HEALTHEQUITY, INC. 10-K

Item 8. Financial statements and Supplementary Data HealthEquity, Inc. and subsidiaries Index to consolidated financial statements Page Report of independent registered public accounting firm (PCAOB ID 238 ) 50 Consolidated balance sheets as of January 31, 2023 and 2022 52 Consolidated statements of operations and comprehensive income (loss) for the years ended January 31, 2023, 2022 and 2021 53 Consolidated statements of stockholders' equity for the years ended January 31, 2023, 2022 and 2021 54 Consolidated statements of cash flows for the years ended January 31, 2023, 2022 and 2021 55 Notes to consolidated financial statements 57 -49- Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of HealthEquity, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of HealthEquity, Inc. and its subsidiaries (the “Company”) as of January 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended January 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's report on internal control over financial reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. -50- Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Service Revenue Recognition As described in Note 1 to the consolidated financial statements, the Company's primary sources of revenue are service, custodial, and interchange revenue. The Company’s service revenue was $430.2 million for the year ended January 31, 2023. To generate service revenue, the Company administers its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services. All of these services are consumed as they are received. The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations. The principal consideration for our determination that performing procedures relating to service revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to revenue recognition, including consideration of the material weaknesses in internal control over financial reporting that were previously disclosed by management and existed during the year related to this matter. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the recognition of service revenue for a sample of revenue transactions by obtaining confirmation from customers or obtaining and inspecting source documents, including invoices, sales contracts, and cash receipts. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah March 30, 2023 We have served as the Company’s auditor since 2013. -51- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated balance sheets (in thousands, except par value) January 31, 2023 January 31, 2022 Assets Current assets Cash and cash equivalents $ 254,266 $ 225,414 Accounts receivable, net of allowance for doubtful accounts of $ 4,989 and $ 6,228 as of January 31, 2023 and 2022, respectively 96,835 87,428 Other current assets 31,792 38,495 Total current assets 382,893 351,337 Property and equipment, net 12,862 23,372 Operating lease right-of-use assets 56,461 63,613 Intangible assets, net 936,359 973,137 Goodwill 1,648,145 1,645,836 Other assets 52,180 49,807 Total assets $ 3,088,900 $ 3,107,102 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 13,899 $ 27,541 Accrued compensation 45,835 47,136 Accrued liabilities 43,668 57,589 Current portion of long-term debt 17,500 8,750 Operating lease liabilities 10,159 12,171 Total current liabilities 131,061 153,187 Long-term liabilities Long-term debt, net of issuance costs 907,838 922,077 Operating lease liabilities, non-current 58,988 65,232 Other long-term liabilities 12,708 14,185 Deferred tax liability 82,665 99,846 Total long-term liabilities 1,062,199 1,101,340 Total liabilities 1,193,260 1,254,527 Commitments and contingencies (see Note 7) Stockholders’ equity Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of January 31, 2023 and 2022 — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 84,758 and 83,780 shares issued and outstanding as of January 31, 2023 and 2022, respectively 8 8 Additional paid-in capital 1,745,716 1,676,508 Accumulated earnings 149,916 176,059 Total stockholders’ equity 1,895,640 1,852,575 Total liabilities and stockholders’ equity $ 3,088,900 $ 3,107,102 The accompanying notes are an integral part of the consolidated financial statements. -52- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated statements of operations and comprehensive income (loss) Year ended January 31, (in thousands, except per share data) 2023 2022 2021 Revenue Service revenue $ 430,196 $ 426,910 $ 430,966 Custodial revenue 283,112 202,817 190,933 Interchange revenue 148,440 126,829 111,671 Total revenue 861,748 756,556 733,570 Cost of revenue Service costs 317,360 290,302 280,214 Custodial costs 29,101 21,867 19,574 Interchange costs 25,196 20,681 18,448 Total cost of revenue 371,657 332,850 318,236 Gross profit 490,091 423,706 415,334 Operating expenses Sales and marketing 68,849 58,605 49,964 Technology and development 193,375 157,364 124,809 General and administrative 95,628 84,379 84,493 Amortization of acquired intangible assets 94,586 82,791 76,064 Merger integration 28,596 64,805 45,990 Total operating expenses 481,034 447,944 381,320 Income (loss) from operations 9,057 ( 24,238 ) 34,014 Other expense Interest expense ( 48,424 ) ( 36,572 ) ( 34,881 ) Other income (expense), net 1,271 ( 5,931 ) 5,007 Total other expense ( 47,153 ) ( 42,503 ) ( 29,874 ) Income (loss) before income taxes ( 38,096 ) ( 66,741 ) 4,140 Income tax benefit ( 11,953 ) ( 22,452 ) ( 4,694 ) Net income (loss) and comprehensive income (loss) $ ( 26,143 ) $ ( 44,289 ) $ 8,834 Net income (loss) per share: Basic $ ( 0.31 ) $ ( 0.53 ) $ 0.12 Diluted $ ( 0.31 ) $ ( 0.53 ) $ 0.12 Weighted-average number of shares used in computing net income (loss) per share: Basic 84,442 83,133 74,235 Diluted 84,442 83,133 75,679 The accompanying notes are an integral part of the consolidated financial statements. -53- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated statements of stockholders’ equity Common stock Additional paid-in capital Accumulated earnings Total stockholders' equity (in thousands) Shares Amount Balance as of January 31, 2020 71,051 $ 7 $ 818,774 $ 211,514 $ 1,030,295 Issuance of common stock: Issuance of common stock upon exercise of options, and for restricted stock 827 — 9,956 — 9,956 Other issuance of common stock 5,290 1 286,779 — 286,780 Stock-based compensation — — 42,863 — 42,863 Net income — — — 8,834 8,834 Balance as of January 31, 2021 77,168 $ 8 $ 1,158,372 $ 220,348 $ 1,378,728 Issuance of common stock: Issuance of common stock upon exercise of options, and for restricted stock 862 — 8,746 — 8,746 Other issuance of common stock 5,750 — 456,640 — 456,640 Stock-based compensation — — 52,750 — 52,750 Net loss — — — ( 44,289 ) ( 44,289 ) Balance as of January 31, 2022 83,780 $ 8 $ 1,676,508 $ 176,059 $ 1,852,575 Issuance of common stock: Issuance of common stock upon exercise of options, and for restricted stock 978 — 6,594 — 6,594 Stock-based compensation — — 62,614 — 62,614 Net loss — — — ( 26,143 ) ( 26,143 ) Balance as of January 31, 2023 84,758 $ 8 $ 1,745,716 $ 149,916 $ 1,895,640 The accompanying notes are an integral part of the consolidated financial statements. -54- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated statements of cash flows Year ended January 31, (in thousands) 2023 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 26,143 ) $ ( 44,289 ) $ 8,834 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 161,201 137,188 115,904 Stock-based compensation 62,614 52,750 42,863 Impairment of right-of-use assets — 11,246 — Amortization of debt issuance costs 3,261 4,448 5,102 Loss on extinguishment of debt — 4,049 — Change in fair value of contingent consideration — ( 2,147 ) — Gains on equity securities — ( 1,677 ) — Other non-cash items 268 1,232 1,753 Deferred taxes ( 17,181 ) ( 23,430 ) ( 5,132 ) Changes in operating assets and liabilities: Accounts receivable ( 9,570 ) ( 11,204 ) ( 413 ) Other assets 4,620 7,464 ( 24,839 ) Operating lease right-of-use assets 8,244 15,235 11,150 Accrued compensation ( 1,282 ) ( 3,657 ) 771 Accounts payable, accrued liabilities, and other current liabilities ( 26,673 ) ( 2,178 ) 30,422 Operating lease liabilities, non-current ( 7,232 ) ( 9,412 ) ( 10,803 ) Other long-term liabilities ( 1,477 ) 5,377 6,007 Net cash provided by operating activities 150,650 140,995 181,619 Cash flows from investing activities: Business combinations, net of cash acquired — ( 504,533 ) — Purchases of software and capitalized software development costs ( 45,173 ) ( 62,708 ) ( 51,500 ) Acquisitions of HSA portfolios ( 70,583 ) ( 65,465 ) ( 32,371 ) Purchases of property and equipment ( 3,371 ) ( 8,908 ) ( 13,093 ) Proceeds from sale of equity securities — 2,367 — Net cash used in investing activities ( 119,127 ) ( 639,247 ) ( 96,964 ) Cash flows from financing activities: Principal payments on long-term debt ( 8,750 ) ( 1,003,125 ) ( 239,063 ) Proceeds from long-term debt — 950,000 — Payment of debt issuance costs — ( 11,920 ) — Proceeds from follow-on equity offering, net of payments for offering costs — 456,640 286,779 Settlement of client-held funds obligation, net ( 603 ) ( 486 ) ( 3,862 ) Proceeds from exercise of common stock options 6,682 9,754 8,568 Payment of contingent consideration — ( 6,000 ) — Net cash provided by (used in) financing activities ( 2,671 ) 394,863 52,422 Increase (decrease) in cash and cash equivalents 28,852 ( 103,389 ) 137,077 Beginning cash and cash equivalents 225,414 328,803 191,726 Ending cash and cash equivalents $ 254,266 $ 225,414 $ 328,803 The accompanying notes are an integral part of the consolidated financial statements. -55- Table of Contents HealthEquity, Inc. and subsidiaries Consolidated statements of cash flows (continued) Year ended January 31, (in thousands) 2023 2022 2021 Supplemental cash flow data: Interest expense paid in cash $ 43,570 $ 16,107 $ 27,686 Income tax payments (refunds), net 1,526 ( 5,632 ) ( 6,022 ) 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 3,595 4,640 1,930 Purchases of property and equipment included in accounts payable or accrued liabilities 69 1,414 160 Acquisitions of HSA portfolios included in accounts payable or accrued liabilities — 1,692 — Decrease (increase) in goodwill due to measurement period adjustments, net ( 2,309 ) 19 5,438 Exercise of common stock options receivable 382 470 1,478 The accompanying notes are an integral part of the consolidated financial statements. -56- Table of Contents HealthEquity, Inc. and subsidiaries Notes to 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. In February 2006, HealthEquity received designation by the U.S. Department of Treasury to act as a passive non-bank custodian, which allows HealthEquity to hold custodial assets for individual account holders. On July 24, 2017, HealthEquity received designation by the U.S. Department of Treasury to act as both a passive and non-passive non-bank custodian, which allows HealthEquity to hold custodial assets for individual account holders and use discretion to direct investment of such assets held. As a passive and non-passive non-bank custodian according to Treasury Regulations section 1.408-2(e)(5)(ii)(B), the Company must maintain net worth (assets minus liabilities) greater than the sum of 2 % of passive custodial funds held at each fiscal year-end and 4 % of the non-passive custodial funds held at each fiscal year-end in order to take on additional custodial assets. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the consolidated financial statements. 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. Segments The Company operates in one segment, which reflects the way in which its chief operating decision maker, the Chief Executive Officer, reviews the Company's financial performance and makes decisions about resource allocation. All long-lived assets are maintained in the United States of America. Cash and cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents were held in institutions in the U.S. and include deposits in a money market account that was unrestricted as to withdrawal or use. Client-held funds Many of the Company's client services agreements with employers (referred to as "Clients") provide that Clients remit funds to the Company to pre-fund Client and employee participant contributions related to flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs,” respectively) and commuter accounts. These Client-held funds remitted to the Company do not represent cash assets of the Company to the extent that they are not combined with corporate cash, and accordingly are not included in cash and cash equivalents on the Company's consolidated balance sheets. Accounts receivable Accounts receivable represent monies due to the Company for monthly service revenue, custodial revenue and interchange revenue. The Company maintains an allowance for doubtful accounts to reserve for expected credit losses from trade receivables considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions. In evaluating the Company’s ability to collect outstanding receivable balances, the Company considers various factors including macroeconomic variables, the age of the balance, the creditworthiness of the customer, which is assessed based on ongoing credit evaluations and payment history, and the customer’s current financial condition. -57- Table of Contents Other assets Other assets consist primarily of contract costs, prepaid expenditures, debt issuance costs, income tax receivables, inventories, and various other assets. Amounts expected to be recouped or recognized over a period of twelve months or less have been classified as current in the accompanying consolidated balance sheets. Leases The Company determines if a contract contains a lease at inception or any modification of the contract. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a specified period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Leases with an expected term of 12 months or less at commencement are not accounted for on the balance sheet. All operating lease expense is recognized on a straight-line basis over the expected lease term. Certain leases also include obligations to pay for non-lease services, such as utilities and common area maintenance. The services are accounted for separately from lease components, and the Company allocates payments to the lease and other services components based on estimated stand-alone prices. Operating lease right-of-use ("ROU") assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. As the rate implicit in each lease is not readily determinable, management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Property and equipment Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of individual assets. The useful life for leasehold improvements is the shorter of the estimated useful life or the term of the lease ranging from 3 - 5 years. The useful life used for computing depreciation for all other asset classes is described below: Computer equipment 3 - 5 years Furniture and fixtures 5 years Maintenance and repairs are expensed when incurred, and improvements that extend the economic useful life of an asset are capitalized. Gains and losses on the disposal of property and equipment are reflected in operating expenses. Intangible assets, net Intangible assets are carried at cost and amortized, typically, on a straight-line basis over their estimated useful lives. The useful life used for computing amortization for all intangible asset classes is described below: Software and software development costs 3 years Acquired customer relationships 7 - 15 years Acquired developed technology 2 - 5 years Acquired trade names and trademarks 3 years Acquired HSA portfolios 15 years The Company accounts for the costs of computer software developed or obtained for internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software . Costs incurred during operation and post-implementation stages are charged to expense. Costs incurred during the application development stage that are directly attributable to developing or obtaining software for internal use are capitalized. Management’s judgment is required in determining the point when various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. Acquired customer relationships, developed technology, and trade names and trademarks are valued utilizing the discounted cash flow method, a form of the income approach. The useful lives of acquired customer relationships were estimated based on discount rates and revenue growth rates, net of attrition. The useful lives of developed technology and trade names were estimated based on expected obsolescence. The Company expenses the assets straight-line over the useful lives and determined that this amortization method is appropriate to reflect the pattern over which the economic benefits of these acquired assets are realized. -58- Table of Contents Acquired HSA portfolios consist of the contractual rights to administer the activities related to the individual HSAs acquired. The Company used its HSA customer relationship period assumption and the historical attrition rates of member accounts to determine that an average useful life of 15 years and the use of a straight-line amortization method are appropriate to reflect the pattern over which the economic benefits of existing member assets are realized. The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually on January 31 or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s impairment tests are based on a single operating segment and reporting unit structure. The goodwill impairment test involves a qualitative assessment to compare a reporting unit's fair value to its carrying value. If it is determined that it is more likely than not that a reporting unit's fair value is less than its carrying value, a quantitative comparison is made between the Company's market capitalization and the carrying value of the reporting unit, including goodwill. If the carrying value of the reporting unit exceeds its fair value, an impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. Self-insurance The Company is self-insured for medical insurance up to certain annual stop-loss limits. The Company establishes a liability as of the balance sheet date for claims, both reported and incurred but not reported, using currently available information as well as historical claims experience, and as determined by an independent third party. Other long-term liabilities Other long-term liabilities consists of long-term deferred revenue and other liabilities that the Company does not expect to settle within one year. Revenue recognition The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company determines revenue recognition through the following steps: • identification of the contract, or contracts, with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the Company satisfies a performance obligation. Disaggregation of revenue. The Company's primary sources of revenue are service, custodial, and interchange revenue and are disclosed in the consolidated statements of operations and comprehensive income (loss). All of the Company's sources of revenue are deemed to be revenue contracts with customers. Each revenue source is affected differently by economic factors as it relates to the nature, amount, timing and uncertainty. Costs to obtain a contract. ASC 606, Revenue from contracts with customers , requires capitalizing the costs of obtaining a contract when those costs are expected to be recovered. In order to determine the amortization period for sales commissions contract costs, the Company applied the portfolio approach. Accordingly, the amortization period of the assets has been determined to be the average economic life of an HSA or other CDB relationship, which is estimated to be 15 years and 7 years, respectively. Amortization of capitalized sales commission contract costs is included in sales and marketing expenses in the consolidated statements of operations and comprehensive income (loss). The Company has applied the practical expedient which allows an entity to account for incremental costs of obtaining a contract at a portfolio level. The Company has also applied the practical expedient to recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. -59- Table of Contents Performance obligations. ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. Service revenue. The Company administers its platforms, prepares statements, provides a mechanism for spending funds, and provides customer support services. All of these services are consumed as they are received. The Company recognizes service revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for those services, on a monthly basis as it satisfies its performance obligations. Custodial revenue. The Company earns custodial revenue primarily from HSA assets deposited with depository partners or placed in group annuity contracts or similar arrangements with insurance company partners, recordkeeping fees earned in respect of mutual funds in which HSA members invest, and Client-held funds deposited with depository partners. In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA assets in mutual funds through a custodial investment partner, from which the Company earns a recordkeeping fee, calculated as a percentage of custodial investments. The deposit of funds represents a service that is simultaneously received and consumed by the depository partners, insurance company partners, and investment partner. The Company recognizes custodial revenue each month, in an amount that reflects the consideration it expects to be entitled to in exchange for the service. Interchange revenue. The Company satisfies its interchange performance obligation each time payments are made with its cards via payment networks. The Company recognizes interchange revenue, in an amount that reflects the consideration it expects to be entitled to in exchange for the service, in the month the payment transaction occurs. 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. Significant judgments. The Company makes no significant judgments in determining the amount or timing of revenue recognition. The Company has estimated the average economic life of an HSA or CDB member relationship, which has been determined to be the amortization period for the capitalized sales commissions contract costs. Cost of revenue The Company incurs cost of revenue related to servicing member accounts, managing customer and partner relationships, and processing reimbursement claims. Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations, new member and participant supplies, and other operating costs of the member account servicing departments. Other components of the Company’s cost of revenue include interest retained by members on custodial assets held and interchange costs incurred in connection with processing card transactions initiated by members. Stock-based compensation The Company grants stock-based awards, which consist of stock options and restricted stock units ("RSUs"), to certain team members, executive officers, and directors. Historically, the Company also granted restricted stock awards ("RSAs"). The Company recognizes compensation expense for stock-based awards based on the grant date estimated fair value. Expense for stock-based awards is generally recognized on a straight-line basis over the requisite service period and is reversed as pre-vesting forfeitures occur. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock options on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables. The fair value of RSUs is based on the current value of the Company's closing stock price on the date of grant less the present value of future expected dividends discounted at the risk-free interest rate. For stock-based awards with performance conditions, the Company evaluates the probability of achieving the performance criteria and of the number of shares that are expected to vest, and compensation expense is then adjusted to reflect the number of shares expected to vest and the requisite service period. For awards with performance conditions, compensation expense is recognized using the graded-vesting attribution method in accordance with the provisions of ASC 718, Compensation—Stock Compensation ("Topic 718"). Compensation -60- Table of Contents expense related to stock-based awards with market conditions is recorded on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied. Upon the exercise of a stock option or release of an RSU, common shares are issued from authorized, but not outstanding, common stock. Interest expense Interest expense primarily consists of accrued interest expense and amortization of deferred financing costs associated with long-term debt. Income tax benefit The Company accounts for income taxes and the related accounts under the asset and liability method as set forth in ASC 740, Income Taxes . Under this method, current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, for net operating losses, and for tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for when it is more likely than not that some or all of the deferred tax assets may not be realized in future years. The Company recognizes the tax benefit from an uncertain tax position taken or expected to be taken in a tax return using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, based on the technical merits of the position. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit in the financial statements as the largest benefit that has a greater than 50% likelihood of being sustained upon settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as a component of other income (expense), net in the consolidated statements of operations and comprehensive income (loss). Changes in facts and circumstances could have a material impact on the Company’s effective tax rate and results of operations. Asset acquisitions The Company routinely acquires rights to be the custodian of HSA portfolios, in which substantially all of the fair value of the gross portfolio assets acquired is concentrated in a group of similar HSA assets and therefore the acquisitions do not constitute a business. Accordingly, the acquisitions are accounted for under the asset acquisition method of accounting in accordance with ASC 805-50, Business Combinations—Related Issues . Under the asset acquisition method of accounting, the Company is required to fair value the assets transferred. The cost of the assets acquired, including transaction costs incurred in conjunction with an asset acquisition, is allocated to the individual assets acquired based on their relative fair values and does not give rise to goodwill. Business combinations Consideration paid for the acquisition of a business as defined by ASC 805-10 is allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. Acquisition-related expenses incurred in conjunction with the acquisition of a business are recognized in earnings in the period in which they are incurred and are included in other income (expense), net on the consolidated statements of operations and comprehensive income (loss). Use of estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made estimates for the allowance for doubtful accounts, capitalized software development costs, evaluating goodwill and long-lived assets for impairment, useful lives of property and equipment and intangible assets, accrued compensation, accrued liabilities, grant date fair value of stock options and performance restricted stock units and restricted stock awards, and income taxes. Actual results could differ from those estimates. -61- Table of Contents Recently adopted accounting pronouncements None. Recently issued accounting pronouncements not yet adopted None. Note 2. Net income (loss) per share The following table sets forth the computation of basic and diluted net income (loss) per share: Year ended January 31, (in thousands, except per share data) 2023 2022 2021 Numerator (basic and diluted): Net income (loss) $ ( 26,143 ) $ ( 44,289 ) $ 8,834 Denominator (basic): Weighted-average common shares outstanding 84,442 83,133 74,235 Denominator (diluted): Weighted-average common shares outstanding 84,442 83,133 74,235 Weighted-average dilutive effect of stock options and restricted stock units — — 1,444 Diluted weighted-average common shares outstanding 84,442 83,133 75,679 Net income (loss) per share: Basic $ ( 0.31 ) $ ( 0.53 ) $ 0.12 Diluted $ ( 0.31 ) $ ( 0.53 ) $ 0.12 For the fiscal years ended January 31, 2023, 2022 and 2021, 2.5 million, 1.8 million, and 0.6 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings (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 during 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. -62- 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 was subject to adjustment during the measurement period (up to one year from the acquisition date). The purchase price allocation was finalized during the three months ended January 31, 2023. The following table summarizes the Company's 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 2,309 284,596 Current liabilities ( 2,137 ) ( 2,146 ) ( 4,283 ) 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. Note 4. Supplemental financial statement information Selected consolidated balance sheet and consolidated statement of operations and comprehensive income (loss) components consist of the following: Allowance for doubtful accounts As of January 31, 2023 and 2022, the Company had an allowance for doubtful accounts of $ 5.0 million and $ 6.2 million, respectively. During the fiscal years ended January 31, 2023, 2022, and 2021, the Company recorded credit losses from trade receivables of $ 2.1 million, $ 3.3 million, and $ 3.4 million, respectively. Prepaid expenses As of January 31, 2023 and 2022, the Company had prepaid expenses of $ 20.1 million and $ 20.6 million, respectively, which are included within other current assets on the Company's consolidated balance sheets. Costs to obtain a contract As of January 31, 2023 and 2022, the net amount capitalized as contract costs was $ 44.0 million and $ 39.3 million, respectively, which is included in other current assets and other assets. Amortization of capitalized contract costs during the fiscal years ended January 31, 2023, 2022, and 2021 was $ 4.4 million, $ 4.3 million, and $ 2.4 million, respectively. Property and equipment Property and equipment consisted of the following as of January 31, 2023 and 2022: (in thousands) January 31, 2023 January 31, 2022 Leasehold improvements $ 18,269 $ 18,573 Furniture and fixtures 8,392 8,417 Computer equipment 28,021 31,982 Property and equipment, gross 54,682 58,972 Accumulated depreciation ( 41,820 ) ( 35,600 ) Property and equipment, net $ 12,862 $ 23,372 Depreciation expense for the fiscal years ended January 31, 2023, 2022 and 2021 was $ 12.3 million, $ 14.7 million and $ 16.0 million, respectively. -63- Table of Contents Contract balances As of January 31, 2023 and 2022, the balance of deferred revenue was $ 8.3 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 58 % of its balance of deferred revenue as revenue over the next 12 months and the remainder thereafter. Amounts expected to be recognized as revenue within a period of twelve months or less are classified as accrued liabilities in the Company's consolidated balance sheets, with the remainder included within other long-term liabilities. Revenue recognized during the fiscal year that was included in the beginning balance of deferred revenue was $ 4.9 million. The Company expects to satisfy its remaining obligations for these arrangements. Other income (expense), net Other income (expense), net, consisted of the following: Year ended January 31, (in thousands) 2023 2022 2021 Interest income $ 1,763 $ 1,501 $ 1,045 Gain on equity securities — 1,692 — Acquisition costs ( 53 ) ( 10,832 ) ( 1,118 ) Other income (expense) ( 439 ) 1,708 5,080 Total other income (expense), net $ 1,271 $ ( 5,931 ) $ 5,007 Interest expense Based on the application of ASC 470-50, Debt - Modifications and Extinguishments, the Company recorded a $ 4.0 million loss on extinguishment of debt during the fiscal year ended January 31, 2022, which is included within interest expense in the consolidated statements of operations and comprehensive income (loss) for the fiscal year ended January 31, 2022. Note 5. Leases The Company has entered into various non-cancelable operating lease agreements for office space, data storage facilities, and other leases with remaining lease terms of less than 1 year to approximately 8 years, often with one or more Company options to renew. These renewal terms can extend the lease term from 2 to 10 years and are included in the lease term when it is reasonably certain that the Company will exercise the option. The components of operating lease costs were as follows: Year ended January 31, (in thousands) 2023 2022 2021 Operating lease expense $ 11,371 $ 14,762 $ 16,073 Sublease income ( 2,187 ) ( 1,836 ) ( 1,799 ) Net operating lease cost $ 9,184 $ 12,926 $ 14,274 Weighted average lease term and discount rate were as follows: January 31, 2023 January 31, 2022 Weighted average remaining lease term 7.53 years 8.32 years Weighted average discount rate 4.31 % 4.29 % Lease liabilities were as follows: (in thousands) January 31, 2023 January 31, 2022 Gross lease liabilities $ 81,313 $ 92,529 Less: imputed interest ( 12,166 ) ( 15,126 ) Present value of lease liabilities 69,147 77,403 Less: current portion of lease liabilities ( 10,159 ) ( 12,171 ) Lease liabilities, non-current $ 58,988 $ 65,232 -64- Table of Contents As of January 31, 2023, the Company had additional operating leases for office space that had not yet commenced with aggregate undiscounted lease payments of $ 3.2 million. The operating leases will commence during fiscal years 2024 and 2025 and have lease terms of approximately 7 to 8 years. Supplemental cash flow information related to the Company's operating leases was as follows: Year ended January 31, (in thousands) 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 12,533 $ 14,742 Right-of-use assets obtained in exchange for lease obligations $ 1,092 $ 586 During the fiscal year ended January 31, 2022, the Company recorded impairment losses on right-of-use assets of $ 11.2 million, which are included within merger integration expense in the consolidated statement of operations and comprehensive income (loss). The impairment losses related primarily to a right-of-use asset acquired through the acquisition of the Company's wholly owned subsidiary WageWorks, Inc. ("WageWorks"), which had a carrying value of $ 14.8 million prior to impairment and no corresponding lease liability. During the fiscal year ended January 31, 2022, the right-of-use asset met the criteria to be classified as held-for-sale and an impairment loss of $ 10.9 million was recognized. The remaining carrying value of $ 3.9 million was included within other current assets on the Company's consolidated balance sheet as of January 31, 2022. On March 24, 2022, the Company completed the sale of the asset for $ 3.9 million. Note 6. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets were as follows: January 31, 2023 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 233,194 $ ( 152,178 ) $ 81,016 Acquired HSA portfolios 261,188 ( 63,547 ) 197,641 Acquired customer relationships 759,782 ( 153,434 ) 606,348 Acquired developed technology 132,825 ( 81,692 ) 51,133 Acquired trade names 12,900 ( 12,679 ) 221 Total amortizable intangible assets $ 1,399,889 $ ( 463,530 ) $ 936,359 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 During the fiscal years ended January 31, 2023 and 2022, the Company capitalized $ 68.9 million and $ 67.2 million, respectively, to acquire the rights to act as a custodian of HSA portfolios. -65- Table of Contents Amortization expense for the fiscal years ended January 31, 2023, 2022, and 2021 was $ 148.9 million, $ 122.5 million and $ 99.9 million, respectively. Estimated amortization expense for the fiscal years ending January 31 is as follows: Year ending January 31, (in thousands) 2024 $ 139,225 2025 112,377 2026 83,960 2027 72,045 2028 67,324 Thereafter 461,428 Total $ 936,359 Goodwill The Company’s annual goodwill impairment test resulted in no impairment charges in any of the periods presented in the accompanying consolidated financial statements. During the fiscal year ended January 31, 2023, goodwill increased by $ 2.3 million due to measurement period adjustments associated with the Further Acquisition. During the fiscal year ended January 31, 2022, goodwill increased by $ 318.6 million due to the acquisitions of Luum and Further and associated measurement period adjustments. There were no other changes to the goodwill carrying value during the fiscal years ended January 31, 2023 and 2022. Note 7. Commitments and contingencies Commitments The following table summarizes the payments due by fiscal year for the Company's outstanding contractual obligations as of January 31, 2023: Payments due by fiscal year (in thousands) 2024 2025 2026 2027 2028 Thereafter Total 4.50 % Senior Notes due 2029 (1) $ — $ — $ — $ — $ — $ 600,000 $ 600,000 Term Loan Facility (1) 17,500 17,500 26,250 280,000 — — 341,250 Interest on long-term debt obligations (2) 48,320 47,256 45,819 38,411 27,000 45,000 251,806 Operating lease obligations (3) 10,443 10,877 11,094 11,344 11,600 29,058 84,416 Other contractual obligations (4) 25,798 16,690 12,584 5,505 6,501 — 67,078 Total $ 102,061 $ 92,323 $ 95,747 $ 335,260 $ 45,101 $ 674,058 $ 1,344,550 (1) As of January 31, 2023, the outstanding combined principal of $ 941.3 million is presented net of debt issuance costs on the consolidated balance sheets. The debt issuance costs are not included in the table above. (2) Estimated interest payments assume the stated interest rates applicable to the Notes and Term Loan Facility as of January 31, 2023, which were 4.50 % and 6.31 % per annum, respectively. (3) The Company leases office space and data storage facilities, and has other non-cancelable operating leases expiring at various dates through 2030. These amounts exclude contractual sublease income of $ 0.9 million, which is expected to be received through May 2027. (4) Other contractual obligations consist of processing services agreements, software subscriptions, telephony services, and other contractual commitments. Contingencies In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Legal matters 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 -66- Table of Contents 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. The Company recorded the $ 2.8 million draw as merger integration expense in the consolidated statement of operations and comprehensive income (loss). 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 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 8. Indebtedness Long-term debt consisted of the following: (in thousands) January 31, 2023 January 31, 2022 4.50 % Senior Notes due 2029 $ 600,000 $ 600,000 Term Loan Facility 341,250 350,000 Principal amount 941,250 950,000 Less: unamortized discount and issuance costs (1) 15,912 19,173 Total debt, net 925,338 930,827 Less: current portion of long-term debt 17,500 8,750 Long-term debt, net $ 907,838 $ 922,077 (1) In addition to the $ 15.9 million and $ 19.2 million of unamortized discount and issuance costs related to long-term debt as of January 31, 2023 and 2022, respectively, $ 3.4 million and $ 4.4 million of unamortized issuance costs related to the Revolving Credit Facility (as defined below) are included within other assets on the consolidated balance sheets as of January 31, 2023 and January 31, 2022, 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 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 January 31, 2023, the balance of accrued interest on the Notes was $ 9.0 million, which is -67- Table of Contents included within accrued liabilities on the Company's 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 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; 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 January 31, 2023, the stated interest rate was 6.31 % and the effective interest rate was 7.14 %. 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. As of January 31, 2023, 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 -68- Table of Contents 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 January 31, 2023, 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. Income taxes The income tax benefit consisted of the following: Year ended January 31, (in thousands) 2023 2022 2021 Current: Federal $ 3,260 $ 628 $ 181 State 1,968 239 258 Total current tax provision $ 5,228 $ 867 $ 439 Deferred: Federal $ ( 14,382 ) $ ( 21,197 ) $ ( 1,630 ) State ( 2,799 ) ( 2,122 ) ( 3,503 ) Total deferred tax benefit $ ( 17,181 ) $ ( 23,319 ) $ ( 5,133 ) Total income tax benefit $ ( 11,953 ) $ ( 22,452 ) $ ( 4,694 ) -69- Table of Contents Total income tax benefit differed from the amounts computed by applying the U.S. federal statutory income tax rate to income before income taxes as a result of the following: Year ended January 31, (in thousands) 2023 2022 2021 Federal income tax provision (benefit) at the statutory rate $ ( 8,000 ) $ ( 14,016 ) $ 869 State income tax benefit, net of federal tax provision (benefit) ( 1,021 ) ( 3,733 ) ( 99 ) Other non-deductible or non-taxable items, net 225 ( 165 ) 469 Excessive employee remuneration 3,246 1,214 1,186 Excess tax benefits on stock-based compensation expense, net ( 2,479 ) ( 5,098 ) ( 2,983 ) Federal research and development credits ( 1,341 ) ( 4,218 ) ( 2,195 ) Change in uncertain tax position reserves, net of indirect benefits ( 2,970 ) 836 511 Reclassification of operating lease right-of-use assets — — 185 Change in net operating losses due to measurement period adjustments — — 377 Deferred tax rate adjustment due to merger integration — 725 ( 1,814 ) Return-to-provision adjustments ( 38 ) ( 810 ) ( 1,010 ) Change in valuation allowance 733 3,457 ( 145 ) Other items, net ( 308 ) ( 644 ) ( 45 ) Total income tax benefit $ ( 11,953 ) $ ( 22,452 ) $ ( 4,694 ) The Company’s effective income tax benefit rate for the fiscal years ended January 31, 2023, 2022, and 2021 was 31.4 %, 33.6 %, and 113.4 %, respectively. The difference between the effective income tax rate and the U.S. federal statutory income tax rate each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense, changes in valuation allowance, and other items. The decrease in the effective tax benefit rate for the fiscal year ended January 31, 2023 compared to the fiscal year ended January 31, 2022 was primarily due to a decrease in benefit for state income taxes, a decrease in research and development tax credits, a decrease in excess tax benefits on stock-based compensation expense, and an increase in nondeductible executive compensation relative to pre-tax book loss, partially offset by a release of uncertain tax positions and a smaller change in valuation allowance. The decrease in the effective tax rate for the fiscal year ended January 31, 2022 compared to the fiscal year ended January 31, 2021 was primarily due to the impact of tax benefit items, such as stock-based compensation expense, credits, and changes to the valuation allowance, relative to the larger pre-tax book loss and smaller pre-tax book income, respectively. -70- Table of Contents Deferred tax assets and liabilities consisted of the following: (in thousands) January 31, 2023 January 31, 2022 Deferred tax assets: Net operating loss carryforward $ 2,646 $ 5,542 Stock compensation 16,217 14,778 Research and development credits 7,147 13,351 Lease liabilities 17,337 19,356 Capitalized research and development 16,419 — Accruals and reserves 4,439 7,729 Other, net 5,643 3,728 Total gross deferred tax assets $ 69,848 $ 64,484 Less valuation allowance ( 4,294 ) ( 3,561 ) Deferred tax assets, net of valuation allowance 65,554 60,923 Deferred tax liabilities: Fixed assets ( 1,509 ) ( 1,862 ) Intangible assets ( 99,471 ) ( 119,048 ) Incremental contract costs ( 11,118 ) ( 9,585 ) Right-of-use assets ( 14,132 ) ( 16,923 ) Goodwill ( 20,271 ) ( 11,481 ) Other, net ( 1,718 ) ( 1,870 ) Total gross deferred tax liabilities ( 148,219 ) ( 160,769 ) Net deferred tax liability $ ( 82,665 ) $ ( 99,846 ) The impact of Internal Revenue Code Section 174 changes requiring capitalization of software development costs pursuant to the Tax Cuts and Jobs Act of 2017 resulted in higher current income tax payable and significant utilization of net operating loss and research and development tax credit deferred tax assets for the fiscal year ended January 31, 2023. Management considered whether it is more likely than not that some portion or all of the deferred tax assets would be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities in making this assessment and determined that based on the weight of all available evidence, it is more likely than not (i.e., a likelihood of more than 50%) that the Company will be able to realize all of its federal deferred tax assets and the majority if its state deferred tax assets. The Company recorded a valuation allowance of $ 4.3 million and $ 3.6 million as of January 31, 2023 and 2022, respectively, related to certain state deferred tax assets. The $ 0.7 million increase in valuation allowance recorded is primarily the result of state research and development tax credits that are not expected to be utilized before expiration. As of January 31, 2023, the Company had recorded state net operating loss carryforwards of $ 43.1 million, which begin to expire at various intervals following the tax year ending January 31, 2031. As of January 31, 2023, the Company also had federal and state research and development credits of $ 2.4 million and $ 10.8 million, respectively, which begin to expire following the tax years ending January 31, 2032 and 2024, respectively. As of January 31, 2023 and 2022, the gross unrecognized tax benefit was $ 8.7 million and $ 11.7 million, respectively. If recognized, $ 5.4 million and $ 10.8 million of the total unrecognized tax benefits would affect the Company's effective tax rate as of January 31, 2023 and 2022, respectively. Total gross unrecognized tax benefits decreased by $ 3.0 million in the period from January 31, 2022 to January 31, 2023. -71- Table of Contents A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits, including the impact of purchase accounting from the Luum Acquisition, is as follows: (in thousands) January 31, 2023 January 31, 2022 Gross unrecognized tax benefits at beginning of year $ 11,653 $ 10,206 Gross amounts of increases and decreases: Purchase accounting adjustments — 240 Increases as a result of tax positions taken during a prior period — 38 Decreases as a result of tax positions taken during a prior period ( 183 ) — Increases as a result of tax positions taken during the current period 639 1,169 Decreases resulting from the lapse of the applicable statute of limitations ( 3,419 ) — Gross unrecognized tax benefits at end of year $ 8,690 $ 11,653 Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . The resulting unrecognized tax benefit recorded within the Company's consolidated balance sheet excludes the following amounts that have been netted against the related deferred tax assets accordingly: (in thousands) January 31, 2023 January 31, 2022 Total gross unrecognized tax benefits $ 8,690 $ 11,653 Amounts netted against related deferred tax assets ( 4,337 ) ( 7,097 ) Unrecognized tax benefits recorded on the consolidated balance sheet $ 4,353 $ 4,556 The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other income (expense), net in the statement of operations and comprehensive income (loss). During the fiscal years ended January 31, 2023, 2022, and 2021, the Company recorded penalties and interest of $ 0.4 million, $ 0.7 million, and $ 0.2 million, respectively, related to unrecognized tax benefits. As of January 31, 2023 and 2022, the Company recorded accrued interest and penalties of $ 1.3 million and $ 1.5 million, respectively. 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 2003. Note 10. Stock-based compensation The following table shows a summary of stock-based compensation in the Company's consolidated statements of operations and comprehensive income (loss) during the fiscal years presented: Year ended January 31, (in thousands) 2023 2022 2021 Cost of revenue $ 14,426 $ 11,258 $ 7,996 Sales and marketing 9,821 7,001 6,986 Technology and development 13,828 13,132 10,772 General and administrative 24,539 21,359 17,109 Other expense, net — 342 — Total stock-based compensation expense $ 62,614 $ 53,092 $ 42,863 -72- Table of Contents The following table shows stock-based compensation by award type: Year ended January 31, (in thousands) 2023 2022 2021 Stock options $ 882 $ 1,816 $ 4,499 Restricted stock units 46,590 37,693 28,040 Performance restricted stock units 15,120 12,948 6,270 Restricted stock awards 22 155 1,335 Performance restricted stock awards — 138 2,719 Total non-cash stock-based compensation expense 62,614 52,750 42,863 Acquisition awards exchanged for cash — 342 — Total stock-based compensation expense $ 62,614 $ 53,092 $ 42,863 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. Historically, the Company also granted restricted stock awards ("RSAs") under the Incentive Plan. 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 January 31, 2023, 9.6 million shares were available for grant under the Incentive Plan. Stock options Under the terms of the Incentive Plan, the Company has the ability to grant incentive and nonqualified stock options. Incentive stock options may be granted only to Company team members. Nonqualified stock options may be granted to Company executive officers, other team members, directors and consultants. Such options are to be exercisable at prices, as determined by the board of directors, which must be equal to no less than the fair value of the Company's common stock at the date of the grant. Stock options granted under the Incentive Plan generally expire 10 years from the date of issuance or are forfeited 90 days after termination of employment. Shares of common stock underlying stock options that are forfeited or that expire are returned to the Incentive Plan. Valuation assumptions. The Company has adopted the provisions of Topic 718, which requires the measurement and recognition of compensation for all stock-based awards made to team members and directors, based on estimated fair values. Under Topic 718, the Company uses the Black-Scholes option pricing model as the method of valuation for stock options. The determination of the fair value of stock-based awards on the date of grant is affected by the fair value of the stock as well as assumptions regarding a number of complex and subjective variables. The variables include, but are not limited to, (1) the expected life of the option, (2) the expected volatility of the fair value of the Company's common stock over the term of the award estimated by averaging the Company's historical volatility in addition to published volatilities of a relative peer group, (3) risk-free interest rate, and (4) expected dividends. No options were granted during the fiscal years ended January 31, 2023 and 2022. The weighted-average fair value of options granted during the fiscal year ended January 31, 2021 was $ 23.68 per share. The key input assumptions utilized in the valuation of the stock options were as follows: Year ended January 31, 2023 2022 2021 Expected dividend yield n/a n/a 0 % Expected stock price volatility n/a n/a 37.97 % Risk-free interest rate n/a n/a 1.39 % Expected life of options n/a n/a 5.18 years Expected volatility was determined using a weighted average volatility of publicly traded peer companies and the Company's own historical volatility. The risk-free interest rate was determined by using published zero coupon rates -73- Table of Contents on treasury notes for each grant date given the expected term on the options. The dividend yield of zero was based on the fact that the Company had no current plans to pay dividends on its common stock. 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 ( 203 ) $ 1.25 - 59.63 $ 32.56 Forfeited ( 8 ) $ 25.45 - 73.61 $ 60.84 Outstanding as of January 31, 2023 1,021 $ 14.00 - 82.39 $ 36.06 3.2 $ 27,293 Vested and expected to vest as of January 31, 2023 1,021 $ 36.06 3.2 $ 27,293 Exercisable as of January 31, 2023 1,001 $ 35.29 3.1 $ 27,293 The aggregate intrinsic value in the table above represents the difference between the estimated fair value of common stock and the exercise price of outstanding, in-the-money stock options. The total intrinsic value of options exercised during the fiscal years ended January 31, 2023, 2022 and 2021 was $ 7.2 million, $ 19.3 million, and $ 15.4 million, respectively. As of January 31, 2023, the weighted-average vesting period of non-vested options expected to vest was approximately 0.2 years, and the amount of compensation expense the Company expects to recognize for stock options vesting in future periods was $ 0.1 million. Restricted stock units The Company grants RSUs to certain team members, officers, and directors under the Incentive Plan, which vest upon service-based criteria and performance-based criteria. The weighted-average fair value of RSUs granted during the fiscal years ended January 31, 2023, 2022 and 2021 was $ 75.64 , $ 64.87 and $ 56.93 per share, respectively. Service-based restricted stock units. Generally, service-based RSUs granted prior to March 2022 vest over a four-year period in equal annual installments commencing upon the first anniversary of the grant date. Service-based RSUs granted in March 2022 or later generally vest 25 % on the first anniversary of the vesting commencement date, which is generally the first day of the fiscal quarter of the grant date, with the remaining portion vesting ratably over the following 12 calendar quarters. Service-based RSUs are valued based on the current value of the Company's closing stock price on the date of grant less the present value of future expected dividends discounted at the risk-free interest rate. Performance restricted stock units. During the fiscal year ended January 31, 2021, the Company awarded 277,950 performance restricted stock units ("PRSUs") subject to a market condition based on the Company’s total shareholder return relative to the Russell 2000 index as measured on January 31, 2023. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $ 20.8 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 Talent, Compensation and Culture Committee of the board of directors. During the fiscal year ended January 31, 2022, the Company awarded 249,750 PRSUs subject to a market condition based on the Company’s total shareholder return 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 Talent, Compensation and Culture Committee of the board of directors. During the fiscal year ended January 31, 2023, the Company awarded 281,784 PRSUs subject to a market condition based on the Company’s total shareholder return 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 -74- Table of Contents level of performance achieved. The PRSUs cliff vest upon approval by the Talent, Compensation and Culture Committee of the board of directors. A summary of RSU activity is as follows: Outstanding RSUs (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 1,693 75.64 Vested ( 761 ) 59.15 Forfeited ( 661 ) 66.71 Outstanding as of January 31, 2023 3,011 $ 70.40 During the fiscal years ended January 31, 2023, 2022 and 2021 the aggregate intrinsic value of RSUs and RSAs vested was $ 50.7 million, $ 40.9 million, and $ 31.8 million, respectively. As of January 31, 2023, total unrecorded stock-based compensation expense associated with RSUs was $ 146.0 million, which was expected to be recognized over a weighted-average period of 2.4 years. As of January 31, 2023, there was no unrecorded stock-based compensation expense associated with RSAs, and there were no RSAs outstanding. Note 11. 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 January 31, 2023, the fair value of the Notes was $ 536.9 million. The Term Loan Facility is considered a Level 2 instrument and recorded at book value in the Company's 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. Note 12. Employee benefits The Company has established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All non-seasonal team members over the age of 18 are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 3.5 % of eligible earnings. Employer matching contribution expense was $ 8.0 million, $ 7.1 million and $ 6.5 million for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. The Company is self-insured for medical and dental benefits for all qualifying employees. The medical plan carries a stop-loss policy which will protect from individual claims during the plan year exceeding $ 400,000 . The Company records estimates of costs of claims incurred based on an analysis of historical data and independent estimates. -75- Table of Contents The Company's liability for self-insured medical claims is included in accrued compensation in its consolidated balance sheet and was $ 5.1 million and $ 3.9 million as of January 31, 2023 and 2022, respectively. -76- Table of Contents Item 9. Changes in and disagreements with accountants on accounting and financial disclosure None.