What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-06-03 compared with 2023-12-05 · 200 added, 154 removed, 267 unchanged (57% of the section changed)

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Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements.

Such statements include, but are not limited to, statements concerning our ability to integrate acquired businesses, the impact on the Company of societal and economic changes arising out of the COVID-19 pandemic, the anticipated synergies and other benefits of acquired businesses and any future acquisitions, health savings accounts and other tax-advantaged consumer-directed benefits, tax and other regulatory changes, market opportunity, our future financial and operating results, our investment and acquisition strategy, our sales and marketing strategy, management’s plans, beliefs and objectives for future operations, technology and development, economic and industry trends or trend analysis, expectations about seasonality, opportunity for portfolio purchases and other acquisitions, operating expenses, anticipated income tax rates, capital expenditures, cash flows and liquidity.

Such statements include, but are not limited to, statements concerning our ability to integrate acquired businesses, the anticipated synergies and other benefits of acquired businesses and any future acquisitions, health savings accounts and other tax-advantaged consumer-directed benefits, tax and other regulatory changes, market opportunity, our future financial and operating results, our investment and acquisition strategy, our sales and marketing strategy, management’s plans, beliefs and objectives for future operations, technology and development, economic and industry trends or trend analysis, expectations about seasonality, opportunity for portfolio purchases and other acquisitions, operating expenses, anticipated income tax rates, capital expenditures, cash flows and liquidity.

These statements are based on the beliefs and assumptions of our management based on information currently available to us.

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, this Quarterly Report on Form 10-Q for the quarterly period ended October 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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We use our innovative technology to manage consumers' tax-advantaged health savings accounts ("HSAs") and other consumer-directed benefits ("CDBs") offered by employers, including flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”), and to administer Consolidated Omnibus Budget Reconciliation Act (“COBRA”), commuter and other benefits.

As part of our services, we provide consumers with healthcare bill evaluation and payment processing services, personalized benefit information, including information on treatment options and comparative pricing, access to remote and telemedicine benefits, the ability to earn wellness incentives, and investment advice to grow their tax-advantaged healthcare savings.

As part of our services, we provide consumers with payment processing services, personalized benefit information, the ability to earn wellness incentives, and investment advice to grow their tax-advantaged healthcare savings.

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 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.

As of April 30, 2024, we administered 9.1 million HSAs, with balances totaling $27.3 billion, which we call HSA Assets, as well as 6.9 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 16.0 million as of April 30, 2024.

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 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.

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

According to Devenir, as of December 2023, we were the largest HSA provider by both accounts and HSA Assets.

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

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We earn service revenue mainly from fees paid by our Network Partners, Clients, and members for the administration services we provide in connection with the HSAs and other CDBs we offer.

We earn custodial revenue primarily from HSA Assets held by our federally insured bank and credit union partners, which we collectively call our Depository Partners, or our insurance company partners, recordkeeping fees we earn in respect of mutual funds in which our members invest, and Client-held funds deposited with our Depository Partners.

We earn custodial revenue primarily from HSA cash held by our federally insured bank and credit union partners, which we collectively call our Depository Partners, HSA cash held by our insurance company partners, and Client-held funds deposited with our Depository Partners.

We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and on our virtual payment system.

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.

See “Key components of our results of operations” for additional information on our sources of revenue.

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.

In September 2023, we entered into an agreement to acquire the BenefitWallet HSA portfolio from Conduent Business Services, LLC ("Conduent").

The transfer closed in a series of three tranches, as presented in the following table:

Transfers to HealthEquity Applicable purchase price

(in thousands, except HSA Assets) HSAs HSA Assets

(in millions) Paid using cash on hand Paid using borrowings under the Revolving Credit Facility Total purchase price

March 7, 2024 266 $ 1,071 $ 163,974 $ — $ 163,974

April 11, 2024 134 555 34,925 50,000 84,925

May 9, 2024 216 1,047 1,101 175,000 176,101

Total 616 $ 2,673 $ 200,000 $ 225,000 $ 425,000

The BenefitWallet HSA portfolio acquisition was accounted for as an asset acquisition, and related acquisition costs were capitalized as part of the cost of the asset, which is included within intangible assets, net, on our condensed consolidated balance sheet.

We capitalized $11.7 million and $15.5 million of transaction costs associated with the acquisition during the three months ended April 30, 2024 and in May 2024, respectively.

Total capitalized transaction costs of $27.2 million include the reimbursement of $20.0 million of Conduent's transfer-related expenses.

In addition, in May 2024, we assumed a contract with a Depository Partner representing approximately 7% of the total HSA Assets added through the acquisition, which provides a custodial yield that is below current market rates and expires in June 2026.

We recorded a $20.3 million liability in May 2024 as a result of the assumed contract, which will be recorded as an increase to custodial revenue over the life of the assumed contract.

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, this Quarterly Report on Form 10-Q for the quarterly period ended October 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, 2024 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, including through the pending BenefitWallet HSA portfolio acquisition.

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

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

We have developed an internal capability to source, evaluate, and integrate acquired HSA portfolios.

Our success depends in part on our ability to successfully integrate acquired businesses and HSA portfolios with our business in an efficient and effective manner and to realize anticipated synergies.

Our success depends in part on our ability to successfully integrate acquired businesses and HSA portfolios with our business in an efficient and effective manner.

Structural change in U.S.

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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.

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

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

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

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Our sales force calls on enterprise and regional employers in industries across the U.S., as well as potential Network Partners from among health plans, benefits administrators, and retirement plan record keepers.

Our Network Partners are a key channel through which we gain access to Clients and members.

Our Network Partners collectively employ thousands of sales representatives and account managers who promote both the Network Partners' products and our products and services.

Our sales representatives and account management teams work with and train the sales representatives and account management teams of our Network Partners.

Product breadth

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

For the reasons described below, we have been taking steps to encourage our members to place more of their HSA cash in our Enhanced Rates offering.

As our Basic Rates contracts expire, the HSA cash held in those Basic Rates contracts will transition to Enhanced Rates contracts, subject to our members retaining the right to keep their HSA cash in Basic Rates.

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

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

We believe that diversification of Depository Partners and insurance company partners, varied contract terms, and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue.

We believe that increased participation in our Enhanced Rates offering, diversification of Depository Partners and insurance company partners, varied contract terms, and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing

interest rates on our custodial revenue.

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.

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

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

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

Recent interest rate increases have caused interest expense related to our credit facilities to increase substantially.

Our proprietary technology

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

Our full suite of CDB offerings complements our HSA solution and

enhances our leadership position within the HSA sector.

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

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

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

We are currently investing in a significant modernization of our proprietary technology platforms to support new opportunities and enhance security, privacy and platform infrastructure, while maintaining existing applications, features, and services.

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

In addition, we are investing in technology solutions to meet the evolving needs of our members, Clients and Network Partners.

Our current innovation efforts include, among others, increasing member and client self-service capabilities, developing APIs, driving electronic communication rather than paper, increasing straight-through processing, improving overall process times utilizing both traditional robotic process automation, and increasingly through AI tools, leveraging stacked cards, and mobile wallet.

Our Purple culture

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In addition, numerous indirect competitors, including benefits administration service providers, partner with banks and other HSA custodians to compete with us.

Our Network Partners may also choose to offer competitive services directly, as some health plans have done.

Our Network Partners and ecosystem partners may also choose to offer competitive services directly, as some health plans have done.

Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics.

As a result of the COVID-19 pandemic, we have seen a significant decline in the use of commuter benefits due to many of our members working from home, which has negatively impacted both our interchange revenue and service revenue, and this "work from home" trend, or hybrid work environments, may continue indefinitely.

Regulatory environment

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Key financial and operating metrics

Our management regularly reviews a number of key operating and financial metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business.

We regularly review a number of key operating and financial metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business.

We discuss certain of these key financial metrics, including revenue, below in the section entitled “Key components of our results of operations.” In addition, we utilize other key metrics as described below.

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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) October 31, 2023 October 31, 2022 % Change January 31, 2023

(in thousands, except percentages) April 30, 2024 April 30, 2023 % Change January 31, 2024

HSAs 9,097 8,045 13 % 8,692

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Average Total Accounts - Year-to-date 15,919 14,980 6 % 15,105

* Not meaningful

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 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 number of our HSAs increased by 1.1 million, or 13%, from April 30, 2023 to April 30, 2024, driven by new HSAs from sales and new HSAs added through the first two tranches of the BenefitWallet HSA portfolio acquisition.

The number of our CDBs decreased by 41 thousand, or 1%, from April 30, 2023 to April 30, 2024, primarily driven by a decrease in FSA and COBRA accounts, partially offset by increases in HRA and commuter accounts.

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

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

(in millions, except percentages) April 30, 2024 April 30, 2023 % Change January 31, 2024

HSA cash $ 15,850 $ 14,113 12 % $ 15,006

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

(i) HSA cash, which includes cash deposits held by our Depository Partners and our insurance company partners, and (ii) HSA investments in mutual funds through our custodial investment fund partners.

(i) HSA cash, which includes member cash held by our Depository Partners and our insurance company partners, and (ii) HSA investments, which includes member investments held by our custodial investment partner.

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 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.

HSA cash increased by $1.7 billion, or 12%, from April 30, 2023 to April 30, 2024, due to net HSA contributions from new and existing HSA members and HSA cash added through the first two tranches of the BenefitWallet HSA portfolio acquisition, partially offset by transfers to HSA investments.

HSA investments increased by $3.2 billion, or 39%, from April 30, 2023 to April 30, 2024, due to HSA investments added through the first two tranches of the BenefitWallet HSA portfolio acquisition, the increased market value of invested balances, and transfers from HSA cash.

Total HSA Assets increased by $5.0 billion, or 22%, from April 30, 2023 to April 30, 2024, primarily due to net HSA contributions from new and existing HSA members, HSA Assets added through the first two tranches of the BenefitWallet HSA portfolio acquisition, and the increased market value of invested balances.

The following table summarizes the amount of HSA cash held by our Depository Partners and insurance company partners that is expected to reprice by fiscal year and the respective average annualized yield currently earned on that HSA cash as of April 30, 2024:

Year ending January 31, (in billions, except percentages) HSA cash expected to reprice Average annualized yield

Remainder of 2025 $ 1.8 3.7 %

2026 3.3 1.7 %

2027 3.0 1.7 %

2028 1.9 3.9 %

Thereafter 5.1 3.9 %

Total (1) $ 15.1 3.0 %

(1) Excludes $0.8 billion of HSA cash held in floating-rate contracts as of April 30, 2024.

BenefitWallet HSA Assets transferred to HealthEquity on May 9, 2024 are also excluded.

Client-held funds

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

(in millions, except percentages) April 30, 2024 April 30, 2023 % Change January 31, 2024

Client-held funds $ 858 $ 926 (7) % $ 842

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Adjusted EBITDA

We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, amortization of incremental costs to obtain a contract, costs associated with unused office space, and certain other non-operating items.

We define Adjusted EBITDA, which is a non-GAAP financial metric, as earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, amortization of incremental costs to obtain a contract, costs associated with unused office space, and certain other non-operating items.

We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses and serves as a basis for comparison against other companies in our industry.

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 October 31, Nine months ended October 31,

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

Three months ended April 30,

(in thousands) 2024 2023

Net income (loss) $ 14,673 $ (1,641) $ 29,348 $ (25,934)

Net income $ 28,813 $ 4,094

Interest income (3,881) (1,598)

Interest expense 11,795 14,997

Income tax provision (benefit) 6,414 (4,539) 15,975 (12,170)

Income tax provision 4,426 5,918

Depreciation and amortization 13,393 15,875

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Merger integration expenses 2,143 3,458

Acquisition costs — — — 53

Amortization of incremental costs to obtain a contract 1,632 1,304

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Adjusted EBITDA $ 117,435 $ 86,587

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

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

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

Net income (loss) $ 14,673 $ (1,641) $ 16,314 * $ 29,348 $ (25,934) $ 55,282 *

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

Three months ended April 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

Net income $ 28,813 $ 4,094 $ 24,719 604%

As a percentage of revenue 10 % 2 %

* Not meaningful

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."

Our net income increased by $24.7 million, from $4.1 million for the three months ended April 30, 2023 to $28.8 million for the three months ended April 30, 2024, due to an increase in gross profit and decreases in other expense and income tax provision, partially offset by a net increase in operating expenses, as described more fully in the section entitled "Comparison of the three months ended April 30, 2024 and 2023."

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

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

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

Three months ended April 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

Adjusted EBITDA $ 117,435 $ 86,587 $ 30,848 36 %

As a percentage of revenue 41 % 35 %

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 Adjusted EBITDA increased by $30.8 million, or 36%, from $86.6 million for the three months ended April 30, 2023 to $117.4 million for the three months ended April 30, 2024, primarily due to an increase in total revenue, partially offset by increases in personnel-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.

Non-GAAP net income

Non-GAAP net income is calculated by adding back to GAAP net income before income taxes the following items:

amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, costs associated with unused office space, and losses on extinguishment of debt, and subtracting a non-GAAP tax provision using a normalized non-GAAP tax rate.

We believe that non-GAAP net income and non-GAAP net income per diluted share provide useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because these non-GAAP metrics reflect operating profitability before consideration of certain non-operating expenses and non-cash expenses and serve as a basis for comparison against other companies in our industry.

The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to non-GAAP net income for the periods indicated:

Three months ended April 30,

(in thousands, except per share data) 2024 2023

Net income $ 28,813 $ 4,094

Income tax provision 4,426 5,918

Income before income taxes - GAAP 33,239 10,012

Non-GAAP adjustments:

Amortization of acquired intangible assets 25,545 23,166

Stock-based compensation expense 32,020 18,204

Merger integration expenses 2,143 3,458

Costs associated with unused office space 790 1,016

Loss on extinguishment of debt — 1,157

Total adjustments to income before income taxes - GAAP 60,498 47,001

Income before income taxes - Non-GAAP 93,737 57,013

Income tax provision - Non-GAAP (1) 23,434 14,253

Non-GAAP net income 70,303 42,760

Diluted weighted-average shares 88,324 86,102

GAAP net income per diluted share $ 0.33 $ 0.05

Non-GAAP net income per diluted share $ 0.80 $ 0.50

(1) The Company utilizes a normalized non-GAAP tax rate to provide better consistency across the interim reporting periods within a given fiscal year by eliminating the effects of non-recurring and period-specific items, which can vary in size and frequency, and which are not necessarily reflective of the Company’s longer-term operations.

The normalized non-GAAP tax rate applied to each period presented was 25%.

The Company may adjust its non-GAAP tax rate as additional information becomes available and in conjunction with any other significant events occurring that may materially affect this rate, such as merger and acquisition activity, changes in business outlook, or other changes in expectations regarding tax regulations.

Our non-GAAP net income increased by $27.5 million, or 64%, from the three months ended April 30, 2023 to the three months ended April 30, 2024, primarily due to an increase in total revenue, partially offset by increases in personnel-related costs and interest expense.

Our use of non-GAAP net income has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Key components of our results of operations

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With respect to our Network Partners and Clients, our fees are generally based on a fixed tiered structure for the duration of the relevant service agreement and are paid to us on a monthly basis.

In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA Assets through our investment partner from

which we earn recordkeeping and advisory fees, calculated as a percentage of the member's HSA investments.

We recognize revenue on a monthly basis as services are rendered to our members and Clients.

Custodial revenue.

We earn custodial revenue primarily from HSA Assets held by our Depository Partners or our insurance company partners, recordkeeping fees we earn in respect of mutual funds in which our members invest, and Client-held funds deposited with our Depository Partners.

We earn custodial revenue primarily from HSA cash held by our Depository Partners or our insurance company partners and Client-held funds held by our Depository Partners.

HSA cash is held by our Depository Partners pursuant to contracts that (i) typically have terms ranging from three to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances held by the relevant Depository Partner, and (iii) have minimum and maximum required balances.

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Client-held funds held by our Depository Partners are held in interest-bearing demand deposit accounts that have a floating interest rate and no set term or duration.

We earn custodial revenue on HSA Assets and Client-held funds that is based on the interest rates offered to us by these Depository Partners and insurance company partners.

In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA Assets in mutual funds through our custodial investment partner from which we earn a recordkeeping fee, calculated as a percentage of custodial investments.

We earn custodial revenue on HSA cash and Client-held funds that is based on the interest rates offered to us by these Depository Partners and insurance company partners.

Interchange revenue.

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Cost of revenue

Cost of revenue includes costs related to servicing accounts, managing Client and Network Partner relationships and processing reimbursement claims.

Expenditures include personnel-related costs, depreciation, amortization, stock-based compensation, common expense allocations (such as office rent, supplies, and other overhead expenses), new member and participant supplies, and other operating costs related to servicing our members.

Other components of cost of revenue include interest retained by members on HSA cash and interchange costs incurred in connection with processing card transactions for our members.

Service costs.

Service costs include the servicing costs described in the paragraph above.

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

Service costs are comprised of costs related to servicing accounts, managing Client and Network Partner relationships and processing reimbursement claims.

Custodial costs.

Custodial costs are comprised of interest retained by our HSA members, in respect of HSA cash, personnel-related costs, and fees we pay to banking consultants whom we use to help secure agreements with our Depository Partners.

Custodial costs are comprised of interest retained by our HSA members on HSA cash and fees we pay to banking consultants whom we use to help secure agreements with our Depository Partners.

Interest retained by HSA members is calculated on a tiered basis.

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Amortization of acquired intangible assets results primarily from intangible assets acquired in connection with business combinations.

The assets include acquired customer relationships, acquired developed technology, and acquired trade names and trademarks, which we amortize over the assets' estimated useful lives, estimated to be 7-15 years, 2-5 years, and 3 years, respectively.

The assets include acquired customer relationships, acquired developed technology, and acquired trade names and trademarks, which we amortize over

the assets' estimated useful lives, estimated to be 7-15 years, 2-5 years, and 3 years, respectively.

We also acquired intangible HSA portfolios from third-party custodians.

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Interest expense

Interest expense primarily consists of accrued interest expense and amortization of deferred financing costs associated with our long-term debt.

Interest expense consists primarily of accrued interest expense and amortization of deferred financing costs associated with our long-term debt.

Interest on our term loan facility and revolving credit facility (together, the “Credit Facilities”) 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.

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)

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

Income tax provision

We are subject to federal and state income taxes in the United States based on a January 31 fiscal year end.

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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 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.

As of April 30, 2024, 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 nine months ended October 31, 2023 and 2022

Comparison of the three months ended April 30, 2024 and 2023

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

The reclassifications relate primarily to recordkeeping and advisory fees associated with HSA investments, which were reclassified from custodial revenue to service revenue to better align our financial statement presentation with the underlying drivers of our revenue streams.

We also reclassified certain immaterial personnel-related costs from custodial costs to service costs or general and administrative costs.

The reclassifications had no impact on our total revenue, income from operations, net income, cash flows, or stockholders' equity.

The following table presents the impact of the reclassifications:

Three months ended April 30, 2023

(in thousands) Prior presentation Reclassifications Current presentation

Service revenue $ 105,112 $ 5,961 $ 111,073

Custodial revenue 94,441 (5,961) 88,480

Interchange revenue 44,879 — 44,879

Total revenue 244,432 — 244,432

Total cost of revenue 96,606 (644) 95,962

Gross profit 147,826 644 148,470

Total operating expenses 124,645 644 125,289

Total other expense (13,169) — (13,169)

Income tax provision 5,918 — 5,918

Net income $ 4,094 $ — $ 4,094

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

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

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

Three months ended April 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

Service revenue $ 118,214 $ 111,073 $ 7,141 6 %

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Service revenue.

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.

The $7.1 million, or 6%, increase in service revenue from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to the increases in the number of HSAs and the amount of HSA investments.

We expect service revenue to continue to increase, primarily due to an increase in Total Accounts, partially offset by lower average service fees per account.

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.

The $33.2 million, or 37%, increase in custodial revenue from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to an increase in average annualized yield on HSA cash from 2.32% for the three months ended April 30, 2023 to 2.93% for the three months ended April 30, 2024 (due to both higher market interest rates and increased participation in our Enhanced Rates offering), the $1.3 billion, or 9%, increase in the 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.

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.

As Basic Rates contracts mature, we intend to transfer the associated HSA cash into Enhanced Rates contracts unless the HSA member affirmatively opts to remain in the Basic Rates offering.

Interchange revenue.

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.

The $2.9 million, or 6%, increase in interchange revenue from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to an increase in Total Accounts.

Total revenue.

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.

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.

We saw a negative impact on the financial results related to our COBRA product, as the Employee Benefits Security Administration provided disaster relief in the form of an extension to the required timeline for participants to make COBRA elections, which we believe resulted in fewer COBRA elections by our members because they had more time to assess the cost of their out-of-pocket expenses against the cost of COBRA premiums.

The national emergency under which the disaster relief was provided ended in April 2023;

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

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.

Total revenue increased $43.2 million, or 18%, from the three months ended April 30, 2023 to the three months ended April 30, 2024 due to the increases in custodial, service, and interchange revenues, described above.

Cost of revenue

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

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

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

Three months ended April 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

Service costs $ 82,347 $ 80,873 $ 1,474 2 %

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Service 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.

The $1.5 million, or 2%, increase in service costs from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to increases in personnel-related costs to support the increase in Total Accounts, partially offset by efficiencies resulting from our technology investments and lower amortization expense.

Custodial costs.

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.

The $1.0 million, or 13%, increase in custodial costs from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to the $1.3 billion, or 9%, increase in the year-over-year average daily balance of HSA cash, as described above, and an increase in fees charged by our Depository Partners.

On an annual basis, relative to the fiscal year ended January 31, 2024, we expect custodial costs to increase due to an increase in the year-over-year average daily balance of HSA cash and an increase in the average annualized rate of interest retained by HSA members on HSA cash.

Interchange costs.

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.

The $2.0 million, or 28%, increase in interchange costs from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to an increase in Total Accounts and certain costs associated with our transition to a single card processor, which transition is expected to be completed during the three months ending July 31, 2024.

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.

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.

However, on an annual basis, relative to the fiscal year ended January 31, 2024, 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 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, and account management functions.

Operating expenses

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

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

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

Three months ended April 30,

(in thousands, except percentages) 2024 2023 $ Change % Change

Sales and marketing $ 23,494 $ 19,935 $ 3,559 18 %

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Sales and marketing.

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.

The $3.6 million, or 18%, increase in sales and marketing expenses from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to an increase in personnel-related expenses.

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 $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.

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.

The $2.9 million, or 5%, increase in technology and development expenses from the three months ended April 30, 2023 to the three months ended April 30, 2024 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, including our ongoing modernization project described earlier.

On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our technology and development expenses to decrease slightly 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 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.

The $12.7 million, or 50%, increase in general and administrative expenses from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to accelerated stock-based compensation expense recognized with respect to certain performance restricted stock units granted during the current fiscal year, as described in Note 8—Stock-based compensation, and increases in other personnel-related expenses and professional services expense, 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.

On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our general and administrative expenses to increase as a percentage of our total revenue, primarily due to the increase in stock-based compensation expense during the three months ended April 30, 2024.

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 $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.

The $2.4 million, or 10%, increase in amortization of acquired intangible assets from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to the new intangible assets added through the BenefitWallet HSA portfolio acquisition.

On an annual basis, relative to the fiscal year ended January 31, 2024, we expect amortization of acquired intangible assets to increase, primarily due to the intangible assets added through BenefitWallet HSA portfolio acquisition.

Merger integration.

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.

Merger integration expense decreased $1.3 million, or 38%, from the three months ended April 30, 2023 to the three months ended April 30, 2024.

The $2.1 million in merger integration expense for the three months ended April 30, 2024 was primarily due to professional fees, personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, and technology-related expenses directly related to the Further acquisition and certain ongoing merger integration expenses related to the acquisition of WageWorks.

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 $1.4 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.

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.

The $3.2 million, or 21%, decrease in interest expense from the three months ended April 30, 2023 to the three months ended April 30, 2024 was primarily due to a lower average principal balance under our Credit Facilities during the three months ended April 30, 2024 and a non-recurring $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.

These decreases were partially offset by the impact of higher interest rates on our Credit Facilities, which had a stated interest rate of 6.67% as of April 30, 2024, up from 6.56% as of April 30, 2023.

Our Credit Facilities had an outstanding principal balance of $336.9 million and $286.9 million as of April 30, 2024 and 2023, respectively.

The increase was due to $50.0 million of borrowings under our revolving credit facility during the three months ended April 30, 2024 to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price.

On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our interest expense to increase, primarily due to the additional borrowings under our revolving credit facility to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price.

The additional borrowings included $50.0 million and $175.0 million during the three months ended April 30, 2024 and in May 2024, respectively.

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

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 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.

The $1.6 million increase in other income, net, from $1.8 million during the three months ended April 30, 2023 to $3.4 million during the three months ended April 30, 2024 was due to a $2.3 million increase in interest income on corporate cash, partially offset by a $0.7 million increase in other expense, net.

Income tax provision

For the three months ended April 30, 2024 and 2023, we recorded an income tax provision of $4.4 million and $5.9 million, respectively.

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

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

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Cash and cash equivalents overview

Our principal sources of liquidity are our current cash and cash equivalents balances, collections from our service, custodial, and interchange revenue activities, and availability under our Revolving Credit Facility (as defined below).

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 October 31, 2023 and January 31, 2023, cash and cash equivalents were $334.1 million and $254.3 million, respectively.

As of April 30, 2024 and January 31, 2024, cash and cash equivalents were $251.2 million and $404.0 million, respectively.

Capital resources

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In addition, we may conduct concurrent or other financings at any time.

Our credit agreement includes a five-year senior secured revolving credit facility (the “Revolving Credit Facility”), in an aggregate principal amount of up to $1.0 billion, which may be used for working capital and general corporate purposes, including the financing of acquisitions and other investments.

Our credit agreement includes a five-year senior secured revolving credit facility, in an aggregate principal amount of up to $1.0 billion, which may be used for working capital and general corporate purposes, including the financing of acquisitions and other investments.

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

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 nine months ended October 31, 2023 and 2022 were $31.5 million and $38.3 million, respectively.

As of April 30, 2024, the amount outstanding under the revolving credit facility was $50.0 million.

In May 2024, we borrowed an additional $175.0 million under our revolving credit facility, which was used to pay for the third tranche of the BenefitWallet HSA portfolio acquisition.

We were in compliance with all covenants under the credit agreement as of April 30, 2024, and for the period then ended.

We continue to be in compliance with all covenants under the Credit Agreement through the filing date of this Quarterly Report on Form 10-Q.

During the three months ended April 30, 2024, we used $256.1 million of cash, which includes $50.0 million borrowed under our revolving credit facility, to pay for the first two tranches of the BenefitWallet HSA portfolio acquisition.

Capital expenditures for the three months ended April 30, 2024 and 2023 were $13.8 million and $9.1 million, respectively.

We expect to continue our current level of capital expenditures for the remainder of the fiscal year ending January 31, 2025 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:

Nine months ended October 31,

Three months ended April 30,

(in thousands) 2024 2023

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Net cash used in investing activities (269,950) (9,135)

Net cash used in financing activities (51,154) (1,525)

Increase (decrease) in cash and cash equivalents 79,795 (15,217)

Net cash provided by (used in) financing activities 51,771 (51,027)

Decrease in cash and cash equivalents (152,750) (28,624)

Beginning cash and cash equivalents 403,979 254,266

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Cash flows from operating activities.

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.

Net cash provided by operating activities increased by $33.9 million from the three months ended April 30, 2023 to the three months ended April 30, 2024 primarily due to increased cash receipts with respect to our custodial revenue.

Cash flows from investing activities.

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.

Net cash used in investing activities increased by $260.8 million from the three months ended April 30, 2023 to the three months ended April 30, 2024 due to $256.1 million of cash used to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price, a $4.1 million increase in cash used for purchases of software and capitalized software development costs, and a $0.6 million increase in cash used for purchases of property and equipment.

Cash flows from financing activities.

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.

Net cash provided by financing activities was $51.8 million during the three months ended April 30, 2024, compared to $51.0 million of net cash used in financing activities during the three months ended April 30, 2023.

The change was due to a $54.4 million decrease in principal payments on our long-term debt, $50.0 million of borrowings under our revolving credit facility during the three months ended April 30, 2024 to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price, and a $1.4 million increase in proceeds from the exercise of common stock options.

These changes were partially offset by a $3.0 million increase in net payments made in the settlement of client-held funds obligations.

Contractual obligations

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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.

As of April 30, 2024, 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 estimates

Critical accounting policies and significant management 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.

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Our significant accounting policies are more fully described in Note 1 of the accompanying unaudited condensed consolidated financial statements and in Note 1 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024.

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.

There have been no significant or material changes in our critical accounting policies during the three months ended April 30, 2024, 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, 2024.

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