What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-09-05 compared with 2023-06-07 · 82 added, 65 removed, 331 unchanged (31% 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 April 30, 2023, we administered 8.0 million HSAs, with balances totaling $22.3 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 15.0 million as of April 30, 2023.

As of July 31, 2023, we administered 8.2 million HSAs, with balances totaling $23.2 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 15.0 million as of July 31, 2023.

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

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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, 2023 April 30, 2022 % Change January 31, 2023

(in thousands, except percentages) July 31, 2023 July 31, 2022 % Change January 31, 2023

HSAs 8,164 7,523 9 % 7,984

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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 0.7 million, or 9%, from April 30, 2022 to April 30, 2023, primarily driven by new HSAs from sales.

The number of our CDBs decreased by 0.1 million, or 2%, from April 30, 2022 to April 30, 2023, primarily driven by a decrease in COBRA accounts due to a change in the manner in which COBRA accounts are counted following migration to our current COBRA platform.

The number of our HSAs increased by 0.6 million, or 9%, from July 31, 2022 to July 31, 2023, primarily driven by new HSAs from sales.

The number of our CDBs decreased by 0.2 million, or 3%, from July 31, 2022 to July 31, 2023, primarily driven by a decrease in COBRA accounts due to a change in the manner in which COBRA accounts are counted following migration to our current COBRA platform.

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

(in millions, except percentages) April 30, 2023 April 30, 2022 % Change January 31, 2023

(in millions, except percentages) July 31, 2023 July 31, 2022 % Change January 31, 2023

HSA cash $ 14,021 $ 13,097 7 % $ 14,199

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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 $1.2 billion, or 9%, from April 30, 2022 to April 30, 2023, due primarily to net HSA contributions from new and existing HSA members, partially offset by transfers to HSA investments.

HSA investments increased by $0.9 billion, or 12%, from April 30, 2022 to April 30, 2023, due primarily to transfers from HSA cash, partially offset by the reduced value of invested balances due to market volatility.

Total HSA Assets increased by $2.1 billion, or 10%, from April 30, 2022 to April 30, 2023, due primarily to net HSA contributions from new and existing HSA members, partially offset by the reduced value of invested balances due to market volatility.

HSA cash increased by $0.9 billion, or 7%, from July 31, 2022 to July 31, 2023, primarily due to net HSA contributions from new and existing HSA members, partially offset by transfers to HSA investments.

HSA investments increased by $1.7 billion, or 23%, from July 31, 2022 to July 31, 2023, primarily due to transfers from HSA cash and the increased value of invested balances.

Total HSA Assets increased by $2.7 billion, or 13%, from July 31, 2022 to July 31, 2023, primarily due to net HSA contributions from new and existing HSA members and the increased value of invested balances.

Client-held funds

(in millions, except percentages) April 30, 2023 April 30, 2022 % Change January 31, 2023

(in millions, except percentages) July 31, 2023 July 31, 2022 % Change January 31, 2023

Client-held funds $ 811 $ 801 1 % $ 901

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The following table presents a reconciliation of net income (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) 2023 2022 2023 2022

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

Three months ended April 30,

(in thousands, except percentages) 2023 2022 $ Change % Change

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

(in thousands, except percentages) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Net income (loss) $ 10,581 $ (10,654) $ 21,235 (199) % $ 14,675 $ (24,293) $ 38,968 (160) %

As a percentage of revenue 4 % (5) % 3 % (6) %

Our net income increased by $17.7 million, from net loss of $13.6 million for the three months ended April 30, 2022 to net income of $4.1 million for the three months ended April 30, 2023, due to an increase in gross profit, partially offset by net increases in operating expenses, income tax provision, and other expenses, as described more fully in the section entitled "Comparison of the three months ended April 30, 2023 and 2022."

Our net income increased by $21.2 million, from net loss of $10.7 million for the three months ended July 31, 2022 to net income of $10.6 million for the three months ended July 31, 2023, due to an increase in gross profit and other income, net, partially offset by net increases in operating expenses and income tax provision, as described more fully in the section entitled "Comparison of the three and six months ended July 31, 2023 and 2022."

Our net income increased by $39.0 million, from net loss of $24.3 million for the six months ended July 31, 2022 to net income of $14.7 million for the six months ended July 31, 2023, due to an increase in gross profit and other income, net, partially offset by net increases in operating expenses and income tax provision, as described more fully in the section entitled "Comparison of the three and six months ended July 31, 2023 and 2022."

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

Three months ended April 30,

(in thousands, except percentages) 2023 2022 $ Change % Change

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

(in thousands, except percentages) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Adjusted EBITDA $ 88,111 $ 67,043 $ 21,068 31 % $ 174,698 $ 125,379 $ 49,319 39 %

As a percentage of revenue 36 % 33 % 36 % 30 %

Our Adjusted EBITDA increased by $28.3 million, or 48%, from $58.3 million for the three months ended April 30, 2022 to $86.6 million for the three months ended April 30, 2023, primarily due to an increase in total revenue, partially offset by increases in personnel and related costs.

Our Adjusted EBITDA increased by $21.1 million, or 31%, from $67.0 million for the three months ended July 31, 2022 to $88.1 million for the three months ended July 31, 2023, primarily due to an increase in total revenue, partially offset by increases in personnel and related costs.

Our Adjusted EBITDA increased by $49.3 million, or 39%, from $125.4 million for the six months ended July 31, 2022 to $174.7 million for the six months ended July 31, 2023, 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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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards, and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

Deferred tax assets and liabilities are measured using enacted statutory

tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

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

As of April 30, 2023, we have not recorded a valuation allowance on federal deferred tax assets, but have recorded a valuation allowance on certain state deferred tax assets.

As of July 31, 2023, we have not recorded a valuation allowance on federal deferred tax assets, but we have recorded a valuation allowance on certain state deferred tax assets.

We maintain an overall net federal and state deferred tax liability on our condensed consolidated balance sheet.

Comparison of the three months ended April 30, 2023 and 2022

Comparison of the three and six months ended July 31, 2023 and 2022

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

Three months ended April 30,

(in thousands, except percentages) 2023 2022 $ Change % Change

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

(in thousands, except percentages) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Service revenue $ 105,719 $ 103,034 $ 2,685 3 % $ 210,831 $ 207,382 $ 3,449 2 %

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Service revenue.

The $0.8 million, or 1%, increase in service revenue from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to service revenue earned with respect to new HSAs, largely offset by FSA and COBRA fee attrition in connection with platform migrations.

The $2.7 million, or 3%, increase in service revenue from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to service revenue earned with respect to new HSAs.

The $3.4 million, or 2%, increase in service revenue from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to service revenue earned with respect to new HSAs.

Custodial revenue.

The $35.1 million, or 59%, increase in custodial revenue from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to an increase in average annualized yield on HSA cash from 1.69% for the three months ended April 30, 2022 to 2.32% for the three months ended April 30, 2023 and the $1.2 billion, or 9%, increase in the year-over-year average daily balance of HSA cash, as described above.

The $33.3 million, or 51%, increase in custodial revenue from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to an increase in average annualized yield on HSA cash from 1.80% for the three months ended July 31, 2022 to 2.37% for the three months ended July 31, 2023, an increase in interest rates on the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate, and the $1.1 billion, or 8%, increase in the year-over-year average daily balance of HSA cash, as described above.

The $68.4 million, or 55%, increase in custodial revenue from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to an increase in average annualized yield on HSA cash from 1.75% for the six months ended July 31, 2022 to 2.34% for the six months ended July 31, 2023, an increase in interest rates on the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate, and the $1.1 billion, or 9%, increase in the year-over-year average daily balance of HSA cash, as described above.

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 average annualized yield and thus our custodial revenue.

In addition, on an annual basis, relative to the fiscal year ended January 31, 2023, we expect an increase in custodial revenue resulting from the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate.

In addition, on an annual basis, relative to the fiscal year ended January 31, 2023, we expect custodial revenue resulting from the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate to increase.

Interchange revenue.

The $2.9 million, or 7%, increase in interchange revenue from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to an increase in Total Accounts and increased spend per account.

The $1.4 million, or 4%, increase in interchange revenue from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to an increase in Total Accounts, partially offset by lower average spend per HSA account.

The $4.3 million, or 5%, increase in interchange revenue from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to an increase in Total Accounts, partially offset by lower average spend per HSA account.

Total revenue.

Total revenue increased $38.8 million, or 19%, from the three months ended April 30, 2022 to the three months ended April 30, 2023 due to the increases in custodial, interchange, and service revenues, described above.

Total revenue increased $37.4 million, or 18%, from the three months ended July 31, 2022 to the three months ended July 31, 2023 due to the increases in custodial, service, and interchange revenues, described above.

Total revenue increased $76.2 million, or 18%, from the six months ended July 31, 2022 to the six months ended July 31, 2023 due to the increases in custodial, interchange, and service revenues, described above.

Impact of COVID-19.

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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) 2023 2022 $ Change % Change

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

(in thousands, except percentages) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Service costs $ 76,543 $ 74,914 $ 1,629 2 % $ 157,098 $ 155,788 $ 1,310 1 %

3 unchanged sentences

Service costs.

The $0.3 million, or less than 1%, decrease in service costs from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to a decrease in personnel costs.

The $1.6 million, or 2%, increase in service costs from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to the 3% increase in average Total Accounts, partially offset by a decrease in personnel costs.

The $1.3 million, or 1%, increase in service costs from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to the 3% increase in average Total Accounts, partially offset by a decrease in personnel costs.

Custodial costs.

The $2.4 million, or 36%, increase in custodial costs from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.16% during the three months ended April 30, 2022 to 0.22% during the three months ended April 30, 2023, and the $1.2 billion, or 9%, increase in the year-over-year average daily balance of HSA cash, as described above.

The $2.0 million, or 29%, increase in custodial costs from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.18% during the three months ended July 31, 2022 to 0.22% during the three months ended July 31, 2023, and the $1.1 billion, or 8%, increase in the year-over-year average daily balance of HSA cash, as described above.

The $4.4 million, or 32%, increase in custodial costs from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.17% during the six months ended July 31, 2022 to 0.22% during the six months ended July 31, 2023, and the $1.1 billion, or 9%, increase in the year-over-year average daily balance of HSA cash, as described above.

Interchange costs.

The $0.1 million, or 1%, increase in interchange costs from the three months ended April 30, 2022 to the three months ended April 30, 2023 was due to an increase in Total Accounts and increased spend per account.

The $0.6 million, or 10%, increase in interchange costs from the three months ended July 31, 2022 to the three months ended July 31, 2023 was due to an increase in Total Accounts, partially offset by lower average spend per HSA account.

The $0.7 million, or 5%, increase in interchange costs from the six months ended July 31, 2022 to the six months ended July 31, 2023 was due to an increase in Total Accounts, partially offset by lower average spend per HSA account.

Total cost of revenue.

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

Three months ended April 30,

(in thousands, except percentages) 2023 2022 $ Change % Change

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

(in thousands, except percentages) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

Sales and marketing $ 19,123 $ 15,843 $ 3,280 21 % $ 39,058 $ 32,403 $ 6,655 21 %

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Sales and marketing.

The $3.4 million, or 20%, increase in sales and marketing expenses from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to an increase in marketing expenses from increased personnel-related expenses and travel costs.

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

The $3.3 million, or 21%, increase in sales and marketing expenses from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to an increase in marketing expenses from increased personnel-related expenses and travel costs.

The $6.7 million, or 21%, increase in sales and marketing expenses from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to an increase in marketing expenses from increased personnel-related expenses and travel costs.

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

On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our sales and marketing expenses to remain relatively steady as a percentage of our total revenue.

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Technology and development.

The $8.0 million, or 18%, increase in technology and development expenses from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to increases in personnel-related expenses and amortization.

The $8.2 million, or 18%, increase in technology and development expenses from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to increases in personnel-related expenses and software costs.

The $16.2 million, or 18%, increase in technology and development expenses from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to increases in personnel-related expenses and software costs.

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, relative to the fiscal year ended January 31, 2023, we expect our technology and development expenses to remain relatively steady as a

percentage of our total revenue.

On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our technology and development expenses to remain relatively steady as a percentage of our total revenue.

However, 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 $1.2 million, or 5%, increase in general and administrative expenses from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to an increase in stock-based compensation.

The $1.2 million, or 4%, increase in general and administrative expenses from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to increases in professional services expense and credit losses from trade receivables, partially offset by a decrease in stock-based compensation.

The $2.3 million, or 5%, increase in general and administrative expenses from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to increases in professional services expense and credit losses from trade receivables.

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

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Amortization of acquired intangible assets.

The $0.5 million, or 2%, decrease in amortization of acquired intangible assets from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to the smaller amount of intangible assets that have not been fully amortized.

The $1.0 million, or 4%, decrease in amortization of acquired intangible assets from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to the smaller carrying amount of intangible assets that have not been fully amortized.

The $1.5 million, or 3%, decrease in amortization of acquired intangible assets from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to the smaller amount of intangible assets that have not been fully amortized.

Merger integration.

The $5.8 million, or 63%, decrease in merger integration expense from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to a decrease in merger integration activities related to the acquisition of the Further business.

The $3.5 million in merger integration expense for the three months ended April 30, 2023 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 WageWorks acquisition, including ongoing lease expense related to WageWorks offices that have been permanently closed, less any related sublease income, and professional fees associated with the remediation of material weaknesses in internal control over financial reporting.

The $5.6 million, or 73%, decrease in merger integration expense from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to a decrease in merger integration activities related to the acquisitions of WageWorks and the Further business.

The $11.5 million, or 68%, decrease in merger integration expense from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to a decrease in merger integration activities related to the acquisitions of the Further business and WageWorks.

The $2.0 million and $5.5 million in merger integration expense for the three and six months ended July 31, 2023 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 WageWorks acquisition, including ongoing lease expense related to WageWorks offices that have been permanently closed, less any related sublease income, and professional fees associated with the remediation of material weaknesses in internal control over financial reporting.

We expect merger integration expenses attributable to the Further acquisition totaling approximately $55 million to be incurred over a period of approximately five to six years from the date of the acquisition, which occurred in November 2021.

Interest expense

The $4.5 million, or 43%, increase in interest expense was primarily due to the impact of higher interest rates on our Term Loan Facility, which had an effective interest rate of 7.32% as of April 30, 2023, up from 3.33% as of April 30, 2022, and a $1.2 million loss on extinguishment of debt due to the prepayment of $50.0 million under our Term Loan Facility during the three months ended April 30, 2023.

Our Term Loan Facility had an outstanding principal balance of $286.9 million and $347.8 million as of April 30, 2023 and 2022, respectively.

On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our interest expense to increase, primarily due to the impact of increased interest rates on our Term Loan Facility, partially offset by a lower average principal balance under our Term Loan Facility.

The $1.8 million, or 15%, increase in interest expense from the three months ended July 31, 2022 to the three months ended July 31, 2023 was primarily due to the impact of higher interest rates on our Term Loan Facility, which had an effective interest rate of 7.68% as of July 31, 2023, up from 4.92% as of July 31, 2022, partially offset by a lower average principal balance under our Term Loan Facility.

The $6.3 million, or 29%, increase in interest expense from the six months ended July 31, 2022 to the six months ended July 31, 2023 was primarily due to the impact of higher interest rates on our Term Loan Facility, which had an effective interest rate of 7.68% as of July 31, 2023, up from 4.92% as of July 31, 2022, and a $1.2 million loss on extinguishment of debt due to the prepayment of $50.0 million under our Term Loan Facility in April 2023, partially offset by a lower average principal balance under our Term Loan Facility.

Our Term Loan Facility had an outstanding principal balance of $286.9 million and $345.6 million as of July 31, 2023 and 2022, respectively.

The decrease was due to principal payments, including the $50.0 million prepayment in April 2023.

On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our interest expense to increase, primarily due to the impact of increased interest rates on our Term Loan Facility and the $1.2 million loss on extinguishment of debt in April 2023, partially offset by a lower average principal balance under our Term Loan Facility.

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 $2.1 million change in other income (expense), net, from expense of $0.3 million during the three months ended April 30, 2022 to income of $1.8 million during the three months ended April 30, 2023 was due to a $1.5 million increase in interest income and a $0.6 million increase in other income, net.

The $2.7 million increase in other income, net, from $32 thousand during the three months ended July 31, 2022 to $2.8 million during the three months ended July 31, 2023 was primarily due to a $2.4 million increase in interest income on corporate cash and a $0.3 million increase in other income, net.

The $4.9 million change in other income (expense), net, from expense of $0.3 million during the six months ended July 31, 2022 to income of $4.6 million during the six months ended July 31, 2023 was primarily due to a $3.9 million increase in interest income on corporate cash and a $0.9 million increase in other income, net.

Income tax provision (benefit)

For the three months ended April 30, 2023 and 2022, we recorded an income tax provision of $5.9 million and an income tax benefit of $4.4 million, respectively.

For the three months ended July 31, 2023 and 2022, we recorded an income tax provision of $3.6 million and an income tax benefit of $3.2 million, respectively.

The increase in income tax provision was primarily the result of an increase in pre-tax book income, a decrease in tax deductible stock-based compensation compared to GAAP stock-based compensation expense, an increase in nondeductible executive compensation, and a decrease in research and development tax credits.

For the six months ended July 31, 2023 and 2022, we recorded an income tax provision of $9.6 million and an income tax benefit of $7.6 million, respectively.

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

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Before we realize any revenue from these new accounts, we incur costs related to implementing and supporting our new Network Partners and new accounts.

These costs of services relate

to activating accounts and hiring additional staff, including seasonal help to support our member support center.

These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center.

These expenses begin to ramp up during our third fiscal quarter, with the majority of seasonal expenses incurred in our fourth fiscal quarter.

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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, 2023 and January 31, 2023, cash and cash equivalents were $225.6 million and $254.3 million, respectively.

As of July 31, 2023 and January 31, 2023, cash and cash equivalents were $290.3 million and $254.3 million, respectively.

Capital resources

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For a description of the terms of the credit agreement, refer to Note 6—Indebtedness.

As of April 30, 2023, 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, 2023, and for the period then ended.

During the three months ended April 30, 2023, we used $50.0 million of cash to prepay, in direct order of maturity, principal due under our Term Loan Facility.

Capital expenditures for the three months ended April 30, 2023 and 2022 were $9.1 million and $14.8 million, respectively.

As of July 31, 2023, 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, 2023, and for the period then ended.

In April 2023, we used $50.0 million of cash to prepay, in direct order of maturity, principal due under our Term Loan Facility.

Capital expenditures for the six months ended July 31, 2023 and 2022 were $19.4 million and $26.6 million, respectively.

We expect to continue our current level of capital expenditures for the remainder of the fiscal year ending January 31, 2024 as we continue to invest in 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:

Three months ended April 30,

Six months ended July 31,

(in thousands) 2023 2022

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Net cash used in investing activities (19,384) (95,324)

Net cash provided by (used in) financing activities (51,027) 2,959

Decrease in cash and cash equivalents (28,624) (64,167)

Net cash used in financing activities (53,182) (430)

Increase (decrease) in cash and cash equivalents 36,079 (48,528)

Beginning cash and cash equivalents 254,266 225,414

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Cash flows from operating activities.

Net cash provided by operating activities increased by $24.5 million from the three months ended April 30, 2022 to the three months ended April 30, 2023 primarily due to increased collections with respect to our custodial and interchange revenues and a decrease in cash payments made to our accounts payable, accrued liabilities, and other current liabilities during the three months ended April 30, 2023.

Net cash provided by operating activities increased by $61.4 million from the six months ended July 31, 2022 to the six months ended July 31, 2023 primarily due to increased collections with respect to our custodial and interchange revenues and a decrease in cash payments made to our accounts payable, accrued liabilities, and other current liabilities during the six months ended July 31, 2023.

Cash flows from investing activities.

Net cash used in investing activities decreased by $65.1 million from the three months ended April 30, 2022 to the three months ended April 30, 2023 due to a $59.4 million decrease in cash used in HSA portfolio acquisitions, a $4.6 million decrease in cash used for purchases of software and capitalized software development costs, and a $1.0 million decrease in cash used for purchases of property and equipment.

Net cash used in investing activities decreased by $75.9 million from the six months ended July 31, 2022 to the six months ended July 31, 2023 due to a $68.7 million decrease in cash used in HSA portfolio acquisitions, a $5.4 million decrease in cash used for purchases of software and capitalized software development costs, and a $1.8 million decrease in cash used for purchases of property and equipment.

Cash flows from financing activities.

Net cash used in financing activities was $51.0 million during the three months ended April 30, 2023, compared to net cash provided by financing activities of $3.0 million during the three months ended April 30, 2022.

The change resulted primarily from a $52.2 million increase in payments related to our long-term debt, including $50.0 million of cash used to prepay, in direct order of maturity, principal due under our Term Loan Facility, and a $1.9 million decrease in proceeds from the exercise of common stock options.

These changes were partially offset by a $0.1 million increase in net payments received in the settlement of client-held funds obligation.

Net cash used in financing activities increased by $52.8 million from the six months ended July 31, 2022 to the six months ended July 31, 2023 due to the $50.0 million of cash used to prepay, in direct order of maturity, principal due under our Term Loan Facility and a $3.6 million decrease in proceeds from the exercise of common stock options.

These changes were partially offset by a $0.8 million decrease in net payments made in the settlement of client-held funds obligation.

Contractual obligations

1 unchanged sentence

Off-balance sheet arrangements

As of April 30, 2023, 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, 2023, 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.

8 unchanged sentences

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, 2023.

There have been no significant or material changes in our critical accounting policies during the three months ended April 30, 2023, 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, 2023.

There have been no significant or material changes in our critical accounting policies during the six months ended July 31, 2023, 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, 2023.

Recent accounting pronouncements

1 unchanged sentence

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