UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 31, 2021~~April 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-36568



HEALTHEQUITY, INC.

(Exact name of registrant as specified in its charter)

Delaware

52-2383166

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

15 West Scenic Pointe Drive

Suite 100

Draper, Utah 84020

(Address of principal executive offices) (Zip code)

(801) 727-1000

(Registrant's telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.0001 per share	HQY	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of ~~August~~May 31, ~~2021,~~2022, there were ~~83,508,975~~84,367,663 shares of the registrant's common stock outstanding.

Table of Contents

HealthEquity, Inc. and subsidiaries

Form 10-Q quarterly report

Table of contents


		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial statements
	Condensed consolidated balance sheets as of ~~July 31, 2021~~April 30, 2022 (unaudited) and January 31, ~~2021~~2022	3
	Condensed consolidated statements of operations and comprehensive ~~income (loss)~~loss for the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~ (unaudited)	4
	Condensed consolidated statements of stockholders' equity for the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~ (unaudited)	5
	Condensed consolidated statements of cash flows for the ~~six~~three months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~ (unaudited)	6
	Notes to condensed consolidated financial statements (unaudited)	8
Item 2.	Management's discussion and analysis of financial condition and results of operations	17
Item 3.	Quantitative and qualitative disclosures about market risk	3230
Item 4.	Controls and procedures	3331
Part II. OTHER INFORMATION
Item 1.	Legal proceedings	3734
Item 1A.	Risk factors	3734
Item 6.	Exhibits	4035
	Signatures	4136

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Part I. Financial information

Item 1. Financial statements

HealthEquity, Inc. and subsidiaries

Condensed consolidated balance sheets


(in thousands, except par value)	(in thousands, except par value)	July 31, 2021		January 31, 2021		(in thousands, except par value)	April 30, 2022		January 31, 2022
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	753,754	$	328,803	Cash and cash equivalents	$	161,247	$	225,414
Accounts receivable, net of allowance for doubtful accounts of $5,824 and $4,239 as of July 31, 2021 and January 31, 2021, respectively		74,223		72,767
Accounts receivable, net of allowance for doubtful accounts of $6,542 and $6,228 as of April 30, 2022 and January 31, 2022, respectively						Accounts receivable, net of allowance for doubtful accounts of $6,542 and $6,228 as of April 30, 2022 and January 31, 2022, respectively	86,003		87,428
Other current assets	Other current assets	32,637		58,607		Other current assets	31,673		38,495
Total current assets	Total current assets	860,614		460,177		Total current assets	278,923		351,337
Property and equipment, net	Property and equipment, net	27,382		29,106		Property and equipment, net	21,003		23,372
Operating lease right-of-use assets	Operating lease right-of-use assets	83,768		89,508		Operating lease right-of-use assets	62,599		63,613
Intangible assets, net	Intangible assets, net	770,329		767,003		Intangible assets, net	1,007,864		973,137
Goodwill	Goodwill	1,363,568		1,327,193		Goodwill	1,645,836		1,645,836
Other assets	Other assets	42,973		37,420		Other assets	48,842		49,807
Total assets	Total assets	$	3,148,634	$	2,710,407	Total assets	$	3,065,067	$	3,107,102
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	4,696	$	1,614	Accounts payable	$	13,661	$	27,541
Accrued compensation	Accrued compensation	40,154		50,670		Accrued compensation	33,405		47,136
Accrued liabilities	Accrued liabilities	49,098		75,880		Accrued liabilities	47,840		57,589
Current portion of long-term debt	Current portion of long-term debt	78,125		62,500		Current portion of long-term debt	10,938		8,750
Operating lease liabilities	Operating lease liabilities	13,051		14,037		Operating lease liabilities	11,807		12,171
Total current liabilities	Total current liabilities	185,124		204,701		Total current liabilities	117,651		153,187
Long-term liabilities	Long-term liabilities					Long-term liabilities
Long-term debt, net of issuance costs		895,449		924,217
Long-term debt, net						Long-term debt, net	918,514		922,077
Operating lease liabilities, non-current	Operating lease liabilities, non-current	69,998		74,224		Operating lease liabilities, non-current	64,344		65,232
Other long-term liabilities	Other long-term liabilities	20,091		8,808		Other long-term liabilities	13,919		14,185
Deferred tax liability	Deferred tax liability	115,306		119,729		Deferred tax liability	95,376		99,846
Total long-term liabilities	Total long-term liabilities	1,100,844		1,126,978		Total long-term liabilities	1,092,153		1,101,340
Total liabilities	Total liabilities	1,285,968		1,331,679		Total liabilities	1,209,804		1,254,527
Commitments and contingencies (see Note 6)	Commitments and contingencies (see Note 6)	0		0		Commitments and contingencies (see Note 6)	0		0
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of July 31, 2021 and January 31, 2021, respectively		—		—
Common stock, $0.0001 par value, 900,000 shares authorized, 83,608 and 77,168 shares issued and outstanding as of July 31, 2021 and January 31, 2021, respectively		8		8
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2022 and January 31, 2022, respectively						Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2022 and January 31, 2022, respectively	—		—
Common stock, $0.0001 par value, 900,000 shares authorized, 84,365 and 83,780 shares issued and outstanding as of April 30, 2022 and January 31, 2022, respectively						Common stock, $0.0001 par value, 900,000 shares authorized, 84,365 and 83,780 shares issued and outstanding as of April 30, 2022 and January 31, 2022, respectively	8		8
Additional paid-in capital	Additional paid-in capital	1,648,743		1,158,372		Additional paid-in capital	1,692,835		1,676,508
Accumulated earnings	Accumulated earnings	213,915		220,348		Accumulated earnings	162,420		176,059
Total stockholders’ equity	Total stockholders’ equity	1,862,666		1,378,728		Total stockholders’ equity	1,855,263		1,852,575
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,148,634	$	2,710,407	Total liabilities and stockholders’ equity	$	3,065,067	$	3,107,102

See accompanying notes to condensed consolidated financial statements.

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HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of operations and

comprehensive ~~income (loss)~~loss (unaudited)


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands, except per share data)	(in thousands, except per share data)	2021		2020		2021		2020		(in thousands, except per share data)	2022		2021
Revenue	Revenue									Revenue
Service revenue	Service revenue	$	109,182	$	103,805	$	211,716	$	215,076	Service revenue	$	104,348	$	102,534
Custodial revenue	Custodial revenue	48,776		46,909		95,754		93,808		Custodial revenue	59,365		46,978
Interchange revenue	Interchange revenue	31,145		25,325		65,835		57,166		Interchange revenue	41,966		34,690
Total revenue	Total revenue	189,103		176,039		373,305		366,050		Total revenue	205,679		184,202
Cost of revenue	Cost of revenue									Cost of revenue
Service costs	Service costs	67,334		65,246		137,966		136,259		Service costs	80,874		70,632
Custodial costs	Custodial costs	4,824		4,998		9,833		10,043		Custodial costs	6,641		5,009
Interchange costs	Interchange costs	4,974		4,011		10,419		9,890		Interchange costs	6,991		5,445
Total cost of revenue	Total cost of revenue	77,132		74,255		158,218		156,192		Total cost of revenue	94,506		81,086
Gross profit	Gross profit	111,971		101,784		215,087		209,858		Gross profit	111,173		103,116
Operating expenses	Operating expenses									Operating expenses
Sales and marketing	Sales and marketing	15,476		12,167		29,562		23,622		Sales and marketing	16,560		14,086
Technology and development	Technology and development	37,898		30,654		73,367		61,732		Technology and development	45,183		35,469
General and administrative	General and administrative	22,812		20,493		43,499		39,491		General and administrative	23,727		20,687
Amortization of acquired intangible assets	Amortization of acquired intangible assets	20,289		19,077		40,103		37,779		Amortization of acquired intangible assets	23,698		19,814
Merger integration	Merger integration	16,371		10,365		25,178		23,135		Merger integration	9,294		8,807
Total operating expenses	Total operating expenses	112,846		92,756		211,709		185,759		Total operating expenses	118,462		98,863
Income (loss) from operations	Income (loss) from operations	(875)		9,028		3,378		24,099		Income (loss) from operations	(7,289)		4,253
Other expense	Other expense									Other expense
Interest expense	Interest expense	(7,254)		(8,895)		(13,943)		(21,158)		Interest expense	(10,461)		(6,689)
Other income (expense), net		344		(824)		(3,286)		(1,588)
Other expense, net										Other expense, net	(301)		(3,630)
Total other expense	Total other expense	(6,910)		(9,719)		(17,229)		(22,746)		Total other expense	(10,762)		(10,319)
Income (loss) before income taxes		(7,785)		(691)		(13,851)		1,353
Loss before income taxes										Loss before income taxes	(18,051)		(6,066)
Income tax benefit	Income tax benefit	(3,967)		(543)		(7,418)		(325)		Income tax benefit	(4,412)		(3,451)
Net income (loss) and comprehensive income (loss)		$	(3,818)	$	(148)	$	(6,433)	$	1,678
Net income (loss) per share:
Net loss and comprehensive loss										Net loss and comprehensive loss	$	(13,639)	$	(2,615)
Net loss per share:										Net loss per share:
Basic	Basic	$	(0.05)	$	0.00	$	(0.08)	$	0.02	Basic	$	(0.16)	$	(0.03)
Diluted	Diluted	$	(0.05)	$	0.00	$	(0.08)	$	0.02	Diluted	$	(0.16)	$	(0.03)
Weighted-average number of shares used in computing net income (loss) per share:
Weighted-average number of shares used in computing net loss per share:										Weighted-average number of shares used in computing net loss per share:
Basic	Basic	83,481		72,343		82,628		71,669		Basic	84,022		81,747
Diluted	Diluted	83,481		72,343		82,628		72,971		Diluted	84,022		81,747

See accompanying notes to condensed consolidated financial statements.

-4-

HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of stockholders’ equity (unaudited)


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		2021		2020		(in thousands)	2022		2021
Total stockholders' equity, beginning balance	Total stockholders' equity, beginning balance	$	1,848,270	$	1,040,650	$	1,378,728	$	1,030,295	Total stockholders' equity, beginning balance	$	1,852,575	$	1,378,728

Common stock:	Common stock:									Common stock:
Beginning balance	Beginning balance	8		7		8		7		Beginning balance	8		8
Issuance of common stock upon exercise of stock options, and for restricted stock	Issuance of common stock upon exercise of stock options, and for restricted stock	—		—		—		—		Issuance of common stock upon exercise of stock options, and for restricted stock	—		—
Other issuance of common stock	Other issuance of common stock	—		1		—		1		Other issuance of common stock	—		—
Ending balance	Ending balance	8		8		8		8		Ending balance	8		8
Additional paid-in capital:	Additional paid-in capital:									Additional paid-in capital:
Beginning balance	Beginning balance	1,630,529		827,303		1,158,372		818,774		Beginning balance	1,676,508		1,158,372
Issuance of common stock upon exercise of stock options, and for restricted stock	Issuance of common stock upon exercise of stock options, and for restricted stock	2,599		1,618		5,315		2,751		Issuance of common stock upon exercise of stock options, and for restricted stock	2,341		2,716
Other issuance of common stock	Other issuance of common stock	(2)		286,777		456,640		286,777		Other issuance of common stock	—		456,642
Stock-based compensation	Stock-based compensation	15,617		11,438		28,416		18,834		Stock-based compensation	13,986		12,799
Ending balance	Ending balance	1,648,743		1,127,136		1,648,743		1,127,136		Ending balance	1,692,835		1,630,529
Accumulated earnings	Accumulated earnings									Accumulated earnings
Beginning balance	Beginning balance	217,733		213,340		220,348		211,514		Beginning balance	176,059		220,348
Net income (loss)		(3,818)		(148)		(6,433)		1,678
Net loss										Net loss	(13,639)		(2,615)
Ending balance	Ending balance	213,915		213,192		213,915		213,192		Ending balance	162,420		217,733

Total stockholders' equity, ending balance	Total stockholders' equity, ending balance	$	1,862,666	$	1,340,336	$	1,862,666	$	1,340,336	Total stockholders' equity, ending balance	$	1,855,263	$	1,848,270

See accompanying notes to condensed consolidated financial statements.

-5-

HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of cash flows (unaudited)


		Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income (loss)		$	(6,433)	$	1,678
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net loss						Net loss	$	(13,639)	$	(2,615)
Adjustments to reconcile net loss to net cash provided by operating activities:						Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	64,819		56,106		Depreciation and amortization	39,486		31,768
Stock-based compensation	Stock-based compensation	28,416		18,834		Stock-based compensation	13,986		12,799
Amortization of debt issuance costs		2,482		2,533
Change in fair value of contingent consideration		1,011		—
Amortization of debt discount and issuance costs						Amortization of debt discount and issuance costs	812		1,228
Other non-cash items	Other non-cash items	(752)		1,145		Other non-cash items	—		893
Deferred taxes	Deferred taxes	(4,051)		(568)		Deferred taxes	(4,470)		3,243
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(230)		628		Accounts receivable, net	1,425		(475)
Other assets	Other assets	20,636		(3,187)		Other assets	7,317		2,249
Operating lease right-of-use assets	Operating lease right-of-use assets	6,060		5,563		Operating lease right-of-use assets	2,034		3,369
Accrued compensation	Accrued compensation	(10,639)		(13,854)		Accrued compensation	(13,731)		(17,748)
Accounts payable, accrued liabilities, and other current liabilities	Accounts payable, accrued liabilities, and other current liabilities	(30,213)		30		Accounts payable, accrued liabilities, and other current liabilities	(24,056)		(381)
Operating lease liabilities, non-current	Operating lease liabilities, non-current	(4,556)		(5,723)		Operating lease liabilities, non-current	(1,821)		(2,308)
Other long-term liabilities	Other long-term liabilities	1,616		5,477		Other long-term liabilities	(266)		(1,104)
Net cash provided by operating activities	Net cash provided by operating activities	68,166		68,662		Net cash provided by operating activities	7,077		30,918
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Acquisitions, net of cash acquired		(49,533)		—
Purchases of software and capitalized software development costs	Purchases of software and capitalized software development costs	(32,097)		(21,787)		Purchases of software and capitalized software development costs	(13,635)		(15,469)
Purchases of property and equipment	Purchases of property and equipment	(6,352)		(8,987)		Purchases of property and equipment	(1,155)		(2,490)
Acquisition of intangible member assets	Acquisition of intangible member assets	(2,653)		(24,922)		Acquisition of intangible member assets	(59,413)		(309)
Proceeds from sale of equity securities		2,367		—
Acquisitions, net of cash acquired						Acquisitions, net of cash acquired	—		(49,533)
Net cash used in investing activities	Net cash used in investing activities	(88,268)		(55,696)		Net cash used in investing activities	(74,203)		(67,801)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from follow-on equity offering, net of payments for offering costs		456,642		287,318
Principal payments on long-term debt	Principal payments on long-term debt	(15,625)		(215,625)		Principal payments on long-term debt	(2,187)		(15,625)
Settlement of client-held funds obligation, net	Settlement of client-held funds obligation, net	(2,636)		(10,292)		Settlement of client-held funds obligation, net	2,335		(353)
Proceeds from exercise of common stock options	Proceeds from exercise of common stock options	6,672		2,817		Proceeds from exercise of common stock options	2,811		4,189
Proceeds from follow-on equity offering, net of payments for offering costs						Proceeds from follow-on equity offering, net of payments for offering costs	—		456,642
Net cash provided by financing activities	Net cash provided by financing activities	445,053		64,218		Net cash provided by financing activities	2,959		444,853
Increase in cash and cash equivalents		424,951		77,184
Increase (decrease) in cash and cash equivalents						Increase (decrease) in cash and cash equivalents	(64,167)		407,970
Beginning cash and cash equivalents	Beginning cash and cash equivalents	328,803		191,726		Beginning cash and cash equivalents	225,414		328,803
Ending cash and cash equivalents	Ending cash and cash equivalents	$	753,754	$	268,910	Ending cash and cash equivalents	$	161,247	$	736,773

See accompanying notes to condensed consolidated financial statements.

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HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of cash flows (unaudited) (continued)


		Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Supplemental cash flow data:	Supplemental cash flow data:					Supplemental cash flow data:
Interest expense paid in cash	Interest expense paid in cash	$	9,838	$	17,659	Interest expense paid in cash	$	15,496	$	4,988
Income tax payments (refunds), net	Income tax payments (refunds), net	(5,545)		798		Income tax payments (refunds), net	55		(4,852)
Supplemental disclosures of non-cash investing and financing activities:	Supplemental disclosures of non-cash investing and financing activities:					Supplemental disclosures of non-cash investing and financing activities:
Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation	Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation	4,077		1,262		Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation	2,917		3,982
Purchases of property and equipment included in accounts payable or accrued liabilities	Purchases of property and equipment included in accounts payable or accrued liabilities	357		1,104		Purchases of property and equipment included in accounts payable or accrued liabilities	1,165		765
Purchases of intangible member assets included in accounts payable or accrued liabilities						Purchases of intangible member assets included in accounts payable or accrued liabilities	1,305		—
Contingent consideration recognized at acquisition	Contingent consideration recognized at acquisition	8,147		—		Contingent consideration recognized at acquisition	—		8,147
Exercise of common stock options receivable	Exercise of common stock options receivable	119		66		Exercise of common stock options receivable	—		5
Purchases of intangible member assets		—		58
Additions to goodwill due to measurement period adjustments		—		1,177
Follow-on equity offering costs accrued during the period		—		540

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

HealthEquity, Inc. and subsidiaries

Notes to condensed consolidated financial statements

Note 1. Summary of business and significant accounting policies

Business

HealthEquity, Inc. ("HealthEquity" or the "Company") was incorporated in the state of Delaware on September 18, 2002. HealthEquity is a leader in administering health savings accounts (“HSAs”) and complementary consumer-directed benefits (“CDBs”), which empower consumers to access tax-advantaged healthcare savings while also providing corporate tax advantages for employers.

Principles of consolidation

The ~~condensed consolidated~~Company consolidates entities in which the Company has a controlling financial ~~statements include the accounts~~interest, which includes all of ~~HealthEquity and~~ its wholly owned direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of presentation

The accompanying condensed consolidated financial statements as of ~~July 31, 2021~~April 30, 2022 and for the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~ are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021.~~2022. The fiscal year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

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

~~Follow-on equity offering~~

In the first quarter of fiscal year 2022, the Company closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $80.30 per share, less the underwriters' discount. The Company received net proceeds of $456.6 million after deducting underwriting discounts and commissions of $4.6 million and other offering expenses of approximately $0.5 million. The Company used $50.2 million of the net proceeds from the offering to acquire 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum, and intends to use the remaining net proceeds from the offering for general corporate purposes, which may include prepayments under its term loan facility or potential acquisitions, including the acquisitions of Further and the Fifth Third Bank HSA portfolio.

Significant accounting policies

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021.~~2022.

Recently adopted accounting pronouncements

None.

Recently issued accounting pronouncements not yet adopted

None.

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Table of Contents

Note 2. Net ~~income (loss)~~loss per share

The following table sets forth the computation of basic and diluted net ~~income (loss)~~loss per share:


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands, except per share data)	(in thousands, except per share data)	2021		2020		2021		2020		(in thousands, except per share data)	2022		2021
Numerator (basic and diluted):	Numerator (basic and diluted):									Numerator (basic and diluted):
Net income (loss)		$	(3,818)	$	(148)	$	(6,433)	$	1,678
Net loss										Net loss	$	(13,639)	$	(2,615)
Denominator (basic):	Denominator (basic):									Denominator (basic):
Weighted-average common shares outstanding	Weighted-average common shares outstanding	83,481		72,343		82,628		71,669		Weighted-average common shares outstanding	84,022		81,747
Denominator (diluted):	Denominator (diluted):									Denominator (diluted):
Weighted-average common shares outstanding	Weighted-average common shares outstanding	83,481		72,343		82,628		71,669		Weighted-average common shares outstanding	84,022		81,747
Weighted-average dilutive effect of stock options and restricted stock units	Weighted-average dilutive effect of stock options and restricted stock units	—		—		—		1,302		Weighted-average dilutive effect of stock options and restricted stock units	—		—
Diluted weighted-average common shares outstanding	Diluted weighted-average common shares outstanding	83,481		72,343		82,628		72,971		Diluted weighted-average common shares outstanding	84,022		81,747
Net income (loss) per share:
Net loss per share:										Net loss per share:
Basic	Basic	$	(0.05)	$	0.00	$	(0.08)	$	0.02	Basic	$	(0.16)	$	(0.03)
Diluted	Diluted	$	(0.05)	$	0.00	$	(0.08)	$	0.02	Diluted	$	(0.16)	$	(0.03)

For the three months ended ~~July 31,~~April 30, 2022 and 2021, ~~and 2020, 1.9~~approximately 2.0 million and ~~2.1~~1.9 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted ~~earnings~~net loss per share as their inclusion would have been anti-dilutive.

For the six months ended July 31, 2021 and 2020, approximately 2.0 million and 0.6 million shares, respectively, attributable to stock options and restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

Note 3. Business ~~combination~~combinations

~~Acquisition of~~ Luum acquisition

On March 8, 2021, the Company acquired 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). ~~Luum provides employers with a suite of commute tools as well as real-time commute data to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.~~ The aggregate purchase price for the acquisition consisted of ~~$50.2~~$56.2 million in cash, ~~and up to $20.0~~which reflects a $2.1 million reduction in additional payments which are contingent on Luum achieving certain revenue targets during the two-year period following the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024. The Company recorded an $8.1 million liability representing its best estimate of the fair value of ~~the~~ contingent consideration ~~as of~~during the acquisition date. The fair value of this contingent consideration was determined using a Monte Carlo valuation model based on Level 3 inputs and will be remeasured to fair value quarterly, with any changes in the fair value recorded as other income (expense), net, in the condensed consolidated statement of operations and comprehensive income (loss). As of Julyfiscal year ended January 31, ~~2021, the fair value of the contingent consideration liability was $9.2 million.~~2022.

The Luum Acquisition was accounted for under the acquisition method of accounting for business combinations. ~~Consideration~~The consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. The initial allocation of the consideration paid was based on a preliminary valuation and was subject to adjustment during the measurement period (up to one year from the acquisition date). The purchase price allocation was finalized in the three months ended April 30, 2022.

The following table summarizes the Company's allocation of the consideration paid:


(in thousands)	Estimated fair value		Adjustments		Updated Allocation
Cash and cash equivalents	$	626	$	—	$	626
Other current assets	1,469		—		1,469
Intangible assets	23,900		—		23,900
Goodwill	36,374		(19)		36,355
Other assets	100		—		100
Current liabilities	(597)		—		(597)
Deferred tax liability	(3,566)		19		(3,547)
Total consideration paid	$	58,306	$	—	$	58,306

The adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired, liabilities assumed, and tax-related matters. The goodwill created in the Luum Acquisition is not expected to be deductible for tax purposes.

Further acquisition

On November 1, 2021, the Company completed its acquisition of the Further business (other than Further's voluntary employee beneficiary association business) for $455 million (the "Further Acquisition").

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The Further Acquisition was accounted for under the acquisition method of accounting for business combinations. The consideration paid was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. The initial allocation of the consideration paid was based on a preliminary valuation and is subject to adjustment during the measurement period (up to one year from the acquisition date). Balances subject to adjustment primarily include the valuations of acquired assets (tangible and intangible) and liabilities assumed, as well as tax-related matters. The Company expects the allocation of the consideration transferred to be finalized within the measurement period.

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The following table summarizes the Company's current allocation of the consideration paid:


(in thousands)	Estimated fair value
~~Cash and cash equivalents~~Current assets	$	~~626~~
~~Other current assets~~	~~1,469~~2,667
Intangible assets	~~23,900~~172,183
Goodwill	~~36,374~~
~~Other assets~~	~~100~~282,287
Current liabilities	~~(597)~~
~~Deferred tax liability~~	~~(3,566)~~(2,137)
Total consideration paid	$	~~58,306~~455,000

The Luum Acquisition resulted in $36.4 million of goodwill. The preliminary goodwill to be recognized is attributable to several strategic, operational, and financial benefits expected from the Luum Acquisition, including an expanded commuter offering beyond traditional pre-tax commuter benefits and additional cross-selling opportunities. The goodwill created in the Luum Acquisition is not expected to be deductible for tax purposes.

~~The preliminary allocation of consideration exchanged to acquired identified intangible assets is as follows:~~

($ in thousands) Fair value Estimated life
(in years)
Customer relationships (1) $ 12,400 7.0
Developed technology (1) 10,900 5.0
Trade names & trademarks (1) 600 3.0
Total acquired intangible assets $ 23,900 6.0

~~(1) The Company preliminarily valued the acquired assets utilizing the discounted cash flow method, a form of the income approach.~~

~~The pro forma effects of the Luum Acquisition would not materially impact the Company's reported results for any period presented, and as a result no pro forma financial information is presented.~~

Note 4. Supplemental financial statement information

Selected condensed consolidated balance sheet and condensed consolidated statement of operations and comprehensive ~~income (loss)~~loss components consisted of the following:

Property and equipment

Property and equipment consisted of the following as of ~~July 31, 2021~~April 30, 2022 and January 31, ~~2021:~~2022:


(in thousands)	(in thousands)	July 31, 2021		January 31, 2021		(in thousands)	April 30, 2022		January 31, 2022
Leasehold improvements	Leasehold improvements	$	20,604	$	22,271	Leasehold improvements	$	18,614	$	18,573
Furniture and fixtures	Furniture and fixtures	9,014		9,230		Furniture and fixtures	8,459		8,417
Computer equipment	Computer equipment	33,927		28,592		Computer equipment	32,176		31,982
Property and equipment, gross	Property and equipment, gross	63,545		60,093		Property and equipment, gross	59,249		58,972
Accumulated depreciation	Accumulated depreciation	(36,163)		(30,987)		Accumulated depreciation	(38,246)		(35,600)
Property and equipment, net	Property and equipment, net	$	27,382	$	29,106	Property and equipment, net	$	21,003	$	23,372

Depreciation expense was $3.3 million and $3.9 million for the three months ended ~~July 31,~~April 30, 2022 and 2021, ~~and 2020 was $3.5 million and $4.1 million, respectively, and $7.4 million and $8.0 million for the six months ended July 31, 2021 and 2020,~~ respectively.

Contract balances

The Company does not recognize revenue until its right to consideration is unconditional and therefore has no related contract assets. The Company records a receivable when revenue is recognized prior to payment and the Company has unconditional right to payment. Alternatively, when payment precedes the related services, the Company records a contract liability, or deferred revenue, until its performance obligations are satisfied. As of ~~July 31, 2021~~April 30, 2022 and January 31, ~~2021,~~2022, the balance of deferred revenue was ~~$4.0~~$10.0 million and ~~$4.1~~$10.5 million, respectively. The balances are related to cash received in advance for an interchange and custodial revenue ~~arrangement,~~arrangements, other up-front fees and other commuter deferred revenue. The Company expects to recognize approximately 50% of its balance of deferred revenue as revenue over the next 12 months and ~~are generally recognized within twelve months, with the~~

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~~exception of~~ the ~~interchange arrangement, which is recognized over a term of approximately ten years.~~remainder thereafter. During the three ~~and six~~ months ended ~~July 31, 2021,~~April 30, 2022, approximately ~~$0.5 million and $1.1~~$1.2 million of revenue was recognized that was included in the balance of deferred revenue as of January 31, ~~2021.~~2022. The Company expects to satisfy its remaining obligations for these arrangements.

Leases

The components of operating lease costs were as follows:


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		2021		2020		(in thousands)	2022		2021
Operating lease expense	Operating lease expense	$	3,498	$	3,925	$	7,809	$	8,249	Operating lease expense	$	2,859	$	4,313
Sublease income	Sublease income	(450)		(450)		(900)		(900)		Sublease income	(495)		(450)
Net operating lease expense	Net operating lease expense	$	3,048	$	3,475	$	6,909	$	7,349	Net operating lease expense	$	2,364	$	3,863

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Other ~~income (expense),~~expense, net

Other ~~income (expense),~~expense, net, consisted of the following:


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		2021		2020		(in thousands)	2022		2021
Interest income	Interest income	$	533	$	76	$	941	$	676	Interest income	$	52	$	408
Acquisition gains (costs), net		(1,665)		28		(7,604)		(66)
Acquisition costs, net										Acquisition costs, net	(6)		(5,939)
Other income (expense), net	Other income (expense), net	1,476		(928)		3,377		(2,198)		Other income (expense), net	(347)		1,901
Total other income (expense), net		$	344	$	(824)	$	(3,286)	$	(1,588)
Total other expense, net										Total other expense, net	$	(301)	$	(3,630)

Supplemental cash flow information

Supplemental cash flow information related to the Company's operating leases was as follows:


		Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	7,261	$	6,468	Operating cash flows from operating leases	$	3,098	$	3,635
Operating lease right-of-use assets obtained in exchange for new operating lease obligations	Operating lease right-of-use assets obtained in exchange for new operating lease obligations	$	320	$	17,480	Operating lease right-of-use assets obtained in exchange for new operating lease obligations	$	1,020	$	—

Note 5. Intangible assets and goodwill

Intangible assets

The gross carrying amount and associated accumulated amortization of intangible assets were as ~~follows as of July 31, 2021 and January 31, 2021:~~follows:


(in thousands)	(in thousands)	July 31, 2021		January 31, 2021		(in thousands)	April 30, 2022		January 31, 2022
Amortizable intangible assets:	Amortizable intangible assets:					Amortizable intangible assets:
Software and software development costs	Software and software development costs	$	161,134	$	127,005	Software and software development costs	$	203,462	$	192,050
Acquired HSA portfolios	Acquired HSA portfolios	127,794		125,141		Acquired HSA portfolios	251,324		192,298
Acquired customer relationships	Acquired customer relationships	613,781		601,381		Acquired customer relationships	759,781		759,781
Acquired developed technology	Acquired developed technology	107,825		96,925		Acquired developed technology	132,825		132,825
Acquired trade names	Acquired trade names	12,900		12,300		Acquired trade names	12,900		12,900
Amortizable intangible assets, gross	Amortizable intangible assets, gross	1,023,434		962,752		Amortizable intangible assets, gross	1,360,292		1,289,854
Accumulated amortization	Accumulated amortization	(253,105)		(195,749)		Accumulated amortization	(352,428)		(316,717)
Amortizable intangible assets, net	Amortizable intangible assets, net	$	770,329	$	767,003	Amortizable intangible assets, net	$	1,007,864	$	973,137

Amortization expense for the three months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~ was ~~$29.5~~$36.2 million and ~~$24.5~~$27.9 million, ~~respectively, and $57.4 million and $48.1 million for the six months ended July 31, 2021 and 2020,~~ respectively.

Goodwill

~~During the six months ended July 31, 2021, goodwill increased by $36.4 million due to the Luum Acquisition. For further information, see Note 3—Business combination.~~ There were no ~~other~~ changes to the carrying value of goodwill during the ~~six~~three months ended ~~July 31, 2021.~~

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Note 6. Commitments and contingencies

Commitments

~~Contingent acquisition consideration.~~ In connection with the Luum Acquisition, the Company agreed to pay up to $20.0 million in additional payments which are contingent on Luum achieving certain revenue targets during the two-year period following the closing of the Luum Acquisition and, if achieved, would be payable in fiscal years 2023 and 2024. For further information, see Note 3—Business combination.

~~Fifth Third Bank HSA portfolio acquisition.~~ In April 2021, the Company entered into a definitive agreement with Fifth Third Bank, National Association ("Fifth Third"), to transition custodianship of Fifth Third’s HSA portfolio to HealthEquity. The definitive agreement contemplates a $60.8 million dollar purchase price for a transfer of approximately 149,000 HSA members and their approximately $477.0 million of HSA assets. The agreement includes a mechanism to adjust the purchase price based on the amount of HSA assets actually transferred. The transaction is subject to satisfaction of certain customary closing conditions and is expected to close by the end of the Company's fiscal third quarter.

~~Further acquisition.~~ In April 2021, the Company entered into a definitive agreement to acquire Further for $500 million. Further is a leading provider of HSA and other CDB administration services, with approximately 550,000 HSAs and $1.7 billion of HSA assets. In September 2021, the terms of the acquisition were amended pursuant to two agreements: (1) an agreement to acquire all cash balances and investment assets included in any voluntary employee beneficiary association (“VEBA”) account that is funding a health reimbursement arrangement (either Section 501(c)(9) or Section 115 trusts) and all contracts related exclusively thereto for, which is anticipated to close on January 31, 2022 for a maximum purchase price of $45 million, calculated based on the actual amount of VEBA assets transferred relative to the total amount of VEBA assets as of April 30, 2021, and (2) an amended agreement to acquire the remainder of the Further business for $455 million, with a target closing date on November 1, 2021. The transactions are subject to satisfaction of certain customary closing conditions.

~~Lease termination.~~In April 2021, the Company exercised its right to terminate an operating lease that had not yet commenced with aggregate undiscounted lease payments of $63.1 million and a term of approximately 11 years following the landlord's failure to fulfill its obligations under the lease agreement. The Company's right to terminate the lease agreement is disputed by the landlord. Because the lease had not yet commenced, the Company had not recognized a right-of-use asset, operating lease liability, or any rent expense associated with the lease.

~~Other commitments.~~ The Company’s ~~other~~principal commitments consist ~~primarily~~ of ~~a term loan facility,~~long-term debt, operating lease obligations for office space and data storage facilities, processing services agreements, telephony services, and other ~~leases, a processing services agreement with a vendor, and~~ contractual ~~commitments related to network infrastructure, equipment, and certain maintenance agreements under long-term, non-cancelable~~ commitments. ~~Except~~On March 2, 2022, the Company completed its acquisition of the Health Savings Administrators, L.L.C. ("HealthSavings") HSA portfolio for ~~the items noted above, there~~$60 million in cash. There were no other material changes during the three ~~and six~~ months ended ~~July 31, 2021,~~April 30, 2022, outside of the ordinary course of business, in ~~our~~the Company's commitments from those disclosed in ~~our~~the its Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021.~~2022.

Contingencies

~~As described above, the Company's right to terminate an operating lease agreement with aggregate undiscounted lease payments of $63.1 million is disputed by the landlord.~~

In the normal course of business, the Company enters into contracts and agreements that contain a variety of covenants, representations, and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the

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future, but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

Legal matters

~~On March 9, 2018, a putative class action was filed in~~In April 2021, the U.S. District Court for the Northern District of California (the “Securities Class Action”). On May 16, 2019, a consolidated amended complaint was filed by the lead plaintiffs asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against the Company's wholly owned subsidiary WageWorks, Inc. ("WageWorks"), exercised its ~~former Chief Executive Officer~~right to terminate a lease for office space in Mesa, Arizona that had not yet commenced, with aggregate lease payments of $63.1 million and a term of approximately 11 years, following the landlord's failure to fulfill its ~~former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018. The complaint also alleged claims~~obligations under the ~~Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those same defendants, as well as~~lease agreement. Because the ~~members of its board of directors at~~lease had not yet commenced, the ~~time of~~Company had not recognized a right-of-use asset, operating lease liability, or any rent expense associated with the lease. WageWorks' right to terminate the lease agreement was disputed by the landlord, Union Mesa 1, LLC (“Union Mesa”). On November 5, 2021, Union Mesa notified WageWorks that ~~offering. The class action settled for $30.0 million. During the quarter ended July 31, 2021, WageWorks~~

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~~contributed $5.0 million and its insurers paid the remaining $25.0 million. The court granted final approval~~it was in default of the ~~settlement~~lease for failure to pay rent, which Union Mesa claimed was due beginning in November 2021, and ~~entered~~on November 24, 2021 drew $2.8 million, the full amount under the letter of credit that WageWorks had posted to secure its obligations under the lease. On December 1, 2021, WageWorks filed a ~~final~~lawsuit against Union Mesa in the Superior Court of the State of Arizona in and for the County of Maricopa. On January 4, 2022, WageWorks filed an amended complaint in the Superior Court. Pursuant to the lawsuit, WageWorks seeks declaratory judgment that the lease was properly terminated and recourse against Union Mesa for breach of contract, breach of the duty of good faith and fair dealing, and conversion, including return of the funds drawn under the letter of credit. On January 31, 2022, Union Mesa filed a motion to dismiss for the conversion cause of action, which the Superior Court denied on ~~August 20, 2021.~~April 13, 2022. On May 18, 2022, Union Mesa filed an answer and counterclaim with the Superior Court, wherein Union Mesa denied WageWorks' claims, and separately seeks recourse against WageWorks for breach of contract and breach of the implied covenant of good faith and fair dealing. On May 19, 2022, Union Mesa filed an amended complaint and counterclaim seeking the same recourse.

On June 22, 2018 and September 6, 2018, 2 derivative lawsuits were filed against certain of WageWorks’ former officers and directors and WageWorks (as nominal defendant) in the Superior Court of the State of California, County of San Mateo. The actions were consolidated. On July 23, 2018, a similar derivative lawsuit was filed against certain former WageWorks’ officers and directors and WageWorks (as nominal defendant) in the U.S. District Court for the Northern District of California (together, the “Derivative Suits”). The allegations in the Derivative Suits relate to substantially the same facts as those underlying the Securities Class Action described ~~above.~~in previous reports, where the plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against WageWorks, its former Chief Executive Officer and its former Chief Financial Officer on behalf of purchasers of WageWorks common stock between May 6, 2016 and March 1, 2018, as well as alleged claims under the Securities Act of 1933, as amended, arising from WageWorks’ June 19, 2017 common stock offering against those same defendants, as well as the members of its board of directors at the time of that offering. The plaintiffs seek unspecified damages, fees and costs. Plaintiffs in the Superior Court action filed an amended consolidated complaint on October 28, 2019, naming as defendants certain former officers and directors of WageWorks and alleging a direct claim of "inseparable fraud/breach of fiduciary duty" on behalf of a class. WageWorks was not named as a party in that complaint. On June 24, 2020, the court granted the defendants’ motion to dismiss the amended complaint. The plaintiffs subsequently filed a notice of appeal. On October 28, 2021, the court of appeal dismissed the appeal pursuant to the release in the class action settlement discussed above. The District Court action is currently stayed.

WageWorks previously entered into indemnification agreements with its former directors and officers and, pursuant to these indemnification agreements, is covering the defense fees and costs of its former directors and officers in the legal proceedings described above.

The Company and its subsidiaries are involved in various other litigation, governmental proceedings and claims, not described above, that arise in the normal course of business. It is not possible to determine the ultimate outcome or the duration of such litigation, governmental proceedings or claims, or the impact that such litigation, proceedings and claims will have on the Company’s financial position, results of operations, and cash flows.

As required under GAAP, the Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. ~~Except with respect to the Securities Class Action, which has been settled,~~Based on currently available information, the Company does not believe ~~based on currently available information,~~ that any liabilities relating to these matters are probable or that the amount of any resulting loss is estimable. However, litigation is subject to inherent uncertainties and the Company’s view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations and cash flows for the period in which the unfavorable outcome occurs, and potentially in future periods.

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Note 7. Income taxes

The Company follows ~~Accounting Standards Codification ("ASC")~~ASC 740-270, Income Taxes - Interim Reporting, for the computation and presentation of its interim period tax provision. Accordingly, management estimated the effective annual tax rate and applied this rate to the ~~year-to-date~~ pre-tax book ~~income (loss)~~loss through the end of the latest fiscal quarter to determine the interim ~~benefit or provision for~~ income ~~taxes.~~tax benefit. For the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021, the Company recorded an income tax benefit of ~~$4.0~~$4.4 million and ~~$7.4~~$3.5 million, respectively. This resulted in an effective income tax benefit rate of ~~50.8%~~24.4% and ~~53.6%~~57.1% for the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021, ~~respectively, compared with an effective income tax benefit rate of 78.6% and 24.0% for the three and six months ended July 31, 2020,~~ respectively. For the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021, discrete tax items had an effective tax rate benefit of ~~25.6%~~4.3% and ~~28.9%~~33.2%, ~~respectively, compared with an effective tax rate benefit of 62.9% and 57.4% for the three and six months ended July 31, 2020,~~ respectively, primarily due to excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.

As of ~~July 31, 2021~~April 30, 2022 and January 31, ~~2021,~~2022, the Company’s total gross unrecognized tax benefit was ~~$10.7~~$11.8 million and ~~$10.2~~$11.7 million, respectively. If recognized, ~~$9.9~~$8.5 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of ~~July 31, 2021.~~April 30, 2022.

The Company files income tax returns with U.S. federal and state taxing jurisdictions and is currently under examination by the IRS and in the state of Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to ~~our~~the Company's taxes, net operating losses, and/or tax credit carryforwards. As a result of the Company's net operating loss carryforwards and tax credit carryforwards, the Company remains subject to examination by one or more jurisdictions for tax years after 2001.

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Note 8. Indebtedness

Long-term debt consisted of the following:
(in thousands) July 31, 2021 January 31, 2021
Term loan facility $ 987,500 $ 1,003,125
Less: unamortized loan issuance costs (1) 13,926 16,408
Long-term debt, net of issuance costs $ 973,574 $ 986,717


(in thousands)	April 30, 2022		January 31, 2022
4.50% Senior Notes due 2029	$	600,000	$	600,000
Term Loan Facility	347,813		350,000
Principal amount	947,813		950,000
Less: unamortized discount and issuance costs (1)	18,361		19,173
Total debt, net	929,452		930,827
Less: current portion of long-term debt	10,938		8,750
Long-term debt, net	$	918,514	$	922,077

(1)In addition to the ~~$13.9~~$18.4 million and ~~$16.4~~$19.2 million of unamortized discount and issuance costs related to long-term debt as of April 30, 2022 and January 31, 2022, respectively, $4.1 million and $4.4 million of unamortized issuance costs related to the ~~term loan facility as of July 31, 2021 and January 31, 2021, respectively, $4.3 million and $5.0 million of unamortized issuance costs related to our revolving credit facility~~Company's Revolving Credit Facility (as defined below) are included within other assets on the condensed consolidated balance sheets as of ~~July 31, 2021~~April 30, 2022 and January 31, ~~2021,~~2022, respectively.

4.50% Senior Notes due 2029

On October 8, 2021, the Company completed its offering of $600.0 million aggregate principal amount of its 4.50% Senior Notes due 2029 (the “Notes”). The Notes were issued under an indenture (the “Indenture”), dated October 8, 2021, among the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee.

The Notes are guaranteed by each of the Company’s existing, wholly owned domestic subsidiaries that guarantees its obligations under the Credit Agreement (as defined below) and are required to be guaranteed by any of the Company’s future subsidiaries that guarantee its obligations under the Credit Agreement or certain of its other indebtedness. The Notes will mature on October 1, 2029. Interest on the Notes is payable on April 1 and October 1 of each year. As of April 30, 2022 and January 31, 2022, $2.3 million and $8.7 million, respectively, of accrued interest on the Notes is included within accrued liabilities on the Company's condensed consolidated balance sheets. The effective interest rate on the Notes is 4.72%.

The Notes are unsecured senior obligations of the Company and rank equally in right of payment to all of its existing and future senior unsecured debt and senior in right of payment to all of its future subordinated debt.

The Notes are redeemable at the Company’s option, in whole or in part, at any time on or after October 1, 2024, at a redemption price if redeemed during the 12 months beginning (i) October 1, 2024 of 102.250%, (ii) October 1, 2025 of 101.125%, and (iii) October 1, 2026 and thereafter of 100.000%, in each case of the principal amount of the Notes being redeemed, and together with accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company ~~is party~~may also redeem some or all of the Notes before October 1, 2024 at a redemption price equal to 100% of the principal amount of the Notes, plus the applicable “make-whole” premium as of, and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time prior to October 1,

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2024, the Company may redeem up to 40% of the aggregate principal amount of the Notes issued under the Indenture on one or more occasions in an aggregate amount equal to the net cash proceeds of one or more equity offerings at a redemption price equal to 104.500% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. Furthermore, the Company may be required to make an offer to purchase the Notes upon the sale of certain assets or upon specific kinds of changes of control.

The Indenture contains covenants that impose significant operational and financial restrictions on the Company; however, these covenants generally align with the covenants contained in the Credit Agreement. See "Credit Agreement" below for a description of these covenants.

Credit Agreement

On October 8, 2021, the Company entered into a credit ~~facility~~agreement (the ~~"Credit~~“Credit Agreement”) ~~that provides for:~~among the Company, as borrower, each lender from time to time party thereto (the “Lenders”), JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the “Agent”) and the Swing Line Lender (as defined in the Credit Agreement), and each L/C Issuer (as defined therein) party thereto, pursuant to which the Company established:

(i)a five-year senior secured term loan A facility (the “Term Loan Facility”), in an aggregate principal amount of ~~$1.25 billion;~~$350.0 million; and

(ii)a five-year senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”), in an aggregate principal amount of up to ~~$350.0~~$1.0 billion (with a $25 million sub-limit for the issuance of letters of credit), the proceeds of which may be used for working capital and general corporate purposes of the Company and its subsidiaries, including the financing of acquisitions and other investments. ~~No amounts were drawn~~

Subject to the terms and conditions set forth in the Credit Agreement (including obtaining additional commitments from one or more new or existing lenders), the Company may in the future incur additional loans or commitments under the ~~Revolving~~ Credit ~~Facility~~Agreement in an aggregate principal amount of up to $300 million, plus an additional amount so long as the Company’s pro forma First Lien Net Leverage Ratio (as defined in the Credit Agreement) would not exceed 3.85 to 1.00 as of ~~July 31, 2021.~~the date such loans or commitments are incurred.

Borrowings under the Credit Facilities bear interest at an annual rate equal to, at the option of ~~HealthEquity,~~the Company, either (i) LIBOR (adjusted for reserves) plus a margin ranging from 1.25% to 2.25% or (ii) an alternate base rate plus a margin ranging from 0.25% to 1.25%, with the applicable margin determined by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of ~~July 31, 2021,~~April 30, 2022, the stated interest rate was ~~1.84%~~2.56% and the effective interest rate was ~~2.37%~~3.33%. The Company is also required to pay certain fees to the ~~lenders,~~Lenders, including, among others, a quarterly commitment fee on the average unused amount of the Revolving Credit Facility at a rate ranging from 0.20% to 0.40%, with the applicable rate also determined by reference to a leverage-based pricing grid set forth in the Credit Agreement.

The loans made under the Term Loan Facility amortize in equal quarterly installments in an aggregate annual amount equal to the following percentage of the original principal amount of the Term Loan Facility: (i) 2.5% for the first year after October 8, 2021; (ii) 5.0% for each of the second and third years after October 8, 2021; (iii) 7.5% for the fourth year after October 8, 2021; and (iv) 10.0% for the fifth year after October 8, 2021. In addition, the Term Loan Facility is required to be mandatorily prepaid with 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries, subject to customary exceptions and thresholds, including to the extent such proceeds are reinvested in assets useful in the business of the Company and its subsidiaries within 450 days following receipt (or committed to be reinvested within such 450-day period and reinvested within 180 days after the end of such 450-day period). The loans under the Credit Facilities may be prepaid, and the commitments thereunder may be reduced, by the Company without penalty or premium, subject to the reimbursement of customary “breakage costs.”

The Credit Agreement contains significant customary affirmative and negative covenants, including covenants that limit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, in each case, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the Credit Agreement contains financial performance covenants, which require the Company to maintain (i) a maximum total net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than ~~4.50 to 1.00 (subject to a customary “acquisition holiday” provision that allows the maximum total net leverage ratio to increase to~~ 5.00 to 1.00 ~~for the four fiscal quarter period ending on or following the date of a permitted acquisition by the Company in excess of $100.0 million),~~ and (ii) a minimum consolidated interest coverage ratio, measured as of the last day of each fiscal quarter, of

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no less than 3.00 to 1.00. The Company was in compliance with all covenants under the Credit Agreement as of ~~July 31, 2021,~~April 30, 2022, and for the period then ended.

The repayment obligation under the Credit Agreement may be accelerated upon the occurrence of an event of default thereunder, including, among other things, failure to pay principal, interest or fees on a timely basis, material inaccuracy of any representation or warranty, failure to comply with covenants, cross-default to other material debt, material judgments, change of control and certain insolvency or bankruptcy-related events, in each case, subject to any certain grace and/or cure periods.

The obligations of ~~HealthEquity~~the Company under the Credit Agreement are required to be unconditionally guaranteed by ~~WageWorks and Fort Effect Corp~~each of the Company’s existing or subsequently acquired or organized domestic subsidiaries and are secured by security interests in substantially all assets of ~~HealthEquity~~the Company and the guarantors, in each case, subject to certain customary exceptions.

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Note 9. Stock-based compensation

The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive ~~income (loss)~~loss during the periods presented:


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		2021		2020		(in thousands)	2022		2021
Cost of revenue	Cost of revenue	$	3,068	$	2,065	$	5,471	$	3,528	Cost of revenue	$	3,007	$	2,403
Sales and marketing	Sales and marketing	2,660		1,818		4,848		2,776		Sales and marketing	2,014		2,188
Technology and development	Technology and development	3,693		2,493		6,706		5,410		Technology and development	3,380		3,013
General and administrative	General and administrative	6,196		5,062		11,391		7,120		General and administrative	5,585		5,195
Other expense (1)		—		—		342		—
Other expense, net (1)										Other expense, net (1)	—		342
Total stock-based compensation expense	Total stock-based compensation expense	$	15,617	$	11,438	$	28,758	$	18,834	Total stock-based compensation expense	$	13,986	$	13,141

(1)Equity-based awards exchanged for cash in connection with the Luum Acquisition.

Stock award plans

Incentive Plan. The Company grants stock options and restricted stock units ("RSUs"~~), and restricted stock awards ("RSAs"~~) under the HealthEquity, Inc. 2014 Equity Incentive Plan (as amended and restated, the "Incentive Plan"), which provided for the issuance of stock awards to the directors and team members of the Company to purchase up to an aggregate of 2.6 million shares of common stock.

In addition, under the Incentive Plan, the number of shares of common stock reserved for issuance under the Incentive Plan automatically increases on February 1 of each year, beginning as of February 1, 2015 and continuing through and including February 1, 2024, by 3% of the total number of shares of the Company’s capital stock outstanding on January 31 of the preceding fiscal year, or a lesser number of shares determined by the board of directors. As of ~~July 31, 2021, 7.5~~April 30, 2022, 9.3 million shares were available for grant under the Incentive Plan.

Stock options

A summary of stock option activity is as follows:
Outstanding stock options
(in thousands, except for exercise prices and term) Number of
options Range of
exercise
prices Weighted-
average
exercise
price Weighted-
average
contractual
term
(in years) Aggregate
intrinsic
value
Outstanding as of January 31, 2021 1,674 $1.25 - 82.39 $ 31.46 5.00 $ 87,164
Exercised (225) $1.25 - 44.53 $ 23.69
Outstanding as of July 31, 2021 1,449 $1.25 - 82.39 $ 32.66 4.40 $ 60,083
Vested and expected to vest as of July 31, 2021 1,449 $ 32.66 4.40 $ 60,083
Exercisable as of July 31, 2021 1,352 $ 29.95 4.20 $ 59,645


	Outstanding stock options
(in thousands, except for exercise prices and term)	Number of options	Range of exercise prices	Weighted- average exercise price		Weighted- average contractual term (in years)	Aggregate intrinsic value
Outstanding as of January 31, 2022	1,232	$1.25 - 82.39	$	35.64	4.2	$	25,719
Exercised	(62)	$1.25 - 51.44	$	38.18
Forfeited	(2)	$28.69	$	28.69
Outstanding as of April 30, 2022	1,168	$1.25 - 82.39	$	35.52	3.9	$	33,070
Vested and expected to vest as of April 30, 2022	1,168		$	35.52	3.9	$	33,070
Exercisable as of April 30, 2022	1,129		$	34.24	3.8	$	33,052

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Restricted stock units ~~and restricted stock awards~~

A summary of RSU ~~and RSA~~ activity is as follows:


		RSUs and PRSUs			RSAs and PRSAs				RSUs and PRSUs
(in thousands, except weighted-average grant date fair value)	(in thousands, except weighted-average grant date fair value)	Shares	Weighted-average grant date fair value		Shares	Weighted-average grant date fair value		(in thousands, except weighted-average grant date fair value)	Shares	Weighted-average grant date fair value
Outstanding as of January 31, 2021		1,832	$	60.41	193	$	61.77
Outstanding as of January 31, 2022								Outstanding as of January 31, 2022	2,740	$	63.15
Granted	Granted	1,265	72.47		—	—		Granted	1,292	78.63
Vested	Vested	(383)	57.64		(116)	61.77		Vested	(493)	60.11
Forfeited	Forfeited	(103)	60.43		(73)	61.77		Forfeited	(189)	60.97
Outstanding as of July 31, 2021		2,611	$	66.66	4	$	61.72
Outstanding as of April 30, 2022								Outstanding as of April 30, 2022	3,350	$	69.69

Performance restricted stock units. During the ~~first quarter of fiscal year~~three months ended April 30, 2022, the Company awarded ~~249,750~~281,784 performance restricted stock units ("PRSUs") subject to a market condition based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index as measured on January 31, ~~2024.~~2025. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was ~~$22.4~~$32.1 million.

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Compensation expense is recorded if the service condition is met regardless of whether the market condition is satisfied. The market condition allows for a range of vesting from 0% to 200% based on the level of performance achieved. The PRSUs cliff vest upon approval by the Compensation Committee of the board of directors.

Note 10. Fair value

Fair value measurements are made at a specific point in time based on relevant market information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

•Level 1—quoted prices in active markets for identical assets or liabilities;

•Level 2—inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

•Level 3—unobservable inputs based on the Company’s own assumptions.

Cash and cash equivalents are considered Level 1 instruments and are valued based on publicly available daily net asset values. ~~Level 1 instruments consist primarily of cash and cash equivalents.~~ The carrying ~~value~~values of cash and cash equivalents approximate fair values ~~as of July 31, 2021~~ due to the short-term nature of these instruments.

~~Our long-term debt~~The Notes are valued based upon quoted market prices and are considered Level 2 instruments because the markets in which the Notes trade are not considered active markets. As of April 30, 2022, the fair value of the Notes was $548.2 million.

The Term Loan Facility is considered a Level 2 instrument and is recorded at book value in ~~our~~the Company's condensed consolidated financial statements. ~~Our long-term debt~~The Term Loan Facility reprices frequently due to variable interest rate terms and entails no significant changes in credit risk. As a result, ~~we believe the fair value of our long-term debt approximates carrying value.~~

The contingent consideration liability resulting from the Luum Acquisition was determined using a Monte Carlo valuation model based on Level 3 inputs. The estimate of fair value of the contingent consideration obligation requires subjective assumptions to be made regarding revenue growth rates, discount rates, peer revenue volatilities, and probabilities assigned to various potential business result scenarios and was determined using probability assessments with respect to the likelihood of achieving certain revenue targets. The fair value measurement is based on inputs unobservable in the market and thus represents a level 3 measurement. Changes in current expectations of progress could change the probability of achieving the targets within the measurement periods and result in an increase or decrease in the fair value of the ~~contingent consideration obligation. For further information, see Note 3—Business combination.~~

~~The following table reconciles the change in the fair value of the contingent consideration during the period presented:~~


~~(in thousands)~~	~~Carrying Amount~~
~~Balance as of January 31, 2021~~	$	—
~~Contingent consideration recognized at acquisition~~	~~8,147~~
~~Change in fair value recognized in the condensed consolidated statement of operations and comprehensive income (loss)~~	~~1,011~~
~~Balance as of July 31, 2021~~	$	~~9,158~~

Term Loan Facility approximates carrying value.

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Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 ~~close the acquisition of Further,~~integrate acquired businesses, the impact of the ~~ongoing~~ COVID-19 pandemic and resulting societal and economic changes on the Company, the anticipated synergies and other benefits of ~~the~~acquired businesses and any future acquisitions, ~~of WageWorks and Further,~~ 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, ~~2021,~~2022, this Quarterly Report on Form 10-Q, and our other reports filed with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such events.

Overview

We are a leader and an innovator in providing technology-enabled services that empower consumers to make healthcare saving and spending decisions. 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 and our subsidiaries 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.

The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis. As of ~~July 31, 2021,~~April 30, 2022, we administered ~~6.0~~7.4 million HSAs, with balances totaling ~~$15.5~~$20.3 billion, which we call HSA ~~Assets. Also,~~Assets, as ~~of July 31, 2021, we administered 7.2~~well as 7.1 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had ~~13.1~~14.5 million as of ~~July 31, 2021.~~April 30, 2022.

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

We have increased our share of the growing HSA market from 4% in ~~calendar year~~December 2010 to ~~16% in 2020,~~18% as of December 2021, measured by HSA Assets. According to Devenir, ~~today~~ we are the largest HSA provider by accounts and second largest by ~~assets.~~assets as of December 2021. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and ~~service-driven culture. Our proprietary~~service-

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

Our ability to assist consumers is enhanced by our capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems. Our commuter benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers. These strengths reflect our “DEEP Purple” culture of remarkable service to customers and teammates, achieved by driving excellence, ethics, and process into everything we do.

We earn revenue primarily from three sources: service, custodial, and interchange. We earn service revenue mainly from fees paid by Clients on a recurring per-account per-month basis. We earn custodial revenue mainly from HSA Assets held at our members’ direction in federally insured cash deposits, insurance contracts or mutual funds, and from investment of Client-held funds. 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 ~~ongoing~~ COVID-19 ~~pandemic.~~pandemic and resulting societal and economic changes.

~~WageWorks Acquisition~~Recent acquisitions

On August 30, 2019, we completed the acquisition of WageWorks, Inc. (the "WageWorks Acquisition") and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under a new term loan facility and approximately $816.9 million of cash on hand. As a result of the WageWorks Acquisition, WageWorks Inc. became a wholly owned subsidiary of HealthEquity, Inc.

The key strategy of the WageWorks Acquisition was to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs. WageWorks’ historic strength of selling to employers directly and through health benefits brokers and advisors complemented our distribution through Network Partners. With WageWorks’ CDB capabilities, we provide employers with a single partner for both HSAs and other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite Group. For Clients that partner with us in this way, we believe we can produce more value by encouraging both CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings available through other CDBs. Accordingly, we believe that there are significant opportunities to expand the scope of services that we provide to our Clients.

We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies. We have identified opportunities of approximately $80 million in annualized ongoing net synergies to be achieved by the end of fiscal year 2022, of which approximately $70 million were achieved as of July 31, 2021. Furthermore, we anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader service offerings and as we continue to drive member engagement. We estimate non-recurring costs to achieve these synergies of approximately $100 million resulting from investment in technology we use to provide our services, and to run our back-office systems, and from integration of technology, as well as rationalization of cost of operations. Merger integration expenses attributable to the WageWorks Acquisition are expected to be completed by the end of fiscal year 2022, with the exception of ongoing lease expense related to certain WageWorks offices that have been permanently closed, less any related sublease income. As of July 31, 2021, we had incurred a total of $96 million of non-recurring merger integration costs related to the WageWorks Acquisition.

Luum ~~Acquisition~~

acquisition. In March 2021, we bolstered our commuter offering by acquiring 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition") ~~for an~~. The aggregate purchase price ~~consisting~~for the acquisition consisted of ~~$50.2~~$56.2 million in ~~cash and up to $20.0 million in contingent payments payable during the two-year period following the closing of the Luum Acquisition.~~cash. Luum provides employers with ~~a suite of commute tools as well as~~various commuter services, including access to real-time commute data, to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.

Fifth Third Bank HSA portfolio ~~acquisition~~

acquisition. In ~~April~~September 2021, we ~~entered into a definitive agreement with~~acquired the Fifth Third Bank, National Association ("Fifth Third")~~, to transition custodianship of Fifth Third’s~~ HSA portfolio, ~~to HealthEquity. The definitive agreement contemplates a $60.8 million dollar purchase price for a transfer~~which consisted of ~~approximately 149,000 HSA members and their approximately $477.0~~$490.0 million of HSA ~~Assets. The agreement includes~~Assets held in approximately 160,000 HSAs in exchange for a ~~mechanism to adjust the~~ purchase price ~~based on the amount~~ of ~~HSA Assets actually transferred. The transaction is subject to satisfaction of certain customary closing conditions and is expected to close by the end of our fiscal third quarter.~~$60.8 million in cash.

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Further ~~Acquisition~~

acquisition. In ~~April~~November 2021, we ~~entered into a definitive agreement to acquire~~acquired the Further ~~for $500 million. Further is~~business (other than Further's voluntary employee beneficiary association business), a leading provider of HSA and other CDB administration services, with approximately ~~550,000~~580,000 HSAs and ~~$1.7~~$1.9 billion of HSA ~~Assets. In September 2021,~~Assets, for $455 million in cash (the "Further Acquisition"). We expect merger integration expenses attributable to the ~~terms~~Further Acquisition totaling approximately $55 million to be incurred over a period of approximately three years from the acquisition ~~were amended pursuant to two agreements: (1) an agreement to acquire all cash balances and investment assets included~~date.

HealthSavings HSA portfolio acquisition. In March 2022, we acquired the Health Savings Administrators, L.L.C. (“HealthSavings”) HSA portfolio, which consisted of $1.3 billion of HSA Assets held in any voluntary employee beneficiary association (“VEBA”) account that is funding a health reimbursement arrangement (either Section 501(c)(9) or Section 115 trusts) and all contracts related exclusively thereto for, which is anticipated to close on January 31, 2022approximately 87,000 HSAs in exchange for a ~~maximum~~ purchase price of ~~$45~~$60 million calculated based on the actual amount of VEBA assets transferred relative to the total amount of VEBA assets as of April 30, 2021, and (2) an amended agreement to acquire the remainder of the Further business for $455 million, with a target closing date on November 1, 2021. The transactions are subject to satisfaction of certain customary closing conditions.in cash.

Key factors affecting our performance

We believe that our future performance will be driven by a number of factors, including those identified below. Each of these factors presents both significant opportunities and significant risks to our future performance. See also "Results of operations - Revenue" for information relating to the ~~ongoing~~ COVID-19 pandemic and resulting societal and economic changes, and also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021,~~2022, this Quarterly Report on Form 10-Q, and our other reports filed with the SEC.

Our acquisition and integration strategy

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

Structural change in U.S. health insurance

We derive revenue primarily from healthcare-related saving and spending by consumers in the U.S., which are driven by changes in the broader healthcare industry, including the structure of health insurance. The average premium for employer-sponsored health insurance has risen by 22% since ~~2015~~2016 and ~~55%~~47% since ~~2010,~~2011, 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. However, the timing and impact of

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these and other developments in U.S. healthcare are uncertain. Moreover, changes in healthcare policy, such as "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to predict.

Trends in U.S. tax law

Tax law has a profound impact on our business. Our offerings to members, Clients, and Network Partners consist primarily of services enabled, mandated, or advantaged by provisions of U.S. tax law and regulations. Changes in tax policy are speculative and may affect our business in ways that are difficult to predict.

Our client base

Our business model is based on a B2B2C distribution strategy, whereby we work with Network Partners and Clients to reach consumers to increase the number of our members with HSA accounts and complementary CDBs. We believe that there are significant opportunities to expand the scope of services that we provide to our current Clients.

Broad distribution footprint

We believe we have a diverse distribution footprint to attract new Clients and Network Partners. 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.

Product breadth

We are the largest custodian and administrator of HSAs (by number of accounts), as well as a market-share leader in each of the major categories of complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits administration. Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs. With our CDB capabilities, we can provide employers with a single partner for both HSAs and complementary CDBs, which is preferred by the vast majority of employers, according to research conducted for us by Aite Group. We believe that the combination of HSA and complementary CDB offerings significantly strengthens our value proposition to employers, health benefits brokers and consultants, and Network Partners as a leading single-source provider.

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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. ~~We are building on these innovations by combining our HSA offering with WageWorks' complementary CDB offerings, giving us a~~Our full suite of CDB ~~products,~~offerings complements our HSA solution and ~~adding to~~enhances our ~~solutions set and~~ 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. 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.

Our “DEEP Purple” service culture

The successful healthcare consumer needs education and guidance delivered by people as well as by technology. We believe that our "DEEP Purple" culture, which we define as driving excellence, ethics, and process while providing remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly, opportunities in the rapidly changing healthcare sector. We make significant efforts to promote and foster DEEP Purple within our workforce. We invest in and intend to continue to invest in human capital through technology-enabled training, career development, and advancement opportunities.

Interest rates

As a non-bank custodian, ~~we contract with~~our members’ custodial HSA cash assets are held by either our federally insured ~~banks~~bank and credit ~~unions,~~union partners, which we collectively call our Depository Partners ~~and also~~(our “Basic Rates” offering), pursuant to contractual arrangements we have with these Depository Partners, or by our insurance company partners ~~to hold custodial cash assets on behalf of our members.~~through group annuity contracts or other similar arrangements (our “Enhanced Rates” offering). We earn a material portion of our total revenue from interest paid to us by these partners.

The lengths of our agreements with Depository Partners typically range from three to five years and may have fixed or variable interest rate terms. The terms of new and renewing agreements with our Depository Partners may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and

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government policies over which we have no control. Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members.

HSA members who place their HSA cash into our Enhanced Rates offering receive a higher yield compared to our Basic Rates offering. An increase in the percentage of HSA cash held in our Enhanced Rates offering also positively impacts our custodial revenues, as we generally receive a higher yield on HSA cash held by our insurance company partners compared to cash held by our Depository Partners. As with our Depository Partners, yields paid by our insurance company partners may be impacted by the prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control. 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. Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members.

Although interest rates have ~~improved somewhat,~~increased, we expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve ~~associated with~~at the ~~ongoing~~beginning of the COVID-19 pandemic, the lack of demand from Depository Partners for deposits, and other market conditions that have caused ~~the interest rates offered by~~ our ~~Depository Partners~~average annualized yield on HSA cash to decline significantly.

Interest on our ~~long-term debt~~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.

Our competition and industry

Our direct competitors are HSA custodians and other CDB providers. Many of these are state or federally chartered banks and other financial institutions for which we believe benefits administration services are not a core business. Some of our direct competitors (including healthcare service companies such as United Health Group's Optum, Webster Bank, and well-known retail investment companies, such as Fidelity Investments) are in a position to devote more resources to the development, sale, and support of their products and services than we have at our disposal. Our other CDB administration competitors include health insurance carriers, human resources consultants and outsourcers, payroll providers, national CDB specialists, regional third-party administrators, and commercial banks. 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 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 an adverse impact on sales opportunities, with some opportunities delayed and most now being held virtually. As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected. Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs, or other CDBs and reduce overall demand for our products. We have seen a significant decline in the use of commuter benefits due to many of our members working from home, ~~during the outbreak or other impacts from the outbreak,~~ which has negatively impacted both our interchange revenue and service revenue, and this "work from home" trend, or hybrid work environments, may continue ~~after the pandemic. We have also~~

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seen a decline in interchange revenue across all other products. The extent to which the COVID-19 pandemic will negatively impact our business remains highly uncertain and cannot be accurately predicted.indefinitely.

Regulatory environment

Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, the Employee Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the provision of health insurance and provide the tax advantages associated with our services, play a pivotal role in determining our market opportunity. Privacy and data security-related laws such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, laws governing the provision of investment advice to consumers, such as the Investment Advisers Act of 1940, or the Advisers Act, the USA PATRIOT Act, anti-money laundering laws, and the Federal Deposit Insurance Act, all play a similar role in determining our competitive landscape. In addition, state-level regulations also have significant implications for our business in some cases. For example, our subsidiary HealthEquity Trust Company is regulated by the Wyoming Division of Banking, and several states are considering, or have already passed, new privacy regulations that can affect our business. Various states also have laws and regulations that impose additional restrictions on our collection, storage, and use of personally identifiable information. Privacy regulation in particular has become a priority issue in many states, including California, which in 2018 enacted the California Consumer Privacy Act broadly regulating California residents’ personal information and providing California residents with various rights to access and control their data, and the new California Privacy Rights Act. We have also seen an increase in regulatory changes related to our services due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes. Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success.

On March 21, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law. ARPA temporarily increased the dependent care flexible spending account contribution limit for the 2021 plan year. It also provided a temporary 100% subsidy of COBRA premium payments for eligible individuals who lost coverage due to an involuntary termination or a reduction of hours for up to 6 months.

~~Our acquisition strategy~~

We have a successful history of acquiring HSA portfolios and businesses that strengthen our service offerings. We seek 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. We intend to continue to pursue acquisitions of complementary assets and businesses that we believe will strengthen our service offering, and 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.

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On February 18, 2022, President Biden formally continued the National Emergency Concerning COVID-19, which tolls certain deadlines related to COBRA and other CDBs and increases the complexity of properly administering these programs. Each national emergency declaration generally lasts for one year unless the President announces an earlier termination.

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 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.

Total Accounts

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


(in thousands, except percentages)	(in thousands, except percentages)	July 31, 2021	July 31, 2020	% Change		January 31, 2021	(in thousands, except percentages)	April 30, 2022	April 30, 2021	% Change		January 31, 2022
HSAs	HSAs	5,972	5,384	11	%	5,782	HSAs	7,359	5,846	26	%	7,207
New HSAs from sales - Quarter-to-date	New HSAs from sales - Quarter-to-date	180	108	67	%	370	New HSAs from sales - Quarter-to-date	159	115	38	%	472
New HSAs from sales - Year-to-date	New HSAs from sales - Year-to-date	295	213	38	%	687	New HSAs from sales - Year-to-date	159	115	38	%	918
New HSAs from acquisitions - Year-to-date	New HSAs from acquisitions - Year-to-date	—	—	n/a		—	New HSAs from acquisitions - Year-to-date	90	—	n/a		740
HSAs with investments	HSAs with investments	402	284	42	%	333	HSAs with investments	506	371	36	%	455
CDBs	CDBs	7,171	7,090	1	%	7,028	CDBs	7,095	6,986	2	%	7,192
Total Accounts	Total Accounts	13,143	12,474	5	%	12,810	Total Accounts	14,454	12,832	13	%	14,399
Average Total Accounts - Quarter-to-date	Average Total Accounts - Quarter-to-date	13,358	12,416	8	%	12,659	Average Total Accounts - Quarter-to-date	14,427	12,870	12	%	14,326
Average Total Accounts - Year-to-date	Average Total Accounts - Year-to-date	13,114	12,602	4	%	12,604	Average Total Accounts - Year-to-date	14,427	12,870	12	%	13,450

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 ~~approximately 0.6~~1.5 million, or ~~11%~~26%, from ~~July 31, 2020~~April 30, 2021 to ~~July 31, 2021, due to further penetration into existing Network Partners~~April 30, 2022, primarily driven by new HSAs from sales, HSAs acquired through the Further Acquisition, the Fifth Third acquisition, the HealthSavings acquisition, and ~~the addition of new Network Partners.~~other HSA portfolio acquisitions. The number of our CDBs increased by ~~approximately~~ 0.1 million, or 1%2%, from ~~July 31, 2020~~April 30, 2021 to ~~July 31, 2021,~~April 30, 2022, primarily driven by ~~an increase in COBRA accounts, largely~~CDBs acquired through the Further Acquisition, partially offset by a decrease in ~~commuter benefit~~FSA accounts ~~that are currently suspended due to the COVID-19 pandemic~~ and fewer workers being required to commute to an office. The suspended commuter accounts continue to be administered on our platform and can be reinstated at any time. We have excluded the suspended commuter accounts from our account totals because they are currently not generating revenue for the Company.COBRA accounts.

HSA Assets

The following table sets forth HSA Assets as of and for the periods indicated:
(in millions, except percentages) July 31, 2021 July 31, 2020 % Change January 31, 2021
HSA cash with yield (1) $ 9,938 $ 8,626 15 % $ 9,875
HSA cash without yield (2) 90 344 (74) % 244
Total HSA cash 10,028 8,970 12 % 10,119
HSA investments with yield (1) 5,351 3,046 76 % 4,078
HSA investments without yield (2) 92 195 (53) % 138
Total HSA investments 5,443 3,241 68 % 4,216
Total HSA Assets 15,471 12,211 27 % 14,335
Average daily HSA cash with yield - Year-to-date 9,838 8,332 18 % 8,599
Average daily HSA cash with yield - Quarter-to-date $ 9,850 $ 8,380 18 % $ 9,060

~~(1)HSA Assets that generate custodial revenue.~~

~~(2)HSA Assets that do not generate custodial revenue.~~


(in millions, except percentages)	April 30, 2022		April 30, 2021		% Change		January 31, 2022
HSA cash	$	12,935	$	10,026	29	%	$	12,943
HSA investments	7,330		4,987		47	%	6,675
Total HSA Assets	20,265		15,013		35	%	19,618
Average daily HSA cash - Year-to-date	12,910		10,051		28	%	10,579
Average daily HSA cash - Quarter-to-date	12,910		10,051		28	%	12,118

HSA Assets ~~which are~~includes our HSA ~~members'~~members’ custodial assets, ~~for~~ which ~~we are the custodian or administrator, or from which we generate custodial revenue, consist~~consists of the following components: (i) HSA cash, which includes cash deposits ~~with~~held by our Depository Partners ~~or other custodians~~ and ~~cash placed in annuity contracts with~~ our insurance company partners, and (ii) HSA investments in mutual funds through our custodial investment fund partners. ~~We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.~~ Measuring HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating.

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~~Total~~ HSA cash increased by ~~$1.1~~$2.9 billion, or ~~12%~~29%, from ~~July 31, 2020~~April 30, 2021 to ~~July 31, 2021,~~April 30, 2022, due primarily to HSA cash transferred to us as part of the Further Acquisition, net HSA contributions from new ~~HSAs,~~ and ~~decreased spending per~~existing HSA members, and acquisitions of HSA portfolios, partially offset by transfers to HSA investments.

HSA investments increased by ~~$2.2~~$2.3 billion, or ~~68%~~47%, from ~~July 31, 2020~~April 30, 2021 to ~~July 31, 2021,~~April 30, 2022, due primarily to the HealthSavings acquisition, other HSA portfolio acquisitions, and transfers from HSA ~~cash and appreciation~~cash.

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Table of ~~invested balances.~~Contents

Total HSA Assets increased by ~~$3.3~~$5.3 billion, or ~~27%~~35%, from ~~July 31, 2020~~April 30, 2021 to ~~July 31, 2021,~~April 30, 2022, due primarily to HSA Assets transferred to us as part of the Further Acquisition, the Fifth Third acquisition, the HealthSavings acquisition, and other HSA portfolio acquisitions, and net HSA contributions from new ~~HSAs, decreased spending per~~and existing HSA ~~and appreciation of invested balances.~~members.

Client-held funds
(in millions, except percentages) July 31, 2021 July 31, 2020 % Change January 31, 2021
Client-held funds (1) $ 810 $ 840 (4) % $ 986
Average daily Client-held funds - Year-to-date (1) 876 861 2 % 847
Average daily Client-held funds - Quarter-to-date (1) 853 891 (4) % 848

~~(1) Client-held funds that generate custodial revenue.~~


(in millions, except percentages)	April 30, 2022		April 30, 2021		% Change		January 31, 2022
Client-held funds	$	872	$	903	(3)	%	$	897
Average daily Client-held funds - Year-to-date	865		899		(4)	%	842
Average daily Client-held funds - Quarter-to-date	865		899		(4)	%	822

Client-held funds are interest-earning deposits from which we generate custodial revenue. These deposits are amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of CDBs. We deposit the Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. Client-held funds fluctuate depending on the timing of funding and spending of CDB ~~balances.~~balances and the number of CDBs we administer.

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 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),~~loss, the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated:


		Three months ended July 31,				Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		2021		2020		(in thousands)	2022		2021
Net income (loss)		$	(3,818)	$	(148)	$	(6,433)	$	1,678
Net loss										Net loss	$	(13,639)	$	(2,615)
Interest income	Interest income	(533)		(76)		(941)		(676)		Interest income	(52)		(408)
Interest expense	Interest expense	7,254		8,895		13,943		21,158		Interest expense	10,461		6,689
Income tax benefit	Income tax benefit	(3,967)		(543)		(7,418)		(325)		Income tax benefit	(4,412)		(3,451)
Depreciation and amortization	Depreciation and amortization	12,762		9,522		24,716		18,327		Depreciation and amortization	15,788		11,954
Amortization of acquired intangible assets	Amortization of acquired intangible assets	20,289		19,077		40,103		37,779		Amortization of acquired intangible assets	23,698		19,814
Stock-based compensation expense	Stock-based compensation expense	15,617		11,438		28,416		18,834		Stock-based compensation expense	13,986		12,799
Merger integration expenses	Merger integration expenses	16,371		10,365		25,178		23,135		Merger integration expenses	9,294		8,807
Acquisition costs (gains) (1)		1,665		(28)		7,604		66
Gain on equity securities		(1,677)		—		(1,677)		—
Other (2)		1,552		1,500		999		3,034
Acquisition costs (1)										Acquisition costs (1)	6		5,939
Amortization of incremental costs to obtain a contract										Amortization of incremental costs to obtain a contract	1,067		1,272
Costs associated with unused office space										Costs associated with unused office space	1,294		—
Other										Other	844		(1,826)
Adjusted EBITDA	Adjusted EBITDA	$	65,515	$	60,002	$	124,490	$	123,010	Adjusted EBITDA	$	58,335	$	58,974

(1)For the ~~six~~three months ended ~~July 31,~~April 30, 2021, acquisition costs included $0.3 million of stock-based ~~compensation.~~compensation expense.

~~(2)~~For the three months ended July 31, 2021 and 2020, other consisted of amortization of incremental costs to obtain a contract of $1.4 million and $0.6 million, respectively, and other costs, net, of $0.2 million and $0.9 million, respectively. For the six months ended July 31, 2021 and 2020, other consisted of amortization of incremental costs to obtain a contract of $2.6 million and $0.8 million, respectively, and other income of $1.6 million and other costs of $2.2 million, respectively.

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


		Three months ended July 31,										Six months ended July 31,											Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2021			2020			$ Change		% Change		2021			2020			$ Change		% Change		(in thousands, except percentages)	2022			2021			$ Change		% Change
Adjusted EBITDA	Adjusted EBITDA	$	65,515		$	60,002		$	5,513	9	%	$	124,490		$	123,010		$	1,480	1	%	Adjusted EBITDA	$	58,335		$	58,974		$	(639)	(1)	%
As a percentage of revenue	As a percentage of revenue	35		%	34		%					33		%	34		%					As a percentage of revenue	28		%	32		%

Our Adjusted EBITDA ~~increased~~decreased by ~~$5.5~~$0.6 million, ~~or 9%~~less than 1%, from ~~$60.0~~$59.0 million for the three months ended ~~July 31, 2020~~April 30, 2021 to ~~$65.5~~$58.3 million for the three months ended ~~July 31, 2021. The increase~~April 30, 2022, primarily due to increases in ~~Adjusted EBITDA was primarily driven~~personnel and related costs, largely offset by an increase in ~~revenue related to COBRA benefits administration, which increased primarily due to the temporary COBRA subsidy available to eligible individuals under ARPA.~~total revenue.

Our Adjusted EBITDA increased by $1.5 million, or 1%, from $123.0 million for the six months ended July 31, 2020 to $124.5 million for the six months ended July 31, 2021. The increase in Adjusted EBITDA was driven by the increase in revenue related to COBRA benefits administration, partially offset by a decrease in the number

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Table of ~~commuter benefit accounts due to accounts being suspended as a result of the COVID-19 pandemic.~~Contents

Our use of Adjusted EBITDA has limitations as an analytical tool, and it 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

Revenue

We generate revenue from three primary sources: service revenue, custodial revenue, and interchange revenue.

Service revenue. 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. 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 ~~deposited with~~held by our Depository Partners ~~and with~~or our insurance company partners, ~~Client-held funds deposited with our Depository Partners, and~~ recordkeeping fees we earn in respect of mutual funds in which our members ~~invest. We deposit HSA cash~~invest, and Client-held funds deposited with our Depository Partners. HSA cash held by our Depository Partners is held 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 ~~deposited with~~held by the relevant Depository Partner, and (iii) have minimum and maximum required ~~deposit~~ balances. ~~We deposit the~~HSA cash held by our insurance company partners is held in group annuity contracts or similar arrangements. Client-held funds ~~with~~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. We~~partner from which we earn a recordkeeping fee, calculated as a percentage of custodial investments. ~~We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.~~

Interchange revenue. We earn interchange revenue each time one of our members uses one of our physical payment cards or virtual platforms to make a purchase. This revenue is collected each time a member “swipes” our payment card to pay expenses. We recognize interchange revenue monthly based on reports received from third parties, namely, the card-issuing banks and card processors.

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 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.

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Custodial costs. Custodial costs are comprised of interest retained by our HSA members, in respect of HSA cash with yield, 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. The interest rates retained by HSA members can change based on a formula or upon required notice.

Interchange costs. Interchange costs are comprised of costs we incur in connection with processing payment transactions initiated by our members. Due to the substantiation requirement on FSA/HRA-linked payment card transactions, payment card costs are higher for FSA/HRA card transactions. In addition to fixed per card fees, we are assessed additional transaction costs determined by the amount of the transaction.

Gross profit and gross margin

Our gross profit is our total revenue minus our total cost of revenue, and our gross margin is our gross profit expressed as a percentage of our total revenue. Our gross margin has been and will continue to be affected by a number of factors, including interest rates, the amount we charge our Network Partners, Clients, and members, the mix of our sources of revenue, how many services we deliver per account, and payment processing costs per account.

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Table of Contents

Operating expenses

Sales and marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including sales commissions for our direct sales force, external agent/broker commission expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense allocations.

Technology and development. Technology and development expenses include personnel and related expenses for software development and delivery, licensed software, information technology, data management, product, and security. Technology and development expenses also include software engineering services, the costs of operating our on-demand technology infrastructure, depreciation, amortization of capitalized software development costs, stock-based compensation, and common expense allocations.

General and administrative. General and administrative expenses include personnel and related expenses of, and professional fees incurred by our executive, finance, legal, internal audit, corporate development, compliance, and people departments. They also include depreciation, amortization, stock-based compensation, and common expense allocations.

Amortization of acquired intangible assets. 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. We also acquired intangible HSA portfolios from third-party custodians. We amortize these assets over the assets’ estimated useful life of 15 years. We evaluate our acquired intangible assets for impairment annually, or at a triggering event.

Merger integration. Merger integration expenses include personnel and related expenses, including severance, professional fees, legal expenses, and facilities and technology expenses directly related to integration activities to merge operations as a result of acquisitions.

Interest expense

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

Other ~~income (expense),~~expense, net

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

Income tax ~~provision (benefit)~~benefit

We are subject to federal and state income taxes in the United States based on a January 31 fiscal year end. We use the asset and liability method to account for income taxes, under which current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year. 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

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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 ~~July 31, 2021,~~April 30, 2022, we have recorded a valuation allowance on certain state deferred tax assets and maintained an overall net federal and state deferred tax liability on our condensed consolidated balance sheet.

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Table of Contents

Comparison of the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~

Revenue

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


		Three months ended July 31,								Six months ended July 31,									Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change		(in thousands, except percentages)	2022		2021		$ Change		% Change
Service revenue	Service revenue	$	109,182	$	103,805	$	5,377	5	%	$	211,716	$	215,076	$	(3,360)	(2)	%	Service revenue	$	104,348	$	102,534	$	1,814	2	%
Custodial revenue	Custodial revenue	48,776		46,909		1,867		4	%	95,754		93,808		1,946		2	%	Custodial revenue	59,365		46,978		12,387		26	%
Interchange revenue	Interchange revenue	31,145		25,325		5,820		23	%	65,835		57,166		8,669		15	%	Interchange revenue	41,966		34,690		7,276		21	%
Total revenue	Total revenue	$	189,103	$	176,039	$	13,064	7	%	$	373,305	$	366,050	$	7,255	2	%	Total revenue	$	205,679	$	184,202	$	21,477	12	%

Service revenue. The ~~$5.4~~$1.8 million, or 5%2%, increase in service revenue from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to ~~an increase in revenue related to COBRA benefits administration, which increased primarily due to the temporary COBRA subsidy available to eligible individuals under ARPA.~~

~~The $3.4 million, or 2%, decrease in service~~new revenue from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to the decrease in the number of commuter benefit accounts due to accounts being suspended as a result of the COVID-19 pandemic,acquired businesses and HSA portfolios, and new HSAs from sales, partially offset ~~the increase in revenue related to COBRA benefits administration.~~by lower average service fees per account.

Custodial revenue. The ~~$1.9~~$12.4 million, or 4%26%, increase in custodial revenue from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to the ~~$1.5~~$2.9 billion, or ~~18%~~28%, increase in the year-over-year average daily balance of HSA ~~cash with yield.~~cash. The increase was partially offset by a decrease in average annualized yield from ~~2.10%~~1.79% for the three months ended ~~July 31, 2020~~April 30, 2021 to ~~1.77%~~1.69% for the three months ended ~~July 31, 2021,~~April 30, 2022, which was due in part to HSA cash that was placed with our Depository Partners following the interest rate cuts made by the Federal Reserve ~~in response to~~at the beginning of the COVID-19 ~~pandemic.~~

~~The $1.9 million, or 2%, increase in custodial revenue~~pandemic, and by transfers from ~~the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to the $1.5 billion, or 18%, increase in the year-over-year average daily balance of~~ HSA cash with yield. The increase was partially offset by a decrease in average annualized yield from 2.11% for the six months ended July 31, 2020 to 1.78% for the six months ended July 31, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic.

~~We are continuing to transition HSA cash without yield~~ to HSA cash with yield and expect to complete the transition in fiscal year 2022. This cash is being placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial revenue.investments.

Interchange revenue. The ~~$5.8~~$7.3 million, or ~~23%~~21%, increase in interchange revenue from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to an increase in accounts and increased spend per ~~account, as healthcare-related restrictions related to the COVID-19 pandemic have decreased.~~account.

The $8.7 million, or 15%, increase in interchange revenue from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to increased spend per account, as healthcare-related restrictions related to the COVID-19 pandemic have decreased, partially offset by a decrease in spend with respect to commuter benefit accounts partially attributable to the COVID-19 pandemic and fewer workers being required to commute to an office.

Total revenue. Total revenue increased ~~$13.1~~$21.5 million, or 7%12%, from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 due to the increases in service, custodial, and interchange ~~service, and custodial revenues.~~

~~Total revenue increased $7.3 million, or 2%, from the six months ended July 31, 2020 to the six months ended July 31, 2021 due to the increases in interchange and custodial~~ revenues ~~partially offset by the decrease in service revenue.~~

~~-26-~~

~~Tabl~~e of Co ~~ntents~~described above.

Impact of COVID-19. Our business has been adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by ~~the COVID-19 pandemic, including as a result of the associated interest rate cuts by the Federal Reserve~~related societal and ~~other market conditions that have caused~~economic changes. Although interest rates ~~to decline significantly, which reduces the yield on funds placed~~have increased from their pandemic lows, a majority of our members' HSA cash is deposited with our Depository Partners pursuant to contracts that have fixed interest rate terms, typically ranging from three to five years, which reduces the short-term impact of an increase or decline in ~~this environment. Sales opportunities have also been impacted, with some opportunities delayed and most now being held virtually. In addition, we are required to support~~prevailing interest rates on our ~~Clients' open enrollment activities virtually. We may be unable to meet our service level commitments to our Clients as~~custodial revenue. As a result, ~~of disruptions to~~the yield we currently receive from our ~~work force~~Depository Partners and ~~disruptions to third party contracts that we rely on to provide our services.~~insurance company partners remains significantly below the levels seen before the pandemic. Our financial results related to certain of our products have also been adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak, and ~~other impacts from the outbreak, and~~ the "work from home" trend, or hybrid work environments, may continue ~~after the pandemic.~~indefinitely. In particular, the ~~recent~~ increased spread of COVID-19 in early 2022 and the associated decisions by employers to delay return-to-office plans for their employees ~~will~~ further ~~delay~~delayed the recovery of use of these commuter benefits. During the initial stages of the COVID-19 pandemic, and during subsequent increases in COVID-19 cases, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue and service revenue. ~~If the current increase~~Our compliance with proposed COVID-19 vaccine mandates has resulted in, ~~COVID-19 cases results~~and could continue to result in, ~~new lockdowns or restrictions~~increased team member attrition, absenteeism, and associated costs. We may be unable to meet our service level commitments to our Clients as a result of disruptions to our work force and disruptions to third-party contracts that we rely on ~~elective medical procedures,~~to provide our ~~interchange revenue and service revenue could again be negatively impacted.~~services. The extent to which the COVID-19 pandemic and any longer lasting impacts on the usage of our services will continue to negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our business and financial results.

-25-

Table of Contents

Cost of revenue

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


		Three months ended July 31,								Six months ended July 31,									Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change		(in thousands, except percentages)	2022		2021		$ Change		% Change
Service costs	Service costs	$	67,334	$	65,246	$	2,088	3	%	$	137,966	$	136,259	$	1,707	1	%	Service costs	$	80,874	$	70,632	$	10,242	15	%
Custodial costs	Custodial costs	4,824		4,998		(174)		(3)	%	9,833		10,043		(210)		(2)	%	Custodial costs	6,641		5,009		1,632		33	%
Interchange costs	Interchange costs	4,974		4,011		963		24	%	10,419		9,890		529		5	%	Interchange costs	6,991		5,445		1,546		28	%
Total cost of revenue	Total cost of revenue	$	77,132	$	74,255	$	2,877	4	%	$	158,218	$	156,192	$	2,026	1	%	Total cost of revenue	$	94,506	$	81,086	$	13,420	17	%

Service costs. The ~~$2.1~~$10.2 million, or 3%15%, increase in service costs from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to the inclusion of Further's results of operations and an increase in personnel costs ~~related~~ to ~~COBRA benefits administration, which increased primarily due to efforts to implement~~support the ~~offering of the temporary COBRA subsidy available to eligible individuals under ARPA.~~

~~The $1.7 million, or 1%,~~ increase in service costs from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to an increase in costs related to COBRA benefits administration, which increased primarily due to efforts to implement the offering of the temporary COBRA subsidy available to eligible individuals under ARPA.average Total Accounts.

Custodial costs. The ~~$0.2~~$1.6 million, or 3%33%, ~~decrease~~increase in custodial costs from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was due to an increase in the average daily balance of HSA cash, which increased from $10.1 billion for the three months ended April 30, 2021 to $12.9 billion for the three months ended April 30, 2022 and an associated increase in interest retained by HSA members, partially offset by a lower average annualized rate of interest retained by HSA members on HSA cash, ~~with yield,~~ which decreased from ~~0.20%~~0.18% for the three months ended ~~July 31, 2020~~April 30, 2021 to 0.16% for the three months ended July 31, 2021, partially offset by an increase in the average daily balance of HSA cash with yield, which increased from $8.4 billion for the three months ended July 31, 2020 to $9.9 billion for the three months ended July 31, 2021.April 30, 2022.

The $0.2 million, or 2%, decrease in custodial costs from the six months ended July 31, 2020 to the six months ended July 31, 2021 was due to a lower average annualized rate of interest retained by HSA members on HSA cash with yield, which decreased from 0.20% for the six months ended July 31, 2020 to 0.17% for the six months ended July 31, 2021, partially offset by an increase in the average daily balance of HSA cash with yield, which increased from $8.3 billion for the six months ended July 31, 2020 to $9.8 billion for the six months ended July 31, 2021.

Interchange costs. The ~~$1.0~~$1.5 million, or ~~24%~~28%, increase in interchange costs from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was due to ~~higher card spend volumes, as healthcare-related restrictions related to the COVID-19 pandemic have decreased.~~

~~The $0.5 million, or 5%,~~an increase in ~~interchange costs from the six months ended July 31, 2020 to the six months ended July 31, 2021 was due to higher card~~accounts and increased spend ~~volumes, as healthcare-related restrictions related to the COVID-19 pandemic have decreased.~~

~~-27-~~

~~Tabl~~e of Co ~~ntents~~per account.

Total cost of revenue. As we continue to add Total Accounts, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members. On an annual basis, we expect our cost of revenue to continue to increase as a percentage of our total revenue, primarily due to the inclusion of a full year of Further's results of operations and expected increases in stock-based compensation. Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, account management functions, realized synergies, and the impact of the COVID-19 pandemic.

Operating expenses

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


		Three months ended July 31,								Six months ended July 31,									Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2021		2020		$ Change		% Change		2021		2020		$ Change		% Change		(in thousands, except percentages)	2022		2021		$ Change		% Change
Sales and marketing	Sales and marketing	$	15,476	$	12,167	$	3,309	27	%	$	29,562	$	23,622	$	5,940	25	%	Sales and marketing	$	16,560	$	14,086	$	2,474	18	%
Technology and development	Technology and development	37,898		30,654		7,244		24	%	73,367		61,732		11,635		19	%	Technology and development	45,183		35,469		9,714		27	%
General and administrative	General and administrative	22,812		20,493		2,319		11	%	43,499		39,491		4,008		10	%	General and administrative	23,727		20,687		3,040		15	%
Amortization of acquired intangible assets	Amortization of acquired intangible assets	20,289		19,077		1,212		6	%	40,103		37,779		2,324		6	%	Amortization of acquired intangible assets	23,698		19,814		3,884		20	%
Merger integration	Merger integration	16,371		10,365		6,006		58	%	25,178		23,135		2,043		9	%	Merger integration	9,294		8,807		487		6	%
Total operating expenses	Total operating expenses	$	112,846	$	92,756	$	20,090	22	%	$	211,709	$	185,759	$	25,950	14	%	Total operating expenses	$	118,462	$	98,863	$	19,599	20	%

Sales and marketing. The ~~$3.3~~$2.5 million, or ~~27%~~18%, increase in sales and marketing expense from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to ~~an increase in marketing expenses from increased team member and partner commissions, staffing, and marketing materials.~~

~~The $5.9 million, or 25%, increase in sales and marketing expense from~~ the ~~six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to~~inclusion of Further's results of operations, an increase in marketing expenses from increased staffing and marketing collateral costs, and increases in team member and partner commissions.

We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns. On an annual basis, we expect our sales and marketing expenses to continue to increase as a percentage of our total ~~revenue.~~revenue, primarily due to the inclusion of a full year of Further's results of operations and expected increases in stock-based compensation. However, our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.

Technology and development. The ~~$7.2~~$9.7 million, or ~~24%~~27%, increase in technology and development expense from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to ~~increases in amortization, stock-based compensation, and personnel-related expenses.~~the inclusion

~~The $11.6 million, or 19%, increase in technology~~

-26-

Table of Contents

of Further's results of operations and ~~development expense from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to~~ increases in amortization, stock-based compensation, and personnel-related expenses.

We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary technology. On an annual basis, we expect our technology and development expenses to continue to increase as a percentage of our total revenue, ~~pursuant~~primarily due to the inclusion of a full year of Further's results of operations, expected increases in stock-based compensation, and our growth initiatives. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses.

General and administrative. The ~~$2.3~~$3.0 million, or ~~11%~~15%, increase in general and administrative expense from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to ~~increases in credit losses on trade receivables~~the inclusion of Further's results of operations and ~~stock-based compensation, partially offset by decreases~~increases in personnel-related expenses and ~~professional fees.~~

The $4.0 million, or 10%, increase in general and administrative expense from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to increases in credit losses on trade receivables and stock-based ~~compensation, partially offset by decreases in personnel-related expenses and professional fees.~~compensation.

We expect our general and administrative expenses ~~to continue~~ to increase for the foreseeable future due to the additional demands on our legal, compliance, ~~accounting,~~ and ~~insurance~~accounting functions that we incur as we continue to grow our business. On an annual basis, we expect our general and administrative expenses to ~~remain relatively steady~~increase as a percentage of our total revenue, ~~over~~primarily due to the ~~near term pursuant to~~inclusion of a full year of Further's results of operations, expected increases in stock-based compensation, and our growth initiatives. Our general and

~~-28-~~

~~Tabl~~e of Co ~~ntents~~

administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

Amortization of acquired intangible assets. The ~~$1.2~~$3.9 million, or 6%20%, increase in amortization of acquired intangible assets from the three months ended ~~July 31, 2020~~April 30, 2021 to the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the ~~Luum Acquisition. The remainder of the increase was due to amortization of acquired HSA portfolios.~~

~~The $2.3 million, or 6%, increase in amortization of acquired intangible assets from the six months ended July 31, 2020 to the six months ended July 31,~~Further Acquisition commencing November 1, 2021 ~~was primarily due to the inclusion of amortization related to identified intangible assets acquired through~~and the Luum Acquisition commencing March 8, 2021. The remainder of the increase was due to amortization of acquired HSA portfolios, including the Fifth Third and HealthSavings HSA portfolios.

Merger integration. The ~~$16.4 million and $25.2~~$9.3 million in merger integration expense for the three ~~and six~~ months ended ~~July 31, 2021, respectively,~~April 30, 2022 was primarily due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, ~~severance,~~ professional fees, ~~technology-related,~~ and ~~facilities~~technology-related expenses directly related to the ~~WageWorks~~Further Acquisition and ~~additional~~certain ongoing merger integration expenses ~~incurred~~ related to the acquisition of ~~Further. We expect integration expenses totaling approximately $100 million and $55 million in the aggregate for the~~our wholly owned subsidiary WageWorks, ~~and Further acquisitions, respectively. Merger integration expenses attributable to the WageWorks Acquisition are expected to be completed by the end of fiscal year 2022, with the exception of~~Inc. ("WageWorks"), including ongoing lease expense related to ~~certain~~ WageWorks offices that have been permanently closed, less any related sublease ~~income. As~~income, professional fees associated with the remediation of ~~July 31, 2021, we had~~remaining material weaknesses in internal control over financial reporting, and costs associated with remaining platform migrations. We expect merger integration expenses attributable to the Further Acquisition totaling approximately $55 million to be incurred over a ~~total~~period of approximately ~~$103 million of non-recurring merger integration costs related to~~three years from the ~~WageWorks Acquisition and the Further acquisition.~~acquisition date.

Interest expense

The ~~$7.3 million and $13.9~~$10.5 million in interest expense for the three ~~and six~~ months ended ~~July 31, 2021, respectively,~~April 30, 2022 consisted primarily of interest accrued ~~under~~on our long-term debt and amortization of debt discount and issuance costs. On an annual basis, we expect interest expense to increase, primarily from the inclusion of a full year of interest expense we will incur on the $600.0 million aggregate principal amount of the Notes, which were issued in October 2021, and due to the impact of increased interest rates on our term loan facility, which had an outstanding principal balance of $347.8 million as of April 30, 2022. The interest rate on our term loan facility and ~~amortization of financing costs. We expect~~Revolving Credit Facility is variable and, accordingly, we may incur additional expense if interest ~~expense to decrease as a result of the principal repayments under our term loan facility and to fluctuate based on changes~~rates increase in ~~prevailing interest rates.~~future periods.

Other ~~income (expense),~~expense, net

The ~~$1.2~~$3.3 million ~~change~~decrease in other ~~income (expense),~~expense, net, from ~~expense of $0.8~~$3.6 million during the three months ended ~~July 31, 2020~~April 30, 2021 to ~~income of $0.4~~$0.3 million during the three months ended ~~July 31, 2021~~April 30, 2022 was primarily due to a ~~$2.9~~$5.9 million ~~increase in interest income and other income, partially offset by a $1.7 million increase in acquisition costs.~~

The $1.7 million increase in other expense, net, from $1.6 million during the six months ended July 31, 2020 to $3.3 million during the six months ended July 31, 2021 was due to a $7.5 million increasedecrease in acquisition costs, partially offset by a ~~$5.8~~$2.6 million ~~increase~~decrease in interest ~~income~~ and other ~~income.~~income, net.

Income tax benefit

~~Income tax benefit for~~For the three ~~and six~~ months ended ~~July 31,~~April 30, 2022 and 2021, ~~was $4.0 million and $7.4 million, respectively, compared to~~we recorded an income tax benefit of ~~$0.5~~$4.4 million and ~~$0.3~~$3.5 million, ~~for the three and six months ended July 31, 2020,~~ respectively. The ~~$3.5 million and $7.1 million~~ increase in ~~the~~ income tax benefit ~~for the three and six months ended~~ ~~July 31, 2021~~ ~~compared to the three and six months ended~~ ~~July 31, 2020~~was primarily ~~due to a~~ ~~decrease in~~the result of increased pre-tax book loss and a corresponding increase in benefit for state income ~~and~~taxes, partially offset by an increase in nondeductible executive compensation and a decrease in excess tax benefits on stock-based compensation ~~expense recognized in the provision for income taxes.~~and research and development tax credits.

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Table of Contents

Seasonality

Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations. Revenue results are seasonally impacted due to ancillary service fees, timing of HSA contributions, and timing of card spend. Cost of revenue is seasonally impacted as a significant number of new and existing Network Partners bring us new HSAs and CDBs beginning in January of each year concurrent with the start of many employers’ benefit plan years. Before we realize any revenue from these new accounts, we incur costs related to implementing and supporting our new Network Partners and new accounts. These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center. These expenses begin to ramp up during our third fiscal quarter, with the majority of expenses incurred in our fourth fiscal quarter.

~~-29-~~

~~Tabl~~e of Co ~~ntents~~

Liquidity and capital resources

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 described below.~~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 ~~under~~on our ~~term loan facility,~~long-term debt, and capital expenditures.

As of ~~July 31, 2021~~April 30, 2022 and January 31, ~~2021,~~2022, cash and cash equivalents were ~~$753.8~~$161.2 million and ~~$328.8~~$225.4 million, respectively. Cash and cash equivalents as of July 31, 2021 included $456.6 million of net proceeds we received from our follow-on public offering in the first quarter of fiscal year 2022 from the sale of 5,750,000 shares of our common stock, partially offset by $50.2 million used for the Luum Acquisition.

Capital resources

We ~~routinely~~ maintain a “shelf” registration statement on Form S-3 on file with the SEC. 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. 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.

In the first quarter of fiscal year 2022, we closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $80.30 per share, less the underwriters' discount. We received net proceeds of $456.6 million after deducting underwriting discounts and commissions of $4.6 million and other offering expenses of approximately $0.5 million.

Our credit agreement includes a five-year senior secured revolving credit facility (the “Revolving Credit Facility”), in an aggregate principal amount of up to ~~$350.0 million,~~$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 8—Indebtedness. As of April 30, 2022, there were no amounts outstanding under the Revolving Credit Facility. We were in compliance with all covenants under the credit agreement as of ~~July 31, 2021,~~April 30, 2022, and for the period then ended.

Use of cash

~~We used $50.2 million~~On March 2, 2022, we completed our acquisition of the ~~net proceeds from the follow-on public offering~~HealthSavings HSA portfolio in exchange for the Luum Acquisition, with the remaining proceeds to be used for general corporate purposes, which may include prepayments under our term loan facility or potential acquisitions, including the acquisitionsa purchase price of ~~Further and the Fifth Third Bank HSA portfolio.~~$60 million in cash.

Capital expenditures for the ~~six~~three months ended ~~July 31,~~April 30, 2022 and 2021 ~~and 2020~~ were ~~$38.4~~$14.8 million and ~~$30.8~~$18.0 million, respectively. We expect to continue our current level of increased capital expenditures for the remainder of the fiscal year ending January 31, ~~2022~~2023 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems. Costs to improve the architecture of our proprietary systems include computer hardware, personnel and related costs for software engineering and outsourced software engineering services.

We believe our existing cash, cash equivalents, and ~~revolving credit facility~~Revolving Credit Facility will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months. To the extent these current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may need to raise additional funds through public or private equity or debt financing. In the event that additional financing is required, we may not be able to raise it on favorable terms, if at all.

~~-30-~~-28-

~~Tabl~~e Table of Co ~~ntents~~Contents

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


		Six months ended July 31,					Three months ended April 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Net cash provided by operating activities	Net cash provided by operating activities	$	68,166	$	68,662	Net cash provided by operating activities	$	7,077	$	30,918
Net cash used in investing activities	Net cash used in investing activities	(88,268)		(55,696)		Net cash used in investing activities	(74,203)		(67,801)
Net cash provided by financing activities	Net cash provided by financing activities	445,053		64,218		Net cash provided by financing activities	2,959		444,853
Increase in cash and cash equivalents		424,951		77,184
Increase (decrease) in cash and cash equivalents						Increase (decrease) in cash and cash equivalents	(64,167)		407,970
Beginning cash and cash equivalents	Beginning cash and cash equivalents	328,803		191,726		Beginning cash and cash equivalents	225,414		328,803
Ending cash and cash equivalents	Ending cash and cash equivalents	$	753,754	$	268,910	Ending cash and cash equivalents	$	161,247	$	736,773

Cash flows from operating activities. Net cash provided by operating activities during the ~~six~~three months ended ~~July 31, 2021~~April 30, 2022 resulted from a net loss of ~~$6.4~~$13.6 million, plus depreciation and amortization expense of ~~$64.8~~$39.5 million, stock-based compensation expense of ~~$28.4~~$14.0 million, and amortization of debt discount and issuance costs of ~~$2.5 million, and an increase in the fair value of contingent consideration of $1.0~~$0.8 million, partially offset by other non-cash items and working capital changes totaling ~~$22.1~~$33.6 million.

Net cash provided by operating activities during the ~~six~~three months ended ~~July 31, 2020~~April 30, 2021 resulted from a net ~~income~~loss of ~~$1.7~~$2.6 million, plus depreciation and amortization expense of ~~$56.1~~$31.8 million, stock-based compensation expense of ~~$18.8~~$12.8 million, and amortization of debt issuance costs of ~~$2.5~~$1.2 million, partially offset by other non-cash items and working capital changes totaling ~~$10.5~~$12.3 million.

Cash flows from investing activities. Cash used in investing activities for the ~~six~~three months ended ~~July 31,~~April 30, 2022 resulted from $59.4 million in acquisitions of intangible member assets, $13.6 million in software and capitalized software development, and $1.2 million in purchases of property and equipment.

Cash used in investing activities for the three months ended April 30, 2021 resulted from the Luum Acquisition for $49.5 million, net of cash acquired, ~~$32.1~~$15.5 million in software and capitalized software development, ~~$6.4~~$2.5 million in purchases of property and equipment, and ~~$2.7 million in acquisitions of intangible member assets, partially offset by $2.4 million of proceeds from the sale of equity securities associated with a long-term capital investment.~~

Net cash used in investing activities for the six months ended July 31, 2020 resulted from $21.8 million in software and capitalized software development, $9.0 million in purchases of property and equipment, and $24.9$0.3 million in acquisitions of intangible member assets.

Cash flows from financing activities. Net cash provided by financing activities during the ~~six~~three months ended ~~July 31,~~April 30, 2022 resulted from $2.3 million received in the settlement of Client-held funds obligations, net, and the exercise of stock options of $2.8 million. These items were partially offset by $2.2 million of principal payments on our long-term debt.

Net cash provided by financing activities during the three months ended April 30, 2021 resulted from $456.6 million of net proceeds from our follow-on public offering of 5,750,000 shares of common stock and the exercise of stock options of ~~$6.7~~$4.2 million. These items were partially offset by $15.6 million of principal payments on our long-term debt and ~~$2.6~~$0.4 million used in the settlement of Client-held funds ~~obligation.~~

Net cash provided by financing activities during the six months ended July 31, 2020 resulted primarily from $287.3 million of net proceeds from our follow-on public offering of 5,290,000 shares of common stock, which does not include accrued offering costs of $0.5 million, and the exercise of stock options of $2.8 million, partially offset by $215.6 million of principal payments on our long-term debt and $10.3 million used in the settlement of Client-held funds obligation.obligation, net.

Contractual obligations

See Note 6—Commitments and contingencies for information about our contractual obligations.

Off-balance sheet arrangements

As of ~~July 31, 2021,~~April 30, 2022, other than outstanding letters of credit issued under our ~~revolving credit facility,~~Revolving Credit Facility, we did not have any off-balance sheet arrangements. The majority of the standby letters of credit 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. The letters of credit are contingent liabilities, supported by our ~~revolving credit facility,~~Revolving Credit Facility, and are not reflected on our condensed consolidated balance sheets.

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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. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

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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, ~~2021.~~2022. There have been no significant or material changes in our critical accounting policies during the ~~six~~three months ended ~~July 31, 2021,~~April 30, 2022, as compared to those disclosed in “Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies and significant management estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021.~~2022.

Recent accounting pronouncements

See Note 1—Summary of business and significant accounting policies within the interim financial statements included in this Form 10-Q for further discussion.

Item 3. ~~Qualitative~~Quantitative and ~~quantitative~~qualitative disclosures about market risk

Market risk

Concentration of market risk. We derive a substantial portion of our revenue from providing services to tax-advantaged healthcare account holders. A significant downturn in this market or changes in state and/or federal laws impacting the preferential tax treatment of healthcare accounts such as HSAs could have a material adverse effect on our results of operations. During the ~~six~~three months ended ~~July 31,~~April 30, 2022 and 2021, ~~and 2020,~~ no one customer accounted for greater than 10% of our total revenue. We monitor market and regulatory changes regularly and make adjustments to our business if necessary.

Inflation. Inflationary factors may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, athe current high rate of inflation ~~in the future~~ may have an adverse effect on our ability to maintain current levels of expenses as a percentage of revenue if our revenue does not correspondingly increase with inflation.

Concentration of credit risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents. We maintain our cash and cash equivalents in bank and other depository accounts, which frequently may exceed federally insured limits. Our cash and cash equivalents as of ~~July 31, 2021~~April 30, 2022 were ~~$753.8~~$161.2 million, the vast majority of which was not covered by federal depository insurance. We have not experienced any material losses in such accounts and believe we are not exposed to any significant credit risk with respect to our cash and cash equivalents. Our accounts receivable balance as of ~~July 31, 2021~~April 30, 2022 was ~~$74.2~~$86.0 million. We have not experienced any significant write-offs to our accounts receivable and believe that we are not exposed to significant credit risk with respect to our accounts ~~receivable; however, the extent to which the ongoing COVID-19 pandemic will negatively impact our credit risk remains highly uncertain and cannot be accurately predicted.~~receivable. We continue to monitor our credit risk and place our cash and cash equivalents with reputable financial institutions.

Interest rate risk

HSA Assets and Client-held funds. HSA Assets consist of custodial HSA funds we hold in custody on behalf of our members. As of ~~July 31, 2021,~~April 30, 2022, we held in custody HSA Assets of approximately ~~$15.5~~$20.3 billion. As a non-bank custodian, we contract with our Depository Partners and insurance company partners to hold custodial cash assets on behalf of our members, and we earn a significant portion of our total revenue from interest paid to us by these partners. Custodial cash assets held by our insurance company partners are held in group annuity contracts or similar arrangements. The ~~contract terms~~lengths of our agreements with ~~our~~ Depository Partners typically range from three to five years and have either fixed or variable interest rates. As HSA Assets increase and existing contracts with Depository Partners expire, we seek to enter into new contracts with Depository Partners, the terms of which are impacted by the then-prevailing interest rate environment. The diversification of HSA Assets ~~placed among~~held by our Depository Partners and insurance

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company partners, and varied contract terms, substantially reduces our exposure to short-term fluctuations in prevailing interest rates and mitigates the short-term impact of a sustained increase or decline in prevailing interest rates on our custodial revenue. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize. Conversely, a sustained increase in prevailing interest rates can increase our yield. An increase in our yield would increase our custodial revenue as a percentage of total revenue. In addition, if our yield increases, we expect the spread to also increase between the interest offered to us by our Depository Partners and insurance company partners and the interest retained by our members, thus increasing our profitability. However, we may be required to increase the interest retained by our members in a rising prevailing

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interest rate environment. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no ~~control, such as the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic.~~control.

Client-held funds are interest earning deposits from which we generate custodial revenue. As of ~~July 31, 2021,~~April 30, 2022, we held Client-held funds of approximately ~~$810.0 million.~~$0.9 billion. These deposits are amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of our other CDBs. These deposits are held with Depository Partners. We deposit the Client-held funds with our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the yield available to us and thus the amount of the custodial revenue we can realize from Client-held funds. Conversely, a sustained increase in prevailing interest rates can increase our yield. Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control.

Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be unrestricted cash equivalents. Our unrestricted cash and cash equivalents are held in institutions in the U.S. and include deposits in a money market account that is unrestricted as to withdrawal or use. As of ~~July 31, 2021,~~April 30, 2022, we had unrestricted cash and cash equivalents of ~~$753.8~~$161.2 million. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our cash and cash equivalents as a result of changes in interest rates.

~~Credit agreement.~~Long-term debt. As of ~~July 31, 2021,~~April 30, 2022, we had ~~$987.5~~$347.8 million outstanding under our term loan facility and no amounts drawn under our ~~revolving credit facility.~~Revolving Credit Facility. Our overall interest rate sensitivity under these credit facilities is primarily influenced by any amounts borrowed and the prevailing interest rates on these instruments. The interest rate on our term loan credit facility and ~~revolving credit facility~~Revolving Credit Facility is variable and was ~~1.84 percent~~2.56% at ~~July 31, 2021.~~April 30, 2022. Accordingly, we may incur additional expense if interest rates increase in future periods. For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at ~~July 31, 2021~~April 30, 2022 would result in approximately ~~$9.6~~$3.5 million of additional interest expense over the next 12 months. The interest rate on our $600 million of unsecured Senior Notes due 2029 is fixed at 4.50%.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of ~~July 31, 2021,~~April 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on such evaluation, the CEO and CFO have concluded that as of ~~July 31, 2021,~~April 30, 2022, the Company’s disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting ~~at the Company’s wholly owned subsidiary, WageWorks,~~ described below.

Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses ~~in its WageWorks subsidiary,~~described below, management has concluded that the condensed consolidated financial statements

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included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.

In accordance with interpretive guidance issued by SEC staff, companies are allowed to exclude acquired businesses from the assessment of internal control over financial reporting during the first year after completion of an acquisition and from the assessment of disclosure controls and procedures to the extent subsumed in such internal control over financial reporting. In accordance with this guidance, as the Company acquired ~~Luum~~Further on ~~March 8,~~

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November 1, 2021, management's evaluation and conclusion as to the effectiveness of the Company's disclosure controls and procedures as of ~~July 31, 2021~~April 30, 2022 excluded the portion of disclosure controls and procedures that are subsumed by internal control over financial reporting of ~~Luum. Luum’s~~Further. Further represented approximately 1% of assets and approximately 8% of revenues, ~~represented approximately 1%,~~ excluding the effects of purchase accounting, of the Company's consolidated total assets and consolidated total revenues as of and for the fiscal quarter ended ~~July 31, 2021.~~April 30, 2022.

Material Weaknesses in Internal Control over Financial Reporting

~~Management~~As previously disclosed, management identified certain deficiencies in ~~WageWorks'~~the Company’s internal control over financial reporting that aggregated to material weaknesses in the following ~~components of the~~ ~~Internal Control - Integrated Framework~~ ~~(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”):~~

~~Risk Assessment~~ – The WageWorks subsidiary did not sufficiently identify and analyze risks arising from changes in the business environment, including risks arising in connection with the integration of acquisitions and financial system implementations.

~~Information and Communication~~ – The WageWorks subsidiary did not establish cross-functional procedures and policies relating to effective information and communication necessary to support the functioning of internal control over financial reporting.

~~Monitoring~~ ~~– The WageWorks subsidiary did not implement effective monitoring controls that were responsive to changes in the business or the timely remediation of identified control deficiencies.~~

~~The COSO Framework component material weaknesses described above contributed to deficiencies at the control activity level that aggregated to the material weaknesses described below:~~areas:

A. ~~Accounting Close and Financial Reporting~~

The WageWorks subsidiary had inadequate process level and monitoring controls in the area of accounting close and financial reporting specifically, but not exclusively, around the review of account reconciliations, completeness and accuracy of data material to financial reporting, accounting estimates and related cut-off, the establishment, review, and implementation of accounting policies, and the review of the accuracy and completeness of certain manual and complex data feeds into journal entries and reconciliations of high-volume standard transactions.

B. Contract to Cash Process

The ~~WageWorks subsidiary~~Company did not have effective controls around the contract-to-cash life cycle of service fees, including ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements that require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, availability of customer contracts, and reviews of non-standard contracts.

C.B. Information Technology General Controls

The ~~WageWorks subsidiary~~Company did not have effective controls related to information technology general controls (ITGCs) in the areas of logical access and ~~change-management~~change management over certain information technology systems that supported its financial reporting processes. ~~WageWorks’~~The Company's business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

These material weaknesses resulted in material misstatements of WageWorks' historical financial statements, which preceded the acquisition, and could result in a misstatement of our account balances or disclosures that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.

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Ongoing Integration and Remediation Efforts

Management has assessed the impact of the acquisition of WageWorks on the Company’s internal control over financial reporting and continues to assess changes driven by the integration of WageWorks with the existing operations at the consolidated Company. As part of this assessment, management has continued to evaluate the Company’s internal control environment to ensure that it has appropriate controls in place to mitigate the risks of a material misstatement to its consolidated financial statements associated with the WageWorks subsidiary and the Company as a whole.

~~In response to the COSO Framework component material weaknesses in the WageWorks subsidiary’s internal control over financial reporting, management has taken the following actions:~~

•performed its semi-annual risk assessment and scoping of key systems and business processes, including a risk assessment at the financial statement assertion level to ensure that the level of precision of relevant controls is adequate to address the identified risks;

•dedicated certain senior finance, accounting, operational, and IT leadership team members to work on remediation efforts and appointed third-party internal controls advisors to assist with such efforts;

•~~implemented a periodic assessment to monitor business changes impacting accounting processes and controls;~~

•~~incorporated certain WageWorks processes into the Company’s existing entity-level controls;~~

•~~established periodic reporting of the remediation plan progress to the Audit and Risk Committee of the Company's board of directors;~~

•~~continued to execute its plan to formalize documentation underlying processes and controls to promote knowledge and information transfer across functions and upon personnel changes; and~~

•~~continued to monitor the operating effectiveness of the existing entity-level controls.~~

In response to the material weakness “A. ~~Accounting Close and Financial Reporting,” management has taken the following actions:~~

•incorporated certain WageWorks processes into the Company’s process-level controls, including, but not limited to, those that address the monitoring of the accounting close cycle and enhanced the evaluation of accounting policies;

•~~redesigned certain processes and controls in conjunction with the enterprise resource planning “ERP” system migration described below;~~

•continued to execute its plan to assess the relevancy of information and data used in key controls, including a plan to design or augment controls to incorporate the review of the accuracy and completeness of such items; and

•~~continued to monitor the operating effectiveness of the process-level and redesigned controls.~~

~~In response to the material weakness “B.~~ Contract to Cash Process,” management has taken the following actions:

•continued to execute its plan to consolidate service platforms related to the contract-to-cash cycle, which will reduce a significant number of manual business process controls; ~~and~~

•enhanced the design of existing controls ~~including information and data used in controls, where applicable,~~ and implemented additional controls to further strengthen the control ~~environment.~~environment;

•continued to formalize the assessment of the relevancy of information and data used in key controls, including the incorporation of the review of the accuracy and completeness of such items; and

•continued to execute the process to assess the design and monitor the operating effectiveness of the redesigned controls.

In response to the material weakness ~~“C.~~“B. Information Technology General Controls,” management has taken the following actions:

•continued to execute its plan to consolidate service platforms, which will reduce the number of ~~ITGCs;~~ITGCs in the areas of logical access and change management;

•enhanced the design of existing controls, where applicable, and implemented additional controls to further strengthen the control environment; ~~and~~

•continued to execute the process to assess and enhance the design and monitor the operating effectiveness of controls related to logical access and change management for relevant ~~WageWorks~~ applications and ~~systems.~~systems; and

•continued training of control owners on the appropriate evidence and documentation for IT dependencies and logical access controls.

As we continue to evaluate operating effectiveness and monitor improvements to our internal control over financial reporting, we may take additional measures to address control deficiencies or modify the remediation plans described above.

As part of our integration efforts, we have migrated all of our material operations to a single ERP system for the consolidated Company that will enhance our business and financial processes and standardize our information systems. We have re-assessed risks in response to the ERP system migration and the associated changes to underlying processes. We have redesigned certain controls in response to the current risks and continue to monitor the operating effectiveness of the redesigned controls.

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Changes in Internal Control Over Financial Reporting

Other than continuing to make progress on the ongoing integration and remediation efforts described above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended ~~July 31, 2021~~April 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II—Other Information

Item 1. Legal Proceedings

From time-to-time, we may be subject to various legal proceedings and claims that arise in the normal course of our business activities. Except as described in Note 6—Commitments and contingencies, as of the date of this Quarterly Report on Form 10-Q, we were not a party to any litigation whereby the outcome of such litigation, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations, cash flows or financial position. For a description of these legal proceedings, see Note 6—Commitments and contingencies of the ~~Notes~~notes to condensed consolidated financial statements.

Item 1A. Risk factors

The risks described in “Risk factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2021~~2022 could materially and adversely affect our business, financial condition and results of operations. Except as described below, there have been no material changes in such risks. These risk factors do not identify all risks that we face, and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.

~~The ongoing~~Natural disasters, pandemics or other epidemics (including the current COVID-19 ~~pandemic has materially impacted~~pandemic), acts of terrorism, acts of war, adverse economic conditions, and other unforeseen events, may cause damage or disruption to us or our ~~business~~customers.

Natural disasters, pandemics or other epidemics (including the current COVID-19 pandemic), acts of war (including the current war between Russia and ~~may continue to materially impact our business.~~

~~Our business has been, and may continue to be, materially and adversely affected by~~Ukraine), terrorist attacks, the ~~COVID-19 pandemic. The Federal Reserve’s interest rate cut~~escalation of military activity in response to such attacks, adverse economic conditions (including the economic impact of COVID-19 and other interest rate market conditions have caused interest rates to decline significantly. While interest rates have improved somewhat since these actions were taken by the Federal Reserve, the funds that we place with our depository partners in this environment continue to be placed at lower interest rates than we originally expected. We have also seen anrecent increase in ~~regulatory~~inflation), or otherwise may have negative and significant effects, such as imposition of increased security measures, changes ~~related~~in applicable laws, market disruptions, increased costs to operate our ~~products due to government~~business, reduced economic activity among our clients, and job losses. Such events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist attacks and the national and international responses to such threats could affect the COVID-19 pandemic and may continue to see additional regulatory changes, which changes require substantial time and costs for us to ensure compliance. For example, regulatory changes related to our COBRA product have created uncertainty and additional workload on our team members. Further regulatory changes could reduce our operational efficiency and resultbusiness in ~~additional costs.~~

Our financial results related to certain of our products have also been adversely affected. For example, we have seen a significant decline in the use of commuter benefits, and the recent spread of the Delta variant of COVID-19 and the associated decisions by employers to delay return-to-office plans for their employees will further delay the recovery of use of these commuter benefits. In addition, to the extent the "work from home" trend continues after the pandemic,ways that ~~would further negatively impact the revenue we receive from commuter benefits.~~

During the initial stages of the pandemic, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue and service revenue. If the current increase in COVID-19 cases associated with the Delta variant results in new lockdowns or restrictions on elective medical procedures, our interchange revenue and service revenue could againcannot be negatively impacted. In the event our financial results are severely impacted, it may make it more difficult for us to comply with the financial covenants in our credit agreement, which could result in a breach of the financial covenants and the acceleration of our outstanding debt by our lenders.

As a result of the ongoing pandemic, substantially all of our team members have been working from home. Sales opportunities have been impacted by the lack of travel and in-person meetings, with some opportunities delayed and most now being held virtually.predicted. The rise in the Delta variant may mean that sales opportunities and lack of travel continue to be impacted longer than we anticipated and likely means that we will be supporting the open enrollment activities of our Clients virtually again during the upcoming open enrollment season. We may be unable to meet our service level commitments to our Clients as a result of disruptions to our work force and disruptions to third-party contractors that we rely on to provide our services. The risk of cybersecurity breaches and incidents, and the potential impact of these on our operations, is also higher while our team members log in to our network remotely.

The extent to which the COVID-19 pandemic will continue to negatively impact our business remains highly uncertain and, as a result, may continue to have a material and adverse impact on our business and financial results.

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~~Failure to adequately manage and maintain our custodial assets, or the failure~~effect of any of ~~our depository~~these events or ~~insurance partners, could materially and adversely affect our business, financial condition and results of operations.~~

As a non-bank custodian, we rely on our federally insured custodial depository partners and our insurance company partners to hold the vast majority of the HSA Assets that we hold in custody. If any material adverse event were to affect one of our depository partners or our insurance company partners, including a significant decline in its financial condition, a decline in the quality of its service, loss of deposits, its inability to comply with applicable banking and financial services regulatory requirements, systems failure or its inability to return principal or pay interest thereon, our business, financial condition and results of operations could be materially and adversely affected.

The HSA Assets held through our insurance company partners are not federally insured. As a result, in the event of a failure of one of our insurance company partners, the HSA Assets held through that partner would be at risk and no assurance can be given that these contractual provisions will be sufficient. Although the members bear the risk of loss with respect to investment of their HSA Assets, we would suffer reputational harm if one of our insurance company partners failed or otherwise breached its obligations to guarantee principal or pay interest thereon, which could in turn lead to financial harm to the Company.

Certain of our arrangements with our depository and insurance company partners require that we keep a minimum amount of HSA Assets with such partner, including sufficient liquid assets. If we fail to comply with those minimum HSA Asset requirements, including as a result of withdrawals by our members, we may be subject to penalties payable to our partners or a reduction in the interest payable. These requirements accordingly restrict our ability to quickly terminate our arrangements with these partners and remove our HSA Assets. Such penalties or reductions, if imposed,threats could have a material ~~and~~ adverse ~~impact~~effect on our business, financial condition, and results of operations.

In addition, certain of our insurance company partners have commitments to us with respect to the interest rates paid; however, some of these commitments are conditional upon certain market events and/or satisfaction of our obligations to the partner. A reduction of the interest rate payable, or a requirement that we post collateral in lieu of any such reduction, could have a material and adverse impact on our business, financial condition and results of operations.

In addition to any potential penalties payable, if we were required to change depository or insurance company partners, we cannot accurately predict the success of such change or that the terms of our agreement with the new partner would be as favorable to us as our current agreements.

~~Our acquisition of the Further business may not be consummated, and the integration of the Further business may not be successful.~~

We have entered into two agreements to acquire Further: (1) an agreement to acquire all cash balances and investment assets included in any voluntary employee beneficiary association (“VEBA”) account that is funding a health reimbursement arrangement (either Section 501(c)(9) or Section 115 trusts) and all contracts related exclusively thereto, and (2) an amended agreement to acquire the remainder of the Further business. Completion of this acquisition is subject to a number of risks and uncertainties, and we can provide no assurance that the various closing conditions to each part of this acquisition will be satisfied. Many of the conditions required to close the acquisition are not within our control, and we cannot predict when, or if, the acquisition will be completed. In particular, the closing of the VEBA portion of the acquisition is subject to our ability to arrange group annuity contracts with an insurance company partner for the assets of each of the VEBA plans being transferred in the acquisition, and no assurance can be given that all or a significant portion of the VEBA plans will agree to enter into such group annuity contracts. These new group annuity contracts are subject to the approval of applicable state insurance departments and will be subject to counterparty risk with our insurance company partner. The inability to complete the acquisition of Further could have a material adverse effect on our results of operations, financial condition and prospects.

The success of the Further acquisition, if completed, will depend in part on our ability to realize the anticipated business opportunities from combining the operations of Further with our business in an efficient and effective manner. The Further business is being carved out from the operations of its parent company. As such, the successful integration of the Further business with the Company is dependent on our ability to successfully carve out the Further business from its parent. While we intend to enter into a transition services agreement in order to effectively carve-out the Further business from its parent, no assurance can be given that the carve-out will be successful. In addition, the integration process could take longer than anticipated and could result in the loss of key employees, the disruption of the Company's ongoing business and the Further business, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which

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could adversely affect our ability to maintain relationships with team members, Clients, Network Partners, or other third parties, or our ability to achieve the anticipated benefits of the acquisition, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of Further with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the acquisition of Further, and our business, results of operations and financial condition could be materially and adversely affected.

~~We rely on our management team and team members, and our business could be harmed if we are unable to retain qualified personnel.~~

Our success depends, in part, on the skills, working relationships and continued services of our executive leadership team and other key personnel. While we have entered into offer letters or employment agreements with certain of our executive officers, all of our team members are “at-will” employees, and their employment can be terminated by us or them at any time, for any reason, and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable team members, in addition to salary and cash incentives, we provide equity-based awards that vest over time or based on performance. The value to team members of these awards will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other organizations. The departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to hire other personnel to manage and operate our business, and there can be no assurance that we would be able to employ a suitable replacement for the departing individual, or that a replacement could be hired on terms that are favorable to us. Volatility or lack of performance in our stock price may affect our ability to attract replacements should key personnel depart.

Our success also depends on our ability to attract, retain, and motivate additional skilled management personnel and other team members. For example, competition for qualified personnel in our field and geographic markets is intense due to the limited number of individuals who possess the skills and experience required by our industry, particularly in the technology-related fields. In addition, we have experienced team member turnover as a result of both the WageWorks Acquisition and the ongoing "great resignation" occurring throughout the American economy, and we expect to continue to experience team member turnover in the future. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New team members may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. For example, it has become more difficult for us to hire entry-level team members in our member service and client service teams. If our retention efforts are not successful or our team member turnover rate continues to increase in the future, our ~~business, results of operations and financial condition could be materially and adversely affected~~.

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Item 6. Exhibits

Incorporate by reference

Exhibit
no.

Description

Form

File No.

Exhibit

Filing Date

~~10.1†~~

Amended and Restated Asset and Unit Purchase Agreement, dated as of September 7, 2021, by and among Viking Acquisition Corp., HealthEquity, Inc., MII Life Insurance, Incorporated d/b/a Further and Aware Integrated, Inc.

~~8-K~~

~~001-36568~~

~~2.1~~

~~September 8, 2021~~

~~10.2†~~

~~Asset Purchase Agreement, dated as of September 7, 2021, by and among HealthEquity, Inc., Viking Acquisition Corp. and MII Life Insurance, Incorporated d/b/a Further~~

~~8-K~~

~~001-36568~~

~~2.2~~

~~September 8, 2021~~

31.1+

Certification of the Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2+

Certification of the Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*#

Certification of the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*#

Certification of the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy schema linkbase document

101.CAL

Inline XBRL Taxonomy calculation linkbase document

101.DEF

Inline XBRL Taxonomy definition linkbase document

101.LAB

Inline XBRL Taxonomy labels linkbase document

101.PRE

Inline XBRL Taxonomy presentation linkbase document

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~July 31, 2021,~~April 30, 2022, formatted in Inline XBRL.


+						Filed herewith.
*						Furnished herewith.
#						These certifications are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference in any filing the registrant makes under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.
†						Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. HealthEquity hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.

~~-40-~~-35-

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	HEALTHEQUITY, INC.
Date: ~~September 9, 2021~~June 8, 2022	By:	/s/ Tyson Murdock
	Name:	Tyson Murdock
	Title:	Executive Vice President and Chief Financial Officer

~~-41-~~-36-


($ in thousands)	Fair value		Estimated life (in years)
Customer relationships (1)	$	12,400	7.0
Developed technology (1)	10,900		5.0
Trade names & trademarks (1)	600		3.0
Total acquired intangible assets	$	23,900	6.0