HEALTHEQUITY, INC. 10-Q

Item 1. Financial statements HealthEquity, Inc. and subsidiaries Condensed consolidated balance sheets (in thousands, except par value) October 31, 2023 January 31, 2023 (unaudited) Assets Current assets Cash and cash equivalents $ 334,061 $ 254,266 Accounts receivable, net of allowance for doubtful accounts of $ 4,876 and $ 4,989 as of October 31, 2023 and January 31, 2023, respectively 96,181 96,835 Other current assets 44,166 31,792 Total current assets 474,408 382,893 Property and equipment, net 7,660 12,862 Operating lease right-of-use assets 50,329 56,461 Intangible assets, net 860,514 936,359 Goodwill 1,648,145 1,648,145 Other assets 52,446 52,180 Total assets $ 3,093,502 $ 3,088,900 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 13,419 $ 13,899 Accrued compensation 31,208 45,835 Accrued liabilities 41,840 43,668 Current portion of long-term debt — 17,500 Operating lease liabilities 9,769 10,159 Total current liabilities 96,236 131,061 Long-term liabilities Long-term debt, net of issuance costs 874,270 907,838 Operating lease liabilities, non-current 50,580 58,988 Other long-term liabilities 17,711 12,708 Deferred tax liability 66,737 82,665 Total long-term liabilities 1,009,298 1,062,199 Total liabilities 1,105,534 1,193,260 Commitments and contingencies (see Note 5) Stockholders’ equity Preferred stock, $ 0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of October 31, 2023 and January 31, 2023, respectively — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 85,800 and 84,758 shares issued and outstanding as of October 31, 2023 and January 31, 2023, respectively 9 8 Additional paid-in capital 1,808,695 1,745,716 Accumulated earnings 179,264 149,916 Total stockholders’ equity 1,987,968 1,895,640 Total liabilities and stockholders’ equity $ 3,093,502 $ 3,088,900 See accompanying notes to condensed consolidated financial statements. -3- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of operations and comprehensive income (loss) (unaudited) Three months ended October 31, Nine months ended October 31, (in thousands, except per share data) 2023 2022 2023 2022 Revenue Service revenue $ 107,512 $ 108,580 $ 318,343 $ 315,962 Custodial revenue 106,575 74,642 299,933 199,606 Interchange revenue 35,132 32,864 118,924 112,339 Total revenue 249,219 216,086 737,200 627,907 Cost of revenue Service costs 75,347 76,493 232,445 232,281 Custodial costs 9,177 6,812 27,310 20,543 Interchange costs 6,287 5,923 20,281 19,240 Total cost of revenue 90,811 89,228 280,036 272,064 Gross profit 158,408 126,858 457,164 355,843 Operating expenses Sales and marketing 19,656 17,245 58,714 49,648 Technology and development 55,614 48,890 163,573 140,653 General and administrative 26,379 25,131 78,363 74,795 Amortization of acquired intangible assets 23,213 23,541 69,545 71,420 Merger integration 2,655 6,509 8,157 23,486 Total operating expenses 127,517 121,316 378,352 360,002 Income (loss) from operations 30,891 5,542 78,812 ( 4,159 ) Other expense Interest expense ( 13,545 ) ( 12,165 ) ( 41,814 ) ( 34,119 ) Other income, net 3,741 443 8,325 174 Total other expense ( 9,804 ) ( 11,722 ) ( 33,489 ) ( 33,945 ) Income (loss) before income taxes 21,087 ( 6,180 ) 45,323 ( 38,104 ) Income tax provision (benefit) 6,414 ( 4,539 ) 15,975 ( 12,170 ) Net income (loss) and comprehensive income (loss) $ 14,673 $ ( 1,641 ) $ 29,348 $ ( 25,934 ) Net income (loss) per share: Basic $ 0.17 $ ( 0.02 ) $ 0.34 $ ( 0.31 ) Diluted $ 0.17 $ ( 0.02 ) $ 0.34 $ ( 0.31 ) Weighted-average number of shares used in computing net income (loss) per share: Basic 85,697 84,572 85,424 84,349 Diluted 87,122 84,572 86,707 84,349 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) 2023 2022 2023 2022 Total stockholders' equity, beginning balance $ 1,949,614 $ 1,864,896 $ 1,895,640 $ 1,852,575 Common stock: Beginning balance 9 8 8 8 Issuance of common stock upon exercise of stock options, and for restricted stock — — 1 — Ending balance 9 8 9 8 Additional paid-in capital: Beginning balance 1,785,014 1,713,122 1,745,716 1,676,508 Issuance of common stock upon exercise of stock options, and for restricted stock 2,019 1,693 3,040 6,167 Stock-based compensation 21,662 18,170 59,939 50,310 Ending balance 1,808,695 1,732,985 1,808,695 1,732,985 Accumulated earnings Beginning balance 164,591 151,766 149,916 176,059 Net income (loss) 14,673 ( 1,641 ) 29,348 ( 25,934 ) Ending balance 179,264 150,125 179,264 150,125 Total stockholders' equity, ending balance $ 1,987,968 $ 1,883,118 $ 1,987,968 $ 1,883,118 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) 2023 2022 Cash flows from operating activities: Net income (loss) $ 29,348 $ ( 25,934 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 115,167 120,726 Stock-based compensation 59,939 50,310 Amortization of debt discount and issuance costs 2,150 2,454 Loss on extinguishment of debt 1,157 — Other non-cash items — 269 Deferred taxes ( 15,928 ) ( 10,565 ) Changes in operating assets and liabilities: Accounts receivable, net 654 ( 451 ) Other assets ( 12,820 ) 6,809 Operating lease right-of-use assets 8,241 6,169 Accrued compensation ( 14,829 ) ( 11,630 ) Accounts payable, accrued liabilities, and other current liabilities ( 2,363 ) ( 33,170 ) Operating lease liabilities, non-current ( 9,966 ) ( 5,401 ) Other long-term liabilities 5,003 ( 4,427 ) Net cash provided by operating activities 165,753 95,159 Cash flows from investing activities: Purchases of software and capitalized software development costs ( 30,413 ) ( 35,306 ) Purchases of property and equipment ( 1,134 ) ( 2,971 ) Acquisitions of HSA portfolios ( 3,257 ) ( 70,574 ) Net cash used in investing activities ( 34,804 ) ( 108,851 ) Cash flows from financing activities: Principal payments on long-term debt ( 54,375 ) ( 6,562 ) Settlement of client-held funds obligation, net ( 183 ) ( 1,579 ) Proceeds from exercise of common stock options 3,404 6,616 Net cash used in financing activities ( 51,154 ) ( 1,525 ) Increase (decrease) in cash and cash equivalents 79,795 ( 15,217 ) Beginning cash and cash equivalents 254,266 225,414 Ending cash and cash equivalents $ 334,061 $ 210,197 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) 2023 2022 Supplemental cash flow data: Interest expense paid in cash $ 44,194 $ 36,268 Income tax payments, net 24,777 775 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 2,882 4,099 Purchases of property and equipment included in accounts payable or accrued liabilities 98 297 Exercise of common stock options receivable 19 21 Increase in goodwill due to measurement period adjustments, net — 77 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, 2023 and for the three and nine months ended October 31, 2023 and 2022 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 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, 2023. 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, 2023. Recently adopted accounting pronouncements None. Recently issued accounting pronouncements not yet adopted None. -8- Table of Contents Note 2. Net income (loss) per share The following table sets forth the computation of basic and diluted net income (loss) per share: Three months ended October 31, Nine months ended October 31, (in thousands, except per share data) 2023 2022 2023 2022 Numerator (basic and diluted): Net income (loss) $ 14,673 $ ( 1,641 ) $ 29,348 $ ( 25,934 ) Denominator (basic): Weighted-average common shares outstanding 85,697 84,572 85,424 84,349 Denominator (diluted): Weighted-average common shares outstanding 85,697 84,572 85,424 84,349 Weighted-average dilutive effect of stock options and restricted stock units 1,425 — 1,283 — Diluted weighted-average common shares outstanding 87,122 84,572 86,707 84,349 Net income (loss) per share: Basic $ 0.17 $ ( 0.02 ) $ 0.34 $ ( 0.31 ) Diluted $ 0.17 $ ( 0.02 ) $ 0.34 $ ( 0.31 ) For the three months ended October 31, 2023 and 2022, approximately 0.6 million and 2.0 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net income (loss) per share as their inclusion would have been anti-dilutive. For the nine months ended October 31, 2023 and 2022, approximately 1.0 million and 2.4 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net income (loss) per share as their inclusion would have been anti-dilutive. Note 3. Supplemental financial statement information Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive income (loss) components consisted of the following: Property and equipment Property and equipment consisted of the following: (in thousands) October 31, 2023 January 31, 2023 Leasehold improvements $ 18,214 $ 18,269 Furniture and fixtures 8,392 8,392 Computer equipment 26,918 28,021 Property and equipment, gross 53,524 54,682 Accumulated depreciation ( 45,864 ) ( 41,820 ) Property and equipment, net $ 7,660 $ 12,862 Depreciation expense for the three months ended October 31, 2023 and 2022 was $ 1.8 million and $ 2.9 million, respectively, and $ 6.4 million and $ 9.4 million for the nine months ended October 31, 2023 and 2022, 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, 2023 and January 31, 2023, the balance of deferred revenue was $ 5.8 million and $ 8.3 million, respectively, and is included within accrued liabilities on the Company's condensed consolidated balance sheets. 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 67 % 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, 2023, approximately $ 1.1 million and $ 4.0 million, respectively, of revenue was -9- Table of Contents recognized that was included in the balance of deferred revenue as of January 31, 2023. The Company expects to satisfy its remaining obligations for these arrangements. Leases The components of operating lease costs were as follows: Three months ended October 31, Nine months ended October 31, (in thousands) 2023 2022 2023 2022 Operating lease expense $ 2,323 $ 2,855 $ 7,289 $ 8,568 Sublease income ( 813 ) ( 568 ) ( 1,795 ) ( 1,614 ) Net operating lease expense $ 1,510 $ 2,287 $ 5,494 $ 6,954 Accrued liabilities Accrued inventory of $ 5.7 million is included within accrued liabilities on the Company's condensed consolidated balance sheet as of October 31, 2023. Other income, net Other income, net, consisted of the following: Three months ended October 31, Nine months ended October 31, (in thousands) 2023 2022 2023 2022 Interest income $ 3,713 $ 443 $ 7,795 $ 584 Acquisition costs — — — ( 53 ) Other income (expense), net 28 — 530 ( 357 ) Total other income, net $ 3,741 $ 443 $ 8,325 $ 174 Interest expense Based on the application of Accounting Standards Codification ("ASC") 470-50, Debt - Modifications and Extinguishments , the Company recorded a $ 1.2 million loss on extinguishment of debt due to the prepayment of $ 50.0 million under the Company's Term Loan Facility (as defined in Note 6—Indebtedness) in April 2023, which is included within interest expense in the condensed consolidated statement of operations and comprehensive income for the nine months ended October 31, 2023. 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) 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 8,174 $ 9,387 Operating lease right-of-use assets obtained in exchange for new operating lease obligations $ 2,109 $ 1,092 -10- Table of Contents Note 4. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets were as follows: October 31, 2023 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 257,863 $ ( 186,405 ) $ 71,458 Acquired HSA portfolios 264,445 ( 76,654 ) 187,791 Acquired customer relationships 759,782 ( 192,203 ) 567,579 Acquired developed technology 132,825 ( 99,210 ) 33,615 Acquired trade names 12,900 ( 12,829 ) 71 Total amortizable intangible assets $ 1,427,815 $ ( 567,301 ) $ 860,514 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 Amortization expense for the three months ended October 31, 2023 and 2022 was $ 36.0 million and $ 37.6 million, respectively, and $ 108.8 million and $ 111.4 million for the nine months ended October 31, 2023 and 2022, respectively. Goodwill There were no changes to the carrying value of goodwill during the nine months ended October 31, 2023. Note 5. 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, software subscriptions, telephony services, and other contractual commitments. In April 2023, the Company used $ 50.0 million of cash to prepay, in direct order of maturity, principal due under its Term Loan Facility. In September 2023, the Company entered into an agreement to acquire the BenefitWallet HSA portfolio from Conduent Business Services, LLC, for a purchase price of $ 425.0 million and up to $ 20.0 million in transfer-related expenses. In addition, the Company expects to incur approximately $ 7.0 million of transaction costs associated with the acquisition. The agreement contemplates a transfer of approximately 665,000 customer accounts and their approximately $ 2.8 billion of HSA assets and includes a mechanism to adjust the purchase price based on the amount of HSA assets actually transferred. Pursuant to the agreement, HealthEquity will assume a contract with a depository partner representing approximately 7 % of the total maximum acquired HSA assets, which provides a custodial yield that is below current market rates and expires in June 2026. The transfer is expected to close in multiple tranches during the first half of fiscal 2025, subject to the satisfaction of certain customary closing conditions. The Company expects to pay approximately 50 % of the purchase price and associated costs using cash on hand, with the remainder paid using the Company’s Revolving Credit Facility (as defined in Note 6—Indebtedness) with the actual percentages to be determined in connection with the payment for each tranche. -11- Table of Contents There were no other material changes during the nine months ended October 31, 2023, 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, 2023. 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, Inc. ("WageWorks"), a wholly owned subsidiary of the Company, 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 counter-defendant. On July 21, 2022, WageWorks and the Company filed an answer to the counterclaims. On April 26, 2023, Union Mesa filed a motion for partial summary judgment, the Company and WageWorks filed a response on September 5, 2023, an oral argument was held on the motion on September 29, 2023, and the parties are awaiting a decision on the motion from the Superior Court. Through its claims, Union Mesa is seeking direct and consequential damages in an amount to be proven at trial and an award of its reasonable attorney fees, plus interest until any damages or fees that are awarded are paid. 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. -12- Table of Contents Note 6. Indebtedness Long-term debt consisted of the following: (in thousands) October 31, 2023 January 31, 2023 4.50 % Senior Notes due 2029 $ 600,000 $ 600,000 Term Loan Facility 286,875 341,250 Principal amount 886,875 941,250 Less: unamortized discount and issuance costs (1) 12,605 15,912 Total debt, net 874,270 925,338 Less: current portion of long-term debt — 17,500 Long-term debt, net $ 874,270 $ 907,838 (1) In addition to the $ 12.6 million and $ 15.9 million of unamortized discount and issuance costs related to long-term debt as of October 31, 2023 and January 31, 2023, respectively, $ 2.7 million and $ 3.4 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, 2023 and January 31, 2023, respectively. 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. Accrued interest on the Notes was $ 2.3 million and $ 9.0 million as of October 31, 2023 and January 31, 2023, respectively, and 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 -13- Table of Contents 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. Prior to June 1, 2023, borrowings under the Credit Facilities bore 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 in either scenario by reference to a leverage-based pricing grid set forth in the Credit Agreement. On June 1, 2023, the Company entered into an amendment to the Credit Agreement (“Amendment No. 1”) which replaced interest rate provisions based on LIBOR with the forward-looking term rate based on the secured overnight financing rate published by the CME Group Benchmark Administration Limited (“Term SOFR”). As a result, borrowings under the Credit Agreement as so amended by Amendment No. 1 bear interest, as of October 31, 2023, at an annual rate equal to, at the option of the Company, either (i) Term SOFR, plus a 0.10 % credit spread adjustment, 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 in either scenario by reference to a leverage-based pricing grid set forth in the Credit Agreement (as amended by Amendment No. 1). As of October 31, 2023, the stated interest rate was 6.68 % and the effective interest rate was 7.44 %. 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 October 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 thereunder may be reduced, by the Company without penalty or premium, subject to the reimbursement of customary “breakage costs.” In April 2023, the Company used $ 50.0 million of cash to prepay, in direct order of maturity, principal due under its Term Loan Facility. 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, 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 -14- Table of Contents interests in substantially all assets of the Company and the guarantors, in each case, subject to certain customary exceptions. Note 7. Income taxes The Company follows ASC 740-270, Income Taxes - Interim Reporting , for the computation and presentation of its interim period tax provision. Accordingly, management estimated the effective annual tax rate and applied this rate to pre-tax income through the end of the latest fiscal quarter to determine the interim income tax provision. For the three and nine months ended October 31, 2023, the Company recorded an income tax provision of $ 6.4 million and $ 16.0 million, respectively. This resulted in an effective income tax provision rate of 30.4 % and 35.2 % for the three and nine months ended October 31, 2023, respectively, compared with an effective income tax benefit rate of 73.4 % and 31.9 % for the three and nine months ended October 31, 2022, respectively. For the three and nine months ended October 31, 2023, discrete tax items impacting the effective tax rate were primarily due to return-to-provision adjustments on research and development tax credits, an increase in unrecognized tax benefits, adjustments from settlement of an Internal Revenue Service ("IRS") examination, and differences in tax deductible stock-based compensation compared to GAAP stock-based compensation expense. For the three and nine months ended October 31, 2022, discrete tax items impacting the effective tax rate were primarily due to a decrease in unrecognized tax benefits and differences in tax deductible stock-based compensation compared to GAAP stock-based compensation expense. As of October 31, 2023 and January 31, 2023, the Company’s total gross unrecognized tax benefit was $ 13.8 million and $ 8.7 million, respectively. If recognized, $ 10.3 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of October 31, 2023. The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by the state of Texas. The Texas examination may lead to ordinary course adjustments or proposed adjustments to the Company's taxes, net operating losses, and/or tax credit carryforwards. An IRS examination was effectively settled during the three months ended October 31, 2023; adjustments recorded as a result of the examination were not material. 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. Stock-based compensation The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive income (loss) during the periods presented: Three months ended October 31, Nine months ended October 31, (in thousands) 2023 2022 2023 2022 Cost of revenue $ 4,673 $ 3,662 $ 13,222 $ 10,667 Sales and marketing 3,506 2,569 9,763 7,136 Technology and development 5,923 4,045 15,098 10,388 General and administrative 7,560 7,894 21,856 22,119 Total stock-based compensation expense $ 21,662 $ 18,170 $ 59,939 $ 50,310 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. 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, 2023, 11.5 million shares were available for grant under the Incentive Plan. -15- Table of Contents 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, 2023 1,021 $ 14.00 - 82.39 $ 36.06 3.2 $ 27,293 Exercised ( 99 ) $ 14.00 - 59.63 $ 30.68 Forfeited ( 4 ) $ 24.36 - 44.53 $ 38.41 Outstanding as of October 31, 2023 918 $ 14.00 - 82.39 $ 36.63 2.4 $ 32,636 Vested and expected to vest as of October 31, 2023 918 $ 36.63 2.4 $ 32,636 Exercisable as of October 31, 2023 918 $ 36.63 2.4 $ 32,636 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, 2023 3,011 $ 70.40 Granted 1,890 64.82 Vested ( 925 ) 67.34 Forfeited ( 307 ) 70.03 Outstanding as of October 31, 2023 3,669 $ 68.33 Performance restricted stock units. During the three months ended April 30, 2023, the Company awarded 270,966 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, 2026. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $ 23.9 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 9. Fair value Fair value measurements are made at a specific point in time based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1—quoted prices in active markets for identical assets or liabilities; • Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3—unobservable inputs based on the Company’s own assumptions. Cash and cash equivalents are considered Level 1 instruments and are valued based on publicly available daily net asset values. The carrying values of cash and cash equivalents approximate fair values due to the short-term nature of these instruments. The Notes are valued based upon quoted market prices and are considered Level 2 instruments because the markets in which the Notes trade are not considered active markets. As of October 31, 2023, the fair value of the Notes was $ 514.7 million. -16- Table of Contents 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