HEALTHEQUITY, INC. 10-Q

Item 1. Financial statements HealthEquity, Inc. and subsidiaries Condensed consolidated balance sheets (in thousands, except par value) April 30, 2024 January 31, 2024 (unaudited) Assets Current assets Cash and cash equivalents $ 251,229 $ 403,979 Accounts receivable, net of allowance for doubtful accounts of $ 3,741 and $ 3,947 as of April 30, 2024 and January 31, 2024, respectively 106,218 104,893 Other current assets 47,455 48,564 Total current assets 404,902 557,436 Property and equipment, net 5,083 6,013 Operating lease right-of-use assets 48,108 48,380 Intangible assets, net 1,071,371 835,948 Goodwill 1,648,145 1,648,145 Other assets 68,875 67,868 Total assets $ 3,246,484 $ 3,163,790 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 18,167 $ 12,041 Accrued compensation 23,103 49,608 Accrued liabilities 41,192 46,038 Operating lease liabilities 9,755 9,404 Total current liabilities 92,217 117,091 Long-term liabilities Long-term debt, net of issuance costs 925,675 874,972 Operating lease liabilities, non-current 48,253 48,766 Other long-term liabilities 19,273 19,270 Deferred tax liability 63,282 68,670 Total long-term liabilities 1,056,483 1,011,678 Total liabilities 1,148,700 1,128,769 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 April 30, 2024 and January 31, 2024, respectively — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 87,010 and 86,127 shares issued and outstanding as of April 30, 2024 and January 31, 2024, respectively 9 9 Additional paid-in capital 1,863,334 1,829,384 Accumulated earnings 234,441 205,628 Total stockholders’ equity 2,097,784 2,035,021 Total liabilities and stockholders’ equity $ 3,246,484 $ 3,163,790 See accompanying notes to condensed consolidated financial statements. -3- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of operations and comprehensive income (unaudited) Three months ended April 30, (in thousands, except per share data) 2024 2023 Revenue Service revenue $ 118,214 $ 111,073 Custodial revenue 121,644 88,480 Interchange revenue 47,739 44,879 Total revenue 287,597 244,432 Cost of revenue Service costs 82,347 80,873 Custodial costs 9,057 8,038 Interchange costs 9,055 7,051 Total cost of revenue 100,459 95,962 Gross profit 187,138 148,470 Operating expenses Sales and marketing 23,494 19,935 Technology and development 56,090 53,192 General and administrative 38,236 25,538 Amortization of acquired intangible assets 25,545 23,166 Merger integration 2,143 3,458 Total operating expenses 145,508 125,289 Income from operations 41,630 23,181 Other expense Interest expense ( 11,795 ) ( 14,997 ) Other income, net 3,404 1,828 Total other expense ( 8,391 ) ( 13,169 ) Income before income taxes 33,239 10,012 Income tax provision 4,426 5,918 Net income and comprehensive income $ 28,813 $ 4,094 Net income per share: Basic $ 0.33 $ 0.05 Diluted $ 0.33 $ 0.05 Weighted-average number of shares used in computing net income per share: Basic 86,472 85,030 Diluted 88,324 86,102 See accompanying notes to condensed consolidated financial statements. -4- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of stockholders’ equity (unaudited) Three months ended April 30, (in thousands) 2024 2023 Total stockholders' equity, beginning balance $ 2,035,021 $ 1,895,640 Common stock: Beginning balance 9 8 Issuance of common stock upon exercise of stock options, and for restricted stock — 1 Ending balance 9 9 Additional paid-in capital: Beginning balance 1,829,384 1,745,716 Issuance of common stock upon exercise of stock options, and for restricted stock 1,930 653 Stock-based compensation 32,020 18,204 Ending balance 1,863,334 1,764,573 Accumulated earnings Beginning balance 205,628 149,916 Net income 28,813 4,094 Ending balance 234,441 154,010 Total stockholders' equity, ending balance $ 2,097,784 $ 1,918,592 See accompanying notes to condensed consolidated financial statements. -5- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of cash flows (unaudited) Three months ended April 30, (in thousands) 2024 2023 Cash flows from operating activities: Net income $ 28,813 $ 4,094 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 38,938 39,041 Stock-based compensation 32,020 18,204 Amortization of debt discount and issuance costs 703 782 Loss on extinguishment of debt — 1,157 Deferred taxes ( 5,388 ) ( 738 ) Changes in operating assets and liabilities: Accounts receivable, net ( 1,325 ) ( 1,579 ) Other assets ( 227 ) ( 4,514 ) Operating lease right-of-use assets 1,741 1,844 Accrued compensation ( 25,757 ) ( 25,381 ) Accounts payable, accrued liabilities, and other current liabilities ( 2,347 ) ( 50 ) Operating lease liabilities, non-current ( 1,745 ) ( 1,921 ) Other long-term liabilities 3 599 Net cash provided by operating activities 65,429 31,538 Cash flows from investing activities: Purchases of software and capitalized software development costs ( 13,106 ) ( 9,003 ) Purchases of property and equipment ( 721 ) ( 132 ) Acquisitions of HSA portfolios ( 256,123 ) — Net cash used in investing activities ( 269,950 ) ( 9,135 ) Cash flows from financing activities: Proceeds from long-term debt 50,000 — Principal payments on long-term debt — ( 54,375 ) Settlement of client-held funds obligation, net ( 546 ) 2,432 Proceeds from exercise of common stock options 2,317 916 Net cash provided by (used in) financing activities 51,771 ( 51,027 ) Decrease in cash and cash equivalents ( 152,750 ) ( 28,624 ) Beginning cash and cash equivalents 403,979 254,266 Ending cash and cash equivalents $ 251,229 $ 225,642 See accompanying notes to condensed consolidated financial statements. -6- HealthEquity, Inc. and subsidiaries Condensed consolidated statements of cash flows (unaudited) (continued) Three months ended April 30, (in thousands) 2024 2023 Supplemental cash flow data: Interest expense paid in cash $ 18,850 $ 19,498 Income tax payments (refunds), net 277 ( 7 ) 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 2,404 2,465 Purchases of property and equipment included in accounts payable or accrued liabilities 32 119 Acquisitions of HSA portfolios included in accounts payable or accrued liabilities 4,453 — Exercise of common stock options receivable 42 120 See accompanying notes to condensed consolidated financial statements. -7- Table of Contents HealthEquity, Inc. and subsidiaries Notes to condensed consolidated financial statements (unaudited) 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. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications relate primarily to recordkeeping and advisory fees associated with HSA investments, which were reclassified from custodial revenue to service revenue to better align the Company's financial statement presentation with the underlying drivers of the Company's revenue streams. The Company also reclassified certain immaterial personnel-related costs from custodial costs to service costs or general and administrative costs. The reclassifications had no impact on the Company's total revenue, income from operations, net income, cash flows, or stockholders' equity. The following table presents the impact of the reclassifications: Three months ended April 30, 2023 (in thousands) Prior presentation Reclassifications Current presentation Service revenue $ 105,112 $ 5,961 $ 111,073 Custodial revenue 94,441 ( 5,961 ) 88,480 Interchange revenue 44,879 — 44,879 Total revenue 244,432 — 244,432 Total cost of revenue 96,606 ( 644 ) 95,962 Gross profit 147,826 644 148,470 Total operating expenses 124,645 644 125,289 Total other expense ( 13,169 ) — ( 13,169 ) Income tax provision 5,918 — 5,918 Net income $ 4,094 $ — $ 4,094 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 April 30, 2024 and for the three months ended April 30, 2024 and 2023 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, 2024. 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, 2024. -8- Table of Contents Recently adopted accounting pronouncements None. Recently issued accounting pronouncements not yet adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss, an amount and description of other segment items, interim disclosure of a reportable segment’s profit or loss and assets, the title and position of the CODM, and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The ASU requires public companies with a single reportable segment to provide the segment disclosures required by Topic 280 and will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We are currently evaluating the ASU to determine its impact on our disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. This guidance will be effective for annual periods beginning after December 15, 2024. Early adoption is permitted. Upon adoption, the guidance can be applied prospectively or retrospectively. We are currently evaluating the ASU to determine its impact on our income tax disclosures. Note 2. Net income per share The following table sets forth the computation of basic and diluted net income per share: Three months ended April 30, (in thousands, except per share data) 2024 2023 Numerator (basic and diluted): Net income $ 28,813 $ 4,094 Denominator (basic): Weighted-average common shares outstanding 86,472 85,030 Denominator (diluted): Weighted-average common shares outstanding 86,472 85,030 Weighted-average dilutive effect of stock options and restricted stock units 1,852 1,072 Diluted weighted-average common shares outstanding 88,324 86,102 Net income per share: Basic $ 0.33 $ 0.05 Diluted $ 0.33 $ 0.05 For the three months ended April 30, 2024 and 2023, 0.1 million and 1.0 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net income 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 components consisted of the following: Prepaid expenses As of April 30, 2024 and January 31, 2024, the Company had prepaid expenses of $ 36.9 million and $ 31.2 million, respectively, which are included within other current assets on the Company's condensed consolidated balance sheets. -9- Table of Contents Property and equipment Property and equipment consisted of the following: (in thousands) April 30, 2024 January 31, 2024 Leasehold improvements $ 14,455 $ 14,455 Furniture and fixtures 7,087 7,087 Computer equipment 24,954 25,489 Property and equipment, gross 46,496 47,031 Accumulated depreciation ( 41,413 ) ( 41,018 ) Property and equipment, net $ 5,083 $ 6,013 Depreciation expense was $ 1.4 million and $ 2.5 million for the three months ended April 30, 2024 and 2023, 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 April 30, 2024 and January 31, 2024, the balance of deferred revenue was $ 5.3 million and $ 6.2 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 74 % 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 12 months or less are classified as accrued liabilities on the Company's condensed consolidated balance sheets, with the remainder included within other long-term liabilities. Revenue recognized during the three months ended April 30, 2024 that was included in the balance of deferred revenue as of January 31, 2024 was $ 1.5 million. The Company expects to satisfy its remaining obligations for these arrangements. Leases The components of operating lease costs were as follows: Three months ended April 30, (in thousands) 2024 2023 Operating lease expense $ 2,367 $ 2,601 Sublease income ( 972 ) ( 362 ) Net operating lease expense $ 1,395 $ 2,239 Other income, net Other income, net, consisted of the following: Three months ended April 30, (in thousands) 2024 2023 Interest income $ 3,881 $ 1,598 Other income (expense), net ( 477 ) 230 Total other income, net $ 3,404 $ 1,828 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 three months ended April 30, 2023. -10- Table of Contents Supplemental cash flow information Supplemental cash flow information related to the Company's operating leases was as follows: Three months ended April 30, (in thousands) 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 2,257 $ 2,741 Right-of-use assets obtained in exchange for lease obligations $ 1,469 $ 2,109 Note 4. Intangible assets and goodwill Intangible assets The gross carrying amount and associated accumulated amortization of intangible assets were as follows: April 30, 2024 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 273,998 $ ( 203,496 ) $ 70,502 Acquired HSA portfolios 525,021 ( 87,821 ) 437,200 Acquired customer relationships 759,782 ( 218,050 ) 541,732 Acquired developed technology 132,825 ( 110,888 ) 21,937 Acquired trade names 12,900 ( 12,900 ) — Total amortizable intangible assets $ 1,704,526 $ ( 633,155 ) $ 1,071,371 January 31, 2024 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 267,498 $ ( 197,388 ) $ 70,110 Acquired HSA portfolios 264,445 ( 81,059 ) 183,386 Acquired customer relationships 759,782 ( 205,127 ) 554,655 Acquired developed technology 132,825 ( 105,049 ) 27,776 Acquired trade names 12,900 ( 12,879 ) 21 Total amortizable intangible assets $ 1,437,450 $ ( 601,502 ) $ 835,948 Amortization expense was $ 37.5 million and $ 36.5 million for the three months ended April 30, 2024 and 2023, respectively. Goodwill There were no changes to the carrying value of goodwill during the three months ended April 30, 2024. 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. -11- Table of Contents In September 2023, the Company entered into an agreement to acquire the BenefitWallet HSA portfolio from Conduent Business Services, LLC ("Conduent"). The transfer closed in a series of three tranches, as presented in the following table: Transfers to HealthEquity Applicable purchase price (in thousands, except HSA Assets) HSAs HSA Assets (in millions) Paid using cash on hand Paid using borrowings under the Revolving Credit Facility Total purchase price March 7, 2024 266 $ 1,071 $ 163,974 $ — $ 163,974 April 11, 2024 134 555 34,925 50,000 84,925 May 9, 2024 216 1,047 1,101 175,000 176,101 Total 616 $ 2,673 $ 200,000 $ 225,000 $ 425,000 The BenefitWallet HSA portfolio acquisition was accounted for as an asset acquisition, and related acquisition costs were capitalized as part of the cost of the asset, which is included within intangible assets, net, on the Company's condensed consolidated balance sheet. The Company capitalized $ 11.7 million and $ 15.5 million of transaction costs associated with the acquisition during the three months ended April 30, 2024 and in May 2024, respectively. Total capitalized transaction costs of $ 27.2 million include the reimbursement of $ 20.0 million of Conduent's transfer-related expenses. In addition, in May 2024, the Company assumed a contract with a depository partner representing approximately 7 % of the total HSA Assets added through the acquisition, which provides a custodial yield that is below current market rates and expires in June 2026. The Company recorded a $ 20.3 million liability in May 2024 as a result of the assumed contract, which will be recorded as an increase to custodial revenue over the life of the assumed contract. There were no other material changes during the three months ended April 30, 2024, 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, 2024. 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 (the "Lease"). WageWorks' right to terminate the Lease was disputed by the landlord, Union Mesa 1, LLC (“Union Mesa”), which claimed that the Lease had commenced on December 1, 2020. 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, after 11 months of abated rent. On November 24, 2021, Union Mesa 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 Maricopa County Superior Court in the State of Arizona. On January 4, 2022, WageWorks filed an amended complaint, seeking a 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. In May and June 2022, Union Mesa filed an answer, counterclaim, and third-party complaint against WageWorks and the Company, denying WageWorks' claims and separately seeking recourse against WageWorks for breach of contract and breach of the implied covenant of good faith and fair dealing, as well as against the Company under the terms of its guaranty of WageWorks' obligations under the Lease. On July 21, 2022, WageWorks and the Company filed an answer to the counterclaim and the third-party complaint on its declaratory judgment claim that WageWorks' termination was improper under the Lease. On December 8, 2023, representatives from the parties participated in a court-ordered mediation held in Phoenix, Arizona, which was unsuccessful. On December 29, 2023, the Superior -12- Table of Contents Court issued an order denying Union Mesa’s motion for partial summary judgment after finding that genuine issues of material fact exist. A trial is scheduled to start on December 9, 2024. WageWorks is seeking consequential damages relating to Union Mesa’s breach of the Lease and conversion of the letter of credit, including consequential damages, pre-judgment interest, and its attorneys’ fees. Union Mesa has denied liability for these damages. 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. According to Union Mesa, these damages include (i) all rent payments due under the Lease accruing from December 2, 2020 (including abated rent), (ii) late charges of 3 % on past due amounts, (iii) interest on past due amounts at an interest rate of the prime rate plus 5 %, (iv) costs incurred in reletting the premises, (v) attorneys’ fees negotiating the lease and related agreements, and (vi) any other amounts necessary to compensate Union Mesa for the detriment proximately caused by WageWorks’ alleged breach of the Lease. In addition, Union Mesa states that it intends to re-assert periodic actions against WageWorks to seek all amounts due from time to time through the remaining term of the Lease or until the premises are successfully relet. 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 6. Indebtedness Long-term debt consisted of the following: (in thousands) April 30, 2024 January 31, 2024 4.50 % Senior Notes due 2029 $ 600,000 $ 600,000 Term Loan Facility 286,875 286,875 Revolving Credit Facility 50,000 — Principal amount 936,875 886,875 Less: unamortized discount and issuance costs (1) 11,200 11,903 Total debt, net 925,675 874,972 Less: current portion of long-term debt — — Long-term debt, net $ 925,675 $ 874,972 (1) In addition to the $ 11.2 million and $ 11.9 million of unamortized discount and issuance costs related to long-term debt as of April 30, 2024 and January 31, 2024, respectively, $ 2.3 million and $ 2.5 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 April 30, 2024 and January 31, 2024, 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. As of April 30, 2024 and January 31, 2024, the balance of accrued interest on the Notes was $ 2.3 million and $ 9.3 million, respectively, which 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. -13- Table of Contents 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 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. 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 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 bear interest 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). As of April 30, 2024, the stated interest rate on the Credit Facilities was 6.67 % and the effective interest rate on the Term Loan Facility was 7.43 %. 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 April 30, 2024, the Company had $ 50.0 million outstanding under its Revolving Credit Facility. In May 2024, the Company borrowed an additional $ 175.0 million under its Revolving Credit Facility, which was used to pay for the third tranche of the BenefitWallet HSA portfolio acquisition. 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 -14- Table of Contents the fourth year after October 8, 2021; and (iv) 10.0 % for the fifth year after October 8, 2021. In addition, the Term Loan Facility is required to be mandatorily prepaid with 100 % of the net cash proceeds of all asset sales, insurance and condemnation recoveries, subject to customary exceptions and thresholds, including to the extent such proceeds are reinvested in assets useful in the business of the Company and its subsidiaries within 450 days following receipt (or committed to be reinvested within such 450 -day period and reinvested within 180 days after the end of such 450 -day period). The loans under the Credit Facilities may be prepaid, and the commitments thereunder may be reduced, by the Company without penalty or premium, subject to the reimbursement of customary “breakage costs.” The Credit Agreement contains significant customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.00 to 1.00 and (ii) a minimum consolidated interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00. The Company was in compliance with all covenants under the Credit Agreement as of April 30, 2024, and for the period then ended. The Company continues to be in compliance with all covenants under the Credit Agreement through the filing date of this Quarterly Report on Form 10-Q. 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 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 months ended April 30, 2024, the Company recorded an income tax provision of $ 4.4 million. This resulted in an effective income tax rate of 13.3 % for the three months ended April 30, 2024, compared with an effective income tax rate of 59.1 % for the three months ended April 30, 2023. For the three months ended April 30, 2024 and 2023, discrete tax items impacting the effective tax rate were primarily due to differences in tax deductible stock-based compensation compared to GAAP stock-based compensation expense. As of April 30, 2024 and January 31, 2024, the Company’s total gross unrecognized tax benefit was $ 20.2 million and $ 19.2 million, respectively. If recognized, $ 17.1 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of April 30, 2024. The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by California and Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to the Company's taxes, net operating losses, and/or tax credit carryforwards. As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2006. -15- Table of Contents 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 during the periods presented: Three months ended April 30, (in thousands) 2024 2023 Cost of revenue $ 4,525 $ 3,606 Sales and marketing 4,323 2,779 Technology and development 5,940 4,892 General and administrative 17,232 6,927 Total stock-based compensation expense $ 32,020 $ 18,204 Stock award plans Incentive Plan. The Company grants restricted stock units ("RSUs") under the HealthEquity, Inc. 2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provides for the issuance of stock awards to the directors and team members of the Company. Historically, the Company also granted stock options under the Incentive Plan. As of April 30, 2024, 14.3 million shares were available for grant under the Incentive Plan. Stock options A summary of stock option activity is as follows: Outstanding stock options (in thousands, except for exercise prices and term) Number of options Range of exercise prices Weighted- average exercise price Weighted- average contractual term (in years) Aggregate intrinsic value Outstanding as of January 31, 2024 726 $ 14.00 - 73.61 $ 36.91 2.5 $ 28,067 Exercised ( 117 ) $ 14.00 - 41.28 $ 16.47 Outstanding as of April 30, 2024 609 $ 14.00 - 73.61 $ 40.84 2.6 $ 23,169 Vested and expected to vest as of April 30, 2024 609 $ 40.84 2.6 $ 23,169 Exercisable as of April 30, 2024 609 $ 40.84 2.6 $ 23,169 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, 2024 3,363 $ 67.96 Granted 989 87.67 Vested ( 750 ) 66.43 Forfeited ( 39 ) 62.67 Outstanding as of April 30, 2024 3,563 $ 73.81 Performance restricted stock units. During the three months ended April 30, 2024, the Company awarded 182,044 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, 2027. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $ 20.2 million. Compensation expense is recorded over the requisite service period 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 three months ended April 30, 2024, the Company awarded 60,682 PRSUs subject to the achievement of certain financial criteria measured on January 31, 2027. The PRSUs cliff vest and are issued upon approval by the Talent, Compensation and Culture Committee. The Company records stock-based compensation related to PRSUs over the requisite service period when it is considered probable that the performance conditions will be met. The -16- Table of Contents Company believes it is probable that the PRSUs will vest at least in part. The vesting of the PRSUs will ultimately range from 0 % to 200 % of the number of shares underlying the PRSU grant based on the level of achievement of the performance goals. Each of the PRSUs granted during the three months ended April 30, 2024 contain a provision such that upon the award holder's eligible retirement, the PRSUs would remain outstanding and eligible to vest based on achievement of their respective market or performance conditions without regard to the award holder’s continued employment on the vesting date. Based on the application of ASC 718, Compensation - Stock Compensation , expense is recognized over the requisite service period, which ends on the earlier of (1) the date of approval by the Talent, Compensation and Culture Committee or (2) the date the award holder becomes eligible for retirement (defined as at least 55 years old with least 10 years of service at the Company). As a result, the expense associated with PRSUs granted to retirement-eligible individuals was recorded on the grant date. 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 April 30, 2024, the fair value of the Notes was $ 547.5 million. Borrowings under the Credit Facilities are considered Level 2 instruments and recorded at book value in the Company's condensed consolidated financial statements. The Credit Facilities reprice frequently due to variable interest rate terms and entail no significant changes in credit risk. As a result, the fair value of the Credit Facilities approximates carrying value. Note 10. Subsequent events Except for the completion of the BenefitWallet HSA portfolio acquisition and related borrowing under the Revolving Credit Facility, as described in Note 5—Commitments and contingencies, there were no subsequent events that required recognition or disclosure. -17- Table of Contents