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 April 30, ~~2022~~2023


☐			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 May 31, ~~2022,~~2023, there were ~~84,367,663~~85,470,961 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 April 30, ~~2022~~2023 (unaudited) and January 31, ~~2022~~2023	3
	Condensed consolidated statements of operations and comprehensive ~~loss~~income (loss) for the three months ended April 30, ~~2022~~2023 and ~~2021~~2022 (unaudited)	4
	Condensed consolidated statements of stockholders' equity for the three months ended April 30, ~~2022~~2023 and ~~2021~~2022 (unaudited)	5
	Condensed consolidated statements of cash flows for the three months ended April 30, ~~2022~~2023 and ~~2021~~2022 (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	30
Item 4.	Controls and procedures	31
Part II. OTHER INFORMATION
Item 1.	Legal proceedings	3432
Item 1A.	Risk factors	3432
Item 6.	Exhibits	3533
	Signatures	3634

-2-

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)	April 30, 2022		January 31, 2022		(in thousands, except par value)	April 30, 2023		January 31, 2023
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	161,247	$	225,414	Cash and cash equivalents	$	225,642	$	254,266
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
Accounts receivable, net of allowance for doubtful accounts of $4,722 and $4,989 as of April 30, 2023 and January 31, 2023, respectively						Accounts receivable, net of allowance for doubtful accounts of $4,722 and $4,989 as of April 30, 2023 and January 31, 2023, respectively	98,414		96,835
Other current assets	Other current assets	31,673		38,495		Other current assets	34,353		31,792
Total current assets	Total current assets	278,923		351,337		Total current assets	358,409		382,893
Property and equipment, net	Property and equipment, net	21,003		23,372		Property and equipment, net	10,532		12,862
Operating lease right-of-use assets	Operating lease right-of-use assets	62,599		63,613		Operating lease right-of-use assets	56,726		56,461
Intangible assets, net	Intangible assets, net	1,007,864		973,137		Intangible assets, net	907,703		936,359
Goodwill	Goodwill	1,645,836		1,645,836		Goodwill	1,648,145		1,648,145
Other assets	Other assets	48,842		49,807		Other assets	53,494		52,180
Total assets	Total assets	$	3,065,067	$	3,107,102	Total assets	$	3,035,009	$	3,088,900
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	13,661	$	27,541	Accounts payable	$	13,362	$	13,899
Accrued compensation	Accrued compensation	33,405		47,136		Accrued compensation	20,001		45,835
Accrued liabilities	Accrued liabilities	47,840		57,589		Accrued liabilities	45,647		43,668
Current portion of long-term debt	Current portion of long-term debt	10,938		8,750		Current portion of long-term debt	—		17,500
Operating lease liabilities	Operating lease liabilities	11,807		12,171		Operating lease liabilities	10,646		10,159
Total current liabilities	Total current liabilities	117,651		153,187		Total current liabilities	89,656		131,061
Long-term liabilities	Long-term liabilities					Long-term liabilities
Long-term debt, net		918,514		922,077
Long-term debt, net of issuance costs						Long-term debt, net of issuance costs	872,902		907,838
Operating lease liabilities, non-current	Operating lease liabilities, non-current	64,344		65,232		Operating lease liabilities, non-current	58,625		58,988
Other long-term liabilities	Other long-term liabilities	13,919		14,185		Other long-term liabilities	13,307		12,708
Deferred tax liability	Deferred tax liability	95,376		99,846		Deferred tax liability	81,927		82,665
Total long-term liabilities	Total long-term liabilities	1,092,153		1,101,340		Total long-term liabilities	1,026,761		1,062,199
Total liabilities	Total liabilities	1,209,804		1,254,527		Total liabilities	1,116,417		1,193,260
Commitments and contingencies (see Note 6)		0		0
Commitments and contingencies (see Note 5)						Commitments and contingencies (see Note 5)
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
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		8		8
Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2023 and January 31, 2023, respectively						Preferred stock, $0.0001 par value, 100,000 shares authorized, no shares issued and outstanding as of April 30, 2023 and January 31, 2023, respectively	—		—
Common stock, $0.0001 par value, 900,000 shares authorized, 85,470 and 84,758 shares issued and outstanding as of April 30, 2023 and January 31, 2023, respectively						Common stock, $0.0001 par value, 900,000 shares authorized, 85,470 and 84,758 shares issued and outstanding as of April 30, 2023 and January 31, 2023, respectively	9		8
Additional paid-in capital	Additional paid-in capital	1,692,835		1,676,508		Additional paid-in capital	1,764,573		1,745,716
Accumulated earnings	Accumulated earnings	162,420		176,059		Accumulated earnings	154,010		149,916
Total stockholders’ equity	Total stockholders’ equity	1,855,263		1,852,575		Total stockholders’ equity	1,918,592		1,895,640
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	3,065,067	$	3,107,102	Total liabilities and stockholders’ equity	$	3,035,009	$	3,088,900

See accompanying notes to condensed consolidated financial statements.

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HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of operations and

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


		Three months ended April 30,					Three months ended April 30,
(in thousands, except per share data)	(in thousands, except per share data)	2022		2021		(in thousands, except per share data)	2023		2022
Revenue	Revenue					Revenue
Service revenue	Service revenue	$	104,348	$	102,534	Service revenue	$	105,112	$	104,348
Custodial revenue	Custodial revenue	59,365		46,978		Custodial revenue	94,441		59,365
Interchange revenue	Interchange revenue	41,966		34,690		Interchange revenue	44,879		41,966
Total revenue	Total revenue	205,679		184,202		Total revenue	244,432		205,679
Cost of revenue	Cost of revenue					Cost of revenue
Service costs	Service costs	80,874		70,632		Service costs	80,555		80,874
Custodial costs	Custodial costs	6,641		5,009		Custodial costs	9,000		6,641
Interchange costs	Interchange costs	6,991		5,445		Interchange costs	7,051		6,991
Total cost of revenue	Total cost of revenue	94,506		81,086		Total cost of revenue	96,606		94,506
Gross profit	Gross profit	111,173		103,116		Gross profit	147,826		111,173
Operating expenses	Operating expenses					Operating expenses
Sales and marketing	Sales and marketing	16,560		14,086		Sales and marketing	19,935		16,560
Technology and development	Technology and development	45,183		35,469		Technology and development	53,192		45,183
General and administrative	General and administrative	23,727		20,687		General and administrative	24,894		23,727
Amortization of acquired intangible assets	Amortization of acquired intangible assets	23,698		19,814		Amortization of acquired intangible assets	23,166		23,698
Merger integration	Merger integration	9,294		8,807		Merger integration	3,458		9,294
Total operating expenses	Total operating expenses	118,462		98,863		Total operating expenses	124,645		118,462
Income (loss) from operations	Income (loss) from operations	(7,289)		4,253		Income (loss) from operations	23,181		(7,289)
Other expense	Other expense					Other expense
Interest expense	Interest expense	(10,461)		(6,689)		Interest expense	(14,997)		(10,461)
Other expense, net		(301)		(3,630)
Other income (expense), net						Other income (expense), net	1,828		(301)
Total other expense	Total other expense	(10,762)		(10,319)		Total other expense	(13,169)		(10,762)
Loss before income taxes		(18,051)		(6,066)
Income tax benefit		(4,412)		(3,451)
Net loss and comprehensive loss		$	(13,639)	$	(2,615)
Net loss per share:
Income (loss) before income taxes						Income (loss) before income taxes	10,012		(18,051)
Income tax provision (benefit)						Income tax provision (benefit)	5,918		(4,412)
Net income (loss) and comprehensive income (loss)						Net income (loss) and comprehensive income (loss)	$	4,094	$	(13,639)
Net income (loss) per share:						Net income (loss) per share:
Basic	Basic	$	(0.16)	$	(0.03)	Basic	$	0.05	$	(0.16)
Diluted	Diluted	$	(0.16)	$	(0.03)	Diluted	$	0.05	$	(0.16)
Weighted-average number of shares used in computing net loss per share:
Weighted-average number of shares used in computing net income (loss) per share:						Weighted-average number of shares used in computing net income (loss) per share:
Basic	Basic	84,022		81,747		Basic	85,030		84,022
Diluted	Diluted	84,022		81,747		Diluted	86,102		84,022

See accompanying notes to condensed consolidated financial statements.

-4-

HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of stockholders’ equity (unaudited)


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Total stockholders' equity, beginning balance	Total stockholders' equity, beginning balance	$	1,852,575	$	1,378,728	Total stockholders' equity, beginning balance	$	1,895,640	$	1,852,575

Common stock:	Common stock:					Common stock:
Beginning balance	Beginning balance	8		8		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	1		—
Other issuance of common stock		—		—
Ending balance	Ending balance	8		8		Ending balance	9		8
Additional paid-in capital:	Additional paid-in capital:					Additional paid-in capital:
Beginning balance	Beginning balance	1,676,508		1,158,372		Beginning balance	1,745,716		1,676,508
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	2,341		2,716		Issuance of common stock upon exercise of stock options, and for restricted stock	653		2,341
Other issuance of common stock		—		456,642
Stock-based compensation	Stock-based compensation	13,986		12,799		Stock-based compensation	18,204		13,986
Ending balance	Ending balance	1,692,835		1,630,529		Ending balance	1,764,573		1,692,835
Accumulated earnings	Accumulated earnings					Accumulated earnings
Beginning balance	Beginning balance	176,059		220,348		Beginning balance	149,916		176,059
Net loss		(13,639)		(2,615)
Net income (loss)						Net income (loss)	4,094		(13,639)
Ending balance	Ending balance	162,420		217,733		Ending balance	154,010		162,420

Total stockholders' equity, ending balance	Total stockholders' equity, ending balance	$	1,855,263	$	1,848,270	Total stockholders' equity, ending balance	$	1,918,592	$	1,855,263

See accompanying notes to condensed consolidated financial statements.

-5-

HealthEquity, Inc. and subsidiaries

Condensed consolidated statements of cash flows (unaudited)


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss		$	(13,639)	$	(2,615)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)						Net income (loss)	$	4,094	$	(13,639)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:						Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	39,486		31,768		Depreciation and amortization	39,041		39,486
Stock-based compensation	Stock-based compensation	13,986		12,799		Stock-based compensation	18,204		13,986
Amortization of debt discount and issuance costs	Amortization of debt discount and issuance costs	812		1,228		Amortization of debt discount and issuance costs	782		812
Other non-cash items		—		893
Loss on extinguishment of debt						Loss on extinguishment of debt	1,157		—
Deferred taxes	Deferred taxes	(4,470)		3,243		Deferred taxes	(738)		(4,470)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable, net	Accounts receivable, net	1,425		(475)		Accounts receivable, net	(1,579)		1,425
Other assets	Other assets	7,317		2,249		Other assets	(4,514)		7,317
Operating lease right-of-use assets	Operating lease right-of-use assets	2,034		3,369		Operating lease right-of-use assets	1,844		2,034
Accrued compensation	Accrued compensation	(13,731)		(17,748)		Accrued compensation	(25,381)		(13,731)
Accounts payable, accrued liabilities, and other current liabilities	Accounts payable, accrued liabilities, and other current liabilities	(24,056)		(381)		Accounts payable, accrued liabilities, and other current liabilities	(50)		(24,056)
Operating lease liabilities, non-current	Operating lease liabilities, non-current	(1,821)		(2,308)		Operating lease liabilities, non-current	(1,921)		(1,821)
Other long-term liabilities	Other long-term liabilities	(266)		(1,104)		Other long-term liabilities	599		(266)
Net cash provided by operating activities	Net cash provided by operating activities	7,077		30,918		Net cash provided by operating activities	31,538		7,077
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of software and capitalized software development costs	Purchases of software and capitalized software development costs	(13,635)		(15,469)		Purchases of software and capitalized software development costs	(9,003)		(13,635)
Purchases of property and equipment	Purchases of property and equipment	(1,155)		(2,490)		Purchases of property and equipment	(132)		(1,155)
Acquisition of intangible member assets		(59,413)		(309)
Acquisitions, net of cash acquired		—		(49,533)
Acquisitions of HSA portfolios						Acquisitions of HSA portfolios	—		(59,413)
Net cash used in investing activities	Net cash used in investing activities	(74,203)		(67,801)		Net cash used in investing activities	(9,135)		(74,203)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Principal payments on long-term debt	Principal payments on long-term debt	(2,187)		(15,625)		Principal payments on long-term debt	(54,375)		(2,187)
Settlement of client-held funds obligation, net	Settlement of client-held funds obligation, net	2,335		(353)		Settlement of client-held funds obligation, net	2,432		2,335
Proceeds from exercise of common stock options	Proceeds from exercise of common stock options	2,811		4,189		Proceeds from exercise of common stock options	916		2,811
Proceeds from follow-on equity offering, net of payments for offering costs		—		456,642
Net cash provided by financing activities		2,959		444,853
Increase (decrease) in cash and cash equivalents		(64,167)		407,970
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(51,027)		2,959
Decrease in cash and cash equivalents						Decrease in cash and cash equivalents	(28,624)		(64,167)
Beginning cash and cash equivalents	Beginning cash and cash equivalents	225,414		328,803		Beginning cash and cash equivalents	254,266		225,414
Ending cash and cash equivalents	Ending cash and cash equivalents	$	161,247	$	736,773	Ending cash and cash equivalents	$	225,642	$	161,247

See accompanying notes to condensed consolidated financial statements.

-6-

HealthEquity, Inc. and subsidiaries

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


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Supplemental cash flow data:	Supplemental cash flow data:					Supplemental cash flow data:
Interest expense paid in cash	Interest expense paid in cash	$	15,496	$	4,988	Interest expense paid in cash	$	19,498	$	15,496
Income tax payments (refunds), net	Income tax payments (refunds), net	55		(4,852)		Income tax payments (refunds), net	(7)		55
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	2,917		3,982		Purchases of software and capitalized software development costs included in accounts payable, accrued liabilities, or accrued compensation	2,465		2,917
Purchases of property and equipment included in accounts payable or accrued liabilities	Purchases of property and equipment included in accounts payable or accrued liabilities	1,165		765		Purchases of property and equipment included in accounts payable or accrued liabilities	119		1,165
Purchases of intangible member assets included in accounts payable or accrued liabilities		1,305		—
Contingent consideration recognized at acquisition		—		8,147
Acquisitions of HSA portfolios included in accounts payable or accrued liabilities						Acquisitions of HSA portfolios included in accounts payable or accrued liabilities	—		1,305
Exercise of common stock options receivable	Exercise of common stock options receivable	—		5		Exercise of common stock options receivable	120		—

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 Company consolidates entities in which the Company has a controlling financial interest, which includes all of 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 April 30, ~~2022~~2023 and for the three months ended April 30, ~~2022~~2023 and ~~2021~~2022 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, ~~2022.~~2023. 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.~~

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, ~~2022.~~2023.

Recently adopted accounting pronouncements

None.

Recently issued accounting pronouncements not yet adopted

None.

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Table of Contents

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

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


		Three months ended April 30,					Three months ended April 30,
(in thousands, except per share data)	(in thousands, except per share data)	2022		2021		(in thousands, except per share data)	2023		2022
Numerator (basic and diluted):	Numerator (basic and diluted):					Numerator (basic and diluted):
Net loss		$	(13,639)	$	(2,615)
Net income (loss)						Net income (loss)	$	4,094	$	(13,639)
Denominator (basic):	Denominator (basic):					Denominator (basic):
Weighted-average common shares outstanding	Weighted-average common shares outstanding	84,022		81,747		Weighted-average common shares outstanding	85,030		84,022
Denominator (diluted):	Denominator (diluted):					Denominator (diluted):
Weighted-average common shares outstanding	Weighted-average common shares outstanding	84,022		81,747		Weighted-average common shares outstanding	85,030		84,022
Weighted-average dilutive effect of stock options and restricted stock units	Weighted-average dilutive effect of stock options and restricted stock units	—		—		Weighted-average dilutive effect of stock options and restricted stock units	1,072		—
Diluted weighted-average common shares outstanding	Diluted weighted-average common shares outstanding	84,022		81,747		Diluted weighted-average common shares outstanding	86,102		84,022
Net loss per share:
Net income (loss) per share:						Net income (loss) per share:
Basic	Basic	$	(0.16)	$	(0.03)	Basic	$	0.05	$	(0.16)
Diluted	Diluted	$	(0.16)	$	(0.03)	Diluted	$	0.05	$	(0.16)

For the three months ended April 30, 2023 and 2022, ~~and 2021,~~ approximately ~~2.0~~1.0 million and ~~1.9~~2.0 million shares, respectively, attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net ~~loss~~income (loss) per share as their inclusion would have been anti-dilutive.

~~Note 3.~~ ~~Business combinations~~

~~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"). The aggregate purchase price for the acquisition consisted of $56.2 million in cash, which reflects a $2.1 million reduction in the fair value of contingent consideration during the fiscal year ended January 31, 2022.

The Luum 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 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.

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


~~(in thousands)~~	~~Estimated fair value~~
~~Current assets~~	$	~~2,667~~
~~Intangible assets~~	~~172,183~~
~~Goodwill~~	~~282,287~~
~~Current liabilities~~	~~(2,137)~~
~~Total consideration paid~~	$	~~455,000~~

Note 4.3. Supplemental financial statement information

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

Property and equipment

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


(in thousands)	(in thousands)	April 30, 2022		January 31, 2022		(in thousands)	April 30, 2023		January 31, 2023
Leasehold improvements	Leasehold improvements	$	18,614	$	18,573	Leasehold improvements	$	18,072	$	18,269
Furniture and fixtures	Furniture and fixtures	8,459		8,417		Furniture and fixtures	8,392		8,392
Computer equipment	Computer equipment	32,176		31,982		Computer equipment	27,546		28,021
Property and equipment, gross	Property and equipment, gross	59,249		58,972		Property and equipment, gross	54,010		54,682
Accumulated depreciation	Accumulated depreciation	(38,246)		(35,600)		Accumulated depreciation	(43,478)		(41,820)
Property and equipment, net	Property and equipment, net	$	21,003	$	23,372	Property and equipment, net	$	10,532	$	12,862

Depreciation expense ~~was $3.3 million and $3.9 million~~ for the three months ended April 30, 2023 and 2022 was $2.5 million and ~~2021,~~$3.3 million, 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 April 30, ~~2022~~2023 and January 31, ~~2022,~~2023, the balance of deferred revenue was ~~$10.0~~$7.8 million and ~~$10.5~~$8.3 million, respectively. The balances are related to cash received in advance for interchange and custodial revenue arrangements, other up-front fees and other commuter deferred revenue. The Company expects to recognize approximately ~~50%~~62% of its balance of deferred revenue as revenue over the next 12 months and the remainder thereafter. During the three months ended April 30, ~~2022,~~2023, approximately ~~$1.2~~$1.5 million of revenue was recognized that was included in the balance of deferred revenue as of January 31, ~~2022.~~2023. The Company expects to satisfy its remaining obligations for these arrangements.

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Leases

The components of operating lease costs were as follows:
Three months ended April 30,
(in thousands) 2022 2021
Operating lease expense $ 2,859 $ 4,313
Sublease income (495) (450)
Net operating lease expense $ 2,364 $ 3,863

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	Three months ended April 30,
(in thousands)	2023		2022
Operating lease expense	$	2,601	$	2,859
Sublease income	(362)		(495)
Net operating lease expense	$	2,239	$	2,364

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

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


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Interest income	Interest income	$	52	$	408	Interest income	$	1,598	$	52
Acquisition costs, net		(6)		(5,939)
Acquisition costs						Acquisition costs	—		(6)
Other income (expense), net	Other income (expense), net	(347)		1,901		Other income (expense), net	230		(347)
Total other expense, net		$	(301)	$	(3,630)
Total other income (expense), net						Total other income (expense), net	$	1,828	$	(301)

Interest expense

Based on the application of Accounting Standards Codification ("ASC") 470-50, Debt - Modifications and Extinguishments, the Company recorded a $1.2 million loss on extinguishment of debt due to the prepayment of $50.0 million under the Company's Term Loan Facility (as defined in Note 6—Indebtedness) during the three months ended April 30, 2023, which is included within interest expense in the condensed consolidated statement of operations and comprehensive income for the three months ended April 30, 2023.

Supplemental cash flow information

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


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
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	$	3,098	$	3,635	Operating cash flows from operating leases	$	2,741	$	3,098
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	$	1,020	$	—	Operating lease right-of-use assets obtained in exchange for new operating lease obligations	$	2,109	$	1,020

Note 5.4. Intangible assets and goodwill

Intangible assets

The gross carrying amount and associated accumulated amortization of intangible assets were as follows:


	April 30, 2023
(in thousands)	Gross carrying amount		Accumulated amortization		Net carrying amount
Amortizable intangible assets:
Software and software development costs	$	237,841	$	(162,316)	$	75,525
Acquired HSA portfolios	261,188		(67,900)		193,288
Acquired customer relationships	759,782		(166,357)		593,425
Acquired developed technology	132,825		(87,531)		45,294
Acquired trade names	12,900		(12,729)		171
Total amortizable intangible assets	$	1,404,536	$	(496,833)	$	907,703

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(in thousands) April 30, 2022 January 31, 2022
Amortizable intangible assets:
Software and software development costs $ 203,462 $ 192,050
Acquired HSA portfolios 251,324 192,298
Acquired customer relationships 759,781 759,781
Acquired developed technology 132,825 132,825
Acquired trade names 12,900 12,900
Amortizable intangible assets, gross 1,360,292 1,289,854
Accumulated amortization (352,428) (316,717)
Amortizable intangible assets, net $ 1,007,864 $ 973,137


	January 31, 2023
(in thousands)	Gross carrying amount		Accumulated amortization		Net carrying amount
Amortizable intangible assets:
Software and software development costs	$	233,194	$	(152,178)	$	81,016
Acquired HSA portfolios	261,188		(63,547)		197,641
Acquired customer relationships	759,782		(153,434)		606,348
Acquired developed technology	132,825		(81,692)		51,133
Acquired trade names	12,900		(12,679)		221
Total amortizable intangible assets	$	1,399,889	$	(463,530)	$	936,359

Amortization expense for the three months ended April 30, 2023 and 2022 ~~and 2021~~ was ~~$36.2~~$36.5 million and ~~$27.9~~$36.2 million, respectively.

Goodwill

There were no changes to the carrying value of goodwill during the three months ended April 30, ~~2022.~~2023.

Note 6.5. Commitments and contingencies

Commitments

The Company’s principal commitments consist of long-term debt, operating lease obligations for office space and data storage facilities, processing services agreements, software subscriptions, telephony services, and other contractual commitments. ~~On March 2, 2022,~~During the three months ended April 30, 2023, the Company ~~completed~~used $50.0 million of cash to prepay, in direct order of maturity, principal due under its ~~acquisition of the Health Savings Administrators, L.L.C. ("HealthSavings") HSA portfolio for $60 million in cash.~~Term Loan Facility. There were no other material changes during the three months ended April 30, ~~2022,~~2023, outside of the ordinary course of business, in the Company's commitments from those disclosed in ~~the~~ its Annual Report on Form 10-K for the fiscal year ended January 31, ~~2022.~~2023.

Contingencies

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

In April 2021, ~~the Company's~~WageWorks, Inc. ("WageWorks"), a wholly owned subsidiary ~~WageWorks, Inc. ("WageWorks")~~of the Company, exercised its 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 obligations under the lease agreement. 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. 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 it was in default of the lease for failure to pay rent, which Union Mesa claimed was due beginning in November 2021, and 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 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 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~~29, 2022, Union Mesa filed a second amended answer and ~~September 6, 2018, 2 derivative lawsuits were filed against certain of WageWorks’ former officers and directors and WageWorks (as nominal defendant) in~~counterclaim, which names the ~~Superior Court of the State of California, County of San Mateo. The actions were consolidated.~~Company as a counter-defendant. On July ~~23, 2018, a similar derivative lawsuit was filed against certain former WageWorks’ officers~~21, 2022, WageWorks 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 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 actionCompany 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.answer to the counterclaims. On ~~June 24, 2020, the court granted the defendants’ motion to dismiss the amended complaint. The plaintiffs subsequently~~April 26, 2023, Union Mesa filed a ~~notice~~motion for partial summary judgment, and the Company expects to file its response in due course. The parties are currently engaged in discovery.

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Table 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.~~Contents

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. Based on currently available information, the Company does not believe 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 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 pre-tax book loss through the end of the latest fiscal quarter to determine the interim income tax benefit. For the three months ended April 30, 2022 and 2021, the Company recorded an income tax benefit of $4.4 million and $3.5 million, respectively. This resulted in an effective income tax benefit rate of 24.4% and 57.1% for the three months ended April 30, 2022 and 2021, respectively. For the three months ended April 30, 2022 and 2021, discrete tax items had an effective tax rate benefit of 4.3% and 33.2%, respectively, primarily due to excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.

As of April 30, 2022 and January 31, 2022, the Company’s total gross unrecognized tax benefit was $11.8 million and $11.7 million, respectively. If recognized, $8.5 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of 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 the state of Texas. These examinations may lead to ordinary course adjustments or proposed adjustments to 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.

~~Note 8.~~6. Indebtedness

Long-term debt consisted of the following:


(in thousands)	(in thousands)	April 30, 2022		January 31, 2022		(in thousands)	April 30, 2023		January 31, 2023
4.50% Senior Notes due 2029	4.50% Senior Notes due 2029	$	600,000	$	600,000	4.50% Senior Notes due 2029	$	600,000	$	600,000
Term Loan Facility	Term Loan Facility	347,813		350,000		Term Loan Facility	286,875		341,250
Principal amount	Principal amount	947,813		950,000		Principal amount	886,875		941,250
Less: unamortized discount and issuance costs (1)	Less: unamortized discount and issuance costs (1)	18,361		19,173		Less: unamortized discount and issuance costs (1)	13,973		15,912
Total debt, net	Total debt, net	929,452		930,827		Total debt, net	872,902		925,338
Less: current portion of long-term debt	Less: current portion of long-term debt	10,938		8,750		Less: current portion of long-term debt	—		17,500
Long-term debt, net	Long-term debt, net	$	918,514	$	922,077	Long-term debt, net	$	872,902	$	907,838

(1)In addition to the ~~$18.4~~$14.0 million and ~~$19.2~~$15.9 million of unamortized discount and issuance costs related to long-term debt as of April 30, ~~2022~~2023 and January 31, ~~2022,~~2023, respectively, ~~$4.1~~$3.2 million and ~~$4.4~~$3.4 million of unamortized issuance costs related to the Company's Revolving Credit Facility (as defined below) are included within other assets on the condensed consolidated balance sheets as of April 30, ~~2022~~2023 and January 31, ~~2022,~~2023, respectively.

4.50% Senior Notes due 2029

On October 8, 2021, the Company completed its offering of ~~$600.0~~$600 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~~2023 and January 31, ~~2022,~~2023, $2.3 million and ~~$8.7~~$9.0 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 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.

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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 agreement (the “Credit Agreement”) 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 ~~$350.0~~$350 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 $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.

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 Credit 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 the date such loans or commitments are incurred.

Borrowings under the Credit Facilities as of April 30, 2023 bear interest at an annual rate equal to, at the option of 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 in either scenario by reference to a leverage-based pricing grid set forth in the Credit Agreement. As of April 30, ~~2022,~~2023, the stated interest rate was ~~2.56%~~6.56% and the effective interest rate was ~~3.33%~~7.32%.

On June 1, 2023, the Company entered into an amendment to the Credit Agreement (“Amendment No. 1”) which replaced interest rate provisions based on LIBOR with the forward-looking term rate based on the secured overnight financing rate published by the CME Group Benchmark Administration Limited (“Term SOFR”). As a result, borrowings under the Credit Agreement as so amended by Amendment No. 1 will bear interest at an annual rate equal to, at the option of the Company, either (i) Term SOFR, plus a 0.10% credit spread adjustment, 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 in either scenario by reference to a leverage-based pricing grid set forth in the Credit Agreement (as amended by Amendment No. 1).

The Company is also required to pay certain fees to the 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. As of April 30, 2023, no amounts have been drawn under the Revolving Credit Facility.

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

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

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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 5.00 to 1.00 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 April 30, ~~2022,~~2023, 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 the Company under the Credit Agreement are required to be unconditionally guaranteed by each of the Company’s existing or subsequently acquired or organized domestic subsidiaries and are secured by security interests in substantially all assets of the Company and the guarantors, in each case, subject to certain customary exceptions.

Note 7. Income taxes

The Company follows 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 pre-tax income through the end of the latest fiscal quarter to determine the interim income tax provision. For the three months ended April 30, 2023 and 2022, the Company recorded an income tax provision of $5.9 million and an income tax benefit of $4.4 million, respectively. This resulted in an effective income tax provision rate of 59.1% and an income tax benefit rate of 24.4% for the three months ended April 30, 2023 and 2022, respectively. For the three months ended April 30, 2023 and 2022, discrete tax items impacting the effective tax rate were primarily due to differences in tax deductible stock-based compensation expense compared to GAAP stock-based compensation expense.

As of April 30, 2023 and January 31, 2023, the Company’s total gross unrecognized tax benefit was $8.8 million and $8.7 million, respectively. If recognized, $5.4 million of the total gross unrecognized tax benefits would affect the Company's effective tax rate as of April 30, 2023.

As of April 30, 2023, $6.9 million of federal income tax payable is included within accrued liabilities on the Company's condensed consolidated balance sheet.

Note 9.8. Stock-based compensation

The following table shows a summary of stock-based compensation in the Company's condensed consolidated statements of operations and comprehensive ~~loss~~income (loss) during the periods presented:
Three months ended April 30,
(in thousands) 2022 2021
Cost of revenue $ 3,007 $ 2,403
Sales and marketing 2,014 2,188
Technology and development 3,380 3,013
General and administrative 5,585 5,195
Other expense, net (1) — 342
Total stock-based compensation expense $ 13,986 $ 13,141

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


	Three months ended April 30,
(in thousands)	2023		2022
Cost of revenue	$	3,835	$	3,007
Sales and marketing	2,779		2,014
Technology and development	4,892		3,380
General and administrative	6,698		5,585
Total stock-based compensation expense	$	18,204	$	13,986

Stock award plans

Incentive Plan. The Company grants stock options and restricted stock units ("RSUs") 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.

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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 April 30, ~~2022, 9.3~~2023, 11.4 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, 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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	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, 2023	1,021	$14.00 - 82.39	$	36.06	3.2	$	27,293
Exercised	(20)	$14.00 - 44.53	$	32.73
Forfeited	(2)	$44.53 - 44.53	$	44.53
Outstanding as of April 30, 2023	999	$14.00 - 82.39	$	36.10	2.9	$	20,970
Vested and expected to vest as of April 30, 2023	999		$	36.10	2.9	$	20,970
Exercisable as of April 30, 2023	999		$	36.10	2.9	$	20,970

Restricted stock units

A summary of RSU activity is as follows:


		RSUs and PRSUs				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		(in thousands, except weighted-average grant date fair value)	Shares	Weighted-average grant date fair value
Outstanding as of January 31, 2022		2,740	$	63.15
Outstanding as of January 31, 2023					Outstanding as of January 31, 2023	3,011	$	70.40
Granted	Granted	1,292	78.63		Granted	1,565	64.73
Vested	Vested	(493)	60.11		Vested	(674)	67.44
Forfeited	Forfeited	(189)	60.97		Forfeited	(89)	70.13
Outstanding as of April 30, 2022		3,350	$	69.69
Outstanding as of April 30, 2023					Outstanding as of April 30, 2023	3,813	$	68.60

Performance restricted stock units. During the three months ended April 30, ~~2022,~~2023, the Company awarded ~~281,784~~270,966 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, ~~2025.~~2026. The Company used a Monte Carlo simulation to determine that the grant date fair value of the awards was ~~$32.1~~$23.9 million. 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.~~9. 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.

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Cash and cash equivalents are considered Level 1 instruments and are valued based on publicly available daily net asset values. The carrying values of cash and cash equivalents approximate fair values due to the short-term nature of these instruments.

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,~~2023, the fair value of the Notes was ~~$548.2~~$536.6 million.

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

Note 10. Subsequent events

Except for Amendment No. 1 to the Credit Agreement, as described in Note 6—Indebtedness, there were no subsequent events that required recognition or disclosure.

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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 integrate acquired businesses, the impact ofon the ~~COVID-19 pandemic and resulting~~Company of societal and economic changes onarising out of the ~~Company,~~COVID-19 pandemic, the anticipated synergies and other benefits of acquired businesses and any future acquisitions, health savings accounts and other tax-advantaged consumer-directed benefits, tax and other regulatory changes, market opportunity, our future financial and operating results, our investment and acquisition strategy, our sales and marketing strategy, management’s plans, beliefs and objectives for future operations, technology and development, economic and industry trends or trend analysis, expectations about seasonality, opportunity for portfolio purchases and other acquisitions, operating expenses, anticipated income tax rates, capital expenditures, cash flows and liquidity. 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, ~~2022, this Quarterly Report on Form 10-Q,~~2023 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 April 30, ~~2022,~~2023, we administered ~~7.4~~8.0 million HSAs, with balances totaling ~~$20.3~~$22.3 billion, which we call HSA Assets, as well as ~~7.1~~7.0 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had ~~14.5~~15.0 million as of April 30, ~~2022.~~2023.

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

We have increased our share of the growing HSA market from 4% in December 2010 to ~~18%~~20% as of December ~~2021,~~2022, measured by HSA Assets. According to Devenir, as of December 2022, we are the largest HSA provider by both accounts and ~~second largest by assets as of December 2021.~~HSA Assets. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our ~~proprietary technology,~~service-driven culture, product breadth, ecosystem connectivity, and ~~service-~~proprietary

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

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 our Network Partners, Clients, ~~on a recurring per-account per-month basis.~~and members for the administration services we provide in connection with the HSAs and other CDBs we offer. We earn custodial revenue ~~mainly~~primarily from HSA Assets held atby our ~~members’ direction in~~ federally insured ~~cash deposits,~~bank and credit union partners, which we collectively call our Depository Partners, or our insurance ~~contracts or~~company partners, recordkeeping fees we earn in respect of mutual funds in which our members invest, and ~~from investment of~~ Client-held ~~funds.~~funds deposited with our Depository Partners. We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and on our virtual payment system. See “Key components of our results of operations” for additional information on our sources of revenue, including the adverse impacts caused by the ~~COVID-19 pandemic and resulting~~ societal and economic ~~changes.~~

~~Recent acquisitions~~

~~Luum acquisition.~~ ~~In March 2021, we bolstered our commuter offering by acquiring 100%~~changes arising out of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition"). The aggregate purchase price for the acquisition consisted of $56.2 million in cash. Luum provides employers with 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.~~ In September 2021, we acquired the Fifth Third Bank, National Association ("Fifth Third") HSA portfolio, which consisted of $490.0 million of HSA Assets held in approximately 160,000 HSAs in exchange for a purchase price of $60.8 million in cash.

~~Further acquisition.~~ In November 2021, we acquired the Further business (other than Further's voluntary employee beneficiary association business), a leading provider of HSA and other CDB administration services, with approximately 580,000 HSAs and $1.9 billion of HSA Assets, for $455 million in cash (the "Further Acquisition"). We expect merger integration expenses attributable to the Further Acquisition totaling approximately $55 million to be incurred over a period of approximately three years from the acquisition 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 approximately 87,000 HSAs in exchange for a purchase price of $60 million in cash.COVID-19 pandemic.

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 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, ~~2022, this Quarterly Report on Form 10-Q,~~2023 and our other reports filed with the SEC.

Our acquisition and integration strategy

We have historically acquired HSA portfolios and businesses that strengthen our service offerings. We 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%~~20% since ~~2016~~2017 and ~~47%~~43% since ~~2011,~~2012, 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.

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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.

~~Our proprietary technology~~

We believe that innovations incorporated in our technology, which enable us to better assist consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits, differentiate us from our competitors and drive our growth. Our full suite of CDB offerings complements our HSA solution and enhances our leadership position within the HSA sector. We intend to continue to invest in our technology development to enhance our capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data. 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, our members’ custodial HSA cash assets are held by either our federally insured ~~bank and credit union partners, which we collectively call our~~ Depository Partners (our “Basic Rates” offering), pursuant to contractual arrangements we have with these Depository Partners, or by our insurance company partners through group annuity contracts or other similar arrangements (our “Enhanced Rates” offering). ~~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~~are 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~~retain 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,~~revenue, 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~~are 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 increased, we expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve at the beginning of the COVID-19 pandemic due to the ~~lack~~impact of ~~demand from~~contracts signed with our Depository Partners ~~for deposits,~~in that environment and other market conditions that have caused our average annualized yield on HSA cash to decline ~~significantly.~~from historical levels.

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

Our proprietary technology

Our Purple culture

A successful healthcare consumer needs education and guidance delivered by people as well as by technology. The education and customer service we provide is driven by our Purple culture, which we believe is a significant factor in our ability to attract and retain customers and to address opportunities in the rapidly changing healthcare

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

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~~UnitedHealth 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 a significant decline in the use of commuter benefits due to many of our members working from home, which has negatively impacted both our interchange revenue and service revenue, and this "work from home" trend, or hybrid work environments, may continue indefinitely.

Regulatory environment

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~~for example, 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.~~Act, which became effective on January 1, 2023. 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.

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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)	April 30, 2022	April 30, 2021	% Change		January 31, 2022	(in thousands, except percentages)	April 30, 2023	April 30, 2022	% Change		January 31, 2023
HSAs	HSAs	7,359	5,846	26	%	7,207	HSAs	8,045	7,359	9	%	7,984
New HSAs from sales - Quarter-to-date	New HSAs from sales - Quarter-to-date	159	115	38	%	472	New HSAs from sales - Quarter-to-date	134	159	(16)	%	445
New HSAs from sales - Year-to-date	New HSAs from sales - Year-to-date	159	115	38	%	918	New HSAs from sales - Year-to-date	134	159	(16)	%	971
New HSAs from acquisitions - Year-to-date	New HSAs from acquisitions - Year-to-date	90	—	n/a		740	New HSAs from acquisitions - Year-to-date	—	90	(100)	%	90
HSAs with investments	HSAs with investments	506	371	36	%	455	HSAs with investments	556	506	10	%	541
CDBs	CDBs	7,095	6,986	2	%	7,192	CDBs	6,954	7,095	(2)	%	6,933
Total Accounts	Total Accounts	14,454	12,832	13	%	14,399	Total Accounts	14,999	14,454	4	%	14,917
Average Total Accounts - Quarter-to-date	Average Total Accounts - Quarter-to-date	14,427	12,870	12	%	14,326	Average Total Accounts - Quarter-to-date	14,980	14,427	4	%	14,677
Average Total Accounts - Year-to-date	Average Total Accounts - Year-to-date	14,427	12,870	12	%	13,450	Average Total Accounts - Year-to-date	14,980	14,427	4	%	14,531

The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from them. The number of our HSAs increased by ~~1.5~~0.7 million, or ~~26%~~9%, from April 30, ~~2021~~2022 to April 30, ~~2022,~~2023, primarily driven by new HSAs from ~~sales, HSAs acquired through the Further Acquisition, the Fifth Third acquisition, the HealthSavings acquisition, and other HSA portfolio acquisitions.~~sales. The number of our CDBs ~~increased~~decreased by 0.1 million, or 2%, from April 30, ~~2021~~2022 to April 30, ~~2022,~~2023, primarily driven ~~by CDBs acquired through the Further Acquisition, partially offset~~ by a decrease in ~~FSA~~COBRA accounts ~~and~~due to a change in the manner in which COBRA ~~accounts.~~accounts are counted following migration to our current COBRA platform.

HSA Assets

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


(in millions, except percentages)	(in millions, except percentages)	April 30, 2022		April 30, 2021		% Change		January 31, 2022		(in millions, except percentages)	April 30, 2023		April 30, 2022		% Change		January 31, 2023
HSA cash	HSA cash	$	12,935	$	10,026	29	%	$	12,943	HSA cash	$	14,113	$	12,935	9	%	$	14,199
HSA investments	HSA investments	7,330		4,987		47	%	6,675		HSA investments	8,206		7,330		12	%	7,947
Total HSA Assets	Total HSA Assets	20,265		15,013		35	%	19,618		Total HSA Assets	22,319		20,265		10	%	22,146
Average daily HSA cash - Year-to-date	Average daily HSA cash - Year-to-date	12,910		10,051		28	%	10,579		Average daily HSA cash - Year-to-date	14,074		12,910		9	%	13,049
Average daily HSA cash - Quarter-to-date	Average daily HSA cash - Quarter-to-date	12,910		10,051		28	%	12,118		Average daily HSA cash - Quarter-to-date	14,074		12,910		9	%	13,375

HSA Assets includes our HSA members’ custodial assets, which consists of the following components: (i) HSA cash, which includes cash deposits held by our Depository Partners and our insurance company partners, and (ii) HSA investments in mutual funds through our custodial investment fund partners. Measuring HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating.

HSA cash increased by ~~$2.9~~$1.2 billion, or ~~29%~~9%, from April 30, ~~2021~~2022 to April 30, ~~2022,~~2023, due primarily to ~~HSA cash transferred to us as part of the Further Acquisition,~~ net HSA contributions from new and existing HSA members, ~~and acquisitions of HSA portfolios,~~ partially offset by transfers to HSA investments.

HSA investments increased by ~~$2.3~~$0.9 billion, or ~~47%~~12%, from April 30, ~~2021~~2022 to April 30, ~~2022,~~2023, due primarily to ~~the HealthSavings acquisition, other HSA portfolio acquisitions, and~~ transfers from HSA ~~cash.~~cash, partially offset by the reduced value of invested balances due to market volatility.

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

Client-held funds


(in millions, except percentages)	April 30, 2023		April 30, 2022		% Change		January 31, 2023
Client-held funds	$	926	$	872	6	%	$	901
Average daily Client-held funds - Year-to-date	902		865		4	%	827
Average daily Client-held funds - Quarter-to-date	902		865		4	%	809

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Total HSA Assets increased by $5.3 billion, or 35%, from April 30, 2021 to 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 and existing HSA members.

~~Client-held funds~~
(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 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 ~~loss,~~income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated:


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Net loss		$	(13,639)	$	(2,615)
Net income (loss)						Net income (loss)	$	4,094	$	(13,639)
Interest income	Interest income	(52)		(408)		Interest income	(1,598)		(52)
Interest expense	Interest expense	10,461		6,689		Interest expense	14,997		10,461
Income tax benefit		(4,412)		(3,451)
Income tax provision (benefit)						Income tax provision (benefit)	5,918		(4,412)
Depreciation and amortization	Depreciation and amortization	15,788		11,954		Depreciation and amortization	15,875		15,788
Amortization of acquired intangible assets	Amortization of acquired intangible assets	23,698		19,814		Amortization of acquired intangible assets	23,166		23,698
Stock-based compensation expense	Stock-based compensation expense	13,986		12,799		Stock-based compensation expense	18,204		13,986
Merger integration expenses	Merger integration expenses	9,294		8,807		Merger integration expenses	3,458		9,294
Acquisition costs ~~(1)~~	Acquisition costs ~~(1)~~	6		5,939		Acquisition costs ~~(1)~~	—		6
Amortization of incremental costs to obtain a contract	Amortization of incremental costs to obtain a contract	1,067		1,272		Amortization of incremental costs to obtain a contract	1,304		1,067
Costs associated with unused office space	Costs associated with unused office space	1,294		—		Costs associated with unused office space	1,016		1,294
Other	Other	844		(1,826)		Other	153		844
Adjusted EBITDA	Adjusted EBITDA	$	58,335	$	58,974	Adjusted EBITDA	$	86,587	$	58,335

~~(1)~~The following table sets forth our net income (loss) as a percentage of revenue:~~For~~


	Three months ended April 30,
(in thousands, except percentages)	2023			2022			$ Change		% Change
Net income (loss)	$	4,094		$	(13,639)		$	17,733	(130)	%
As a percentage of revenue	2		%	(7)		%

Our net income increased by $17.7 million, from net loss of $13.6 million for the three months ended April 30, ~~2021, acquisition costs included $0.3~~2022 to net income of $4.1 million for the three months ended April 30, 2023, due to an increase in gross profit, partially offset by net increases in operating expenses, income tax provision, and other expenses, as described more fully in the section entitled "Comparison of ~~stock-based compensation expense.~~the three months ended April 30, 2023 and 2022."

The following table ~~further~~ sets forth our Adjusted EBITDA as a percentage of revenue:
Three months ended April 30,
(in thousands, except percentages) 2022 2021 $ Change % Change
Adjusted EBITDA $ 58,335 $ 58,974 $ (639) (1) %
As a percentage of revenue 28 % 32 %


	Three months ended April 30,
(in thousands, except percentages)	2023			2022			$ Change		% Change
Adjusted EBITDA	$	86,587		$	58,335		$	28,252	48	%
As a percentage of revenue	35		%	28		%

Our Adjusted EBITDA ~~decreased~~increased by ~~$0.6~~$28.3 million, ~~less than 1%~~or 48%, from ~~$59.0 million for the three months ended April 30, 2021 to~~ $58.3 million for the three months ended April 30, 2022 to $86.6 million for the three months ended April 30, 2023, primarily due to an increase in total revenue, partially offset by increases in personnel and related ~~costs, largely offset by an increase in total revenue.~~costs.

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Our use of Adjusted EBITDA, including as a percentage of revenue, 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 held by our Depository Partners or our insurance company partners, recordkeeping fees we earn in respect of mutual funds in which our members invest, and Client-held funds deposited with our Depository Partners. HSA cash is 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 held by the relevant Depository Partner, and (iii) have minimum and maximum required balances. HSA cash held by our insurance company partners is held in group annuity contracts or similar arrangements. Client-held funds held by our Depository Partners are held in interest-bearing, demand deposit accounts that have a floating interest rate and no set term or duration. We earn custodial revenue on HSA Assets and Client-held funds that is based on the interest rates offered to us by these Depository Partners and insurance company partners. In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA Assets in mutual funds through our custodial investment partner from which we earn a recordkeeping fee, calculated as a percentage of custodial investments.

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

Custodial costs. Custodial costs are comprised of interest retained by our HSA members, in respect of HSA cash, ~~with yield,~~personnel-related costs, 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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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 long-term debt. Interest on our term loan facility changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.

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

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

Income tax ~~benefit~~provision (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 tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. As of April 30, ~~2022,~~2023, we have not recorded a valuation allowance on federal deferred tax assets, but have recorded a valuation allowance on certain state deferred tax ~~assets and maintained~~assets. We maintain an overall net federal and state deferred tax liability on our condensed consolidated balance sheet.

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Comparison of the three months ended April 30, ~~2022~~2023 and ~~2021~~2022

Revenue

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


		Three months ended April 30,									Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2022		2021		$ Change		% Change		(in thousands, except percentages)	2023		2022		$ Change		% Change
Service revenue	Service revenue	$	104,348	$	102,534	$	1,814	2	%	Service revenue	$	105,112	$	104,348	$	764	1	%
Custodial revenue	Custodial revenue	59,365		46,978		12,387		26	%	Custodial revenue	94,441		59,365		35,076		59	%
Interchange revenue	Interchange revenue	41,966		34,690		7,276		21	%	Interchange revenue	44,879		41,966		2,913		7	%
Total revenue	Total revenue	$	205,679	$	184,202	$	21,477	12	%	Total revenue	$	244,432	$	205,679	$	38,753	19	%

Service revenue. The ~~$1.8~~$0.8 million, or 2%1%, increase in service revenue from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to ~~new~~service revenue ~~from acquired businesses and HSA portfolios, and~~earned with respect to new HSAs, ~~from sales, partially~~largely offset by ~~lower average service fees per account.~~FSA and COBRA fee attrition in connection with platform migrations.

Custodial revenue. The ~~$12.4~~$35.1 million, or ~~26%~~59%, increase in custodial revenue from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to an increase in average annualized yield on HSA cash from 1.69% for the ~~$2.9~~three months ended April 30, 2022 to 2.32% for the three months ended April 30, 2023 and the $1.2 billion, or ~~28%~~9%, increase in the year-over-year average daily balance of HSA ~~cash. The increase was partially offset by a decrease in~~cash, as described above.

Assuming the current interest rate environment continues, we expect our average annualized yield ~~from 1.79% for the three months ended April 30, 2021 to 1.69% for the three months ended April 30, 2022, which was due in part to~~on HSA cash ~~that was placed~~to increase as our existing agreements with our Depository Partners ~~following~~are renewed or replaced, resulting in higher custodial revenue. In addition, we expect an increase in the ~~interest rate cuts made by the Federal Reserve at the beginning~~percentage of ~~the COVID-19 pandemic, and by transfers from~~ HSA cash held in our Enhanced Rates offering to ~~HSA investments.~~positively impact our average annualized yield and thus our custodial revenue. In addition, on an annual basis, relative to the fiscal year ended January 31, 2023, we expect an increase in custodial revenue resulting from the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate.

Interchange revenue. The ~~$7.3~~$2.9 million, or ~~21%~~7%, increase in interchange revenue from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to an increase in ~~accounts~~Total Accounts and increased spend per account.

Total revenue. Total revenue increased ~~$21.5~~$38.8 million, or ~~12%~~19%, from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 due to the increases in ~~service,~~ custodial, interchange, and ~~interchange~~service revenues, described above.

Impact of COVID-19. Our business ~~has been~~was adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by ~~related~~the societal and economic ~~changes.~~changes arising out of the pandemic. Although interest rates have increased from their pandemic lows, a majority of our members' HSA cash is deposited with our Depository Partners pursuant to contracts that have fixed interest rate terms, typically ranging from three to five years, which reduces the short-term impact of an increase or decline in prevailing interest rates on our custodial revenue. As a result, the average annualized yield we currently receive from our Depository Partners ~~and insurance company partners~~ remains ~~significantly~~ below the levels seen immediately before the pandemic due to the HSA cash that was deposited with them during the pandemic. Our financial results related to certain of our products ~~have also been~~were adversely affected, such as commuter benefits, due to ~~many of our members working from home during the outbreak, and the~~ "work from home" ~~trend, or~~and hybrid work environments, which have continued and may continue indefinitely. ~~In particular,~~We saw a negative impact on the ~~increased spread~~financial results related to our COBRA product, as the Employee Benefits Security Administration provided disaster relief in the form of ~~COVID-19~~an extension to the required timeline for participants to make COBRA elections, which we believe resulted in ~~early 2022 and~~fewer COBRA elections by our members because they had more time to assess the ~~associated decisions by employers~~cost of their out-of-pocket expenses against the cost of COBRA premiums. The national emergency under which the disaster relief was provided ended in April 2023; however, the extent to ~~delay return-to-office plans for~~which COBRA elections will return to their ~~employees further delayed the recovery of use of these commuter benefits.~~prior levels, if at all, remains uncertain. During the initial stages of the COVID-19 pandemic, and during subsequent increases in COVID-19 cases, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue and service revenue. ~~Our compliance with proposed COVID-19 vaccine mandates has resulted in, and could continue to result in, increased team member attrition, absenteeism, and associated costs. We~~In the event of further outbreaks, we may be unable to meet our service level commitments to our Clients as a result of disruptions to our ~~work force~~workforce and disruptions to third-party contracts that we rely on to provide our services. The extent to which the societal and economic changes arising out of the COVID-19 pandemic, ~~and~~including any longer lasting impacts on the usage of our services, will continue to negatively impact our business remains highly uncertain and as a result may have a material adverse impact on our business and financial results.

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Cost of revenue

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


		Three months ended April 30,									Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2022		2021		$ Change		% Change		(in thousands, except percentages)	2023		2022		$ Change		% Change
Service costs	Service costs	$	80,874	$	70,632	$	10,242	15	%	Service costs	$	80,555	$	80,874	$	(319)	0	%
Custodial costs	Custodial costs	6,641		5,009		1,632		33	%	Custodial costs	9,000		6,641		2,359		36	%
Interchange costs	Interchange costs	6,991		5,445		1,546		28	%	Interchange costs	7,051		6,991		60		1	%
Total cost of revenue	Total cost of revenue	$	94,506	$	81,086	$	13,420	17	%	Total cost of revenue	$	96,606	$	94,506	$	2,100	2	%

Service costs. The ~~$10.2~~$0.3 million, or ~~15%~~less than 1%, ~~increase~~decrease in service costs from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to ~~the inclusion of Further's results of operations and an increase~~a decrease in personnel ~~costs to support the increase in average Total Accounts.~~costs.

Custodial costs. The ~~$1.6~~$2.4 million, or ~~33%~~36%, increase in custodial costs from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily 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 ~~which decreased~~ from ~~0.18% for~~0.16% during the three months ended April 30, ~~2021~~2022 to ~~0.16% for~~0.22% during the three months ended April 30, ~~2022.~~2023, and the $1.2 billion, or 9%, increase in the year-over-year average daily balance of HSA cash, as described above.

Interchange costs. The ~~$1.5~~$0.1 million, or ~~28%~~1%, increase in interchange costs from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was due to an increase in ~~accounts~~Total Accounts and increased spend 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. OnHowever, on an annual basis, relative to the fiscal year ended January 31, 2023, we expect our cost of revenue to ~~continue to increase~~decrease as a percentage of our total revenue, primarily due to ~~the inclusion of a full year of Further's results of operations and expected~~an increase in custodial revenue, partially offset by increases in stock-based ~~compensation.~~compensation and other personnel costs. Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, account management functions, ~~realized synergies,~~ and the impact of societal and economic changes arising out of the COVID-19 pandemic.

Operating expenses

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


		Three months ended April 30,									Three months ended April 30,
(in thousands, except percentages)	(in thousands, except percentages)	2022		2021		$ Change		% Change		(in thousands, except percentages)	2023		2022		$ Change		% Change
Sales and marketing	Sales and marketing	$	16,560	$	14,086	$	2,474	18	%	Sales and marketing	$	19,935	$	16,560	$	3,375	20	%
Technology and development	Technology and development	45,183		35,469		9,714		27	%	Technology and development	53,192		45,183		8,009		18	%
General and administrative	General and administrative	23,727		20,687		3,040		15	%	General and administrative	24,894		23,727		1,167		5	%
Amortization of acquired intangible assets	Amortization of acquired intangible assets	23,698		19,814		3,884		20	%	Amortization of acquired intangible assets	23,166		23,698		(532)		(2)	%
Merger integration	Merger integration	9,294		8,807		487		6	%	Merger integration	3,458		9,294		(5,836)		(63)	%
Total operating expenses	Total operating expenses	$	118,462	$	98,863	$	19,599	20	%	Total operating expenses	$	124,645	$	118,462	$	6,183	5	%

Sales and marketing. The ~~$2.5~~$3.4 million, or ~~18%~~20%, increase in sales and marketing ~~expense~~expenses from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to ~~the inclusion of Further's results of operations,~~ an increase in marketing expenses from increased ~~staffing~~personnel-related expenses and ~~marketing collateral costs, and increases in team member and partner commissions.~~travel costs.

We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns. On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our sales and marketing expenses to ~~continue to increase~~remain relatively steady 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.~~revenue. 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 ~~$9.7~~$8.0 million, or ~~27%~~18%, increase in technology and development ~~expense~~expenses from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to ~~the inclusion~~

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~~of Further's results of operations and~~ increases in ~~amortization, stock-based compensation,~~personnel-related expenses and ~~personnel-related expenses.~~amortization.

We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary technology. On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our technology and development expenses to ~~continue to increase~~remain relatively steady as a

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percentage of our total ~~revenue, primarily due to the inclusion of a full year of Further's results of operations, expected increases in stock-based compensation, and~~revenue. However, 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 ~~$3.0~~$1.2 million, or ~~15%~~5%, increase in general and administrative ~~expense~~expenses from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to ~~the inclusion of Further's results of operations and increases~~an increase in ~~personnel-related expenses and~~ stock-based compensation.

We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, and ~~accounting~~finance functions ~~that we incur~~ as we continue to grow our business. On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our general and administrative expenses to ~~increase~~remain relatively steady as a percentage of our total ~~revenue, primarily due to the inclusion of a full year of Further's results of operations, expected increases in stock-based compensation, and~~revenue. However, our ~~growth initiatives. Our~~ general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

Amortization of acquired intangible assets. The ~~$3.9~~$0.5 million, or ~~20%~~2%, ~~increase~~decrease in amortization of acquired intangible assets from the three months ended April 30, ~~2021~~2022 to the three months ended April 30, ~~2022~~2023 was primarily due to the ~~inclusion~~smaller amount of ~~amortization related to identified~~ intangible assets acquired through the Further Acquisition commencing November 1, 2021 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.that have not been fully amortized.

Merger integration. The ~~$9.3~~$5.8 million, or 63%, decrease in merger integration expense from the three months ended April 30, 2022 to the three months ended April 30, 2023 was primarily due to a decrease in merger integration activities related to the acquisition of the Further business. The $3.5 million in merger integration expense for the three months ended April 30, ~~2022~~2023 was primarily due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, professional fees, and technology-related expenses directly related to the Further ~~Acquisition~~acquisition and certain ongoing merger integration expenses related to the ~~acquisition of our wholly owned subsidiary~~ WageWorks ~~Inc. ("WageWorks"),~~acquisition, including ongoing lease expense related to WageWorks offices that have been permanently closed, less any related sublease income, and professional fees associated with the remediation of ~~remaining~~ material weaknesses in internal control over financial ~~reporting, and costs associated with remaining platform migrations.~~reporting. We expect merger integration expenses attributable to the Further ~~Acquisition~~acquisition totaling approximately $55 million to be incurred over a period of approximately ~~three~~five to six years from the date of the acquisition, ~~date.~~which occurred in November 2021.

Interest expense

The ~~$10.5~~$4.5 million, or 43%, increase in interest expense ~~for~~was primarily due to the impact of higher interest rates on our Term Loan Facility, which had an effective interest rate of 7.32% as of April 30, 2023, up from 3.33% as of April 30, 2022, and a $1.2 million loss on extinguishment of debt due to the prepayment of $50.0 million under our Term Loan Facility during the three months ended April 30, 2023. Our Term Loan Facility had an outstanding principal balance of $286.9 million and $347.8 million as of April 30, 2023 and 2022, ~~consisted primarily of interest accrued on our long-term debt and amortization of debt discount and issuance costs.~~respectively. On an annual basis, relative to the fiscal year ended January 31, 2023, we expect our 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~~Term Loan Facility, partially offset by a lower average principal balance ~~of $347.8 million as of April 30, 2022.~~under our Term Loan Facility. The interest rate on our ~~term loan facility~~Term Loan Facility and Revolving Credit Facility is variable and, accordingly, we may incur additional expense if interest rates continue to increase in future periods.

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

The ~~$3.3~~$2.1 million ~~decrease~~change in other ~~expense,~~income (expense), net, from ~~$3.6 million during the three months ended April 30, 2021 to~~expense of $0.3 million during the three months ended April 30, 2022 to income of $1.8 million during the three months ended April 30, 2023 was ~~primarily~~ due to a ~~$5.9~~$1.5 million ~~decrease in acquisition costs, partially offset by a $2.6 million decrease~~increase in interest income and a $0.6 million increase in other income, net.

Income tax ~~benefit~~provision (benefit)

For the three months ended April 30, ~~2022~~2023 and ~~2021,~~2022, we recorded an income tax provision of $5.9 million and an income tax benefit of $4.4 million, ~~and $3.5 million,~~ respectively. The increase in income tax ~~benefit~~provision was primarily the result of ~~increased~~an increase in pre-tax book ~~loss and~~income, a ~~corresponding increase~~decrease in ~~benefit for state income taxes, partially offset by~~tax deductible stock-based compensation compared to GAAP stock-based compensation expense, an increase in nondeductible executive compensation, and a decrease in ~~excess tax benefits on stock-based compensation and~~ research and development tax credits.

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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

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to activating accounts and hiring additional staff, including seasonal help to support our member support center. These expenses begin to ramp up during our third fiscal quarter, with the majority of seasonal expenses incurred in our fourth fiscal quarter.

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

As of April 30, ~~2022~~2023 and January 31, ~~2022,~~2023, cash and cash equivalents were ~~$161.2~~$225.6 million and ~~$225.4~~$254.3 million, respectively.

Capital resources

We 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.

Our credit agreement includes a five-year senior secured revolving credit facility (the “Revolving Credit Facility”), in an aggregate principal amount of up to $1.0 billion, which may be used for working capital and general corporate purposes, including the financing of acquisitions and other investments. For a description of the terms of the credit agreement, refer to Note 8—6—Indebtedness. As of April 30, ~~2022,~~2023, there were no amounts outstanding under the Revolving Credit Facility. We were in compliance with all covenants under the credit agreement as of April 30, ~~2022,~~2023, and for the period then ended.

Use of cash

~~On March 2, 2022,~~During the three months ended April 30, 2023, we ~~completed~~used $50.0 million of cash to prepay, in direct order of maturity, principal due under our ~~acquisition of the HealthSavings HSA portfolio in exchange for a purchase price of $60 million in cash.~~Term Loan Facility.

Capital expenditures for the three months ended April 30, 2023 and 2022 ~~and 2021~~ were ~~$14.8~~$9.1 million and ~~$18.0~~$14.8 million, respectively. We expect to continue our current level of ~~increased~~ capital expenditures for the remainder of the fiscal year ending January 31, ~~2023~~2024 as we continue to ~~devote a significant amount of our capital expenditures to~~invest in improving the architecture and functionality of our proprietary systems. ~~Costs~~Capital expenditures 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 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.

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


		Three months ended April 30,					Three months ended April 30,
(in thousands)	(in thousands)	2022		2021		(in thousands)	2023		2022
Net cash provided by operating activities	Net cash provided by operating activities	$	7,077	$	30,918	Net cash provided by operating activities	$	31,538	$	7,077
Net cash used in investing activities	Net cash used in investing activities	(74,203)		(67,801)		Net cash used in investing activities	(9,135)		(74,203)
Net cash provided by financing activities		2,959		444,853
Increase (decrease) in cash and cash equivalents		(64,167)		407,970
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(51,027)		2,959
Decrease in cash and cash equivalents						Decrease in cash and cash equivalents	(28,624)		(64,167)
Beginning cash and cash equivalents	Beginning cash and cash equivalents	225,414		328,803		Beginning cash and cash equivalents	254,266		225,414
Ending cash and cash equivalents	Ending cash and cash equivalents	$	161,247	$	736,773	Ending cash and cash equivalents	$	225,642	$	161,247

Cash flows from operating activities. Net cash provided by operating activities increased by $24.5 million from the three months ended April 30, 2022 to the three months ended April 30, 2023 primarily due to increased collections with respect to our custodial and interchange revenues and a decrease in cash payments made to our accounts payable, accrued liabilities, and other current liabilities during the three months ended April 30, 2022 resulted from a net loss of $13.6 million, plus depreciation and amortization expense of $39.5 million, stock-based compensation expense of $14.0 million, and amortization of debt discount and issuance costs of $0.8 million, partially offset by other non-cash items and working capital changes totaling $33.6 million.2023.

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

Cash flows from investing activities. ~~Cash~~Net cash used in investing activities ~~for~~decreased by $65.1 million from the three months ended 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~~to the three months ended April 30, ~~2021 resulted from the Luum Acquisition~~2023 due to a $59.4 million decrease in cash used in HSA portfolio acquisitions, a $4.6 million decrease in cash used for ~~$49.5 million, net~~purchases of ~~cash acquired, $15.5 million in~~ software and capitalized software development ~~$2.5~~costs, and a $1.0 million decrease in cash used for purchases of property and ~~equipment, and $0.3 million in acquisitions of intangible member assets.~~equipment.

Cash flows from financing activities. Netcash ~~provided by~~used in financing activities was $51.0 million during the three months ended April 30, ~~2022 resulted from $2.3 million received in the settlement of Client-held funds obligations,~~2023, compared to 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 of $3.0 million during the three months ended April 30, ~~2021~~2022. The change resulted primarily from ~~$456.6~~a $52.2 million increase in payments related to our long-term debt, including $50.0 million of ~~net~~cash used to prepay, in direct order of maturity, principal due under our Term Loan Facility, and a $1.9 million decrease in proceeds from ~~our follow-on public offering of 5,750,000 shares~~the exercise of common stock ~~and the exercise of stock options of $4.2 million.~~options. These ~~items~~changes were partially offset by ~~$15.6~~a $0.1 million ~~of principal~~increase in net payments ~~on our long-term debt and $0.4 million used~~received in the settlement of ~~Client-held~~client-held funds ~~obligation, net.~~obligation.

Contractual obligations

See Note 6—5—Commitments and contingencies for information about our contractual obligations.

Off-balance sheet arrangements

As of April 30, ~~2022,~~2023, other than outstanding letters of credit issued under our Revolving Credit Facility, we did not have any off-balance sheet arrangements. The ~~majority of the~~ standby letters of credit generally expire within one year. However, in the ordinary course of business, we will continue to renew or modify the terms of the letters of credit to support business requirements. The letters of credit are contingent liabilities, supported by our Revolving Credit Facility, and are not reflected on our condensed consolidated balance sheets.

Critical accounting policies and significant management estimates

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, ~~2022.~~2023. There have been no significant or material changes in our critical accounting policies during the three months ended April 30, ~~2022,~~2023, as compared to those disclosed in “Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies and significant management estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2022.~~2023.

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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. Quantitative and 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 three months ended April 30, ~~2022~~2023 and ~~2021,~~2022, 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, the current high rate of inflation 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 April 30, ~~2022~~2023 and January 31, 2023 were ~~$161.2~~$225.6 million and $254.3 million, respectively, 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.~~accounts. Our accounts receivable balance as of April 30, ~~2022~~2023 and January 31, 2023 was ~~$86.0 million.~~$98.4 million and $96.8 million, respectively. 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. 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 April 30, ~~2022,~~2023 and January 31, 2023, we held in custody HSA Assets of ~~approximately $20.3 billion.~~$22.3 billion and $22.1 billion, respectively. 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 lengths of our agreements with 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 held by our Depository Partners and insurance 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.

Client-held funds are interest earning deposits from which we generate custodial revenue. As of April 30, ~~2022,~~2023 and January 31, 2023, we held Client-held funds of ~~approximately $0.9 billion.~~$926 million and $901 million, respectively. 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

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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~~may 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 April 30, ~~2022,~~2023 and January 31, 2023, we had unrestricted cash and cash equivalents of ~~$161.2 million.~~$225.6 million and $254.3 million, respectively. 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.

Long-term debt. As of April 30, ~~2022,~~2023 and January 31, 2023, we had ~~$347.8~~$286.9 million and $341.3 million, respectively, outstanding under our term loan facility and no amounts drawn under our 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 stated interest rate on our term loan credit facility and Revolving Credit Facility is variable and was ~~2.56%~~6.56% at April 30, ~~2022.~~2023. Accordingly, we may incur additional expense if interest rates further increase in future periods. For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at April 30, ~~2022~~2023 would result in approximately ~~$3.5~~$2.9 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~~procedures

Evaluation of ~~Disclosure Controls~~disclosure controls and ~~Procedures~~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 April 30, ~~2022,~~2023, 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 provide only 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~~our CEO and our CFO ~~have~~ concluded that as of April 30, ~~2022, the Company’s disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting described below.~~

Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses described below, management has concluded that the condensed consolidated financial statements 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 Further on

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~~November 1, 2021, management's evaluation and conclusion as to the effectiveness of~~2023, the Company's disclosure controls and procedures ~~as of April 30, 2022 excluded~~were effective at the ~~portion of disclosure controls and procedures that are subsumed by~~reasonable assurance level.

Changes in internal control over financial reporting of Further. Further represented approximately 1% of assets and approximately 8% of revenues, 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 April 30, 2022.

~~Material Weaknesses in Internal Control over Financial Reporting~~

~~As previously disclosed, management identified certain deficiencies in the Company’s internal control over financial reporting that aggregated to material weaknesses in the following areas:~~

~~A. Contract to Cash Process~~

The 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.

~~B. Information Technology General Controls~~

The Company did not have effective controls related to information technology general controls (ITGCs) in the areas of logical access and change management over certain information technology systems that supported its financial reporting processes. 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.

~~Ongoing Integration and Remediation Efforts~~

~~In response to the material weakness “A. 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;~~

•~~enhanced the design of existing controls and implemented additional controls to further strengthen the control 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 “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 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;~~

•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 applications and 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.

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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~~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 April 30, ~~2022~~2023 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~~information

Item 1. Legal ~~Proceedings~~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—5—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—5—Commitments and contingencies of the 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, ~~2022~~2023, and subsequent periodic reports 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.

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

Natural disasters, pandemics or other epidemics (including the current COVID-19 pandemic), acts of war (including the current war between Russia and Ukraine), terrorist attacks, the escalation of military activity in response to such attacks, adverse economic conditions (including the recent increase in inflation), or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions, increased costs to operate our 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 business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our business, financial condition, and results of operations.

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Item 6. Exhibits

Incorporate by reference

Exhibit
no.

Description

Form

File No.

Exhibit

Filing Date

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 April 30, ~~2022,~~2023, 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.

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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: June ~~8, 2022~~7, 2023	By:	/s/ Tyson Murdock
	Name:	Tyson Murdock
	Title:	Executive Vice President and Chief Financial Officer

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(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