HEALTHEQUITY, INC. 10-Q

Item 1. Financial statements HealthEquity, Inc. and subsidiaries Condensed consolidated balance sheets (in thousands, except par value) October 31, 2024 January 31, 2024 (unaudited) Assets Current assets Cash and cash equivalents $ 322,163 $ 403,979 Accounts receivable, net of allowance for doubtful accounts of $ 2,516 and $ 3,947 as of October 31, 2024 and January 31, 2024, respectively 106,712 104,893 Other current assets 66,371 48,564 Total current assets 495,246 557,436 Property and equipment, net 3,890 6,013 Operating lease right-of-use assets 44,845 48,380 Intangible assets, net 1,228,476 835,948 Goodwill 1,648,145 1,648,145 Other assets 67,745 67,868 Total assets $ 3,488,347 $ 3,163,790 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 10,352 $ 12,041 Accrued compensation 47,514 49,608 Accrued liabilities 86,725 46,038 Operating lease liabilities 9,948 9,404 Total current liabilities 154,539 117,091 Long-term liabilities Long-term debt, net of issuance costs 1,081,039 874,972 Operating lease liabilities, non-current 44,202 48,766 Other long-term liabilities 25,275 19,270 Deferred tax liability 58,605 68,670 Total long-term liabilities 1,209,121 1,011,678 Total liabilities 1,363,660 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 October 31, 2024 and January 31, 2024, respectively — — Common stock, $ 0.0001 par value, 900,000 shares authorized, 86,823 and 86,127 shares issued and outstanding as of October 31, 2024 and January 31, 2024, respectively 9 9 Additional paid-in capital 1,893,088 1,829,384 Accumulated earnings 231,590 205,628 Total stockholders’ equity 2,124,687 2,035,021 Total liabilities and stockholders’ equity $ 3,488,347 $ 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 October 31, Nine months ended October 31, (in thousands, except per share data) 2024 2023 2024 2023 Revenue Service revenue $ 119,174 $ 114,082 $ 354,108 $ 337,115 Custodial revenue 140,953 100,005 401,281 281,161 Interchange revenue 40,305 35,132 132,568 118,924 Total revenue 300,432 249,219 887,957 737,200 Cost of revenue Service costs 86,860 75,721 246,122 233,498 Custodial costs 10,241 8,029 29,406 24,104 Interchange costs 6,305 6,287 24,213 20,281 Total cost of revenue 103,406 90,037 299,741 277,883 Gross profit 197,026 159,182 588,216 459,317 Operating expenses Sales and marketing 22,636 19,656 67,655 58,714 Technology and development 60,189 55,614 174,859 163,573 General and administrative 31,789 27,153 102,285 80,516 Amortization of acquired intangible assets 28,350 23,213 84,876 69,545 Merger integration 34,437 2,655 38,357 8,157 Total operating expenses 177,401 128,291 468,032 380,505 Income from operations 19,625 30,891 120,184 78,812 Other expense Interest expense ( 18,155 ) ( 13,545 ) ( 45,377 ) ( 41,814 ) Other income, net 4,748 3,741 11,266 8,325 Total other expense ( 13,407 ) ( 9,804 ) ( 34,111 ) ( 33,489 ) Income before income taxes 6,218 21,087 86,073 45,323 Income tax provision 515 6,414 15,735 15,975 Net income and comprehensive income $ 5,703 $ 14,673 $ 70,338 $ 29,348 Net income per share: Basic $ 0.07 $ 0.17 $ 0.81 $ 0.34 Diluted $ 0.06 $ 0.17 $ 0.79 $ 0.34 Weighted-average number of shares used in computing net income per share: Basic 87,193 85,697 86,935 85,424 Diluted 88,634 87,122 88,699 86,707 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) 2024 2023 2024 2023 Total stockholders' equity, beginning balance $ 2,157,037 $ 1,949,614 $ 2,035,021 $ 1,895,640 Common stock: Beginning balance 9 9 9 8 Issuance of common stock upon exercise of stock options, and for restricted stock — — — 1 Ending balance 9 9 9 9 Additional paid-in capital: Beginning balance 1,886,765 1,785,014 1,829,384 1,745,716 Issuance of common stock upon exercise of stock options, and for restricted stock 837 2,019 4,624 3,040 Stock-based compensation 21,123 21,662 74,717 59,939 Repurchases of common stock ( 15,637 ) — ( 15,637 ) — Ending balance 1,893,088 1,808,695 1,893,088 1,808,695 Accumulated earnings Beginning balance 270,263 164,591 205,628 149,916 Repurchases of common stock ( 44,376 ) — ( 44,376 ) — Net income 5,703 14,673 70,338 29,348 Ending balance 231,590 179,264 231,590 179,264 Total stockholders' equity, ending balance $ 2,124,687 $ 1,987,968 $ 2,124,687 $ 1,987,968 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) 2024 2023 Cash flows from operating activities: Net income $ 70,338 $ 29,348 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 123,269 115,167 Stock-based compensation 74,717 59,939 Amortization of debt discount and issuance costs 1,805 2,150 Loss on extinguishment of debt 1,576 1,157 Deferred taxes ( 10,065 ) ( 15,928 ) Changes in operating assets and liabilities: Accounts receivable, net ( 1,819 ) 654 Other assets ( 11,672 ) ( 12,820 ) Operating lease right-of-use assets 5,004 8,241 Accrued compensation ( 3,161 ) ( 14,829 ) Accounts payable, accrued liabilities, and other current liabilities 24,757 ( 2,363 ) Operating lease liabilities, non-current ( 5,796 ) ( 9,966 ) Other long-term liabilities ( 4,845 ) 5,003 Net cash provided by operating activities 264,108 165,753 Cash flows from investing activities: Purchases of software and capitalized software development costs ( 37,900 ) ( 30,413 ) Purchases of property and equipment ( 1,756 ) ( 1,134 ) Acquisitions of HSA portfolios ( 452,241 ) ( 3,257 ) Net cash used in investing activities ( 491,897 ) ( 34,804 ) Cash flows from financing activities: Proceeds from long-term debt 736,875 — Principal payments on long-term debt ( 536,875 ) ( 54,375 ) Payment of debt issuance costs ( 3,748 ) — Repurchases of common stock ( 58,513 ) — Settlement of client-held funds obligation, net 3,188 ( 183 ) Proceeds from exercise of common stock options 5,046 3,404 Net cash provided by (used in) financing activities 145,973 ( 51,154 ) Increase (decrease) in cash and cash equivalents ( 81,816 ) 79,795 Beginning cash and cash equivalents 403,979 254,266 Ending cash and cash equivalents $ 322,163 $ 334,061 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) 2024 2023 Supplemental cash flow data: Interest expense paid in cash $ 50,203 $ 44,194 Income tax payments, net 23,817 24,777 Supplemental disclosures of non-cash investing and financing activities: Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation 4,754 2,882 Purchases of property and equipment included in accounts payable or accrued liabilities 106 98 Repurchases of common stock included in accrued liabilities 1,500 — Non-cash purchase consideration related to acquisitions of HSA portfolios 20,325 — Exercise of common stock options receivable 7 19 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 October 31, 2023 Nine months ended October 31, 2023 (in thousands) Prior presentation Reclassifications Current presentation Prior presentation Reclassifications Current presentation Service revenue $ 107,512 $ 6,570 $ 114,082 $ 318,343 $ 18,772 $ 337,115 Custodial revenue 106,575 ( 6,570 ) 100,005 299,933 ( 18,772 ) 281,161 Interchange revenue 35,132 — 35,132 118,924 — 118,924 Total revenue 249,219 — 249,219 737,200 — 737,200 Total cost of revenue 90,811 ( 774 ) 90,037 280,036 ( 2,153 ) 277,883 Gross profit 158,408 774 159,182 457,164 2,153 459,317 Total operating expenses 127,517 774 128,291 378,352 2,153 380,505 Total other expense ( 9,804 ) — ( 9,804 ) ( 33,489 ) — ( 33,489 ) Income tax provision 6,414 — 6,414 15,975 — 15,975 Net income $ 14,673 $ — $ 14,673 $ 29,348 $ — $ 29,348 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, 2024 and for the three and nine months ended October 31, 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. In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40), Disaggregation of Income Statement Expenses . The ASU requires a public business entity to disclose additional information about specific expense categories in the notes to the financial statements for interim and annual reporting periods. The ASU is effective for annual reporting periods beginning after December 15, 2026, and for interim reporting periods beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the ASU to determine its impact on our 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 October 31, Nine months ended October 31, (in thousands, except per share data) 2024 2023 2024 2023 Numerator (basic and diluted): Net income $ 5,703 $ 14,673 $ 70,338 $ 29,348 Denominator (basic): Weighted-average common shares outstanding 87,193 85,697 86,935 85,424 Denominator (diluted): Weighted-average common shares outstanding 87,193 85,697 86,935 85,424 Weighted-average dilutive effect of stock options and restricted stock units 1,441 1,425 1,764 1,283 Diluted weighted-average common shares outstanding 88,634 87,122 88,699 86,707 Net income per share: Basic $ 0.07 $ 0.17 $ 0.81 $ 0.34 Diluted $ 0.06 $ 0.17 $ 0.79 $ 0.34 For the three months ended October 31, 2024 and 2023, 0.1 million and 0.6 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. For the nine months ended October 31, 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. -9- Table of Contents 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 October 31, 2024 and January 31, 2024, the Company had prepaid expenses of $ 42.1 million and $ 31.2 million, respectively, which are included within other current assets on the Company's condensed consolidated balance sheets. Property and equipment Property and equipment consisted of the following: (in thousands) October 31, 2024 January 31, 2024 Leasehold improvements $ 13,879 $ 14,455 Furniture and fixtures 6,707 7,087 Computer equipment 22,921 25,489 Property and equipment, gross 43,507 47,031 Accumulated depreciation ( 39,617 ) ( 41,018 ) Property and equipment, net $ 3,890 $ 6,013 Depreciation expense was $ 1.0 million and $ 3.7 million for the three and nine months ended October 31, 2024, respectively, and $ 1.8 million and $ 6.4 million for the three and nine months ended October 31, 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 October 31, 2024 and January 31, 2024, the balance of deferred revenue was $ 19.2 million and $ 6.2 million, respectively. The balance as of October 31, 2024 relates primarily to a contract with a depository partner, which the Company assumed in conjunction with the BenefitWallet HSA portfolio acquisition, as described in Note 5—Commitments and contingencies. The remainder of the balances as of October 31, 2024 and January 31, 2024 relates 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 61 % 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 and nine months ended October 31, 2024 that was included in the balance of deferred revenue as of January 31, 2024 was $ 1.1 million and $ 3.9 million, respectively. 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) 2024 2023 2024 2023 Operating lease expense $ 2,250 $ 2,323 $ 6,875 $ 7,289 Sublease income ( 987 ) ( 813 ) ( 2,944 ) ( 1,795 ) Net operating lease expense $ 1,263 $ 1,510 $ 3,931 $ 5,494 -10- Table of Contents Other income, net Other income, net, consisted of the following: Three months ended October 31, Nine months ended October 31, (in thousands) 2024 2023 2024 2023 Interest income $ 3,897 $ 3,713 $ 10,881 $ 7,795 Other income, net 851 28 385 530 Total other income, net $ 4,748 $ 3,741 $ 11,266 $ 8,325 Interest expense Based on the application of Accounting Standards Codification ("ASC") 470-50, Debt - Modifications and Extinguishments , the Company recorded $ 1.6 million and $ 1.2 million of loss on extinguishment of debt during the nine months ended October 31, 2024 and 2023, respectively, which is included within interest expense in the condensed consolidated statements of operations and comprehensive income. 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) 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 7,354 $ 8,174 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: October 31, 2024 (in thousands) Gross carrying amount Accumulated amortization Net carrying amount Amortizable intangible assets: Software and software development costs $ 298,052 $ ( 223,104 ) $ 74,948 Acquired HSA portfolios 737,011 ( 112,323 ) 624,688 Acquired customer relationships 759,782 ( 243,896 ) 515,886 Acquired developed technology 132,825 ( 119,871 ) 12,954 Acquired trade names 12,900 ( 12,900 ) — Total amortizable intangible assets $ 1,940,570 $ ( 712,094 ) $ 1,228,476 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 $ 39.7 million and $ 119.5 million for the three and nine months ended October 31, 2024, respectively, and $ 36.0 million and $ 108.8 million for the three and nine months ended October 31, 2023, respectively. -11- Table of Contents Goodwill There were no changes to the carrying value of goodwill during the nine months ended October 31, 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, and other contractual commitments. 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 Prior 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 $ 27.2 million of transaction costs associated with the acquisition during the nine months ended October 31, 2024, which includes 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 deferred revenue of $ 20.3 million 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. On November 27, 2024, the Company agreed to pay $ 30.0 million to settle a lawsuit related to a lease termination, as described below in the section entitled "Legal matters." There were no other material changes during the nine months ended October 31, 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. -12- Table of Contents 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. On November 27, 2024, the parties agreed to settle the lawsuit, with Union Mesa retaining the $ 2.8 million from the letter of credit and HealthEquity and WageWorks jointly agreeing to pay an additional $ 30.0 million to Union Mesa. The $ 30.0 million settlement amount was recorded as merger integration expense during the three months ended October 31, 2024, and is included within accrued liabilities on the Company's condensed consolidated balance sheet as of October 31, 2024. The $ 2.8 million letter of credit was previously recorded as merger integration expense during the period in which it was drawn by Union Mesa. As a result of a cybersecurity incident earlier this year in which a business partner's user account containing personally identifiable information was breached, the Company is subject to multiple putative class action lawsuits that have been filed in federal court in the District of Utah. The plaintiffs allege that the Company failed to implement reasonable data security practices, which resulted in a breach and disclosure of plaintiffs' and others' personally identifiable information and protected health information. The plaintiffs are seeking, among other damages, unspecified monetary damages, equitable relief, costs and attorneys' fees arising out of the incident. On August 22, 2024, the court issued an order granting a motion to consolidate the class action lawsuits. On October 15, 2024, a consolidated class action amended complaint was filed. The Company intends to vigorously defend these lawsuits. The amount of the potential loss associated with these lawsuits cannot be reasonably estimated based on currently available information. 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. Except with respect to the Lease settlement, described above, no loss accrual relating to these matters was recorded because, based on currently available information, the Company does not believe that any contingent 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) October 31, 2024 January 31, 2024 4.50 % Senior Notes due 2029 $ 600,000 $ 600,000 Revolving Credit Facility 486,875 — Prior Term Loan Facility — 286,875 Principal amount 1,086,875 886,875 Less: unamortized discount and issuance costs (1) 5,836 11,903 Total debt, net 1,081,039 874,972 Less: current portion of long-term debt — — Long-term debt, net $ 1,081,039 $ 874,972 (1) In addition to the $ 5.8 million and $ 11.9 million of unamortized discount and issuance costs related to long-term debt as of October 31, 2024 and January 31, 2024, respectively, $ 8.1 million and $ 2.5 million of unamortized issuance costs related to the Company's Revolving Credit Facility and Prior Revolving Credit Facility (as defined below) are included within other assets on the condensed consolidated balance sheets as of October 31, 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. -13- Table of Contents The Notes are guaranteed by each of the Company’s existing, wholly owned domestic subsidiaries that guarantees its obligations under the Credit Agreement (as defined below) and are required to be guaranteed by any of the Company’s future subsidiaries that guarantee its obligations under the Credit Agreement or certain of its other indebtedness. The Notes will mature on October 1, 2029. Interest on the Notes is payable on April 1 and October 1 of each year. As of October 31, 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. 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 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 August 23, 2024, 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 a new five-year senior secured revolving credit facility (the “Revolving Credit Facility”) 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 Company borrowed $ 511.9 million under the Revolving Credit Facility to refinance the Prior Credit Agreement (as defined below). The Revolving Credit Facility may be used in the future for working capital and general corporate purposes, including the financing of acquisitions and other investments. As of October 31, 2024, the outstanding balance under the Revolving Credit Facility was $ 486.9 million, which is included within long-term debt, net of issuance costs, on the condensed consolidated balance sheet. The maturity date of the Revolving Credit Facility is August 23, 2029. 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 $ 450 million, plus an additional amount so long as the Company’s pro forma first lien net leverage ratio would not exceed 3.85 to 1.00 as of the date such loans or commitments are incurred. Borrowings under the Revolving Credit Facility bear interest at an annual rate equal to, at the Company’s option, either (i) the secured overnight financing rate published by the CME Group Benchmark Administration Limited (“Term SOFR”) (subject to a 0.10 % “credit spread adjustment”) plus a margin ranging from 1.25 % to 2.50 % or (ii) an alternate base rate plus a margin ranging from 0.25 % to 1.50 %, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. 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 0.25 % to 0.50 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of October 31, 2024, the interest rate on the Revolving Credit Facility was 6.34 %. The loans under the Revolving Credit Facility may be prepaid, and the commitments thereunder may be reduced by the Company without penalty or premium, subject to the reimbursement of customary “breakage costs.” The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 5.00 to -14- Table of Contents 1.00 beginning with the fiscal quarter ending January 31, 2025, and (ii) a minimum consolidated interest coverage ratio, measured as of the last day of each fiscal quarter, of no less than 3.00 to 1.00 beginning with the fiscal quarter ending January 31, 2025. The Company was in compliance with all covenants under the Credit Agreement as of October 31, 2024 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 Company’s obligations under the Credit Agreement are required to be unconditionally guaranteed by each of its existing or subsequently acquired or organized direct and indirect domestic subsidiaries and are secured by security interests in substantially all assets of the Company and the guarantors, in each case, subject to certain customary exceptions. Prior Credit Agreement On October 8, 2021, the Company entered into a credit agreement (as amended, the “Prior Credit Agreement”) among the Company, as borrower, each lender from time to time party thereto (the “Prior Lenders”), JPMorgan Chase Bank, N.A., as administrative agent and the Swing Line Lender (as defined in the Prior 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 “Prior Term Loan Facility”), in an aggregate principal amount of $ 350 million; and (ii) a five-year senior secured revolving credit facility (the “Prior Revolving Credit Facility” and, together with the Prior Term Loan Facility, the “Prior Credit Facilities”), in an aggregate principal amount of up to $ 1.0 billion (with a $ 25 million sub-limit for the issuance of letters of credit). Prior to June 1, 2023, borrowings under the Prior 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 Prior Credit Agreement. On June 1, 2023, the Company entered into an amendment to the Prior Credit Agreement which replaced interest rate provisions based on LIBOR with the forward-looking term rate based on Term SOFR. As a result, borrowings under the Prior Credit Agreement as so amended bore 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 Prior Credit Agreement (as amended). The Company was also required to pay certain fees to the Prior Lenders, including, among others, a quarterly commitment fee on the average unused amount of the Prior Revolving Credit Facility at a rate ranging from 0.20 % to 0.40 %, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Prior Credit Agreement. The Prior Credit Agreement contained significant customary affirmative and negative covenants. The Company was in compliance with all covenants under the Prior Credit Agreement through the date on which the Prior Credit Agreement was terminated. On August 23, 2024, in connection with the entry into the Credit Agreement, the Company repaid all outstanding obligations in the amount of $ 511.9 million under the Prior Credit Agreement and terminated all commitments thereunder. 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, 2024, the Company recorded an income tax provision of $ 0.5 million and $ 15.7 million, respectively. This resulted in an effective income tax rate of 8.3 % and 18.3 % for the three and nine months ended October 31, 2024, respectively, compared with an effective income tax rate of 30.4 % and 35.2 % for -15- Table of Contents the three and nine months ended October 31, 2023, respectively. For the three and nine months ended October 31, 2024, 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, return-to-provision adjustments on research and development tax credits, and an increase in unrecognized tax benefits. 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 examination, and differences in tax deductible stock-based compensation compared to GAAP stock-based compensation expense. As of October 31, 2024 and January 31, 2024, the Company’s total gross unrecognized tax benefit was $ 24.0 million and $ 19.2 million, respectively. If recognized, $ 20.7 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of October 31, 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. 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 October 31, Nine months ended October 31, (in thousands) 2024 2023 2024 2023 Cost of revenue $ 3,751 $ 4,343 $ 11,210 $ 12,342 Sales and marketing 3,700 3,506 11,873 9,763 Technology and development 6,353 5,923 18,747 15,098 General and administrative 7,319 7,890 32,887 22,736 Total stock-based compensation expense $ 21,123 $ 21,662 $ 74,717 $ 59,939 Stock award plans Incentive Plan. During the nine months ended October 31, 2024, the Company adopted the HealthEquity, Inc. 2024 Equity Incentive Plan (the "Incentive Plan"), which provides for the issuance of stock awards to team members, consultants, and directors of the Company. Subject to adjustment as provided in the Incentive Plan, as of October 31, 2024, the aggregate number of shares of the Company’s common stock reserved and available for issuance pursuant to awards granted under the Incentive Plan was 4.1 million. No further awards will be made under the Company’s 2014 Equity 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 ( 249 ) $ 14.00 - 47.21 $ 18.59 Outstanding as of October 31, 2024 477 $ 21.27 - 73.61 $ 46.47 2.6 $ 18,499 Vested and expected to vest as of October 31, 2024 477 $ 46.47 2.6 $ 18,499 Exercisable as of October 31, 2024 477 $ 46.47 2.6 $ 18,499 -16- Table of Contents Restricted stock units A summary of restricted stock unit ("RSU") and performance restricted stock unit ("PRSU") 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 1,046 84.99 Vested ( 1,164 ) 65.50 Forfeited ( 192 ) 71.02 Outstanding as of October 31, 2024 3,053 $ 74.54 Performance restricted stock units. During the nine months ended October 31, 2024, the Company awarded 182,044 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, 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. In addition, during the nine months ended October 31, 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 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 nine months ended October 31, 2024 contains 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. Stockholders' equity Stock repurchase program In September 2024, the Company announced that its Board of Directors authorized a common stock repurchase program. Under the program, the Company may purchase up to $ 300.0 million of its common stock, as market conditions warrant. The common stock may be repurchased at prices that the Company deems appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company's sole discretion. Such repurchases may be effected through open market purchases, privately negotiated transactions or otherwise, including repurchase plans that satisfy the conditions of Rule 10b5-1 under the Securities Exchange Act of 1934. The stock repurchase program does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and the program may be suspended or discontinued at any time. The following table sets forth the common stock repurchased and subsequently retired during the periods presented: Three months ended October 31, 2024 Nine months ended October 31, 2024 (in thousands) Shares Amount Shares Amount Common stock repurchases (1) 732 $ 60,013 732 $ 60,013 (1) Shares repurchased include unsettled repurchases as of October 31, 2024. All repurchases were made in open market transactions. The excess of repurchase price over par value was allocated between additional paid-in capital and retained earnings. As of October 31, 2024, $ 240.0 million of common stock remained authorized for repurchase under the Company's stock repurchase program. -17- Table of Contents Note 10. Fair value Fair value measurements are made at a specific point in time based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1—quoted prices in active markets for identical assets or liabilities; • Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3—unobservable inputs based on the Company’s own assumptions. Cash and cash equivalents are considered Level 1 instruments and are valued based on publicly available daily net asset values. The carrying values of cash and cash equivalents approximate fair values due to the short-term nature of these instruments. The Notes are valued based upon quoted market prices and are considered Level 2 instruments because the markets in which the Notes trade are not considered active markets. As of October 31, 2024, the fair value of the Notes was $ 571.0 million. Borrowings under the Revolving Credit Facility are considered Level 2 instruments and recorded at book value in the Company's condensed consolidated financial statements. The Revolving Credit 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 Revolving Credit Facility approximates carrying value. Note 11. Subsequent events As described in Note 5—Commitments and contingencies, on November 27, 2024, the Company agreed to settle a lawsuit related to the termination of an office lease and agreed to pay $ 30.0 million as part of the settlement. -18- Table of Contents