HEALTHEQUITY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled "Risk factors" included under Part I, Item 1A and elsewhere in this report. See "Special note regarding forward-looking statements" on page 1 of this Annual Report. Overview We are a leader and an innovator in providing technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions. Consumers and employers use our platforms to manage tax-advantaged HSAs and other CDBs offered by employers, including FSAs and HRAs, COBRA administration, commuter and other benefits, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit information, access remote and telemedicine benefits, earn wellness incentives, and receive investment advice to grow their tax-advantaged healthcare savings. The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis. As ofJanuary 31, 2021 , we administered 5.8 million HSAs, with balances totaling$14.3 billion , which we call HSA Assets. During the fiscal years endedJanuary 31, 2021 and 2020, we added approximately 0.7 million and 1.5 million new HSAs, respectively, which reflects in 2019 the WageWorks Acquisition. Also, as ofJanuary 31, 2021 , we administered 7.0 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs on our platforms as Total Accounts, of which we had 12.8 million as ofJanuary 31, 2021 . We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients primarily through a sales force that calls on Clients directly, relationships with benefits brokers and advisors, and integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we callNetwork Partners . As ofJanuary 31, 2021 , our platforms were integrated with 174Network Partners , and we serve approximately 100,000 Clients. We have increased our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2020, measured by HSA Assets. According to Devenir, today we are the largest HSA provider by accounts and second largest by assets. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-driven culture. Our proprietary technology is designed to help consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security. Our ability to engage consumers is enhanced by our platforms' capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems. Our commuter benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers. These strengths reflect our "DEEP Purple" culture of remarkable service to customers and teammates, achieved by driving excellence, ethics, and process into everything we do. We earn revenue primarily from three sources: service, custodial, and interchange. We earn service revenue mainly from fees paid by Clients on a recurring per-account per-month basis. We earn custodial revenue mainly from HSA Assets held at our members' direction in federally insured cash deposits, insurance contracts or mutual funds, and from investment of Client-held funds. We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and virtual platforms. See "Key components of our results of operations" for additional information on our sources of revenue, including the adverse impacts caused by the ongoing COVID-19 pandemic. -33- -------------------------------------------------------------------------------- Table of Contents WageWorks Acquisition OnAugust 30, 2019 , we completed the WageWorks Acquisition and paid approximately$2.0 billion in cash toWageWorks stockholders, financed through net borrowings of approximately$1.22 billion under a new term loan facility and approximately$816.9 million of cash on hand. As a result of theWageWorks Acquisition,WageWorks Inc. became a wholly owned subsidiary ofHealthEquity, Inc. The key strategy of the WageWorks Acquisition was to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs.WageWorks' historic strength of selling to employers directly and through health benefits brokers and advisors complemented our distribution throughNetwork Partners . WithWageWorks' CDB capabilities, we provide employers with a single partner for both HSAs and other CDBs, which is preferred by the vast majority of employers according to research conducted for us byAite Group . For Clients that partner with us in this way, we believe we can produce more value by encouraging both CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings available through other CDBs. Accordingly, we believe that there are significant opportunities to expand the scope of services that we provide to our Clients. The WageWorks Acquisition has significantly increased the number of our Total Accounts, HSA Assets, Client-held funds, Adjusted EBITDA, total revenue, total cost of revenue, operating expenses, and other financial results. These increases impact the comparability of the period-over-period results described in this report. Key factors affecting our performance We believe that our future performance will be driven by a number of factors, including those identified below. Each of these factors presents both significant opportunities and significant risks to our future performance. See also "Results of operations - Revenue" for information relating to the ongoing COVID-19 pandemic and also the section entitled "Risk factors" included in Part 1, Item 1A of this Annual Report on Form 10-K and our other reports filed with theSEC .WageWorks integration OnAugust 30, 2019 , we completed the WageWorks Acquisition. We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies. We have identified opportunities of approximately$80 million in annualized ongoing net synergies to be achieved by the end of the fiscal year endingJanuary 31, 2022 , of which approximately$60 million were achieved as ofJanuary 31, 2021 . Furthermore, we anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader platform and service offerings and as we continue to drive member engagement. We estimate non-recurring costs to achieve these synergies of approximately$100 million incurred by the end of fiscal year 2022, resulting from investment in technology platforms, back-office systems and platform integration, as well as rationalization of cost of operations. As ofJanuary 31, 2021 , we had incurred a total of approximately$78 million of non-recurring merger integration costs related to the WageWorks Acquisition. Structural change inU.S. health insurance We derive revenue primarily from healthcare-related saving and spending by consumers in theU.S. , which are driven by changes in the broader healthcare industry, including the structure of health insurance. The average premium for employer-sponsored health insurance has risen by 22% since 2015 and 55% since 2010, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health insurance more generally. We believe that continued growth in healthcare costs and related factors will spur continued growth in HSA-qualified health plans and HSAs and may encourage policy changes making HSAs or similar vehicles available to new populations such as individuals in Medicare. However, the timing and impact of these and other developments inU.S. healthcare are uncertain. Moreover, changes in healthcare policy, such as "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to predict. Trends inU.S. tax law Tax law has a profound impact on our business. Our offerings to members, Clients, andNetwork Partners consist primarily of services enabled, mandated, or advantaged by provisions ofU.S. tax law and regulations. We believe that the present direction ofU.S. tax policy is favorable to our business, as evidenced for example by recent regulatory action and bipartisan policy proposals to expand the availability of HSAs. However, changes in tax policy are speculative, and may affect our business in ways that are difficult to predict. -34- -------------------------------------------------------------------------------- Table of Contents Our client base Our business model is based on a B2B2C distribution strategy, whereby we work withNetwork Partners and Clients to reach consumers to increase the number of our members with HSA accounts and complementary CDBs. We believe that there are significant opportunities to expand the scope of services that we provide to our current Clients. Broad distribution footprint We believe we have a diverse distribution footprint to attract newClients and Network Partners . Our sales force calls on enterprise and regional employers in industries across theU.S. , as well as potentialNetwork Partners from among health plans, benefits administrators, and retirement plan record keepers. Product breadth We are the largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration. Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs. With our CDB capabilities, we can provide employers with a single partner for both HSAs and complementary CDBs, which is preferred by the vast majority of employers, according to research conducted for us byAite Group . We believe that the combination of HSA and complementary CDB offerings significantly strengthens our value proposition to employers, health benefits brokers and consultants, andNetwork Partners as a leading single-source provider. Our proprietary technology platforms We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits differentiate us from our competitors and drive our growth. We are building on these innovations by combining our HSA platform withWageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership position within the HSA sector. We intend to continue to invest in our technology development to enhance our platforms' capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data. For example, we are making significant investments in our platforms' architecture and related platform infrastructure to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement. Our "DEEP Purple" service culture The successful healthcare consumer needs education and guidance delivered by people as well as technology. We believe that our "DEEP Purple" culture, which we define as Driving Excellence, Ethics, and Process while providing remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly, opportunities in the rapidly changing healthcare sector. We make significant efforts to promote and foster DEEP Purple within our workforce. We invest in and intend to continue to invest in human capital through technology-enabled training, career development, and advancement opportunities. Interest rates As a non-bank custodian, we contract with federally insured banks, credit unions, and insurance company partners, which we collectively call ourDepository Partners , to hold custodial cash assets on behalf of our members. We earn a material portion of our total revenue from interest paid to us by these partners. The lengths of our agreements withDepository Partners typically range from three to five years and may have fixed or variable interest rate terms. The terms of new and renewing agreements may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control. Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members. We believe that diversification ofDepository Partners , varied contract terms and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue. Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members. We expect our custodial revenue to continue to be adversely affected by the interest rate cuts by theFederal Reserve associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to decline significantly. -35- -------------------------------------------------------------------------------- Table of Contents Interest on our long-term debt changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates. Our competition and industry Our direct competitors are HSA custodians and other CDB providers. Many of these are state or federally chartered banks and other financial institutions for which we believe technology-based healthcare services are not a core business. Some of our direct competitors (including healthcare service companies such asUnited Health Group's Optum,Webster Bank , and well-known retail investment companies, such asFidelity Investments ) are in a position 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. OurNetwork Partners may also choose to offer competitive services directly, as some health plans have done. Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics. As a result of the COVID-19 pandemic, we have seen an adverse impact on sales opportunities, with some opportunities delayed and most now being held virtually. As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected. Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs and reduce overall demand for our products. We have seen a significant decline in the use of commuter benefits due to many of our members working from home during the outbreak or other impacts from the outbreak, which has negatively impacted both our interchange revenue and service revenue, and this "work from home" trend may continue after the pandemic. We have also seen a decline in interchange revenue across all other products. The extent to which the COVID-19 pandemic will negatively impact our business is highly uncertain and cannot be accurately predicted. Regulatory environment Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, theEmployee Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the provision of health insurance and provide the tax advantages associated with our products, play a pivotal role in determining our market opportunity. Privacy and data security-related laws such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, laws governing the provision of investment advice to consumers, such as the Investment Advisers Act of 1940, or the Advisers Act, theUSA PATRIOT Act, anti-money laundering laws, and the Federal Deposit Insurance Act, all play a similar role in determining our competitive landscape. In addition, state-level regulations also have significant implications for our business in some cases. For example, our subsidiaryHealthEquity Trust Company is regulated by theWyoming Division of Banking , and several states are considering, or have already passed, new privacy regulations that can affect our business. Various states also have laws and regulations that impose additional restrictions on our collection, storage, and use of personally identifiable information. Privacy regulation in particular has become a priority issue in many states, includingCalifornia , which in 2018 enacted the California Consumer Privacy Act broadly regulatingCalifornia residents' personal information and providingCalifornia residents with various rights to access and control their data, and the new California Privacy Rights Act. We have also seen an increase in regulatory changes related to our products due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes. Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success. Our acquisition strategy We have a successful history of acquiring HSA portfolios and businesses that strengthen our platform. We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities. We have developed an internal capability to source, evaluate, and integrate acquired HSA portfolios. We intend to continue to thoughtfully pursue acquisitions of complementary assets and businesses that we believe will strengthen our platform. Key financial and operating metrics Our management regularly reviews a number of key operating and financial metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies, and evaluate forward-looking projections and trends affecting our business. We discuss certain of these key financial metrics, including revenue, below in the section entitled "Key components of our results of operations." In addition, we utilize other key metrics as described below. -36- -------------------------------------------------------------------------------- Table of Contents For a discussion related to key financial and operating metrics for fiscal year 2020 compared to fiscal year 2019, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, filed with theSEC onMarch 31, 2020 . Total Accounts The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated: (in thousands, except percentages) January 31, 2021 January 31, 2020 % Change HSAs 5,782 5,344 8 % New HSAs from sales - Quarter-to-date 370 379 (2) % New HSAs from sales - Year-to-date 687 724 (5) % New HSAs from acquisitions - Year-to-date - 757 (100) % HSAs with investments 333 220 51 % CDBs 7,028 7,437 (5) % Total Accounts 12,810 12,781 0 % Average Total Accounts - Quarter-to-date 12,659 12,603 0 % Average Total Accounts - Year-to-date 12,604 8,013 57 % The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from them. The number of our HSAs increased by approximately 0.4 million, or 8%, fromJanuary 31, 2020 toJanuary 31, 2021 , due to further penetration into existingNetwork Partners and the addition of newNetwork Partners and Clients. The number of our CDBs decreased by approximately 0.4 million, or 5%, fromJanuary 31, 2020 toJanuary 31, 2021 , driven primarily by 0.8 million commuter benefit accounts that are currently suspended due to the COVID-19 pandemic and associated local government restrictions around the country. The suspended commuter accounts continue to be administered on our platform and can be reinstated at any time. We chose to exclude the suspended commuter accounts from our account totals because they are currently not generating revenue for the Company. HSA Assets The following table sets forth our HSA Assets as of and for the periods indicated: (in millions, except percentages) January 31, 2021 January 31, 2020 % Change HSA cash with yield (1) $ 9,875 $ 8,301 19 % HSA cash without yield (2) 244 383 (36) % Total HSA cash 10,119 8,684 17 % HSA investments with yield (1) 4,078 2,495 63 % HSA investments without yield (2) 138 362 (62) % Total HSA investments 4,216 2,857 48 % Total HSA Assets 14,335 11,541 24 % Average daily HSA cash with yield - Year-to-date 8,599 6,937 24 % Average daily HSA cash with yield - Quarter-to-date $ 9,060 $ 7,791 16 % (1)HSA Assets that generate custodial revenue. (2)HSA Assets that do not generate custodial revenue. Our HSA Assets, which are our HSA members' assets for which we are the custodian or administrator, or from which we generate custodial revenue, consist of the following components: (i) cash deposits, which are deposits with ourDepository Partners or other custodians, (ii) custodial cash deposits invested in annuity contracts with our insurance company partners, and (iii) investments in mutual funds through our custodial investment fund partners. We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022. Measuring our HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating. Total HSA cash increased by$1.4 billion , or 17%, fromJanuary 31, 2020 toJanuary 31, 2021 , due primarily to HSA contributions, new HSAs, and decreased spending per HSA, partially offset by transfers to HSA investments. Our HSA investment assets increased by$1.4 billion , or 48%, fromJanuary 31, 2020 toJanuary 31, 2021 , due primarily to transfers from HSA cash and appreciation of invested balances. -37- -------------------------------------------------------------------------------- Table of Contents Our total HSA Assets increased by 2.8 billion, or 24%, fromJanuary 31, 2020 toJanuary 31, 2021 , due primarily to HSA contributions, new HSAs, decreased spending per HSA, and appreciation of invested balances. Client-held funds (in millions, except percentages) January 31, 2021 January 31, 2020 % Change Client-held funds (1) $ 986 $ 779 27 % Average daily Client-held funds - Year-to-date (1) 847 382 122 % Average daily Client-held funds - Quarter-to-date (1) 848 727 17 % (1)Client-held funds that generate custodial revenue. Our Client-held funds are interest earning deposits from which we generate custodial revenue. These deposits are amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of CDBs. We deposit the Client-held funds with ourDepository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. Client-held funds fluctuate depending on the timing of funding and spending of CDB balances. Adjusted EBITDA We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on marketable equity securities, and certain other non-operating items. We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses, and serves as a basis for comparison against other companies in our industry. The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated: Year ended January 31, (in thousands) 2021 2020 Net income$ 8,834 $ 39,664 Interest income (1,045) (5,905) Interest expense 34,881 24,772
Income tax provision (benefit) (4,694) 3,491
Depreciation and amortization 39,839 20,648
Amortization of acquired intangible assets 76,064 34,704
Stock-based compensation expense 42,863 30,107
Merger integration expenses (1) 45,990 32,111
Acquisition costs (2) 1,118 40,810
Gain on marketable equity securities -
(27,760)
Other (3) (3,055) 3,811
Adjusted EBITDA $ 240,795 $ 196,453
(1)For the fiscal year ended January 31, 2020 , merger integration expenses
included $1.6 million of stock-based compensation expense related to
post-WageWorks Acquisition integration activities.
(2)For the fiscal year ended January 31, 2020 , acquisition costs included
$13.7 million of stock-based compensation expense related to awards that were
accelerated in connection with the WageWorks Acquisition.
(3)For the fiscal year ended January 31, 2021 , Other consisted of amortization
of incremental costs to obtain a contract of $2.0 million , offset by other
income, net, of $5.1 million . For the fiscal year ended January 31, 2020 , Other
consisted of amortization of incremental costs to obtain a contract of
$1.9 million and other costs of $1.9 million .
The following table further sets forth our Adjusted EBITDA as a percentage of
revenue:
Year ended January 31,
(in thousands, except percentages) 2021 2020 % Change
Adjusted EBITDA $ 240,795 $ 196,453 23 %
As a percentage of revenue 33 % 37 %
-38--------------------------------------------------------------------------------- Table of Contents Our Adjusted EBITDA increased by$44.3 million , or 23%, from$196.5 million for the fiscal year endedJanuary 31, 2020 to$240.8 million for the fiscal year endedJanuary 31, 2021 . The increase in Adjusted EBITDA was driven by the inclusion ofWageWorks' results of operations for the full period, increased efficiency, and the overall growth of our business. Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Key components of our results of operations WageWorks Acquisition As the WageWorks Acquisition closed onAugust 30, 2019 ,WageWorks' results of operations are included in our consolidated results of operations for the fiscal year endedJanuary 31, 2021 , but are only included in our consolidated results of operations for approximately five months out of the fiscal year endedJanuary 31, 2020 . In addition, the results of operations attributable toWageWorks may not be directly comparable toWageWorks' results of operations reported byWageWorks prior to the WageWorks Acquisition. Revenue We generate revenue from three primary sources: service revenue, custodial revenue, and interchange revenue. Service revenue. We earn service revenue from the fees we charge our Network Partners, Clients, and members for the administration services we provide in connection with the HSAs and other CDBs we offer. With respect to ourNetwork Partners and Clients, our fees are generally based on a fixed tiered structure for the duration of the relevant service agreement and are paid to us on a monthly basis. We recognize revenue on a monthly basis as services are rendered to our members and Clients. As a result of the WageWorks Acquisition, service revenue now comprises a majority of our revenue. Custodial revenue. We earn custodial revenue primarily from our HSA Assets deposited with ourDepository Partners and with our insurance company partners, Client-held funds deposited with ourDepository Partners , and recordkeeping fees we earn in respect of mutual funds in which our members invest. We deposit HSA cash with ourDepository Partners pursuant to contracts that (i) typically have terms ranging from three to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant Depository Partner, and (iii) have minimum and maximum required deposit balances. We deposit the Client-held funds with ourDepository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. We earn custodial revenue on HSA Assets and Client-held funds that is based on the interest rates offered to us by theseDepository 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 earn a recordkeeping fee, calculated as a percentage of custodial investments. We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022. Interchange revenue. We earn interchange revenue each time one of our members uses one of our physical payment cards or virtual platforms to make a purchase. This revenue is collected each time a member "swipes" our payment card to pay expenses. We recognize interchange revenue monthly based on reports received from third parties, namely, the card-issuing banks and card processors. Cost of revenue Cost of revenue includes costs related to servicing accounts, managing Client and Network Partner relationships and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations (such as office rent, supplies, and other overhead expenses), new member and participant supplies, and other operating costs related to servicing our members. Other components of cost of revenue include interest retained by members on HSA cash and interchange costs incurred in connection with processing card transactions for our members. Service costs. Service costs include the servicing costs described above. Additionally, for new accounts, we incur on-boarding costs associated with the new accounts, such as new member welcome kits, the cost associated with issuance of new payment cards, and costs of marketing materials that we produce for ourNetwork Partners . Custodial costs. Custodial costs are comprised of interest retained by our HSA members, in respect of HSA cash with yield, and fees we pay to banking consultants whom we use to help secure agreements with our Depository -39- -------------------------------------------------------------------------------- Table of Contents Partners. Interest retained by HSA members is calculated on a tiered basis. The interest rates retained by HSA members can change based on a formula or upon required notice. Interchange costs. Interchange costs are comprised of costs we incur in connection with processing payment transactions initiated by our members. Due to the substantiation requirement on FSA/HRA-linked payment card transactions, payment card costs are higher for FSA/HRA card transactions. In addition to fixed per card fees, we are assessed additional transaction costs determined by the amount of the transaction. Gross profit and gross margin Our gross profit is our total revenue minus our total cost of revenue, 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 interest rates, the amount we charge ourNetwork Partners , Clients, and members, the mix of our sources of revenue, how many services we deliver per account, and payment processing costs per account. 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. Technology and development. Technology and development expenses include personnel and related expenses for software development and delivery, information technology, data management, product, and security. Technology and development expenses also include 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. General and administrative. General and administrative expenses include personnel and related expenses of, and professional fees incurred by our executive, finance, legal, internal audit, corporate development, compliance, and people departments. They also include depreciation, amortization, stock-based compensation, and common expense allocations. Amortization of acquired intangible assets. Amortization of acquired intangible assets results primarily from intangible assets acquired in connection with business combinations. The assets include acquired customer relationships, acquired developed technology, and acquired trade names and trademarks, which we amortize over the assets' estimated useful lives, estimated to be 10-15 years, 2-5 years, and 3 years, respectively. We also acquired intangible HSA portfolios from third-party custodians. We amortize these assets over the assets' estimated useful life of 15 years. We evaluate our acquired intangible assets for impairment annually, or at a triggering event. Merger integration. Merger integration expenses include personnel and related expenses, including severance, professional fees, and facilities and technology expenses directly related to integration activities to merge operations as a result of the WageWorks Acquisition. Merger integration expenses for the year endedJanuary 31, 2021 also include the estimated net cost to settle a legal matter related to the WageWorks Acquisition described in Note 7-Commitments and contingencies. Interest expense Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with our credit agreement. Interest on our long-term debt changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates. Other income (expense), net Other income (expense), net, primarily consists of acquisition costs, gains and losses on marketable equity securities, non-income-based taxes, a gain resulting from a legal matter described in Note 7-Commitments and contingencies, and interest income earned on corporate cash. Income tax provision (benefit) As ofDecember 31, 2019 , we were subject to federal and state income taxes inthe United States based on a calendar tax year-end; however, beginningJanuary 31, 2020 , we began reporting federal and state income taxes using aJanuary 31 year-end, consistent with our financial reporting fiscal year. 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 -40- -------------------------------------------------------------------------------- Table of Contents 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. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. As ofJanuary 31, 2021 , we have recorded an overall net deferred tax liability. The Company evaluates its tax positions in accordance with ASC 740-10-25, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Results of operations Impact of WageWorks Acquisition The comparability of our operating results is impacted by theWageWorks Acquisition onAugust 30, 2019 . As the WageWorks Acquisition closed onAugust 30, 2019 ,WageWorks' results of operations are included in our consolidated results of operations for the entire fiscal year endedJanuary 31, 2021 , but are only included in our consolidated results of operations for approximately five months during the fiscal year endedJanuary 31, 2020 . Revenue and expense attributable toWageWorks generally is not separately identifiable due to the integration ofWageWorks into our existing operations. For a discussion related to the results of operations and liquidity and capital resources for fiscal year 2020 compared to fiscal year 2019, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, filed with theSEC onMarch 31, 2020 . Revenue The following table sets forth our revenue for the periods indicated: Year ended January 31, (in thousands, except percentages) 2021 2020 $ change % change Service revenue$ 430,966 $ 262,868 $ 168,098 64 % Custodial revenue 190,933 181,892 9,041 5 % Interchange revenue 111,671 87,233 24,438 28 % Total revenue$ 733,570 $ 531,993 $ 201,577 38 % Service revenue. The$168.1 million , or 64%, increase in service revenue was primarily due to the inclusion for the full period of service revenue associated with the CDBs added through the WageWorks Acquisition, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs. Custodial revenue. The$9.0 million , or 5%, increase in custodial revenue was primarily due to an increase in the average daily balance of HSA cash with yield of$1.7 billion , or 24%. The increase was partially offset by a decrease in yield from 2.44% for the fiscal year endedJanuary 31, 2020 to 2.06% for the fiscal year endedJanuary 31, 2021 , which was due in part to the interest rate cuts made by theFederal Reserve in response to the COVID-19 pandemic and due to the lower yield on HSA cash with yield added through the WageWorks Acquisition. We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022. This cash is being placed with ourDepository Partners at prevailing interest rates, which we expect will generate additional custodial revenue. Interchange revenue. The$24.4 million , or 28%, increase in interchange revenue was primarily due to the inclusion for the full period of interchange revenue associated with the CDBs added through the WageWorks Acquisition and an increased average interchange rate. The increase was partially offset by a decrease in spend per CDB, primarily with respect to FSA and commuter benefit accounts, as well as lower healthcare spending partially attributable to the restrictions imposed by local governments around the country in connection with the COVID-19 pandemic. Total revenue. Total revenue increased by$201.6 million , or 38%, primarily due to the inclusion for the full period ofWageWorks' results of operations and related realized net revenue synergies. Impact of COVID-19. Our business has been adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by the COVID-19 pandemic, including as a result of the associated interest -41- -------------------------------------------------------------------------------- Table of Contents rate cuts by theFederal Reserve and other market conditions that have caused interest rates to decline significantly, which reduces the yield on funds placed with ourDepository Partners in this environment. Sales opportunities have also been impacted, with some opportunities delayed and most now being held virtually. In addition, we are required to support our Clients' open enrollment activities virtually. As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected. Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs. We may be unable to meet our service level commitments to our Clients as a result of disruptions to our work force and disruptions to third party contracts that we rely on to provide our services. Our financial results related to certain of our products have also been adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak and other impacts from the outbreak, and the "work from home" trend may continue after the pandemic. Clients may be unable to pay fees required under contracts and exercise "force majeure" or similar defenses, which would negatively impact our financial results. The extent to which the COVID-19 pandemic will continue to negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our business and financial results. Cost of revenue The following table sets forth our cost of revenue for the periods indicated: Year ended January 31, (in thousands, except percentages) 2021 2020 $ change % change Service costs$ 280,214 $ 170,863 $ 109,351 64 % Custodial costs 19,574 17,563 2,011 11 % Interchange costs 18,448 17,658 790 4 % Total cost of revenue$ 318,236 $ 206,084 $ 112,152 54 % Service costs. The$109.4 million , or 64%, increase in service costs was primarily due to the inclusion for the full period ofWageWorks' results of operations and the resulting higher volume of accounts being serviced, including additional hiring of personnel to implement and support our newNetwork Partners , Clients, and HSAs, increases in stock-based compensation expense, and increases in other expenses. Custodial costs. The$2.0 million , or 11%, increase in custodial costs was due to an increase in the average daily balance of HSA cash with yield, which increased from$6.9 billion for the fiscal year endedJanuary 31, 2020 to$8.6 billion for the fiscal year endedJanuary 31, 2021 . The increase was partially offset by a lower average interest rate paid on HSA cash with yield, which decreased from 0.22% for the fiscal year endedJanuary 31, 2020 to 0.19% for the fiscal year endedJanuary 31, 2021 . Interchange costs. The$0.8 million , or 4%, increase in interchange costs was primarily due to an overall increase in average Total Accounts, which increased primarily due to the inclusion for the full period of accounts added through the WageWorks Acquisition, partially offset by a decrease in card spend per account as a result of the local government restrictions in response to the COVID-19 pandemic. Total cost of revenue. As we continue to add Total Accounts, we expect that our cost of revenue will increase in dollar amount to support ourNetwork Partners , Clients, and members. Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, account management functions, and the impact of the COVID-19 pandemic. Operating expenses The following table sets forth our operating expenses for the periods indicated: Year ended January
31,
(in thousands, except percentages) 2021 2020 $ change % change Sales and marketing$ 49,964 $ 43,951 $ 6,013 14 % Technology and development 124,809 77,576 47,233 61 % General and administrative 84,493 60,561 23,932 40 % Amortization of acquired intangible assets 76,064 34,704 41,360 119 % Merger integration 45,990 32,111 13,879 43 % Total operating expenses$ 381,320 $ 248,903 $ 132,417 53 % -42-
-------------------------------------------------------------------------------- Table of Contents Sales and marketing. The$6.0 million , or 14%, increase in sales and marketing expenses was primarily due to the inclusion for the full period ofWageWorks' results of operations, which resulted in increased staffing, increases in other expenses, and higher stock-based compensation expense, partially offset by increased efficiencies. We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns. On an annual basis, we expect our sales and marketing expenses to increase as a percentage of our total revenue. However, 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. The$47.2 million , or 61%, increase in technology and development expenses was primarily due to the inclusion for the full period ofWageWorks' results of operations, which resulted in increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases, which were partially offset by increases in capitalized development and operating efficiencies. We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary platforms. On an annual basis, we expect our technology and development expenses to increase as a percentage of our total revenue pursuant to our growth initiatives. 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. The$23.9 million , or 40%, increase in general and administrative expenses was primarily due to the inclusion for the full period ofWageWorks' results of operations, which resulted in increased personnel-related expense, increases in professional fees, and increased stock-based compensation expense, partially offset by increased efficiencies. We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, accounting, and insurance functions that we incur as we continue to grow our business, as well as other costs associated with being a public company. On an annual basis, we expect our general and administrative expenses to remain relatively steady as a percentage of our total revenue over the near term pursuant to our growth initiatives. 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. The$41.4 million increase in amortization of acquired intangible assets was due to the inclusion for the full period of amortization related to identified intangible assets acquired through the WageWorks Acquisition. Merger integration. The$46.0 million in merger integration expense for the fiscal year endedJanuary 31, 2021 was due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, severance, professional fees, technology and facilities expenses directly related to the WageWorks Acquisition, and the estimated net cost to settle a legal matter as described in Note 7-Commitments and contingencies. We expect integration expenses totaling approximately$100 million in the aggregate to be incurred by the end of fiscal year 2022. As ofJanuary 31, 2021 , we had incurred a total of approximately$78 million of non-recurring merger integration costs related to the WageWorks Acquisition. Interest expense The$34.9 million in interest expense for the fiscal year endedJanuary 31, 2021 consists primarily of interest accrued under our term loan facility and amortization of financing costs. We expect interest expense to decrease as a result of the principal repayments under our term loan facility. Other income (expense), net The change in other income (expense), net, from expense of$9.1 million during the fiscal year endedJanuary 31, 2020 to income of$5.0 million during the fiscal year endedJanuary 31, 2021 was primarily due to a$39.7 million decrease in acquisition costs and a$27.8 million non-recurring gain in connection with our equity investment inWageWorks during the fiscal year endedJanuary 31, 2020 . The remainder of the change was due to a non-recurring gain of$6.8 million in connection with a legal matter during the fiscal year endedJanuary 31, 2021 , a$4.9 million decrease in interest income, and a$0.3 million decrease in other expenses. -43-
-------------------------------------------------------------------------------- Table of Contents Income tax provision (benefit) For the fiscal years endedJanuary 31, 2021 and 2020, we recorded an income tax benefit of$4.7 million and an income tax provision of$3.5 million , respectively. The decrease in income tax provision was primarily the result of an increase in excess tax benefits on stock-based compensation expense, deferred tax rate adjustments due to merger integration, and research and development credits recognized in the provision for income taxes relative to our pre-tax income. The Company's effective income tax rate for the fiscal years endedJanuary 31, 2021 and 2020 was an effective income tax benefit rate of 113.4% and an effective income tax expense rate of 8.1%, respectively. The difference between the effective income tax rate and theU.S. federal statutory income tax rate each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense due to the adoption of ASU 2016-09, and other discrete items. The decrease in the effective tax rate for the fiscal year endedJanuary 31, 2021 was primarily due to an increase in excess tax benefits on stock-based compensation expense, deferred tax rate adjustments due to merger integration, and research and development credits recognized in the provision for income taxes relative to our pre-tax income. Seasonality Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations. Revenue results are seasonally impacted due to ancillary service fees, timing of HSA contributions, and timing of card spend. Cost of revenue is seasonally impacted as a significant number of new and existingNetwork Partners bring us new HSAs and CDBs beginning in January of each year concurrent with the start of many employers' benefit plan years. Before we realize any revenue from these new accounts, we incur costs related to implementing and supporting our newNetwork Partners and new accounts. These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center. These expenses begin to ramp up during our third fiscal quarter, with the majority of expenses incurred in our fourth fiscal quarter. Liquidity and capital resources Cash and cash equivalents overview Our principal sources of liquidity are our current cash and cash equivalents balances, collections from our service, custodial and interchange revenue activities, and availability under our revolving credit facility described below. 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, payments under our term loan facility, and capital expenditures. As ofJanuary 31, 2021 andJanuary 31, 2020 , cash and cash equivalents were$328.8 million and$191.7 million , respectively. Cash and cash equivalents as ofJanuary 31, 2021 included$286.8 million of net proceeds we received from our follow-on public offering inJuly 2020 from the sale of 5,290,000 shares of our common stock, partially offset by$200 million used to prepay long-term debt. It does not include$456.7 million of net proceeds we received from our follow-on public offering in February andMarch 2021 . Capital resources We have a "shelf" registration statement on Form S-3 on file with theSEC . This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to, working capital, sales and marketing activities, general and administrative matters and capital expenditures, and if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time. InJuly 2020 , we closed a follow-on public offering of 5,290,000 shares of common stock at a public offering price of$56.00 per share, less the underwriters' discount. We received net proceeds of$286.8 million after deducting underwriting discounts and commissions of$8.9 million and other offering expenses of$0.6 million . Our credit agreement includes a five-year senior secured revolving credit facility in an aggregate principal amount of up to$350.0 million , which may be used for working capital and general corporate purposes, including the financing -44- -------------------------------------------------------------------------------- Table of Contents of acquisitions and other investments. For a description of the terms of the credit agreement, refer to Note 8-Indebtedness. We were in compliance with all covenants under the credit agreement as ofJanuary 31, 2021 , and for the period then ended. Use of cash We used a portion of the net proceeds from the follow-on public offering inJuly 2020 to prepay$200 million under our term loan facility, with the remaining proceeds to be used for general corporate purposes, which may include additional prepayments under our term loan facility or potential acquisitions. Capital expenditures for the fiscal years endedJanuary 31, 2021 and 2020 were$64.6 million and$32.9 million , respectively. We expect to continue our current level of increased capital expenditures during the fiscal year endingJanuary 31, 2022 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems. Costs to improve the architecture of our proprietary systems include computer hardware, personnel and related costs for software engineering and outsourced software engineering services. We believe our existing cash, cash equivalents, and revolving credit facility 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: Year endedJanuary 31 , (in thousands) 2021
2020
Net cash provided by operating activities
$ (96,964) $
(1,740,494)
Net cash provided by financing activities$ 52,422 $ 1,465,735 Increase (decrease) in cash and cash equivalents 137,077 (169,749) Beginning cash and cash equivalents 191,726
361,475
Ending cash and cash equivalents$ 328,803 $
191,726
Cash flows from operating activities. Net cash provided by operating activities during the fiscal year endedJanuary 31, 2021 resulted from net income of$8.8 million , plus depreciation and amortization expense of$115.9 million , stock-based compensation expense of$42.9 million , amortization of debt issuance costs of$5.1 million , and other non-cash items and working capital changes totaling$8.9 million . Net cash provided by operating activities during the fiscal year endedJanuary 31, 2020 resulted from net income of$39.7 million , plus depreciation and amortization expense of$55.4 million , stock-based compensation expense of$39.8 million , and amortization of debt issuance costs of$2.7 million , partially offset by gains on marketable equity securities of$27.6 million and other non-cash items and working capital changes totaling$5.0 million . Cash flows from investing activities. Cash used in investing activities during the fiscal year endedJanuary 31, 2021 resulted from$51.5 million in software and capitalized software development,$32.4 million in acquisitions of intangible member assets, and$13.1 million in purchases of property and equipment. Cash used in investing activities during the fiscal year endedJanuary 31, 2020 resulted from$1.64 billion used in the WageWorks Acquisition,$53.8 million in purchases of marketable equity securities,$25.7 million in software and capitalized software development,$9.1 million in acquisitions of intangible member assets, and$7.3 million in purchases of property and equipment. Cash flows from financing activities. Net cash provided by financing activities during the fiscal year endedJanuary 31, 2021 resulted from$286.8 million of net proceeds from ourJuly 2020 follow-on public offering of 5,290,000 shares of common stock and the exercise of stock options of$8.6 million . These items were partially offset by$239.1 million of principal payments on our long-term debt and$3.9 million used in the settlement of Client-held funds obligations. Net cash provided by financing activities during the fiscal year endedJanuary 31, 2020 resulted from net borrowings of$1.22 billion under our term loan facility, net proceeds of$458.5 million from the sale of 7,762,500 shares of our -45- -------------------------------------------------------------------------------- Table of Contents common stock in ourJuly 2019 follow-on offering, and the exercise of stock options of$11.3 million . These items were partially offset by$215.8 million of cash used to settle Client-held funds obligations. Contractual obligations Our contractual obligations consist of commitments under operating leases, our credit agreement, and other non-cancellable agreements. See Note 7-Commitments and contingencies for additional information about our contractual obligations. Off-balance sheet arrangements As ofJanuary 31, 2021 , other than outstanding letters of credit issued under our revolving credit facility, we do not have any off-balance sheet arrangements. The majority of the standby letters of credit expire within one year. However, in the ordinary course of business, we will continue to renew or modify the terms of the letters of credit to support business requirements. The letters of credit are contingent liabilities, supported by our revolving credit facility, and are not reflected on our consolidated balance sheets. Critical accounting policies and significant management estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, management's judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that there are several accounting policies that are critical to understanding our business and prospects for future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management's judgment and estimates. These significant policies and our procedures related to these policies are described in detail below. Costs to obtain a contract We recognize an asset for the incremental costs of obtaining a contract with a customer, such as sales commissions, when we expect the benefit of those costs to be recoverable. Total capitalized costs to obtain a contract with a customer are included in other current assets and other assets on our consolidated balance sheets. We apply the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. We applied a portfolio approach based on product or service type to determine the amortization period for the sales commissions contract costs. The capitalized costs will be amortized over a period consistent with the transfer to the customer of the products or services to which the asset relates. The estimated lives have been determined by taking into consideration the type of product or service sold, the estimated customer relationship period based on our historical experience, and industry data. Amortization of capitalized sales commission contract costs is included in sales and marketing expenses in the consolidated statement of operations and comprehensive income. We review the assets for impairment whenever events or circumstances indicate that the associated carrying amount may not be recoverable. Capitalized software development costs We account for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification, or ASC, 350-40,Internal-Use Software . Costs incurred during operation and post-implementation stages are charged to expense. Costs incurred that are directly attributable to developing or obtaining software for internal use incurred in the application development stage are capitalized. Management's judgment is required in determining the point when various projects enter the stages at which costs may be -46- -------------------------------------------------------------------------------- Table of Contents capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. Valuation of long-lived assets including goodwill, intangible assets and estimated useful lives We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. As ofJanuary 31, 2021 , no impairment of goodwill has been identified. Long-lived assets, including property and equipment and intangible assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any significant impairment charges during the years presented. The useful lives of our long-lived assets including property and equipment and finite-lived intangible assets are determined by management when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. The current estimate of useful lives represents our best estimate based on current facts and circumstances, but may differ from the actual useful lives due to changes in future circumstances such as changes to our business operations, changes in the planned use of assets, and technological advancements. When we change the estimated useful life assumption for any asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the revised estimated useful life. Historically changes in useful lives have not resulted in material changes to our depreciation and amortization expense. Income taxes We account for income taxes and the related accounts under the asset and liability method as set forth in ASC 740, Income Taxes. Under this method, current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may not be realized in future years. We use the tax law ordering approach of intraperiod allocation in determining when excess tax benefits have been realized for provisions of the tax law that identify the sequence in which those amounts are utilized for tax purposes. We have also elected to exclude the indirect tax effects of share-based compensation deductions in computing the income tax provision or benefit recorded within the consolidated statement of operations and comprehensive income. Also, we use the portfolio approach in releasing income tax effects from accumulated other comprehensive income. We recognize the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon settlement. We recognize interest and penalties, if any, related to unrecognized tax benefits as a component of other income (expense), net in the consolidated statements of operations and comprehensive income. Changes in facts and circumstances could have a material impact on our effective tax rate and results of operations. Recent accounting pronouncements See Note 1-Summary of business and significant accounting policies within the financial statements included in this Form 10-K for further discussion. -47-
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