What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-05 compared with 2023-09-05 · 101 added, 93 removed, 320 unchanged (38% of the section changed)

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

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 and our other reports filed with the SEC.

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

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

As of 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.

As of October 31, 2023, we administered 8.3 million HSAs, with balances totaling $22.6 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 15.3 million as of October 31, 2023.

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 20% as of December 2022, measured by HSA Assets.

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

We have increased our share of the growing HSA market from 4% in December 2010 to 20% as of June 2023, measured by HSA Assets.

According to Devenir, as of June 2023, 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 service-driven culture, product breadth, ecosystem connectivity, and proprietary

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

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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See “Key components of our results of operations” for additional information on our sources of revenue, including the adverse impacts caused by the societal and economic changes arising out of the COVID-19 pandemic.

BenefitWallet HSA portfolio acquisition

In September 2023, we entered into an agreement to acquire the BenefitWallet HSA portfolio from Conduent Business Services, LLC, for a purchase price of $425.0 million and up to $20.0 million in transfer-related expenses.

In addition, we expect to incur approximately $7.0 million of transaction costs associated with the acquisition.

The agreement contemplates a transfer of approximately 665,000 customer accounts and their approximately $2.8 billion of HSA Assets and includes a mechanism to adjust the purchase price based on the amount of HSA Assets actually transferred.

Pursuant to the agreement, HealthEquity will assume a contract with a Depository Partner representing approximately 7% of the total maximum acquired HSA Assets, which provides a custodial yield that is below current market rates and expires in June 2026.

The transfer is expected to close in multiple tranches during the first half of fiscal 2025, subject to the satisfaction of certain customary closing conditions.

We expect to pay approximately 50% of the purchase price and associated costs using cash on hand, with the remainder paid using our revolving credit facility with the actual percentages to be determined in connection with the payment for each tranche.

Key factors affecting our performance

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

See also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 and our other reports filed with the SEC.

See also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023, this Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2023, and our other reports filed with the SEC.

Our acquisition and integration strategy

We have historically acquired HSA portfolios and businesses that strengthen our service offerings.

We have historically acquired HSA portfolios and businesses that strengthen our service offerings, including through the pending BenefitWallet HSA portfolio acquisition.

We plan to continue this growth strategy and are regularly engaged in evaluating different opportunities.

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We derive revenue primarily from healthcare-related saving and spending by consumers in the U.S., which are driven by changes in the broader healthcare industry, including the structure of health insurance.

The average premium for employer-sponsored health insurance has risen by 20% since 2017 and 43% since 2012, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health insurance more generally.

The average family premium for employer-sponsored health insurance has risen by 22% since 2018 and 47% since 2013, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health insurance more generally.

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

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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 from historical levels.

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.

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

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

Our full suite of CDB offerings complements our HSA solution and

enhances our leadership position within the HSA sector.

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

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

The education and customer service we provide is driven by our Purple culture, which we believe is a significant factor in our ability to attract and retain customers and to address opportunities in the rapidly changing healthcare

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

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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, 2023 July 31, 2022 % Change January 31, 2023

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

HSAs 8,295 7,650 8 % 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 0.6 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 number of our HSAs increased by 0.6 million, or 8%, from October 31, 2022 to October 31, 2023, driven by new HSAs from sales.

The number of our CDBs increased by 0.1 million, or 2%, from October 31, 2022 to October 31, 2023, primarily driven by an increase in HRA and commuter accounts, partially offset 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) July 31, 2023 July 31, 2022 % Change January 31, 2023

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

HSA cash $ 13,971 $ 13,096 7 % $ 14,199

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Total HSA Assets 22,568 20,204 12 % 22,146

Average daily HSA cash - Year-to-date 14,048 12,924 9 % 13,049

Average daily HSA cash - Quarter-to-date 13,977 12,973 8 % 13,375

Average daily HSA cash - Year-to-date 14,024 12,941 8 % 13,049

HSA Assets includes our HSA members’ custodial assets, which consists of the following components:

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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 $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.

HSA cash increased by $0.9 billion, or 7%, from October 31, 2022 to October 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 $1.5 billion, or 21%, from October 31, 2022 to October 31, 2023, primarily due to transfers from HSA cash and the increased value of invested balances.

Total HSA Assets increased by $2.4 billion, or 12%, from October 31, 2022 to October 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) July 31, 2023 July 31, 2022 % Change January 31, 2023

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

Client-held funds $ 761 $ 759 0 % $ 901

Average daily Client-held funds - Year-to-date 896 852 5 % 827

Average daily Client-held funds - Quarter-to-date 794 794 0 % 809

Average daily Client-held funds - Year-to-date 862 832 4 % 827

Client-held funds are interest-earning deposits from which we generate custodial revenue.

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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 July 31, Six months ended July 31,

Three months ended October 31, Nine months ended October 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 July 31, Six months ended July 31,

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

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

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As a percentage of revenue 6 % (1) % 4 % (4) %

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."

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Our net income increased by $16.3 million, from net loss of $1.6 million for the three months ended October 31, 2022 to net income of $14.7 million for the three months ended October 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 nine months ended October 31, 2023 and 2022."

Our net income increased by $55.3 million, from net loss of $25.9 million for the nine months ended October 31, 2022 to net income of $29.3 million for the nine months ended October 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 nine months ended October 31, 2023 and 2022."

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) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

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As a percentage of revenue 38 % 34 % 37 % 32 %

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 Adjusted EBITDA increased by $22.3 million, or 30%, from $73.4 million for the three months ended October 31, 2022 to $95.6 million for the three months ended October 31, 2023, primarily due to an increase in total revenue, partially offset by increases in personnel and related costs.

Our Adjusted EBITDA increased by $71.6 million, or 36%, from $198.7 million for the nine months ended October 31, 2022 to $270.3 million for the nine months ended October 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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Other income (expense), net

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

Other income, net

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

Income tax provision (benefit)

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

As of 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.

As of October 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 and six months ended July 31, 2023 and 2022

Comparison of the three and nine months ended October 31, 2023 and 2022

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) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

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Service revenue.

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.

The $1.1 million, or 1%, decrease in service revenue from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to lower fees with respect to FSA and COBRA accounts, partially offset by service revenue earned with respect to new HSAs.

The $2.4 million, or 1%, increase in service revenue from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to service revenue earned with respect to new HSAs, partially offset by lower fees with respect to FSA and COBRA accounts.

Custodial revenue.

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.

The $31.9 million, or 43%, increase in custodial revenue from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to an increase in average annualized yield on HSA cash from 2.00% for the three months ended October 31, 2022 to 2.58% for the three months ended October 31, 2023 (due to both higher interest rates overall and increased participation in our Enhanced Rates offering), the $1.0 billion, or 8%, increase in the year-over-year average daily balance of HSA cash, as described above, and 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.

The $100.3 million, or 50%, increase in custodial revenue from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to an increase in average annualized yield on HSA cash from 1.83% for the nine months ended October 31, 2022 to 2.42% for the nine months ended October 31, 2023 (due to both higher interest rates overall and increased participation in our Enhanced Rates offering), the $1.1 billion, or 8%, increase in the year-over-year average daily balance of HSA cash, as described above, and 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.

Assuming the current interest rate environment continues, we expect our average annualized yield on HSA cash to further 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 continue 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 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 $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.

The $2.3 million, or 7%, increase in interchange revenue from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to an increase in Total Accounts.

The $6.6 million, or 6%, increase in interchange revenue from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to an increase in Total Accounts.

Total revenue.

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.

Total revenue increased $33.1 million, or 15%, from the three months ended October 31, 2022 to the three months ended October 31, 2023 due to the increases in custodial and interchange revenues, partially offset by the decrease in service revenues, described above.

Total revenue increased $109.3 million, or 17%, from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 due to the increases in custodial, interchange, and service revenues, described above.

Impact of COVID-19.

Our business was adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by the societal and economic changes arising out of the pandemic.

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 average annualized yield we currently receive from our Depository Partners remains below the levels seen immediately before the pandemic due to the HSA cash that was deposited with them during the pandemic.

Our financial results related to certain of our products were adversely affected, such as commuter benefits, due to "work from home" and hybrid work environments, which have continued and may continue indefinitely.

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however, the extent to which COBRA elections will return to their prior levels, if at all, remains uncertain.

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.

In the event of further outbreaks, we may be unable to meet our service level commitments to our Clients as a result of disruptions to our workforce and disruptions to third-party contracts that we rely on to provide our services.

The extent to which the societal and economic changes arising out of the COVID-19 pandemic, including 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.

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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) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

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Service 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.

The $1.1 million, or 1%, decrease in service costs from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to efficiencies resulting from our technology investments and lower amortization expense, partially offset by increases in personnel-related costs.

The $0.2 million, or less than 1%, increase in service costs from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to increases in personnel-related costs, largely offset by efficiencies resulting from our technology investments and lower amortization expense.

Custodial costs.

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.

The $2.4 million, or 35%, increase in custodial costs from the three months ended October 31, 2022 to the three months ended October 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 three months ended October 31, 2022 to 0.22% during the three months ended October 31, 2023, and the $1.0 billion, or 8%, increase in the year-over-year average daily balance of HSA cash, as described above.

The $6.8 million, or 33%, increase in custodial costs from the nine months ended October 31, 2022 to the nine months ended October 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 nine months ended October 31, 2022 to 0.22% during the nine months ended October 31, 2023, and the $1.1 billion, or 8%, increase in the year-over-year average daily balance of HSA cash, as described above.

On an annual basis, relative to the fiscal year ended January 31, 2023, we expect custodial costs to increase due to an increase in the average annualized rate of interest retained by HSA members on HSA cash and an increase in the year-over-year average daily balance of HSA cash.

Interchange costs.

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.

The $0.4 million, or 6%, increase in interchange costs from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to an increase in Total Accounts.

The $1.0 million, or 5%, increase in interchange costs from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to an increase in Total Accounts.

Total cost of revenue.

As we continue to add Total Accounts, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members.

However, on an annual basis, relative to the fiscal year ended January 31, 2023, 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 increases in stock-based compensation and other personnel costs.

However, on an annual basis, relative to the fiscal year ended January 31, 2023, 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 increases in stock-based compensation and other personnel costs.

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, and the impact of societal and economic changes arising out of the COVID-19 pandemic.

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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) 2023 2022 $ Change % Change 2023 2022 $ Change % Change

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Sales and marketing.

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.

The $2.4 million, or 14%, increase in sales and marketing expenses from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to an increase in marketing expenses from increased personnel-related expenses and travel costs.

The $9.1 million, or 18%, increase in sales and marketing expenses from the nine months ended October 31, 2022 to the nine months ended October 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.

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Technology and development.

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.

The $6.7 million, or 14%, increase in technology and development expenses from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to increases in personnel-related expenses and software costs.

The $22.9 million, or 16%, increase in technology and development expenses from the nine months ended October 31, 2022 to the nine months ended October 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.

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General and administrative.

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.

The $1.2 million, or 5%, increase in general and administrative expenses from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to increases in personnel-related expenses, partially offset by a decrease in amortization expense.

The $3.6 million, or 5%, increase in general and administrative expenses from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to increases in professional services expense, personnel-related expenses, and credit losses from trade receivables, partially offset by a decrease in amortization expense.

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.

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

However, 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.

However, 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 $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.

The $0.3 million, or 1%, decrease in amortization of acquired intangible assets from the three months ended October 31, 2022 to the three months ended October 31, 2023 was due to the smaller carrying amount of intangible assets that have not been fully amortized.

The $1.9 million, or 3%, decrease in amortization of acquired intangible assets from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was due to the smaller carrying amount of intangible assets that have not been fully amortized.

Merger integration.

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.

The $3.9 million, or 59%, decrease in merger integration expense from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to a decrease in merger integration activities related to the acquisitions of WageWorks and the Further business.

The $15.3 million, or 65%, decrease in merger integration expense from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to a decrease in merger integration activities related to the acquisitions of the Further business and WageWorks.

The $2.7 million and $8.2 million in merger integration expense for the three and nine months ended October 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.

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 $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 $1.4 million, or 11%, increase in interest expense from the three months ended October 31, 2022 to the three months ended October 31, 2023 was primarily due to the impact of higher interest rates on our Term Loan Facility, which had an effective interest rate of 7.44% as of October 31, 2023, up from 6.38% as of October 31, 2022, partially offset by a lower average principal balance under our Term Loan Facility.

The $7.7 million, or 23%, increase in interest expense from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 was primarily due to the impact of higher interest rates on our Term Loan Facility, which had an effective interest rate of 7.44% as of October 31, 2023, up from 6.38% as of October 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 $343.4 million as of October 31, 2023 and 2022, respectively.

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

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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 $2.7 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.

Other income, net

The $3.3 million increase in other income, net, from $0.4 million during the three months ended October 31, 2022 to $3.7 million during the three months ended October 31, 2023 was primarily due to an increase in interest income on corporate cash.

The $8.2 million increase in other income, net, from $0.2 million during the nine months ended October 31, 2022 to $8.3 million during the nine months ended October 31, 2023 was primarily due to a $7.2 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 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.

For the three months ended October 31, 2023 and 2022, we recorded an income tax provision of $6.4 million and an income tax benefit of $4.5 million, respectively.

The increase in income tax provision was primarily the result of

an increase in pre-tax book income, an increase in unrecognized tax benefits, and adjustments from settlement of an IRS examination, partially offset by return-to-provision adjustments on research and development tax credits.

For the nine months ended October 31, 2023 and 2022, we recorded an income tax provision of $16.0 million and an income tax benefit of $12.2 million, respectively.

The increase in income tax provision was primarily the result of an increase in pre-tax book income, an increase in unrecognized tax benefits, adjustments from settlement of an IRS examination, and a decrease in tax deductible stock-based compensation compared to GAAP stock-based compensation expense, partially offset by return-to-provision adjustments on 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, 2023 and January 31, 2023, cash and cash equivalents were $290.3 million and $254.3 million, respectively.

As of October 31, 2023 and January 31, 2023, cash and cash equivalents were $334.1 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 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.

As of October 31, 2023, there were no amounts outstanding under the Revolving Credit Facility.

In connection with the BenefitWallet HSA portfolio acquisition, which is expected to close in multiple tranches during the first half of fiscal 2025, we expect to borrow approximately 50% of the purchase price and related costs using our Revolving Credit Facility with the actual percentages to be determined in connection with the payment for each tranche.

We were in compliance with all covenants under the credit agreement as of October 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.

Capital expenditures for the nine months ended October 31, 2023 and 2022 were $31.5 million and $38.3 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:

Six months ended July 31,

Nine months ended October 31,

(in thousands) 2023 2022

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Cash flows from operating activities.

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.

Net cash provided by operating activities increased by $70.6 million from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 primarily due to increased collections with respect to our custodial revenue and a decrease in cash payments made to our accounts payable, accrued liabilities, and other current liabilities during the nine months ended October 31, 2023.

Cash flows from investing activities.

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.

Net cash used in investing activities decreased by $74.0 million from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 due to a $67.3 million decrease in cash used in HSA portfolio acquisitions, a $4.9 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 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.

Net cash used in financing activities increased by $49.6 million from the nine months ended October 31, 2022 to the nine months ended October 31, 2023 due to a $47.8 million increase in principal payments on our long-term debt, which includes the $50.0 million of cash used to prepay, in direct order of maturity, principal due under our Term Loan Facility, and a $3.2 million decrease in proceeds from the exercise of common stock options.

These changes were partially offset by a $1.4 million decrease in net payments made in the settlement of client-held funds obligations.

Contractual obligations

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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.

As of October 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.

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The letters of credit are contingent liabilities, supported by our Revolving Credit Facility, and are not reflected on our condensed consolidated balance sheets.

Critical accounting policies and significant management estimates

Critical accounting estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

On an ongoing basis, we evaluate our critical accounting policies and estimates.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions and conditions.

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 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.

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

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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