HEALTHEQUITY, INC. 10-Q

Item 1. Financial statements HealthEquity, Inc. and subsidiaries Condensed consolidated balance sheets (in thousands, except par value) April 30, 2021 January 31, 2021 (unaudited) Assets Current assets Cash and cash equivalents $ 736,773 $ 328,803 Accounts receivable, net of allowance for doubtful accounts of $ 4,648 and $ 4,239 as of April 30, 2021 and January 31, 2021, respectively 74,468 72,767 Other current assets 53,870 58,607 Total current assets 865,111 460,177 Property and equipment, net 27,479 29,106 Operating lease right-of-use assets 86,139 89,508 Intangible assets, net 780,794 767,003 Goodwill 1,363,568 1,327,193 Other assets 38,778 37,420 Total assets $ 3,161,869 $ 2,710,407 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 9,636 $ 1,614 Accrued compensation 33,045 50,670 Accrued liabilities 73,446 75,880 Current portion of long-term debt 62,500 62,500 Operating lease liabilities 13,677 14,037 Total current liabilities 192,304 204,701 Long-term liabilities Long-term debt, net of issuance costs 909,820 924,217 Operating lease liabilities, non-current 71,916 74,224 Other long-term liabilities 14,811 8,808 Deferred tax liability 124,748 119,729 Total long-term liabilities 1,121,295 1,126,978 Total liabilities 1,313,599 1,331,679 Commitments and contingencies (see Note 6) Stockholders’ equity Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2021 and January 31, 2021, respectively — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 83,377 and 77,168 shares issued and outstanding as of April 30, 2021 and January 31, 2021, respectively 8 8 Additional paid-in capital 1,630,529 1,158,372 Accumulated earnings 217,733 220,348 Total stockholders’ equity 1,848,270 1,378,728 Total liabilities and stockholders’ equity $ 3,161,869 $ 2,710,407 See accompanying notes to condensed consolidated financial statements. -3- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of operations and comprehensive income (loss) (unaudited) Three months ended April 30, (in thousands, except per share data) 2021 2020 Revenue Service revenue $ 102,534 $ 111,271 Custodial revenue 46,978 46,899 Interchange revenue 34,690 31,841 Total revenue 184,202 190,011 Cost of revenue Service costs 70,632 71,013 Custodial costs 5,009 5,045 Interchange costs 5,445 5,879 Total cost of revenue 81,086 81,937 Gross profit 103,116 108,074 Operating expenses Sales and marketing 14,086 11,455 Technology and development 35,469 31,078 General and administrative 20,687 18,998 Amortization of acquired intangible assets 19,814 18,702 Merger integration 8,807 12,770 Total operating expenses 98,863 93,003 Income from operations 4,253 15,071 Other expense Interest expense ( 6,689 ) ( 12,263 ) Other expense, net ( 3,630 ) ( 764 ) Total other expense ( 10,319 ) ( 13,027 ) Income (loss) before income taxes ( 6,066 ) 2,044 Income tax provision (benefit) ( 3,451 ) 218 Net income (loss) and comprehensive income (loss) $ ( 2,615 ) $ 1,826 Net income (loss) per share: Basic $ ( 0.03 ) $ 0.03 Diluted $ ( 0.03 ) $ 0.03 Weighted-average number of shares used in computing net income (loss) per share: Basic 81,747 70,980 Diluted 81,747 72,292 See accompanying notes to condensed consolidated financial statements. -4- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of stockholders’ equity (unaudited) Three months ended April 30, (in thousands) 2021 2020 Total stockholders' equity, beginning balance $ 1,378,728 $ 1,030,295 Common stock: Beginning balance 8 7 Issuance of common stock upon exercise of stock options, and for restricted stock — — Other issuance of common stock — — Ending balance 8 7 Additional paid-in capital: Beginning balance 1,158,372 818,774 Issuance of common stock upon exercise of stock options, and for restricted stock 2,716 1,133 Other issuance of common stock 456,642 — Stock-based compensation 12,799 7,396 Ending balance 1,630,529 827,303 Accumulated earnings Beginning balance 220,348 211,514 Net income (loss) ( 2,615 ) 1,826 Ending balance 217,733 213,340 Total stockholders' equity, ending balance $ 1,848,270 $ 1,040,650 See accompanying notes to condensed consolidated financial statements. -5- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of cash flows (unaudited) Three months ended April 30, (in thousands) 2021 2020 Cash flows from operating activities: Net income (loss) $ ( 2,615 ) $ 1,826 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 31,768 27,507 Stock-based compensation 12,799 7,396 Amortization of debt issuance costs 1,228 1,201 Other non-cash items 893 972 Deferred taxes 3,243 3,786 Changes in operating assets and liabilities: Accounts receivable ( 475 ) 1,074 Other assets 2,249 ( 8,360 ) Operating lease right-of-use assets 3,369 3,104 Accrued compensation ( 17,748 ) ( 22,924 ) Accounts payable, accrued liabilities, and other current liabilities ( 381 ) 1,362 Operating lease liabilities, non-current ( 2,308 ) ( 3,045 ) Other long-term liabilities ( 1,104 ) 1,127 Net cash provided by operating activities 30,918 15,026 Cash flows from investing activities: Acquisitions, net of cash acquired ( 49,533 ) — Purchases of software and capitalized software development costs ( 15,469 ) ( 11,775 ) Purchases of property and equipment ( 2,490 ) ( 7,511 ) Acquisition of intangible member assets ( 309 ) ( 6,008 ) Net cash used in investing activities ( 67,801 ) ( 25,294 ) Cash flows from financing activities: Proceeds from follow-on equity offering, net of payments for offering costs 456,642 — Principal payments on long-term debt ( 15,625 ) ( 7,812 ) Settlement of client-held funds obligation, net ( 353 ) ( 3,776 ) Proceeds from exercise of common stock options 4,189 1,223 Net cash provided by (used in) financing activities 444,853 ( 10,365 ) Increase (decrease) in cash and cash equivalents 407,970 ( 20,633 ) Beginning cash and cash equivalents 328,803 191,726 Ending cash and cash equivalents $ 736,773 $ 171,093 See accompanying notes to condensed consolidated financial statements. -6- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of cash flows (unaudited) (continued) Three months ended April 30, (in thousands) 2021 2020 Supplemental cash flow data: Interest expense paid in cash $ 4,988 $ 10,749 Income tax payments (refunds), net ( 4,852 ) 733 Supplemental disclosures of non-cash investing and financing activities: Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 3,982 1,537 Purchases of property and equipment included in accounts payable or accrued liabilities 765 968 Contingent consideration recognized at acquisition 8,147 — Exercise of common stock options receivable 5 — See accompanying notes to condensed consolidated financial statements. -7- Table of Contents HealthEquity, Inc. and subsidiaries Notes to condensed consolidated financial statements Note 1. Summary of business and significant accounting policies Business HealthEquity, Inc. ("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002. HealthEquity is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers. Principles of consolidation The condensed consolidated financial statements include the accounts of HealthEquity and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of presentation The accompanying condensed consolidated financial statements as of April 30, 2021 and for the three months ended April 30, 2021 and 2020 are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2021. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Follow-on equity offering In the first quarter of fiscal year 2022, the Company closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $ 80.30 per share, less the underwriters' discount. The Company received net proceeds of $ 456.6 million after deducting underwriting discounts and commissions of $ 4.6 million and other offering expenses of approximately $ 0.5 million. The Company used $ 50.2 million of the net proceeds from the offering to acquire 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum, and intends to use the remaining net proceeds from the offering for general corporate purposes, which may include prepayments under its term loan facility or potential acquisitions, including the acquisitions of Further and the Fifth Third Bank HSA portfolio. Significant accounting policies There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2021. Recently adopted accounting pronouncements None. Recently issued accounting pronouncements not yet adopted None. -8- Table of Contents Note 2. Net income (loss) per share The following table sets forth the computation of basic and diluted net income (loss) per share: Three months ended April 30, (in thousands, except per share data) 2021 2020 Numerator (basic and diluted): Net income (loss) $ ( 2,615 ) $ 1,826 Denominator (basic): Weighted-average common shares outstanding 81,747 70,980 Denominator (diluted): Weighted-average common shares outstanding 81,747 70,980 Weighted-average dilutive effect of stock options and restricted stock units — 1,312 Diluted weighted-average common shares outstanding 81,747 72,292 Net income (loss) per share: Basic $ ( 0.03 ) $ 0.03 Diluted $ ( 0.03 ) $ 0.03 For the three months ended April 30, 2021 and 2020, 1.9 million and 0.5 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. Note 3. Business combination Acquisition of Luum On March 8, 2021, the Company acquired 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). Luum provides employers with a suite of commute tools as well as real-time commute data to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits. The aggregate purchase price consisted of $ 50.2 million in cash, and up to $ 20.0 million in additional payments which are contingent on Luum achieving certain financial targets during the two-year period following the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024. The Company recorded an $ 8.1 million liability representing its best estimate of the fair value of the contingent consideration as of the acquisition date. The fair value of this contingent consideration was determined using a Monte Carlo valuation model based on Level 3 inputs and will be remeasured to fair value quarterly, with any changes in the fair value recorded in the condensed consolidated statement of operations and comprehensive income (loss). The Luum Acquisition was accounted for under the acquisition method of accounting for business combinations. Consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. The initial allocation of the consideration paid was based on a preliminary valuation and is subject to adjustment during the measurement period (up to one year from the acquisition date). Balances subject to adjustment primarily include the valuations of acquired assets (tangible and intangible) and liabilities assumed, as well as tax-related matters. The Company expects the allocation of the consideration transferred to be finalized within the measurement period. The following table summarizes the Company's current allocation of the consideration paid: (in millions) Estimated fair value Cash and cash equivalents $ 0.6 Other current assets 1.5 Intangible assets 23.9 Goodwill 36.4 Other assets 0.1 Current liabilities ( 0.6 ) Deferred tax liability ( 3.6 ) Total consideration paid $ 58.3 -9- Table of Contents The Luum Acquisition resulted in $ 36.4 million of goodwill. The preliminary goodwill to be recognized is attributable to several strategic, operational, and financial benefits expected from the Luum Acquisition, including an expanded commuter offering beyond traditional pre-tax commuter benefits and additional cross-selling opportunities. The goodwill created in the Luum Acquisition is not expected to be deductible for tax purposes. The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows: ($ in millions) Fair value Estimated life (in years) Customer relationships (1) $ 12.4 7.0 Developed technology (1) 10.9 5.0 Trade names & trademarks (1) 0.6 3.0 Total acquired intangible assets $ 23.9 6.0 (1) The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach. Note 4. Supplemental financial statement information Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income (loss) components consisted of the following: Property and equipment Property and equipment consisted of the following as of April 30, 2021 and January 31, 2021: (in thousands) April 30, 2021 January 31, 2021 Leasehold improvements $ 20,172 $ 22,271 Furniture and fixtures 9,014 9,230 Computer equipment 31,129 28,592 Property and equipment, gross 60,315 60,093 Accumulated depreciation ( 32,836 ) ( 30,987 ) Property and equipment, net $ 27,479 $ 29,106 Depreciation expense was $ 3.9 million for each of the three months ended April 30, 2021 and 2020. Contract balances The Company does not recognize revenue in advance of invoicing its customers and therefore has no related contract assets. The Company records a receivable when revenue is recognized prior to payment and the Company has unconditional right to payment. Alternatively, when payment precedes the related services, the Company records a contract liability, or deferred revenue, until its performance obligations are satisfied. As of April 30, 2021 and January 31, 2021, the balance of deferred revenue was $ 4.4 million and $ 4.1 million, respectively. The balances are related to cash received in advance for an interchange revenue arrangement, other up-front fees and other commuter deferred revenue, and are generally recognized within twelve months, with the exception of the interchange arrangement, which is recognized over a term of approximately ten years . During the three months ended April 30, 2021, approximately $ 0.6 million of revenue was recognized that was included in the balance of deferred revenue as of January 31, 2021. Leases The components of operating lease costs were as follows: Three months ended April 30, (in thousands) 2021 2020 Operating lease expense $ 4,313 4,308 Sublease income ( 450 ) ( 450 ) Net operating lease expense $ 3,863 $ 3,858 -10- Table of Contents Supplemental cash flow information related to the Company's operating leases was as follows: Three months ended April 30, (in thousands) 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 3,635 $ 3,297 Operating lease right-of-use assets obtained in exchange for new operating lease obligations $ — $ 17,480 Other expense, net Other expense, net, consisted of the following: Three months ended April 30, (in thousands) 2021 2020 Interest income $ 408 $ 600 Acquisition costs ( 5,939 ) ( 94 ) Other income (expense) 1,901 ( 1,270 ) Total other expense, net $ ( 3,630 ) $ ( 764 ) Note 5. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of April 30, 2021 and January 31, 2021: (in thousands) April 30, 2021 January 31, 2021 Amortizable intangible assets: Software and software development costs $ 144,411 $ 127,005 Acquired HSA portfolios 125,450 125,141 Acquired customer relationships 613,781 601,381 Acquired developed technology 107,825 96,925 Acquired trade names 12,900 12,300 Amortizable intangible assets, gross 1,004,367 962,752 Accumulated amortization ( 223,573 ) ( 195,749 ) Amortizable intangible assets, net $ 780,794 $ 767,003 Amortization expense for the three months ended April 30, 2021 and 2020 was $ 27.9 million and $ 23.6 million, respectively. Goodwill During the three months ended April 30, 2021, goodwill increased by $ 36.4 million due to the Luum Acquisition. For further information, see Note 3—Business combination. There were no other changes to the carrying value of goodwill during the three months ended April 30, 2021. Note 6. Commitments and contingencies Commitments Contingent acquisition consideration. In connection with the Luum Acquisition, the Company agreed to pay up to $ 20.0 million in additional payments which are contingent on Luum achieving certain financial targets during the two-year period following the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024. For further information, see Note 3—Business combination. Fifth Third Bank HSA portfolio acquisition. In April 2021, the Company entered into a definitive agreement with Fifth Third Bank, National Association ("Fifth Third"), to transition custodianship of Fifth Third’s HSA portfolio to HealthEquity. The definitive agreement contemplates a $ 60.8 million dollar purchase price for a transfer of approximately 149,000 HSA members and their approximately $ 477.0 million of HSA assets. The agreement -11- Table of Contents includes a mechanism to adjust the purchase price based on the amount of HSA assets actually transferred. The transaction is subject to regulatory approval and satisfaction of other customary closing conditions. Further acquisition. In April 2021, the Company entered into a definitive agreement to acquire Further for $ 500 million. Further is a leading provider of HSA and other CDB administration services, with approximately 550,000 HSAs and $ 1.7 billion of HSA assets. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close by September 2021. Lease termination. In April 2021, the Company exercised its right to terminate an operating lease that had not yet commenced with aggregate undiscounted lease payments of $ 63.1 million and a term of approximately 11 years following the landlord's failure to fulfill its obligations under the lease agreement. The Company's right to terminate the lease agreement is disputed by the landlord. Because the lease had not yet commenced, the Company had not recognized a right-of-use asset, operating lease liability, or any rent expense associated with the lease. Other commitments. The Company’s other commitments consist primarily of a term loan facility, operating lease obligations for office space, data storage facilities, and other leases, a processing services agreement with a vendor, and contractual commitments related to network infrastructure, equipment, and certain maintenance agreements under long-term, non-cancelable commitments. Except for the items noted above, there were no material changes during the three months ended April 30, 2021, outside of the ordinary course of business, in our commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021. Contingencies In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Legal matters On March 9, 2018, a putative class action was filed in the U.S. District Court for the Northern District of California (the “Securities Class Action”). On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against the Company's subsidiary WageWorks, Inc. ("WageWorks"), its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018. The complaint also alleged claims under the Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those same defendants, as well as the members of its board of directors at the time of that offering. On February 11, 2021, counsel for all parties involved in this lawsuit signed a term sheet to settle all claims for $ 30.0 million, of which WageWorks will contribute $ 5.0 million and its insurers will pay the remaining $ 25.0 million. The $ 30.0 million settlement and related $ 25.0 million insurance recovery are included within accrued liabilities and other current assets, respectively, on the April 30, 2021 condensed consolidated balance sheet. On May 3, 2021, the Court preliminarily approved the settlement. The settlement is subject to notice to class members and final approval of the Court. On June 22, 2018 and September 6, 2018, two derivative lawsuits were filed against certain of WageWorks’ former officers and directors and WageWorks (as nominal defendant) in the Superior Court of the State of California, County of San Mateo. The actions were consolidated. On July 23, 2018, a similar derivative lawsuit was filed against certain former WageWorks’ officers and directors and WageWorks (as nominal defendant) in the U.S. District Court for the Northern District of California (together, the “Derivative Suits”). The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Class Action described above. The plaintiffs seek unspecified damages, fees and costs. Plaintiffs in the Superior Court action filed an amended consolidated complaint on October 28, 2019, naming as defendants certain former officers and directors of WageWorks and alleging a direct claim of "inseparable fraud/breach of fiduciary duty" on behalf of a class. WageWorks was not named as a party in that complaint. On June 24, 2020, the court granted the defendants’ motion to dismiss the amended complaint. The plaintiffs subsequently filed a notice of appeal. The District Court action is currently stayed. On February 16, 2021, a complaint was filed in the United States District Court for the Northern District of California against WageWorks, its former Chief Executive Officer, and its former Chief Financial Officer. The allegations in this suit relate to substantially the same facts as those underlying the Securities Class Action described above and the SEC settlement involving the former executives described below. The action alleges claims under Sections 10(b) -12- Table of Contents and 20(a) of the Securities Exchange Act of 1934, as well as common law fraud and negligent misrepresentation. The Company responded to the complaint and filed a motion to dismiss on May 10, 2021, which is pending before the Court. Plaintiffs seek unspecified damages, costs and expenses. WageWorks voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the restatement of WageWorks' financial statements and related independent investigation. WageWorks is providing information and documents to the SEC and continues to cooperate with the SEC’s investigation into these matters. The U.S. Attorney’s Office for the Northern District of California also opened an investigation. WageWorks has provided documents and information to the U.S. Attorney’s Office and continues to cooperate with any inquiries by the U.S. Attorney’s Office regarding the matter. On February 2, 2021, the SEC announced charges against two former WageWorks executives and reached a settlement with these former executives. As part of the settlement, the two executives agreed to reimburse WageWorks for a total of $ 2.1 million, which is included within other expense, net in the condensed consolidated statement of operations and comprehensive income (loss). WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to these indemnification agreements, is covering the defense fees and costs of its former directors and officers in the legal proceedings described above. The Company and its subsidiaries are involved in various other litigation, governmental proceedings and claims, not described above, that arise in the normal course of business. It is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, or the impact that such litigation, proceedings and claims will have on the Company’s financial position, results of operations, and cash flows. The Company maintains liability insurance coverage that is intended to cover the legal matters described above; however, it is possible that claims may be denied by our insurance carriers or could exceed the amount of our applicable insurance coverage, we may be required by our insurance carriers to contribute to the payment of claims, and our insurance coverage may not continue to be available to us on acceptable terms or in sufficient amounts. As required under GAAP, the Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Except with respect to the Securities Class Action, the Company does not believe, based on currently available information, that any liabilities relating to these matters are probable or that the amount of any resulting loss is estimable. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations and cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods. Note 7. Income taxes The Company follows Accounting Standards Codification ("ASC") 740-270, Income Taxes - Interim Reporting , for the computation and presentation of its interim period tax provision. Accordingly, management estimated the effective annual tax rate and applied this rate to the year-to-date pre-tax book income (loss) to determine the interim benefit or provision for income taxes. For the three months ended April 30, 2021, the Company recorded an income tax benefit of $ 3.5 million. This resulted in an effective income tax benefit rate of 57.1 % for the three months ended April 30, 2021, compared with an effective income tax expense rate of 10.7 % for the three months ended April 30, 2020. For the three months ended April 30, 2021 and 2020, discrete tax items had an effective tax rate benefit of 33.2 % and 16.8 %, respectively, primarily due to excess tax benefits on stock-based compensation expense recognized in the provision for income taxes. As of April 30, 2021 and January 31, 2021, the Company’s total gross unrecognized tax benefit was $ 10.5 million and $ 10.2 million, respectively. If recognized, $ 9.7 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of April 30, 2021. The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by the IRS and in the states of California and Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to our taxes, net operating losses, and/or tax credit carryforwards. As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2001. -13- Table of Contents Note 8. Indebtedness As of April 30, 2021, long-term debt consisted of the following: (in millions) April 30, 2021 Term loan facility $ 987.5 Less: unamortized loan issuance costs (1) 15.2 Long-term debt, net of issuance costs $ 972.3 (1) In addition to the $ 15.2 million of unamortized issuance costs related to the term loan facility, $ 4.6 million of unamortized issuance costs related to our revolving credit facility are included within other assets on the April 30, 2021 condensed consolidated balance sheet. The Company is party to a credit facility (the "Credit Agreement”) that provides for: (i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $ 1.25 billion; and (ii) a five-year senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”), in an aggregate principal amount of up to $ 350.0 million, which may be used for working capital and general corporate purposes, including acquisitions and other investments. No amounts were drawn under the Revolving Credit Facility as of April 30, 2021. Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of HealthEquity, either (i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25 % to 2.25 % or (ii) an alternate base rate plus a margin ranging from 0.25 % to 1.25 %, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of April 30, 2021, the stated interest rate was 1.86 % and the effective interest rate was 2.39 %. The Company is also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20 % to 0.40 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.00 to 1.00, which steps down to 4.50 to 1.00 beginning with the fiscal quarter ending July 31, 2021 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to 5.00 to 1.00 for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $ 100.0 million), and (ii) a minimum interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00. The Company was in compliance with all covenants under the Credit Agreement as of April 30, 2021, and for the period then ended. The obligations of HealthEquity under the Credit Agreement are required to be unconditionally guaranteed by WageWorks and Fort Effect Corp and are secured by security interests in substantially all assets of HealthEquity and the guarantors, subject to certain customary exceptions. -14- Table of Contents Note 9. Stock-based compensation The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income (loss) during the periods presented: Three months ended April 30, (in thousands) 2021 2020 Cost of revenue $ 2,403 $ 1,463 Sales and marketing 2,188 958 Technology and development 3,013 2,917 General and administrative 5,195 2,058 Other expense, net (1) 342 — Total stock-based compensation expense $ 13,141 $ 7,396 (1) Equity-based awards exchanged for cash in connection with the Luum Acquisition. Stock award plans Incentive Plan. The Company grants stock options, restricted stock units ("RSUs"), and restricted stock awards ("RSAs") under the HealthEquity, Inc. 2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provided for the issuance of stock awards to the directors and team members of the Company to purchase up to an aggregate of 2.6 million shares of common stock. In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing through and including February 1, 2024, by 3 % of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors. As of April 30, 2021, 7.5 million shares were available for grant under the Incentive Plan. Stock options A summary of stock option activity is as follows: Outstanding stock options (in thousands, except for exercise prices and term) Number of options Range of exercise prices Weighted- average exercise price Weighted- average contractual term (in years) Aggregate intrinsic value Outstanding as of January 31, 2021 1,674 $ 1.25 - 82.39 $ 31.46 5.00 $ 87,164 Exercised ( 103 ) $ 14.00 - 44.53 $ 26.46 Outstanding as of April 30, 2021 1,571 $ 1.25 - 82.39 $ 31.79 4.70 $ 69,562 Vested and expected to vest as of April 30, 2021 1,571 $ 31.79 4.70 $ 69,562 Exercisable as of April 30, 2021 1,463 $ 29.08 4.50 $ 68,694 Restricted stock units and restricted stock awards A summary of RSU and RSA activity is as follows: RSUs and PRSUs RSAs and PRSAs (in thousands, except weighted-average grant date fair value) Shares Weighted-average grant date fair value Shares Weighted-average grant date fair value Outstanding as of January 31, 2021 1,832 $ 60.41 193 $ 61.77 Granted 1,213 72.00 — — Vested ( 274 ) 56.05 ( 116 ) 61.77 Forfeited ( 36 ) 63.18 ( 73 ) 61.77 Outstanding as of April 30, 2021 2,735 $ 65.95 4 $ 61.72 Performance restricted stock units. During the first quarter of fiscal year 2022, the Company awarded 249,750 performance restricted stock units ("PRSUs") subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2024. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $ 22.4 million. -15- Table of Contents Compensation expense is recorded if the service condition is met regardless of whether the market condition is satisfied. The market condition allows for a range of vesting from 0 % to 200 % based on the level of performance achieved. The PRSUs cliff vest upon approval by the Compensation Committee of the board of directors. Note 10. Fair value Fair value measurements are made at a specific point in time based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1—quoted prices in active markets for identical assets or liabilities; • Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3—unobservable inputs based on the Company’s own assumptions. Level 1 instruments are valued based on publicly available daily net asset values. Level 1 instruments consist primarily of cash and cash equivalents. The carrying value of cash and cash equivalents approximate fair values as of April 30, 2021 due to the short-term nature of these instruments. Our long-term debt is considered a Level 2 instrument and is recorded at book value in our condensed consolidated financial statements. Our long-term debt reprices frequently due to variable interest rate terms and entails no significant changes in credit risk. As a result, we believe the fair value of our long-term debt approximates carrying value. The contingent consideration liability resulting from the Luum Acquisition was determined using a Monte Carlo valuation model based on Level 3 inputs. The estimate of fair value of the contingent consideration obligation requires subjective assumptions to be made regarding the future business results, discount rates, volatilities, and probabilities assigned to various potential business result scenarios and was determined using probability assessments with respect to the likelihood of achieving certain financial targets. The fair value measurement is based on significant inputs unobservable in the market and thus represents a level 3 measurement. Changes in current expectations of progress could change the probability of achieving the targets within the measurement periods and result in an increase or decrease in the fair value of the contingent consideration obligation. For further information, see Note 3—Business combination. -16- Table of Contents