What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-08 compared with 2022-06-08 · 114 added, 91 removed, 319 unchanged (39% of the section changed)

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Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, this Quarterly Report on Form 10-Q, and our other reports filed with the SEC.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, our Quarterly Report on Form 10-Q for the quarter ended April 30, 2022, and our other reports filed with the SEC.

Furthermore, such forward-looking statements speak only as of the date of this report.

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The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis.

As of April 30, 2022, we administered 7.4 million HSAs, with balances totaling $20.3 billion, which we call HSA Assets, as well as 7.1 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 14.5 million as of April 30, 2022.

As of July 31, 2022, we administered 7.5 million HSAs, with balances totaling $20.5 billion, which we call HSA Assets, as well as 7.0 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 14.5 million as of July 31, 2022.

We reach consumers primarily through relationships with their employers, which we call Clients.

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Each of these factors presents both significant opportunities and significant risks to our future performance.

See also "Results of operations - Revenue" for information relating to the COVID-19 pandemic and resulting societal and economic changes, and also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, this Quarterly Report on Form 10-Q, and our other reports filed with the SEC.

See also "Results of operations - Revenue" for information relating to the COVID-19 pandemic and resulting societal and economic changes, and also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022, our Quarterly Report on Form 10-Q for the quarter ended April 30, 2022, and our other reports filed with the SEC.

Our acquisition and integration strategy

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The average premium for employer-sponsored health insurance has risen by 22% since 2016 and 47% since 2011, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health insurance more generally.

We believe that continued growth in healthcare costs and related factors will spur continued growth in HSA-qualified health plans and HSAs and may encourage policy changes making HSAs or similar vehicles available to new populations such as individuals in Medicare.

However, the timing and impact of

these and other developments in U.S.

We believe that continued growth in healthcare costs and related factors will spur continued growth in HSA-qualified health plans and HSAs and may encourage policy changes making HSAs or

similar vehicles available to new populations such as individuals in Medicare.

However, the timing and impact of these and other developments in U.S.

healthcare are uncertain.

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We believe that the combination of HSA and complementary CDB offerings significantly strengthens our value proposition to employers, health benefits brokers and consultants, and Network Partners as a leading single-source provider.

Our proprietary technology

We believe that innovations incorporated in our technology, which enable us to better assist consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits, differentiate us from our competitors and drive our growth.

Our full suite of CDB offerings complements our HSA solution and enhances our leadership position within the HSA sector.

We intend to continue to invest in our technology development to enhance our capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data.

For example, we are making significant investments in the architecture and infrastructure of the technology that we use to provide our services to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement.

Our “DEEP Purple” service culture

The successful healthcare consumer needs education and guidance delivered by people as well as by technology.

We believe that our "DEEP Purple" culture, which we define as driving excellence, ethics, and process while providing remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly, opportunities in the rapidly changing healthcare sector.

We make significant efforts to promote and foster DEEP Purple within our workforce.

We invest in and intend to continue to invest in human capital through technology-enabled training, career development, and advancement opportunities.

Interest rates

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The lengths of our agreements with Depository Partners typically range from three to five years and may have fixed or variable interest rate terms.

The terms of new and renewing agreements with our Depository Partners may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and

government policies over which we have no control.

The terms of new and renewing agreements with our Depository Partners may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control.

Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members.

HSA members who place their HSA cash into our Enhanced Rates offering receive a higher yield compared to our Basic Rates offering.

An increase in the percentage of HSA cash held in our Enhanced Rates offering also positively impacts our custodial revenues, as we generally receive a higher yield on HSA cash held by our insurance company partners compared to cash held by our Depository Partners.

An increase in the percentage of HSA cash held in our Enhanced Rates offering also positively impacts our custodial revenue, as we generally receive a higher yield on HSA cash held by our insurance company partners compared to cash held by our Depository Partners.

As with our Depository Partners, yields paid by our insurance company partners may be impacted by the prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control.

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Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members.

Although interest rates have increased, we expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve at the beginning of the COVID-19 pandemic, the lack of demand from Depository Partners for deposits, and other market conditions that have caused our average annualized yield on HSA cash to decline significantly.

Although interest rates have increased, we expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve at the beginning of the COVID-19 pandemic due to the impact of contracts signed with our Depository Partners in that environment and other market conditions that have caused our average annualized yield on HSA cash to decline significantly.

Interest on our term loan facility changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.

Recent interest rate increases have caused interest expense related to our term loan facility to increase.

Our proprietary technology

Our full suite of CDB offerings complements our HSA solution and enhances our leadership position within the HSA sector.

We intend to continue to invest in our technology development to enhance our capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data.

Our “DEEP Purple” service culture

The successful healthcare consumer needs education and guidance delivered by people as well as by technology.

We make significant efforts to promote and foster DEEP Purple within our workforce.

We invest in and intend to continue to invest in human capital through technology-enabled training, career development, and advancement opportunities.

Our competition and industry

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

(in thousands, except percentages) April 30, 2022 April 30, 2021 % Change January 31, 2022

(in thousands, except percentages) July 31, 2022 July 31, 2021 % Change January 31, 2022

HSAs 7,523 5,972 26 % 7,207

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The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from them.

The number of our HSAs increased by 1.5 million, or 26%, from April 30, 2021 to April 30, 2022, primarily driven by new HSAs from sales, HSAs acquired through the Further Acquisition, the Fifth Third acquisition, the HealthSavings acquisition, and other HSA portfolio acquisitions.

The number of our CDBs increased by 0.1 million, or 2%, from April 30, 2021 to April 30, 2022, primarily driven by CDBs acquired through the Further Acquisition, partially offset by a decrease in FSA accounts and COBRA accounts.

The number of our HSAs increased by 1.6 million, or 26%, from July 31, 2021 to July 31, 2022, primarily driven by new HSAs from sales, HSAs acquired through the Further Acquisition, the Fifth Third acquisition, the HealthSavings acquisition, and other HSA portfolio acquisitions.

The number of our CDBs decreased by 0.1 million, or 2%, from July 31, 2021 to July 31, 2022, primarily driven by a decrease in COBRA accounts, largely offset by CDBs acquired through the Further Acquisition.

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

(in millions, except percentages) April 30, 2022 April 30, 2021 % Change January 31, 2022

(in millions, except percentages) July 31, 2022 July 31, 2021 % Change January 31, 2022

HSA cash $ 13,097 $ 10,028 31 % $ 12,943

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Measuring HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating.

HSA cash increased by $2.9 billion, or 29%, from April 30, 2021 to April 30, 2022, due primarily to HSA cash transferred to us as part of the Further Acquisition, net HSA contributions from new and existing HSA members, and acquisitions of HSA portfolios, partially offset by transfers to HSA investments.

HSA investments increased by $2.3 billion, or 47%, from April 30, 2021 to April 30, 2022, due primarily to the HealthSavings acquisition, other HSA portfolio acquisitions, and transfers from HSA cash.

Total HSA Assets increased by $5.3 billion, or 35%, from April 30, 2021 to April 30, 2022, due primarily to HSA Assets transferred to us as part of the Further Acquisition, the Fifth Third acquisition, the HealthSavings acquisition, and other HSA portfolio acquisitions, and net HSA contributions from new and existing HSA members.

HSA cash increased by $3.1 billion, or 31%, from July 31, 2021 to July 31, 2022, due primarily to net HSA contributions from new and existing HSA members, HSA cash transferred to us as part of the Further Acquisition, and acquisitions of HSA portfolios, partially offset by transfers to HSA investments.

HSA investments increased by $2.0 billion, or 37%, from July 31, 2021 to July 31, 2022, due primarily to transfers from HSA cash, the HealthSavings acquisition, and other HSA portfolio acquisitions, partially offset by the reduced value of invested balances due to market volatility.

Total HSA Assets increased by $5.1 billion, or 33%, from July 31, 2021 to July 31, 2022, due primarily to HSA Assets transferred to us as part of the Further Acquisition, net HSA contributions from new and existing HSA members, and acquisitions of HSA portfolios, partially offset by the reduced value of invested balances due to market volatility.

Client-held funds

(in millions, except percentages) April 30, 2022 April 30, 2021 % Change January 31, 2022

(in millions, except percentages) July 31, 2022 July 31, 2021 % Change January 31, 2022

Client-held funds $ 801 $ 810 (1) % $ 897

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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 April 30,

Three months ended July 31, Six months ended July 31,

(in thousands) 2022 2021 2022 2021

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Acquisition costs (1) 47 1,665 53 7,604

Gain on equity securities — (1,677) — (1,677)

Amortization of incremental costs to obtain a contract 1,074 1,352 2,142 2,624

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Adjusted EBITDA $ 67,043 $ 65,515 $ 125,379 $ 124,490

(1) For the three months ended April 30, 2021, acquisition costs included $0.3 million of stock-based compensation expense.

The following table further sets forth our Adjusted EBITDA as a percentage of revenue:

Three months ended April 30,

(in thousands, except percentages) 2022 2021 $ Change % Change

(1) For the six months ended July 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 July 31, Six months ended July 31,

(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Net loss $ (10,654) $ (3,818) $ (6,836) 179 % $ (24,293) $ (6,433) $ (17,860) 278 %

As a percentage of revenue (5) % (2) % (6) % (2) %

Our net loss increased by $6.8 million, or 179%, from $3.8 million for the three months ended July 31, 2021 to $10.7 million for the three months ended July 31, 2022, primarily due to increases in technology and development expense, amortization of acquired intangibles, general and administrative expense, sales and marketing expense, and other expense, partially offset by an increase in gross profit and a decrease in merger integration expense.

Our net loss increased by $17.9 million, or 278%, from $6.4 million for the six months ended July 31, 2021 to $24.3 million for the six months ended July 31, 2022, primarily due to increases in technology and development expense, amortization of acquired intangibles, general and administrative expense, sales and marketing expense, and other expense, partially offset by an increase in gross profit and a decrease in merger integration expense.

The following table sets forth our Adjusted EBITDA as a percentage of revenue:

Three months ended July 31, Six months ended July 31,

(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Adjusted EBITDA $ 67,043 $ 65,515 $ 1,528 2 % $ 125,379 $ 124,490 $ 889 1 %

As a percentage of revenue 33 % 35 % 30 % 33 %

Our Adjusted EBITDA decreased by $0.6 million, less than 1%, from $59.0 million for the three months ended April 30, 2021 to $58.3 million for the three months ended April 30, 2022, primarily due to increases in personnel and related costs, largely offset by an increase in total revenue.

Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Our Adjusted EBITDA increased by $1.5 million, or 2%, from $65.5 million for the three months ended July 31, 2021 to $67.0 million for the three months ended July 31, 2022, primarily due to an increase in total revenue, partially offset by increases in personnel and related costs.

Our Adjusted EBITDA increased by $0.9 million, or 1%, from $124.5 million for the six months ended July 31, 2021 to $125.4 million for the six months ended July 31, 2022, primarily due to an increase in total revenue, partially offset by increases in personnel and related costs.

Our use of Adjusted EBITDA, including as a percentage of revenue, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Key components of our results of operations

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Technology and development expenses include personnel and related expenses for software development and delivery, licensed software, information technology, data management, product, and security.

Technology and development expenses also include software engineering services, the costs of operating our on-demand technology infrastructure, depreciation, amortization of capitalized software development costs, stock-based compensation, and common expense allocations.

Technology and development expenses also include software engineering services, the costs of operating our technology infrastructure, depreciation, amortization of capitalized software development costs, stock-based compensation, and common expense allocations.

General and administrative.

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Other expense, net

Other expense, net, consists of acquisition costs, interest income earned on corporate cash and other miscellaneous income and expense.

Other income (expense), net

Other income (expense), net, consists of acquisition costs, interest income earned on corporate cash and other miscellaneous income and expense.

Income tax benefit

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Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.

As of April 30, 2022, we have recorded a valuation allowance on certain state deferred tax assets and maintained an overall net federal and state deferred tax liability on our condensed consolidated balance sheet.

Comparison of the three months ended April 30, 2022 and 2021

As of July 31, 2022, we have recorded a valuation allowance on certain state deferred tax assets and maintained an overall net federal and state deferred tax liability on our condensed consolidated balance sheet.

The Inflation Reduction Act, which was enacted on August 16, 2022, includes a number of tax provisions, including an adjusted book minimum tax and excise tax on stock buybacks;

however, these provisions are not expected to have a material impact on the Company.

Comparison of the three and six months ended July 31, 2022 and 2021

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

Three months ended April 30,

(in thousands, except percentages) 2022 2021 $ Change % Change

Three months ended July 31, Six months ended July 31,

(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Service revenue $ 103,034 $ 109,182 $ (6,148) (6) % $ 207,382 $ 211,716 $ (4,334) (2) %

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Service revenue.

The $1.8 million, or 2%, increase in service revenue from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to new revenue from acquired businesses and HSA portfolios, and new HSAs from sales, partially offset by lower average service fees per account.

The $6.1 million, or 6%, decrease in service revenue from the three months ended July 31, 2021 to the three months ended July 31, 2022 was primarily due to non-recurring revenue related to COBRA benefits administration during the three months ended July 31, 2021 and FSA and COBRA fee attrition resulting from platform migrations, partially offset by new revenue from the Further Acquisition and the HSA portfolio acquisitions, and sales of new HSAs.

The $4.3 million, or 2%, decrease in service revenue from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to non-recurring revenue related to COBRA benefits administration during the six months ended July 31, 2021 and FSA and COBRA fee attrition resulting from platform migrations, partially offset by new revenue from the Further Acquisition and the HSA portfolio acquisitions, and sales of new HSAs.

Custodial revenue.

The $12.4 million, or 26%, increase in custodial revenue from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to the $2.9 billion, or 28%, increase in the year-over-year average daily balance of HSA cash.

The increase was partially offset by a decrease in average annualized yield from 1.79% for the three months ended April 30, 2021 to 1.69% for the three months ended April 30, 2022, which was due in part to HSA cash that was placed with our Depository Partners following the interest rate cuts made by the Federal Reserve at the beginning of the COVID-19 pandemic, and by transfers from HSA cash to HSA investments.

The $16.8 million, or 34%, increase in custodial revenue from the three months ended July 31, 2021 to the three months ended July 31, 2022 was primarily due to the $3.0 billion, or 30%, increase in the year-over-year average daily balance of HSA cash, as described above, and an increase in average annualized yield from 1.77% for the three months ended July 31, 2021 to 1.80% for the three months ended July 31, 2022.

The $29.2 million, or 31%, increase in custodial revenue from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to the $2.9 billion, or 29%, increase in the year-over-year average daily balance of HSA cash.

The increase was partially offset by a decrease in average annualized yield from 1.78% for the six months ended July 31, 2021 to 1.75% for the six months ended July 31, 2022, which was due in part to HSA cash that was placed with our Depository Partners following the interest rate cuts made by the Federal Reserve at the beginning of the COVID-19 pandemic, and by transfers from HSA cash to HSA investments.

Interchange revenue.

The $7.3 million, or 21%, increase in interchange revenue from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to an increase in accounts and increased spend per account.

The $6.4 million, or 20%, increase in interchange revenue from the three months ended July 31, 2021 to the three months ended July 31, 2022 was primarily due to an increase in accounts and increased spend per account.

The $13.6 million, or 21%, increase in interchange revenue from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to an increase in accounts and increased spend per account.

Total revenue.

Total revenue increased $21.5 million, or 12%, from the three months ended April 30, 2021 to the three months ended April 30, 2022 due to the increases in service, custodial, and interchange revenues described above.

Total revenue increased $17.0 million, or 9%, from the three months ended July 31, 2021 to the three months ended July 31, 2022 due to the increases in custodial and interchange revenues, partially offset by the decrease in service revenue, described above.

Total revenue increased $38.5 million, or 10%, from the six months ended July 31, 2021 to the six months ended July 31, 2022 due to the increases in custodial and interchange revenues, partially offset by the decrease in service revenue, described above.

Impact of COVID-19.

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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, the increased spread of COVID-19 in early 2022 and the associated decisions by employers to delay return-to-office plans for their employees further delayed the recovery of use of these commuter benefits.

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.

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.

Our compliance with proposed COVID-19 vaccine mandates has resulted in, and could continue to result in, increased team member attrition, absenteeism, and associated costs.

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.

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

Three months ended April 30,

(in thousands, except percentages) 2022 2021 $ Change % Change

Three months ended July 31, Six months ended July 31,

(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Service costs $ 74,914 $ 67,334 $ 7,580 11 % $ 155,788 $ 137,966 $ 17,822 13 %

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Service costs.

The $10.2 million, or 15%, increase in service costs from the three months ended April 30, 2021 to the three months ended April 30, 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.

The $7.6 million, or 11%, increase in service costs from the three months ended July 31, 2021 to the three months ended July 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.

The $17.8 million, or 13%, increase in service costs from the six months ended July 31, 2021 to the six months ended July 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 $1.6 million, or 33%, increase in custodial costs from the three months ended April 30, 2021 to the three months ended April 30, 2022 was due to an increase in the average daily balance of HSA cash, which increased from $10.1 billion for the three months ended April 30, 2021 to $12.9 billion for the three months ended April 30, 2022 and an associated increase in interest retained by HSA members, partially offset by a lower average annualized rate of interest retained by HSA members on HSA cash, which decreased from 0.18% for the three months ended April 30, 2021 to 0.16% for the three months ended April 30, 2022.

The $2.3 million, or 47%, increase in custodial costs from the three months ended July 31, 2021 to the three months ended July 31, 2022 was due to an increase in the average daily balance of HSA cash, which increased from $10.0 billion for the three months ended July 31, 2021 to $12.9 billion for the three months ended July 31, 2022, and an increase in the average annualized rate of interest retained by HSA members on HSA cash, which increased from 0.16% for the three months ended July 31, 2021 to 0.18% for the three months ended July 31, 2022.

The $3.9 million, or 40%, increase in custodial costs from the six months ended July 31, 2021 to the six months ended July 31, 2022 was due to an increase in the average daily balance of HSA cash, which increased from $10.0

billion for the six months ended July 31, 2021 to $12.9 billion for the six months ended July 31, 2022 and an associated increase in interest retained by HSA members.

Interchange costs.

The $1.5 million, or 28%, increase in interchange costs from the three months ended April 30, 2021 to the three months ended April 30, 2022 was due to an increase in accounts and increased spend per account.

The $1.4 million, or 27%, increase in interchange costs from the three months ended July 31, 2021 to the three months ended July 31, 2022 was due to an increase in accounts and increased spend per account.

The $2.9 million, or 28%, increase in interchange costs from the six months ended July 31, 2021 to the six months ended July 31, 2022 was due to an increase in accounts and increased spend per account.

Total cost of revenue.

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On an annual basis, we expect our cost of revenue to continue to increase as a percentage of our total revenue, primarily due to the inclusion of a full year of Further's results of operations and expected 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 the COVID-19 pandemic.

Operating expenses

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

Three months ended April 30,

(in thousands, except percentages) 2022 2021 $ Change % Change

Three months ended July 31, Six months ended July 31,

(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Sales and marketing $ 15,843 $ 15,476 $ 367 2 % $ 32,403 $ 29,562 $ 2,841 10 %

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Sales and marketing.

The $2.5 million, or 18%, increase in sales and marketing expense from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to the inclusion of Further's results of operations, an increase in marketing expenses from increased staffing and marketing collateral costs, and increases in team member and partner commissions.

The $0.4 million, or 2%, increase in sales and marketing expense from the three months ended July 31, 2021 to the three months ended July 31, 2022 was primarily due to the inclusion of Further's results of operations, an increase in marketing expenses from increased staffing and travel costs, largely offset by a decrease in advertising expenses.

The $2.8 million, or 10%, increase in sales and marketing expense from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to the inclusion of Further's results of operations, an increase in marketing expenses from increased staffing and marketing costs, and increases in team member and partner commissions.

We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns.

On an annual basis, we expect our sales and marketing expenses to continue to increase as a percentage of our total revenue, primarily due to the inclusion of a full year of Further's results of operations and expected increases in stock-based compensation.

On an annual basis, we expect our sales and marketing expenses to increase as a percentage of our total revenue, primarily due to the inclusion of a full year of Further's results of operations and expected increases in stock-based compensation.

However, our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.

Technology and development.

The $9.7 million, or 27%, increase in technology and development expense from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to the inclusion

of Further's results of operations and increases in amortization, stock-based compensation, and personnel-related expenses.

The $8.7 million, or 23%, increase in technology and development expense from the three months ended July 31, 2021 to the three months ended July 31, 2022 was primarily due to the inclusion of Further's results of operations and increases in amortization and personnel-related expenses.

The $18.4 million, or 25%, increase in technology and development expense from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to the inclusion of Further's results of operations and increases in amortization and personnel-related expenses.

We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary technology.

On an annual basis, we expect our technology and development expenses to continue to increase as a percentage of our total revenue, primarily due to the inclusion of a full year of Further's results of operations, expected increases in stock-based compensation, and our growth initiatives.

Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses.

On an annual basis, we expect our technology and development expenses to increase as a percentage of our total revenue, primarily due to the inclusion of a full year of Further's results of operations, expected increases in stock-based compensation, and our growth initiatives.

Our technology and development expenses may fluctuate as a percentage of our total revenue from period to

period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses.

General and administrative.

The $3.0 million, or 15%, increase in general and administrative expense from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to the inclusion of Further's results of operations and increases in personnel-related expenses and stock-based compensation.

The $3.1 million, or 14%, increase in general and administrative expense from the three months ended July 31, 2021 to the three months ended July 31, 2022 was primarily due to the inclusion of Further's results of operations and increases in personnel-related expenses and stock-based compensation.

The $6.2 million, or 14%, increase in general and administrative expense from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to the inclusion of Further's results of operations and increases in personnel-related expenses and stock-based compensation.

We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, and accounting functions that we incur as we continue to grow our business.

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Amortization of acquired intangible assets.

The $3.9 million, or 20%, increase in amortization of acquired intangible assets from the three months ended April 30, 2021 to the three months ended April 30, 2022 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Further Acquisition commencing November 1, 2021 and the Luum Acquisition commencing March 8, 2021.

The $3.9 million, or 19%, increase in amortization of acquired intangible assets from the three months ended July 31, 2021 to the three months ended July 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.

The $7.8 million, or 19%, increase in amortization of acquired intangible assets from the six months ended July 31, 2021 to the six months ended July 31, 2022 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Further Acquisition commencing November 1, 2021 and the Luum Acquisition commencing March 8, 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 $9.3 million in merger integration expense for the three months ended April 30, 2022 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.

The $7.7 million and $17.0 million in merger integration expense for the three and six months ended July 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.

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Interest expense

The $10.5 million in interest expense for the three months ended April 30, 2022 consisted primarily of interest accrued on our long-term debt and amortization of debt discount and issuance costs.

On an annual basis, we expect interest expense to increase, primarily from the inclusion of a full year of interest expense we will incur on the $600.0 million aggregate principal amount of the Notes, which were issued in October 2021, and due to the impact of increased interest rates on our term loan facility, which had an outstanding principal balance of $347.8 million as of April 30, 2022.

The interest rate on our term loan facility and Revolving Credit Facility is variable and, accordingly, we may incur additional expense if interest rates increase in future periods.

Other expense, net

The $3.3 million decrease in other expense, net, from $3.6 million during the three months ended April 30, 2021 to $0.3 million during the three months ended April 30, 2022 was primarily due to a $5.9 million decrease in acquisition costs, partially offset by a $2.6 million decrease in interest and other income, net.

The $11.5 million and $22.0 million in interest expense for the three and six months ended July 31, 2022, respectively, consisted primarily of interest accrued on our long-term debt and amortization of debt discount and issuance costs, up from $7.3 million and $13.9 million for the three and six months ended July 31, 2021, respectively.

On an annual basis, we expect interest expense to increase, primarily from the inclusion of a full year of interest expense on the $600.0 million aggregate principal amount of the Notes, which were issued in October 2021, and due to the impact of increased interest rates on our term loan facility, which had an outstanding principal balance of $345.6 million as of July 31, 2022.

The interest rate on our term loan facility and Revolving Credit Facility is variable and, accordingly, we may incur additional expense if interest rates continue to increase in future periods.

Other income (expense), net

The $0.3 million decrease in other income, net, from $0.3 million during the three months ended July 31, 2021 to $32 thousand during the three months ended July 31, 2022 was primarily due to a $1.9 million decrease in interest and other income, net, partially offset by a $1.6 million decrease in acquisition costs.

The $3.0 million decrease in other expense, net, from $3.3 million during the six months ended July 31, 2021 to $0.3 million during the six months ended July 31, 2022 was primarily due to a $7.6 million decrease in acquisition costs, partially offset by a $4.5 million decrease in interest and other income, net.

Income tax benefit

For the three months ended April 30, 2022 and 2021, we recorded an income tax benefit of $4.4 million and $3.5 million, respectively.

The increase in income tax benefit was primarily the result of increased pre-tax book loss and a corresponding increase in benefit for state income taxes, partially offset by an increase in nondeductible executive compensation and a decrease in excess tax benefits on stock-based compensation and research and development tax credits.

For the three months ended July 31, 2022 and 2021, we recorded an income tax benefit of $3.2 million and $4.0 million, respectively.

For the six months ended July 31, 2022 and 2021, we recorded an income tax benefit of $7.6 million and $7.4 million, respectively.

The change in income tax benefit was primarily the result of an increase in pre-tax book loss, an increase in nondeductible executive compensation, and a decrease in excess tax benefits on stock-based compensation.

Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations.

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We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, principal and interest payments on our long-term debt, and capital expenditures.

As of April 30, 2022 and January 31, 2022, cash and cash equivalents were $161.2 million and $225.4 million, respectively.

As of July 31, 2022 and January 31, 2022, cash and cash equivalents were $176.9 million and $225.4 million, respectively.

Capital resources

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For a description of the terms of the credit agreement, refer to Note 8—Indebtedness.

As of April 30, 2022, there were no amounts outstanding under the Revolving Credit Facility.

We were in compliance with all covenants under the credit agreement as of April 30, 2022, and for the period then ended.

As of July 31, 2022, there were no amounts outstanding under the Revolving Credit Facility.

We were in compliance with all covenants under the credit agreement as of July 31, 2022, and for the period then ended.

On March 2, 2022, we completed our acquisition of the HealthSavings HSA portfolio in exchange for a purchase price of $60 million in cash.

Capital expenditures for the three months ended April 30, 2022 and 2021 were $14.8 million and $18.0 million, respectively.

We expect to continue our current level of increased capital expenditures for the remainder of the fiscal year ending January 31, 2023 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems.

Capital expenditures for the six months ended July 31, 2022 and 2021 were $26.6 million and $38.4 million, respectively.

We expect to continue our current level of capital expenditures for the remainder of the fiscal year ending January 31, 2023 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems.

Costs to improve the architecture of our proprietary systems include computer hardware, personnel and related costs for software engineering and outsourced software engineering services.

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

Three months ended April 30,

Six months ended July 31,

(in thousands) 2022 2021

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Net cash used in investing activities (95,324) (88,268)

Net cash provided by financing activities 2,959 444,853

Net cash provided by (used in) financing activities (430) 445,053

Increase (decrease) in cash and cash equivalents (48,528) 424,951

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Cash flows from operating activities.

Net cash provided by operating activities during the three months ended April 30, 2022 resulted from a net loss of $13.6 million, plus depreciation and amortization expense of $39.5 million, stock-based compensation expense of $14.0 million, and amortization of debt discount and issuance costs of $0.8 million, partially offset by other non-cash items and working capital changes totaling $33.6 million.

Net cash provided by operating activities during the three months ended April 30, 2021 resulted from a net loss of $2.6 million, plus depreciation and amortization expense of $31.8 million, stock-based compensation expense of $12.8 million, and amortization of debt issuance costs of $1.2 million, partially offset by other non-cash items and working capital changes totaling $12.3 million.

Net cash provided by operating activities decreased by $20.9 million from the the six months ended July 31, 2021 to the six months ended July 31, 2022 primarily due to an increase in cash payments made to our accounts payable, accrued liabilities, and other current liabilities during the six months ended July 31, 2022.

Cash flows from investing activities.

Cash used in investing activities for the three months ended April 30, 2022 resulted from $59.4 million in acquisitions of intangible member assets, $13.6 million in software and capitalized software development, and $1.2 million in purchases of property and equipment.

Cash used in investing activities for the three months ended April 30, 2021 resulted from the Luum Acquisition for $49.5 million, net of cash acquired, $15.5 million in software and capitalized software development, $2.5 million in purchases of property and equipment, and $0.3 million in acquisitions of intangible member assets.

Net cash used in investing activities increased by $7.1 million from the the six months ended July 31, 2021 to the six months ended July 31, 2022 primarily due to a $16.5 million increase in cash used in HSA portfolio acquisitions and businesses combinations, including the HealthSavings acquisition.

The increase was partially offset by a $7.9 million decrease in cash used for purchases of software and capitalized software development costs, a $4.0 million decrease in cash used for purchases of property and equipment, and 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 provided by financing activities during the three months ended April 30, 2022 resulted from $2.3 million received in the settlement of Client-held funds obligations, net, and the exercise of stock options of $2.8 million.

These items were partially offset by $2.2 million of principal payments on our long-term debt.

Net cash provided by financing activities during the three months ended April 30, 2021 resulted from $456.6 million of net proceeds from our follow-on public offering of 5,750,000 shares of common stock and the exercise of stock options of $4.2 million.

These items were partially offset by $15.6 million of principal payments on our long-term debt and $0.4 million used in the settlement of Client-held funds obligation, net.

Net cash used in financing activities was $0.4 million during the six months ended July 31, 2022, compared to net cash provided by financing activities of $445.1 million during the six months ended July 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 six months ended July 31, 2021, and a $1.7 million decrease in proceeds from the exercise of common stock options.

These changes were partially offset by an $11.3 million decrease in principal payments required under our Term Loan Facility, and a $1.6 million decrease in cash used in the settlement of client-held funds obligation, net, as compared to the six months ended July 31, 2021.

Contractual obligations

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Off-balance sheet arrangements

As of April 30, 2022, other than outstanding letters of credit issued under our Revolving Credit Facility, we did not have any off-balance sheet arrangements.

As of July 31, 2022, other than outstanding letters of credit issued under our Revolving Credit Facility, we did not have any off-balance sheet arrangements.

The majority of the standby letters of credit expire within one year.

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Our significant accounting policies are more fully described in Note 1 of the accompanying unaudited condensed consolidated financial statements and in Note 1 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

There have been no significant or material changes in our critical accounting policies during the three months ended April 30, 2022, as compared to those disclosed in “Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies and significant management estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

There have been no significant or material changes in our critical accounting policies during the six months ended July 31, 2022, as compared to those disclosed in “Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies and significant management estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

Recent accounting pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis