HEALTHEQUITY, INC. 10-Q

Item 1. Financial statements HealthEquity, Inc. and subsidiaries Condensed consolidated balance sheets (in thousands, except par value) October 31, 2021 January 31, 2021 (unaudited) Assets Current assets Cash and cash equivalents $ 649,129 $ 328,803 Accounts receivable, net of allowance for doubtful accounts of $ 6,063 and $ 4,239 as of October 31, 2021 and January 31, 2021, respectively 84,083 72,767 Other current assets 30,919 58,607 Total current assets 764,131 460,177 Property and equipment, net 24,930 29,106 Operating lease right-of-use assets 81,150 89,508 Intangible assets, net 820,946 767,003 Goodwill 1,363,549 1,327,193 Other assets 44,908 37,420 Total assets $ 3,099,614 $ 2,710,407 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 5,244 $ 1,614 Accrued compensation 32,695 50,670 Accrued liabilities 49,879 75,880 Current portion of long-term debt 6,563 62,500 Operating lease liabilities 12,693 14,037 Total current liabilities 107,074 204,701 Long-term liabilities Long-term debt, net 923,501 924,217 Operating lease liabilities, non-current 67,836 74,224 Other long-term liabilities 18,953 8,808 Deferred tax liability 110,400 119,729 Total long-term liabilities 1,120,690 1,126,978 Total liabilities 1,227,764 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 October 31, 2021 and January 31, 2021, respectively — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 83,586 and 77,168 shares issued and outstanding as of October 31, 2021 and January 31, 2021, respectively 8 8 Additional paid-in capital 1,662,965 1,158,372 Accumulated earnings 208,877 220,348 Total stockholders’ equity 1,871,850 1,378,728 Total liabilities and stockholders’ equity $ 3,099,614 $ 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 October 31, Nine months ended October 31, (in thousands, except per share data) 2021 2020 2021 2020 Revenue Service revenue $ 102,733 $ 104,562 $ 314,449 $ 319,638 Custodial revenue 49,006 48,544 144,760 142,352 Interchange revenue 28,215 26,245 94,050 83,411 Total revenue 179,954 179,351 553,259 545,401 Cost of revenue Service costs 66,217 65,936 204,183 202,195 Custodial costs 5,734 4,762 15,567 14,805 Interchange costs 4,683 4,095 15,102 13,985 Total cost of revenue 76,634 74,793 234,852 230,985 Gross profit 103,320 104,558 318,407 314,416 Operating expenses Sales and marketing 12,726 12,880 42,288 36,502 Technology and development 38,070 30,758 111,437 92,490 General and administrative 20,004 22,099 63,503 61,590 Amortization of acquired intangible assets 19,642 19,126 59,745 56,905 Merger integration 13,244 8,193 38,422 31,328 Total operating expenses 103,686 93,056 315,395 278,815 Income (loss) from operations ( 366 ) 11,502 3,012 35,601 Other expense Interest expense ( 11,881 ) ( 6,952 ) ( 25,824 ) ( 28,110 ) Other income (expense), net 3,122 ( 421 ) ( 164 ) ( 2,009 ) Total other expense ( 8,759 ) ( 7,373 ) ( 25,988 ) ( 30,119 ) Income (loss) before income taxes ( 9,125 ) 4,129 ( 22,976 ) 5,482 Income tax provision (benefit) ( 4,087 ) 2,340 ( 11,505 ) 2,015 Net income (loss) and comprehensive income (loss) $ ( 5,038 ) $ 1,789 $ ( 11,471 ) $ 3,467 Net income (loss) per share: Basic $ ( 0.06 ) $ 0.02 $ ( 0.14 ) $ 0.05 Diluted $ ( 0.06 ) $ 0.02 $ ( 0.14 ) $ 0.05 Weighted-average number of shares used in computing net income (loss) per share: Basic 83,551 76,701 82,939 73,358 Diluted 83,551 77,845 82,939 74,665 See accompanying notes to condensed consolidated financial statements. -4- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of stockholders’ equity (unaudited) Three months ended October 31, Nine months ended October 31, (in thousands) 2021 2020 2021 2020 Total stockholders' equity, beginning balance $ 1,862,666 $ 1,340,336 $ 1,378,728 $ 1,030,295 Common stock: Beginning balance 8 8 8 7 Issuance of common stock upon exercise of stock options, and for restricted stock — — — — Other issuance of common stock — — — 1 Ending balance 8 8 8 8 Additional paid-in capital: Beginning balance 1,648,743 1,127,136 1,158,372 818,774 Issuance of common stock upon exercise of stock options, and for restricted stock 938 1,651 6,253 4,402 Other issuance of common stock — 2 456,640 286,779 Stock-based compensation 13,284 11,479 41,700 30,313 Ending balance 1,662,965 1,140,268 1,662,965 1,140,268 Accumulated earnings Beginning balance 213,915 213,192 220,348 211,514 Net income (loss) ( 5,038 ) 1,789 ( 11,471 ) 3,467 Ending balance 208,877 214,981 208,877 214,981 Total stockholders' equity, ending balance $ 1,871,850 $ 1,355,257 $ 1,871,850 $ 1,355,257 See accompanying notes to condensed consolidated financial statements. -5- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of cash flows (unaudited) Nine months ended October 31, (in thousands) 2021 2020 Cash flows from operating activities: Net income (loss) $ ( 11,471 ) $ 3,467 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 98,364 85,485 Stock-based compensation 41,700 30,313 Amortization of debt discount and issuance costs 3,616 3,818 Loss on extinguishment of debt 4,044 — Change in fair value of contingent consideration ( 2,147 ) — Other non-cash items ( 750 ) 1,727 Deferred taxes ( 8,765 ) ( 973 ) Changes in operating assets and liabilities: Accounts receivable, net ( 10,090 ) 8,063 Other assets 19,888 3,309 Operating lease right-of-use assets 8,944 8,344 Accrued compensation ( 18,098 ) ( 15,251 ) Accounts payable, accrued liabilities, and other current liabilities ( 34,023 ) ( 7,936 ) Operating lease liabilities, non-current ( 6,808 ) ( 8,361 ) Other long-term liabilities 6,034 8,712 Net cash provided by operating activities 90,438 120,717 Cash flows from investing activities: Acquisitions, net of cash acquired ( 49,533 ) — Purchases of software and capitalized software development costs ( 49,033 ) ( 37,242 ) Purchases of property and equipment ( 7,284 ) ( 11,388 ) Acquisition of intangible member assets ( 64,463 ) ( 28,100 ) Proceeds from sale of equity securities 2,367 — Net cash used in investing activities ( 167,946 ) ( 76,730 ) Cash flows from financing activities: Principal payments on long-term debt ( 1,003,125 ) ( 223,438 ) Proceeds from issuance of long-term debt 950,000 — Payment of debt issuance costs ( 11,846 ) — Proceeds from follow-on equity offering, net of payments for offering costs 456,642 286,779 Settlement of client-held funds obligation, net ( 1,565 ) ( 4,189 ) Proceeds from exercise of common stock options 7,728 4,491 Net cash provided by financing activities 397,834 63,643 Increase in cash and cash equivalents 320,326 107,630 Beginning cash and cash equivalents 328,803 191,726 Ending cash and cash equivalents $ 649,129 $ 299,356 See accompanying notes to condensed consolidated financial statements. -6- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of cash flows (unaudited) (continued) Nine months ended October 31, (in thousands) 2021 2020 Supplemental cash flow data: Interest expense paid in cash $ 13,685 $ 22,849 Income tax payments (refunds), net ( 5,926 ) 1,053 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 3,708 1,346 Purchases of property and equipment included in accounts payable or accrued liabilities 479 167 Purchases of intangible member assets included in accounts payable or accrued liabilities 2,281 289 Contingent consideration recognized at acquisition 8,147 — Exercise of common stock options receivable 1 89 Decrease in goodwill due to measurement period adjustments, net 19 5,838 See accompanying notes to condensed consolidated financial statements. -7- Table of Contents HealthEquity, Inc. and subsidiaries Notes to condensed consolidated financial statements Note 1. Summary of business and significant accounting policies Business HealthEquity, Inc. ("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002. HealthEquity is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers. Principles of consolidation The condensed consolidated financial statements include the accounts of HealthEquity and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of presentation The accompanying condensed consolidated financial statements as of October 31, 2021 and for the three and nine months ended October 31, 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 used an additional $ 60.8 million to acquire the Fifth Third Bank HSA portfolio. The Company used the remaining net proceeds from the offering, and other cash on hand, for the acquisition of Further on November 1, 2021. For a description of the Further acquisition, refer to Note 11—Subsequent events. 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 October 31, Nine months ended October 31, (in thousands, except per share data) 2021 2020 2021 2020 Numerator (basic and diluted): Net income (loss) $ ( 5,038 ) $ 1,789 $ ( 11,471 ) $ 3,467 Denominator (basic): Weighted-average common shares outstanding 83,551 76,701 82,939 73,358 Denominator (diluted): Weighted-average common shares outstanding 83,551 76,701 82,939 73,358 Weighted-average dilutive effect of stock options and restricted stock units — 1,144 — 1,307 Diluted weighted-average common shares outstanding 83,551 77,845 82,939 74,665 Net income (loss) per share: Basic $ ( 0.06 ) $ 0.02 $ ( 0.14 ) $ 0.05 Diluted $ ( 0.06 ) $ 0.02 $ ( 0.14 ) $ 0.05 For the three months ended October 31, 2021 and 2020, 1.6 million and 1.0 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. For the nine months ended October 31, 2021 and 2020, approximately 1.9 million and 0.6 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 were contingent on Luum achieving certain revenue 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, with any changes in the fair value recorded as other income (expense), net, in the condensed consolidated statement of operations and comprehensive income (loss). During the three and nine months ended October 31, 2021, the Company recognized income of $ 3.2 million and $ 2.1 million, respectively, resulting from changes in the fair value of the contingent consideration. On October 31, 2021, the Company entered into an amendment to the purchase agreement to pay $ 6.0 million in satisfaction of the contingent consideration liability, which is presented within accrued liabilities on the Company's condensed consolidated balance sheet as of October 31, 2021. 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. -9- Table of Contents The following table summarizes the Company's current allocation of the consideration paid: (in thousands) Estimated fair value Adjustments Updated Allocation Cash and cash equivalents $ 626 $ — $ 626 Other current assets 1,469 — 1,469 Intangible assets 23,900 — 23,900 Goodwill 36,374 ( 19 ) 36,355 Other assets 100 — 100 Current liabilities ( 597 ) — ( 597 ) Deferred tax liability ( 3,566 ) 19 ( 3,547 ) Total consideration paid $ 58,306 $ — $ 58,306 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 adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters. 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 thousands) Fair value Estimated life (in years) Customer relationships (1) $ 12,400 7.0 Developed technology (1) 10,900 5.0 Trade names & trademarks (1) 600 3.0 Total acquired intangible assets $ 23,900 6.0 (1) The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach. The pro forma effects of the Luum Acquisition would not materially impact the Company's reported results for any period presented, and as a result no pro forma financial information is presented. 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 October 31, 2021 and January 31, 2021: (in thousands) October 31, 2021 January 31, 2021 Leasehold improvements $ 20,718 $ 22,271 Furniture and fixtures 9,068 9,230 Computer equipment 34,099 28,592 Property and equipment, gross 63,885 60,093 Accumulated depreciation ( 38,955 ) ( 30,987 ) Property and equipment, net $ 24,930 $ 29,106 Depreciation expense for the three months ended October 31, 2021 and 2020 was $ 3.5 million and $ 4.0 million, respectively, and $ 10.9 million and $ 12.0 million for the nine months ended October 31, 2021 and 2020, respectively. Contract balances The Company does not recognize revenue until its right to consideration is unconditional 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 -10- Table of Contents October 31, 2021 and January 31, 2021, the balance of deferred revenue was $ 10.1 million and $ 4.1 million, respectively. The balances are related to cash received in advance for interchange and custodial revenue arrangements, other up-front fees and other commuter deferred revenue. The Company expects to recognize approximately 40 % of its balance of deferred revenue as revenue over the next 12 months and the remainder thereafter. During the three and nine months ended October 31, 2021, approximately $ 0.3 million and $ 1.4 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 October 31, Nine months ended October 31, (in thousands) 2021 2020 2021 2020 Operating lease expense $ 3,512 $ 3,777 $ 11,322 $ 12,297 Sublease income ( 455 ) ( 450 ) ( 1,355 ) ( 1,349 ) Net operating lease expense $ 3,057 $ 3,327 $ 9,967 $ 10,948 Other income (expense), net Other income (expense), net, consisted of the following: Three months ended October 31, Nine months ended October 31, (in thousands) 2021 2020 2021 2020 Interest income $ 478 $ 174 $ 1,419 $ 850 Gain on equity securities — — 1,677 — Acquisition gains (costs), net 2,687 ( 13 ) ( 4,917 ) ( 79 ) Other income (expense), net ( 43 ) ( 582 ) 1,657 ( 2,780 ) Total other income (expense), net $ 3,122 $ ( 421 ) $ ( 164 ) $ ( 2,009 ) Interest expense Based on the application of Accounting Standards Codification ("ASC") 470-50, Debt - Modifications and Extinguishments , the Company recorded a $ 4.0 million loss on extinguishment of debt during the three months ended October 31, 2021, which is included within interest expense in the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended October 31, 2021. Supplemental cash flow information Supplemental cash flow information related to the Company's operating leases was as follows: Nine months ended October 31, (in thousands) 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 10,928 $ 9,739 Operating lease right-of-use assets obtained in exchange for new operating lease obligations $ 586 $ 17,480 -11- Table of Contents Note 5. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets were as follows as of October 31, 2021 and January 31, 2021: (in thousands) October 31, 2021 January 31, 2021 Amortizable intangible assets: Software and software development costs $ 177,693 $ 127,005 Acquired HSA portfolios 191,885 125,141 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 1,104,084 962,752 Accumulated amortization ( 283,138 ) ( 195,749 ) Amortizable intangible assets, net $ 820,946 $ 767,003 Amortization expense for the three months ended October 31, 2021 and 2020 was $ 30.0 million and $ 25.3 million, respectively, and $ 87.5 million and $ 73.5 million for the nine months ended October 31, 2021 and 2020, respectively. 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 the custody of Fifth Third’s HSA portfolio to HealthEquity. On September 29, 2021, the transaction was closed, in which the Company paid a $ 60.8 million purchase price for a transfer of approximately 160,000 HSAs and $ 491.0 million of HSA Assets. The agreement includes a mechanism to adjust the purchase price based on the amount of HSA Assets actually transferred. Goodwill During the nine months ended October 31, 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 nine months ended October 31, 2021. Note 6. Commitments and contingencies Commitments The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of October 31, 2021: Payments due by fiscal year (in thousands) 2022 2023 2024 2025 2026 Thereafter Total 4.50 % Senior Notes due 2029 (1) $ — $ — $ — $ — $ — $ 600,000 $ 600,000 Term Loan Facility (1) — 8,750 17,500 17,500 26,250 280,000 350,000 Interest on long-term debt obligations (2) 8,577 33,951 33,708 33,467 32,965 103,739 246,407 Operating lease obligations (3) 3,416 12,689 10,442 10,836 11,080 52,563 101,026 Further acquisition (4) 500,000 — — — — — 500,000 Contingent acquisition consideration 6,000 — — — — — 6,000 Other contractual obligations (5) 7,143 21,368 9,559 622 16 — 38,708 Total $ 525,136 $ 76,758 $ 71,209 $ 62,425 $ 70,311 $ 1,036,302 $ 1,842,141 (1) As of October 31, 2021, our outstanding combined principal of $ 950.0 million is presented net of debt discount and issuance costs on our condensed consolidated balance sheets. The debt discount and issuance costs are not included in the table above. (2) With respect to the Term Loan Facility, estimated interest payments assume the stated interest rate applicable as of October 31, 2021 of 1.88 % per annum. (3) We lease office space and data storage facilities, and we have other non-cancelable operating leases expiring at various dates through 2031. These amounts exclude contractual sublease income of $ 2.7 million, which is expected to be received through March 2023. (4) For a description of the Further acquisition, refer to Note 11—Subsequent events. (5) Other contractual obligations consist of processing services agreements, telephony services, and other contractual commitments. -12- Table of Contents Contingencies In the normal course of business, the Company enters into contracts and agreements that contain a variety of covenants, 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 In April 2021, WageWorks exercised its right to terminate a lease for office space in Mesa, Arizona that had not yet commenced, with aggregate 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. 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. WageWorks' right to terminate the lease agreement was disputed by the landlord, Union Mesa 1, LLC (“Union Mesa”). On November 5, 2021, Union Mesa notified WageWorks that it was in default of the lease for failure to pay rent, which Union Mesa claimed was due beginning in November 2021, and on November 24, 2021 drew $ 2.8 million, the full amount under the letter of credit that WageWorks had posted to secure its obligations under the lease. On December 1, 2021, WageWorks filed a lawsuit against Union Mesa in the Superior Court of the State of Arizona in and for the County of Maricopa. Pursuant to the lawsuit, WageWorks seeks declaratory judgment that the lease was properly terminated and recourse against Union Mesa for breach of contract, breach of the duty of good faith and fair dealing, and conversion, including return of the funds drawn under the letter of credit. 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. The class action settled for $ 30.0 million. During the nine months ended October 31, 2021, WageWorks contributed $ 5.0 million and its insurers paid the remaining $ 25.0 million. The court granted final approval of the settlement and entered a final judgment on August 20, 2021. This matter is now closed. 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. On October 28, 2021, the court of appeal dismissed the appeal pursuant to the release in the class action settlement discussed above. The District Court action is currently stayed. 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. 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. 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 -13- Table of Contents 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 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 and nine months ended October 31, 2021, the Company recorded an income tax benefit of $ 4.1 million and $ 11.5 million, respectively. This resulted in an effective income tax benefit rate of 44.8 % and 50.1 % for the three and nine months ended October 31, 2021, respectively, compared with an effective income tax expense rate of 56.7 % and 36.8 % for the three and nine months ended October 31, 2020, respectively. For the three and nine months ended October 31, 2021, discrete tax items had an effective tax rate benefit of 7.7 % and 20.5 %, respectively, compared with an effective tax rate expense of 6.0 % and an effective tax rate benefit of 9.6 % for the three and nine months ended October 31, 2020, respectively, primarily due to excess tax benefits on stock-based compensation expense recognized in the provision for income taxes. As of October 31, 2021 and January 31, 2021, the Company’s total gross unrecognized tax benefit was $ 11.2 million and $ 10.2 million, respectively. If recognized, $ 10.3 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of October 31, 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 state of 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. Note 8. Indebtedness Long-term debt consisted of the following: (in thousands) October 31, 2021 January 31, 2021 4.50 % Senior Notes due 2029 $ 600,000 $ — Term Loan Facility 350,000 — Prior Term Loan Facility — 1,003,125 Principal amount 950,000 1,003,125 Less: unamortized discount and issuance costs (1) 19,936 16,408 Total debt, net 930,064 986,717 Less: current portion of long-term debt 6,563 62,500 Long-term debt, net $ 923,501 $ 924,217 (1) In addition to the $ 19.9 million and $ 16.4 million of unamortized discount and issuance costs related to long-term debt as of October 31, 2021 and January 31, 2021, respectively, $ 4.6 million and $ 5.0 million of unamortized issuance costs related to our Revolving Credit Facility (as defined below) and Prior Revolving Credit Facility (as defined below) are included within other assets on the condensed consolidated balance sheets as of October 31, 2021 and January 31, 2021, respectively. 4.50 % Senior Notes due 2029 On October 8, 2021, the Company completed its offering of $ 600.0 million aggregate principal amount of its 4.50 % Senior Notes due 2029 (the “Notes”). The Notes were issued under an indenture (the “Indenture”), dated October 8, 2021, among the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee. The net proceeds from the issuance of the Notes together with borrowings under the Credit Agreement (as defined below) and cash on hand, were used to repay the outstanding borrowings under the Prior Credit Agreement (as defined below). The Notes are guaranteed by each of the Company’s existing direct and indirect, wholly owned domestic subsidiaries that guarantees its obligations under the Credit Agreement and are required to be guaranteed by any of the Company’s future subsidiaries that guarantee its obligations under the Credit Agreement or certain of its other indebtedness. The Notes will mature on October 1, 2029. Interest on the Notes will be payable on April 1 and October 1 of each year, beginning on April 1, 2022. The effective interest rate on the Notes is 4.72 %. -14- Table of Contents The Notes are unsecured senior obligations of the Company and rank equally in right of payment to all of its existing and future senior unsecured debt and senior in right of payment to all of its future subordinated debt. The Notes will be redeemable at the Company’s option, in whole or in part, at any time on or after October 1, 2024, at a redemption price if redeemed during the 12 months beginning (i) October 1, 2024 of 102.250 %, (ii) October 1, 2025 of 101.125 %, and (iii) October 1, 2026 and thereafter of 100.000 %, in each case of the principal amount of the Notes being redeemed, and together with accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may also redeem some or all of the Notes before October 1, 2024 at a redemption price equal to 100 % of the principal amount of the Notes, plus the applicable “make-whole” premium as of, and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time prior to October 1, 2024, the Company may redeem up to 40 % of the aggregate principal amount of the Notes issued under the Indenture on one or more occasions in an aggregate amount equal to the net cash proceeds of one or more equity offerings at a redemption price equal to 104.500 % of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. Furthermore, the Company may be required to make an offer to purchase the Notes upon the sale of certain assets or upon specific kinds of changes of control. The Indenture contains covenants that impose significant operational and financial restrictions on the Company; however, these covenants generally align with the covenants contained in the Credit Agreement. See "Credit Agreement" below for a description of these covenants. Credit Agreement On October 8, 2021, the Company entered into a new credit agreement (the “Credit Agreement”) among the Company, as borrower, each lender from time to time party thereto (the “Lenders”), JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the “Agent”) and the Swing Line Lender (as defined in the Credit Agreement), and each L/C Issuer (as defined therein) party thereto, pursuant to which the Company established: (i) a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of $ 350.0 million, the proceeds of which were used to refinance the Company’s existing senior secured credit facility as described below (the “Refinancing”), to pay fees and expenses incurred in connection with the Refinancing and the establishment of the Credit Facilities (as defined below) and for working capital and general corporate purposes of the Company and its subsidiaries, including the financing of acquisitions and other investments; 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 $ 1.0 billion (with a $ 25 million sub-limit for the issuance of letters of credit), the proceeds of which may be used for working capital and general corporate purposes of the Company and its subsidiaries, including the financing of acquisitions and other investments. Subject to the terms and conditions set forth in the Credit Agreement (including obtaining additional commitments from one or more new or existing lenders), the Company may in the future incur additional loans or commitments under the Credit Agreement in an aggregate principal amount of up to $ 300 million, plus an additional amount so long as the Company’s pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) would not exceed 3.85 to 1.00 as of the date such loans or commitments are incurred. Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of the Company, either (i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25 % to 2.25 % or (ii) an alternate base rate plus a margin ranging from 0.25 % to 1.25 %, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of October 31, 2021, the stated interest rate was 1.88 % and the effective interest rate was 2.63 %. The Company is also required to pay certain fees to the Lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20 % to 0.40 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. The loans made under the Term Loan Facility will amortize in equal quarterly installments in an aggregate annual amount equal to the following percentage of the original principal amount of the Term Loan Facility: (i) 2.5 % for the first year after October 8, 2021; (ii) 5.0 % for each of the second and third years after October 8, 2021; (iii) 7.5 % for the fourth year after October 8, 2021; and (iv) 10.0 % for the fifth year after October 8, 2021. In addition, the Term Loan Facility is required to be mandatorily prepaid with 100 % of the net cash proceeds of all asset sales, insurance and condemnation recoveries, subject to customary exceptions and thresholds, including to the extent such proceeds are reinvested in assets useful in the business of the Company and its subsidiaries within 450 days following receipt (or committed to be reinvested within such 450 -day period and reinvested within 180 days after the -15- Table of Contents end of such 450 -day period). The loans under the Credit Facilities may be prepaid, and the commitments thereunder may be reduced, by the Company without penalty or premium, subject to the reimbursement of customary “breakage costs.” The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company and its subsidiaries 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 beginning with the fiscal quarter ending January 31, 2022, and (ii) a minimum consolidated interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00 beginning with the fiscal quarter ending January 31, 2022. The Company was in compliance with all covenants under the Credit Agreement as of October 31, 2021, and for the period then ended. The repayment obligation under the Credit Agreement may be accelerated upon the occurrence of an event of default thereunder, including, among other things, failure to pay principal, interest or fees on a timely basis, material inaccuracy of any representation or warranty, failure to comply with covenants, cross-default to other material debt, material judgments, change of control and certain insolvency or bankruptcy-related events, in each case, subject to any certain grace and/or cure periods. The obligations of the Company under the Credit Agreement are required to be unconditionally guaranteed by each of the Company’s existing or subsequently acquired or organized direct and indirect domestic subsidiaries and are secured by security interests in substantially all assets of the Company and the guarantors, in each case, subject to certain customary exceptions. Prior Credit Agreement On August 30, 2019, the Company entered into a credit agreement (the "Prior Credit Agreement”) that provided for: (i) a five-year senior secured term loan A facility (the “Prior Term Loan Facility”), in an aggregate principal amount of $ 1.25 billion; and (ii) a five-year senior secured revolving credit facility (the “Prior Revolving Credit Facility” and, together with the Prior Term Loan Facility, the “Prior Credit Facilities”), in an aggregate principal amount of up to $ 350.0 million. No amounts were drawn under the Prior Revolving Credit Facility. Borrowings under the Prior Credit Facilities bore 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 Prior Credit Agreement. The Company was also required to pay certain fees to the lenders, including, among others, a quarterly commitment fee on the average unused amount of the Prior 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 Prior Credit Agreement. The Prior Credit Agreement contained customary affirmative and negative covenants, including covenants that limited, 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 Prior Credit Agreement contained financial performance covenants, which required 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 4.50 to 1.00 (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 Prior Credit Agreement during the period ended October 31, 2021. The obligations of HealthEquity under the Prior Credit Agreement were required to be unconditionally guaranteed by WageWorks and Fort Effect Corp and were secured by security interests in substantially all assets of HealthEquity and the guarantors, subject to certain customary exceptions. -16- Table of Contents On October 8, 2021, in connection with the entry into the Credit Agreement, the Company repaid all outstanding obligations under the Prior Credit Agreement and terminated all commitments thereunder. Note 9. Stock-based compensation The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income (loss) during the periods presented: Three months ended October 31, Nine months ended October 31, (in thousands) 2021 2020 2021 2020 Cost of revenue $ 3,076 $ 2,209 $ 8,547 $ 5,737 Sales and marketing 829 2,035 5,677 4,810 Technology and development 3,458 2,641 10,164 8,051 General and administrative 5,921 4,594 17,312 11,715 Other expense (1) — — 342 — Total stock-based compensation expense $ 13,284 $ 11,479 $ 42,042 $ 30,313 (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 October 31, 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 5.0 $ 87,164 Exercised ( 280 ) $ 1.25 - 44.53 $ 22.36 Outstanding as of October 31, 2021 1,394 $ 1.25 - 82.39 $ 33.29 4.2 $ 47,032 Vested and expected to vest as of October 31, 2021 1,394 $ 33.29 4.2 $ 47,032 Exercisable as of October 31, 2021 1,303 $ 30.76 4.0 $ 46,863 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 1,381 71.61 — — Vested ( 418 ) 58.09 ( 116 ) 61.77 Forfeited ( 255 ) 62.99 ( 75 ) 61.77 Outstanding as of October 31, 2021 2,540 $ 66.62 2 $ 61.72 -17- Table of Contents 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. 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. Cash and cash equivalents are considered Level 1 instruments and are valued based on publicly available daily net asset values. The carrying values of cash and cash equivalents approximate fair values due to the short-term nature of these instruments. The Notes are valued based upon quoted market prices and are considered Level 2 instruments because the markets in which the Notes trade are not considered active markets. As of October 31, 2021, the fair value of the Notes was $ 605.2 million. The Term Loan Facility is considered a Level 2 instrument and recorded at book value in the Company's condensed consolidated financial statements. The Term Loan Facility reprices frequently due to variable interest rate terms and entails no significant changes in credit risk. As a result, the fair value of the Term Loan Facility approximates carrying value. The Prior Term Loan Facility was considered a Level 2 instrument and recorded at book value in the Company's condensed consolidated financial statements. The Prior Term Loan Facility repriced frequently due to variable interest rate terms and entailed no significant changes in credit risk. As a result, the fair value of the Prior Term Loan Facility approximated 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 required subjective assumptions to be made regarding revenue growth rates, discount rates, peer revenue volatilities, and probabilities assigned to various potential business result scenarios and was determined using probability assessments with respect to the likelihood of achieving certain revenue targets. The fair value measurement was based on inputs unobservable in the market and thus represented a level 3 measurement. On October 31, 2021, the Company entered into an amendment to the purchase agreement to pay $ 6.0 million in satisfaction of the contingent consideration liability, and accordingly, the liability was transferred out of Level 3 as it was no longer measured at fair value. For further information, see Note 3—Business combination. The following table reconciles the change in the fair value of the contingent consideration during the period presented: (in thousands) Carrying amount Balance as of January 31, 2021 $ — Contingent consideration recognized at acquisition 8,147 Change in fair value recognized in the condensed consolidated statement of operations and comprehensive income (loss) ( 2,147 ) Balance as of October 31, 2021 $ 6,000 -18- Table of Contents Note 11. Subsequent events 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 580,000 HSAs and $ 1.9 billion of HSA Assets. In September 2021, the terms of the acquisition were amended pursuant to two agreements: (1) an amended agreement to acquire Further (other than VEBA, as described below) for $ 455 million, which closed on November 1, 2021, and (2) an agreement to acquire all cash balances and investment assets included in any voluntary employee beneficiary association (“VEBA”) account that is funding a health reimbursement arrangement (either Section 501(c)(9) or Section 115 trusts) and all contracts related exclusively thereto, subject to satisfaction of certain customary closing conditions, for a maximum purchase price of $ 45 million, calculated based on the actual amount of VEBA assets transferred relative to the total amount of VEBA assets as of April 30, 2021. On December 3, 2021, the parties agreed to terminate the agreement to acquire the Further VEBA business. The initial accounting for the acquisition is incomplete, pending identification and measurement of the assets acquired and liabilities assumed. On December 6, 2021, HealthEquity entered into a definitive agreement with Health Savings Administrators, L.L.C. (“HealthSavings”) to transition the custody of HealthSavings’ HSA portfolio to HealthEquity. The definitive agreement provides a $ 60 million purchase price for approximately $ 1.3 billion of HSA assets held in approximately 87,000 HSAs. Given that a significant portion of the HSA assets are currently invested, HealthSavings and HealthEquity are working closely to coordinate an in-kind transfer of most of the invested assets. The transition of HealthSavings’ HSAs to the HealthEquity platform is expected to be completed in the first quarter of fiscal 2023. -19- Table of Contents