UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________

FORM 10-Q

__________________________________________________________

(Mark One) ☒[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2018~~2019

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

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

For the transition period from____________ to ____________

Commission File Number: 001-35232

__________________________________________________________

WAGEWORKS, INC.

(Exact name of Registrant as specified in its charter)

__________________________________________________________



Delaware		94-3351864
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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1100 Park Place, 4th FloorSan Mateo, California ~~94403~~(Address of principal executive offices,) ~~including~~94403(Zip ~~zip code~~Code)

(650) 577-5200

(Registrant’s telephone number, including area code)

________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	WAGE	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]

Indicate by check mark whether the registrant has submitted electronically ~~and posted to its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "“emerging growth company"” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ] Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of June 20, 2019, there were 39,869,857 shares of the registrant’s common stock outstanding.

As of March 14, 2019, there were 39,852,857 shares of the registrant’s common stock outstanding.

WAGEWORKS, INC.

FORM 10-Q QUARTERLY REPORT

Table of Contents

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Income for the Three months and Nine months Ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	5
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2823
Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	3629
Item 4.	Controls and Procedures	3729
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	4231
Item 1A.	Risk Factors	4231
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4231
Item 4.	Mine Safety Disclosures	4231
Item 5.	Other Information	4231
Item 6.	Exhibits	4332
	Signatures	4433

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WAGEWORKS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

	September 30, 2018			December 31, 2017
	March 31, 2019			December 31, 2018
	(Unaudited)			Derived fromAudited FinancialStatements
Assets
Current assets:
Cash and cash equivalents	$	~~770~~782,~~036~~766		$	~~779~~898,~~345~~426
Restricted cash	333			~~332~~333
Short-term investments	~~253~~183,~~821~~603			~~195~~222,~~534~~205
Receivables, net	84114,~~555~~426			~~107~~101,~~547~~297
Prepaid expenses and other current assets	1530,~~885~~822			2923,~~271~~662
Total current assets	1,~~124~~111,~~630~~950			1,~~112~~245,~~029~~923
Property and equipment, net	7774,~~052~~378			6876,~~742~~920
Operating lease right-of-use assets	24,095			—
Goodwill	297,409			297,409
Acquired intangible assets, net	~~136~~123,~~482~~762			~~155~~130,~~369~~095
Deferred tax assets, net	71,~~940~~305			101,~~143~~482
Other assets	3533,~~074~~300			833,~~291~~324
Total assets	$	1,~~678~~666,~~587~~199		$	1,~~651~~785,~~983~~153
Liabilities and Stockholders' Equity
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	9387,~~056~~812		$	8997,~~977~~347
Customer obligations	~~664~~660,~~520~~437			~~695~~762,~~368~~100
Other current liabilities	5,037			628
Short-term operating lease liabilities	8,069			—
Total current liabilities	762,613			785,973
Other current liabilities	19,197			4,264
Long-term debt, net of financing costs	244,814			244,915
Total current liabilities	775,515			863,711
Other non-current liabilities	11,264			8,845
Long-term debt, net of issuance costs	184,769			244,693
Total liabilities	1,018,691			1,039,733
Long-term operating lease liabilities	28,455			—
Commitments and Contingencies (Note 14)
Other long-term liabilities	4,773			11,608
Stockholders' Equity:
Total liabilities	993,512			1,120,012
Common stock, par value $0.001 per share (authorized 1,000,000 shares; 40,333 shares issued and 39,853 shares outstanding at September 30, 2018 and 40,251 shares issued and 39,771 shares outstanding at December 31, 2017)	41			41
Commitments and Contingencies (Note 10)
Additional paid-in capital	579,241			562,131
Stockholders’ Equity:
Treasury stock at cost (480 shares at September 30, 2018 and December 31, 2017)	(22,309		)	(22,309		)
Common stock, par value $0.001 per share (1,000,000 shares authorized; 40,333 shares issued and 39,853 shares outstanding at March 31, 2019 and December 31, 2018)	41			41
Accumulated other comprehensive loss	(841		)	(354		)
Additional paid-in capital	585,478			582,521
Retained earnings	103,764			72,741
Treasury stock at cost (480 shares at March 31, 2019 and December 31, 2018)	(22,309		)	(22,309		)
Total stockholders’ equity	659,896			612,250
Accumulated other comprehensive loss	(222		)	(754		)
Total liabilities and stockholders’ equity	$	1,678,587		$	1,651,983
Retained earnings	109,699			105,642
Total stockholders’ equity	672,687			665,141
Total liabilities and stockholders’ equity	$	1,666,199		$	1,785,153

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

WAGEWORKS, INC.

Condensed Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine months Ended September 30,
	Three Months Ended March 31,
	2018			2017			2018			2017
	2019			2018
Revenues:
Healthcare	$	6671,~~125~~974		$	6575,~~893~~256		$	~~209,486~~		$	~~208,769~~
COBRA	2523,~~081~~589			2628,~~897~~835			~~80,116~~			~~82,465~~
Commuter	1819,~~785~~340			1718,~~987~~878			~~56,510~~			~~54,366~~
Other	3,~~980~~322			43,~~069~~671			~~11,008~~			~~12,415~~
Total revenues	~~113~~118,~~971~~225			~~114~~126,~~846~~640			~~357,120~~			~~358,015~~
Operating expenses:
Cost of revenues (excluding amortization of internal use software)	3339,~~886~~258			3945,~~031~~242			~~115,272~~			~~130,438~~
Technology and development	1316,~~180~~340			13,~~932~~033			~~39,605~~			~~43,718~~
Sales and marketing	1718,~~920~~331			1618,~~385~~338			~~54,779~~			~~47,192~~
General and administrative	2927,~~681~~909			2025,~~196~~249			~~73,828~~			~~52,155~~
Amortization	10,~~502~~851			9,~~402~~991			~~30,684~~			~~28,032~~
Employee termination and other charges	673			(148		)	3,526			1,500
Total operating expenses	112,689			111,853
Total operating expenses	105,842			98,798			317,694			303,035
Income from operations	5,536			14,787
Income from operations	8,129			16,048			39,426			54,980
Interest and other income, net	2,649			1,266
Other income (expense):
Interest expense	(2,709		)	(2,182		)
Interest income	1,522			340			4,225			502
Income before income taxes	5,476			13,871
Interest expense	(2,575		)	(2,059		)	(7,177		)	(5,261		)
Income tax provision	(1,419		)	(2,852		)
Other income (expense), net	(18		)	(30		)	—			(260		)
Net income	$	4,057		$	11,019
Income before income taxes	7,058			14,299			36,474			49,961
Net income per share:
Income tax provision	(4,934		)	(5,236		)	(12,407		)	(4,563		)
Basic	$	0.10		$	0.28
Net income	$	2,124		$	9,063		$	24,067		$	45,398
Diluted	$	0.10		$	0.27
Net income per share:
Shares used in computing net income per share:
Basic	$39,853	~~0.05~~		$39,823	~~0.23~~		$	~~0.60~~		$	~~1.19~~
Diluted	$40,437	~~0.05~~		$40,480	~~0.23~~		$	~~0.59~~		$	~~1.16~~
Shares used in computing net income per share:
Basic	39,853			39,641			39,843			38,028
Diluted	40,492			40,264			40,463			39,106

See accompanying notes to the condensed consolidated financial statements.

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WAGEWORKS, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

(Unaudited)



	Three Months Ended March 31,
	2019		2018
Net income	$	4,057	$	11,019
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on short-term investments, net of tax	532		(731		)
Other comprehensive income (loss)	532		(731		)
Total comprehensive income	$	4,589	$	10,288

	Three Months Ended September 30,			Nine months Ended September 30,
	2018	2017		2018		2017
Net income	2,124	9,063		24,067		45,398
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on short-term investments, net of tax	197	(35	)	(487	)	(35	)
Other comprehensive income (loss)	197	(35	)	(487	)	(35	)
Total comprehensive income	2,321	9,028		23,580		45,363

See accompanying notes to the condensed consolidated financial statements.

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WAGEWORKS, INC.

Condensed Consolidated Statements of ~~Cash~~Stockholders’ ~~Flows~~Equity

(In thousands) (Unaudited)

	Nine Months Ended September 30,
		Three Months Ended March 31, 2019
	2018			2017
		Common stock					Additional paid-in capital		Treasury stock at cost			Accumulated other comprehensive loss			Retained earnings		Total stockholders’ equity
Cash flows from operating activities:
		Shares		Amount
Net income	$	24,067		$	45,398
Balance at December 31, 2018		39,853		$	41		$	582,521	$	(22,309	)	$	(754	)	$	105,642	$	665,141
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense		—		—			2,904		—			—			—		2,904
Depreciation	10,393			8,172
Capitalized stock-based compensation		—		—			53		—			—			—		53
Amortization	30,684			28,031
Other comprehensive income, net of tax		—		—			—		—			532			—		532
Amortization of debt issuance costs	399			294
Net income		—		—			—		—			—			4,057		4,057
Amortization of commissions	2,210			—
Balance at March 31, 2019		39,853		$	41		$	585,478	$	(22,309	)	$	(222	)	$	109,699	$	672,687
Stock-based compensation expense	14,799			17,988
Loss on disposal of fixed assets	172			98
Provision for doubtful accounts	1,016			90
Deferred taxes	—			592
Realized (gain) loss on investments	—			(4		)
Accrued interest on debt securities	(311		)	(95		)
Changes in operating assets and liabilities:
Receivables	21,976			(66,166		)
Prepaid expenses and other current assets	14,058			130
Other assets	(20,347		)	(1,709		)
Accounts payable and accrued expenses	3,552			15,533
Customer obligations	(30,848		)	79,082
Other liabilities	4,048			1,683
Net cash provided by operating activities	75,868			129,117
Cash flows from investing activities:
Purchases of property and equipment	(27,658		)	(28,489		)
Purchases of short-term investments	(154,696		)	(99,445		)
Proceeds from sales of short-term investments	7,639			5,398
Proceeds from maturities of short-term investments	88,435			—
Purchases of intangible assets	(209		)	(2,107		)
Net cash used in investing activities	(86,489		)	(124,643		)
Cash flows from financing activities:
Proceeds from public stock offering, net of underwriting discounts, commissions and other costs	—			130,832
Proceeds from exercise of common stock options	1,395			10,834
Proceeds from issuance of common stock under Employee Stock Purchase Plan	869			2,172
Payments of debt issuance costs	(500		)	(1,851		)
Payments of debt principal	—			(2,500		)
Payments for treasury stock acquired	—			(7,935		)
Payments of capital lease	(233		)	(224		)
Taxes paid related to net share settlement of stock-based compensation arrangements	(218		)	(8,832		)
Net cash provided by financing activities	1,313			122,496
Net (decrease) increase in cash and cash equivalents, unrestricted and restricted	(9,308		)	126,970
Cash and cash equivalents at beginning of period, unrestricted and restricted	779,677			672,609
Cash and cash equivalents at end of period, unrestricted and restricted	$	770,369		$	799,579



	Three Months Ended March 31, 2018
	Common stock			Additional paid-in capital			Treasury stock at cost			Accumulated other comprehensive loss			Retained earnings		Total stockholders’ equity
	Shares	Amount		Additional paid-in capital			Treasury stock at cost			Accumulated other comprehensive loss			Retained earnings		Total stockholders’ equity
Balance at December 31, 2017	39,771	$	41	$	562,131		$	(22,309	)	$	(354	)	$	72,741	$	612,250
Exercise of stock options	54	—		1,395			—			—			—		1,395
Issuance of common stock under Employee Stock Purchase Plan	18	—		869			—			—			—		869
Issuance of restricted stock units, net of shares withheld for employee taxes	10	—		(281		)	—			—			—		(281		)
Stock-based compensation expense	—	—		7,293			—			—			—		7,293
Capitalized stock-based compensation	—	—		191			—			—			—		191
Other comprehensive loss, net of tax	—	—		—			—			(731		)			(731		)
ASC 606 cumulative-effect adjustment	—	—		—			—			—			6,955		6,955
Net income	—	—		—			—			—			11,019		11,019
Balance at March 31, 2018	39,853	$	41	$	571,598		$	(22,309	)	$	(1,085	)	$	90,715	$	638,960

Table of Contents

	Nine Months Ended September 30,
	2018		2017
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	6,444	$	4,672
Income taxes	$	1,979	$	2,940
Noncash financing and investing activities:
Property and equipment, accrued but not paid	$	1,853	$	3,732
Contingent payment, accrued but not paid	$	—	$	2,060
Property and equipment financed under capital lease	$	142	$	263

WAGEWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)



	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	4,057		$	11,019
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	14,592			13,182
Amortization of debt issuance costs	176			120
Amortization of contract costs	725			780
Stock-based compensation expense	2,904			7,293
Provision for doubtful accounts	414			19
Other	233			(1		)
Changes in operating assets and liabilities:
Receivables	(13,543		)	(18,688		)
Prepaid expenses and other current assets	(7,160		)	5,600
Other assets	(701		)	(8,341		)
Accounts payable and accrued expenses	(10,797		)	(9,556		)
Customer obligations	(101,663		)	(35,766		)
Other liabilities	20,575			17,465
Net cash used in operating activities	(90,188		)	(16,874		)
Cash flows from investing activities:
Purchases of property and equipment	(4,353		)	(7,618		)
Purchases of short-term investments	(4,966		)	(99,564		)
Proceeds from sales of short-term investments	2,560			—
Proceeds from maturities of short-term investments	41,495			34,150
Purchases of intangible assets	(60		)	(70		)
Net cash provided by (used in) investing activities	34,676			(73,102		)
Cash flows from financing activities:
Proceeds from exercise of common stock options	—			1,396
Proceeds from issuance of common stock under Employee Stock Purchase Plan	—			869
Payments of debt modification costs	(100		)	—
Payments of debt principal	(60,000		)	—
Payment of finance lease obligations	(48		)	(75		)
Taxes paid related to net share settlement of stock-based compensation arrangements	—			(218		)
Net cash (used in) provided by financing activities	(60,148		)	1,972
Net decrease in cash and cash equivalents, unrestricted and restricted	(115,660		)	(88,004		)
Cash and cash equivalents at beginning of period, unrestricted and restricted	898,759			779,677
Cash and cash equivalents at end of period, unrestricted and restricted	$	783,099		$	691,673

Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	2,483		$	1,961
Income taxes	$	268		$	113
Noncash financing and investing activities:
Property and equipment, accrued but not paid	$	1,262		$	4,063
Property and equipment under finance lease	$	—		$	142

໿

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 Summary of Business and Significant Accounting Policies

Business

WageWorks, Inc., (together with its subsidiaries, “WageWorks” or the “Company”) was incorporated in the state of Delaware in 2000. The Company is a leader in administering Consumer-Directed Benefits (“CDBs”), which empower employees to ~~save~~lower ~~money~~their onhealthcare ~~taxes~~related expenditures while also providing corporate tax advantages for employers.

The Company operates as a single reportable segment on an entity level basis, and considers itself to operate under one operating and reporting segment with healthcare, transit and other employer sponsored programs representing a group of similar products lines. The Company believes that it engages in a single business activity and operates in a single economic environment.

Basis of Presentation

The unaudited interim condensed consolidated financial statements and the related notes have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented in accordance with ~~accounting principles~~ generally accepted accounting principles in the United States of America (“~~U.S.~~ GAAP”). The results of the interim period presented herein are not necessarily indicative of the results of future periods or annual results for the year ending December 31, ~~2018~~2019.

These unaudited interim condensed consolidated financial statements and the related notes should be read in conjunction with the December 31, ~~2017~~2018 audited financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Annual Report on Form 10-K. The December 31, ~~2017~~2018 consolidated balance sheet, included in this interim Quarterly Report on Form 10-Q, was derived from audited financial statements. Certain prior year amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the current year’s presentation as a result of the adoption of new accounting guidance Accounting Standards Update ("ASU") 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). See "Recent Accounting Pronouncements" section below.

~~Other~~There ~~than~~have ~~the~~been ~~adoption~~no ofmaterial ~~ASU~~changes ~~2014-09,~~to ~~"Revenue~~the ~~from~~Company’s ~~Contracts~~critical ~~with~~accounting ~~Customers~~estimates ~~(Topic~~during ~~606)"~~the ~~and~~three ~~ASU~~months ~~2016-18~~ended March 31, ~~Statement~~2019. Other than the adoption of ~~Cash~~ASU ~~Flows~~2016-02, “Leases (Topic ~~230~~842)~~: Restricted Cash~~”, there have been no material changes to ~~our~~the Company's critical accounting policies ~~and estimates~~ during the three months ended ~~September~~March 3031, ~~2018,~~2019 asfrom ~~compared~~the toitems the ~~critical~~Company ~~accounting policies and estimates~~ disclosed in the ~~“Management’s~~its ~~Discussion and Analysis of Financial Condition and Results of Operations” included in our~~ Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation including the reclassification of deferred revenue from accounts payable and accrued expenses to other current liabilities in the condensed consolidated balance sheet and statement of cash flows for the three months ending March 31, 2018. There was no impact on the condensed consolidated statements of income.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of WageWorks, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

~~Revenue~~Use ~~Recognition~~of Estimates

OnIn ~~January~~preparing 1,the ~~2018~~condensed consolidated financial statements and related disclosure in conformity with GAAP, weand ~~adopted~~pursuant to the ~~requirements~~rules and regulations of ~~Accounting~~the ~~Standards~~Securities ~~Update~~and Exchange Commission (“~~ASU~~SEC”) ~~No. 2014-09~~, ~~Revenue~~the ~~from~~Company ~~Contracts~~must ~~with~~make ~~Customers~~estimates ~~(Topic~~and ~~606)~~judgments ~~(“ASC~~that ~~606”)~~affect asthe ~~discussed~~amounts ~~further~~reported in ~~Recently~~the ~~Adopted~~Consolidated ~~Accounting~~Financial ~~Pronouncements~~Statements ~~below.~~and ~~ASC~~accompanying ~~606~~notes. ~~establishes~~Estimates aare ~~principle~~used for, ~~recognizing~~but ~~revenue~~not ~~upon~~limited ~~the~~to ~~transfer~~revenue ofrecognition, ~~promised~~allowances ~~goods~~for ordoubtful ~~services~~accounts, touseful ~~customers,~~lives infor andepreciation ~~amount~~and ~~that~~amortization, ~~reflects~~loss ~~the~~contingencies, ~~expected~~income ~~consideration~~taxes, ~~received~~the inassumptions ~~exchange~~used for ~~those~~stock-based ~~goods~~compensation orincluding ~~services.~~attainment ~~ASC~~of ~~606~~performance-based ~~also~~awards, ~~includes~~the ~~Subtopic~~assumptions ~~340-40,~~used ~~Other~~for ~~Assets~~software and ~~Deferred~~web ~~Costs-Contracts~~site ~~with~~development ~~Customers~~cost classification, ~~which~~and ~~requires~~recoverability ~~the~~and ~~deferral~~impairments of ~~incremental~~goodwill ~~costs~~and oflong-lived ~~obtaining~~assets aand ~~contract~~average ~~with a~~ customer life. ~~Collectively,~~Actual ~~references~~results tomay ~~ASC~~be ~~606~~materially ~~used~~different ~~herein~~from ~~refer~~those toestimates. ~~both~~In ~~ASC~~making ~~606~~its estimates, the Company considers the current economic and ~~Subtopic~~legislative ~~340-40~~environment.

We account for revenue contracts with customers by applying the requirements of ASC 606, which include the following steps:

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

~~• Identification of the contract, or contracts, with the customer;~~Leases

•The ~~Identification~~Company leases office space under noncancelable operating leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the ~~performance~~present ~~obligations~~value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the ~~contract;~~Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term. In addition, the Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet.

•The ~~Determination~~Company determines if an arrangement is a lease or contains a lease at inception. The Company applied the short-term lease measurement and recognition exemption in which right-of-use (“ROU”) assets and lease obligations are not recognized for short-term leases. The Company does not have lease agreements with residual value guarantees, sales leaseback terms or material restrictive covenants. The Company has one sublease for which the ~~transaction~~sublease ~~price;~~income was recorded as a reduction to operating lease expense for the three months ended March 31, 2019 and 2018.

•The ~~Allocation~~Company ofhas lease agreements that contain both lease and non-lease components. For real estate leases, the ~~transaction~~Company ~~price~~accounts for lease components together with non-lease components (e.g., common-area maintenance). Amounts recognized as ROU assets related to ~~the~~finance ~~performance~~leases ~~obligations~~are included in property and equipment, net in the ~~contract;~~accompanying condensed consolidated balance sheets, while related lease liabilities are included in other current liabilities and other long-term liabilities.

•Recently ~~Recognition~~Adopted ofAccounting ~~the revenue when, or as, the Company satisfies a performance obligation.~~Guidance

~~Our~~In ~~revenues~~February ~~are~~2016, ~~derived~~the ~~primarily~~Financial ~~from~~Accounting ~~benefit~~Standards ~~service~~Board ~~administration,~~(“FASB”) ~~interchange~~issued ~~and~~ASU ~~other~~No. ~~commissions~~2016-02, ~~and~~Leases ~~other~~(Topic ~~revenue~~842), which ~~includes~~requires ~~services~~lessees ~~related~~ to ~~enrollment~~apply ~~and~~a ~~eligibility,~~dual ~~non-healthcare~~approach, ~~and~~classifying ~~employee~~leases ~~account~~as ~~administration~~either ~~(i.e.,~~finance ~~tuition~~or ~~and~~operating ~~health~~leases ~~club~~based ~~reimbursements)~~on ~~and~~the ~~project-related~~principle ~~professional~~of ~~services.~~whether Weor ~~account~~not ~~for~~the ~~individual~~lease ~~products~~is ~~and~~effectively ~~services~~a ~~separately~~financed ifpurchase ~~they~~by ~~are~~the ~~distinct-that~~lessee. This classification will determine whether lease expense is, ifrecognized abased ~~product~~on an effective interest method or ~~service~~on isa ~~separately~~straight-line ~~identifiable~~basis ~~from~~over ~~other~~the ~~items~~term inof the ~~contract~~lease. A lessee is also required to record a right-of-use asset and ifa lease liability for all leases with a ~~customer~~term ~~can~~of ~~benefit~~greater ~~from~~than it12 onmonths ~~its~~regardless ~~own~~of ortheir classification. Leases with ~~other~~a ~~resources~~term ~~that~~of ~~are~~12 ~~readily~~months ~~available~~or less will be accounted for similar to ~~the~~existing ~~customer.~~guidance for operating lease.

WeThe ~~account~~Company ~~for~~adopted aTopic ~~contract~~842 ~~with~~prospectively aduring ~~customer~~the ~~when~~first ~~there~~quarter isof ~~approval~~2019. ~~and~~As ~~commitment~~part ~~from~~of ~~both~~its ~~parties~~adoption, the ~~rights~~Company ofelected ~~the~~a ~~parties~~package ~~are~~of ~~identified,~~practical ~~payment~~expedients ~~terms~~for ~~are~~leases ~~identified,~~that ~~the~~commenced ~~contract~~prior ~~has~~to ~~commercial~~January ~~substance~~1, 2019 and ~~collectability~~did ofnot ~~consideration~~reassess: is(i) ~~probable.~~whether Weany ~~measure~~expired ~~revenue~~or ~~based~~existing oncontracts ~~the~~are ~~consideration~~or ~~specified~~contain inleases; ~~the~~(ii) ~~contract~~lease ~~with~~classification ~~each~~for ~~customer,~~any ~~net~~expired ofor ~~any~~existing ~~sales~~leases; ~~incentives~~ and ~~taxes~~(iii) ~~collected~~initial ondirect ~~behalf~~costs ofcapitalization ~~government~~for ~~authorities.~~any Weexisting ~~recognize~~leases. ~~revenue~~The inCompany arecognizes ~~manner~~those ~~that~~lease ~~best~~payments ~~depicts~~in the ~~transfer~~consolidated ofstatements ~~promised goods or services to the customer, when control~~ of ~~the~~income ~~product~~on ~~or service is transferred to~~ a ~~customer. We~~straight-line ~~make~~basis ~~significant~~over ~~judgments when determining~~ the ~~appropriate~~lease ~~timing of revenue recognition~~term.

~~Based~~The ~~upon~~adoption ~~similar~~of ~~operational~~Topic ~~and~~842 ~~economic~~resulted ~~characteristics,~~ in the Company’s ~~revenues~~recording ~~are~~$25.5 ~~disaggregated~~million ~~into~~of ~~Healthcare,~~right-of-use ~~Commuter,~~lease ~~COBRA~~assets and ~~Other~~$38.4 ~~revenue~~million of lease liabilities as of January 1, 2019. The ~~Company~~new ~~believes~~standard ~~these~~did ~~revenue~~not ~~categories~~have ~~depict~~a ~~how~~significant ~~the~~impact ~~nature,~~on ~~amount,~~the ~~timing,~~condensed ~~and~~consolidated ~~uncertainty~~statements of ~~its~~income. ~~revenue~~See ~~and~~Note ~~cash~~10, ~~flows~~Commitments ~~are~~and ~~affected~~Contingencies byfor ~~economic~~additional ~~factors~~information.

•In February 2018, the FASB issued ASU No. 2018-02, “Income ~~Healthcare~~Statement ~~and~~- ~~commuter~~Reporting ~~programs~~Comprehensive ~~include~~Income ~~revenues~~(Topic ~~generated~~220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the ~~monthly~~Tax ~~administration~~Cuts ~~services~~and ~~based~~Jobs onAct ~~employee~~and ~~participant~~requires ~~levels~~certain disclosures about stranded tax effects. The Company adopted ASU 2018-02 in January 1, 2019 and ~~interchange~~applied it in the period of adoption. The Company did not elect to reclassify any tax effects of the Tax Cuts and Jobs Act on items within accumulated other ~~commission~~comprehensive ~~revenues~~income to retained earnings. The adoption of this standard did not have an effect on the Company’s condensed consolidated financial statements.

•In ~~COBRA~~August ~~revenue~~2018, isthe ~~generated~~FASB ~~from~~issued ~~the~~ASU ~~administration~~No. of2018-15, ~~continuation~~“Intangibles, ofGoodwill ~~coverage~~and ~~services~~Other (Subtopic 350-40): Customer’s Accounting for ~~participants~~Implementation ~~who~~Costs ~~are~~Incurred noin ~~longer~~a ~~eligible~~Cloud ~~for~~Computing Arrangement that is a Service Contract” (ASU 2018-15). ASU 2018-15 requires implementation costs incurred by customers in cloud computing arrangements to be deferred, if those same costs would be capitalized by a customer in a software licensing arrangement under the ~~employer’s~~internal-use ~~health~~software ~~benefits~~guidance in ASC 350-40. ASU 2018-15 is effective for fiscal years, ~~such~~and asinterim ~~medical~~periods within those years, ~~dental~~beginning after December 15, ~~vision~~2019, ~~and~~with ~~for~~early adoption permitted. The Company elected to early adopt the ~~continued~~new ~~administration~~standard as of ~~employee~~March ~~participants’~~31, ~~Health~~2019. ~~Reimbursement~~The ~~Arrangements~~adoption ~~(“HRAs”),~~of ~~and~~this ~~certain~~standard ~~healthcare~~did ~~Flexible~~not ~~Spending~~have ~~Accounts~~a ~~(“FSAs”)~~material effect on the Company’s condensed consolidated financial statements.

• Other revenue includes services related to enrollment and eligibility, non-healthcare, employee account administration (i.e., tuition and health club reimbursements).

Within our Healthcare and Commuter service lines, we have determined that our administration services are a single continuous service. These services are consumed as they are received and the Company recognizes service revenue over time on a monthly basis as it satisfies its performance obligations. As such, the Company recognizes revenue in each month for the administration services provided in that month using the variable consideration allocation exception. The Company applies this exception because it concluded that the nature of its obligations and the variable payment terms are aligned and the uncertainty related to the consideration is resolved on a monthly basis as the Company satisfies its obligations. The administration services are typically billed in the period in which services are performed.

COBRA requires employers to make health coverage available for terminated employees for a period of up to 36 months post-termination. Similar to our Healthcare and Commuter service lines, our COBRA administration services are a single continuous service. These services are consumed as they are received and the Company recognizes service revenue over time on a monthly basis as it satisfies its performance obligations. As such, the Company recognizes revenue in each month for the COBRA administration services provided in that month using the variable consideration allocation exception. The administration services are typically billed in the period in which services are performed.

We also recognize revenues that are generated from the use of debit cards used by employee participants related to the distribution, management and monitoring of such cards and used in connection with our benefits administration services for Healthcare and Commuter service lines. These related fees are known as interchange fees and are based upon a percentage of the amounts transacted on each card. We have determined that our performance obligation for interchange is a single continuous service, which is satisfied over time each month. Therefore, we recognize interchange revenue on a monthly basis based on the services provided and use the variable consideration allocation exception. The interchange revenues are typically billed in the period in which services are performed.

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

~~Contract~~Recently ~~Assets~~Issued ~~Contract~~Accounting ~~assets~~Pronouncements include amounts related to our enforceable right to consideration for completed performance obligations not yet invoiced. The contract assets are transferred to the receivables balance when the rights become unconditional.

~~Contract~~ In ~~Liabilities~~June ~~Contract~~2016, ~~liabilities~~the ~~are~~FASB ~~recorded~~issued asASU ~~deferred~~No. ~~revenues~~2016-13, ~~and~~“Financial ~~include~~Instruments ~~payments~~- ~~received~~Credit inLosses ~~advance~~(Topic 326): Measurement of ~~performance~~Credit ~~under~~Losses on Financial Instruments” (ASU 2016-13), which amends the ~~contract~~FASB’s guidance on the impairment of financial instruments. WeThe ~~generally~~ASU ~~invoice~~adds ~~our~~to ~~customers~~GAAP ~~for~~an ~~services~~impairment model (known as ~~they~~the ~~are~~“current ~~provided~~expected oncredit aloss ~~monthly~~model”) ~~basis,~~that ~~however~~is inbased ~~limited~~on ~~instances~~expected welosses ~~may~~rather ~~invoice~~than inincurred ~~advance~~losses. ASU of2016-13 ~~services~~is toeffective befor ~~provided. Contract~~annual ~~liabilities~~reporting ~~are~~periods ~~recognized~~beginning asafter ~~revenue~~December ~~when~~15, ~~the~~2019, ~~services~~including ~~are~~interim ~~provided~~periods towithin ~~the~~those ~~customer~~fiscal years. ~~Contract~~Early ~~liabilities~~adoption ~~that~~is ~~are~~permitted ~~anticipated~~for tofiscal beyears ~~recognized~~beginning ~~during~~after ~~the~~December ~~succeeding~~15, ~~twelve-month~~2018, ~~period~~including ~~are~~interim ~~recorded~~periods aswithin ~~current~~those ~~deferred~~fiscal ~~revenue~~years. ~~and~~The Company is currently evaluating the ~~remaining~~timing ~~portion~~and isimpact ~~recorded~~of asadoption ~~noncurrent~~on its condensed consolidated financial statements.

~~Contract~~In ~~Costs~~January ~~ASC~~2017, ~~606~~the ~~requires~~FASB ~~the~~issued ~~recognition~~ASU ofNo. an2017-04, ~~asset~~“Intangibles ~~for~~- ~~the~~Goodwill ~~incremental~~and ~~costs~~Other of(Topic ~~obtaining~~350): aSimplifying ~~contract~~the ~~with~~Test afor ~~customer~~Goodwill ifImpairment”. ~~the~~The ~~entity~~amendments ~~expects~~eliminate toStep ~~recover~~2 ~~such~~from ~~costs~~the goodwill impairment test. ~~Incremental~~The ~~costs~~annual, ~~are~~or ~~costs~~interim, ~~that~~goodwill ~~would~~impairment ~~not~~test ~~have~~is ~~been~~performed ~~incurred~~by ifcomparing the ~~contract~~fair ~~had~~value ~~not~~of ~~been~~a ~~obtained.~~reporting ~~Examples~~unit ofwith ~~contract~~its ~~costs~~carrying ~~are~~amount. ~~commissions~~An ~~paid~~impairment tocharge ~~sales~~should ~~personnel.~~be ~~Sales~~recognized ~~commissions~~for ~~earned~~the amount by which the ~~Company~~carrying amount exceeds the reporting unit’s ~~sales~~fair ~~force~~value; ~~are~~however, ~~considered~~the ~~incremental~~loss ~~and~~recognized ~~recoverable~~should ~~costs~~not exceed the total amount of ~~obtaining~~goodwill aallocated ~~contract~~to ~~with~~that areporting ~~customer~~unit. ~~Sales~~In ~~commissions~~addition, ~~for~~income ~~initial~~tax ~~contracts~~effects ~~are~~from ~~deferred~~any ~~and~~tax ~~then~~deductible ~~amortized~~goodwill on athe ~~straight-line~~carrying ~~basis~~amount ~~over~~of athe ~~period~~reporting ofunit ~~benefit~~should ~~that~~be ~~has~~considered ~~been~~when ~~determined~~measuring tothe begoodwill ~~six~~impairment ~~years~~loss, if applicable. The ~~Company~~amendments ~~determined~~also eliminate the ~~period~~requirements offor ~~benefit~~any byreporting ~~taking~~unit ~~into~~with ~~consideration~~a ~~length~~zero ofor ~~customer~~negative ~~contracts~~carrying amount to perform a qualitative assessment and, ~~useful~~if ~~life~~it offails ~~developed~~that ~~technology~~qualitative test, ~~regulatory~~to ~~oversight~~perform Step 2 of the ~~Company~~goodwill isimpairment ~~subject~~test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new standard is effective for fiscal years beginning after December 15, ~~and~~2019, ~~other~~with ~~factors~~early adoption permitted. ~~Amortization~~The ~~expense~~Company is ~~included~~currently inevaluating ~~Sales~~the timing and ~~marketing~~impact ~~expenses~~of adoption on the Company’s condensed consolidated ~~statements~~financial ~~of income~~statements.

~~Use~~In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). The primary focus of ASU 2018-13 is ~~Estimates~~to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in this standard are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the timing and impact of adoption on its condensed consolidated financial statements.

In ~~preparing~~November 2018, the ~~Consolidated~~FASB ~~Financial~~issued ~~Statements~~ASU ~~and related disclosure in conformity with United States (“U~~No.~~S.”)~~ ~~generally accepted accounting principles (“GAAP”)~~2018-19, “Codification ~~and~~Improvements ~~pursuant~~ to ~~the~~Topic ~~rules~~326, ~~and~~Financial ~~regulations~~Instruments-Credit ofLosses”. ASU ~~the~~2018-19 ~~Securities~~clarifies ~~and~~that ~~Exchange~~receivables ~~Commission~~arising ~~("SEC"),~~from ~~the~~operating ~~Company~~leases ~~must~~are ~~make~~not ~~estimates~~within ~~and judgments that affect~~ the ~~amounts~~scope ~~reported~~of in the ~~Consolidated~~credit ~~Financial~~losses ~~Statements and accompanying notes. Estimates are used for~~standard, but ~~not limited to revenue recognition~~rather, ~~allocation~~should ofbe ~~purchase~~accounted ~~consideration~~for toin ~~acquired~~accordance ~~assets~~with ~~and~~the ~~liabilities~~leases ~~from~~standard. ~~business~~In ~~combinations~~general, ~~allowances~~the ~~for~~amendments ~~doubtful~~in this ~~accounts,~~standard are ~~useful~~effective ~~lives~~ for ~~depreciation~~public ~~and~~business ~~amortization,~~entities ~~loss~~that ~~contingencies,~~meet ~~income taxes,~~ the ~~assumptions~~definition ~~used for stock-based compensation including attainment~~ of ~~performance-based~~a ~~awards,~~SEC ~~the~~filer ~~assumptions used~~ for ~~software~~fiscal ~~and~~years ~~web~~beginning ~~site~~after ~~development~~December ~~cost~~15, ~~classification~~2019, and ~~recoverability~~interim ~~and~~periods ~~impairments~~within ofthose ~~goodwill~~fiscal ~~and long-lived assets and average customer life~~years. ~~Actual~~The ~~results~~Company ~~may~~is becurrently ~~materially~~evaluating ~~different~~the ~~from~~timing ~~those~~and ~~estimates.~~impact Inof ~~making~~adoption on its ~~estimates,~~condensed ~~the~~consolidated ~~Company~~financial ~~considers the current economic and legislative environment~~statements.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds, stated at cost, as well as commercial paper with an original maturity of less than 90 days as further described under Marketable Securities below. To the extent the Company’s contracts do not provide for any restrictions on the Company’s use of cash that it receives from clients, the cash is recorded as cash and cash equivalents.

The majority of the Company’s cash and cash equivalents represent funding and pre-funding balances received from customers for which the Company has a corresponding current obligation. In all cases where we have collected cash from a customer but not fulfilled services (the payment of participant healthcare claims and commuter benefits), the Company recognizes a related liability to its customers, classified as customer obligations in the accompanying consolidated balance sheets.

Restricted cash represents cash used to collateralize standby letters of credit which were issued to the benefit of a third party to secure a contract with the Company.

The following table summarizes the Company's cash and cash equivalents as at September 30, 2018 and December 31, 2017 (in thousands):

	September 30, 2018	December 31, 2017
Cash and cash equivalents, unrestricted	770,036	779,345
Cash and cash equivalents, restricted	333	332
Total unrestricted and restricted cash and cash equivalents	770,369	779,677

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

~~Marketable~~Note ~~Securities~~2 Net Income per Share

The ~~Company~~following ~~determines~~table ~~the~~sets ~~classification~~forth ~~of its investments in marketable securities at~~ the ~~time~~computation of ~~purchase.~~basic ~~Marketable securities of highly liquid investments with stated maturities of three months or less when purchased are classified as cash equivalents~~ and ~~those~~diluted with stated maturities of between three months and one year as short-term investments. Marketable securities with maturities beyond twelve months are also included in short-term investments within current assets as the Company intends for its investments to support current operations and other strategic initiatives. These securities are reported at fair value, which includes the accrued interest of interest-bearing securities. Unrealized gains and losses from debt securities, net ofincome ~~taxes,~~per ~~are~~share ~~included~~ (in ~~accumulated other comprehensive loss as a component of stockholders' equity~~thousands, except ~~for~~per ~~unrealized~~share ~~losses determined to be other-than-temporary which will be recorded within other income (expense~~data)~~. Realized gains and losses on the sale of marketable securities are recorded in other income (expense).~~:໿

Receivables



	Three months ended March 31,
	2019		2018
Numerator:
Net income	$	4,057	$	11,019

Denominator:
Basic weighted-average shares	39,853		39,823

Effect of potentially dilutive shares:
Weighted-average dilutive stock options, restricted stock and performance restricted stock units, and employee stock purchase plan shares	584		657
Diluted weighted-average shares	40,437		40,480

Net income per share:
Basic	$	0.10	$	0.28
Diluted	$	0.10	$	0.27

~~Receivables~~For ~~represent both trade receivables from customers in relation to fees for~~ the ~~Company’s~~three ~~services~~months ~~and~~ended ~~unpaid amounts for benefit services provided by third-party vendors~~March 31, ~~such~~2019 ~~as transit agencies~~ and ~~healthcare~~2018, ~~providers~~potential ~~for~~shares ~~which~~from ~~the~~stock ~~Company~~options ~~records a receivable for funding~~ and arestricted ~~corresponding~~stock ~~customer~~units ~~obligations~~totaling ~~liability until the Company disburses the balances to the vendors~~1. ~~The~~9 ~~Company~~million ~~provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability~~ and ~~providing an estimate of the loss exposure~~1.4 ~~The~~million, ~~Company~~respectively, ~~reviews its allowance for doubtful accounts on a quarterly basis. Account balances~~ are ~~written~~not ~~off~~included ~~against~~in the ~~allowance~~computation ~~after all means~~ of ~~collection~~diluted ~~have~~earnings ~~been~~per ~~exhausted~~share ~~and~~because ~~the~~their ~~potential~~inclusion ~~for~~would ~~recovery~~have isbeen ~~considered remote~~anti-dilutive. ~~Write offs for the three and nine months ended September 30, 2018 and 2017 were not significant.~~

~~The~~Note Company offsets on a customer by customer basis unpaid amounts for benefit services and customer obligation balances for financial reporting presentation. Additionally, the Company offsets outstanding trade and non-trade receivables, including any debit or credit memos, against any prefund balances after plan year close or upon termination of services both based on the completion of a full reconciliation with the customer.3 Revenue

~~Property~~The Company generally invoices its customers on a monthly basis with a term of net 30-60 days. The Company applies the practical expedient provided by ASC 606 and ~~Equipment~~does not evaluate contracts of one year or less for the existence of a significant financing component. The Company’s policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements.

~~Property~~Disaggregation and equipment are stated at cost less accumulated depreciation and amortization. Depreciation on computer and equipment and furniture and fixtures is calculated on a straight-line basis over the estimated useful lives of those assets, ranging from 3 to 5. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful life or the lease term. When events or circumstances suggest an asset’s life is different than initially estimated, management reassesses the useful life of the asset and recognizes future depreciation prospectively over the revised life.Revenue

~~When~~The ~~assets~~Company’s ~~are~~primary ~~retired~~categories orof ~~otherwise~~revenue ~~disposed~~are ofHealthcare, ~~the~~Commuter, ~~cost~~COBRA and ~~related~~Other ~~accumulated~~revenue ~~depreciation~~and /are ~~amortization~~disclosed ~~are~~in ~~removed~~the ~~from~~condensed ~~their~~consolidated ~~respective~~statements ~~accounts,~~of ~~and~~income. ~~any~~The ~~gain~~following ortable ~~loss~~provides oninformation ~~such~~about ~~sale~~disaggregated orrevenue ~~disposal~~from iscontracts ~~reflected~~with incustomers ~~operating~~by ~~expenses.~~the nature of the products and services (in thousands):

Maintenance and repairs are expensed as incurred. Expenditures that substantially increase an asset’s useful life are capitalized.



	Three Months Ended March 31,
	2019		2018
Benefit administration services and COBRA	$	95,960	$	104,440
Interchange	15,439		15,745
Other revenue	6,826		6,455
Total	$	118,225	$	126,640

~~Software~~Contract ~~and Web Site Development Costs~~Balances

~~Costs~~The ~~incurred~~Company togenerally ~~develop~~does ~~software~~not ~~for~~recognize ~~internal~~revenue ~~use~~in ~~are~~advance ~~capitalized~~of ~~and~~invoicing ~~amortized~~its ~~over~~customers, ~~the~~however, ~~technology’s~~it ~~estimated~~records ~~useful~~a ~~life,~~receivable ~~generally~~when ~~four~~revenue ~~years.~~is ~~When~~recognized ~~events~~prior orto ~~circumstances~~payment ~~suggest~~and anit ~~asset’s~~has ~~life~~unconditional isright ~~different~~to ~~than~~payment. ~~initially estimated~~Alternatively, ~~management~~when ~~reassesses~~payment ~~the~~precedes ~~useful life of~~ the ~~asset~~related ~~and~~services, ~~recognizes future amortization prospectively over~~ the ~~revised~~Company ~~life.~~records ~~Costs~~a ~~incurred~~contract ~~related~~liability, toor ~~the~~deferred ~~planning~~revenue, ~~and~~until ~~post~~its ~~implementation~~performance ~~phases~~obligations ~~of development~~ are ~~expensed as incurred~~satisfied. ~~Costs~~The ~~associated~~Company’s ~~with~~deferred ~~the~~revenue ~~platform~~as ~~content~~of orMarch 31, ~~the~~2019 ~~repair~~and ~~or maintenance~~December 31, ~~including~~2018 ~~transfer~~was $17.1 ofmillion and $3.9 ~~data~~million, ~~between existing platforms are expensed as incurred~~respectively.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize valuation techniques that maximize the

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

~~use~~The ofbalances ~~observable~~related ~~inputs and minimize the use of unobservable inputs~~ to ~~the~~cash ~~extent~~received ~~possible and we consider counterparty credit risk~~ in ~~our~~advance ~~assessment~~for ofa ~~fair~~certain ~~value.~~interchange ~~Carrying~~revenue ~~amounts of financial instruments~~arrangement, ~~including~~other ~~cash~~up-front ~~equivalents,~~fees ~~accounts receivable, accounts payable,~~ and ~~accrued~~other ~~liabilities,~~commuter ~~approximate~~deferred ~~their fair values as of the balance sheet dates because of their short maturities~~revenue. The ~~carrying value of the~~ Company’s ~~debt~~expects ~~under the credit facility is estimated~~ to ~~approximate~~satisfy ~~fair~~its ~~value~~remaining asobligations ~~the interest rate approximates the market rate~~ for ~~debt~~these ~~securities with similar terms and risk characteristics~~arrangements. ~~The determination of the fair value of the Company’s marketable securities is further explained in Note 5 Investments and Fair Value Measurements.~~

~~The~~Contract Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:Costs

•Contract ~~Level~~costs 1relate ~~Inputs:~~to ~~Unadjusted~~incremental ~~quoted~~costs ~~prices~~of obtaining a contract with a customer. Contract costs, which primarily consist of deferred sales commissions, were $8.7 million and $8.8 million as of March 31, 2019 and December 31, 2018, respectively and are included in ~~active~~other ~~markets~~assets on the condensed consolidated balance sheets. Amortization expense for ~~identical~~the ~~assets~~deferred orcosts ~~liabilities~~was ~~accessible~~$0.7 million and $0.8 million for the three months ended March 31, 2019 and 2018, respectively. There was no impairment loss in relation to the ~~reporting~~costs ~~entity~~capitalized atfor the ~~measurement~~periods ~~date~~presented. Deferred contract costs are amortized on a straight-line basis over the period of benefit, which is consistent with the pattern of transfer of the good or service to which the asset relates.

•Performance Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.Obligations

•During ~~Level 3 Inputs: Unobservable inputs for~~ the ~~asset~~three ormonths ~~liability~~ended ~~used to measure fair value to the extent that observable inputs are not available~~March 31, ~~thereby allowing for situations in which there is little~~2019, ifthe ~~any,~~Company ~~market~~recognized ~~activity for~~ the ~~asset~~following orrevenues ~~liability~~(in ~~at measurement date.~~thousands):

Impairment of Long-lived Assets



Revenue recognized in the period for:	Three Months Ended March 31, 2019
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied	$	143
Changes in the period:
Performance obligations satisfied from new activities in the period - contract revenue	118,082
Total revenue	$	118,225

The ~~Company~~following ~~reviews~~table ~~long-lived~~includes ~~assets~~estimated ~~for~~revenue ~~indicators~~expected ofto ~~impairment~~be ~~whenever~~recognized ~~events or changes~~ in ~~circumstances indicate that~~ the ~~carrying~~future ~~amounts~~related ofto ~~such~~performance ~~assets~~obligations ~~may~~that ~~not~~are beunsatisfied ~~recoverable. An~~or ~~impairment~~partially ofunsatisfied ~~long-lived~~at ~~assets exists when~~ the ~~carrying~~end ~~amount~~ of athe ~~long-lived~~reporting ~~asset group, exceeds its fair value~~period. ~~Such~~The ~~impairment~~Company ~~arises~~applies inthe ~~circumstances~~practical ~~when~~expedient ~~such assets are assessed and determined~~ to ~~have no continuing or future benefit. Impairment losses are recorded when the carrying amount of the impaired asset group is~~ not ~~recoverable.~~disclose ~~Recoverability~~information isabout ~~determined~~contracts bywith ~~comparing~~original ~~the~~expected ~~carrying~~durations ~~amount~~ of ~~the~~one ~~asset~~year or ~~asset~~less, ~~group~~amounts toof ~~the~~variable ~~undiscounted~~consideration ~~cash~~attributable ~~flows which are expected~~ to ~~be generated from its use. If~~ the ~~carrying~~variable ~~amount~~consideration ofallocation ~~the asset group exceeds its estimated future cash flows~~exception, anor ~~impairment~~contract ~~charge~~renewals isthat ~~recognized~~are byunexercised ~~the~~as ~~amount by which the carrying amount~~ of ~~the~~March 31, ~~asset~~2019 or(in ~~asset group exceeds its fair value.~~thousands):

Acquisitions, Goodwill and Definite lived Intangible Assets



	March 31, 2019
2019 (remainder of year)	$	429
2020	571
2021	571
2022 and thereafter	1,143
Total	$	2,714

The cost of an acquisition is allocated to the tangible assets and definite lived intangible assets acquired and liabilities assumed based on their fair value at the date of acquisition. Goodwill represents the excess cost over the fair value of net assets acquired in the acquisition and is not amortized, but rather is tested for impairment.

Definite lived intangible assets, consisting of client/broker contracts and relationships, trade names, technology, noncompete agreements and favorable lease arrangements, are stated at cost less accumulated amortization. All definite lived intangible assets are amortized on a straight-line basis over their estimated remaining economic lives, generally ranging from one to ten years. Amortization expense related to these intangible assets is included in amortization expense on the consolidated statements of income.

The Company performs a goodwill impairment test annually on December 31st and more frequently if events and circumstances indicate that the asset might be impaired. The following are examples of triggering events that could indicate that the fair value of a reporting unit has fallen below the unit’s carrying amount:

• A significant adverse change in legal factors or in the business climate

• An adverse action or assessment by a regulator

• Unanticipated competition

• A loss of key personnel

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

•Note A4 Investments ~~more~~and ~~likely~~Fair ~~than-not~~Value ~~expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of~~Measurements

AnThe ~~impairment~~following ~~loss~~tables issummarize ~~recognized to~~ the ~~extent~~Company’s ~~that~~investments ~~the~~in ~~carrying~~marketable ~~amount~~securities ~~exceeds~~and ~~the reporting unit’s~~ fair value. ~~When~~measurements ~~reviewing~~by ~~goodwill~~investment ~~for~~category ~~impairment,~~reported ~~the~~as ~~Company~~cash ~~assesses~~equivalents ~~whether goodwill should be allocated to operating levels lower than the Company’s single operating segment for which discrete financial information is available~~ and ~~reviewed for decision~~short-~~making~~term ~~purposes.~~investments ~~These lower levels are referred to~~ as ~~reporting~~of ~~units. The Company’s chief operating decision maker~~March 31, ~~the~~2019 ~~Chief~~and ~~Executive Officer~~December 31, ~~does~~2018 ~~not~~(in allocate resources or assess performance at the individual healthcare, commuter, COBRA or other revenue stream level, but rather at the operating segment level. Discrete financial information is therefore not maintained at the revenue stream level. The Company’s one reporting unit was determined to be the Company’s one operating segment.thousands):

Whenever events or circumstances change, entities have the option to first make a qualitative evaluation about the likelihood of goodwill impairment. In assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, overall financial performance, Company specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.



March 31, 2019	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Level 1		Level 2
Cash equivalents:
Money market funds	$	40,171	$	—	$	—		$	40,171	$	40,171	$	—
Commercial paper	52,242		—		(9		)	52,233		—		52,233
Municipal bonds	7,742		—		—			7,742		—		7,742
Total cash equivalents	100,155		—		(9		)	100,146		40,171		59,975

Short-Term Investments:
U.S. government securities	19,501		—		(45		)	19,456		19,456		—
U.S. government agency securities	10,826		—		(27		)	10,799		—		10,799
Municipal bonds	2,345		1		—			2,346		—		2,346
Foreign government securities	2,514		—		(1		)	2,513		—		2,513
Corporate debt securities	114,238		116		(233		)	114,121		—		114,121
Commercial paper	4,975		—		(1		)	4,974		—		4,974
Certificates of deposit	—		—		—			—		—		—
Asset-backed securities	29,481		1		(88		)	29,394		—		29,394
Total short-term investments	183,880		118		(395		)	183,603		19,456		164,147
Total cash equivalents and short-term investments	$	284,035	$	118	$	(404	)	$	283,749	$	59,627	$	224,122

The goodwill impairment analysis is a two-step process: first, the reporting unit’s estimated fair value is compared to its carrying value, including goodwill. If the Company determines that the estimated fair value of the reporting unit is less than its carrying value, the Company moves to the second step to determine the implied fair value of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the reporting unit in a manner similar to a purchase price allocation. If impairment is deemed more likely than not, management would perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required.

Income Taxes

The Company reports income taxes using an asset and liability approach. Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements, as well as from net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under current enacted tax law. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.

The Company records a valuation allowance to reduce the deferred tax assets to the amount that the Company believes is more likely than not to be realized based on its judgment of all available positive and negative evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified. This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the following:

• The nature and history of current or cumulative financial reporting income or losses;

• Sources of future taxable income;

• The anticipated reversal or expiration dates of the deferred tax assets; and

• Tax planning strategies.

The Company takes a two-step approach to recognizing and measuring the financial statement benefit of uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement of the audit. The Company classifies interest and penalties on unrecognized tax benefits as income tax expense or benefit.

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Customer Obligation Liability



December 31, 2018	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Level 1		Level 2
Cash equivalents:
Money market funds	$	41,027	$	—	$	—		$	41,027	$	41,027	$	—
Commercial paper	10,436		1		—			10,437		—		10,437
Municipal bonds	7,781		—		—			7,781		—		7,781
Total cash equivalents	59,244		1		—			59,245		41,027		18,218

Short-Term Investments:
U.S. government securities	22,534		—		(94		)	22,440		22,440		—
U.S. government agency securities	14,346		—		(56		)	14,290		—		14,290
Municipal bonds	3,548		—		(4		)	3,544		—		3,544
Foreign government securities	2,504		—		(6		)	2,498		—		2,498
Corporate debt securities	134,003		37		(685		)	133,355		—		133,355
Commercial paper	12,954		—		(4		)	12,950		—		12,950
Certificates of deposit	1,258		—		—			1,258		—		1,258
Asset-backed securities	32,054		—		(184		)	31,870		—		31,870
Total short-term investments	223,201		37		(1,033		)	222,205		22,440		199,765
Total cash equivalents and short-term investments	$	282,445	$	38	$	(1,033	)	$	281,450	$	63,467	$	217,983

~~Many~~As of ~~our customer agreements include provisions whereby our customers remit funds to us which represent prefunds of employer / client and employee participant contributions related to FSA~~March 31, HRA and commuter programs. The agreements do not represent restricted cash and accordingly the amounts received are included in cash and cash equivalents on our consolidated balance sheets with a corresponding liability recorded as customer obligations. Our customers generally provide us with prefunds for their FSA and HRA programs based on a percentage of projected spending by the employee participants for the plan year and other factors. In the case of our commuter program2019, at the ~~beginning~~Company’s ofunrealized ~~each~~losses ~~month we receive prefunds based~~ on ~~the~~investments ~~employee~~were ~~participants’~~deemed ~~monthly~~temporary ~~elections.~~in ~~These prefunds are maintained throughout the year by our FSA, HRA and commuter clients as benefits are provided under these programs~~nature.

The ~~Company~~following ~~offsets~~tables onsummarize athe ~~customer~~gross byunrealized ~~customer~~losses ~~basis non-trade accounts receivable~~ and ~~customer~~fair ~~obligation~~values ~~balances~~of ~~for~~investments ~~financial~~in ~~reporting~~an ~~presentation. Additionally,~~unrealized ~~the~~loss ~~Company~~position ~~offsets~~as ~~outstanding~~of ~~trade~~March 31, 2019 and ~~non-trade receivables~~December 31, ~~including any debit or credit memos~~2018, ~~against~~aggregated ~~any~~by ~~prefund~~investment ~~balances~~category ~~after~~and ~~plan~~length ~~year close or upon termination~~ of ~~services~~time ~~both~~that ~~based~~individual onsecurities ~~the~~have ~~completion~~been ofin a ~~full~~continuous ~~reconciliation~~unrealized ~~with~~loss ~~the~~position ~~customer~~(in thousands).

Recent Accounting Pronouncements



	Less than 12 months					12 months or greater					Total
March 31, 2019	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
Cash equivalents:
Commercial paper	$	52,233	$	(9	)	$	—	$	—		$	52,233	$	(9	)
Total cash equivalents in unrealized loss position	52,233		(9		)	—		—			52,233		(9		)

Short-Term Investments:
U.S. government securities	—		—			19,455		(45		)	19,455		(45		)
U.S. government agency securities	1,998		(2		)	8,801		(25		)	10,799		(27		)
Foreign government securities	—		—			2,514		(1		)	2,514		(1		)
Corporate debt securities	10,055		(23		)	71,741		(210		)	81,796		(233		)
Commercial paper	4,974		(1		)	—		—			4,974		(1		)
Asset-backed securities	3,884		(8		)	22,155		(80		)	26,039		(88		)
Total short-term investments in unrealized loss position	20,911		(34		)	124,666		(361		)	145,577		(395		)
Total cash equivalents and short-term investments in unrealized loss position	$	73,144	$	(43	)	$	124,666	$	(361	)	$	197,810	$	(404	)

Recently Adopted Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. We adopted ASC 606 on January 1, 2018 by applying the modified retrospective approach to all contracts that were not completed as of January 1, 2018. Results for the reporting period beginning January 1, 2018 are presented under ASC 606, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded an increase in total assets of $9.3 million and an increase in retained earnings of $6.9 million (net of tax effect) as of January 1, 2018 attributed to the deferral of commission costs. The tax impact resulted in an increase in deferred tax liabilities in the amount of $2.4 million with an offset to retained earnings upon adoption. See Note 3, "Revenue" for more details.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories are no longer be presented in the Statement of Cash Flows. The Company adopted this standard on January 1, 2018 using the retrospective method. This amendment did not have a material impact on the Company's condensed consolidated statements of income and balance sheets.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” This guidance principally affects accounting standards for equity investments, financial liabilities where the fair value option has been elected, and the presentation and disclosure requirements for financial instruments. Upon the effective date of the new guidance, all equity investments in unconsolidated entities, other than those accounted for using the equity method of accounting, will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification and therefore, no changes in fair value will be reported in other comprehensive income (loss) for equity securities with readily determinable fair values. The Company adopted this standard on January 1, 2018. This amendment did not have a material impact on the Company's condensed consolidated statements of income, balance sheet or cash flows.

In March 2016, the FASB issued Accounting Standard Update No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). The new guidance creates an exception under ASC 405-20, Liabilities-Extinguishments of Liabilities, to derecognize financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. The Company adopted this update on January 1, 2018. This amendment did not have a material impact on the Company's condensed consolidated statements of income, balance sheet or cash flows.

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash flows: Classification of Certain Cash Receipts and Cash Payments. The update provides specific guidance on a number of cash flow classification issues including contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees and separately identifiable cash flows and application of the predominance principle. The Company adopted this update on January 1, 2018. This update did not have a material impact on the Company's condensed consolidated statements of income, balance sheet or cash flows.



	Less than 12 months
December 31, 2018	Fair Value		Gross Unrealized Loss
Short-Term Investments:
U.S. government securities	$	22,440	$	(94	)
U.S. government agency securities	14,290		(56		)
Municipal bonds	3,544		(4		)
Foreign government securities	2,498		(6		)
Corporate debt securities	125,192		(685		)
Commercial paper	12,950		(4		)
Asset-backed securities	31,870		(184		)
Total short-term investments in unrealized loss position	$	212,784	$	(1,033	)

InRealized ~~May~~gains ~~2017,~~or ~~the~~losses ~~FASB~~on ~~issued~~marketable ~~ASU~~securities ~~2017-09,~~are ~~Compensation-Stock~~included ~~Compensation:~~in ~~Scope~~other ofincome ~~Modification Accounting~~ (~~"ASU 2017-09"~~expense)., ~~The~~net ~~update~~on ~~amends~~ the ~~scope~~Company’s ofcondensed ~~modification~~consolidated ~~accounting~~statements ~~for shared-based payment arrangements to specify that modification accounting would not be applicable if the fair value, vesting conditions and classification~~ of ~~the shared-based awards are the same immediately before and after the modification~~income. ~~The~~Gross ~~Company~~realized ~~adopted~~losses ~~this update~~ on ~~January~~marketable 1,securities ~~2018.~~for ~~This update did not have a material impact on~~ the ~~Company's~~three ~~condensed~~months ~~consolidated~~ended ~~statements of income~~March 31, ~~balance~~2019 ~~sheet~~and or2018 ~~cash~~were ~~flows~~not significant.

~~Recently~~The ~~Issued~~Company ~~Accounting~~uses ~~Pronouncements~~inputs such as actual trade data, benchmark yields, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its investments. There were no transfers between Level 1 and Level 2 fair value categories during the periods presented.

InThe ~~February~~following ~~2016,~~tables summarize the ~~FASB,~~estimated ~~issued~~amortized ~~ASU,~~cost ~~No.~~and ~~2016-02,~~fair ~~Leases~~value ~~(Topic 842), which requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle~~ of ~~whether or not~~ the ~~lease~~Company’s ismarketable ~~effectively~~securities ~~a financed purchase~~ by the ~~lessee.~~contractual ~~This~~maturity ~~classification~~date ~~will~~as ~~determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term~~ of ~~the~~March 31, ~~lease.~~2019 ~~A lessee is also required to record a right-of-use asset~~ and aDecember 31, ~~lease~~2018 ~~liability~~(in for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. thousands):

The Company will adopt the standard effective in the first quarter of 2019 and will not restate comparative periods upon adoption. The Company will elect a package of practical expedients for leases that commenced prior to January 1, 2019 and will not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. The Company will make an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term.



March 31, 2019	Amortized Cost		Fair Value
Due less than one year	$	248,374	$	248,066
Due in one to five years	35,661		35,683
Total	$	284,035	$	283,749

The Company currently expects that our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon its adoption of Topic 842, which will increase the total assets and total liabilities that were reported relative to such amounts prior to adoption. Refer to Note 14 for further information on operating lease commitments. The Company plans to adopt Topic 842 using the alternative modified retrospective approach with the cumulative effect of adoption recognized to retained earnings on January 1, 2019. The Company does not believe the new standard will have a material impact on the consolidated statements of income, nor will it have a notable impact on liquidity. The standard will also have no material impact on debt-covenant compliance under our current agreements.



December 31, 2018	Amortized Cost		Fair Value
Due less than one year	$	219,058	$	218,395
Due in one to five years	63,387		63,055
Total	$	282,445	$	281,450

InNote June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the "current expected credit loss model") that is based on expected losses rather than incurred losses. ASU 2016-13 is effective for annual reporting periods ending after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the timing and impact of adoption on the Company's consolidated financial statements.5 Receivables

InReceivables ~~January~~at ~~2017~~March 31, ~~the~~2019 ~~FASB issued ASU No. 2017-04, "Intangibles - Goodwill~~ and ~~Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments eliminate Step 2 from the goodwill impairment test. The annual~~December 31, or2018 ~~interim,~~were ~~goodwill~~comprised ~~impairment test is performed by comparing the fair value~~ of ~~a reporting unit with its carrying amount. An impairment charge should be recognized for~~ the ~~amount~~following by(in which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new standard is expected to be effective for fiscal years beginning after December 15, 2019, with early adoption thousands):



	March 31, 2019			December 31, 2018
Trade receivables	$	66,974		$	52,525
Unpaid amounts for benefit services	51,474			52,380
Receivables, gross	118,448			104,905
Less: allowance for doubtful accounts	(4,022		)	(3,608		)
Receivables, net	$	114,426		$	101,297

~~Table~~Note of6 Property ~~Contents~~and Equipment

~~Notes~~Property toand ~~Condensed~~equipment ~~Consolidated~~at ~~Financial~~March 31, ~~Statements~~2019 and December 31, 2018 were comprised of the following (~~continued~~in thousands):

(Unaudited)



	March 31, 2019			December 31, 2018
Computers and equipment	$	28,455		$	27,519
Software and software development costs	148,625			144,260
Furniture and fixtures	8,125			8,123
Leasehold improvements	28,895			28,883
	214,100			208,785
Less: accumulated depreciation and amortization	(139,722		)	(131,865		)
Property and equipment, net	$	74,378		$	76,920

~~permitted.~~As ~~The~~of ~~Company~~March 31, is2019 ~~currently~~and ~~evaluating~~December 31, ~~the~~2018, ~~timing~~total right-of-use ~~adoption;~~assets ~~however~~related to finance leases were $1.2 million and $1.2 million respectively, itand ~~does~~were ~~not~~classified ~~believe~~as ~~this~~computers ~~ASU~~and ~~will~~equipment. ~~have~~Accumulated adepreciation ~~material~~for ~~impact~~assets onunder ~~the~~finance ~~Company's~~leases ~~consolidated~~was ~~financial~~$0.9 ~~statements~~million and $0.8 million at March 31, 2019 and December 31, 2018 respectively.

~~In February 2018, the FASB issued ASU No. 2018-02, “Income~~The ~~Statement~~Company -capitalized ~~Reporting~~software ~~Comprehensive~~development ~~Income~~costs ~~(Topic 220) - Reclassification~~ of ~~Certain~~$4.4 ~~Tax~~million ~~Effects~~and ~~from~~$5.7 ~~Accumulated~~million ~~Other~~for ~~Comprehensive~~the ~~Income”.~~three ~~This~~months ~~standard~~ended ~~allows a~~March ~~reclassification~~31, ~~from~~2019 ~~accumulated~~and ~~other~~2018, ~~comprehensive~~respectively. ~~income~~Amortization toexpense ~~retained~~related ~~earnings~~to ~~for~~capitalized ~~stranded~~software ~~tax~~development ~~effects~~costs ~~resulting~~was ~~from~~$4.5 ~~the~~million ~~Tax Cuts~~ and ~~Jobs~~$3.6 ~~Act~~million ~~and requires certain disclosures about stranded tax effects and will be effective~~ for the ~~Company~~three ~~beginning~~months ~~January~~ended 1March 31, 2019 and ~~should~~2018, berespectively. ~~applied~~These ~~either~~costs inare ~~the~~included ~~period~~in ofamortization ~~adoption~~expense orin ~~retrospectively.~~the ~~Early~~condensed ~~adoption~~consolidated isstatements ~~permitted~~of income. ~~The~~At ~~Company~~March 31, is2019, ~~currently evaluating~~ the ~~timing~~unamortized ofsoftware ~~adoption;~~development ~~however,~~costs itincluded ~~does~~in ~~not~~property ~~believe~~and ~~this~~equipment ~~ASU~~in ~~will~~the ~~have~~condensed aconsolidated ~~material~~balance ~~impact~~sheets onwere ~~the~~$40.3 ~~Company's consolidated financial statements~~million.

InTotal ~~August~~depreciation ~~2018,~~expense ~~the~~plus ~~FASB~~amortization ~~issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The primary focus~~ of ~~ASU 2018-13 is~~ tocapitalized ~~improve~~software ~~the~~development ~~effectiveness~~costs, ~~of the disclosure requirements~~ for ~~fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general,~~ the ~~amendments~~three ~~in this~~months ~~standard are~~ended ~~effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December~~March 1531, 2019. ~~Early~~and ~~adoption~~2018 iswas ~~permitted~~$8.2 ~~The~~million ~~Company~~and is$6.8 ~~currently evaluating the timing of adoption; however~~million, ~~it does not believe this ASU will have a material impact on the Company's consolidated financial statements~~respectively.

InNote ~~November~~7 Goodwill 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses." ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. In general, the amendments in this standard are effective for public business entities that meet the definition of a SEC filer for fiscal years beginning after December 15, 2019, and ~~interim~~Intangible ~~periods within those fiscal years. The Company is currently evaluating the timing and impact of adoption.~~Assets

~~Note 2 Net Income per Share~~Goodwill

~~The~~There ~~following~~is ~~table~~no ~~sets~~change ~~forth~~in the ~~computation~~carrying amount of ~~basic~~goodwill ~~and~~for ~~diluted~~the ~~net~~three ~~income~~months ~~per~~ended ~~share (in thousands~~March 31, ~~except per share data):~~2019.

໿Intangible Assets

	Three months ended September 30,				Nine months Ended September 30,
	2018		2017		2018		2017
Numerator for basic net income per share:
Net income	$	2,124	$	9,063	$	24,067	$	45,398
Denominator for basic net income per share:
Weighted-average common shares outstanding	39,853		39,641		39,843		38,028
Basic net income per share	$	0.05	$	0.23	$	0.60	$	1.19
Numerator for diluted net income per share:
Net income	$	2,124	$	9,063	$	24,067	$	45,398
Denominator for diluted net income per share:
Weighted-average common shares outstanding	39,853		39,641		39,843		38,028
Dilutive stock options, restricted stock and performance restricted stock units and employee stock purchase plan shares	639		623		620		1,078
Diluted weighted-average common shares outstanding	40,492		40,264		40,463		39,106
Diluted net income per share	$	0.05	$	0.23	$	0.59	$	1.16

Acquired intangible assets at March 31, 2019 and December 31, 2018 were comprised of the following (in thousands):



	March 31, 2019							December 31, 2018
	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
Amortizable intangible assets:
Client/broker contracts and relationships	$	237,490	$	(114,920	)	$	122,570	$	237,430	$	(108,834	)	$	128,596
Trade names	3,880		(3,611		)	269		3,880		(3,587		)	293
Technology	14,646		(14,249		)	397		14,646		(14,009		)	637
Noncompete agreements	2,232		(2,102		)	130		2,232		(2,084		)	148
Favorable lease agreements	1,134		(738		)	396		1,134		(713		)	421
Total	$	259,382	$	(135,620	)	$	123,762	$	259,322	$	(129,227	)	$	130,095

Amortization of intangible assets for both the three months ended March 31, 2019 and 2018 was $6.4 million.

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

~~Stock options and restricted stock units to purchase common stock are not included in the computation of diluted earnings per share if their effect would be anti-dilutive.~~ The ~~Company~~estimated ~~excluded~~amortization ~~1.5~~expense ~~million and 1.0 million anti-dilutive share equivalents~~ in ~~the~~future ~~calculation~~periods ofat ~~diluted earnings per share for the three months ended September~~March 3031, ~~2018~~2019 ~~and~~is ~~2017,~~as ~~respectively;~~follows ~~and~~(in ~~1.6 million and 0.8 million anti-dilutive shares for the nine months ended September 30, 2018 and 2017, respectively.~~thousands):

໿

Note 3 Revenue



	As of March 31, 2019
Remainder of 2019	$	18,552
2020	22,758
2021	19,953
2022	17,518
2023	14,728
Thereafter	30,253
Total	$	123,762

OnNote ~~January~~8 Accounts 1,Payable 2018, we adopted ASC 606, applying the modified retrospective method to all contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period results are not adjusted and ~~continue~~Accrued to be reported in accordance with Topic 605, Revenue Recognition. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for our accounting policies applied to revenue recognition prior to adoption of ASC 606. We generally invoice our customers at the beginning of the term on a monthly basis with a term of net 30-60 days. We applied the practical expedient provided by ASC 606 and did not evaluate contracts of one year or less for the existence of a significant financing component. Our policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements. The primary impact of adopting ASC 606 relates to the deferral of incremental costs of obtaining customer contracts and the amortization of those costs over the period of benefit. We recorded an increase in total assets of $9.3 million and an increase in retained earnings of $6.9 million (net of tax effect) as of January 1, 2018. The tax impact resulted in an increase in deferred tax liabilities in the amount of $2.4 million with an offset to retained earnings upon adoption. The adoption of the preceding standard did not have a material impact on the Company's revenue for the three and nine months ended September 30, 2018.Expenses

~~Disaggregation~~Accounts payable and accrued expenses at March 31, 2019 and December 31, 2018 were comprised of ~~Revenue~~the following (in thousands):

The Company's primary categories of revenue are Healthcare, Commuter, COBRA and Other revenue and are disclosed in the condensed consolidated statements of income. The following table provides information about disaggregated revenue from contracts with customers by the nature of the products and services (in thousands):



	March 31, 2019		December 31, 2018
Payable to benefit providers and transit agencies	$	26,952	$	32,771
Accounts payable and accrued liabilities	26,911		30,148
Accrued compensation and related benefits	29,064		28,594
Other accrued expenses	4,885		5,834
Accounts payable and accrued expenses	$	87,812	$	97,347

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2018		2017		2018		2017
Benefit Administration Service and COBRA	$	95,212	$	99,482	$	295,911	$	305,405
Interchange	11,161		10,972		40,461		39,924
Other revenue	7,598		4,392		20,748		12,686
Total	$	113,971	$	114,846	$	357,120	$	358,015

Note 9 Long-term debt

~~Contract~~As ~~Balances~~of March 31, 2019 and December 31, 2018, long-term debt consisted of the following (in thousands):

We generally do not recognize revenue in advance of invoicing our customers, however, we record a receivable when revenue is recognized prior to payment and we have unconditional right to payment. Alternatively, when payment precedes the related services, we record a contract liability, or deferred revenue, until our performance obligations are satisfied. Our deferred revenue as of September 30, 2018 and December 31, 2017 was $8.3 million and $3.4 million, net of $1.0 million of contract assets, respectively. The balances related to cash received in advance for a certain interchange revenue arrangement, other up-front fees and other commuter deferred revenue. The Company expects to satisfy its remaining obligations for these arrangements.



	March 31, 2019			December 31, 2018
Revolving credit facility used	$	189,830		$	249,830
Less: Outstanding letters of credit	(2,830		)	(2,830		)
Outstanding revolving credit facility	187,000			247,000
Unamortized loan origination fees	(2,231		)	(2,307		)
Long-term debt	$	184,769		$	244,693

~~Contract~~On ~~Costs~~April 4, 2017, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with MUFG Union Bank, N.A., as administrative agent (“Agent”). The Credit Agreement amends and restates the Company’s existing Amended and Restated Credit Agreement, and increased the Company’s borrowing capacity under the revolving credit facility to $400.0 million, with a $15.0 million letter of credit sub-facility. The Credit Agreement contains an increase option permitting the Company, subject to certain conditions and requirements, to arrange with existing lenders and/or new lenders to provide up to an aggregate of $100.0 million in additional commitments. Loan proceeds may be used for general corporate purposes, including acquisitions permitted under the Credit Agreement. The Company may prepay loans under the Credit Agreement in whole or in part at any time without premium or penalty. The fees incurred in connection with this Credit Agreement are classified as a direct deduction from long-term debt in the condensed consolidated balance sheets. The Second Amended Credit Agreement contains financial and non-financial covenants including debt ratio and interest coverage ratio requirements. The Company is currently in compliance with all the covenants under the credit facility.

Contract costs relate to incremental costs of obtaining a contract with a customer. Contract costs, which primarily consist of deferred sales commissions, were $9.5 million and $9.3 million as of September 30, 2018 and January 1, 2018, respectively and are included in other assets on the condensed consolidated balance sheets. Amortization expense for the deferred costs was $0.7 million and $2.2 million for the three and nine months ended September 30, 2018. There was no impairment loss in relation to

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

In the ~~costs~~first ~~capitalized~~quarter ~~for~~of 2019, the ~~periods~~Company ~~presented~~entered into a Third Reporting Extension Agreement and paid the Agent $0.1 ~~Deferred~~million ~~contract~~to ~~costs~~extend ~~are~~the ~~amortized~~delivery date of the 2018 Annual Report on aForm ~~straight~~10-~~line~~K ~~basis~~to ~~over~~May 10, 2019. In the ~~period~~second quarter of ~~benefit~~2019, ~~which~~the isCompany ~~consistent~~entered ~~with~~into a Fourth Reporting Extension Agreement and paid the ~~pattern~~Agent of$0.1 ~~transfer~~million to extend the delivery date of the ~~good~~2018 orAnnual ~~service~~Report on Form 10-K to ~~which~~May 31, 2019. The fees incurred were added to loan financing fees to be amortized to interest expense over the ~~asset~~remaining ~~relates~~life of the loan. The 2018 Annual Report on Form 10-K was filed on May 29, 2019.

~~Performance~~As ~~Obligations~~of March 31, 2019, the Company had $187.0 million outstanding under the revolving credit facility and $210.0 million unused revolving credit facility still available to borrow under the Credit Agreement. As of March 31, 2019, the interest rate applicable to the revolving credit facility was 3.99% per annum.

~~During~~Note ~~the~~10 Commitments ~~three~~ and nine months ended September 30, 2018, the Company recognized revenue of ($0.1) million and ($0.4) million subject to changes in the estimated transaction price allocated to performance obligations satisfied in prior periods.Contingencies

~~The~~Operating following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period, in thousands. The Company applies the practical expedient to not disclose information about contracts with original expected durations of one year or less, amounts of variable consideration attributable to the variable consideration allocation exception, or contract renewals that are unexercised as of September 30, 2018 (in thousands):Leases

		2018				2019			2020			2021 and thereafter			Total
		$	142			571			571			1,716			$	3,000

The Company leases office space under noncancelable operating leases and leases various office equipment under finance lease arrangements. The Company’s leases have remaining lease terms of approximately 1 to 9 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The exercise of lease renewal options is at the Company’s sole discretion. The components of operating lease expense were as follows (in thousands):

Impacts on Financial Statements



	Three Months Ended March 31, 2019
Operating lease cost	$	1,814
Sublease income	(468		)
Net lease cost	$	1,346

InRent ~~accordance~~expense ~~with~~under ~~ASC~~operating ~~606,~~lease ~~the~~agreements ~~disclosure~~was of$1.5 ~~the~~million ~~impact~~for ofthe ~~adoption~~three tomonths ~~our~~ended ~~unaudited condensed consolidated statements of income and balance sheets was as follows (in thousands~~March 31, ~~except per share amounts):~~2018.

	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	As reported			Adjustments			Balance without adoption of ASC 606			As reported			Adjustments		Balance without adoption of ASC 606
Operating expenses:
Sales and marketing	$	17,920		$	(69	)	$	17,851		$	54,779		225		$	55,004
Total operating expenses	105,842			(69		)	105,773			317,694			225		317,919
Income from operations	8,129			69			8,198			39,426			(225	)	39,201
Income before income taxes	7,058			69			7,127			36,474			(225	)	36,249
Income tax provision	(4,934		)	(48		)	(4,982		)	(12,407		)	76		(12,331		)
Net income	2,124			21			2,145			24,067			(149	)	23,918
Net income per share:
Basic	$	0.05					$	0.05		$	0.60				$	0.60
Diluted	$	0.05					$	0.05		$	0.59				$	0.59

Amortization and interest expense related to finance leases were not material during the three months ended March 31, 2019.

As of March 31, 2019, weighted-average remaining lease term and discount rate for the Company’s operating leases are 5.1 years and 4.6%, respectively.

As of March 31, 2019, maturities of lease liabilities by fiscal year for the Company’s operating leases, excluding the future contractual sublease income of $7.8 million, are as follows (in thousands):



Years Ending December 31,	Operating Leases
2019 (remainder of year)	$	7,154
2020	9,700
2021	9,696
2022	6,536
2023	2,308
Thereafter	5,663
Total minimum lease payments	41,057
Less: imputed interest	(4,533		)
Present value of net minimum lease payments	36,524
Less: current portion	8,069
Long-term operating lease liabilities	$	28,455

~~Table~~Prior to the adoption of ~~Contents~~the new leases standard, future minimum lease payments under non-cancelable operating leases, excluding the contractual sublease income of $8.3 million which is expected to be received through February 2023, were as follows as of December 31, 2018 (in thousands):

Notes to Condensed Consolidated Financial Statements (continued)



Years Ending December 31,	Operating Leases
2019	$	9,479
2020	9,685
2021	9,661
2022	6,536
2023	2,308
Thereafter	5,663
Total future minimum lease payments	$	43,332

~~(Unaudited)~~Operating cash flows from operating leases were $2.3 million for the three months ended March 31, 2019.

	September 30, 2018
	As reported		Adjustments			Balance without adoption of ASC 606
Assets
Other assets	$	35,074	$	(7,104	)	$	27,970
Total assets	1,678,587		(7,104		)	1,671,483
Liabilities and Stockholders' Equity
Retained earnings	103,764		(7,104		)	96,660
Total stockholders' equity	$	659,896	$	(7,104	)	$	652,792

During the second quarter of 2019, the Company entered into an approximately 10-year lease agreement to occupy 150,000 square feet of new office space in Mesa, AZ. The base rent obligation is expected to commence in the second quarter of 2020. In addition to the base rent payments, the Company will be obligated to pay certain customary amounts for its share of operating expenses and tax obligation. The Company has the option to extend the term of the lease for two additional five-year periods.

~~Note~~Legal ~~4 Goodwill and Intangible Assets~~Matters

~~Goodwill~~The Company is pursuing affirmative claims against the Office of Personnel Management (OPM) to obtain payment for services provided by the Company between March 1, 2016 and August 31, 2016 pursuant to its contract with OPM for the Government’s Federal Flexible Account Program (“FSAFEDS”). The Company initially issued its invoice for these services in February 2017. On December 22, 2017, the Company received the Contracting Officer’s “final decision” refusing payment of the invoiced amount and otherwise denying the Company’s Certified Claim. As a result of this decision, and a related Certified Claim that OPM subsequently denied, on February 8, 2018, the Company filed an appeal to the Civilian Board of Contract Appeals (“CBCA”) against OPM for services provided by the Company between March 1, 2016 and August 31, 2016. On August 3, 2018, the Company also filed an appeal to the CBCA of OPM’s June 21, 2018 denial of a Request for Equitable Adjustment for extra work associated with a contract modification imposing new security and other requirements not part of the original scope of FSAFED’s contract work. In connection with the Company’s claims against OPM, OPM has also claimed that an erroneous statement in a certificate signed by a former executive officer constituted a violation of the False Claims Act and moved to dismiss part of the Company’s claim against OPM as a result. In March 2019, the Company filed a Motion for Summary Judgement with CBCA on the December 22nd denial by the OPM. OPM has moved to defer consideration of the Summary Judgment Motion to permit it further discovery. That Motion has been briefed and the case is on hold pending a ruling by the CBCA which could be handed down any day. In order to accelerate resolution of all matters before the CBCA, the Company’s appeal of the June 21st denial by the OPM was withdrawn on April 9, 2019. The remaining claim related to the OPM’s December 22nd denial, valued at approximately $6.2 million, is scheduled to go to trial in July 2019 if the pending Summary Judgment is denied by the CBCA. As with all legal proceedings, no assurance can be provided as to the outcome of these matters or if the Company will be successful in recovering the full claimed amount.

~~There~~On isMarch no9, ~~change~~2018, a putative class action was filed in the ~~carrying~~United ~~amount~~States ofDistrict ~~goodwill~~Court for the ~~three~~Northern District of California (the “Securities Class Action”). On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs asserting claims under Sections 10(b) and ~~nine~~20(a) ~~months~~of ~~ended~~the ~~September 30~~Securities Exchange Act of 1934, as amended, against the Company, its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018. The complaint also alleges claims under the Securities Act of 1933, as amended, arising from the Company’s June 19, 2017 common stock offering against those same defendants, as well as the members of its Board of Directors at the time of that offering and the underwriters of the offering.

~~Intangible~~On ~~Assets~~June 22, 2018 and September 6, 2018, two derivative lawsuits were filed against certain of our officers and directors and the Company (as nominal defendant) in the Superior Court of the State of California, County of San Mateo. The actions were consolidated. On July 23, 2018, a similar derivative lawsuit was filed against certain of our officers and directors and the Company (as nominal defendant) in the United States District Court for the Northern District of California (together, the “Derivative Suits”).

Acquired intangible assets at September 30, 2018 and December 31, 2017 were comprised of the following (in thousands):

	September 30, 2018						December 31, 2017
	Grosscarryingamount		Accumulatedamortization		Net		Grosscarryingamount		Accumulatedamortization		Net
Amortizable intangible assets:
Client/broker contracts and relationships	$	237,431	$	102,756	$	134,675	$	237,221	$	84,581	$	152,640
Trade names	3,880		3,563		317		3,880		3,492		388
Technology	14,646		13,769		877		14,646		13,047		1,599
Noncompete agreements	2,232		2,066		166		2,232		2,013		219
Favorable lease arrangements	1,134		687		447		1,134		611		523
Total	$	259,323	$	122,841	$	136,482	$	259,113	$	103,744	$	155,369

Amortization of intangible assets totaled $6.4 million and $6.4 million for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, amortization expense of intangible assets was $19.1 million and $19.4 million, respectively.

The estimated amortization expense in future periods at September 30, 2018 is as follows (in thousands):

	As of September 30, 2018
Remainder of 2018	$	6,369
2019	24,914
2020	22,749
2021	19,945
2022	17,509
Thereafter	44,996
Total	$	136,482

~~Table~~The Derivative Suits purport to allege claims related to breaches of ~~Contents~~fiduciary duties, waste of corporate assets, and unjust enrichment. In addition, the complaint in District Court includes a claim for abuse of control, and the complaint in Superior Court includes a claim to require the Company to hold an annual shareholder meeting. The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Class Action described above. The plaintiffs seek unspecified damages and fees and costs. In addition, the complaint in the Superior Court seeks for us to provide past operational reports and financial statements, to publish timely and accurate operational reports and financial statements going forward, to hold an annual shareholder meeting, and to take steps to improve its corporate governance and internal procedures.

~~Notes~~Plaintiffs toin ~~Condensed~~the Superior Court action filed a Consolidated ~~Financial~~Complaint ~~Statements~~on May 2, 2019. As stipulated by the parties, and approved by the District Court, the District Court action is stayed. The parties in the District Court action are to notify the District Court within 15 days of (~~continued~~1) the dismissal of the Securities Class Action, (2) the denial of defendants’ motion(s) to dismiss, or (3) a party giving notice that they no longer consent to the voluntary stay.

~~(Unaudited)~~The Company voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the restatement and independent investigation. The Company is providing information and documents to the SEC and will continue to cooperate with the SEC’s investigation into these matters. The U.S. Attorney’s Office for the Northern District of California also opened an investigation. The Company has provided documents and information to the U.S. Attorney’s Office and will continue to cooperate with any inquiries by the U.S. Attorney’s Office regarding the matter.

~~Note~~The ~~5 Investments~~Company records a provision for contingent losses when it is both probable that a liability has been incurred and ~~Fair~~the ~~Value~~amount ~~Measurements~~of the loss can be reasonably estimated. Based on currently available information, the Company does not believe that any additional liabilities relating to other unresolved matters are probable or that the amount of any resulting loss is estimable. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, the Company will provide disclosure to that effect. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods.

The ~~following~~Company ~~table~~is ~~summarizes~~involved ~~the~~in ~~Company's~~various ~~investments~~other inlitigation, ~~marketable~~governmental ~~securities~~proceedings and ~~fair~~claims, ~~value~~not ~~measurements~~described byabove, ~~investment~~that ~~category~~arise ~~reported~~in asthe ~~cash~~normal ~~equivalents~~course of business. While it is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, the Company believes, based on current knowledge and ~~short-term~~the ~~investments~~advice asof atcounsel, ~~September 30~~that such litigation, ~~2018~~proceedings ~~(in~~and ~~thousands):~~claims will not have a material impact on the Company’s financial position or results of operations.

	Carrying Amount		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Level 1		Level 2
Cash equivalents:
Money market funds	$	1,054	$	—	$	—		$	1,054	$	1,054	$	—
Commercial paper	22,428		—		(4		)	22,424		—		22,424
Municipal bonds	2,519		—		—			2,519		—		2,519
Total cash equivalents	$	26,001	$	—	$	(4	)	$	25,997	$	1,054	$	24,943
Short-Term Investments:
U.S. government securities	$	28,967	$	—	$	(144	)	$	28,823	$	28,823	$	—
U.S. government agency securities	14,315		—		(85		)	14,230		—		14,230
Municipal bonds	4,961				(14		)	4,947		—		4,947
Foreign government securities	5,020		—		(15		)	5,005		—		5,005
Corporate debt securities	145,074		47		(684		)	144,437		—		144,437
Commercial paper	21,076		—		(6		)	21,070		—		21,070
Certificates of deposit	1,258		—		—			1,258		—		1,258
Asset-backed securities	34,253		3		(205		)	34,051		—		34,051
Total short-term investments	$	254,924	$	50	$	(1,153	)	$	253,821	$	28,823	$	224,998
Total cash equivalents and short-term investments	$	280,925	$	50	$	(1,157	)	$	279,818	$	29,877	$	249,941

Note 11 Stockholders’ Equity

~~The~~Share ~~following~~Repurchase table summarizes the Company's investments in marketable securities and fair value measurements by investment category reported as cash equivalents and short-term investments as at December 31, 2017 (in thousands):Program

On August 6, 2015, the Company’s Board of Directors authorized a $100 million stock repurchase program for 3 years which commenced on November 5, 2015 and expired on November 4, 2018. There were no shares of common stock repurchased during the three months ended March 31, 2018.

On March 11, 2019, the Company’s Board of Directors authorized a $150 million stock repurchase program for 3 years which commenced on March 13, 2019 and expires on March 12, 2022. Stock repurchases may be made from time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, corporate and regulatory requirements, restrictions under its debt obligations and other market and economic conditions. No shares of common stock have been repurchased under this program to date.

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

	Carrying Amount		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Level 1		Level 2
Cash equivalents:
Money market funds	$	58,953	$	—	$	—		$	58,953	$	58,953	$	—
Commercial paper	21,930		—		(3		)	21,927		—		21,927
Total cash equivalents	$	80,883	$	—	$	(3	)	$	80,880	$	58,953	$	21,927
Short-Term Investments:
U.S. government securities	$	17,472	$	—	$	(41	)	$	17,431	$	17,431	$	—
U.S. government agency securities	11,540		—		(30		)	11,510		—		11,510
Municipal bonds	6,974		2		(8		)	6,968		—		6,968
Foreign government securities	7,499		—		(27		)	7,472		—		7,472
Corporate debt securities	105,144		3		(273		)	104,874		—		104,874
Commercial paper	30,798		1		(9		)	30,790		—		30,790
Certificates of deposit	1,255		—		—			1,255		—		1,255
Asset-backed securities	15,310		—		(76		)	15,234		—		15,234
Total short-term investments	$	195,992	$	6	$	(464	)	$	195,534	$	17,431	$	178,103
Total cash equivalents and short-term investments	$	276,875	$	6	$	(467	)	$	276,414	$	76,384	$	200,030

Note 12 Employee Benefit Plans

As of September 30, 2018, the Company had no investments that were in an unrealized loss position for a period of twelve months or greater and have determined that the gross unrealized losses on investments are temporary in nature.

Realized gains and losses on marketable securities are included in other income (expense) on the Company's consolidated statements of income. Gross realized gains and losses on marketable securities for the three and nine months ended September 30, 2018 were not significant.

The Company uses inputs such as actual trade data, benchmark yields, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its investments. There were no transfers between Level 1 and Level 2 fair value categories during the periods presented.

The following table summarizes the estimated amortized cost and fair value of the Company's marketable securities by the contractual maturity date as at September 30, 2018 (in thousands):

	Amortized Cost		Fair Value
Due less than one year	$	193,309	$	192,753
Due in one to five years	87,616		87,065
Total	$	280,925	$	279,818

The following table summarizes the estimated amortized costs and fair value of the Company's marketable securities by the contractual maturity date as at December 31, 2017 (in thousands):

	Amortized Costs		Fair Value
Due less than one year	$	157,651	$	157,573
Due in one to five years	119,224		118,841
Total	$	276,875	$	276,414

Table of Contents

Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Note 6 Receivables

Receivables at September 30, 2018 and December 31, 2017 were comprised of the following (in thousands):

	September 30, 2018			December 31, 2017
Trade receivables	$	52,565		$	58,067
Unpaid amounts for benefit services	35,580			52,054
Receivables, gross	88,145			110,121
Less: allowance for doubtful accounts	(3,590		)	(2,574		)
Receivables, net	$	84,555		$	107,547

Note 7 Property and Equipment

Property and equipment at September 30, 2018 and December 31, 2017 were comprised of the following (in thousands):

	September 30, 2018			December 31, 2017
Computers and equipment	$	26,803		$	22,702
Software and software development costs	137,986			120,278
Furniture and fixtures	8,089			7,754
Leasehold improvements	28,881			25,097
	$	201,759		$	175,831
Less: accumulated depreciation and amortization	(124,707		)	(107,089		)
Property and equipment, net	$	77,052		$	68,742

As of September 30, 2018 and December 31, 2017, total assets under capital lease obligations were $1.4 million and $1.7 million respectively, and were classified as computers and equipment. Accumulated depreciation for assets under capital lease obligations was $0.9 million and $1.1 million as at September 30, 2018 and December 31, 2017 respectively.

The Company capitalized software development costs of $5.4 million and $5.8 million for the three months ended September 30, 2018 and 2017, respectively; and $17.0 million and $15.4 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense related to capitalized software development costs was $4.1 million and $3.0 million for the three months ended September 30, 2018 and 2017, respectively; and $11.6 million and $8.7 million for the nine months ended September 30, 2018 and 2017, respectively. These costs are included in amortization expense in the condensed consolidated statements of income. At September 30, 2018, the unamortized software development costs included in property and equipment in the condensed consolidated balance sheets were $39.9 million.

Total depreciation expense plus amortization of capitalized software development costs, for the three months ended September 30, 2018 and 2017 was $7.9 million and $6.0 million, respectively; and $22.0 million and $16.8 million for the nine months ended September 30, 2018 and 2017, respectively.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Note 8 Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at September 30, 2018 and December 31, 2017 were comprised of the following (in thousands):

	September 30, 2018		December 31, 2017
Payable to benefit providers and transit agencies	25,407		32,469
Accounts payable and accrued liabilities	23,471		23,788
Accrued compensation and related benefits	31,282		25,921
Other accrued expenses	6,210		5,275
Deferred revenue	6,686		2,524
Accounts payable and accrued expenses	$	93,056	$	89,977

Note 9 Long-term debt

As of September 30, 2018 and December 31, 2017, long-term debt consisted of the following (in thousands):

	September 30, 2018			December 31, 2017
Revolving credit facility used	$	249,830		$	249,830
Less: Outstanding letters of credit	(2,830		)	(2,830		)
Outstanding revolving credit facility	247,000			247,000
Unamortized loan origination fees	(2,186		)	(2,085		)
Long-term debt	$	244,814		$	244,915

On April 4, 2017, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with MUFG Union Bank, N.A., as administrative agent (“Agent”). The Credit Agreement amends and restates the Company’s existing Amended and Restated Credit Agreement, and increased the Company's borrowing capacity under the revolving credit facility to $400.0 million, with a $15.0 million letter of credit sub-facility. The Credit Agreement contains an increase option permitting the Company, subject to certain conditions and requirements, to arrange with existing lenders and/or new lenders to provide up to an aggregate of $100.0 million in additional commitments. Loan proceeds may be used for general corporate purposes, including acquisitions permitted under the Credit Agreement. The Company may prepay loans under the Credit Agreement in whole or in part at any time without premium or penalty. The fees incurred in connection with this Credit Agreement are classified as a direct deduction from long-term debt in the condensed consolidated balance sheets.

The loans bear interest, at the Company’s option, at either (i) a London Interbank Offered Rate (LIBOR) determined in accordance with the Credit Agreement, plus a margin ranging from 1.25% to 2.25%, or (ii) a base rate determined in accordance with the Credit Agreement, plus a margin ranging from 0.25% to 1.25%, in either case with such margin determined based on the Company’s consolidated leverage ratio for the preceding four fiscal quarter period. Interest is due and payable in arrears quarterly for base rate loans and at the end of an interest period for LIBOR rate loans. Principal, together with all accrued and unpaid interest, is due and payable on April 4, 2022. The Company elected option (i) and, as of September 30, 2018, the interest rate applicable to the revolving credit facility was 3.63%.

The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets. All of the Company’s existing and future material subsidiaries are required to guarantee its obligations under the Credit Agreement. The guarantees by future material subsidiaries are and will be secured by substantially all of the assets of such subsidiaries.

The Credit Agreement contains financial and non-financial covenants including debt ratio and interest coverage ratio requirements. The Company is currently in compliance with all the covenants under the credit facility.

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

On April 5, 2018, the Company's Board of Directors concluded the previously issued financial statements for (i) the quarterly periods ended September 30, June 30 and March 31, 2017, (ii) the annual period ended December 31, 2016 and (iii) the quarterly periods ended September 30 and June 30, 2016 (collectively, the “Non-Reliance Periods”) should be restated and should no longer be relied upon. On March 22, 2018 the Company entered a “First Reporting Extension” Agreement and on June 25, 2018 entered a “Second Reporting Extension” Agreement. These agreements are amendments to the Credit Agreement dated April 4, 2017 and provide credit accommodations to the Company in the form of modification of the reporting and Compliance Certificates. In 2018, the Company paid the Agent $0.8 million to extend the delivery date of the delinquent financial statements to March 16, 2019 pursuant to the Reporting Extension Agreement. In March 2019, the Company entered into a Third Reporting Extension Agreement and paid the Agent $0.1 million to extend the delivery date of any remaining delinquent financial statements to May 10, 2019.

As of September 30, 2018, the Company had $247.0 million outstanding under the revolving credit facility and $150.2 million unused revolving credit facility still available to borrow under the Credit Agreement.

The credit facility contains customary events of default including, among others, payment defaults, covenant defaults, inaccuracy of representations and warranties, cross-defaults to other material indebtedness, judgment defaults, a change of control default and bankruptcy, and insolvency defaults. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default under the loan agreement at a per annum rate of interest equal to 2.00% above the applicable interest rate. Upon an event of default, the lenders may terminate the commitments, declare the outstanding obligations payable by the Company to be immediately due and payable, and exercise other rights and remedies provided for under the credit facility.

Note 10 Organizational Efficiency Plan

In 2015, the Company initiated the organizational efficiency plan and continued to evaluate ways to improve business processes to ensure that operations align with its strategy and vision for the future. During the three and nine months ended September 30, 2018, the Company incurred $0.7 million and $3.5 million in employee termination or facility closure costs, respectively. During the three and nine months ended September 30, 2017, the Company incurred $(0.1) million and $1.5 million in employee termination or facility closure costs, respectively.

Note 11 Employee Benefit Plans

Stock-based compensation

Stock-based compensation is classified in the condensed consolidated statements of income in the same expense line items as cash compensation. Amounts recorded as expense in the condensed consolidated statements of income were as follows (in thousands):

		Three Months Ended September 30,					Nine Months Ended September 30,
	Three Months Ended March 31,
		2018			2017		2018		2017
	2019			2018
Cost of revenues	$	$525	~~339~~	$	$1,667	~~1,824~~	$	~~2,666~~	$	~~5,571~~
Technology and development	515	~~381~~		575	~~510~~		~~1,542~~		~~1,721~~
Sales and marketing	631	~~449~~		978	~~702~~		~~2,199~~		~~2,111~~
General and administrative	1,233	~~4,748~~		4,073	~~4,141~~		~~8,392~~		~~8,585~~
Total	$	$2,904	~~5,917~~	$	$7,293	~~7,177~~	$	~~14,799~~	$	~~17,988~~

(a) Employee Stock Option Plan

In May 2010, the Company adopted the 2010 Equity Incentive Plan ("“2010 Plan"”). Under the 2010 Plan, the Company can grant share-based awards to all employees, including executive officers, outside consultants and non-employee directors. Options under 2010 Plan generally has a term of 10 years and vest over 4 years with 25% vesting after one year of service and monthly vesting over the remaining period. As of ~~September~~March 3031, ~~2018~~2019, the 2010 Plan has a total of 5.54 million common stock shares available for issuance.

24There were no stock options granted in the first quarter of 2018 or 2019.

~~Table~~Stock ofoption ~~Contents~~activity for the three months ended March 31, 2019 was as follows (shares in thousands):

Notes to Condensed Consolidated Financial Statements (continued)



	Shares		Weighted-average exercise price		Remaining contractual term (in years)	Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2018	2,219		$	46.50	5.11	$	4,321
Granted	—
Exercised	—
Forfeited and cancelled	(4	)	$	53.47
Outstanding as of March 31, 2019	2,215		$	46.49	4.82	$	8,892
Vested and expected to vest at March 31, 2019	2,189		$	46.32	4.79	$	8,895
Exercisable at March 31, 2019	1,914		$	44.16	4.43	$	8,895

~~(Unaudited)~~As of March 31, 2019, there was $6.3 million of total unrecognized stock-based compensation expense associated with stock options which will be recognized over a weighted-average period of approximately 1 year. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

The following table summarizes the weighted-average fair value of stock options granted:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Stock options granted (in thousands)	—		63		—		608
Weighted-average fair value at date of grant	$	—	$	23.27	$	—	$	26.36

Stock option activity for the nine months ended September 30, 2018 was as follows (shares in thousands):

	Shares		Weighted-averageexercise price		Remainingcontractual term(in years)	Aggregateintrinsic value(in thousands)
Outstanding at December 31, 2017	2,478		$	47.24	7.22	$	42,324
Granted	—		—
Exercised	(54	)	26.10
Forfeited and cancelled	(195	)	60.71
Outstanding as of September 30, 2018	2,229		$	46.56	5.36	$	12,383
Vested and expected to vest at September 30, 2018	2,191		$	46.34	5.31	$	12,387
Exercisable at September 30, 2018	1,783		$	43.29	4.76	$	12,386

As of September 30, 2018, there was $9.2 million of total unrecognized stock-based compensation expense associated with stock options which will be recognized over a weighted-average period of approximately 2 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

(b) Restricted Stock Units

The Company grants restricted stock units ("“RSU"”) to certain employees, officers, and directors under the 2010 Plan. Restricted stock units vest upon performance-based, ~~market-based,~~ or service-based criteria.

~~In the third quarter of 2018 and 2017 the Company granted no performance-based restricted stock units.~~ During the ~~nine~~three months ended ~~September 30~~March 31, ~~2018,~~2019 ~~the company granted no performance-based restricted stock units,~~ and ~~in the nine months ended September 30~~2018, ~~2017,~~ the ~~Company~~company granted azero ~~total of 343,000 of~~ performance-based restricted stock units ~~to certain executive officers~~. Performance-based restricted stock units are typically granted such that they vest upon the achievement of certain revenue growth rates and other financial metrics during a specified performance period for which participants have the ability to receive up to 200% of the target number of shares originally granted, depending on terms of the grant agreement.

Stock-based compensation expense related to restricted stock units was $1.1 million and $4.1 million for the three months ended September 30, 2018 and 2017, respectively; and $4.1 million and $9.1 million for the nine months ended September 30, 2018 and 2017, respectively. Total unrecorded stock-based compensation expense at September 30, 2018 associated with restricted stock units was estimated at $12.2 million, which is expected to be recognized over a weighted-average period of approximately 1 year.21

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Notes to Condensed Consolidated Financial Statements (continued)

(Unaudited)

Stock-based compensation expense related to restricted stock units was $1.5 million and $4.1 million for the three months ended March 31, 2019 and 2018, respectively. Total unrecorded stock-based compensation expense at March 31, 2019 associated with restricted stock units was estimated at $7.9 million, which is expected to be recognized over a weighted-average period of approximately 1 year.

The following table summarizes information about restricted stock units issued to officers, directors and employees under the 2010 Plan (shares in thousands):

	(Shares in thousands)				Weighted-average grant date fair value
					Weighted-average grant date fair value
	Service-based RSUs		Performance-based RSUs		Service-based RSUs		Performance-based RSUs
Unvested at December 31, 2017	304		725		$	61.61	$	60.21
Unvested at December 31, 2018	164		200		$	61.79	$	59.76
Granted	—		—		—		—
Vested	(7311	)	(~~221~~88	)	~~58.67~~$	55.86	~~58.45~~$	43.63
Forfeited and cancelled	(314	)	~~(304~~—	)	~~63.27~~$	60.58	~~61.65~~$	—
Unvested at September 30, 2018	200		200		$	62.42	$	59.98
Unvested at March 31, 2019	149		112		$	62.26	$	72.30

~~Note~~As ~~12 Stockholders~~of March 31, 2019, there were 0.1 million and 0.4 million cumulative vested Service-based and Performed-based RSUs which were not yet released due to the Company’s ~~Equity~~delay in filing its SEC reports.

Share Repurchase Program

On August 6, 2015, the Company's Board of Directors authorized a $100 million stock repurchase program for 3 years which commenced on November 5, 2015 and expires on November 4, 2018. Repurchases made under this program may be made in the open market as the Company deems appropriate and market conditions allow. There were no shares of common stock repurchased during the three and nine months ended September 30, 2018 and 2017. In August 2017, the Company repurchased 134,900 shares of its common stock at an average price of $58.82 per share for a total cost of $7.9 million. As of September 30, 2018, the Company had $77.7 million available for future purchases under the stock repurchase program.

Note 13 Income Taxes

The Company reports income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable. The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Presently, there are no income tax examinations on-going in the jurisdictions where the Company operates.

The Company'’s effective tax rate was 6925.9% and 3620.6% for the three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017, respectively and 34.0% and 9.1% for the nine months ended September 30,~~ 2018 ~~and 2017~~, respectively. The income tax provision for the three months ended ~~September~~March 3031, ~~2018~~2019 and ~~2017~~2018 was $41.94 million and $5.2 ~~million, respectively, and $12~~.49 million ~~and $4.6 million for the nine months ended September 30~~, ~~2018 and 2017,~~ respectively.

As of ~~September~~March 3031, ~~2018~~2019, the Company remains in a net deferred tax asset position. The realization of the Company’s deferred tax assets depends primarily on its ability to generate sufficient U.S. taxable income in future periods. The amount of deferred tax assets considered realizable may increase or decrease in subsequent quarters as management reevaluates the underlying basis for the estimates of future domestic taxable income.

Note 14 ~~Commitments~~ Subsequent ~~and Contingencies~~Events

(On June 27, 2019, the Company announced that it entered into a) ~~Capital~~definitive ~~Lease~~agreement ~~Obligations~~under which HealthEquity, Inc. will acquire all of its issued and outstanding shares of common stock for $51.35 per share in cash.

~~The~~On ~~Company~~May ~~leases~~23, ~~equipment~~2019, ~~under~~each ~~capital lease obligations that expire at various expiration dates through 2022. Future minimum lease payments under capital lease obligations as~~ of ~~September 30,~~our ~~2018~~executive ~~are~~officers ~~$0.5~~(other ~~million.~~than ~~The~~our ~~Company~~Executive ~~recorded~~Chairman ~~current~~ and ~~long-term~~CEO) ~~portions~~entered ofinto ~~capital~~a ~~lease~~change ~~obligations~~in ~~under~~control ~~other current liabilities~~ and ~~non-current~~severance ~~liabilities, respectively, in the consolidated balance sheets~~agreement.

~~(b)~~In ~~Operating~~June ~~Leases~~2019, the Board of Directors approved a grant of 728,297 RSUs to directors, executives, and employees of the Company.

The Company leases office space and equipment under noncancelable operating leases with various expiration dates through 2028. Future minimum lease payments under noncancelable operating leases, excluding the contractual sublease income of $8.7 million, are as follows (in thousands):22

	As of September 30, 2018
Remainder of 2018	$	2,310
2019	9,518
2020	9,720
2021	9,689
2022	6,536
Thereafter	7,971
Total future minimum lease payments	$	45,744

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26Notes to Condensed Consolidated Financial Statements (continued)

Rent expense for the three months ended September 30, 2018 and 2017 was $1.9 million and $1.9 million, respectively, and $5.9 million and $5.8 million for the nine months ended September 30, 2018 and 2017, respectively. Sublease income for the three and nine months ended September 30, 2018 was $0.5 million and $1.4 million, respectively. There was $0.5 million and $1.2 million sublease income recognized for the same periods in 2017, respectively.(Unaudited)

The Company is pursuing affirmative claims against the OPM to obtain payment for services provided by the Company between March 1, 2016 and August 31, 2016 pursuant to our contract with OPM for the Government’s Federal Flexible Account Program (“FSAFEDS”). The Company initially issued its invoice for these services in February 2017. On December 22, 2017, the Company received the Contracting Officer’s “final decision” refusing payment of the invoiced amount and otherwise denying the Company’s Certified Claim. As a result of this decision, and a related Certified Claim that OPM subsequently denied, on February 8, 2018, we filed an appeal to the Civilian Board of Contract Appeals (“CBCA”) against OPM for services provided by the Company between March 1, 2016 and August 31, 2016. On August 3, 2018, we filed an appeal to the CBCA of OPM’s June 21, 2018 denial of a Request for Equitable Adjustment for extra work associated with a contract modification imposing new security and other requirements not part of the original scope of FSAFED’s contract work. The aggregate amount of our claims is approximately $9.1 million. The cases have been consolidated and discovery is ongoing.

There have been multiple discovery motions, as well as motion to dismiss the claim we filed on August 3, 2018 which has been fully briefed and is awaiting a decision by the CBCA. The cases had been set for a hearing on the merits on April 24, 2019. However, because of the recent partial Government shutdown, the trial date has been postponed and has been tentatively scheduled for mid-June 2019. In connection with the Company’s claims against OPM, OPM has also claimed that an erroneous statement in a certificate signed by a former executive officer constituted a violation of the False Claims Act, and has moved to dismiss part of our claim against OPM as a result. As with all legal proceedings, no assurance can be provided as to the outcome of these matters or if we will be successful in recovering the full claimed amount.

On March 9, 2018, a putative class action - captioned Government Employees’ Retirement System of the Virgin Islands v. WageWorks, Inc., et al., No. 4:18-cv-01523-JSW - was filed in the United States District Court for the Northern District of California (the “Securities Class Action”) against the Company, our former Chief Executive Officer, and our former Chief Financial Officer. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on behalf of persons and entities that acquired WageWorks securities between May 6, 2016 and March 1, 2018, and alleges, among other things, that the defendants issued false and misleading financial statements. The plaintiffs seek unspecified damages, fees, interest, and costs. The Company believes that the claims are without merit. On August 7, 2018, the Court entered an order granting the motion of the Public Pension Group, consisting of Public Employees’ Retirement System of Mississippi, the Government Employees’ Retirement System of the Virgin Islands, and the New Mexico Public Employees Retirement Association of New Mexico, to be lead plaintiff. Under the schedule stipulated by the parties, and approved by the Court, lead plaintiff will file its consolidated amended complaint no later than forty-five (45) days following issuance of the Company’s Restatement.

On June 22, 2018 and September 6, 2018, two derivative lawsuits were filed against certain of our officers and directors and the Company (as nominal defendant) in the Superior Court of the State of California, County of San Mateo. Pursuant to the parties’ stipulation, which was approved by the Superior Court, the actions were consolidated. On July 23, 2018, a similar derivative lawsuit was filed against certain of our officers and directors and the Company (as nominal defendant) in the United States District Court for the Northern District of California (together, the “Derivative Suits”). The Derivative Suits purport to allege claims related to breaches of fiduciary duties, waste of corporate assets, and unjust enrichment. In addition, the complaint in District Court includes a claim for abuse of control, and the complaint in Superior Court includes a claim to require the Company to hold an annual shareholder meeting. The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Class Action described above. The plaintiffs seek unspecified damages and fees and costs. In addition, the complaint in the Superior Court seek for us to provide past operational reports and financial statements, to publish timely and accurate operational reports and financial statements going forward, to hold an annual shareholder meeting, and to take steps to improve its corporate governance and internal procedures.

Under the schedule stipulated by the parties, and approved by the Superior Court, the plaintiff in the Superior Court action will file its Consolidated Complaint within 45 days from the date we issue our Restatement. As stipulated by the parties,

and approved by the District Court, the District Court action is stayed. The parties in the District Court action are to notify the District Court within 15 days of (1) the dismissal of the Securities Class Action, (2) the denial of defendants' motion(s) to dismiss, or (3) a party giving notice that they no longer consent to the voluntary stay.

From time to time, the Company may become involved in legal proceedings, claims and litigation arising in the ordinary course of business.

The Company voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the restatement and independent investigation. The Company is providing information and documents to the SEC and will continue to cooperate with the SEC’s investigation into these matters. The U.S. Attorney’s Office for the Northern District of California also opened an investigation. The Company has provided documents and information to the U.S. Attorney’s Office and will continue to cooperate with any inquiries by the U.S. Attorney’s Office regarding the matter.

The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on currently available information, the Company does not believe that any additional liabilities relating to other unresolved matters are probable or that the amount of any resulting loss is estimable. However, litigation is subject to inherent uncertainties and the Company's view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company's financial position, results of operations or cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods.

Note 15 Subsequent Events

On October 15, 2018, Mr. Ismail Dawood was appointed Chief Financial Officer of the Company after previously serving as the Interim Chief Financial Officer and principal financial officer since April 9, 2018, and on January 14, 2019, Mr. John G. Saia joined the Company as Senior Vice President, General Counsel and Corporate Secretary.

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 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 tread analysis, expectations about seasonality, opportunities for portfolio purchases, acquisitions, channel partnerships and carrier relationships, 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 in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, wethe ~~undertake~~Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such events.

Overview

We are a leader in administering Consumer-Directed Benefits ("“CDBs"”), which empower employees to ~~save~~lower ~~money~~their onhealthcare ~~taxes~~related expenditures while also providing corporate tax advantages for employers. We are solely dedicated to administering CDBs, including pre-tax spending accounts such as Health Savings Accounts ("“HSAs"”), health and dependent care Flexible Spending Accounts ("“FSAs"”), Health Reimbursement Arrangements ("“HRAs"”), as well as Commuter Benefit Services, including transit and parking programs, wellness programs, Consolidated Omnibus Budget Reconciliation Act ("“COBRA"”), and other employee benefits in the United States.

We deliver ~~our~~ CDB programs through a highly scalable delivery model that employer clients and their employee participants may access through a standard web browser on any internet-enabled device, including computers, smart phones, and other mobile devices such as tablet computers. Our on-demand delivery model eliminates the need for our employer clients to install and maintain hardware and software in order to support CDB programs and enables us to rapidly implement product enhancements across our entire user base.

Our CDB programs assist employees and their families in saving money by using pre-tax dollars to pay for certain portions of their healthcare, dependent care, and commuter expenses. Employers financially benefit from our programs through reduced payroll taxes, the benefits of which are realized even after factoring in our fees. Under ~~our~~the FSA, HSA, and commuter programs, employee participants contribute funds from their pre-tax income to pay for qualified out-of-pocket healthcare expenses, not fully covered by insurance, such as co-pays, deductibles, and over-the-counter medical products or for commuting costs.

Our services are priced based on the estimated number and types of claims, whether payment processing and client support activities will be provided within or outside of the United States, the estimated number of calls to our customer support center, and any specific client requirements. In addition, we derive a portion of our revenues from interchange fees that we receive when employee participants use the prepaid debit cards we provide to them for healthcare and commuter expenses.

Critical Accounting Policies and Significant Management Estimates

Other than the adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, there have been no material changes to our critical accounting policies and estimates during the three months ended September 30, 2018, as compared to the critical accounting policies and estimates disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

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Results of Operations

~~Revenue~~Revenues

Revenue and changes in revenue by product for the three ~~and nine~~ months ended ~~September 30~~March 31, ~~2017~~2019 and ~~2016~~2018 were as follows:

	Three Months Ended September 30,									Nine Months Ended September 30,
	Three Months Ended March 31,
	2018		2017							2018		2017
(In thousands except percentage)	2019		2018		$ Change			% Change
(Dollar in thousands)	Amount		Amount		$ Change			% Change		Amount		Amount		$ Change			% Change
Revenues:
Revenues:
Healthcare	$	71,974	$	75,256	$	(3,282	)	(4	)%
Healthcare	$	66,125	$	65,893	$	232		—	%	$	209,486	$	208,769	$	717		—	%
COBRA	23,589		28,835		(5,246		)	(18	)%
COBRA	25,081		26,897		(1,816		)	(7	)%	80,116		82,465		(2,349		)	(3	)%
Commuter	19,340		18,878		462			2	%
Commuter	18,785		17,987		798			4	%	56,510		54,366		2,144			4	%
Other	3,322		3,671		(349		)	(10	)%
Other	3,980		4,069		(89		)	(2	)%	11,008		12,415		(1,407		)	(11	)%
Total revenues	$	118,225	$	126,640	$	(8,415	)	(7	)%
Total revenues	$	113,971	$	114,846	$	(875	)	(1	)%	$	357,120	$	358,015	$	(895	)	—	%

໿

Healthcare Revenue

We derive our healthcare revenue from the service fees paid by our employer clients for the administration services we provide in connection with their employee participants’ FSAs, HRAs, and HSAs. We also earn interchange revenue paid by financial institutions related to transaction fees on debit cards used by employee participants in connection with all of our healthcare programs and through our wholesale card program and revenue from self-service plan kits called Premium Only Plan kits, or POP revenue.

Healthcare revenue increased by $0.2 million, or 0% for the three months ended September 30, 2018, as compared to the same period in 2017. Healthcare revenue increased by $0.7 million, or 0% for the nine months ended September 30, 2018, as compared to the same period in 2017. Healthcare revenue increased due to the addition of new clients and growth in new employee participation for HSA and an increase in interchange fee and other incentive revenue as a result of a contract renegotiation for our debit card usage.23

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institutions related to transaction fees on debit cards used by employee participants in connection with all of our healthcare programs and through our wholesale card program and revenue from self-service plan kits called Premium Only Plan kits, or POP revenue.

Healthcare revenue decreased by $3.3 million, or 4% for the three months ended March 31, 2019, as compared to the same period in 2018, primarily due to (FSA) ADP portfolio attrition.

COBRA Revenue

COBRA revenue is derived from administration services we provide to employer clients for continuation of coverage for participants who are no longer eligible for the employer’s health benefits, such as medical, dental, and vision, and for the continued administration of the employee participants’ HRAs and certain healthcare FSAs.

COBRA revenue decreased by $15.82 million, or 718% for the three months ended ~~September~~March 3031, ~~2018~~2019, as compared to the same period in ~~2017~~2018. ~~COBRA~~The ~~revenue~~decrease ~~decreased~~was byprimarily ~~$2.3~~due ~~million,~~to orADP 3%portfolio ~~for~~attrition, the ~~nine~~termination ~~months~~of ~~ended~~the ~~September 30,~~Alight ~~2018~~partnership, asand ~~compared~~generally tolower ~~the~~COBRA ~~same period in 2017~~activity. ~~The decrease was primarily driven by client terminations partially offset by an increase in annual notice fees.~~

Commuter Revenue

We derive our commuter revenue from monthly service fees paid by our employer clients, interchange revenue paid by financial institutions related to transaction fees on debit cards used by employee participants in connection with our commuter solutions, and commissions from the sale of transit passes used in our commuter solutions which we purchase from various transit agencies on behalf of employee participants.

Commuter revenue increased by $0.85 million, or 42% for the three months ended ~~September~~March 3031, ~~2018~~2019, as compared to the same period in ~~2017. Commuter revenue increased by $2.1 million, or 4% for the nine months ended September 30,~~ 2018~~, as compared to the same period in 2017~~. The increases were primarily due to ~~the~~increased ~~addition of new clients and growth in the number of employee participation and an increase in interchange fee revenue~~participants.

Other Revenue

Other revenue includes enrollment and eligibility services, employee account administration (i.e., tuition and health club reimbursements), project-related professional fees and other program incentives.

29Other revenue decreased by $0.3 million or 10% for the three months ended March 31, 2019, as compared to the same period in 2018. The decrease was primarily due to a decrease in Direct Bill participants.

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Other revenue decreased by $0.1 million or 2% for the three months ended September 30, 2018, as compared to the same period in 2017. Other revenue decreased by $1.4 million or 11% for the nine months ended September 30, 2018, as compared to the same period in 2017. The decrease was primarily due to a decrease in revenue from enrollment and eligibility services.

Cost of Revenues

		Three Months Ended September 30,														Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)		2018				2017				$ Change				% Change		2018			2017			$ Change			% Change
(In thousands except percentage)	2019				2018				$ Change				% Change
Cost of revenues (excluding amortization of internal use software)	$	$39,258	~~33,886~~		$	$45,242	~~39,031~~		$	$(5,984	~~(5,145~~)	)	(13	~~(13~~)%	)%	$	~~115,272~~		$	~~130,438~~		$	~~(15,166~~	)	~~(12~~	)%
Percentage of revenue	33	30	%	%	36	34	%	%								32		%	36		%

Cost of revenues consist of direct expenses for claims processing, product support, and customer service personnel, outsourced and temporary labor, check/ACH payment processing services, debit card processing services, shipping and handling, passes, and employee participant communications.

Cost of revenues decreased by $56.10 million or 13% for the three months ended ~~September~~March 3031, ~~2018~~2019, as compared to the same period in ~~2017. Cost of revenues decreased by $15.2 million or 12% for the nine months ended September 30,~~ 2018~~, as compared to the same period in 2017~~. The decreases were primarily due to alower ~~decrease~~outsourced inservices ~~compensation~~& printing and ~~related~~fulfillment ~~benefits~~costs, ~~associated~~as ~~with~~well ~~the~~as ~~headcount~~lower ~~vacancy~~stock-based ~~that~~compensation ~~occurred~~expense indue to the ~~third~~suspension ~~quarter~~ of ~~2017~~stock ~~and~~award agrants, ~~reduction~~partially inoffset ~~outsourced~~by ~~services~~higher Technology costs.

As we grow organically and through portfolio purchases, acquisitions, and channel partner arrangements, we expect our cost of revenues to increase in dollar amount to support increased employer client and employee participant levels. Cost of revenues will continue to be affected by our portfolio purchases, acquisitions and channel partner arrangements. Prior to migrating to our proprietary technology platforms, new portfolios often operate with higher service delivery costs that result in increased cost of revenues until we are able to complete the migration process, which is targeted to occur within 12 to 24 months of the portfolio acquisition date.

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Operating Expenses

Technology and Development

		Three Months Ended September 30,														Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)		2018				2017				$ Change				% Change		2018			2017			$ Change			% Change
(In thousands except percentage)	2019				2018				$ Change				% Change
Technology and development	$	$16,340	~~13,180~~		$	$13,033	~~13,932~~		$	$3,307	~~(752~~	)	25	(5%	)%	$	~~39,605~~		$	~~43,718~~		$	~~(4,113~~	)	(9	)%
Percentage of revenue	14	12	%	%	10	12	%	%								11		%	12		%

໿

Technology and development expenses consist of personnel and related expenses, outsourced programming services, on-demand technology infrastructure, and expenses associated with equipment and software development and licenses.

Technology and development expenses ~~decreased~~increased by $03.83 million, or 525% for the three months ended ~~September~~March 3031, ~~2018~~2019, as compared to the same period in ~~2017. Technology and development expenses decreased by $4.1 million, or 9% for the nine months ended September 30,~~ 2018~~, as compared to the same period in 2017~~. The ~~decrease~~increase was primarily due to aincreased ~~decrease~~outside ~~in outsourced~~ services, ~~partially~~technology, ~~offset~~and ~~by an increase in software expenses~~depreciation.

We intend to continue enhancing the functionality of our software platform as part of our continuous effort to improve our employer client and employee participant experience and to maintain and enhance our control and compliance environment. The timing of development and enhancement projects, including the nature of expenditures as well as the phase of the project that could require capitalization or expense treatment, will significantly affect our technology and development expense both in dollar amount and as a percentage of revenues.

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Sales and Marketing

	Three Months Ended September 30,											Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)	2018			2017			$ Change			% Change		2018			2017			$ Change		% Change
(In thousands except percentage)	2019			2018			$ Change			% Change
Sales and marketing	$	1718,~~920~~331		$	1618,~~385~~338		$	~~1,535~~(7	)	9—	%	$	~~54,779~~		$	~~47,192~~		$	~~7,587~~	16	%
Percentage of revenue	16		%	14		%						15		%	13		%

Sales and marketing expenses consist primarily of compensation and related expenses for our sales, client services, and marketing staff, including sales commissions for our direct sales force and external agent/broker commission expense, as well as communication, promotional, public relations, and other marketing expenses.

Sales and marketing expenses ~~increased~~were byconsistent ~~$1.5 million or 9%~~ for the three months ended ~~September~~March 3031, ~~2018~~2019, as compared to the same period in ~~2017. Sales and marketing expenses increased by $7.6 million or 16% for the nine months ended September 30,~~ 2018~~, as compared to the same period in 2017~~. ~~The increase was primarily due to an increase in compensation, benefit costs and direct sales commissions, partially offset by a decrease in outsourced services.~~

We will continue to invest in sales, client services, and marketing by hiring additional personnel and continuing to build our broker and channel relationships. We will also promote our brand through a variety of marketing and public relations activities. As a result, we expect our sales and marketing expenses to increase in ~~dollar amount in~~ future periods.

General and Administrative

	Three Months Ended September 30,										Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)	2018			2017			$ Change		% Change		2018			2017			$ Change		% Change
(In thousands except percentage)	2019			2018			$ Change		% Change
General and administrative	$	2927,~~681~~909		$	2025,~~196~~249		$	92,~~485~~660	4711	%	$	~~73,828~~		$	~~52,155~~		$	~~21,673~~	42	%
Percentage of revenue	2624		%	1820		%					21		%	15		%

General and administrative expenses include personnel and related expenses and professional fees incurred by our executive, finance, legal, human resources, and facilities departments.

General and administrative expenses increased by $92.57 million or 4711% for the three months ended ~~September~~March 3031, ~~2018~~2019, as compared to the same period in ~~2017. General and administrative expenses increased by $21.7 million or 42% for the nine months ended September 30,~~ 2018~~, as compared to the same period in 2017~~. The increase was primarily due to ~~increase~~higher in professional fees ~~related to legal and accounting fees~~ attributed to ~~the~~excess restatement and audit ~~committee~~related ~~investigations~~costs partially offset by alower ~~decrease in~~ stock-based compensation expense due to ~~executive~~the ~~departures~~suspension ~~and~~of ~~decline in~~ stock ~~price~~award grants.

~~To support our continued growth, we expect our general and administrative expenses to continue to increase in absolute dollars as we expand general and administrative headcount.~~25

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We expect that general and administrative expenses will continue to increase in absolute dollars in order to support our continued growth as we expand general and administrative headcount.

Amortization

	Three Months Ended September 30,										Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)	2018			2017			$ Change		% Change		2018			2017			$ Change		% Change
(In thousands except percentage)	2019			2018			$ Change		% Change
Amortization	$	10,~~502~~851		$	9,~~402~~991		$	~~1,100~~860	129	%	$	~~30,684~~		$	~~28,032~~		$	~~2,652~~	9	%
Percentage of revenue	9		%	8		%					9		%	8		%

Our amortization consists of two components: amortization of internal use software and amortization of acquired intangible assets. We capitalize our software development costs related to the development and enhancement of our business solutions. When the technology is available for its intended use, the capitalized costs are amortized over the technology’s estimated useful life, which is generally four years. Acquisition-related intangible assets are also amortized over their estimated useful lives.

Amortization increased by $0.9 million or 9% for the three months ended March 31, 2019 as compared to the same periods in 2018. The increase was primarily driven by an increase in amortization resulting from internal use software due to increased investment in software development projects.

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Amortization increased by $1.1 million or 12% and increased by $2.7 million or 9% for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. The increase was primarily driven by an increase in amortization resulting from the acquired intangibles from the Tango acquisition and an increase in amortization of internal use software due to increased investment in software development projects.

Employee Termination and Other Charges

	Three Months Ended September 30,										Nine Months Ended September 30,
(Dollar in thousands)	2018			2017			$ Change		% Change		2018			2017			$ Change		% Change
Employee termination and other charges	$	673		$	(148	)	$	821	(555	)%	$	3,526		$	1,500		$	2,026	135	%
Percentage of revenue	1		%	(0.1		)%					1		%	0.4		%

Employee termination and other charges increased by $0.8 million for the three months ended September 30, 2018 as compared to the same periods in 2017. Employee termination and other charges increased by $2.0 million for the nine months ended September 30, 2018 as compared to the same periods in 2017. The increase was primarily attributable to executive departures in 2018.

Other Income (Expense), net

	Three Months Ended September 30,											Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)	2018			2017			$ Change			% Change		2018		2017		$ Change			% Change
(In thousands except percentage)	2019			2018			$ Change			% Change
Interest income	$	1,522		$	340		$	1,182		348	%	4,225		502		$	3,723		742	%
Interest and other income, net	$	2,649		$	1,266		$	1,383		109	%
Interest expense	$	(2,~~575~~709	)	$	(2,~~059~~182	)	$	(~~516~~527	)	2524	%	~~(7,177~~	)	~~(5,261~~	)	$	~~(1,916~~	)	36	%
Other income (expense), net	$	(18	)	$	(30	)	$	12		(40	)%	—		(260	)	$	260		(100	)%

Interest and other income increased by $1.4 million or 109% for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019. ~~due~~The toincrease ~~our~~was ~~investment~~primarily ~~strategy~~due ~~implemented~~to ~~during~~an ~~the~~optimization ~~third~~of ~~quarter~~cash ofmanagement ~~2017~~and investment practices.

Interest expense increased by $0.5 million or 2524% ~~and $1.9 million or 36%~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018,~~2019 ~~respectively,~~ as compared to the same ~~periods~~period in ~~2017~~2018. The increase in interest expense ~~relates~~was toprimarily ~~increased~~due ~~borrowings~~to onan ~~our~~increase ~~revolving~~in ~~credit~~interest ~~facility~~rates.

The decrease in other income (expense), net for the nine months ended September 30, 2018, as compared to the same periods in 2017, was primarily due to a one-time loss in our share of an equity investment.

Income Taxes

	Three Months Ended September 30,										Nine Months Ended September 30,
	Three Months Ended March 31,
(Dollar in thousands)	2018			2017			$ Change		% Change		2018			2017			$ Change			% Change
(In thousands except percentage)	2019			2018			$ Change		% Change
Income before income taxes	$	75,~~058~~476		$	1413,~~299~~871						$	~~36,474~~		$	~~49,961~~
Income tax benefit (provision)	$	(41,~~934~~419	)	$	(52,~~236~~852	)	$	~~302~~1,433	(650	)%	$	~~(12,407~~	)	$	~~(4,563~~	)	$	~~(7,844~~	)	~~172~~	%
Effective tax rate	~~(70~~26		)%	~~(37~~21		)%					~~(34~~		)%	(9		)%

Income tax provision decreased by $01.34 million or 650% ~~and increased by $7.8 million or 172%~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2018~~2019, ~~respectively,~~ as compared to the same ~~periods~~period in ~~2017~~2018. The ~~provision~~decrease ~~for~~in the income tax provision for the three ~~and nine~~ months ended ~~September 30~~March 31, 2019 as compared to the same period in 2018 ~~reflect~~is primarily a result of the ~~effects~~tax effect from the reduction of income before tax offset by the ~~Tax~~impact ~~Act~~of ~~related~~increase toin the ~~discrete~~effective ~~effects~~tax ofrate ~~limitations~~due onto ~~deduction~~increase ofin ~~compensation~~state income taxes.

3226

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Liquidity and Capital Resources

As of ~~September~~March 3031, ~~2018~~2019, our principal sources of liquidity were cash and cash equivalents totaling $~~770~~782.08 million and short-term investments totaling $~~253~~183.86 million comprised primarily of funding by clients of amounts to be paid on behalf of employee participants, ~~public~~as ~~stock~~well ~~offerings~~as ~~and~~other cash ~~generated~~flows from ~~ongoing~~operating ~~operations~~activities.

We believe that our existing cash and cash equivalents, short-term investments, and the available credit from our revolving credit facility will be sufficient to meet our working capital, debt, and capital expenditures, ~~and stock repurchase needs,~~ as well as anticipated cash requirements for potential future portfolio purchases over at least the next 12 months. We have historically been able to fulfill our obligations as incurred and expect to continue to fulfill our obligations in the future. Our expectation is based on our current and anticipated client retention rates and our continuing funding model in which the vast majority of our enterprise clients provide us with prefunds as more fully described below under “Prefunds.”. To the extent these current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, including any potential portfolio purchases, we may need to raise additional funds through public or private equity or debt financing. We cannot provide assurance that we will be able to raise additional funds on favorable terms, if at all.

Prefunds

Under our contracts with the vast majority of our employer clients, we receive prefunds that have been and are expected to continue to be a significant source of cash flows from operating activities. Our client contracts do not contain restrictions on our use of client prefunds and, as a result, each prefund is reflected in cash and cash equivalents on our consolidated balance sheet with an equivalent customer obligation recorded as a liability as the prefund is received. Changes in these prefunds and the corresponding customer obligations are reflected in our cash flows from operating activities. The timing of when employer clients make their prefunds as well as the timing of when we make payments on behalf of employee participants can significantly affect our cash flows.

The operation of these prefunds for our employer clients throughout the year typically is as follows: at the beginning of a plan year, these employer clients provide us with prefunds for their FSA and HRA programs based on a percentage of projected spending by the employee participants for the plan year and other factors. In the case of our commuter program, at the beginning of each month we receive prefunds based on the employee participants’ monthly elections. These prefunds are typically replenished on a weekly basis by our FSA and HRA employer clients and on a monthly basis by our commuter employer clients, in each case, the replenishment occurs after we have advanced the funds necessary to process employee participants’ FSA and HRA claims as they are submitted to us and to pay vendors relating to our commuter programs. As a result, our cash balances can vary significantly depending upon the timing of invoicing and the date payment is received from our employer clients for reimbursement of payments we have made on behalf of employee participants.

Revolving Credit Facility (Credit Agreement)

On April 4, 2017, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with MUFG Union Bank, N.A., as administrative agent (“Agent”). The Credit Agreement amends and restates our existing Amended and Restated Credit Agreement, toand ~~increase~~increased ~~the~~our borrowing capacity under the revolving credit facility to $400.0 million, with a $15.0 million letter of credit ~~subfacility (the "Credit Agreement")~~sub-facility. The Credit Agreement contains an increase option permitting us, subject to certain conditions and requirements, to arrange with existing lenders and/or new lenders to provide up to an aggregate of $100.0 million in additional commitments. ~~The~~Loan ~~loans~~proceeds ~~bear~~may ~~interest,~~be atused ~~our~~for ~~option,~~general atcorporate ~~either~~purposes, ~~(i)~~including aacquisitions ~~London~~permitted ~~Interbank~~under ~~Offered Rate (LIBOR) determined in accordance with~~ the Credit Agreement~~, plus a margin ranging from 1~~.~~25%~~ toWe ~~2.25%,~~may orprepay ~~(ii)~~loans aunder ~~base rate determined in accordance with~~ the Credit Agreement, ~~plus~~in awhole ~~margin~~or ~~ranging from 0.25% to 1.25%,~~ in ~~either~~part ~~case~~at ~~with~~any ~~such~~time ~~margin~~without ~~determined~~premium ~~based~~or ~~on our consolidated leverage ratio for the preceding four fiscal quarter period~~penalty. ~~Interest~~The isfees ~~due~~incurred ~~and payable~~ in ~~arrears~~connection ~~quarterly for base rate loans and at the end of an interest period for LIBOR rate loans. Principal, together~~ with ~~all~~this ~~accrued and unpaid interest, is due and payable on April 4, 2022. Our obligations under the~~ Credit Agreement are ~~secured~~classified ~~by substantially all of our assets. We elected option (i) and,~~ as ofa ~~September 30,~~direct ~~2018,~~deduction ~~the~~from ~~interest~~long-term ~~rate~~debt ~~applicable~~in to the ~~revolving~~condensed ~~credit~~consolidated ~~facility~~balance ~~was 3~~sheets.~~63%. All~~ ofThe ~~our~~Second ~~existing~~Amended ~~and future material subsidiaries are required to guarantee our obligations under the~~ Credit Agreement. ~~The~~contains ~~guarantees~~financial ~~by future material subsidiaries are~~ and ~~will~~non-financial becovenants ~~secured~~including bydebt ~~substantially~~ratio ~~all~~and ofinterest ~~the~~coverage ~~assets~~ratio ~~of such subsidiaries~~requirements. AsThe ofCompany ~~September 30,~~is ~~2018, we have $150.2 million available to borrow under the revolving credit facility. We are~~ currently in compliance with all ~~financial~~the ~~and non-financial~~ covenants under the credit facility.

OnIn ~~April~~the 5,first ~~2018~~quarter of 2019, ~~our~~we ~~Board~~entered ~~concluded~~into ~~the~~a ~~previously~~Third ~~issued~~Reporting ~~financial~~Extension ~~statements~~Agreement ~~for~~and ~~(i)~~paid the ~~quarterly~~Agent ~~periods~~$0.1 ~~ended~~million ~~September~~to ~~30,~~extend ~~June~~the 30delivery ~~and~~date ~~March~~of ~~31,~~the ~~2017,~~2018 ~~(ii)~~Annual ~~the~~Report ~~annual~~on ~~period~~Form ~~ended~~10-K ~~December~~to 31May 10, ~~2016~~2019. ~~and~~In ~~(iii)~~ the ~~quarterly~~second ~~periods~~quarter ~~ended~~of ~~September~~2019, 30we ~~and~~entered ~~June~~into ~~30,~~a ~~2016~~Fourth ~~should~~Reporting beExtension ~~restated~~Agreement and ~~should~~paid nothe ~~longer~~Agent ~~be relied upon~~$0. ~~Consequently,~~1 wemillion ~~did not meet our obligation~~ to ~~provide~~extend ~~our~~the ~~financial~~delivery ~~statements~~date toof the ~~Agent~~2018 byAnnual ~~the~~Report ~~contractual~~on ~~delivery~~Form ~~date.~~10-K Into ~~March~~May ~~2018~~31, we2019. ~~entered~~The ~~into~~fees aincurred ~~Reporting~~were ~~Extension~~added ~~Agreement~~to ~~(the~~loan ~~“Extension~~financing ~~Agreement”),~~fees byto ~~and~~be ~~among~~amortized ~~the~~to ~~Company,~~interest ~~the~~expense ~~lenders~~over ~~party~~the ~~thereto~~remaining ~~and~~life ~~MUFG~~of ~~Union~~the ~~Bank, N~~loan.~~A.,~~

33As of March 31, 2019, we had $187.0 million outstanding under the revolving credit facility and $210.0 million unused revolving credit facility still available to borrow under the Credit Agreement. As of March 31, 2019, the interest rate applicable to the revolving credit facility was 3.99% per annum.

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as administrative agent to extend the time period for delivery to Agent and the lenders our delinquent financial statements to June 30, 2018. In June 2018, we entered into a Second Reporting Extension Agreement and paid the Agent $0.8 million to extend the delivery date of our delinquent financial statements to March 16, 2019. In March 2019, the Company entered into a Third Reporting Extension Agreement and paid the Agent $0.1 million to extend the delivery date of any remaining delinquent financial statements to May 10, 2019.

Cash Flows

The following table presents information regarding our cash flow activities:

	Nine Months Ended September 30,
	Three Months Ended March 31,
(in thousands)	~~2018~~2019			~~2017~~2018			$ Change
Net cash provided by operating activities	$	75,868		$	129,117		$	(53,249	)
Net cash used in operating activities	$	(90,188	)	$	(16,874	)	$	(73,314	)
Net cash used in investing activities	(86,489		)	(124,643		)	38,154
Net cash provided by (used in) investing activities	34,676			(73,102		)	107,778
Net cash provided by financing activities	1,313			122,496			(121,183		)
Net cash (used in) provided by financing activities	(60,148		)	1,972			(62,120		)
Net change in cash and cash equivalents, unrestricted and restricted	$	(9115,~~308~~660	)	$	~~126~~(88,~~970~~004	)	$	(~~136~~27,~~278~~656	)

Cash Flows from Operating Activities

໿

Net cash ~~provided~~used byin operating activities ~~decreased~~increased for the ~~nine~~three months ended ~~September 30~~March 31, ~~2018~~2019 as compared to the same period of ~~2017~~2018 by $5373.23 million. ~~Cash~~The ~~provided~~increase byin cash used in operating activities for the ~~nine~~three months ended ~~September 30~~March 31, ~~2018~~2019 was primarily ~~comprised~~due ~~of net income of $24.1 million, adjusted upward for non-cash items primarily related~~ to ~~depreciation~~changes ~~and~~in ~~amortization~~working ofcapital ~~$44.9~~largely ~~million,~~driven ~~stock-based~~by ~~compensation~~timing ~~expense~~ of ~~$14.8~~prefunding ~~million,~~ and ~~changes~~employer inclient ~~operating assets and liabilities providing a net decrease of $7~~payments.~~6 million.~~

Cash Flows from Investing Activities

໿

Net cash ~~used~~provided inby investing activities was $8634.57 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019, primarily due to $5839.61 million of net proceeds from sales and purchases of investments, ~~and~~offset by $274.74 million of investment in capital expenditures.

Net cash used in investing activities was $73.1 million for the three months ended March 31, 2018, primarily due to $65.4 million net purchases of investments and $7.6 million of investment in capital expenditures.

Cash Flows from Financing Activities

໿

Net cash ~~provided~~used byin financing activities was $160.31 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2018 which consisted of approximately $2.3 million in proceeds from exercises of stock options and sale of stock under the 2012 Employee Stock Purchase Plan (“ESPP”)~~2019, ~~partially~~primarily ~~offset~~due byto a ~~payment~~repayment of ~~$0.5 million for~~ debt ~~issuance~~principal ~~costs~~in ~~related to~~ the ~~credit~~amount ~~agreement amendment and a $0.2 million~~ of ~~taxes related to net share settlement of stock-based compensation arrangements. Net cash provided by financing activities decreased~~ $~~121~~60.20 million ~~compared to the prior year as we received $130~~.~~8 million from our public stock offering in 2017.~~

34Net cash provided by financing activities was $2.0 million for the three months ended March 31, 2018 which consisted of approximately $2.3 million in proceeds from exercises of stock options and sale of stock under the 2012 Employee Stock Purchase Plan, partially offset by a $0.2 million payment of taxes related to net share settlement of stock-based compensation arrangements.

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Contractual Obligations

~~The~~There ~~following~~were ~~table~~no ~~summarizes~~material ~~our~~changes, ~~significant~~outside of the ordinary course of business, in our contractual obligations asfrom ofthose ~~September~~disclosed in our Annual Report on Form 10-K for the year ended December 3031, 2018:.

(in thousands)	Total		Less than1 year		1-3years		3-5years		More than5 years
Long-term debt obligations (1)	$	247,000	$	—	$	—	$	247,000	$	—
Interest on long-term debt obligations (2)	38,731		8,972		17,945		11,814		—
Operating lease obligations (3)	45,744		9,389		19,474		10,925		5,956
Total	$	331,475	$	18,361	$	37,419	$	269,739	$	5,956

Critical Accounting Policies and Significant Management Estimates

~~______________________________________________________________________________~~There have been no material changes to the Company’s critical accounting estimates during the three months ended March 31, 2019. Other than the adoption of ASU 2016-02, “Leases (Topic 842)”, there have been no material changes to the Company’s critical accounting policies during the three months ended March 31, 2019 compared to the policies disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K for the year ended December 31, 2018.

(1) As of September 30, 2018, maximum borrowings under the revolving credit facility are $400.0 million with a base rate determined in accordance with the credit agreement or, at our option, LIBOR plus a spread of 1.25% to 2.25% per annum, and a maturity date of April 4, 2022. As of September 30, 2018, our outstanding principal of $247.0 million is presented net of debt issuance costs on our condensed consolidated balance sheets. The debt issuance costs are not included in the table above.

(2) Estimated interest payments assume the interest rate applicable as of September 30, 2018 of 3.63% per annum on a $247.0 million outstanding principal amount.

(3) We lease facilities under non-cancelable operating leases expiring at various dates through 2028.

Off-Balance Sheet Arrangements

35Other 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 in 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 condensed consolidated balance sheets.

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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 mature in 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 condensed consolidated balance sheets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in ~~our~~the Company’s market risk during the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019. For additional information, see Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk”, of our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

~~Our~~We ~~management~~have, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), ~~has~~ evaluated the effectiveness of our disclosure controls and procedures (as ~~such~~of March 31, 2019. The term is“disclosure controls and procedures,” as defined in ~~Rule~~Rules 13a-15(e) ofand 15d-15(e) under the Securities Exchange Act of 1934, as amended, (or the “Exchange Act~~”))~~, ~~as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures”~~ means ~~our~~ controls and other procedures of a company that are designed to ensure that information required to be disclosed by usa company in the reports that weit ~~file~~files or ~~submit~~submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

~~Based~~Disclosure oncontrols ~~the~~and ~~foregoing~~procedures ~~evaluation~~include, ~~our~~without ~~Chief~~limitation, ~~Executive~~controls ~~Officer~~ and ~~Chief~~procedures ~~Financial~~designed ~~Officer~~to ~~have~~ensure ~~concluded~~ that, asinformation ofrequired ~~September~~to ~~30,~~be ~~2018,~~disclosed ~~due~~by toa company in the ~~existence~~reports ofthat ~~unremediated~~it ~~material~~files ~~weaknesses~~or insubmits under the ~~Company~~Exchange Act is accumulated and communicated to the company’s ~~internal~~management, ~~control~~including ~~over~~its ~~financial~~principal ~~reporting~~executive asofficer ~~described~~and ~~below~~principal financial officer, ~~the~~as ~~Company’s~~appropriate ~~disclosure~~to ~~controls~~allow ~~and~~timely ~~procedures~~decisions ~~were~~regarding ~~not~~required ~~effective~~disclosure.

~~Notwithstanding~~Based on the ~~existence~~evaluation of ~~the~~our ~~material~~disclosure ~~weaknesses~~controls ~~described~~and ~~below,~~procedures ~~management~~as ~~believes~~of March ~~that~~31, ~~the~~2019, ~~consolidated~~our ~~financial~~CEO ~~statements~~ and ~~related~~CFO ~~financial~~concluded ~~information~~that, ~~included~~as inof ~~this~~such ~~Quarterly~~date, ~~Report~~due onto ~~Form~~the ~~10-Q~~identification ~~fairly~~of ~~present,~~material weaknesses in ~~all~~our ~~material~~internal ~~respects,~~control ~~our~~over financial ~~position~~reporting, ~~results~~as offurther ~~operations~~described ~~and~~in ~~cash~~our ~~flows~~2018 asForm of10-K, our disclosure controls and ~~for~~procedures ~~the~~were ~~periods~~not ~~presented,~~effective. inA ~~conformity~~material ~~with~~weakness ~~the~~is ~~generally~~a ~~accepted~~deficiency, ~~accounting~~or ~~principles~~a combination of deficiencies, in ~~the~~internal ~~United~~control ~~States~~over offinancial ~~America~~reporting ~~("GAAP").~~such ~~Management’s~~that ~~belief~~there is ~~based~~a onreasonable possibility that a ~~number~~material misstatement of ~~factors,~~our ~~including,~~annual ~~but~~or interim financial statements will not ~~limited~~be ~~to:~~prevented or detected on a timely basis.

a.Notwithstanding the ~~completion~~material ofweaknesses ~~the~~in ~~Audit~~our ~~Committee’s~~internal ~~investigation~~control ~~and~~over ~~the~~financial ~~substantial~~reporting ~~resources~~reported ~~expended~~in ~~(including~~ the ~~use~~Form of10-K ~~external~~for ~~consultants~~the ~~and~~fiscal ~~experts)~~year toended ~~respond~~December to31, ~~the~~2018, ~~findings~~we ~~and~~have concluded that the ~~resulting~~condensed ~~restatement~~consolidated offinancial ~~certain~~statements ofincluded ~~our~~in ~~previously~~this ~~issued~~Quarterly ~~financial~~Report ~~statements;~~on ~~the~~Form ~~Audit~~10-Q ~~Committee~~fairly ~~engaged~~present, ~~independent~~in ~~professionals~~all tomaterial ~~assist~~respects, ~~its~~our ~~investigation~~financial ~~throughout~~position, ~~the~~results ~~process~~of operations and, cash flows for the ~~Audit~~periods ~~Committee~~presented ~~has~~in ~~concluded~~conformity ~~its~~with ~~investigation;~~accounting principles generally accepted in the United States of America.

b.Additional ~~our~~Analyses ~~internal review that identified certain accounting errors~~ and ~~control~~Procedures deficiencies, leading to the restatement of certain of our previously issued financial statements for the quarterly periods ended June 30, 2016, September 30, 2016, financial year ended December 31,2016, and ~~the~~Remediation ~~quarterly periods ended March 31, 2017, June 30, 2017 and September 30, 2017;~~Plan

c.We ~~based~~have onbegun remediating the ~~efforts~~material inweaknesses ~~(a)~~identified ~~and~~by ~~(b)~~management ~~above,~~and wedescribed ~~have~~in ~~updated,~~greater ~~and~~detail in ~~some~~our 2018 Form ~~cases~~10-K. ~~corrected,~~Although ~~our~~we ~~accounting~~intend ~~policies~~to ~~and~~complete ~~have~~the ~~applied~~remediation ~~these~~process with respect to ~~our~~this ~~previously~~material ~~issued~~weaknesses ~~financial~~as ~~results~~quickly ~~and~~as topossible, ~~our~~we ~~fiscal~~cannot ~~year~~at ~~2016~~this ~~and~~time ~~2017~~estimate ~~financial~~how ~~results;~~long it will take, and our remediation plan may not prove to be successful.

d.Because ~~certain~~the reliability of the internal control process requires repeatable execution, the successful remediation ~~actions~~of the company’s material weaknesses will require review and evidence of effectiveness prior to concluding that the controls are effective, and there is no assurance that additional remediation steps will not be necessary. As such, as we ~~have~~continue ~~undertaken~~to evaluate and work to improve our internal control over financial reporting, our management may decide to take additional measures to address the ~~identified~~ material weaknesses or modify the remediation steps already underway. As noted above, although we plan to complete the remediation process as ~~discussed~~quickly ~~below~~as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful. Accordingly, until this weakness is remediated, we are performing additional analyses and other procedures to ensure that our condensed consolidated financial statements are prepared in accordance with GAAP.

~~Management’s~~Changes ~~Report~~in on Internal Control ~~over~~Over Financial Reporting

Our ~~management~~remediation isefforts ~~responsible~~were ~~for~~ongoing ~~establishing~~during ~~and~~the ~~maintaining~~period ~~adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f)~~ of the ~~Exchange Act~~report. ~~Our~~During ~~internal control over financial reporting is a process designed by~~2019, ~~or under~~ the ~~supervision~~Company ~~of,~~has ~~our~~filled ~~Chief~~certain ~~Executive~~key ~~Officer~~leadership ~~and~~roles ~~Chief~~in ~~Financial~~Accounting ~~Officer,~~ and ~~overseen~~Risk byManagement ~~our Board of Directors (the “Board”), management~~ and ~~other~~is ~~personnel,~~in ~~to provide reasonable assurance regarding~~ the ~~reliability~~process of ~~financial~~enhancing ~~reporting~~capabilities ~~and the preparation~~ of ~~financial~~that ~~statements for external purposes in accordance with GAAP~~department. ~~Internal~~The ~~control~~Company ~~over~~has ~~financial~~engaged ~~reporting~~Senior ~~includes~~Leadership ~~those~~across ~~policies~~the ~~and~~various ~~procedures~~departments ~~that:~~of ~~(i)~~the ~~pertain~~organization to ~~the~~have ~~maintenance~~ownership of ~~records~~areas ~~that,~~of incontrols ~~reasonable detail, accurately~~ and ~~fairly~~remediation. ~~reflect~~Performance ~~the~~measurement ~~transactions~~metrics ~~and~~across ~~dispositions~~various levels of ~~our~~the ~~assets;~~organization ~~(ii)~~have ~~provide~~also ~~reasonable~~incorporated ~~assurance~~controls ~~that~~remediation ~~transactions are recorded~~ as ~~necessary~~a tokey ~~permit~~element. ~~preparation~~In ~~of financial statements in accordance with GAAP~~addition, ~~and~~an ~~that~~outside ~~receipts~~service ~~and~~provider ~~expenditures~~has ~~are~~been ~~being~~engaged ~~made~~to ~~only~~assist ~~in accordance~~ with ~~authorizations~~the ofremediation ~~our~~efforts ~~management~~in ~~and~~the ~~directors;~~areas ~~and (iii) provide reasonable assurance regarding prevention or timely detection~~ of ~~unauthorized~~identified ~~acquisition, use or disposition of our assets that could have a material effect on our financial statements~~weaknesses.

~~Because~~In oforder ~~its~~to ~~inherent~~remediate ~~limitations,~~our ~~internal~~existing ~~control~~material ~~over~~weaknesses, ~~financial~~we ~~reporting~~require ~~may~~additional ~~not~~time ~~prevent~~to orcomplete ~~detect~~the ~~misstatements.~~implementation ~~Also,~~of ~~projections~~our ofremediation ~~any~~plans ~~evaluation~~and ofdemonstrate the effectiveness toof ~~future~~our ~~periods~~remediation ~~are~~efforts. ~~subject~~The tomaterial ~~the~~weaknesses ~~risk~~cannot ~~that~~be ~~controls~~considered ~~may~~remediated ~~become~~until ~~inadequate~~the ~~because~~applicable ofremedial ~~changes~~controls inoperate ~~conditions,~~for ora ~~that~~sufficient ~~the~~period ~~degree~~ of ~~compliance~~time ~~with~~and ~~the~~management ~~policies~~has ~~and~~concluded, ~~procedures~~through ~~included~~testing, inthat ~~such~~these controls ~~may~~are ~~deteriorate.~~operating effectively.

Our management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2018. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely 29

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~~basis. Based~~Other onthan the ~~results~~remediation ofefforts ~~that~~outlined ~~evaluation~~above, ~~which~~there ~~included~~were ~~information~~no ~~identified~~changes ~~during~~in ~~the~~our ~~Audit~~internal ~~Committee~~control ~~investigation~~over ~~and~~financial ~~the~~reporting ~~work~~identified ~~undertaken~~in byconnection ~~management~~with ~~and~~ the ~~Company's~~evaluation ~~advisors,~~required ~~management~~by ~~has~~Rule ~~concluded~~13a-15(d) ~~that~~and ~~our~~15d-15(d) ~~internal~~of ~~control~~the ~~over~~Exchange ~~financial~~Act ~~reporting~~that asoccurred ofduring ~~September~~the ~~30,~~quarter ~~2018~~ended March ~~was~~31, ~~not~~2019, ~~effective~~that ~~due~~have tomaterially ~~the~~affected, ~~existence~~or ofare ~~the~~reasonably ~~following~~likely ~~material~~to ~~weaknesses~~materially inaffect, our internal control over financial reporting ~~described below~~.

~~Control~~Limitations ~~Environment,~~on ~~Risk~~Effectiveness ~~Assessment,~~of ~~Control~~Controls ~~Activities~~ and ~~Monitoring~~ Procedures

~~Based~~In ondesigning ~~the~~and ~~investigations~~evaluating ~~conducted under~~ the ~~direction~~disclosure ofcontrols ~~the~~and ~~Audit Committee of the Board~~procedures, itmanagement ~~was~~recognizes ~~concluded~~ that ~~there~~any ~~was~~controls anand ~~inadequate open flow~~procedures, ~~transparency,~~no ~~communication~~matter ~~and~~how ~~dissemination~~well ofdesigned ~~relevant~~ and ~~pertinent~~operated, ~~information~~can ~~from~~provide ~~former~~only ~~senior~~reasonable ~~management~~assurance ~~concerning~~of aachieving ~~complex transaction with~~ the ~~federal~~desired ~~government~~control ~~that~~objectives. ~~contributed~~In toaddition, anthe ~~ineffective~~design ~~control~~of ~~environment~~disclosure ~~driven~~controls byand ~~the~~procedures ~~tone~~must atreflect the ~~top.~~fact ~~Management’s~~that ~~failure~~there toare ~~timely~~resource ~~communicate~~constraints ~~all~~and ~~pertinent~~that ~~information~~management ~~resulted~~is inrequired ~~an environment which led~~ to anapply ~~error~~judgment in evaluating the ~~financial~~benefits ~~statement as~~ of ~~the~~possible ~~end~~controls ofand ~~the~~procedures ~~period~~relative ~~covered~~to bytheir ~~this report~~costs.

~~In addition, we did not maintain effective internal control over financial reporting related to the following areas: control environment, risk assessment, control activities and monitoring:~~30

• We did not have processes and controls to ensure there were adequate mechanisms and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities and to ensure corrective actions were appropriately prioritized and implemented in a timely manner.

• We did not effectively execute a strategy to attract, develop and retain a sufficient complement of qualified resources with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting.

• There was not an adequate assessment of changes in risks by management that could significantly impact internal control over financial reporting or an adequate determination and prioritization of how those risks should be managed.

• We did not have adequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and GAAP.

• We did not have adequate management oversight around completeness and accuracy of data material to financial reporting.

• There was a lack of robust, established and documented accounting policies and insufficiently detailed Company procedures to put these policies into effective action.

• We were not focused on a commitment to competency as it relates to creating priorities, allocating adequate resources and establishing cross functional procedures around managing complex contracts and non-routine transactions as well as managing change and attracting, developing and retaining qualified resources.

These deficiencies in our internal control over financial reporting contributed to the following identified material weaknesses:

A. Accounting Close and Financial Reporting

We had inadequate or ineffective process level and monitoring controls in the area of accounting close and financial reporting specifically, but not exclusively, around the review of account reconciliations, account estimates and related cut-off, and monitoring of the accounting close cycle. We also did not have effective business processes and controls to conduct an effective review of manual data feeds into journal entries for divisions which were not integrated with the main ERP system.

We did not have robust, established and documented accounting policies that were implemented effectively, which led to adjustments in areas such as, but not exclusive to Impairment of Internally Developed Software (IDS) and Unclaimed Liability. As a result of these adjustments the accounts related to Amortization of IDS, Fixed Assets, and operating expenses as they relate to interest and penalties were impacted.

We also did not have a robust process around managing change and corresponding assessment and implementation of Accounting Policies. This resulted in a reevaluation of the Accounts Receivable and Customer Obligation Offset Policy of the organization. Furthermore, it also resulted in the delayed assessment and design of controls for the timely implementation of controls around Accounting Standard 606 (ASC 606) for Revenue Recognition which is effective January 2018. These gaps resulted in several adjustments in the consolidated financial statements as of the end of the period covered by this report.

B. Contract to Cash Process

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We did not have effective controls around our contract-to-cash life cycle. The root cause of these gaps were due to inadequate or ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements which require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, and availability of customer contracts.

These gaps resulted in several adjustments in Revenue, Accounts Receivable, and Accounts Receivable Reserves in the consolidated financial statements as of the end of the period covered by this report.

C. Risk Assessment and Management of Change

We did not maintain an effective risk assessment and monitoring process to manage the expansion of our existing business. Hence, there were inadequate and ineffective business and financial reporting control activities associated with change and growth in the business. Amongst other areas, the assessment of the control environment and the design of manual controls around financial system implementations, such as NetSuite, was not performed adequately in 2017.

As a result, the Company did not properly estimate and record certain transactions which resulted in errors in the consolidated financial statements as of the end of the period covered by this report

D. Review of New, Unusual or Significant Transactions and Contracts

We did not have adequate risk assessment controls to continuously formally assess the financial reporting risks associated with executing new, significant or unusual transactions, contracts or business initiatives. As a result, the Company did not adequately identify and analyze changes in the business and hence implement effective process level controls and monitoring controls that were responsive to these changes and aligned with financial reporting objectives. This failure to identify and analyze changes occurred in connection with the integration of acquisitions and the monitoring and recording of certain revenues associated with a complex government contract. As a result, the Company did not properly account for certain transactions including Revenue and Customer Obligation Accounts, which resulted in errors in the consolidated financial statements as of the end of the period covered by this report.

E. Manual Reconciliations of High-Volume Standard Transactions

We did not have effective business processes and controls as well as resources with adequate training and support to conduct an effective review of manual reconciliations including the complex data feeds into the reconciliations of high-volume standard transactions. This resulted in several errors mainly to balance sheet classifications around Accounts Receivable, Customer Obligations and other related accounts in the consolidated financial statements as of the end of the period covered by this report.

In addition to the material weaknesses noted above, management identified several deficiencies and significant deficiencies. These deficiencies relate to several areas that are partially rooted in the weaknesses in the internal control environment documented above.

Remediation Plan and Status for Reported Material Weaknesses

We have been working and are currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. The Company is committed to a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with GAAP and the 2013 COSO framework.

To address the material weaknesses in the overall control environment, in addition to the specific remediations noted under each sub-section, the Company has and is in the process of taking the following measures:

• The Company has undergone a leadership transition, and we have a new CEO, CFO and General Counsel. Clear lines of responsibilities have been drawn in new roles to ensure effective controls.

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• We are establishing regular working group meetings, with appropriate oversight by the Audit Committee and leadership of the Company, to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.

• We will be enhancing our compensation practices to further incorporate risk and operational goals.

• We will be assessing and enhancing adequacy and quality of resources in areas impacting financial reporting including, but not limited to conducting additional training programs for our employees to enhance their skill sets which will complement their work.

• We are augmenting accounting staff with additional technical expertise in GAAP to assist with enhanced financial reporting procedures, controls and remediation efforts.

To address the material weakness in the Accounting Close and Financial Reporting area (Material Weakness A., noted above), the Company has taken the following measures:

• We are establishing senior level oversight and executive reporting around the accounting close and financial reporting process with an enhanced focus on improving process level controls to strengthen the existing control environment around formalizing and documenting accounting policies as well as implementing a robust accounting close process with enhanced review of financial statements.

• In addition to enhancing processes and controls over adoption of new accounting standards, we will also be enhancing GAAP expertise within the accounting department.

To address the material weakness in the Contract to Cash Process (Material Weakness B., noted above), the Company has taken the following measures:

• We are establishing senior level oversight and executive reporting around the contract to cash process with an enhanced focus on improving process level controls to strengthen the existing control environment around the contract to cash process and revenue recognition. This includes but is not limited to enhancing the process for record retention of contracts and agreements, assessment of collectability from customers, analysis of complex contracts as well as automation of select billing processes.

To address the material weakness in the Risk Assessment and Change Management Process (Material Weakness C., noted above), the Company has taken the following measures:

• We are developing a plan to implement a periodic risk assessment process, review of control procedures and documentation around impact of changes on accounting processes.

• We are developing a plan to enhance documentation and review around accounting estimates, and interpretations with formal approval of the detailed review.

• We are developing a plan to proactively design manual controls around implementation of new systems impacting financial reporting.

• We have reallocated Company resources to improve the oversight over operational changes across the business and business trends.

To address the material weakness in the Review of New, Unusual or Significant Transactions and Contracts (Material Weakness D., noted above), the Company is in process of strengthening its processes and controls as follows:

• We are designing and implementing enhanced internal controls surrounding identification, analysis and governance and monitoring of new, significant or unusual contracts or transactions to ensure that these contracts or transactions are recorded in accordance with Company’s policies and GAAP. This will entail enhanced documentation of analysis, as well as review and cross functional approval of company policies and interpretations.

To address the material weakness in the Manual Reconciliations of High-Volume Standard Transactions (Material Weakness E, noted above), the Company has taken the following measures:

• We are providing leadership oversight to ensure prioritization of funding and resources for the remediation efforts.

• We are strengthening the review controls and supporting documentation related to reconciliations of high-volume standard transactions. With an enhanced focus on supporting documentation review, we are implementing a comprehensive review methodology over data, inputs and reports used for the reconciliations.

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The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information with respect to this Item may be found under the heading “Legal Matters” in Note 1410 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, which is incorporated into this Item 1 by reference.

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchases

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

~~None~~The terms of the Class III directors consisting of Stuart C. Harvey, Jr., Thomas A. Bevilacqua and Bruce G. Bodaken were to have expired at the Annual Meeting of Stockholders in 2018 and the terms of the Class I directors consisting of Jerome D. Gramglia, Robert L. Metzger and George P. Scanlon were to have expired at the Annual Meeting of Stockholders in 2019. However, the Company has not convened an Annual Meeting of Stockholders since 2017, and, consequently, the terms of the Class III and Class I directors will expire at the Company’s next Annual Meeting of Stockholders.

42Appointment of Ismail (Izzy) Dawood as Chief Financial Officer

On October 10, 2018, Mr. Dawood entered into an at-will employment offer letter with the Company in connection with his appointment as full-time Chief Financial Officer. Under the employment offer letter, Mr. Dawood is eligible to receive a base salary at the annualized rate of $400,000 and is eligible to receive a cash bonus at a target amount of 75% of his base salary, pro-rated based upon the number of months during the year that he is eligible to participate under the terms of the bonus plan to be established by us. Mr. Dawood also received a one-time cash signing bonus of $100,000, payable in a lump sum on his start date. No equity awards were granted to Mr. Dawood in 2018. Following the S-8 Filing Date, Mr. Dawood also will receive equity awards consisting of (1) a grant of an option to purchase 76,878 shares of our common stock (the “Dawood Option”) and (2) a grant of 29,976 restricted stock units covering shares of our common stock (the “Dawood RSU Award”) (each, a “Dawood Equity Award”). The Dawood Option shall vest as to 25% of the shares subject to the Option on the one-year anniversary of his start date and an additional 1/48^th of the total shares subject to the Option on each of the 36 succeeding months thereafter. The Dawood RSU Award shall vest in annual installments on each of the four anniversaries of his start date. Vesting of the Dawood Equity Awards is subject to him remaining in service with us.

Further, in connection with Mr. Dawood’s appointment as full-time Chief Financial Officer, the Tatum Agreement terminated. Mr. Dawood forfeited his right to receive a completion bonus of $200,000 pursuant to the Tatum Agreement. This payment was contingent upon Mr. Dawood not being appointed the Company’s full-time Chief Financial Officer.

In April 2019, our Board, with input from the Compensation Committee, approved a bonus payment to Mr. Dawood of $150,000 for 2018 performance after considering the pro-rated target bonus opportunity for Mr. Dawood’s for 2018 under his offer letter, his and the company’s 2018 performance, including his extraordinary leadership in guiding our finance team to completing the filings relating to our Announced Restatement.

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Item 6. Exhibits

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
31.1	Certification of the Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of the Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1(1)	Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
10.1	Third Amended and Restated Employment Agreement between Registrant and Joseph Jackson dated April 18, 2017	8-K	001-35232	10.1	4/21/2017
10.2	Form of Amended and Restated Executive Severance Benefit Agreement	8-K	001-35232	10.2	4/21/2017
10.10H	Second Amended and Restated Credit Agreement, by and among Registrant, MUFG Union Bank, N.A. (formerly Union Bank, N.A.), Wells Fargo Bank National Association, Suntrust Bank, UMB Bank, N.A., KeyBank National Association, and Comerica Bank dated June 5, 2015	10-Q	001-35232	10.10H	8/1/2017
10.30	Form of Change in Control and Severance Agreement	10-K	001-35232	10.30	5/30/2019
10.35	Dawood Offer Letter					X
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema Linkbase Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Labels Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

(1)

The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of WageWorks, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		WAGEWORKS, INC.
Date: March 18, 2019	By:	/s/ ISMAIL DAWOOD
Date: June 27, 2019	By:	/s/ ISMAIL DAWOOD
		Ismail Dawood
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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