HQY

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☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-36568

HEALTHEQUITY, INC.

(Exact name of registrant as specified in its charter)

Delaware

52-2383166

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

(801) 727-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common stock, par value $0.0001 per share			HQY			The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer			☑			Accelerated filer			☐
Non-accelerated filer			☐			Smaller reporting company			☐
						Emerging growth Company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Table of contents

						Page
Part I. FINANCIAL INFORMATION
Item 1.			Financial statements
			Condensed consolidated balance sheets as of October 31, 2022 (unaudited) and January 31, 2022			3
			Condensed consolidated statements of operations and comprehensive loss for the three and nine months ended October 31, 2022 and 2021 (unaudited)			4
			Condensed consolidated statements of stockholders' equity for the three and nine months ended October 31, 2022 and 2021 (unaudited)			5
			Condensed consolidated statements of cash flows for the nine months ended October 31, 2022 and 2021 (unaudited)			6
			Notes to condensed consolidated financial statements (unaudited)			8
Item 2.			Management's discussion and analysis of financial condition and results of operations			18
Item 3.			Quantitative and qualitative disclosures about market risk			32
Item 4.			Controls and procedures			33
Part II. OTHER INFORMATION
Item 1.			Legal proceedings			36
Item 1A.			Risk factors			36
Item 6.			Exhibits			37
			Signatures			38

Condensed consolidated balance sheets

(in thousands, except par value)			October 31, 2022						January 31, 2022
			(unaudited)
Assets
Current assets
Cash and cash equivalents			$	210,197					$	225,414
Accounts receivable, net of allowance for doubtful accounts of $6,045 and $6,228 as of October 31, 2022 and January 31, 2022, respectively			87,716						87,428
Other current assets			34,247						38,495
Total current assets			332,160						351,337
Property and equipment, net			15,620						23,372
Operating lease right-of-use assets			58,536						63,613
Intangible assets, net			964,531						973,137
Goodwill			1,645,759						1,645,836
Other assets			48,151						49,807
Total assets			$	3,064,757					$	3,107,102
Liabilities and stockholders’ equity
Current liabilities
Accounts payable			$	15,842					$	27,541
Accrued compensation			35,140						47,136
Accrued liabilities			33,367						57,589
Current portion of long-term debt			15,313						8,750
Operating lease liabilities			10,713						12,171
Total current liabilities			110,375						153,187
Long-term liabilities
Long-term debt, net			911,406						922,077
Operating lease liabilities, non-current			60,819						65,232
Other long-term liabilities			9,758						14,185
Deferred tax liability			89,281						99,846
Total long-term liabilities			1,071,264						1,101,340
Total liabilities			1,181,639						1,254,527
Commitments and contingencies (see Note 6)
Stockholders’ equity
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of October 31, 2022 and January 31, 2022, respectively			—						—
Common stock, $0.0001 par value, 900,000 shares authorized, 84,636 and 83,780 shares issued and outstanding as of October 31, 2022 and January 31, 2022, respectively			8						8
Additional paid-in capital			1,732,985						1,676,508
Accumulated earnings			150,125						176,059
Total stockholders’ equity			1,883,118						1,852,575
Total liabilities and stockholders’ equity			$	3,064,757					$	3,107,102

comprehensive loss (unaudited)

			Three months ended October 31,												Nine months ended October 31,
(in thousands, except per share data)			2022						2021						2022						2021
Revenue
Service revenue			$	108,580					$	102,733					$	315,962					$	314,449
Custodial revenue			74,642						49,006						199,606						144,760
Interchange revenue			32,864						28,215						112,339						94,050
Total revenue			216,086						179,954						627,907						553,259
Cost of revenue
Service costs			76,493						66,217						232,281						204,183
Custodial costs			6,812						5,734						20,543						15,567
Interchange costs			5,923						4,683						19,240						15,102
Total cost of revenue			89,228						76,634						272,064						234,852
Gross profit			126,858						103,320						355,843						318,407
Operating expenses
Sales and marketing			17,245						12,726						49,648						42,288
Technology and development			48,890						38,070						140,653						111,437
General and administrative			25,131						20,004						74,795						63,503
Amortization of acquired intangible assets			23,541						19,642						71,420						59,745
Merger integration			6,509						13,244						23,486						38,422
Total operating expenses			121,316						103,686						360,002						315,395
Income (loss) from operations			5,542						(366)						(4,159)						3,012
Other expense
Interest expense			(12,165)						(11,881)						(34,119)						(25,824)
Other income (expense), net			443						3,122						174						(164)
Total other expense			(11,722)						(8,759)						(33,945)						(25,988)
Loss before income taxes			(6,180)						(9,125)						(38,104)						(22,976)
Income tax benefit			(4,539)						(4,087)						(12,170)						(11,505)
Net loss and comprehensive loss			$	(1,641)					$	(5,038)					$	(25,934)					$	(11,471)
Net loss per share:
Basic			$	(0.02)					$	(0.06)					$	(0.31)					$	(0.14)
Diluted			$	(0.02)					$	(0.06)					$	(0.31)					$	(0.14)
Weighted-average number of shares used in computing net loss per share:
Basic			84,572						83,551						84,349						82,939
Diluted			84,572						83,551						84,349						82,939

Condensed consolidated statements of stockholders’ equity (unaudited)

			Three months ended October 31,												Nine months ended October 31,
(in thousands)			2022						2021						2022						2021
Total stockholders' equity, beginning balance			$	1,864,896					$	1,862,666					$	1,852,575					$	1,378,728
Common stock:
Beginning balance			8						8						8						8
Issuance of common stock upon exercise of stock options, and for restricted stock			—						—						—						—
Other issuance of common stock			—						—						—						—
Ending balance			8						8						8						8
Additional paid-in capital:
Beginning balance			1,713,122						1,648,743						1,676,508						1,158,372
Issuance of common stock upon exercise of stock options, and for restricted stock			1,693						938						6,167						6,253
Other issuance of common stock			—						—						—						456,640
Stock-based compensation			18,170						13,284						50,310						41,700
Ending balance			1,732,985						1,662,965						1,732,985						1,662,965
Accumulated earnings
Beginning balance			151,766						213,915						176,059						220,348
Net loss			(1,641)						(5,038)						(25,934)						(11,471)
Ending balance			150,125						208,877						150,125						208,877
Total stockholders' equity, ending balance			$	1,883,118					$	1,871,850					$	1,883,118					$	1,871,850

Condensed consolidated statements of cash flows (unaudited)

			Nine months ended October 31,
(in thousands)			2022						2021
Cash flows from operating activities:
Net loss			$	(25,934)					$	(11,471)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			120,726						98,364
Stock-based compensation			50,310						41,700
Amortization of debt discount and issuance costs			2,454						3,616
Loss on extinguishment of debt			—						4,044
Change in fair value of contingent consideration			—						(2,147)
Other non-cash items			269						(750)
Deferred taxes			(10,565)						(8,765)
Changes in operating assets and liabilities:
Accounts receivable, net			(451)						(10,090)
Other assets			6,809						19,888
Operating lease right-of-use assets			6,169						8,944
Accrued compensation			(11,630)						(18,098)
Accounts payable, accrued liabilities, and other current liabilities			(33,170)						(34,023)
Operating lease liabilities, non-current			(5,401)						(6,808)
Other long-term liabilities			(4,427)						6,034
Net cash provided by operating activities			95,159						90,438
Cash flows from investing activities:
Purchases of software and capitalized software development costs			(35,306)						(49,033)
Purchases of property and equipment			(2,971)						(7,284)
Acquisition of intangible member assets			(70,574)						(64,463)
Acquisitions, net of cash acquired			—						(49,533)
Proceeds from sale of equity securities			—						2,367
Net cash used in investing activities			(108,851)						(167,946)
Cash flows from financing activities:
Principal payments on long-term debt			(6,562)						(1,003,125)
Settlement of client-held funds obligation, net			(1,579)						(1,565)
Proceeds from exercise of common stock options			6,616						7,728
Proceeds from issuance of long-term debt			—						950,000
Payment of debt issuance costs			—						(11,846)
Proceeds from follow-on equity offering, net of payments for offering costs			—						456,642
Net cash provided by (used in) financing activities			(1,525)						397,834
Increase (decrease) in cash and cash equivalents			(15,217)						320,326
Beginning cash and cash equivalents			225,414						328,803
Ending cash and cash equivalents			$	210,197					$	649,129

Condensed consolidated statements of cash flows (unaudited) (continued)

			Nine months ended October 31,
(in thousands)			2022						2021
Supplemental cash flow data:
Interest expense paid in cash			$	36,268					$	13,685
Income tax payments (refunds), net			775						(5,926)
Supplemental disclosures of non-cash investing and financing activities:
Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation			4,099						3,708
Purchases of property and equipment included in accounts payable or accrued liabilities			297						479
Purchases of intangible member assets included in accounts payable or accrued liabilities			—						2,281
Contingent consideration recognized at acquisition			—						8,147
Exercise of common stock options receivable			21						1
Decrease in goodwill due to measurement period adjustments, net			77						19

Note 1. Summary of business and significant accounting policies

Note 2. Net loss per share

The following table sets forth the computation of basic and diluted net loss per share:

			Three months ended October 31,												Nine months ended October 31,
(in thousands, except per share data)			2022						2021						2022						2021
Numerator (basic and diluted):
Net loss			$	(1,641)					$	(5,038)					$	(25,934)					$	(11,471)
Denominator (basic):
Weighted-average common shares outstanding			84,572						83,551						84,349						82,939
Denominator (diluted):
Weighted-average common shares outstanding			84,572						83,551						84,349						82,939
Weighted-average dilutive effect of stock options and restricted stock units			—						—						—						—
Diluted weighted-average common shares outstanding			84,572						83,551						84,349						82,939
Net loss per share:
Basic			$	(0.02)					$	(0.06)					$	(0.31)					$	(0.14)
Diluted			$	(0.02)					$	(0.06)					$	(0.31)					$	(0.14)

Note 3. Business combinations

The following table summarizes the Company's allocation of the consideration paid:

(in thousands)			Estimated fair value						Adjustments						Updated Allocation
Cash and cash equivalents			$	626					$	—					$	626
Other current assets			1,469						—						1,469
Intangible assets			23,900						—						23,900
Goodwill			36,374						(19)						36,355
Other assets			100						—						100
Current liabilities			(597)						—						(597)
Deferred tax liability			(3,566)						19						(3,547)
Total consideration paid			$	58,306					$	—					$	58,306

The following table summarizes the Company's current allocation of the consideration paid:

(in thousands)			Estimated fair value						Adjustments						Updated Allocation
Current assets			$	2,667					$	(163)					$	2,504
Intangible assets			172,183						—						172,183
Goodwill			282,287						(77)						282,210
Current liabilities			(2,137)						240						(1,897)
Total consideration paid			$	455,000					$	—					$	455,000

Note 4. Supplemental financial statement information

Property and equipment consisted of the following:

(in thousands)			October 31, 2022						January 31, 2022
Leasehold improvements			$	18,269					$	18,573
Furniture and fixtures			8,396						8,417
Computer equipment			29,970						31,982
Property and equipment, gross			56,635						58,972
Accumulated depreciation			(41,015)						(35,600)
Property and equipment, net			$	15,620					$	23,372

The components of operating lease costs were as follows:

			Three months ended October 31,												Nine months ended October 31,
(in thousands)			2022						2021						2022						2021
Operating lease expense			$	2,855					$	3,512					$	8,568					$	11,322
Sublease income			(568)						(455)						(1,614)						(1,355)
Net operating lease expense			$	2,287					$	3,057					$	6,954					$	9,967

Other income (expense), net, consisted of the following:

			Three months ended October 31,												Nine months ended October 31,
(in thousands)			2022						2021						2022						2021
Interest income			$	443					$	478					$	584					$	1,419
Gain on equity securities			—						—						—						1,677
Acquisition gains (costs), net			—						2,687						(53)						(4,917)
Other income (expense), net			—						(43)						(357)						1,657
Total other income (expense), net			$	443					$	3,122					$	174					$	(164)

Supplemental cash flow information related to the Company's operating leases was as follows:

			Nine months ended October 31,
(in thousands)			2022						2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases			$	9,387					$	10,928
Operating lease right-of-use assets obtained in exchange for new operating lease obligations			$	1,092					$	586

Note 5. Intangible assets and goodwill

			October 31, 2022
(in thousands)			Gross carrying amount						Accumulated amortization						Net carrying amount
Amortizable intangible assets:
Software and software development costs			$	224,699					$	(138,669)					$	86,030
Acquired HSA portfolios			261,179						(59,194)						201,985
Acquired customer relationships			759,782						(140,510)						619,272
Acquired developed technology			132,825						(75,852)						56,973
Acquired trade names			12,900						(12,629)						271
Total amortizable intangible assets			$	1,391,385					$	(426,854)					$	964,531

			January 31, 2022
(in thousands)			Gross carrying amount						Accumulated amortization						Net carrying amount
Amortizable intangible assets:
Software and software development costs			$	192,050					$	(99,952)					$	92,098
Acquired HSA portfolios			192,298						(46,603)						145,695
Acquired customer relationships			759,781						(101,741)						658,040
Acquired developed technology			132,825						(58,334)						74,491
Acquired trade names			12,900						(10,087)						2,813
Total amortizable intangible assets			$	1,289,854					$	(316,717)					$	973,137

Note 6. Commitments and contingencies

Note 7. Income taxes

The Company follows Accounting Standards Codification 740-270, Income Taxes - Interim Reporting, for the computation and presentation of its interim period tax provision. Accordingly, management estimated the effective annual tax rate and applied this rate to the pre-tax book loss through the end of the latest fiscal quarter to determine the interim income tax benefit. For the three and nine months ended October 31, 2022, the Company recorded an income tax benefit of $4.5 million and $12.2 million, respectively. This resulted in an effective income tax benefit rate of 73.4% and 31.9% for the three and nine months ended October 31, 2022, respectively, compared with an effective income tax benefit rate of 44.8% and 50.1% for the three and nine months ended October 31, 2021, respectively. For the three and nine months ended October 31, 2022, discrete tax items had an effective tax rate benefit of 66.2% and 14.3%, respectively, compared with an effective tax rate benefit of 7.7% and 20.5% for the three and nine months ended October 31, 2021, respectively, primarily due to a release of uncertain tax positions and a change in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.

Note 8. Indebtedness

Long-term debt consisted of the following:

(in thousands)			October 31, 2022						January 31, 2022
4.50% Senior Notes due 2029			$	600,000					$	600,000
Term Loan Facility			343,438						350,000
Principal amount			943,438						950,000
Less: unamortized discount and issuance costs (1)			16,719						19,173
Total debt, net			926,719						930,827
Less: current portion of long-term debt			15,313						8,750
Long-term debt, net			$	911,406					$	922,077

(1)In addition to the $16.7 million and $19.2 million of unamortized discount and issuance costs related to long-term debt as of October 31, 2022 and January 31, 2022, respectively, $3.7 million and $4.4 million of unamortized issuance costs related to the Company's Revolving Credit Facility (as defined below) are included within other assets on the condensed consolidated balance sheets as of October 31, 2022 and January 31, 2022, respectively.

(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.

Note 9. Stock-based compensation

The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive loss during the periods presented:

			Three months ended October 31,												Nine months ended October 31,
(in thousands)			2022						2021						2022						2021
Cost of revenue			$	3,662					$	3,076					$	10,667					$	8,547
Sales and marketing			2,569						829						7,136						5,677
Technology and development			4,045						3,458						10,388						10,164
General and administrative			7,894						5,921						22,119						17,312
Other expense, net (1)			—						—						—						342
Total stock-based compensation expense			$	18,170					$	13,284					$	50,310					$	42,042

(1)Equity-based awards exchanged for cash in connection with the Luum Acquisition.

Incentive Plan. The Company grants stock options and restricted stock units ("RSUs") under the HealthEquity, Inc. 2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provided for the issuance of stock awards to the directors and team members of the Company to purchase up to an aggregate of 2.6 million shares of common stock.

A summary of stock option activity is as follows:

			Outstanding stock options
(in thousands, except for exercise prices and term)			Number of options						Range of exercise prices						Weighted- average exercise price						Weighted- average contractual term (in years)						Aggregate intrinsic value
Outstanding as of January 31, 2022			1,232						$1.25 - 82.39						$	35.64					4.2						$	25,719
Exercised			(191)						$1.25 - 59.63						$	32.43
Forfeited			(2)						$25.45 - 28.69						$	28.54
Outstanding as of October 31, 2022			1,039						$14.00 - 82.39						$	36.24					3.7						$	43,426
Vested and expected to vest as of October 31, 2022			1,039												$	36.24					3.7						$	43,426
Exercisable as of October 31, 2022			1,007												$	35.12					3.6						$	43,196

A summary of RSU activity is as follows:

			RSUs and PRSUs
(in thousands, except weighted-average grant date fair value)			Shares						Weighted-average grant date fair value
Outstanding as of January 31, 2022			2,740						$	63.15
Granted			1,564						76.69
Vested			(635)						60.68
Forfeited			(399)						63.87
Outstanding as of October 31, 2022			3,270						$	70.02

Performance restricted stock units. During the three months ended April 30, 2022, the Company awarded 281,784 performance restricted stock units ("PRSUs") subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, 2025. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was $32.1 million. Compensation expense is recorded if the service condition is met regardless of whether the market condition is satisfied. The market condition allows for a range of vesting from 0% to 200% based on the level of performance achieved. The PRSUs cliff vest upon approval by the Compensation Committee of the board of directors.

Note 10. Fair value

Luum acquisition. In March 2021, we bolstered our commuter offering by acquiring 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). The aggregate purchase price for the acquisition consisted of $56.2 million in cash. Luum provides employers with various commuter services, including access to real-time commute data, to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.

Fifth Third Bank HSA portfolio acquisition. In September 2021, we acquired the Fifth Third Bank, National Association ("Fifth Third") HSA portfolio, which consisted of $490.0 million of HSA Assets held in approximately 160,000 HSAs in exchange for a purchase price of $60.8 million in cash.

Further acquisition. In November 2021, we acquired the Further business (other than Further's voluntary employee beneficiary association business), a leading provider of HSA and other CDB administration services, with approximately 580,000 HSAs and $1.9 billion of HSA Assets, for $455 million in cash (the "Further Acquisition"). We expect merger integration expenses attributable to the Further Acquisition totaling approximately $55 million to be incurred over a period of approximately three years from the acquisition date.

HealthSavings HSA portfolio acquisition. In March 2022, we acquired the Health Savings Administrators, L.L.C. (“HealthSavings”) HSA portfolio, which consisted of $1.3 billion of HSA Assets held in approximately 87,000 HSAs in exchange for a purchase price of $60 million in cash.

The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated:

(in thousands, except percentages)			October 31, 2022						October 31, 2021						% Change						January 31, 2022
HSAs			7,650						6,241						23		%				7,207
New HSAs from sales - Quarter-to-date			170						151						13		%				472
New HSAs from sales - Year-to-date			526						446						18		%				918
New HSAs from acquisitions - Year-to-date			90						160						(44)		%				740
HSAs with investments			529						431						23		%				455
CDBs			6,849						7,085						(3)		%				7,192
Total Accounts			14,499						13,326						9		%				14,399
Average Total Accounts - Quarter-to-date			14,523						13,247						10		%				14,326
Average Total Accounts - Year-to-date			14,482						13,158						10		%				13,450

The following table sets forth HSA Assets as of and for the periods indicated:

(in millions, except percentages)			October 31, 2022						October 31, 2021						% Change						January 31, 2022
HSA cash			$	13,096					$	10,469					25		%				$	12,943
HSA investments			7,108						5,959						19		%				6,675
Total HSA Assets			20,204						16,428						23		%				19,618
Average daily HSA cash - Year-to-date			12,941						10,066						29		%				10,579
Average daily HSA cash - Quarter-to-date			12,973						10,182						27		%				12,118

Client-held funds

(in millions, except percentages)			October 31, 2022						October 31, 2021						% Change						January 31, 2022
Client-held funds			$	759					$	811					(6)		%				$	897
Average daily Client-held funds - Year-to-date			832						849						(2)		%				842
Average daily Client-held funds - Quarter-to-date			794						796						—		%				822

The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated:

			Three months ended October 31,												Nine months ended October 31,
(in thousands)			2022						2021						2022						2021
Net loss			$	(1,641)					$	(5,038)					$	(25,934)					$	(11,471)
Interest income			(443)						(478)						(584)						(1,419)
Interest expense			12,165						11,881						34,119						25,824
Income tax benefit			(4,539)						(4,087)						(12,170)						(11,505)
Depreciation and amortization			16,959						13,904						49,306						38,619
Amortization of acquired intangible assets			23,541						19,642						71,420						59,745
Stock-based compensation expense			18,170						13,284						50,310						41,700
Merger integration expenses			6,509						13,244						23,486						38,422
Acquisition costs (gains) (1)			—						(2,687)						53						4,917
Gain on equity securities			—						—						—						(1,677)
Amortization of incremental costs to obtain a contract			1,114						843						3,256						3,468
Costs associated with unused office space			1,181						—						3,788						—
Other			345						579						1,690						(1,047)
Adjusted EBITDA			$	73,361					$	61,087					$	198,740					$	185,576

(1)For the nine months ended October 31, 2021, acquisition costs included $0.3 million of stock-based compensation expense.

The following table sets forth our net loss as a percentage of revenue:

			Three months ended October 31,																								Nine months ended October 31,
(in thousands, except percentages)			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
Net loss			$	(1,641)					$	(5,038)					$	3,397					(67)		%				$	(25,934)					$	(11,471)					$	(14,463)					126		%
As a percentage of revenue			(1)		%				(3)		%																(4)		%				(2)		%

			Three months ended October 31,																								Nine months ended October 31,
(in thousands, except percentages)			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
Adjusted EBITDA			$	73,361					$	61,087					$	12,274					20		%				$	198,740					$	185,576					$	13,164					7		%
As a percentage of revenue			34		%				34		%																32		%				34		%

Service costs.    Service costs include the servicing costs described above. Additionally, for new accounts, we incur on-boarding costs associated with the new accounts, such as new member welcome kits, the cost associated with issuance of new payment cards, and costs of marketing materials that we produce for our Network Partners.

The following table sets forth our revenue for the periods indicated:

			Three months ended October 31,																								Nine months ended October 31,
(in thousands, except percentages)			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
Service revenue			$	108,580					$	102,733					$	5,847					6		%				$	315,962					$	314,449					$	1,513					—		%
Custodial revenue			74,642						49,006						25,636						52		%				199,606						144,760						54,846						38		%
Interchange revenue			32,864						28,215						4,649						16		%				112,339						94,050						18,289						19		%
Total revenue			$	216,086					$	179,954					$	36,132					20		%				$	627,907					$	553,259					$	74,648					13		%

Service revenue. The $5.8 million, or 6%, increase in service revenue from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to new revenue from the Further Acquisition and our HSA portfolio acquisitions, and sales of new HSAs, partially offset by non-recurring revenue related to COBRA benefits administration during the three months ended October 31, 2021.

Custodial revenue. The $25.6 million, or 52%, increase in custodial revenue from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to the $2.8 billion, or 27%, increase in the year-over-year average daily balance of HSA cash, as described above, and an increase in average annualized yield from 1.72% for the three months ended October 31, 2021 to 2.00% for the three months ended October 31, 2022.

Interchange revenue. The $4.6 million, or 16%, increase in interchange revenue from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to an increase in accounts and increased spend per account.

Total revenue. Total revenue increased $36.1 million, or 20%, from the three months ended October 31, 2021 to the three months ended October 31, 2022 due to the increases in custodial, service, and interchange revenues, described above.

Impact of COVID-19. Our business has been adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by related societal and economic changes. Although interest rates have increased from their pandemic lows, a majority of our members' HSA cash is deposited with our Depository Partners pursuant to contracts that have fixed interest rate terms, typically ranging from three to five years, which reduces the short-term impact of an increase or decline in prevailing interest rates on our custodial revenue. As a result, the yield we currently receive from our Depository Partners remains significantly below the levels seen before the pandemic. Our financial results related to certain of our products have also been adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak, and the "work from home" trend, or hybrid work environments, may continue indefinitely. In particular, decisions by employers to delay return-to-office plans for their employees has continued to delay the recovery of use of these commuter benefits. We have also seen a negative impact on the financial results related to our COBRA product, as the Employee Benefits Security Administration provided disaster relief in the form of an indefinite extension to the required timeline for participants to make COBRA elections, which we believe has resulted in fewer COBRA elections by our members because they have more time to assess the cost of their out-of-pocket expenses against the cost of COBRA premiums. During the initial stages of the COVID-19 pandemic, and during subsequent increases in COVID-19 cases, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue and service revenue. We may be unable to meet our service level commitments to our Clients as a result of disruptions to our work force and disruptions to third-party contracts that we rely on to provide our services. The extent to which the COVID-19 pandemic, its resulting societal and economic impact, and any other longer lasting impacts on the usage of our services will continue to negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our business and financial results.

The following table sets forth our cost of revenue for the periods indicated:

			Three months ended October 31,																								Nine months ended October 31,
(in thousands, except percentages)			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
Service costs			$	76,493					$	66,217					$	10,276					16		%				$	232,281					$	204,183					$	28,098					14		%
Custodial costs			6,812						5,734						1,078						19		%				20,543						15,567						4,976						32		%
Interchange costs			5,923						4,683						1,240						26		%				19,240						15,102						4,138						27		%
Total cost of revenue			$	89,228					$	76,634					$	12,594					16		%				$	272,064					$	234,852					$	37,212					16		%

Service costs. The $10.3 million, or 16%, increase in service costs from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to the inclusion of Further's results of operations and an increase in personnel costs to support the increase in average Total Accounts.

Custodial costs. The $1.1 million, or 19%, increase in custodial costs from the three months ended October 31, 2021 to the three months ended October 31, 2022 was due to an increase in the average daily balance of HSA cash, which increased from $10.2 billion for the three months ended October 31, 2021 to $13.0 billion for the three months ended October 31, 2022 and an associated increase in interest retained by HSA members. The average annualized rate of interest retained by HSA members on HSA cash was 0.17% during the three months ended October 31, 2022 and 2021.

Interchange costs. The $1.2 million, or 26%, increase in interchange costs from the three months ended October 31, 2021 to the three months ended October 31, 2022 was due to an increase in accounts and increased spend per account.

Total cost of revenue. As we continue to add Total Accounts, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members. However, on an annual basis, relative to the fiscal year ended January 31, 2022, we expect our cost of revenue to decrease as a percentage of our total revenue, primarily due to an increase in custodial revenue, partially offset by the inclusion of a full year of Further's results of operations and increases in stock-based compensation. Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, account management functions, realized synergies, and the impact of societal and economic changes arising out of the COVID-19 pandemic.

The following table sets forth our operating expenses for the periods indicated:

			Three months ended October 31,																								Nine months ended October 31,
(in thousands, except percentages)			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
Sales and marketing			$	17,245					$	12,726					$	4,519					36		%				$	49,648					$	42,288					$	7,360					17		%
Technology and development			48,890						38,070						10,820						28		%				140,653						111,437						29,216						26		%
General and administrative			25,131						20,004						5,127						26		%				74,795						63,503						11,292						18		%
Amortization of acquired intangible assets			23,541						19,642						3,899						20		%				71,420						59,745						11,675						20		%
Merger integration			6,509						13,244						(6,735)						(51)		%				23,486						38,422						(14,936)						(39)		%
Total operating expenses			$	121,316					$	103,686					$	17,630					17		%				$	360,002					$	315,395					$	44,607					14		%

Sales and marketing. The $4.5 million, or 36%, increase in sales and marketing expense from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to the inclusion of Further's results of operations and an increase in marketing expenses from increased staffing and travel costs, partially offset by a decrease in advertising expenses.

Technology and development. The $10.8 million, or 28%, increase in technology and development expense from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to the inclusion of Further's results of operations and increases in amortization and personnel-related expenses.

General and administrative. The $5.1 million, or 26%, increase in general and administrative expense from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to the inclusion of Further's results of operations and increases in personnel-related expenses and stock-based compensation.

Amortization of acquired intangible assets. The $3.9 million, or 20%, increase in amortization of acquired intangible assets from the three months ended October 31, 2021 to the three months ended October 31, 2022 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Further Acquisition commencing November 1, 2021. The remainder of the increase was due to amortization of acquired HSA portfolios, including the Fifth Third and HealthSavings HSA portfolios.

Merger integration. The $6.5 million and $23.5 million in merger integration expense for the three and nine months ended October 31, 2022, respectively, was primarily due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, professional fees, and technology-related expenses directly related to the Further Acquisition and certain ongoing merger integration expenses related to the acquisition of our wholly owned subsidiary WageWorks, Inc. ("WageWorks"), including ongoing lease expense related to WageWorks offices that have been permanently closed, less any related sublease income, professional fees associated with the remediation of remaining material weaknesses in internal control over financial reporting, and costs associated with remaining platform migrations. We expect merger integration expenses attributable to the Further Acquisition totaling approximately $55 million to be incurred over a period of approximately three years from the acquisition date.

The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

			Nine months ended October 31,
(in thousands)			2022						2021
Net cash provided by operating activities			$	95,159					$	90,438
Net cash used in investing activities			(108,851)						(167,946)
Net cash provided by (used in) financing activities			(1,525)						397,834
Increase (decrease) in cash and cash equivalents			(15,217)						320,326
Beginning cash and cash equivalents			225,414						328,803
Ending cash and cash equivalents			$	210,197					$	649,129

Cash flows from operating activities. Net cash provided by operating activities increased by $4.7 million from the nine months ended October 31, 2021 to the nine months ended October 31, 2022 primarily due to increased collections from customers, partially offset by an increase in cash payments made to our accounts payable, accrued liabilities, and other current liabilities during the nine months ended October 31, 2022.

Cash flows from investing activities. Net cash used in investing activities decreased by $59.1 million from the nine months ended October 31, 2021 to the nine months ended October 31, 2022 primarily due to a $43.4 million decrease in cash used in HSA portfolio acquisitions and businesses combinations, a $13.7 million decrease in cash used for purchases of software and capitalized software development costs, and a $4.3 million decrease in cash used for purchases of property and equipment. The decrease was partially offset by a $2.4 million decrease in proceeds from the sale of equity securities associated with a long-term capital investment.

Cash flows from financing activities. Net cash used in financing activities was $1.5 million during the nine months ended October 31, 2022, compared to net cash provided by financing activities of $397.8 million during the nine months ended October 31, 2021. The change resulted primarily from $456.6 million of net proceeds from our follow-on public offering of 5,750,000 shares of common stock during the nine months ended October 31, 2021, and a $1.1 million decrease in proceeds from the exercise of common stock options. These changes were partially offset by an $58.4 million decrease in net payments related to our long-term debt and associated debt issuance costs, as compared to the nine months ended October 31, 2021.

Concentration of market risk. We derive a substantial portion of our revenue from providing services to tax-advantaged healthcare account holders. A significant downturn in this market or changes in state and/or federal laws impacting the preferential tax treatment of healthcare accounts such as HSAs could have a material adverse effect on our results of operations. During the nine months ended October 31, 2022 and 2021, no one customer accounted for greater than 10% of our total revenue. We monitor market and regulatory changes regularly and make adjustments to our business if necessary.

Inflation. Inflationary factors may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, the current high rate of inflation may have an adverse effect on our ability to maintain current levels of expenses as a percentage of revenue if our revenue does not correspondingly increase with inflation.

HSA Assets and Client-held funds. HSA Assets consist of custodial HSA funds we hold in custody on behalf of our members. As of October 31, 2022, we held in custody HSA Assets of $20.2 billion. As a non-bank custodian, we contract with our Depository Partners and insurance company partners to hold custodial cash assets on behalf of our members, and we earn a significant portion of our total revenue from interest paid to us by these partners. Custodial cash assets held by our insurance company partners are held in group annuity contracts or similar arrangements. The lengths of our agreements with Depository Partners typically range from three to five years and have either fixed or variable interest rates. As HSA Assets increase and existing contracts with Depository Partners expire, we seek to enter into new contracts with Depository Partners, the terms of which are impacted by the then-prevailing interest rate environment. The diversification of HSA Assets held by our Depository Partners and insurance company partners, and varied contract terms, substantially reduces our exposure to short-term fluctuations in prevailing interest rates and mitigates the short-term impact of a sustained increase or decline in prevailing interest rates on our custodial revenue. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize. Conversely, a sustained increase in prevailing interest rates can increase our yield. An increase in our yield would increase our custodial revenue as a percentage of total revenue. In addition, if our yield increases, we expect the spread to also increase between the interest offered to us by our Depository Partners and insurance company partners and the interest retained by our members, thus increasing our profitability. However, we may be required to increase the interest retained by our members in a rising prevailing interest rate environment. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.

Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be unrestricted cash equivalents. Our unrestricted cash and cash equivalents are held in institutions in the U.S. and include deposits in a money market account that is unrestricted as to withdrawal or use. As of October 31, 2022, we had unrestricted cash and cash equivalents of $210.2 million. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our cash and cash equivalents as a result of changes in interest rates.

Long-term debt. As of October 31, 2022, we had $343.4 million outstanding under our term loan facility and no amounts drawn under our Revolving Credit Facility. Our overall interest rate sensitivity under these credit facilities is primarily influenced by any amounts borrowed and the prevailing interest rates on these instruments. The interest rate on our term loan credit facility and Revolving Credit Facility is variable and was 5.56% at October 31, 2022. Accordingly, we may incur additional expense if interest rates further increase in future periods. For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at October 31, 2022 would result in approximately $3.4 million of additional interest expense over the next 12 months. The interest rate on our $600 million of unsecured Senior Notes due 2029 is fixed at 4.50%.

•substantially completed its plan to consolidate service platforms related to the contract-to-cash cycle, which reduced a significant number of manual business process controls;

•substantially completed its redesign of existing controls and implementation of additional controls to further strengthen the control environment;

•formalized the assessment of the relevancy of information and data used in key controls, including a plan to design or augment controls to incorporate the review of the accuracy and completeness of such items;

•implemented enhancements to monitor design and operating effectiveness of controls; and

•continued to monitor the operating effectiveness of process controls.

•substantially completed its plan to consolidate service platforms, which reduced the number of ITGCs in the areas of logical access and change management;

•enhanced the design of existing controls, where applicable, and implemented additional controls to further strengthen the control environment;

•implemented enhancements to monitor design and operating effectiveness of controls related to logical access and change management for relevant applications and systems;

•implemented recurring training of control owners on the appropriate evidence and documentation for IT dependencies and logical access controls; and

•continued to monitor the operating effectiveness of logical access and change management controls.

Item 6. Exhibits

Incorporate by reference

Exhibit no.

Description

Form

File No.

Exhibit

Filing Date

31.1+

Certification of the Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2+

Certification of the Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*#

Certification of the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*#

Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy schema linkbase document

101.CAL

Inline XBRL Taxonomy calculation linkbase document

101.DEF

Inline XBRL Taxonomy definition linkbase document

101.LAB

Inline XBRL Taxonomy labels linkbase document

101.PRE

Inline XBRL Taxonomy presentation linkbase document

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2022, formatted in Inline XBRL.

+						Filed herewith.
*						Furnished herewith.
#						These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing the registrant makes under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.

			HEALTHEQUITY, INC.
Date: December 8, 2022			By:						/s/ Tyson Murdock
			Name:						Tyson Murdock
			Title:						Executive Vice President and Chief Financial Officer