financial statements
—During the three months ended October 31, 2014, the Company identified an error that originated in the three months ended
July 31, 2014
. This error was caused by using an incorrect fair value amount in calculating the windfall tax benefit for a portion of the vested options exercised during the period. The adjustment increased other current assets and additional paid-in capital by approximately
$1.0 million
. The error also decreased cash provided by operating activities by
$1.0 million
and increased cash provided by financing activities by the same amount. The error had no impact to the condensed consolidated statement of operations and comprehensive income. The Company determined this error did not materially impact the
July 31, 2014
financial statements nor the October 31, 2014 financial statements; however, in order to correctly present the financial statements, the condensed consolidated statement of cash flows for the six months ended
July 31, 2014
has been revised to reflect this correction.
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 2.
Net income per share attributable to common stockholders
The Company computed net income per share of common stock in conformity with the two-class method required for participating securities for the
three and six
months ended
July 31, 2014
. Prior to their conversion to common stock, the Company considered its series D-3 redeemable convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a dividend in the event that a dividend was paid on common stock. The following table sets forth the computation of basic and diluted net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,421
|
|
|
$
|
3,028
|
|
|
$
|
9,398
|
|
|
$
|
5,746
|
|
|
Add back: accretion of redeemable convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,021
|
|
|
Less: dividend on redeemable convertible preferred stock and dividend on convertible preferred stock
|
|
—
|
|
|
(632
|
)
|
|
—
|
|
|
(1,270
|
)
|
|
Less: undistributed income attributed to redeemable convertible preferred stockholders
|
|
—
|
|
|
(831
|
)
|
|
—
|
|
|
(3,040
|
)
|
|
Net income attributable to common stockholders for basic earnings per share
|
|
$
|
4,421
|
|
|
$
|
1,565
|
|
|
$
|
9,398
|
|
|
$
|
5,457
|
|
|
Add back: dividend of redeemable convertible preferred stock
|
|
—
|
|
|
463
|
|
|
—
|
|
|
1,270
|
|
|
Less: accretion on redeemable convertible preferred stock and dividend on convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,021
|
)
|
|
Add back: series D-3 derivative liability revaluations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
735
|
|
|
Add back: adjustment to undistributed income attributed to redeemable convertible preferred stockholders
|
|
—
|
|
|
563
|
|
|
—
|
|
|
3,040
|
|
|
Net income attributable to common stockholders for diluted earnings per share
|
|
$
|
4,421
|
|
|
$
|
2,591
|
|
|
$
|
9,398
|
|
|
$
|
6,481
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (basic):
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
56,730
|
|
|
8,135
|
|
|
55,909
|
|
|
7,757
|
|
|
Denominator (diluted):
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
56,730
|
|
|
8,135
|
|
|
55,909
|
|
|
7,757
|
|
|
Effect of potential dilutive securities:
|
|
|
|
|
|
|
|
|
|
Weighted-average dilutive effect of stock options
|
|
2,202
|
|
|
3,050
|
|
|
2,409
|
|
|
3,207
|
|
|
Weighted-average dilutive effect of common shares from stock warrants
|
|
—
|
|
|
2,350
|
|
|
—
|
|
|
2,415
|
|
|
Dilutive effect from preferred stock assuming conversion
|
|
—
|
|
|
28,145
|
|
|
—
|
|
|
32,468
|
|
|
Weighted-average common shares outstanding
|
|
58,932
|
|
|
41,680
|
|
|
58,318
|
|
|
45,847
|
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
0.19
|
|
|
$
|
0.17
|
|
|
$
|
0.70
|
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
For the three months ended
July 31, 2015
and
2014
, approximately
648,000
and
4.3 million
shares, respectively, attributable to stock options were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 2.
Net income per share attributable to common stockholders (continued)
For the
six
months ended
July 31, 2015
and
2014
, approximately
637,000
and
2,000
shares, respectively, attributable to stock options were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
Note 3.
Property and equipment
Property and equipment consisted of the following as of
July 31, 2015
and
January 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
July 31, 2015
|
|
|
January 31, 2015
|
|
|
Leasehold improvements
|
|
$
|
703
|
|
|
$
|
506
|
|
|
Furniture and fixtures
|
|
1,548
|
|
|
1,317
|
|
|
Computer equipment
|
|
4,842
|
|
|
4,013
|
|
|
Property and equipment, gross
|
|
7,093
|
|
|
5,836
|
|
|
Accumulated depreciation
|
|
(3,936
|
)
|
|
(3,259
|
)
|
|
Property and equipment, net
|
|
$
|
3,157
|
|
|
$
|
2,577
|
|
Depreciation expense for the
three and six
months ended
July 31, 2015
was
$354,000
and
$677,000
, respectively, and
$251,000
and
$485,000
for the
three and six
months ended
July 31, 2014
, respectively.
Note 4.
Intangible assets and goodwill
During the
three and six
months ended
July 31, 2015
, the Company capitalized software development costs of
$1.2 million
and
$2.4 million
, respectively, and
$1.3 million
and
$2.4 million
for the
three and six
months ended
July 31, 2014
, respectively, related to significant enhancements and upgrades to its proprietary system.
The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of
July 31, 2015
and
January 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
July 31, 2015
|
|
|
January 31, 2015
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
Capitalized software development costs
|
|
$
|
12,907
|
|
|
$
|
10,468
|
|
|
Software
|
|
5,301
|
|
|
4,695
|
|
|
Acquired intangible member assets
|
|
24,563
|
|
|
24,563
|
|
|
Intangible assets, gross
|
|
42,771
|
|
|
39,726
|
|
|
Accumulated amortization
|
|
(16,173
|
)
|
|
(13,185
|
)
|
|
Intangible assets, net
|
|
$
|
26,598
|
|
|
$
|
26,541
|
|
During the
three and six
months ended
July 31, 2015
, the Company incurred and expensed a total of
$1.8 million
and
$3.5 million
, respectively, and
$976,000
and
$1.8 million
for the
three and six
months ended
July 31, 2014
, respectively, in software development costs primarily related to the post-implementation and operation stages of its proprietary software.
Amortization expense for the
three and six
months ended
July 31, 2015
was
$1.6 million
and
$3.0 million
, respectively, and
$1.1 million
and
$2.2 million
for the
three and six
months ended
July 31, 2014
, respectively.
There were
no
changes to the goodwill carrying value during the
three and six
months ended
July 31, 2015
and
2014
.
Note 5.
Commitments and contingencies
The Company’s principal commitments and contingencies consist of a processing services agreement with a vendor, and obligations for office space, data storage facilities, equipment and certain maintenance agreements under long-term, non-cancelable operating leases. These commitments as of
January 31, 2015
are disclosed in the
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 5.
Commitments and contingencies (continued)
Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 31, 2015, and did not change materially during the
three and six
months ended
July 31, 2015
, except for the following:
On May 15, 2015, the Company entered into a lease agreement to expand its headquarters in Draper, Utah. The lease provides for a new landlord to construct a building at its cost and to use reasonable efforts to substantially complete the building by July 2016. The Company has no risk of loss during the construction period. The lease will commence upon the substantial completion and delivery of the building to the Company and has an initial term of
129
months thereafter, with a Company option to extend the lease for
two
additional
five
year periods. The Company will be responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately
$1.0 million
, with
2.5%
annual increases. In conjunction with the aforementioned lease, the Company entered into an amended and restated lease agreement for its existing office space at its headquarters in Draper, Utah. The lease commenced on July 1, 2015 and has an initial term of
129
months thereafter, with a Company option to extend the lease for
two
additional
five
year periods. The Company will be responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately
$1.6 million
, with
2.5%
annual increases. As a result of the foregoing transaction, the deferred rent balance of approximately
$470,000
was reversed during the
three and six
months ended
July 31, 2015
.
Lease expense for office space for the
three and six
months ended
July 31, 2015
was
$510,000
and
$983,000
, respectively, and
$293,000
and
$570,000
for the
three and six
months ended
July 31, 2014
, respectively. Expense for other lease agreements for the
three and six
months ended
July 31, 2015
was
$57,000
and
$116,000
, respectively, and
$47,000
and
$99,000
for the
three and six
months ended
July 31, 2014
, respectively.
Note 6.
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 provision for income taxes. For the
three and six
months ended
July 31, 2015
, the Company recorded a provision for income taxes of
$2.5 million
and
$5.4 million
, respectively. The resulting effective tax rate was
36.4%
and
36.6%
, compared with an effective tax rate of
39.8%
and
40.7%
for the
three and six
months ended
July 31, 2014
. For the
three and six
months ended
July 31, 2015
, discrete tax items were not significant. For the
three and six
months ended
July 31, 2014
, the net impact of discrete tax items caused a
1.3%
and
0.5%
decrease, respectively, to the effective tax rate primarily due to the tax benefit on book stock compensation expense on stock options vesting upon the Company's initial public offering offset by changes in tax rates on the Company's deferred tax assets and liabilities. The decrease in the effective tax rate from the same period last year is primarily due to a decrease in unfavorable permanent tax items in relation to income before income taxes, a decrease in state taxes, and an increase in state research and development tax credits. The federal research and development tax credit expired as of December 31, 2014.
As of
July 31, 2015
and
January 31, 2015
, the Company’s total gross unrecognized tax benefit was
$318,000
and
$300,000
, respectively. As a result of Accounting Standards Update No. 2013-11, certain unrecognized tax benefits have been netted against their related deferred tax assets. As a result, the unrecognized tax benefit recorded as of
July 31, 2015
and
January 31, 2015
remains unchanged at
$20,000
. If recognized,
$241,000
of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of
July 31, 2015
. The Company anticipates a decrease of
$20,000
in total gross unrecognized tax benefits within 12 months of the reporting date related to uncertain tax positions on research and development credits claimed and the untimely filing of certain elections for which a lapse of the applicable statute of limitations is expected.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is not currently under examination with any jurisdiction. The Company remains subject to examination by federal and various state taxing jurisdictions for tax years after 2003.
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 7.
Stock options
Stock option activity under the Company's equity incentive plans 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, 2015
|
|
6,457
|
|
|
$0.10 - 25.45
|
|
$
|
5.27
|
|
|
6.88
|
|
$
|
100,290
|
|
|
Granted
|
|
647
|
|
|
$25.39 - 26.66
|
|
$
|
25.52
|
|
|
|
|
|
|
Exercised
|
|
(1,388
|
)
|
|
$0.10 - 14.00
|
|
$
|
0.83
|
|
|
|
|
|
|
Forfeited
|
|
(110
|
)
|
|
$0.80 - 25.45
|
|
$
|
17.11
|
|
|
|
|
|
|
Outstanding as of July 31, 2015
|
|
5,606
|
|
|
$0.10 - 26.66
|
|
$
|
8.47
|
|
|
7.13
|
|
$
|
141,217
|
|
|
Vested and expected to vest as of July 31, 2015
|
|
5,389
|
|
|
|
|
$
|
8.16
|
|
|
7.05
|
|
$
|
137,406
|
|
|
Exercisable as of July 31, 2015
|
|
2,900
|
|
|
|
|
$
|
1.97
|
|
|
5.39
|
|
$
|
91,915
|
|
The aggregate intrinsic value in the table above represents the difference between the estimated fair value of common stock and the exercise price of outstanding, in-the-money stock options.
The key input assumptions that were utilized in the valuation of the stock options granted during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—%
|
|
Expected stock price volatility
|
|
38.5
|
%
|
|
32.9
|
%
|
|
38.5% - 40.3%
|
|
|
32.9%
|
|
Risk-free interest rate
|
|
1.72
|
%
|
|
2.24
|
%
|
|
1.47% - 1.72%
|
|
|
2.24%
|
|
Expected life of options
|
|
6.25 years
|
|
|
6.25 years
|
|
|
5.43 - 6.25 years
|
|
|
6.25 years
|
The determination of the fair value of stock options on the date of grant using an option pricing model is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatility is determined using weighted average volatility of publicly traded peer companies. The Company expects that it will begin using its own historical volatility in addition to the volatility of publicly traded peer companies, as its share price history grows over time. The risk-free interest rate is determined by using published zero coupon rates on treasury notes for each grant date given the expected term on the options. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations. The Company uses the "simplified" method to estimate expected term as determined under Staff Accounting Bulletin No. 110 due to the lack of sufficient option exercise history as a public company.
As of
July 31, 2015
, the weighted-average vesting period of non-vested awards expected to vest approximates
2.7 years
; the amount of compensation expense the Company expects to recognize for stock options vesting in future periods approximates
$12.8 million
.
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 7.
Stock options (continued)
The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
(in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Cost of services
|
|
$
|
208
|
|
|
$
|
52
|
|
|
$
|
436
|
|
|
$
|
70
|
|
|
Sales and marketing
|
|
259
|
|
|
138
|
|
|
487
|
|
|
141
|
|
|
Technology and development
|
|
237
|
|
|
53
|
|
|
387
|
|
|
85
|
|
|
General and administrative
|
|
973
|
|
|
160
|
|
|
1,461
|
|
|
172
|
|
|
Total stock-based compensation expense
|
|
$
|
1,677
|
|
|
$
|
403
|
|
|
$
|
2,771
|
|
|
$
|
468
|
|
Note 8.
Cash, cash equivalents and marketable securities
Cash, cash equivalents and marketable securities as of
July 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost basis
|
|
|
Gross unrealized gains
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Cash and cash equivalents
|
$
|
108,851
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108,851
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Mutual funds
|
40,137
|
|
|
25
|
|
|
(79
|
)
|
|
40,083
|
|
|
Total cash, cash equivalents and marketable securities
|
$
|
148,988
|
|
|
$
|
25
|
|
|
$
|
(79
|
)
|
|
$
|
148,934
|
|
Cash, cash equivalents and marketable securities as of
January 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost basis
|
|
|
Gross unrealized gains
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Cash and cash equivalents
|
$
|
111,005
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
111,005
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Mutual funds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total cash, cash equivalents and marketable securities
|
$
|
111,005
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
111,005
|
|
The following table summarizes the cost basis and fair value of the marketable securities by contractual maturity as of
July 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Cost basis
|
|
|
Fair value
|
|
|
One year or less
|
$
|
25,061
|
|
|
$
|
25,040
|
|
|
Over one year and less than five years
|
15,076
|
|
|
15,043
|
|
|
Total
|
$
|
40,137
|
|
|
$
|
40,083
|
|
As of
July 31, 2015
, there were no marketable securities that were other-than-temporarily impaired or in an unrealized loss position for more than twelve consecutive months.
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 9. Fair value
Fair value measurements—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;
|
|
|
|
|
•
|
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 highly liquid mutual funds.
The following table summarizes the assets measured at fair value on a recurring basis and indicates the level within the fair value hierarchy reflecting the valuation techniques utilized to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2015
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
40,083
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A derivative liability was recorded related to the Company’s series D-3 redeemable convertible preferred stock due to stated features allowing for redemption equal to the greater of the fair value per share of series D-3 redeemable convertible preferred stock, or the liquidation preference per share of series D-3 redeemable convertible preferred stock. The derivative instrument was recorded at its fair value, using an option pricing model, and was adjusted to fair value as of the end of each reporting period. Changes in the fair value of derivative instruments are recognized currently in the condensed consolidated financial statements. The Company had classified this derivative financial instrument as Level 3 in the fair value hierarchy. The Company continued to record adjustments to the fair value of the derivative liability until March 31, 2014, at which time the Company modified the terms of the series D-3 redeemable convertible preferred stock. As a result of the modifications, the Company reclassified the aggregate fair value of the liability to additional paid-in capital.
The following table includes a roll forward of the amounts for the
three and six
months ended
July 31, 2015
and
2014
for instruments classified within Level 3. The classification within Level 3 is based upon significance of the unobservable inputs to the overall fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
(in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,182
|
|
|
Loss on revaluation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
735
|
|
|
Elimination of liability due to removal of FMV provision
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,917
|
)
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
HealthEquity, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 10.
Related party transactions
The Company had entered into a consulting agreement with a company owned by the President and Chief Executive Officer of the Company. In connection with the consummation of the Company's IPO in July 2014, this consulting agreement was terminated and as such
no
amounts were paid to this company for the
three and six
months ended
July 31, 2015
. The amount paid to this company under the terms of the consulting agreement for the
three and six
months ended
July 31, 2014
was
$81,000
and
$162,000
, respectively.
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 market opportunity, our future financial and operating results, investment strategy, 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, use of non-GAAP financial measures, 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 year ended January 31, 2015 and in 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 the high-growth category of technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions. Our platform provides an ecosystem where consumers can access their tax-advantaged healthcare savings, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit and clinical information, earn wellness incentives, and make educated investment choices to grow their tax-advantaged healthcare savings.
The core of our ecosystem is the health savings account, or HSA, which is a financial account through which consumers spend and save long-term for healthcare on a tax-advantaged basis. We are the integrated HSA platform for 20 of the 50 largest health plans in the country, a number of which are among 28 Blue Cross and Blue Shield health plans in 26 states, and approximately 27,000 employer clients, including industry leaders such as Adobe Systems, American Express Company, Dow Corning Corporation, eBay, Inc., Google, Inc., Intermountain Healthcare and Kohl’s Corporation. Through our Network Partners, we have the potential to reach over 60 million consumers, representing approximately 34% of the under-age 65 privately insured population in the United States.
Since our inception in 2002, we have been committed to developing technology solutions that empower healthcare consumers. In 2003, we began offering live 24/7/365 consumer support from health saving and spending experts. In 2005, we integrated HSAs with our first Health Plan Partner, and in 2006, we were authorized to act as an HSA custodian by the U.S. Department of the Treasury. In 2009, we integrated HSAs with multiple health plans of a single large employer, began delivering integrated wellness incentives through an HSA, and partnered with a private health insurance exchange as its preferred HSA partner. In 2011, we integrated HSAs, reimbursement arrangements, or RAs, and investment accounts on one website, and in 2013, we began delivering HSA-specific investment advice online through our wholly-owned investment advisory subsidiary, HealthEquity Advisors, LLC.
Our customers include individuals, employers of all sizes and health plans. We refer to our individual customers as our members, all of our health plan customers as our Health Plan Partners and our employer customers with more than 1,000 employees as our Employer Partners. Our Health Plan Partners and Employer Partners collectively constitute our Network Partners.
We generate revenue primarily from three sources: account fees, custodial fees and card fees. We generate account fee revenue by providing monthly account services on our platform, primarily through multi-year contracts with our Network Partners that are typically three to five years in duration. We generate custodial fee revenue from interest we earn on cash assets under management, or AUM, deposited with our FDIC-insured custodial depository bank partners and our insurance company partner, and recordkeeping fees we earn from mutual funds in which our members invest on a self-directed basis. We also generate payment card fee revenue from interchange fees that we earn on payments that our members make using our physical and virtual payment cards.
Key factors affecting our performance
We believe that our performance and future success are 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 the section entitled “Risk factors” included in our Annual Report on Form 10-K for the year ended January 31, 2015.
Structural change in U.S. private health insurance
Substantially all of our revenue is derived from healthcare-related saving and spending by consumers in the United States, which is impacted by changes affecting the broader healthcare industry in the U.S. The healthcare industry has changed significantly in recent years, and we expect that significant changes will continue to occur that will result in increased participation in high deductible health plans that are eligible to be coupled with HSAs, or HSA Plans, and other consumer-centric health plans. In particular, we believe that the implementation of the Patient Protection and Affordable Care Act of 2010, or PPACA, over the remainder of this decade, continued growth in healthcare costs, and related factors will spur HSA Plan and HSA growth; however, the timing and impact of these and other developments in the healthcare industry are difficult to predict, and, in any event, no assurance can be given that such growth will occur.
Attracting and penetrating network partners
We created our business model to take advantage of the changing dynamics of the U.S. private health insurance market. Our model is based on a business-to-business-to-consumer, or B2B2C, distribution strategy, meaning we rely on our Employer Partners and Health Plan Partners to reach potential members to increase the number of HSAs for which we serve as custodian, which we refer to as our HSA Members. Our success depends in large part on our ability to further penetrate our existing Network Partners by adding new members from these partners and adding new Network Partners.
Our innovative technology platform
We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions differentiate us from our competitors and drive our growth in revenue, HSA Members, Network Partners and AUM. Similarly, these innovations underpin our ability to provide a differentiated consumer experience in a cost-effective manner. For example, we are currently undertaking a significant update of our proprietary platform’s architecture, which will allow us to decrease our maintenance spending and increase our budget for innovation initiatives. As part of this project, we are also investing in improvements in our transaction processing capabilities and related platform infrastructure to support continued account and transaction growth. We intend to continue to invest in our technology development to enhance our platform’s capabilities and infrastructure.
Our “Purple” culture
The new healthcare consumer needs education and advice delivered by people as well as technology. We believe that our team-oriented, customer-focused culture, which we call “Purple,” is a significant factor in our ability to attract and retain customers and to nimbly address opportunities in the rapidly changing healthcare sector. We make significant efforts to promote and foster 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. We regularly measure the success of these efforts, particularly in the context of rapid growth.
Interest rates
As a non-bank custodian, we contract with FDIC-insured custodial depository bank partners to hold cash AUM, and we generate a significant portion of our total revenue from fees we charge based on interest rates offered to us by these partners. These contracts are long-term, substantially reducing our exposure to short-term fluctuations in interest rates. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate margins available to us and thus the size of the custodial fees we can realize. Conversely, a
sustained increase in prevailing interest rates would present us with an opportunity to increase our interest rate margins. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.
Our competition and industry
Our direct competitors are HSA custodians, of which there are over 2,200 competing in the market. These are primarily 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 platform and capabilities to increase our market share. However, some of our direct competitors 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 Health Plan Partners may also choose to offer technology-based healthcare 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.
Regulatory change
Federal law and regulations, including the PPACA, the Internal Revenue Code and IRS regulations, labor law and public health regulations that govern the provision of health insurance and are the foundation for tax-advantaged healthcare saving and spending through HSAs and RAs, play a pivotal role in determining our market opportunity. Privacy and data security-related laws such as the Health Insurance Portability and Accountability Act of 1996, 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, 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. Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success.
Our acquisition strategy
We have a successful history of acquiring complementary assets and businesses that strengthen our platform and we expect to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have developed an internal capability to source, evaluate and integrate acquisitions that have created value for shareholders. We believe the nature of our competitive landscape provides a significant acquisition opportunity. Many of our competitors view their HSA businesses as non-core functions. We believe they will look to divest these assets and, in certain cases, be limited from making acquisitions due to depository capital requirements.
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.
HSA members
The following table sets forth our HSA Members as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2015
|
|
|
July 31, 2014
|
|
|
% Change
|
|
|
January 31, 2015
|
|
|
HSA Members
|
|
1,537,147
|
|
|
1,061,713
|
|
|
45
|
%
|
|
1,426,785
|
|
|
Average HSA Members - Year-to-date
|
|
1,484,990
|
|
|
1,015,539
|
|
|
46
|
%
|
|
1,087,962
|
|
|
Average HSA Members - Quarter-to-date
|
|
1,510,403
|
|
|
1,038,853
|
|
|
45
|
%
|
|
1,230,256
|
|
We define an HSA Member as an HSA for which we serve as custodian. Tracking the number of our HSA Members is critical because our account fee revenue is driven by the administrative fees we charge per account.
The number of our HSA Members increased by approximately 475,000, or 45%, from July 31, 2014 to July 31, 2015, and by approximately 333,000, or 46%, from July 31, 2013 to July 31, 2014.
The increase in the number of our HSA Members in these periods was driven by the addition of new Network Partners and further penetration into existing Network Partners.
Assets under management
The following table sets forth our AUM as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
July 31, 2015
|
|
|
July 31, 2014
|
|
|
% Change
|
|
|
January 31, 2015
|
|
|
Cash AUM
|
|
$
|
2,260,111
|
|
|
$
|
1,546,753
|
|
|
46
|
%
|
|
$
|
2,075,741
|
|
|
Investment AUM
|
|
372,120
|
|
|
237,831
|
|
|
56
|
%
|
|
286,526
|
|
|
Total AUM
|
|
$
|
2,632,231
|
|
|
$
|
1,784,584
|
|
|
47
|
%
|
|
$
|
2,362,267
|
|
|
Average daily cash AUM - Year-to-date
|
|
$
|
2,176,971
|
|
|
$
|
1,480,075
|
|
|
47
|
%
|
|
$
|
1,553,845
|
|
|
Average daily cash AUM - Quarter-to-date
|
|
$
|
2,214,287
|
|
|
$
|
1,500,672
|
|
|
48
|
%
|
|
$
|
1,698,402
|
|
We define AUM as our custodial assets under management. Our AUM, which is our members' assets under management, consists of the following components: (1) cash deposit AUM which are deposits with our FDIC-insured custodial depository bank partners, (2) Cash AUM invested in an annuity contract with our insurance company partner and (3) members' investments in mutual funds through our custodial investment fund partner. Measuring our AUM is important because our custodial fee revenue is determined by the applicable account yields and average daily AUM balances.
Our total AUM increased by $847.6 million, or 47%, from July 31, 2014 to July 31, 2015. Our total AUM increased by $520.7 million, or 41%, from July 31, 2013 to July 31, 2014. The increase in AUM in these periods was driven by additional AUM from our existing HSA Members and new AUM from new HSA Members added during the fiscal year.
Adjusted EBITDA
The following table sets forth our Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
|
|
|
|
Six months ended July 31,
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
Adjusted EBITDA
|
|
$
|
11,092
|
|
|
$
|
6,867
|
|
|
$
|
4,225
|
|
|
62
|
%
|
|
$
|
21,916
|
|
|
$
|
13,671
|
|
|
$
|
8,245
|
|
|
60
|
%
|
|
As a percentage of revenue
|
|
36
|
%
|
|
33
|
%
|
|
|
|
|
|
36
|
%
|
|
33
|
%
|
|
|
|
|
We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization 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.
Our Adjusted EBITDA increased by $4.2 million, or 62%, from $6.9 million for the three months ended July 31, 2014 to $11.1 million for the three months ended July 31, 2015. The increase in Adjusted EBITDA was driven by the overall growth of our business, including a $2.4 million, or 48%, increase in income from operations.
Our Adjusted EBITDA increased by $8.2 million, or 60%, from $13.7 million for the six months ended July 31, 2014 to $21.9 million for the six months ended July 31, 2015. The increase in Adjusted EBITDA was driven by the overall growth of our business, including a $4.9 million, or 47%, increase in income from operations.
Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
(in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Net income
|
|
$
|
4,421
|
|
|
$
|
3,028
|
|
|
$
|
9,398
|
|
|
$
|
5,746
|
|
|
Income tax provision
|
|
2,535
|
|
|
2,004
|
|
|
5,435
|
|
|
3,947
|
|
|
Depreciation and amortization
|
|
1,506
|
|
|
983
|
|
|
2,847
|
|
|
1,825
|
|
|
Amortization of acquired intangible assets
|
|
409
|
|
|
409
|
|
|
818
|
|
|
818
|
|
|
Loss on revaluation of redeemable convertible preferred stock derivative liability
|
|
—
|
|
|
—
|
|
|
—
|
|
|
735
|
|
|
Stock-based compensation expense
|
|
1,677
|
|
|
403
|
|
|
2,771
|
|
|
468
|
|
|
Other (1)
|
|
544
|
|
|
40
|
|
|
647
|
|
|
132
|
|
|
Total adjustments
|
|
$
|
6,671
|
|
|
$
|
3,839
|
|
|
$
|
12,518
|
|
|
$
|
7,925
|
|
|
Adjusted EBITDA
|
|
$
|
11,092
|
|
|
$
|
6,867
|
|
|
$
|
21,916
|
|
|
$
|
13,671
|
|
|
|
|
|
(1)
|
For the three months ended July 31, 2015 and 2014, Other consisted of interest income of $(109) and $0, miscellaneous taxes of $82 and $40, and acquisition-related costs of $571 and $0, respectively. For the six months ended July 31, 2015 and 2014, Other consisted of interest income of $(185) and $0, miscellaneous taxes of $171 and $132, and acquisition-related costs of $661 and $0, respectively.
|
Key components of our results of operations
Revenue
The following table sets forth our revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
|
|
|
|
Six months ended July 31,
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
Account fee revenue
|
|
$
|
14,604
|
|
|
$
|
10,548
|
|
|
$
|
4,056
|
|
|
38
|
%
|
|
$
|
29,001
|
|
|
$
|
20,936
|
|
|
$
|
8,065
|
|
|
39
|
%
|
|
Custodial fee revenue
|
|
9,031
|
|
|
5,934
|
|
|
3,097
|
|
|
52
|
%
|
|
17,450
|
|
|
11,361
|
|
|
6,089
|
|
|
54
|
%
|
|
Card fee revenue
|
|
6,771
|
|
|
4,233
|
|
|
2,538
|
|
|
60
|
%
|
|
13,588
|
|
|
8,531
|
|
|
5,057
|
|
|
59
|
%
|
|
Other revenue
|
|
88
|
|
|
176
|
|
|
(88
|
)
|
|
(50
|
)%
|
|
305
|
|
|
294
|
|
|
11
|
|
|
4
|
%
|
|
Total revenue
|
|
$
|
30,494
|
|
|
$
|
20,891
|
|
|
$
|
9,603
|
|
|
46
|
%
|
|
$
|
60,344
|
|
|
$
|
41,122
|
|
|
$
|
19,222
|
|
|
47
|
%
|
We generate revenue from three primary sources: account fees, custodial fees and card fees. We also generate other revenue, primarily from marketing materials that we produce for our Network Partners.
Account fee revenue.
We earn account fee revenue from the fees we charge our Network Partners, employer clients and individual members for the administration services we provide in connection with the HSAs and Health Reimbursement Arrangements ("HRA") we offer. Our fees are generally based on a tiered structure fixed for the duration of our agreement with the relevant customer, which is typically three to five years, and are paid to us on a monthly basis. We recognize revenue on a monthly basis as services are rendered under our written service agreements.
Custodial fee revenue.
We earn custodial fee revenue from our AUM held in trust with our FDIC-insured custodial depository bank partners, our insurance company partner and our custodial investment partners. As a non-bank custodian, we deposit our cash AUM with our various bank partners pursuant to contracts that (i) have terms up to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant bank partner, and (iii) have minimum and maximum required deposit balances. We earn custodial fees on our cash AUM held in trust that are based on the interest rates offered to us by these bank partners. In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA assets in mutual funds through our custodial investment partner. We receive a recordkeeping fee related to such investment AUM.
Card fee revenue.
We earn card fee revenue each time one of our members uses one of our payment cards to make a qualified purchase. These card fees are collected each time a member “swipes” our payment card to pay a healthcare-related expense. We recognize card fee revenue monthly based on reports received from third parties, namely, the card-issuing bank and the card processor.
Cost of services
Cost of services includes costs related to servicing member accounts, managing customer and partner relationships and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization,
stock-based compensation, common expense (such as office rent, supplies, and other overhead expenses) allocations, and other operating costs related to servicing our members. Other components of cost of services include interest paid to members on cash AUM and card costs incurred in connection with processing card transactions for our members.
Account costs.
Account costs include the account servicing costs described above. Additionally, for new accounts, we incur on-boarding costs associated with the new accounts, such as new member welcome kits and the cost associated with issuance of new payment cards.
Custodial costs.
Custodial costs are comprised of interest we pay to our HSA Members and fees we pay to banking consultants whom we use to help secure agreements with our FDIC-insured custodial depository banking partners. We pay interest to HSA Members on a tiered basis. The interest rates we pay to HSA Members can be changed at any time upon required notice, which is typically 30 days.
Card costs.
Card costs are comprised of costs we incur in connection with processing payment card transactions initiated by our members. Due to the substantiation requirement on RA-linked payment card transactions, which is the requirement that we confirm each purchase involves a qualified medical expense as defined under applicable law, payment card costs are higher for RA card transactions. In addition to fixed per card fees, we are assessed additional transaction costs determined by the amount of the card transaction.
Other costs.
Other costs are comprised of costs of marketing materials that we produce for our Network Partners.
Gross profit and gross margin
Our gross profit is our total revenue minus our total cost of services, and our gross margin is our gross profit expressed as a percentage of our total revenue. Our gross margin has been and will continue to be affected by a number of factors, including the fees we charge per account, interest rates, how many services we deliver per account, and card processing costs per account. We expect our annual gross margin to remain relatively steady over the near term, although our gross margin could fluctuate from period to period depending on the interplay of these factors.
Operating expenses
Sales and marketing.
Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including sales commissions for our direct sales force, external agent/broker commission expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense allocations.
We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the size of our sales and marketing organization and expand into new markets. However, on an annual basis, we expect our sales and marketing expenses to decrease slightly as a percentage of our total revenue over the near term. Our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.
Technology and development.
Technology and development expenses include personnel and related expenses for software engineering, information technology, security and compliance, and product development. Technology and development expenses also include outsourced software engineering services, the costs of operating our on-demand technology infrastructure, depreciation, amortization of capitalized software development costs, stock-based compensation, and common expense allocations.
We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our proprietary system. On an annual basis, we expect our technology and development expenses to increase as a percentage of our total revenue over the near term as a result of higher amortization costs related to our planned capital expenditures to improve the architecture of our proprietary system. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses.
General and administrative.
General and administrative expenses include personnel and related expenses, and professional fees incurred by our executive, finance, legal, and people departments. They also include depreciation, amortization, stock-based compensation and common expense allocations.
We expect our general and administrative expenses to increase for the foreseeable future due to the additional legal, accounting, insurance, investor relations and other public company costs that we continue to incur as a new public company, as well as other costs associated with continuing to grow our business. Looking forward, on an
annual basis we expect our general and administrative expenses to increase as a percentage of our total revenue over the near term. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.
Amortization of acquired intangible assets.
Amortization of acquired intangible assets results from our acquisition of intangible member assets. We acquired these intangible member assets from third-party custodians. We amortize these assets over the assets’ estimated useful life of 15 years. We evaluate these assets for impairment at least each year, or at a triggering event.
Other expense
Other expense primarily consists of miscellaneous taxes, acquisition-related expenses, and loss on revaluation of our derivative liability associated with our series D-3 redeemable convertible preferred stock. We continued to record adjustments to the fair value of the derivative liability associated with our series D-3 redeemable convertible preferred stock until March 31, 2014, at which time the remeasurements ceased. As a result, during the six months ended July 31, 2014, we recorded a loss on revaluation of this derivative liability. However, as a result of our modifications of our series D-3 redeemable convertible preferred stock on March 31, 2014, we reclassified the aggregate fair value of the derivative liability associated with our series D-3 redeemable convertible preferred stock to additional paid-in capital and we ceased to record any related fair value adjustments.
Income tax provision
We are subject to federal and state income taxes in the United States based on a calendar tax year that differs from our fiscal year-end for financial reporting purposes. We use the asset and liability method to account for income taxes, under which current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. As of July 31, 2015, we remain in a net deferred tax liability position. In accordance with FASB ASC 718-740-25-10,
Compensation - Stock Compensation
, a portion of deferred tax assets attributable to excess stock option benefits is tracked separately and is not included in the recorded deferred tax asset. As of July 31, 2015, deferred tax assets attributable to excess stock option benefits totaled $2.6 million. Such benefit will not be recorded until the deduction reduces cash taxes payable. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. Due to the positive evidence of historical profits coupled with forecasted profitability, no valuation allowance was required as of July 31, 2015.
Results of operations
The following table sets forth our results of operations for the specified periods. The period-to-period comparisons of results are not necessarily indicative of results for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Six months ended July 31,
|
|
|
(in thousands)
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Account fee revenue
|
|
$
|
14,604
|
|
|
$
|
10,548
|
|
|
$
|
29,001
|
|
|
$
|
20,936
|
|
|
Custodial fee revenue
|
|
9,031
|
|
|
5,934
|
|
|
17,450
|
|
|
11,361
|
|
|
Card fee revenue
|
|
6,771
|
|
|
4,233
|
|
|
13,588
|
|
|
8,531
|
|
|
Other revenue
|
|
88
|
|
|
176
|
|
|
305
|
|
|
294
|
|
|
Total revenue
|
|
30,494
|
|
|
20,891
|
|
|
60,344
|
|
|
41,122
|
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
Account costs
|
|
8,316
|
|
|
6,703
|
|
|
16,705
|
|
|
13,131
|
|
|
Custodial costs
|
|
1,512
|
|
|
1,006
|
|
|
2,935
|
|
|
1,944
|
|
|
Card costs
|
|
2,049
|
|
|
1,412
|
|
|
4,151
|
|
|
2,817
|
|
|
Other costs
|
|
32
|
|
|
1
|
|
|
62
|
|
|
2
|
|
|
Total cost of services
|
|
11,909
|
|
|
9,122
|
|
|
23,853
|
|
|
17,894
|
|
|
Gross profit
|
|
18,585
|
|
|
11,769
|
|
|
36,491
|
|
|
23,228
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
2,737
|
|
|
2,321
|
|
|
5,570
|
|
|
4,554
|
|
|
Technology and development
|
|
3,998
|
|
|
2,302
|
|
|
7,522
|
|
|
4,488
|
|
|
General and administrative
|
|
3,943
|
|
|
1,666
|
|
|
7,101
|
|
|
2,809
|
|
|
Amortization of acquired intangible assets
|
|
409
|
|
|
409
|
|
|
818
|
|
|
818
|
|
|
Total operating expenses
|
|
11,087
|
|
|
6,698
|
|
|
21,011
|
|
|
12,669
|
|
|
Income from operations
|
|
7,498
|
|
|
5,071
|
|
|
15,480
|
|
|
10,559
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
Loss on revaluation of redeemable convertible preferred stock derivative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(735
|
)
|
|
Other expense, net
|
|
(542
|
)
|
|
(39
|
)
|
|
(647
|
)
|
|
(131
|
)
|
|
Total other expense
|
|
(542
|
)
|
|
(39
|
)
|
|
(647
|
)
|
|
(866
|
)
|
|
Income before income taxes
|
|
6,956
|
|
|
5,032
|
|
|
14,833
|
|
|
9,693
|
|
|
Income tax provision
|
|
2,535
|
|
|
2,004
|
|
|
5,435
|
|
|
3,947
|
|
|
Net income
|
|
$
|
4,421
|
|
|
$
|
3,028
|
|
|
$
|
9,398
|
|
|
$
|
5,746
|
|
The following table presents the components of our results of operations for the periods indicated as a percent of our total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
Three months ended July 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Account fee revenue
|
|
48
|
%
|
|
51
|
%
|
|
48
|
%
|
|
51
|
%
|
|
Custodial fee revenue
|
|
30
|
%
|
|
28
|
%
|
|
29
|
%
|
|
27
|
%
|
|
Card fee revenue
|
|
22
|
%
|
|
20
|
%
|
|
23
|
%
|
|
21
|
%
|
|
Other revenue
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
|
1
|
%
|
|
Total revenue
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
Cost of services
|
|
|
|
|
|
|
|
|
|
Account costs
|
|
27
|
%
|
|
32
|
%
|
|
28
|
%
|
|
32
|
%
|
|
Custodial costs
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
Card costs
|
|
7
|
%
|
|
7
|
%
|
|
7
|
%
|
|
7
|
%
|
|
Other costs
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Total cost of services
|
|
39
|
%
|
|
44
|
%
|
|
40
|
%
|
|
44
|
%
|
|
Gross profit
|
|
61
|
%
|
|
56
|
%
|
|
60
|
%
|
|
56
|
%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
9
|
%
|
|
11
|
%
|
|
9
|
%
|
|
11
|
%
|
|
Technology and development
|
|
13
|
%
|
|
11
|
%
|
|
12
|
%
|
|
11
|
%
|
|
General and administrative
|
|
13
|
%
|
|
8
|
%
|
|
12
|
%
|
|
6
|
%
|
|
Amortization of acquired intangible assets
|
|
1
|
%
|
|
2
|
%
|
|
1
|
%
|
|
2
|
%
|
|
Total operating expenses
|
|
36
|
%
|
|
32
|
%
|
|
34
|
%
|
|
30
|
%
|
|
Income from operations
|
|
25
|
%
|
|
24
|
%
|
|
26
|
%
|
|
26
|
%
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
Loss on revaluation of redeemable convertible preferred stock derivative
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
(2
|
)%
|
|
Other expense, net
|
|
(2
|
)%
|
|
—
|
%
|
|
(1
|
)%
|
|
—
|
%
|
|
Total other expense
|
|
(2
|
)%
|
|
—
|
%
|
|
(1
|
)%
|
|
(2
|
)%
|
|
Income before income taxes
|
|
23
|
%
|
|
24
|
%
|
|
25
|
%
|
|
24
|
%
|
|
Income tax provision
|
|
8
|
%
|
|
10
|
%
|
|
9
|
%
|
|
10
|
%
|
|
Net income
|
|
15
|
%
|
|
14
|
%
|
|
16
|
%
|
|
14
|
%
|
Comparison of the three and six months ended July 31, 2015 and 2014
Account fee revenue
The $4.1 million increase in account fee revenue for the three months ended July 31, 2015 as compared to the three months ended July 31, 2014 was primarily due to an increase in the number of our HSA Members. The $8.1 million increase in account fee revenue for the six months ended July 31, 2015 as compared to the six months ended July 31, 2014 was primarily due to an increase in the number of our HSA Members.The number of our HSA Members increased by approximately 475,000, or 45%, from July 31, 2014 to July 31, 2015.
The growth in the number of our HSA Members from July 31, 2014 to July 31, 2015 was due to a combination of growth from our new and existing Network Partners.
Account fees per HSA Member decreased for the three and six months ended July 31, 2015 as compared to the three and six months ended July 31, 2014 by approximately 5%. Our account fee tier structure incentivizes Network Partners to add HSA Members by charging a lower rate for more HSA Members. As Network Partners add more HSA Members, the account fee per HSA Member will continue to decrease. The decrease in account fees per HSA Member were partially offset by increases in custodial fees per HSA Member.
Custodial fee revenue
The $3.1 million increase in custodial fee revenue from the three months ended July 31, 2014 to the three months ended July 31, 2015 was primarily due to an increase in average daily cash AUM of $713.6 million, or 48%, and an increase in the yield on average cash AUM from 1.52% for the three months ended July 31, 2014 to 1.56% for the three months ended July 31, 2015. Custodial fees increased for the three months ended July 31, 2015 as a percentage of our total revenue compared to the three months ended July 31, 2014, primarily due to higher-rate custodial depository agreements added subsequent to the three months ended July 31, 2014 to accommodate our growth in cash AUM. This had a positive impact on our interest yield for the three months ended July 31, 2015 compared to the three months ended July 31, 2014.
The $6.1 million increase in custodial fee revenue from the six months ended July 31, 2014 to the six months ended July 31, 2015 was primarily due to an increase in average daily cash AUM of $696.9 million, or 47%, and an increase in the yield on average cash AUM from 1.50% in the six months ended July 31, 2014 to 1.56% in the six months ended July 31, 2015. Custodial fees increased in the six months ended July 31, 2015 as a percentage of our total revenue compared to the six months ended July 31, 2014, primarily due to higher-rate custodial depository agreements added subsequent to the six months ended July 31, 2014 to accommodate our growth in cash AUM. This had a positive impact on our interest yield during the six months ended July 31, 2015 compared to the six months ended July 31, 2014.
Custodial fees per HSA Member increased for the three and six months ended July 31, 2015 as compared to the three and six months ended July 31, 2014 by approximately 5% primarily due to the higher yield and higher cash AUM balances.
Investment AUM increases resulted from an increase in the number of our members choosing to move their HSA assets from cash balances to investment balances, along with market changes (positive or negative) in the particular investments chosen.
Card fee revenue
The $2.5 million increase in card fee revenue from the three months ended July 31, 2014 to the three months ended July 31, 2015 was due to an overall increase in the number of our HSA Members and card activity. In addition, we continued to see a trend toward more HSA spending through payment card transaction swipes and less by checks and ACH or electronic reimbursements, which increased our card fee revenue. The increase in payment card transaction swipes has resulted in an increase in card fees per HSA Member for the three and six months ended July 31, 2015 by approximately 10% and 9%, respectively.
The $5.1 million increase in card fee revenue from the six months ended July 31, 2014 to the six months ended July 31, 2015 was due to an overall increase in the number of our HSA Members and card activity.
Other revenue
Other revenue decreased $88,000 and increased $11,000 from the three and six months ended July 31, 2014 to the three and six months ended July 31, 2015, respectively. The fluctuation of other revenue was the result of changes in the amount of fees charged to our Network Partners for marketing materials.
Cost of services
The following table sets forth our cost of service for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
Three months ended July 31,
|
|
|
|
|
|
|
Six months ended July 31,
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
Account costs
|
|
$
|
8,316
|
|
|
$
|
6,703
|
|
|
$
|
1,613
|
|
|
24
|
%
|
|
$
|
16,705
|
|
|
$
|
13,131
|
|
|
$
|
3,574
|
|
|
27
|
%
|
|
Custodial costs
|
|
1,512
|
|
|
1,006
|
|
|
506
|
|
|
50
|
%
|
|
2,935
|
|
|
1,944
|
|
|
991
|
|
|
51
|
%
|
|
Card costs
|
|
2,049
|
|
|
1,412
|
|
|
637
|
|
|
45
|
%
|
|
4,151
|
|
|
2,817
|
|
|
1,334
|
|
|
47
|
%
|
|
Other costs
|
|
32
|
|
|
1
|
|
|
31
|
|
|
3,100
|
%
|
|
62
|
|
|
2
|
|
|
60
|
|
|
3,000
|
%
|
|
Total cost
|
|
$
|
11,909
|
|
|
$
|
9,122
|
|
|
$
|
2,787
|
|
|
31
|
%
|
|
$
|
23,853
|
|
|
$
|
17,894
|
|
|
$
|
5,959
|
|
|
33
|
%
|
Account costs
The $1.6 million increase in account costs from the three months ended July 31, 2014 to the three months ended July 31, 2015 was due to the higher volume of total accounts being serviced
.
The $1.6 million increase includes $1.1 million related to the hiring of additional personnel to implement and support our new Network Partners and HSA Members, activation and processing costs of $284,000 related to account and card activation as well as
monthly processing of statements and other communications, depreciation and amortization of $105,000, information technology expenses of $100,000, and stock compensation expense of $157,000, offset by a decrease in other expenses of $105,000.
The $3.6 million increase in account costs from the six months ended July 31, 2014 to the six months ended July 31, 2015 was due to the higher volume of total accounts being serviced
.
The $3.6 million increase includes $2.3 million related to the hiring of additional personnel to implement and support our new Network Partners and HSA Members, activation and processing costs of $489,000 related to account and card activation as well as monthly processing of statements and other communications, stock compensation expense of $366,000, depreciation and amortization of $193,000, information technology expenses of $156,000, and $9,000 in other expenses.
Custodial costs
Our custodial costs increased $506,000 from the three months ended July 31, 2014 compared to the three months ended July 31, 2015. Our custodial costs of 0.27% on average cash AUM remained steady from the three months ended July 31, 2014 to the three months ended July 31, 2015, while average cash AUM increased from $1.5 billion during the three months ended July 31, 2014 to $2.2 billion during the three months ended July 31, 2015.
Our custodial costs increased $991,000 from the six months ended July 31, 2014 compared to the six months ended July 31, 2015. Our custodial costs on average cash AUM slightly increased from 0.26% in the six months ended July 31, 2014 to 0.27% for the six months ended July 31, 2015, while average cash AUM increased from $1.5 billion during the six months ended July 31, 2014 to $2.2 billion during the six months ended July 31, 2015.
Card costs
Card costs increased $637,000, or 45%, during the three months ended July 31, 2015 compared to the three months ended July 31, 2014. Card costs increased $1.3 million, or 47%, during the six months ended July 31, 2015 compared to the six months ended July 31, 2014. The increase is a result of increases in card spend and RA spend increasing as a percentage of total spend.
As we continue to add HSA Members, our cost of services will increase in aggregate dollar amount to support our Network Partners and members. Cost of services will continue to be affected by a number of different factors, including our ability to implement new technology in our Member Education Center as well as scaling our Network Partner implementation and account management functions.
Operating expenses
The following table sets forth our operating expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentages)
|
|
Three months ended July 31,
|
|
|
|
|
|
|
Six months ended July 31,
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
% Change
|
|
|
Sales and marketing
|
|
$
|
2,737
|
|
|
$
|
2,321
|
|
|
$
|
416
|
|
|
18
|
%
|
|
$
|
5,570
|
|
|
$
|
4,554
|
|
|
$
|
1,016
|
|
|
22
|
%
|
|
Technology and development
|
|
3,998
|
|
|
2,302
|
|
|
1,696
|
|
|
74
|
%
|
|
7,522
|
|
|
4,488
|
|
|
3,034
|
|
|
68
|
%
|
|
General and administrative
|
|
3,943
|
|
|
1,666
|
|
|
2,277
|
|
|
137
|
%
|
|
7,101
|
|
|
2,809
|
|
|
4,292
|
|
|
153
|
%
|
|
Amortization of acquired intangible assets
|
|
409
|
|
|
409
|
|
|
—
|
|
|
—
|
%
|
|
818
|
|
|
818
|
|
|
—
|
|
|
—
|
%
|
|
Total operating expenses
|
|
$
|
11,087
|
|
|
$
|
6,698
|
|
|
$
|
4,389
|
|
|
66
|
%
|
|
$
|
21,011
|
|
|
$
|
12,669
|
|
|
$
|
8,342
|
|
|
66
|
%
|
Sales and marketing
The $416,000 increase in sales and marketing expenses from the three months ended July 31, 2014 compared to the three months ended July 31, 2015 primarily consisted of increased staffing and sales commissions of $225,000, stock compensation expense of $121,000 and other expenses of $69,000.
The $1.0 million increase in sales and marketing expenses from the six months ended July 31, 2014 compared to the six months ended July 31, 2015 primarily consisted of increased staffing and sales commissions of $586,000, stock compensation expense of $347,000 and other expenses of $83,000.
We will continue to invest in sales and marketing by hiring additional personnel and promoting our brand through a variety of marketing and public relations activities. As a result, we expect our sales and marketing expense to increase in future periods.
Technology and development
The $1.7 million increase in technology and development expenses for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 resulted primarily from hiring additional personnel of $1.1 million. There were increases in amortization and depreciation of $408,000, other expenses of $248,000 and stock compensation of $184,000, a decrease in capitalized engineering of $60,000, which were partially offset by a decrease in professional fees of $302,000 associated with the development and enhancement of our proprietary technology platform.
The $3.0 million increase in technology and development expenses for the six months ended July 31, 2015 compared to the six months ended July 31, 2014 resulted primarily from hiring additional personnel of $2.0 million. There were increases in amortization and depreciation of $808,000, other expenses of $449,000 and stock compensation of $302,000, which were partially offset by an increase in capitalized engineering of $47,000 and a decrease in professional fees of $443,000 associated with the development and enhancement of our proprietary technology platform.
We will continue to invest in our proprietary technology platform. The timing of development and enhancement projects, including whether they are capitalized or expensed, will significantly affect our technology and development expenses both in dollar amount and as a percentage of revenue.
General and administrative
The $2.3 million increase in general and administrative expenses for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 was primarily attributable to increased personnel and professional fees of $1.0 million, stock compensation of $812,000 and other expenses of $433,000 primarily related to public company costs (including miscellaneous legal, accounting, and investor relation expenses).
The $4.3 million increase in general and administrative expenses for the six months ended July 31, 2015 compared to the six months ended July 31, 2014 was primarily attributable to increased personnel and professional fees of $2.3 million, stock compensation of $1.3 million and other expenses of $745,000 primarily related to public company costs (including miscellaneous legal, accounting, and investor relation expenses).
As we continue to grow, we expect our general and administrative expenses to continue to increase in dollar amount as we expand general and administrative headcount to support our continued growth and the regulatory and compliance requirements of a public company.
Amortization of acquired intangible assets
The amortization of acquired intangible assets was unchanged between the three and six months ended July 31, 2014 and the three and six months ended July 31, 2015, as no additional acquisitions occurred during the year ended January 31, 2015 or during the three and six months ended July 31, 2015.
Other expense
The following table sets forth our other expense for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31,
|
|
|
|
|
Six months ended July 31,
|
|
|
|
|
|
(in thousands)
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
2015
|
|
|
2014
|
|
|
$ Change
|
|
|
Loss on revaluation of redeemable convertible preferred stock derivative
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(735
|
)
|
|
$
|
735
|
|
|
Other expense, net
|
|
(542
|
)
|
|
(39
|
)
|
|
(503
|
)
|
|
(647
|
)
|
|
(131
|
)
|
|
(516
|
)
|
|
Other expense
|
|
$
|
(542
|
)
|
|
$
|
(39
|
)
|
|
$
|
(503
|
)
|
|
$
|
(647
|
)
|
|
$
|
(866
|
)
|
|
$
|
219
|
|
Loss on revaluation of redeemable convertible preferred stock derivative
There were no adjustments to the fair market value of the series D-3 redeemable convertible stock during the three and six months ended July 31, 2015.
The $735,000 loss during the three months ended July 31, 2014 relates to a revaluation of the fair market value of our derivative liability associated with our series D-3 redeemable convertible preferred stock. Due to the modification of our series D-3 redeemable convertible preferred stock in March 2014, there will be no further fair market value adjustments.
The increase in other expense, net for the three and six months ended July 31, 2015 is primarily due to ongoing acquisition-related activity costs of $571,000 and $661,000, respectively.
Income tax provision
Our effective tax rate for the three and six months ended July 31, 2015 was 36.4% and 36.6%, compared to 39.8% and 40.7% for the three and six months ended July 31, 2014. The 3.4 and 4.1 percentage point decrease in the three and six months ended July 31, 2015 over the three and six months ended July 31, 2014 is primarily due to a decrease in unfavorable permanent tax items in relation to income before income taxes, a decrease in state taxes, and an increase in state research and development tax credits. The federal research and development tax credit expired as of December 31, 2014.
Seasonality
Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations. A significant number of new and existing Network Partners bring new HSA Members beginning in January concurrent with the start of many employers’ benefit plan years. Before we realize any revenue from these new HSA Members, we incur costs related to implementing and supporting our new Network Partners and new HSA Members. These costs of services relate to activating the account and the hiring of additional staff, including seasonal help to support our Member Education Center. We experience seasonality in our cost of services in our third and fourth fiscal quarters as we gear up to onboard these new customers. We also experience higher operating expenses in our fourth fiscal quarter due to sales commissions for new accounts activated in January. We are taking two additional steps that will have an influence on costs and expenses in the second half of fiscal 2016. We are moving approximately $1 million of card replacement costs (included in account costs) forward into our third fiscal quarter that would otherwise occur in our fourth fiscal quarter, so that our service delivery teams can focus on the onboarding of new accounts in the fourth fiscal quarter. Additionally, we expect to incur approximately $1 million of technology and development expenses in both the third and fourth fiscal quarters of fiscal 2016 that were previously slated to start in fiscal 2017.
Liquidity and capital resources
As of July 31, 2015, our principal source of liquidity was our current cash and marketable securities balances and collections from our account, custodial and card fee revenue activities. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, and capital expenditures.
As of July 31, 2015 and January 31, 2015, cash, cash equivalents and marketable securities was $148.9 million and $111.0 million, respectively. As a result of our follow-on offering, we received net proceeds of approximately $23.5 million in May 2015 from the sale of 972,500 shares of our common stock.
Capital expenditures for the six months ended July 31, 2015 and 2014 were $4.2 million and $4.6 million, respectively. We expect to continue to increase our capital expenditures for the remainder of the year ending January 31, 2016 as we are devoting a significant amount of our capital expenditures to improve the architecture and functionality of our proprietary system. Costs to improve the architecture of our proprietary system include outsourced software engineering services, computer hardware, and personnel and related costs for software engineering.
We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months. To the extent these current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may need to raise additional funds through public or private equity or debt financing. In the event that additional financing is required, we may not be able to raise it on favorable terms, if at all.
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended July 31,
|
|
|
(in thousands)
|
|
2015
|
|
|
2014
|
|
|
Net cash provided by operating activities
|
|
$
|
7,292
|
|
|
$
|
5,320
|
|
|
Net cash used in investing activities
|
|
(44,376
|
)
|
|
(4,563
|
)
|
|
Net cash provided by financing activities
|
|
34,930
|
|
|
6,212
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
(2,154
|
)
|
|
6,969
|
|
|
Beginning cash and cash equivalents
|
|
111,005
|
|
|
13,917
|
|
|
Ending cash and cash equivalents
|
|
$
|
108,851
|
|
|
$
|
20,886
|
|
Cash flows provided by operating activities
Net cash provided by operating activities during the six months ended July 31, 2015 resulted primarily from our net income of $9.4 million being adjusted for the following non-cash items: depreciation and amortization of $3.7 million, stock-based compensation of $2.8 million, and inventories, and accrued liabilities of $612,000. These items were offset by changes in other assets of $3.6 million, deferred taxes of $1.1 million, accrued compensation of $2.0 million, accounts receivable of $1.8 million, and other long-term liabilities and accounts payable totaling $620,000.
Net cash provided by operating activities during the six months ended July 31, 2014 resulted primarily from our net income of $5.7 million being adjusted for the following non-cash items: depreciation and amortization of $2.6 million and deferred income taxes of $1.8 million and a revaluation of our derivative liability associated with our series D-3 redeemable convertible preferred stock of $735,000, stock-based compensation expense of $468,000, and changes in inventories and other long-term liabilities totaling $64,000. These items were offset by changes in other assets of $2.4 million, accrued compensation of $1.1 million, accounts payable of $1.9 million, accounts receivable of $582,000 and accrued liabilities of $172,000.
Cash flows used in investing activities
Net cash used in investing activities for the six months ended July 31, 2015 was primarily the result of purchases of marketable securities of $40.1 million and purchases of software and capitalized software development costs of $3.0 million. This compares to purchases of software and capitalized software development costs of $3.5 million for the six months ended July 31, 2014. We continue to develop of our proprietary system and other software necessary to support our continued account growth. We also increased our purchases of property and equipment from $1.0 million during the six months ended July 31, 2014 to $1.3 million during the six months ended July 31, 2015.
Cash flows provided by financing activities
Cash flow provided by financing activities during the six months ended July 31, 2015 resulted primarily from our follow-on offering where we received net proceeds of $23.5 million from the sale of 972,500 shares of our common stock, the exercise of stock options of $1.2 million and the associated tax benefits of $10.3 million.
Cash flow provided by financing activities during the six months ended July 31, 2014 resulted from the exercise of stock options of $2.4 million, the exercise of common stock warrants of $2.3 million and the associated tax benefits of $2.9 million. These items were offset by offering costs of $1.4 million in connection with the Company's initial public offering.
Contractual obligations
Except for the lease agreement and the amended and restated lease agreement described below, there were no material changes, outside of the ordinary course of business, in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended January 31, 2015.
On May 15, 2015, the Company entered into a lease agreement to expand its headquarters in Draper, Utah. The lease provides for a new landlord to construct a building at its cost and to use reasonable efforts to substantially complete the building by July 2016. The Company has no risk of loss during the construction period. The lease will commence upon the substantial completion and delivery of the building to the Company and has an initial term of 129 months thereafter, with a Company option to extend the lease for two additional five year periods. The Company will be responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately
$1.0 million
, with
2.5%
annual increases. In
conjunction with the aforementioned lease, the Company entered into an amended and restated lease agreement for its existing office space at its headquarters in Draper, Utah. The lease commenced on July 1, 2015 and has an initial term of 129 months thereafter, with a Company option to extend the lease for two additional five year periods. The Company will be responsible for payment of taxes and operating expenses for its portion of the building, in addition to an annual base rent in the initial amount of approximately
$1.6 million
, with
2.5%
annual increases. As a result of the foregoing transaction, the deferred rent balance of approximately
$470,000
was reversed during the
three and six
months ended
July 31, 2015
.
Off-balance sheet arrangements
During the three and six months ended July 31, 2015 and 2014, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements.
Critical accounting policies and significant management estimates
Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 1 of the accompanying unaudited condensed consolidated financial statements and in Note 1 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended January 31, 2015. There have been no significant or material changes in our critical accounting policies during the three months ended July 31, 2015, as compared to those disclosed in “Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies and significant management estimates” in our Annual Report on Form 10-K for the year ended January 31, 2015.
Recent accounting pronouncements
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB voted to defer the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption beginning for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of the standard on the ongoing financial reporting.
