What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-08 compared with 2022-09-08 · 96 added, 89 removed, 344 unchanged (35% of the section changed)

14 unchanged sentences

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 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.

As of October 31, 2022, we administered 7.7 million HSAs, with balances totaling $20.2 billion, which we call HSA Assets, as well as 6.8 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 October 31, 2022.

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

We reach Clients primarily through relationships with benefits brokers and advisors, integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners, and a sales force that calls on Clients directly.

We have increased our share of the growing HSA market from 4% in December 2010 to 18% as of December 2021, measured by HSA Assets.

According to Devenir, we are the largest HSA provider by accounts and second largest by assets as of December 2021.

We have increased our share of the growing HSA market from 4% in December 2010 to 20% as of June 2022, measured by HSA Assets.

According to Devenir, as of June 2022, we are the largest HSA provider by both accounts and HSA Assets.

In addition, we believe we are the largest provider of other CDBs.

We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-

driven culture.

We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-driven culture.

Our proprietary technology allows us to help consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security.

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Product breadth

We are the largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration.

We are the largest custodian and administrator of HSAs, as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration.

Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs.

3 unchanged sentences

As a non-bank custodian, our members’ custodial HSA cash assets are held by either our federally insured bank and credit union partners, which we collectively call our Depository Partners (our “Basic Rates” offering), pursuant to contractual arrangements we have with these Depository Partners, or by our insurance company partners through group annuity contracts or other similar arrangements (our “Enhanced Rates” offering).

We earn a material portion of our total revenue from interest paid to us by these partners.

We earn a material portion of our total revenue from interest paid by these partners.

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

1 unchanged sentence

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.

HSA members who place their HSA cash into our Enhanced Rates offering retain 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 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.

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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 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.

27 unchanged sentences

We have also seen an increase in regulatory changes related to our services due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes.

For example, 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.

Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success.

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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) July 31, 2022 July 31, 2021 % Change January 31, 2022

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

HSAs 7,650 6,241 23 % 7,207

1 unchanged sentence

New HSAs from sales - Year-to-date 526 446 18 % 918

New HSAs from acquisitions - Year-to-date 90 — n/a 740

New HSAs from acquisitions - Year-to-date 90 160 (44) % 740

HSAs with investments 529 431 23 % 455

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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 1.6 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 number of our HSAs increased by 1.4 million, or 23%, from October 31, 2021 to October 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 0.2 million, or 3%, from October 31, 2021 to October 31, 2022, primarily driven by a decrease in COBRA accounts due to a change in the manner in which COBRA accounts are counted on our current COBRA platform, partially 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) July 31, 2022 July 31, 2021 % Change January 31, 2022

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

HSA cash $ 13,096 $ 10,469 25 % $ 12,943

6 unchanged sentences

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 $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.

HSA cash increased by $2.6 billion, or 25%, from October 31, 2021 to October 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 $1.1 billion, or 19%, from October 31, 2021 to October 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 $3.8 billion, or 23%, from October 31, 2021 to October 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) July 31, 2022 July 31, 2021 % Change January 31, 2022

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

Client-held funds $ 759 $ 811 (6) % $ 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 July 31, Six months ended July 31,

Three months ended October 31, Nine months ended October 31,

(in thousands) 2022 2021 2022 2021

7 unchanged sentences

Merger integration expenses 6,509 13,244 23,486 38,422

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

Acquisition costs (gains) (1) — (2,687) 53 4,917

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

3 unchanged sentences

Adjusted EBITDA $ 73,361 $ 61,087 $ 198,740 $ 185,576

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

(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 July 31, Six months ended July 31,

Three months ended October 31, Nine months ended October 31,

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

1 unchanged sentence

As a percentage of revenue (1) % (3) % (4) % (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.

Our net loss decreased by $3.4 million, or 67%, from $5.0 million for the three months ended October 31, 2021 to $1.6 million for the three months ended October 31, 2022, primarily due to an increase in gross profit and a decrease in merger integration expense, partially offset by increases in technology and development expense, general and administrative expense, sales and marketing expense, amortization of intangible assets, and other expense.

Our net loss increased by $14.5 million, or 126%, from $11.5 million for the nine months ended October 31, 2021 to $25.9 million for the nine months ended October 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,

Three months ended October 31, Nine months ended October 31,

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

1 unchanged sentence

As a percentage of revenue 34 % 34 % 32 % 34 %

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 Adjusted EBITDA increased by $12.3 million, or 20%, from $61.1 million for the three months ended October 31, 2021 to $73.4 million for the three months ended October 31, 2022, primarily due to an increase in total revenue, partially offset by increases in personnel and related costs.

Our Adjusted EBITDA increased by $13.2 million, or 7%, from $185.6 million for the nine months ended October 31, 2021 to $198.7 million for the nine months ended October 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.

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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 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.

As of October 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

We do not expect these provisions to have a material impact on the Company.

Comparison of the three and nine months ended October 31, 2022 and 2021

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

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

Three months ended October 31, Nine months ended October 31,

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

4 unchanged sentences

Service revenue.

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.

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.

The $1.5 million, or less than one percent, increase in service revenue from the nine months ended October 31, 2021 to the nine 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, largely offset by non-recurring revenue related to COBRA benefits administration during the nine months ended October 31, 2021 and FSA and COBRA fee attrition resulting from platform migrations.

Custodial revenue.

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.

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.

The $54.8 million, or 38%, increase in custodial revenue from the nine months ended October 31, 2021 to the nine months ended October 31, 2022 was primarily due to the $2.9 billion, or 29%, increase in the year-over-year average daily balance of HSA cash, as described above, and an increase in average annualized yield from 1.76% for the nine months ended October 31, 2021 to 1.83% for the nine months ended October 31, 2022.

Assuming the current interest rate environment continues, we expect our average annualized yield on HSA cash to increase as our existing agreements with our Depository Partners are renewed or replaced, resulting in higher custodial revenue.

In addition, we expect an increase in the percentage of HSA cash held in our Enhanced Rates offering to positively impact our custodial revenue.

Interchange revenue.

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.

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.

The $18.3 million, or 19%, increase in interchange revenue from the nine months ended October 31, 2021 to the nine months ended October 31, 2022 was primarily due to an increase in accounts and increased spend per account.

Total revenue.

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.

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.

Total revenue increased $74.6 million, or 13%, from the nine months ended October 31, 2021 to the nine months ended October 31, 2022 due to the increases in custodial, interchange, and service revenues, described above.

Impact of COVID-19.

1 unchanged sentence

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 and insurance company partners remains significantly below the levels seen before the pandemic.

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 and any 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 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.

Cost of revenue

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

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

Three months ended October 31, Nine months ended October 31,

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

4 unchanged sentences

Service costs.

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.

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.

The $28.1 million, or 14%, increase in service costs from the nine months ended October 31, 2021 to the nine 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 $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.

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.

The $5.0 million, or 32%, increase in custodial costs from the nine months ended October 31, 2021 to the nine months ended October 31, 2022 was due to an increase in the average daily balance of HSA cash, which increased from $10.1 billion for the nine months ended October 31, 2021 to $12.9 billion for the nine 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 nine months ended October 31, 2022 and 2021.

Interchange costs.

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.

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.

The $4.1 million, or 27%, increase in interchange costs from the nine months ended October 31, 2021 to the nine 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.

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.

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.

1 unchanged sentence

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

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

Three months ended October 31, Nine months ended October 31,

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

6 unchanged sentences

Sales and marketing.

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.

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.

The $7.4 million, or 17%, increase in sales and marketing expense from the nine months ended October 31, 2021 to the nine 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.

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 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, relative to the fiscal year ended January 31, 2022, 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 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 $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.

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.

The $29.2 million, or 26%, increase in technology and development expense from the nine months ended October 31, 2021 to the nine 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.

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 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, relative to the fiscal year ended January 31, 2022, 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, 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 $3.1 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.

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.

The $11.3 million, or 18%, increase in general and administrative expense from the nine months ended October 31, 2021 to the nine 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.

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.

On an annual basis, we expect our general and administrative 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.

On an annual basis, relative to the fiscal year ended January 31, 2022, we expect our general and administrative 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, increases in stock-based compensation, and our growth initiatives.

Our general and administrative 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 general and administrative expenses.

Amortization of acquired intangible assets.

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 $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.

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 $11.7 million, or 20%, increase in amortization of acquired intangible assets from the nine months ended October 31, 2021 to the nine 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 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 $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.

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.

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Interest expense

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 $12.2 million and $34.1 million in interest expense for the three and nine months ended October 31, 2022, respectively, consisted primarily of interest accrued on our long-term debt and amortization of debt discount and issuance costs, up from $11.9 million and $25.8 million for the three and nine months ended October 31, 2021, respectively.

On an annual basis, relative to the fiscal year ended January 31, 2022, 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 effective interest rate of 6.38% as of October 31, 2022, up from 2.63% as of October 31, 2021.

Our term loan facility had an outstanding principal balance of $343.4 million as of October 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.

The $2.7 million decrease in other income, net, from $3.1 million during the three months ended October 31, 2021 to $0.4 million during the three months ended October 31, 2022 was primarily due to a reduction in the fair value of the contingent acquisition consideration relating to the Luum Acquisition, which was recognized during the three months ended October 31, 2021.

The $0.3 million change in other income (expense), net, from expense of $0.2 million during the nine months ended October 31, 2021 to income of $0.2 million during the nine months ended October 31, 2022 was primarily due to a $4.9 million decrease in acquisition costs, net, partially offset by a $2.8 million decrease in interest and other income, net, and a $1.7 million non-recurring gain on equity securities recognized during the nine months ended October 31, 2021.

Income tax benefit

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.

For the three months ended October 31, 2022 and 2021, we recorded an income tax benefit of $4.5 million and $4.1 million, respectively.

The increase in income tax benefit was primarily the result of a release of uncertain tax positions, partially offset by an increase in nondeductible executive compensation and a decrease in research and development tax credits.

For the nine months ended October 31, 2022 and 2021, we recorded an income tax benefit of $12.2 million and $11.5 million, respectively.

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

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

As of October 31, 2022 and January 31, 2022, cash and cash equivalents were $210.2 million and $225.4 million, respectively.

Capital resources

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A shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings.

Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to, working capital, sales and marketing activities, general and administrative matters, capital expenditures, and repayment of indebtedness, and if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business.

if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business.

Pending such uses, we may invest the net proceeds in interest-bearing securities.

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

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.

As of October 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 October 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 six months ended July 31, 2022 and 2021 were $26.6 million and $38.4 million, respectively.

Capital expenditures for the nine months ended October 31, 2022 and 2021 were $38.3 million and $56.3 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.

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

Six months ended July 31,

Nine months ended October 31,

(in thousands) 2022 2021

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Cash flows from operating activities.

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.

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 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.

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 $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.

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.

Contractual obligations

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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.

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

The standby letters of credit generally expire within one year.

However, in the ordinary course of business, we will continue to renew or modify the terms of the letters of credit to support business requirements.

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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 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.

There have been no significant or material changes in our critical accounting policies during the nine months ended October 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