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Item 2. Management’s Discussion and Analysis

2024-09-03 compared with 2024-06-03 · 110 added, 92 removed, 375 unchanged (35% 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, 2024 and our other reports filed with the SEC.

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

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

As of April 30, 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.

As of July 31, 2024, we administered 9.4 million HSAs, with balances totaling $29.5 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 16.3 million as of July 31, 2024.

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

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(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

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

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

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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.

We capitalized $27.2 million of transaction costs associated with the acquisition during the six months ended July 31, 2024, which includes 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.

We recorded deferred revenue of $20.3 million 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, 2024 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, this Quarterly Report on Form 10-Q and our other reports filed with the SEC.

Our acquisition and integration strategy

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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.

For the reasons described below, we have encouraged 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.

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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.

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.

Interest on our revolving credit 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.

Our proprietary technology

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

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

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

HSAs 9,383 8,164 15 % 8,692

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

The number of our HSAs increased by 1.1 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 number of our HSAs increased by 1.2 million, or 15%, from July 31, 2023 to July 31, 2024, driven by new HSAs added through the BenefitWallet HSA portfolio acquisition and new HSAs from sales.

The number of our CDBs increased by 67 thousand, or 1%, from July 31, 2023 to July 31, 2024, primarily driven by an increase in HRA accounts, largely offset by a decrease in FSA and COBRA accounts.

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

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

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

HSA cash $ 16,368 $ 14,021 17 % $ 15,006

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

HSA cash increased by $1.7 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:

HSA cash increased by $2.3 billion, or 17%, from July 31, 2023 to July 31, 2024, due to HSA cash added through the BenefitWallet HSA portfolio acquisition and net HSA contributions from new and existing HSA members, partially offset by transfers to HSA investments.

HSA investments increased by $3.9 billion, or 43%, from July 31, 2023 to July 31, 2024, due to the increased market value of invested balances, transfers from HSA cash, and HSA investments added through the BenefitWallet HSA portfolio acquisition.

Total HSA Assets increased by $6.3 billion, or 27%, from July 31, 2023 to July 31, 2024, primarily due to HSA Assets added through the BenefitWallet HSA portfolio acquisition, the increased market value of invested balances, and net HSA contributions from new and existing HSA members.

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

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Total (1) $ 15.8 3.1 %

(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.

(1) Excludes $0.6 billion of HSA cash held in floating-rate contracts as of July 31, 2024.

Client-held funds

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

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

Client-held funds $ 817 $ 811 1 % $ 842

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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,

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

(in thousands) 2024 2023 2024 2023

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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

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

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

Net income $ 35,822 $ 10,581 $ 25,241 239 % $ 64,635 $ 14,675 $ 49,960 340 %

As a percentage of revenue 12 % 4 % 11 % 3 %

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."

Our net income increased by $25.2 million, or 239%, from the three months ended July 31, 2023 to the three months ended July 31, 2024, due to an increase in gross profit, partially offset by increases in operating expenses, income tax provision, and other expense, as described more fully in the section entitled "Comparison of the three and six months ended July 31, 2024 and 2023."

Our net income increased by $50.0 million, or 340%, from the six months ended July 31, 2023 to the six months ended July 31, 2024, due to an increase in gross profit and a decrease in other expense, partially offset by 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, 2024 and 2023."

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

Three months ended April 30,

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

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

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

Adjusted EBITDA $ 128,287 $ 88,111 $ 40,176 46 % $ 245,722 $ 174,698 $ 71,024 41 %

As a percentage of revenue 43 % 36 % 42 % 36 %

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 Adjusted EBITDA increased by $40.2 million, or 46%, from the three months ended July 31, 2023 to the three months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in professional fees and personnel-related costs.

Our Adjusted EBITDA increased by $71.0 million, or 41%, from the six months ended July 31, 2023 to the six months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in professional fees and 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.

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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,

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

(in thousands, except per share data) 2024 2023 2024 2023

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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 non-GAAP net income increased by $30.7 million, or 67%, from the three months ended July 31, 2023 to the three months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in personnel-related costs and interest expense.

Our non-GAAP net income increased by $58.3 million, or 66%, from the six months ended July 31, 2023 to the six months ended July 31, 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.

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

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.

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.

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

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

Income tax provision

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

As of April 30, 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.

As of July 31, 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 months ended April 30, 2024 and 2023

Comparison of the three and six months ended July 31, 2024 and 2023

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

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The following table presents the impact of the reclassifications:

Three months ended April 30, 2023

(in thousands) Prior presentation Reclassifications Current presentation

Three months ended July 31, 2023 Six months ended July 31, 2023

(in thousands) Prior presentation Reclassifications Current presentation Prior presentation Reclassifications Current presentation

Service revenue $ 105,719 $ 6,241 $ 111,960 $ 210,831 $ 12,202 $ 223,033

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

Three months ended April 30,

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

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

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

Service revenue $ 116,720 $ 111,960 $ 4,760 4 % $ 234,934 $ 223,033 $ 11,901 5 %

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Service revenue.

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.

The $4.8 million, or 4%, increase in service revenue from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to the increases in the number of HSAs and the amount of HSA investments, partially offset by lower average service fees per account.

The $11.9 million, or 5%, increase in service revenue from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to the increases in the number of HSAs and the amount of HSA investments, partially offset by lower average service fees per account.

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 $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.

The $46.0 million, or 50%, increase in custodial revenue from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in average annualized yield on HSA cash from 2.37% for the three months ended July 31, 2023 to 3.10% for the three months ended July 31, 2024 (due to both higher market interest rates and increased participation in our Enhanced Rates offering), the $2.4 billion, or 17%, 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.

The $79.2 million, or 44%, increase in custodial revenue from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in average annualized yield on HSA cash from 2.34% for the six months ended July 31, 2023 to 3.02% for the six months ended July 31, 2024 (due to both higher market interest rates and increased participation in our Enhanced Rates offering), the $1.8 billion, or 13%, 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.

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 with agreements with higher rates, resulting in higher custodial revenue.

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Interchange revenue.

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.

The $5.6 million, or 14%, increase in interchange revenue from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in Total Accounts and an increase in spend per account.

The $8.5 million, or 10%, increase in interchange revenue from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in Total Accounts and an increase in spend per account.

Total revenue.

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.

Total revenue increased $56.4 million, or 23%, from the three months ended July 31, 2023 to the three months ended July 31, 2024 due to the increases in custodial, interchange, and service revenues, described above.

Total revenue increased $99.5 million, or 20%, from the six months ended July 31, 2023 to the six months ended July 31, 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 April 30,

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

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

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

Service costs $ 76,915 $ 76,904 $ 11 0 % $ 159,262 $ 157,777 $ 1,485 1 %

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Service costs.

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.

The $11 thousand, or less than one percent, increase in service costs from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to increases in personnel-related costs to support the increase in Total Accounts, offset by efficiencies resulting from our technology investments and lower amortization expense.

The $1.5 million, or 1%, increase in service costs from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to increases in personnel-related costs to support the increase in Total Accounts, largely offset by efficiencies resulting from our technology investments and lower amortization expense.

Custodial costs.

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.

The $2.1 million, or 26%, increase in custodial costs from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to the $1.8 billion, or 13%, increase in the year-over-year average daily balance of HSA cash, as described above, an increase in fees charged by our Depository Partners, and an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.22% during the three months ended July 31, 2023 to 0.23% during the three months ended July 31, 2024.

The $3.1 million, or 19%, increase in custodial costs from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to the $1.8 billion, or 13%, increase in the year-over-year average daily balance of HSA cash, as described above, an increase in fees charged by our Depository Partners, and an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.22% during the six months ended July 31, 2023 to 0.23% during the six months ended July 31, 2024.

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 $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.

The $1.9 million, or 28%, increase in interchange costs from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in Total Accounts and certain costs associated with our transition to a single card processor, which transition was completed in August 2024.

The $3.9 million, or 28%, increase in interchange costs from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in Total Accounts and certain costs associated with our transition to a single card processor, which transition was completed in August 2024.

Total cost of revenue.

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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.

For the six months ended July 31, 2024, cost of revenue as a percentage of total revenue decreased to 33.4% from 38.5% for the six months ended July 31, 2023, due to total revenue increasing at a significantly higher rate (20%) than total cost of revenue (5%).

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.

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

Three months ended April 30,

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

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

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

Sales and marketing $ 21,525 $ 19,123 $ 2,402 13 % $ 45,019 $ 39,058 $ 5,961 15 %

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Sales and marketing.

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.

The $2.4 million, or 13%, increase in sales and marketing expenses from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in personnel-related expenses.

The $6.0 million, or 15%, increase in sales and marketing expenses from the six months ended July 31, 2023 to the six months ended July 31, 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 $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.

The $3.8 million, or 7%, increase in technology and development expenses from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to increases in personnel-related expenses and software costs.

The $6.7 million, or 6%, increase in technology and development expenses from the six months ended July 31, 2023 to the six months ended July 31, 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.

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General and administrative.

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.

The $4.4 million, or 16%, increase in general and administrative expenses from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to professional services expense.

The $17.1 million, or 32%, increase in general and administrative expenses from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to increases in professional services expense and 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.

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, 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.

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.

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 $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.

The $7.8 million, or 34%, increase in amortization of acquired intangible assets from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to the new intangible assets added through the BenefitWallet HSA portfolio acquisition.

The $10.2 million, or 22%, increase in amortization of acquired intangible assets from the six months ended July 31, 2023 to the six months ended July 31, 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.

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.

Merger integration expense decreased $0.3 million, or 13%, from the three months ended July 31, 2023 to the three months ended July 31, 2024.

The $1.8 million in merger integration expense for the three months ended July 31, 2024 was primarily due to professional fees, 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.

Merger integration expense decreased $1.6 million, or 29%, from the six months ended July 31, 2023 to the six months ended July 31, 2024.

The $3.9 million in merger integration expense for the six months ended July 31, 2024 was primarily due to professional fees, 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 $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.

The $2.2 million, or 16%, increase in interest expense from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to a higher average principal balance under our prior credit facilities (the "Prior Credit Facilities") during the three months ended July 31, 2024.

The increase was partially offset by the impact of lower interest rates on our Prior Credit Facilities, which had a stated interest rate of 6.70% as of July 31, 2024, down from 6.92% as of July 31, 2023.

The $1.0 million, or 4%, decrease in interest expense from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to a non-recurring $1.2 million loss on extinguishment of debt due to the prepayment of $50.0 million under our prior term loan facility (the "Prior Term Loan Facility") during the six months ended July 31, 2023 and the impact of lower interest rates on our Prior Credit Facilities, which had a stated interest rate of 6.70% as of July 31, 2024, down from 6.92% as of July 31, 2023.

The decrease was partially offset by a higher average principal balance under our Prior Credit Facilities during the six months ended July 31, 2024.

Our Prior Credit Facilities had an outstanding principal balance of $511.9 million and $286.9 million as of July 31, 2024 and 2023, respectively.

The increase was due to $225.0 million of borrowings under our prior revolving credit facility (the "Prior Revolving Credit Facility") during the six months ended July 31, 2024 to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price.

On August 23, 2024, we entered into a credit agreement (the "Credit Agreement") pursuant to which the Company established a new five-year senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $1.0 billion, a portion of which was used to repay all outstanding obligations under our prior credit agreement (the "Prior Credit Agreement").

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 used to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price as well as the slightly higher (25 basis points) interest rate under the Revolving Credit Facility as compared to the Prior Credit Facilities.

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

Other income, net

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.

The $0.3 million increase in other income, net, from $2.8 million during the three months ended July 31, 2023 to $3.1 million during the three months ended July 31, 2024 was due to a $0.6 million increase in interest income on corporate cash, partially offset by a $0.3 million decrease in other income, net.

The $1.9 million increase in other income, net, from $4.6 million during the six months ended July 31, 2023 to $6.5 million during the six months ended July 31, 2024 was due to a $2.9 million increase in interest income on corporate cash, partially offset by a $1.0 million decrease in other income, 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.

For the three months ended July 31, 2024 and 2023, we recorded an income tax provision of $10.8 million and $3.6 million, respectively.

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

For the six months ended July 31, 2024 and 2023, we recorded an income tax provision of $15.2 million and $9.6 million, respectively.

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

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

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

As of July 31, 2024 and January 31, 2024, cash and cash equivalents were $326.9 million and $404.0 million, respectively.

Capital resources

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

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

complement our business.

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

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

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.

On August 23, 2024, we entered into a Credit Agreement, which includes a five-year senior secured Revolving Credit Facility in an aggregate principal amount of up to $1.0 billion, a portion of which was used to refinance our Prior Credit Agreement.

The Revolving Credit Facility may be used in the future 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 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.

As of August 23, 2024, the outstanding balance under the Revolving Credit Facility was $511.9 million.

We were in compliance with all covenants under the Prior Credit Agreement as of July 31, 2024, for the period then ended, and through the date on which the Prior Credit Agreement was terminated.

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.

During the six months ended July 31, 2024, we used $452.2 million of cash, which includes $225.0 million borrowed under our Prior Revolving Credit Facility, to pay for the BenefitWallet HSA portfolio acquisition.

Capital expenditures for the six months ended July 31, 2024 and 2023 were $26.8 million and $19.4 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:

Three months ended April 30,

Six months ended July 31,

(in thousands) 2024 2023

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Net cash provided by (used in) financing activities 228,388 (53,182)

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

Increase (decrease) in cash and cash equivalents (77,086) 36,079

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 $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.

Net cash provided by operating activities increased by $64.9 million from the six months ended July 31, 2023 to the six months ended July 31, 2024 primarily due to increased cash receipts with respect to our custodial, interchange, and service revenues, partially offset by an increase in cash payments with respect to operating expenses, cost of revenue, and interest expense.

Cash flows from investing activities.

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.

Net cash used in investing activities increased by $459.6 million from the six months ended July 31, 2023 to the six months ended July 31, 2024 due to $452.2 million of cash used to pay the BenefitWallet HSA portfolio acquisition purchase price, a $6.5 million increase in cash used for purchases of software and capitalized software development costs, and a $0.9 million increase in cash used for purchases of property and equipment.

Cash flows from financing activities.

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.

Net cash provided by financing activities was $228.4 million during the six months ended July 31, 2024, compared to $53.2 million of net cash used in financing activities during the six months ended July 31, 2023.

The change was due to a $225.0 million increase in proceeds from long-term debt, a $54.4 million decrease in principal payments on our long-term debt, and a $2.9 million increase in proceeds from the exercise of common stock options, partially offset by a $0.7 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 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.

As of July 31, 2024, other than outstanding letters of credit issued under our Prior Revolving Credit Facility, we did not have any off-balance sheet arrangements.

Our letters of credit generally expire within one year.

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

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

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.

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