HEALTHEQUITY, INC. 10-Q

Item 1. Financial statements HealthEquity, Inc. and subsidiaries Condensed consolidated balance sheets (in thousands, except par value) October 31, 2022 January 31, 2022 (unaudited) Assets Current assets Cash and cash equivalents $ 210,197 $ 225,414 Accounts receivable, net of allowance for doubtful accounts of $ 6,045 and $ 6,228 as of October 31, 2022 and January 31, 2022, respectively 87,716 87,428 Other current assets 34,247 38,495 Total current assets 332,160 351,337 Property and equipment, net 15,620 23,372 Operating lease right-of-use assets 58,536 63,613 Intangible assets, net 964,531 973,137 Goodwill 1,645,759 1,645,836 Other assets 48,151 49,807 Total assets $ 3,064,757 $ 3,107,102 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 15,842 $ 27,541 Accrued compensation 35,140 47,136 Accrued liabilities 33,367 57,589 Current portion of long-term debt 15,313 8,750 Operating lease liabilities 10,713 12,171 Total current liabilities 110,375 153,187 Long-term liabilities Long-term debt, net 911,406 922,077 Operating lease liabilities, non-current 60,819 65,232 Other long-term liabilities 9,758 14,185 Deferred tax liability 89,281 99,846 Total long-term liabilities 1,071,264 1,101,340 Total liabilities 1,181,639 1,254,527 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, 2022 and January 31, 2022, respectively — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 84,636 and 83,780 shares issued and outstanding as of October 31, 2022 and January 31, 2022, respectively 8 8 Additional paid-in capital 1,732,985 1,676,508 Accumulated earnings 150,125 176,059 Total stockholders’ equity 1,883,118 1,852,575 Total liabilities and stockholders’ equity $ 3,064,757 $ 3,107,102 See accompanying notes to condensed consolidated financial statements. -3- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of operations and comprehensive loss (unaudited) Three months ended October 31, Nine months ended October 31, (in thousands, except per share data) 2022 2021 2022 2021 Revenue Service revenue $ 108,580 $ 102,733 $ 315,962 $ 314,449 Custodial revenue 74,642 49,006 199,606 144,760 Interchange revenue 32,864 28,215 112,339 94,050 Total revenue 216,086 179,954 627,907 553,259 Cost of revenue Service costs 76,493 66,217 232,281 204,183 Custodial costs 6,812 5,734 20,543 15,567 Interchange costs 5,923 4,683 19,240 15,102 Total cost of revenue 89,228 76,634 272,064 234,852 Gross profit 126,858 103,320 355,843 318,407 Operating expenses Sales and marketing 17,245 12,726 49,648 42,288 Technology and development 48,890 38,070 140,653 111,437 General and administrative 25,131 20,004 74,795 63,503 Amortization of acquired intangible assets 23,541 19,642 71,420 59,745 Merger integration 6,509 13,244 23,486 38,422 Total operating expenses 121,316 103,686 360,002 315,395 Income (loss) from operations 5,542 ( 366 ) ( 4,159 ) 3,012 Other expense Interest expense ( 12,165 ) ( 11,881 ) ( 34,119 ) ( 25,824 ) Other income (expense), net 443 3,122 174 ( 164 ) Total other expense ( 11,722 ) ( 8,759 ) ( 33,945 ) ( 25,988 ) Loss before income taxes ( 6,180 ) ( 9,125 ) ( 38,104 ) ( 22,976 ) Income tax benefit ( 4,539 ) ( 4,087 ) ( 12,170 ) ( 11,505 ) Net loss and comprehensive loss $ ( 1,641 ) $ ( 5,038 ) $ ( 25,934 ) $ ( 11,471 ) Net loss per share: Basic $ ( 0.02 ) $ ( 0.06 ) $ ( 0.31 ) $ ( 0.14 ) Diluted $ ( 0.02 ) $ ( 0.06 ) $ ( 0.31 ) $ ( 0.14 ) Weighted-average number of shares used in computing net loss per share: Basic 84,572 83,551 84,349 82,939 Diluted 84,572 83,551 84,349 82,939 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) 2022 2021 2022 2021 Total stockholders' equity, beginning balance $ 1,864,896 $ 1,862,666 $ 1,852,575 $ 1,378,728 Common stock: Beginning balance 8 8 8 8 Issuance of common stock upon exercise of stock options, and for restricted stock — — — — Other issuance of common stock — — — — Ending balance 8 8 8 8 Additional paid-in capital: Beginning balance 1,713,122 1,648,743 1,676,508 1,158,372 Issuance of common stock upon exercise of stock options, and for restricted stock 1,693 938 6,167 6,253 Other issuance of common stock — — — 456,640 Stock-based compensation 18,170 13,284 50,310 41,700 Ending balance 1,732,985 1,662,965 1,732,985 1,662,965 Accumulated earnings Beginning balance 151,766 213,915 176,059 220,348 Net loss ( 1,641 ) ( 5,038 ) ( 25,934 ) ( 11,471 ) Ending balance 150,125 208,877 150,125 208,877 Total stockholders' equity, ending balance $ 1,883,118 $ 1,871,850 $ 1,883,118 $ 1,871,850 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) 2022 2021 Cash flows from operating activities: Net loss $ ( 25,934 ) $ ( 11,471 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 120,726 98,364 Stock-based compensation 50,310 41,700 Amortization of debt discount and issuance costs 2,454 3,616 Loss on extinguishment of debt — 4,044 Change in fair value of contingent consideration — ( 2,147 ) Other non-cash items 269 ( 750 ) Deferred taxes ( 10,565 ) ( 8,765 ) Changes in operating assets and liabilities: Accounts receivable, net ( 451 ) ( 10,090 ) Other assets 6,809 19,888 Operating lease right-of-use assets 6,169 8,944 Accrued compensation ( 11,630 ) ( 18,098 ) Accounts payable, accrued liabilities, and other current liabilities ( 33,170 ) ( 34,023 ) Operating lease liabilities, non-current ( 5,401 ) ( 6,808 ) Other long-term liabilities ( 4,427 ) 6,034 Net cash provided by operating activities 95,159 90,438 Cash flows from investing activities: Purchases of software and capitalized software development costs ( 35,306 ) ( 49,033 ) Purchases of property and equipment ( 2,971 ) ( 7,284 ) Acquisition of intangible member assets ( 70,574 ) ( 64,463 ) Acquisitions, net of cash acquired — ( 49,533 ) Proceeds from sale of equity securities — 2,367 Net cash used in investing activities ( 108,851 ) ( 167,946 ) Cash flows from financing activities: Principal payments on long-term debt ( 6,562 ) ( 1,003,125 ) Settlement of client-held funds obligation, net ( 1,579 ) ( 1,565 ) Proceeds from exercise of common stock options 6,616 7,728 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 Net cash provided by (used in) financing activities ( 1,525 ) 397,834 Increase (decrease) in cash and cash equivalents ( 15,217 ) 320,326 Beginning cash and cash equivalents 225,414 328,803 Ending cash and cash equivalents $ 210,197 $ 649,129 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) 2022 2021 Supplemental cash flow data: Interest expense paid in cash $ 36,268 $ 13,685 Income tax payments (refunds), net 775 ( 5,926 ) 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 4,099 3,708 Purchases of property and equipment included in accounts payable or accrued liabilities 297 479 Purchases of intangible member assets included in accounts payable or accrued liabilities — 2,281 Contingent consideration recognized at acquisition — 8,147 Exercise of common stock options receivable 21 1 Decrease in goodwill due to measurement period adjustments, net 77 19 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 Company consolidates entities in which the Company has a controlling financial interest, which includes all of its wholly owned 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, 2022 and for the three and nine months ended October 31, 2022 and 2021 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, 2022. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. 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, 2022. Recently adopted accounting pronouncements None. Recently issued accounting pronouncements not yet adopted None. -8- Table of Contents Note 2. Net loss per share The following table sets forth the computation of basic and diluted net loss per share: Three months ended October 31, Nine months ended October 31, (in thousands, except per share data) 2022 2021 2022 2021 Numerator (basic and diluted): Net loss $ ( 1,641 ) $ ( 5,038 ) $ ( 25,934 ) $ ( 11,471 ) Denominator (basic): Weighted-average common shares outstanding 84,572 83,551 84,349 82,939 Denominator (diluted): Weighted-average common shares outstanding 84,572 83,551 84,349 82,939 Weighted-average dilutive effect of stock options and restricted stock units — — — — Diluted weighted-average common shares outstanding 84,572 83,551 84,349 82,939 Net loss per share: Basic $ ( 0.02 ) $ ( 0.06 ) $ ( 0.31 ) $ ( 0.14 ) Diluted $ ( 0.02 ) $ ( 0.06 ) $ ( 0.31 ) $ ( 0.14 ) For the three months ended October 31, 2022 and 2021, approximately 2.0 million and 1.6 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive. For the nine months ended October 31, 2022 and 2021, approximately 2.4 million and 1.9 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive. Note 3. Business combinations Luum acquisition On March 8, 2021, the Company acquired 100 % of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). The aggregate purchase price for the acquisition consisted of $ 56.2 million in cash, which reflects a $ 2.1 million reduction in the fair value of contingent consideration during the fiscal year ended January 31, 2022. The Luum Acquisition was accounted for under the acquisition method of accounting for business combinations. The 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 was subject to adjustment during the measurement period (up to one year from the acquisition date). The purchase price allocation was finalized in the three months ended April 30, 2022. The following table summarizes the Company's 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 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 no t expected to be deductible for tax purposes. -9- Table of Contents Further acquisition On November 1, 2021, the Company completed its acquisition of the Further business (other than Further's voluntary employee beneficiary association business) for $ 455 million (the "Further Acquisition"). The Further Acquisition was accounted for under the acquisition method of accounting for business combinations. The 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 thousands) Estimated fair value Adjustments Updated Allocation Current assets $ 2,667 $ ( 163 ) $ 2,504 Intangible assets 172,183 — 172,183 Goodwill 282,287 ( 77 ) 282,210 Current liabilities ( 2,137 ) 240 ( 1,897 ) Total consideration paid $ 455,000 $ — $ 455,000 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 Further Acquisition is expected to be deductible over a period of 15 years for tax purposes. Note 4. Supplemental financial statement information Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive loss components consisted of the following: Property and equipment Property and equipment consisted of the following: (in thousands) October 31, 2022 January 31, 2022 Leasehold improvements $ 18,269 $ 18,573 Furniture and fixtures 8,396 8,417 Computer equipment 29,970 31,982 Property and equipment, gross 56,635 58,972 Accumulated depreciation ( 41,015 ) ( 35,600 ) Property and equipment, net $ 15,620 $ 23,372 Depreciation expense for the three months ended October 31, 2022 and 2021 was $ 2.9 million and $ 3.5 million, respectively, and $ 9.4 million and $ 10.9 million for the nine months ended October 31, 2022 and 2021, 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 October 31, 2022 and January 31, 2022, the balance of deferred revenue was $ 7.4 million and $ 10.5 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 49 % 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, 2022, approximately $ 1.0 million and $ 4.2 million, respectively, of revenue was recognized that was included in the balance of deferred revenue as of January 31, 2022. The Company expects to satisfy its remaining obligations for these arrangements. -10- Table of Contents Leases The components of operating lease costs were as follows: Three months ended October 31, Nine months ended October 31, (in thousands) 2022 2021 2022 2021 Operating lease expense $ 2,855 $ 3,512 $ 8,568 $ 11,322 Sublease income ( 568 ) ( 455 ) ( 1,614 ) ( 1,355 ) Net operating lease expense $ 2,287 $ 3,057 $ 6,954 $ 9,967 Other income (expense), net Other income (expense), net, consisted of the following: Three months ended October 31, Nine months ended October 31, (in thousands) 2022 2021 2022 2021 Interest income $ 443 $ 478 $ 584 $ 1,419 Gain on equity securities — — — 1,677 Acquisition gains (costs), net — 2,687 ( 53 ) ( 4,917 ) Other income (expense), net — ( 43 ) ( 357 ) 1,657 Total other income (expense), net $ 443 $ 3,122 $ 174 $ ( 164 ) 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) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 9,387 $ 10,928 Operating lease right-of-use assets obtained in exchange for new operating lease obligations $ 1,092 $ 586 Note 5. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets were as follows: October 31, 2022 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 224,699 $ ( 138,669 ) $ 86,030 Acquired HSA portfolios 261,179 ( 59,194 ) 201,985 Acquired customer relationships 759,782 ( 140,510 ) 619,272 Acquired developed technology 132,825 ( 75,852 ) 56,973 Acquired trade names 12,900 ( 12,629 ) 271 Total amortizable intangible assets $ 1,391,385 $ ( 426,854 ) $ 964,531 -11- Table of Contents January 31, 2022 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 192,050 $ ( 99,952 ) $ 92,098 Acquired HSA portfolios 192,298 ( 46,603 ) 145,695 Acquired customer relationships 759,781 ( 101,741 ) 658,040 Acquired developed technology 132,825 ( 58,334 ) 74,491 Acquired trade names 12,900 ( 10,087 ) 2,813 Total amortizable intangible assets $ 1,289,854 $ ( 316,717 ) $ 973,137 Amortization expense for the three months ended October 31, 2022 and 2021 was $ 37.6 million and $ 30.0 million, respectively, and $ 111.4 million and $ 87.5 million for the nine months ended October 31, 2022 and 2021, respectively. Goodwill During the three and nine months ended October 31, 2022, goodwill decreased by $ 0.2 million and $ 0.1 million, respectively, due to measurement period adjustments. For further information, see Note 3—Business combinations. There were no additional changes to the carrying value of goodwill during the nine months ended October 31, 2022. Note 6. Commitments and contingencies Commitments The Company’s principal commitments consist of long-term debt, operating lease obligations for office space and data storage facilities, processing services agreements, telephony services, and other contractual commitments. On March 2, 2022, the Company completed its acquisition of the Health Savings Administrators, L.L.C. ("HealthSavings") HSA portfolio for $ 60 million in cash. There were no other material changes during the nine months ended October 31, 2022, outside of the ordinary course of business, in the Company's commitments from those disclosed in its Annual Report on Form 10-K for the fiscal year ended January 31, 2022. 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, the Company's wholly owned subsidiary WageWorks, Inc. ("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. On January 4, 2022, WageWorks filed an amended complaint in the Superior Court. 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 January 31, 2022, Union Mesa filed a motion to dismiss for the conversion cause of action, which the Superior Court denied on April 13, 2022. On May 18, 2022, Union Mesa filed an answer and counterclaim with the Superior Court, wherein Union Mesa denied WageWorks' claims, and separately seeks recourse against WageWorks for breach of contract and breach of the implied covenant of good faith and fair dealing. On May 19, 2022, Union Mesa filed an amended complaint and counterclaim seeking the same recourse. On June 29, 2022, Union Mesa filed a second amended answer and counterclaim, which names the Company as a -12- Table of Contents counter-defendant. On July 21, 2022, WageWorks and the Company filed an answer to the counterclaims. The parties are currently engaged in discovery. 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. Based on currently available information, the Company does not believe 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 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 pre-tax book loss through the end of the latest fiscal quarter to determine the interim income tax benefit. For the three and nine months ended October 31, 2022, the Company recorded an income tax benefit of $ 4.5 million and $ 12.2 million, respectively. This resulted in an effective income tax benefit rate of 73.4 % and 31.9 % for the three and nine months ended October 31, 2022, respectively, compared with an effective income tax benefit rate of 44.8 % and 50.1 % for the three and nine months ended October 31, 2021, respectively. For the three and nine months ended October 31, 2022, discrete tax items had an effective tax rate benefit of 66.2 % and 14.3 %, respectively, compared with an effective tax rate benefit of 7.7 % and 20.5 % for the three and nine months ended October 31, 2021, respectively, primarily due to a release of uncertain tax positions and a change in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes. As of October 31, 2022 and January 31, 2022, the Company’s total gross unrecognized tax benefit was $ 8.8 million and $ 11.7 million, respectively. If recognized, $ 5.4 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of October 31, 2022. The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by the IRS and the state of Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company's 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 2006. Note 8. Indebtedness Long-term debt consisted of the following: (in thousands) October 31, 2022 January 31, 2022 4.50 % Senior Notes due 2029 $ 600,000 $ 600,000 Term Loan Facility 343,438 350,000 Principal amount 943,438 950,000 Less: unamortized discount and issuance costs (1) 16,719 19,173 Total debt, net 926,719 930,827 Less: current portion of long-term debt 15,313 8,750 Long-term debt, net $ 911,406 $ 922,077 (1) In addition to the $ 16.7 million and $ 19.2 million of unamortized discount and issuance costs related to long-term debt as of October 31, 2022 and January 31, 2022, respectively, $ 3.7 million and $ 4.4 million of unamortized issuance costs related to the Company's Revolving Credit Facility (as defined below) are included within other assets on the condensed consolidated balance sheets as of October 31, 2022 and January 31, 2022, respectively. -13- Table of Contents 4.50 % Senior Notes due 2029 On October 8, 2021, the Company completed its offering of $ 600 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 Notes are guaranteed by each of the Company’s existing, wholly owned domestic subsidiaries that guarantees its obligations under the Credit Agreement (as defined below) 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 is payable on April 1 and October 1 of each year. As of October 31, 2022 and January 31, 2022, $ 2.3 million and $ 8.7 million, respectively, of accrued interest on the Notes is included within accrued liabilities on the Company's condensed consolidated balance sheets. The effective interest rate on the Notes is 4.72 %. 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 are 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 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 million; 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, 2022, the stated interest rate was 5.56 % and the effective interest rate was 6.38 %. 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 -14- Table of Contents 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. No amounts have been drawn under the Revolving Credit Facility. The loans made under the Term Loan Facility 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 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 significant 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 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. The Company was in compliance with all covenants under the Credit Agreement as of October 31, 2022, 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 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. 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 loss during the periods presented: Three months ended October 31, Nine months ended October 31, (in thousands) 2022 2021 2022 2021 Cost of revenue $ 3,662 $ 3,076 $ 10,667 $ 8,547 Sales and marketing 2,569 829 7,136 5,677 Technology and development 4,045 3,458 10,388 10,164 General and administrative 7,894 5,921 22,119 17,312 Other expense, net (1) — — — 342 Total stock-based compensation expense $ 18,170 $ 13,284 $ 50,310 $ 42,042 (1) Equity-based awards exchanged for cash in connection with the Luum Acquisition. Stock award plans Incentive Plan. The Company grants stock options and restricted stock units ("RSUs") 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. -15- Table of Contents 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, 2022, 9.4 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, 2022 1,232 $ 1.25 - 82.39 $ 35.64 4.2 $ 25,719 Exercised ( 191 ) $ 1.25 - 59.63 $ 32.43 Forfeited ( 2 ) $ 25.45 - 28.69 $ 28.54 Outstanding as of October 31, 2022 1,039 $ 14.00 - 82.39 $ 36.24 3.7 $ 43,426 Vested and expected to vest as of October 31, 2022 1,039 $ 36.24 3.7 $ 43,426 Exercisable as of October 31, 2022 1,007 $ 35.12 3.6 $ 43,196 Restricted stock units A summary of RSU activity is as follows: RSUs and PRSUs (in thousands, except weighted-average grant date fair value) Shares Weighted-average grant date fair value Outstanding as of January 31, 2022 2,740 $ 63.15 Granted 1,564 76.69 Vested ( 635 ) 60.68 Forfeited ( 399 ) 63.87 Outstanding as of October 31, 2022 3,270 $ 70.02 Performance restricted stock units. During the three months ended April 30, 2022, the Company awarded 281,784 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, 2025. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $ 32.1 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. -16- Table of Contents 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, 2022, the fair value of the Notes was $ 528.5 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. -17- Table of Contents