# Healthequity, Inc.: Form 10-Q for the period ended Jul 31, 2024 - Company: [Healthequity, Inc.](/companies/hqy.md) (CIK 1428336) - Form: 10-Q - Filed: 2024-09-03 - Accepted by EDGAR: Sep 3, 2024, 20:04 ET - Period: 2024-07-31 - Accession: 0001428336-24-000102 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1428336/000142833624000102/hqy-20240731.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1428336/000142833624000102/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2024-07-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2024-05-01 to 2024-07-31 | $299.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 6 months, 2024-02-01 to 2024-07-31 | $587.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2024-05-01 to 2024-07-31 | $95.9m | us-gaap:CostOfGoodsAndServicesSold | | Cost of revenue | 6 months, 2024-02-01 to 2024-07-31 | $196.3m | us-gaap:CostOfGoodsAndServicesSold | | Gross profit | 3 months, 2024-05-01 to 2024-07-31 | $204.1m | us-gaap:GrossProfit | | Gross profit | 6 months, 2024-02-01 to 2024-07-31 | $391.2m | us-gaap:GrossProfit | | Research and development | 3 months, 2024-05-01 to 2024-07-31 | $58.6m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 6 months, 2024-02-01 to 2024-07-31 | $114.7m | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 3 months, 2024-05-01 to 2024-07-31 | $58.9m | us-gaap:OperatingIncomeLoss | | Operating income | 6 months, 2024-02-01 to 2024-07-31 | $100.6m | us-gaap:OperatingIncomeLoss | | Interest expense | 3 months, 2024-05-01 to 2024-07-31 | $15.4m | us-gaap:InterestExpenseNonoperating | | Interest expense | 6 months, 2024-02-01 to 2024-07-31 | $27.2m | us-gaap:InterestExpenseNonoperating | | Income tax | 3 months, 2024-05-01 to 2024-07-31 | $10.8m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2024-02-01 to 2024-07-31 | $15.2m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2024-05-01 to 2024-07-31 | $35.8m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2024-02-01 to 2024-07-31 | $64.6m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2024-05-01 to 2024-07-31 | $0.40 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2024-02-01 to 2024-07-31 | $0.73 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2024-05-01 to 2024-07-31 | $0.41 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2024-02-01 to 2024-07-31 | $0.74 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2024-05-01 to 2024-07-31 | 88,646,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2024-02-01 to 2024-07-31 | 88,606,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2024-02-01 to 2024-07-31 | $173.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2024-02-01 to 2024-07-31 | $1.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2024-07-31 | $326.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2024-07-31 | $495.6m | us-gaap:AssetsCurrent | | Total assets | at 2024-07-31 | $3.51bn | us-gaap:Assets | | Current liabilities | at 2024-07-31 | $120.9m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2024-07-31 | $1.36bn | us-gaap:Liabilities | | Long-term debt | at 2024-07-31 | $1.10bn | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2024-07-31 | $0 | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2024-07-31 | $2.16bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 72,212 characters. *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 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, 2024, this Quarterly Report on Form 10-Q and our other reports filed with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such events.* ### Overview We are a leader and an innovator in providing technology-enabled services that empower consumers to make healthcare saving and spending decisions. We use our innovative technology to manage consumers' tax-advantaged health savings accounts ("HSAs") and other consumer-directed benefits ("CDBs") offered by employers, including flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”), and to administer Consolidated Omnibus Budget Reconciliation Act (“COBRA”), commuter and other benefits. As part of our services, we provide consumers with payment processing services, personalized benefit information, the ability to earn wellness incentives, and investment advice to grow their tax-advantaged healthcare savings. The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis. As of July 31, 2024, we administered 9.4 million HSAs, with balances totaling $29.5 billion, which we call HSA Assets, as well as 6.9 million complementary CDBs. We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 16.3 million as of July 31, 2024. We reach consumers primarily through relationships with their employers, which we call Clients. We reach Clients primarily through relationships with benefits brokers and advisors, integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners, and a sales force that calls on Clients directly. We have increased our share of the growing HSA market from 4% in December 2010 to 20% as of December 2023, measured by HSA Assets. According to Devenir, as of December 2023, we were the largest HSA provider by both accounts and HSA Assets. In addition, we believe we are the largest provider of other CDBs. We seek to differentiate ourselves through our service-driven culture, product breadth, ecosystem connectivity, and proprietary technology. Our proprietary technology allows us to help consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security. 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. We earn revenue primarily from three sources: service, custodial, and interchange. We earn service revenue mainly from fees paid by our Network Partners, Clients, and members for the administration services we provide in connection with the HSAs and other CDBs we offer. We earn custodial revenue primarily from HSA cash held by our federally insured bank and credit union partners, which we collectively call our Depository Partners, HSA cash held by our insurance company partners, and Client-held funds deposited with our Depository Partners. We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and on our virtual payment system. See “Key components of our results of operations” for additional information on our sources of revenue. ### BenefitWallet HSA portfolio acquisition In September 2023, we entered into an agreement to acquire the BenefitWallet HSA portfolio from Conduent Business Services, LLC ("Conduent"). The transfer closed in a series of three tranches, as presented in the following table: *(in thousands, except HSA Assets)* | | Transfers to HealthEquity HSAs | HSA Assets (in millions) | Applicable purchase price Paid using cash on hand | Paid using borrowings under the Prior Revolving Credit Facility | Total purchase price | | --- | ---: | ---: | ---: | ---: | ---: | | March 7, 2024 | 266 | $1,071 | $163,974 | $— | $163,974 | | April 11, 2024 | 134 | 555 | 34,925 | 50,000 | 84,925 | | May 9, 2024 | 216 | 1,047 | 1,101 | 175,000 | 176,101 | | Total | 616 | $2,673 | $200,000 | $225,000 | $425,000 | The BenefitWallet HSA portfolio acquisition was accounted for as an asset acquisition, and related acquisition costs were capitalized as part of the cost of the asset, which is included within intangible assets, net, on our condensed consolidated balance sheet. We capitalized $27.2 million of transaction costs associated with the acquisition during the six months ended July 31, 2024, which includes the reimbursement of $20.0 million of Conduent's transfer-related expenses. In addition, in May 2024, we assumed a contract with a Depository Partner representing approximately 7% of the total HSA Assets added through the acquisition, which provides a custodial yield that is below current market rates and expires in June 2026. We recorded deferred revenue of $20.3 million in May 2024 as a result of the assumed contract, which will be recorded as an increase to custodial revenue over the life of the assumed contract. ### Key factors affecting our performance 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 the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024, this Quarterly Report on Form 10-Q and our other reports filed with the SEC. ### Our acquisition and integration strategy 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. ### 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 family premium for employer-sponsored health insurance has risen by 22% since 2018 and 47% since 2013, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health insurance more generally. We believe that continued growth in healthcare costs and related factors will spur continued growth in HSA-qualified health plans and HSAs and may encourage policy changes making HSAs or similar vehicles available to new populations such as individuals in Medicare. However, the timing and impact of 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. Our Network Partners are a key channel through which we gain access to Clients and members. Our Network Partners collectively employ thousands of sales representatives and account managers who promote both the Network Partners' products and our products and services. Our sales representatives and account management teams work with and train the sales representatives and account management teams of our Network Partners. ### Product breadth We are the largest custodian and administrator of HSAs, 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. ### Interest rates As a non-bank custodian, our members’ custodial HSA cash assets are held by either our federally insured Depository Partners (our Basic Rates offering), pursuant to contractual arrangements we have with these Depository Partners, or by our insurance company partners through group annuity contracts or other similar arrangements (our Enhanced Rates offering). For the reasons described below, we have encouraged our members to place more of their HSA cash in our Enhanced Rates offering. As our Basic Rates contracts expire, the HSA cash held in those Basic Rates contracts will transition to Enhanced Rates contracts, subject to our members retaining the right to keep their HSA cash in Basic Rates. 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 are impacted by the then-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. HSA members who place their HSA cash into our Enhanced Rates offering 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 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 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 increased participation in our Enhanced Rates offering, diversification of Depository Partners and insurance company partners, varied contract terms, and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue. Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members. Interest on our revolving credit facility changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates. ### Our proprietary technology We believe that innovations incorporated in our technology differentiate us from our competitors and help drive our growth by enabling us to better assist consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits. Our full suite of CDB offerings complements our HSA solution and enhances our leadership position within the HSA sector. We are currently investing in a significant modernization of our proprietary technology platforms to support new opportunities and enhance security, privacy and platform infrastructure, while maintaining existing applications, features, and services. For example, we are making significant investments in the architecture and infrastructure of the technology that we use to provide our services to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement. In addition, we are investing in technology solutions to meet the evolving needs of our members, Clients and Network Partners. Our current innovation efforts include, among others, increasing member and client self-service capabilities, developing APIs, driving electronic communication rather than paper, increasing straight-through processing, improving overall process times utilizing both traditional robotic process automation, and increasingly through AI tools, leveraging stacked cards, and mobile wallet. ### Our Purple culture 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 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 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 and ecosystem partners may also choose to offer competitive services directly, as some health plans have done. Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics. ### 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, for example, the California Privacy Rights 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. ### Key financial and operating metrics We regularly review a number of key operating and financial metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business. We discuss certain of these key financial metrics, including revenue, below in the section entitled “Key components of our results of operations.” In addition, we utilize other key metrics as described below. ### Total Accounts The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated: *(in thousands, except percentages)* | | July 31, 2024 | July 31, 2023 | % Change | January 31, 2024 | | --- | ---: | ---: | ---: | ---: | | HSAs | 9,383 | 8,164 | 15% | 8,692 | | New HSAs from sales - Quarter-to-date | 187 | 156 | 20% | 497 | | New HSAs from sales - Year-to-date | 382 | 290 | 32% | 949 | | New HSAs from acquisitions - Year-to-date | 616 | — | \* | — | | HSAs with investments | 711 | 574 | 24% | 610 | | CDBs | 6,898 | 6,831 | 1% | 7,006 | | Total Accounts | 16,281 | 14,995 | 9% | 15,698 | | Average Total Accounts - Quarter-to-date | 16,214 | 14,954 | 8% | 15,318 | | Average Total Accounts - Year-to-date | 16,066 | 14,967 | 7% | 15,105 | \* Not meaningful The number of our HSAs and CDBs are key metrics because our revenue is driven by the amount we earn from them. The number of our HSAs increased by 1.2 million, or 15%, from July 31, 2023 to July 31, 2024, driven by new HSAs added through the BenefitWallet HSA portfolio acquisition and new HSAs from sales. The number of our CDBs increased by 67 thousand, or 1%, from July 31, 2023 to July 31, 2024, primarily driven by an increase in HRA accounts, largely offset by a decrease in FSA and COBRA accounts. ### HSA Assets The following table sets forth HSA Assets as of and for the periods indicated: *(in millions, except percentages)* | | July 31, 2024 | July 31, 2023 | % Change | January 31, 2024 | | --- | ---: | ---: | ---: | ---: | | HSA cash | $16,368 | $14,021 | 17% | $15,006 | | HSA investments | 13,099 | 9,181 | 43% | 10,208 | | Total HSA Assets | 29,467 | 23,202 | 27% | 25,214 | | Average daily HSA cash - Quarter-to-date | 16,363 | 14,001 | 17% | 14,210 | | Average daily HSA cash - Year-to-date | 15,875 | 14,048 | 13% | 14,071 | HSA Assets includes our HSA members’ custodial assets, which consists of the following components: (i) HSA cash, which includes member cash held by our Depository Partners and our insurance company partners, and (ii) HSA investments, which includes member investments held by our custodial investment partner. Measuring HSA Assets is important because our custodial revenue is directly affected by average daily custodial balances for HSA Assets that are revenue generating. HSA cash increased by $2.3 billion, or 17%, from July 31, 2023 to July 31, 2024, due to HSA cash added through the BenefitWallet HSA portfolio acquisition and net HSA contributions from new and existing HSA members, partially offset by transfers to HSA investments. HSA investments increased by $3.9 billion, or 43%, from July 31, 2023 to July 31, 2024, due to the increased market value of invested balances, transfers from HSA cash, and HSA investments added through the BenefitWallet HSA portfolio acquisition. Total HSA Assets increased by $6.3 billion, or 27%, from July 31, 2023 to July 31, 2024, primarily due to HSA Assets added through the BenefitWallet HSA portfolio acquisition, the increased market value of invested balances, and net HSA contributions from new and existing HSA members. The following table summarizes the amount of HSA cash held by our Depository Partners and insurance company partners that is expected to reprice by fiscal year and the respective average annualized yield currently earned on that HSA cash as of July 31, 2024: | Year ending January 31, (in billions, except percentages) | HSA cash expected to reprice | Average annualized yield | | --- | ---: | ---: | | Remainder of 2025 | $1.9 | 3.7% | | 2026 | 3.4 | 1.8% | | 2027 | 3.4 | 1.8% | | 2028 | 2.0 | 3.9% | | Thereafter | 5.1 | 4.1% | | Total (1) | $15.8 | 3.1% | (1) Excludes $0.6 billion of HSA cash held in floating-rate contracts as of July 31, 2024. ### Client-held funds *(in millions, except percentages)* | | July 31, 2024 | July 31, 2023 | % Change | January 31, 2024 | | --- | ---: | ---: | ---: | ---: | | Client-held funds | $817 | $811 | 1% | $842 | | Average daily Client-held funds - Quarter-to-date | 860 | 891 | (3)% | 791 | | Average daily Client-held funds - Year-to-date | 850 | 896 | (5)% | 845 | 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 earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, amortization of incremental costs to obtain a contract, costs associated with unused office space, and certain other non-operating items. We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses and serves as a basis for comparison against other companies in our industry. The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated: *(in thousands)* | | Three months ended July 31, 2024 | 2023 | Six months ended July 31, 2024 | 2023 | | --- | ---: | ---: | ---: | ---: | | Net income | $35,822 | $10,581 | $64,635 | $14,675 | | Interest income | (3,103) | (2,484) | (6,984) | (4,082) | | Interest expense | 15,427 | 13,272 | 27,222 | 28,269 | | Income tax provision | 10,794 | 3,643 | 15,220 | 9,561 | | Depreciation and amortization | 12,629 | 15,180 | 26,022 | 31,055 | | Amortization of acquired intangible assets | 30,981 | 23,166 | 56,526 | 46,332 | | Stock-based compensation expense | 21,574 | 20,073 | 53,594 | 38,277 | | Merger integration expenses | 1,777 | 2,044 | 3,920 | 5,502 | | Amortization of incremental costs to obtain a contract | 1,681 | 1,350 | 3,313 | 2,654 | | Costs associated with unused office space | 806 | 1,286 | 1,596 | 2,302 | | Other | (101) | — | 658 | 153 | | Adjusted EBITDA | $128,287 | $88,111 | $245,722 | $174,698 | -24- The following table sets forth our net income as a percentage of revenue: *(in thousands, except percentages)* | | Three months ended July 31, 2024 | 2023 | $ Change | % Change | Six months ended July 31, 2024 | 2023 | $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Net income | $35,822 | $10,581 | $25,241 | 239% | $64,635 | $14,675 | $49,960 | 340% | | As a percentage of revenue | 12% | 4% | | | 11% | 3% | | | Our net income increased by $25.2 million, or 239%, from the three months ended July 31, 2023 to the three months ended July 31, 2024, due to an increase in gross profit, partially offset by increases in operating expenses, income tax provision, and other expense, as described more fully in the section entitled "Comparison of the three and six months ended July 31, 2024 and 2023." Our net income increased by $50.0 million, or 340%, from the six months ended July 31, 2023 to the six months ended July 31, 2024, due to an increase in gross profit and a decrease in other expense, partially offset by increases in operating expenses and income tax provision, as described more fully in the section entitled "Comparison of the three and six months ended July 31, 2024 and 2023." The following table sets forth our Adjusted EBITDA as a percentage of revenue: *(in thousands, except percentages)* | | Three months ended July 31, 2024 | 2023 | $ Change | % Change | Six months ended July 31, 2024 | 2023 | $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Adjusted EBITDA | $128,287 | $88,111 | $40,176 | 46% | $245,722 | $174,698 | $71,024 | 41% | | As a percentage of revenue | 43% | 36% | | | 42% | 36% | | | Our Adjusted EBITDA increased by $40.2 million, or 46%, from the three months ended July 31, 2023 to the three months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in professional fees and personnel-related costs. Our Adjusted EBITDA increased by $71.0 million, or 41%, from the six months ended July 31, 2023 to the six months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in professional fees and personnel-related costs. Our use of Adjusted EBITDA, including as a percentage of revenue, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. ### Non-GAAP net income Non-GAAP net income is calculated by adding back to GAAP net income before income taxes the following items: amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, costs associated with unused office space, and losses on extinguishment of debt, and subtracting a non-GAAP tax provision using a normalized non-GAAP tax rate. We believe that non-GAAP net income and non-GAAP net income per diluted share provide useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because these non-GAAP metrics reflect operating profitability before consideration of certain non-operating expenses and non-cash expenses and serve as a basis for comparison against other companies in our industry. The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to non-GAAP net income for the periods indicated: *(in thousands, except per share data)* | | Three months ended July 31, 2024 | 2023 | Six months ended July 31, 2024 | 2023 | | --- | ---: | ---: | ---: | ---: | | Net income | $35,822 | $10,581 | $64,635 | $14,675 | | Income tax provision | 10,794 | 3,643 | 15,220 | 9,561 | | Income before income taxes - GAAP | 46,616 | 14,224 | 79,855 | 24,236 | | Non-GAAP adjustments: | | | | | | Amortization of acquired intangible assets | 30,981 | 23,166 | 56,526 | 46,332 | | Stock-based compensation expense | 21,574 | 20,073 | 53,594 | 38,277 | | Merger integration expenses | 1,777 | 2,044 | 3,920 | 5,502 | | Costs associated with unused office space | 806 | 1,286 | 1,596 | 2,302 | | Loss on extinguishment of debt | — | — | — | 1,157 | | Total adjustments to income before income taxes - GAAP | 55,138 | 46,569 | 115,636 | 93,570 | | Income before income taxes - Non-GAAP | 101,754 | 60,793 | 195,491 | 117,806 | | Income tax provision - Non-GAAP (1) | 25,439 | 15,199 | 48,873 | 29,452 | | Non-GAAP net income | 76,315 | 45,594 | 146,618 | 88,354 | | Diluted weighted-average shares | 88,646 | 86,341 | 88,606 | 86,356 | | GAAP net income per diluted share | $0.40 | $0.12 | $0.73 | $0.17 | | Non-GAAP net income per diluted share | $0.86 | $0.53 | $1.65 | $1.02 | (1) The Company utilizes a normalized non-GAAP tax rate to provide better consistency across the interim reporting periods within a given fiscal year by eliminating the effects of non-recurring and period-specific items, which can vary in size and frequency, and which are not necessarily reflective of the Company’s longer-term operations. The normalized non-GAAP tax rate applied to each period presented was 25%. The Company may adjust its non-GAAP tax rate as additional information becomes available and in conjunction with any other significant events occurring that may materially affect this rate, such as merger and acquisition activity, changes in business outlook, or other changes in expectations regarding tax regulations. Our non-GAAP net income increased by $30.7 million, or 67%, from the three months ended July 31, 2023 to the three months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in personnel-related costs and interest expense. Our non-GAAP net income increased by $58.3 million, or 66%, from the six months ended July 31, 2023 to the six months ended July 31, 2024, primarily due to an increase in total revenue, partially offset by increases in personnel-related costs and interest expense. Our use of non-GAAP net income has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. ### 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. In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA Assets through our investment partner from which we earn recordkeeping and advisory fees, calculated as a percentage of the member's HSA investments. We recognize revenue on a monthly basis as services are rendered to our members and Clients. *Custodial revenue.* We earn custodial revenue primarily from HSA cash held by our Depository Partners or our insurance company partners and Client-held funds held by our Depository Partners. HSA cash is held by our Depository Partners pursuant to contracts that (i) typically have terms ranging from three to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances held by the relevant Depository Partner, and (iii) have minimum and maximum required balances. 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 cash and Client-held funds that is based on the interest rates offered to us by these Depository Partners and insurance company partners. *Interchange revenue.* 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 *Service costs.* Service costs are comprised of 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. *Custodial costs.* Custodial costs are comprised of interest retained by our HSA members on HSA cash and fees we pay to banking consultants whom we use to help secure agreements with our Depository Partners. Interest retained by HSA members is calculated on a tiered basis. 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. ### 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 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 consists primarily of accrued interest expense and amortization of deferred financing costs associated with our long-term debt. Interest on our revolving credit facility changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates. ### Other income, net Other income, net, consists of interest income earned on corporate cash and other miscellaneous income and expense. ### Income tax provision We are subject to federal and state income taxes in the United States based on a January 31 fiscal year end. 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 July 31, 2024, we have not recorded a valuation allowance on federal deferred tax assets, but we have recorded a valuation allowance on certain state deferred tax assets. We maintain an overall net federal and state deferred tax liability on our condensed consolidated balance sheet. ### Comparison of the three and six months ended July 31, 2024 and 2023 Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications relate primarily to recordkeeping and advisory fees associated with HSA investments, which were reclassified from custodial revenue to service revenue to better align our financial statement presentation with the underlying drivers of our revenue streams. We also reclassified certain immaterial personnel-related costs from custodial costs to service costs or general and administrative costs. The reclassifications had no impact on our total revenue, income from operations, net income, cash flows, or stockholders' equity. The following table presents the impact of the reclassifications: *(in thousands)* | | Three months ended July 31, 2023 Prior presentation | Reclassifications | Current presentation | Six months ended July 31, 2023 Prior presentation | Reclassifications | Current presentation | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Service revenue | $105,719 | $6,241 | $111,960 | $210,831 | $12,202 | $223,033 | | Custodial revenue | 98,917 | (6,241) | 92,676 | 193,358 | (12,202) | 181,156 | | Interchange revenue | 38,913 | — | 38,913 | 83,792 | — | 83,792 | | Total revenue | 243,549 | — | 243,549 | 487,981 | — | 487,981 | | Total cost of revenue | 92,619 | (735) | 91,884 | 189,225 | (1,379) | 187,846 | | Gross profit | 150,930 | 735 | 151,665 | 298,756 | 1,379 | 300,135 | | Total operating expenses | 126,190 | 735 | 126,925 | 250,835 | 1,379 | 252,214 | | Total other expense | (10,516) | — | (10,516) | (23,685) | — | (23,685) | | Income tax provision | 3,643 | — | 3,643 | 9,561 | — | 9,561 | | Net income | $10,581 | $— | $10,581 | $14,675 | $— | $14,675 | ### Revenue The following table sets forth our revenue for the periods indicated: *(in thousands, except percentages)* | | Three months ended July 31, 2024 | 2023 | $ Change | % Change | Six months ended July 31, 2024 | 2023 | $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Service revenue | $116,720 | $111,960 | $4,760 | 4% | $234,934 | $223,033 | $11,901 | 5% | | Custodial revenue | 138,684 | 92,676 | 46,008 | 50% | 260,328 | 181,156 | 79,172 | 44% | | Interchange revenue | 44,524 | 38,913 | 5,611 | 14% | 92,263 | 83,792 | 8,471 | 10% | | Total revenue | $299,928 | $243,549 | $56,379 | 23% | $587,525 | $487,981 | $99,544 | 20% | *Service revenue.* The $4.8 million, or 4%, increase in service revenue from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to the increases in the number of HSAs and the amount of HSA investments, partially offset by lower average service fees per account. The $11.9 million, or 5%, increase in service revenue from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to the increases in the number of HSAs and the amount of HSA investments, partially offset by lower average service fees per account. We expect service revenue to continue to increase, primarily due to an increase in Total Accounts, partially offset by lower average service fees per account. *Custodial revenue.* The $46.0 million, or 50%, increase in custodial revenue from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in average annualized yield on HSA cash from 2.37% for the three months ended July 31, 2023 to 3.10% for the three months ended July 31, 2024 (due to both higher market interest rates and increased participation in our Enhanced Rates offering), the $2.4 billion, or 17%, increase in the average daily balance of HSA cash, as described above, and an increase in interest rates on the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate. The $79.2 million, or 44%, increase in custodial revenue from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in average annualized yield on HSA cash from 2.34% for the six months ended July 31, 2023 to 3.02% for the six months ended July 31, 2024 (due to both higher market interest rates and increased participation in our Enhanced Rates offering), the $1.8 billion, or 13%, increase in the average daily balance of HSA cash, as described above, and an increase in interest rates on the portion of our Client-held funds held by our Depository Partners in interest-bearing, demand deposit accounts that have a floating interest rate. Assuming the current interest rate environment continues, we expect our average annualized yield on HSA cash to further increase as our existing agreements with our Depository Partners are renewed or replaced with agreements with higher rates, resulting in higher custodial revenue. In addition, we expect an increase in the percentage of HSA cash held in our Enhanced Rates offering to continue to positively impact our average annualized yield and thus our custodial revenue. As Basic Rates contracts mature, we intend to transfer the associated HSA cash into Enhanced Rates contracts unless the HSA member affirmatively opts to remain in the Basic Rates offering. *Interchange revenue.* The $5.6 million, or 14%, increase in interchange revenue from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in Total Accounts and an increase in spend per account. The $8.5 million, or 10%, increase in interchange revenue from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in Total Accounts and an increase in spend per account. *Total revenue.* Total revenue increased $56.4 million, or 23%, from the three months ended July 31, 2023 to the three months ended July 31, 2024 due to the increases in custodial, interchange, and service revenues, described above. Total revenue increased $99.5 million, or 20%, from the six months ended July 31, 2023 to the six months ended July 31, 2024 due to the increases in custodial, service, and interchange revenues, described above. ### Cost of revenue The following table sets forth our cost of revenue for the periods indicated: *(in thousands, except percentages)* | | Three months ended July 31, 2024 | 2023 | $ Change | % Change | Six months ended July 31, 2024 | 2023 | $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Service costs | $76,915 | $76,904 | $11 | 0% | $159,262 | $157,777 | $1,485 | 1% | | Custodial costs | 10,108 | 8,037 | 2,071 | 26% | 19,165 | 16,075 | 3,090 | 19% | | Interchange costs | 8,853 | 6,943 | 1,910 | 28% | 17,908 | 13,994 | 3,914 | 28% | | Total cost of revenue | $95,876 | $91,884 | $3,992 | 4% | $196,335 | $187,846 | $8,489 | 5% | *Service costs.* The $11 thousand, or less than one percent, increase in service costs from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to increases in personnel-related costs to support the increase in Total Accounts, offset by efficiencies resulting from our technology investments and lower amortization expense. The $1.5 million, or 1%, increase in service costs from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to increases in personnel-related costs to support the increase in Total Accounts, largely offset by efficiencies resulting from our technology investments and lower amortization expense. *Custodial costs.* The $2.1 million, or 26%, increase in custodial costs from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to the $1.8 billion, or 13%, increase in the year-over-year average daily balance of HSA cash, as described above, an increase in fees charged by our Depository Partners, and an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.22% during the three months ended July 31, 2023 to 0.23% during the three months ended July 31, 2024. The $3.1 million, or 19%, increase in custodial costs from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to the $1.8 billion, or 13%, increase in the year-over-year average daily balance of HSA cash, as described above, an increase in fees charged by our Depository Partners, and an increase in the average annualized rate of interest retained by HSA members on HSA cash from 0.22% during the six months ended July 31, 2023 to 0.23% during the six months ended July 31, 2024. On an annual basis, relative to the fiscal year ended January 31, 2024, we expect custodial costs to increase due to an increase in the year-over-year average daily balance of HSA cash and an increase in the average annualized rate of interest retained by HSA members on HSA cash. *Interchange costs.* The $1.9 million, or 28%, increase in interchange costs from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in Total Accounts and certain costs associated with our transition to a single card processor, which transition was completed in August 2024. The $3.9 million, or 28%, increase in interchange costs from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in Total Accounts and certain costs associated with our transition to a single card processor, which transition was completed in August 2024. *Total cost of revenue.* As we continue to add Total Accounts, we expect that our cost of revenue will increase in dollar amount to support our Network Partners, Clients, and members. However, on an annual basis, relative to the fiscal year ended January 31, 2024, we expect our cost of revenue to decrease as a percentage of our total revenue, primarily due to an increase in custodial revenue, partially offset by increases in personnel costs. For the six months ended July 31, 2024, cost of revenue as a percentage of total revenue decreased to 33.4% from 38.5% for the six months ended July 31, 2023, due to total revenue increasing at a significantly higher rate (20%) than total cost of revenue (5%). Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, and account management functions. ### Operating expenses The following table sets forth our operating expenses for the periods indicated: *(in thousands, except percentages)* | | Three months ended July 31, 2024 | 2023 | $ Change | % Change | Six months ended July 31, 2024 | 2023 | $ Change | % Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Sales and marketing | $21,525 | $19,123 | $2,402 | 13% | $45,019 | $39,058 | $5,961 | 15% | | Technology and development | 58,580 | 54,767 | 3,813 | 7% | 114,670 | 107,959 | 6,711 | 6% | | General and administrative | 32,260 | 27,825 | 4,435 | 16% | 70,496 | 53,363 | 17,133 | 32% | | Amortization of acquired intangible assets | 30,981 | 23,166 | 7,815 | 34% | 56,526 | 46,332 | 10,194 | 22% | | Merger integration | 1,777 | 2,044 | (267) | (13)% | 3,920 | 5,502 | (1,582) | (29)% | | Total operating expenses | $145,123 | $126,925 | $18,198 | 14% | $290,631 | $252,214 | $38,417 | 15% | *Sales and marketing.* The $2.4 million, or 13%, increase in sales and marketing expenses from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to an increase in personnel-related expenses. The $6.0 million, or 15%, increase in sales and marketing expenses from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to an increase in personnel-related expenses. We expect our sales and marketing expenses to increase for the foreseeable future as we continue to focus on our cross-selling program and marketing campaigns. On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our sales and marketing expenses to remain relatively steady as a percentage of our total 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 $3.8 million, or 7%, increase in technology and development expenses from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to increases in personnel-related expenses and software costs. The $6.7 million, or 6%, increase in technology and development expenses from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to increases in personnel-related expenses and software costs. We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary technology, including our ongoing modernization project described earlier. On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our technology and development expenses to decrease slightly as a percentage of our total revenue. However, our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses. *General and administrative.* The $4.4 million, or 16%, increase in general and administrative expenses from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to professional services expense. The $17.1 million, or 32%, increase in general and administrative expenses from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to increases in professional services expense and accelerated stock-based compensation expense recognized with respect to certain performance restricted stock units granted during the current fiscal year, as described in Note 8—Stock-based compensation. We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, and finance functions as we continue to grow our business. On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our general and administrative expenses to increase as a percentage of our total revenue. However, our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses. *Amortization of acquired intangible assets.* The $7.8 million, or 34%, increase in amortization of acquired intangible assets from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to the new intangible assets added through the BenefitWallet HSA portfolio acquisition. The $10.2 million, or 22%, increase in amortization of acquired intangible assets from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to the new intangible assets added through the BenefitWallet HSA portfolio acquisition. On an annual basis, relative to the fiscal year ended January 31, 2024, we expect amortization of acquired intangible assets to increase, primarily due to the intangible assets added through BenefitWallet HSA portfolio acquisition. *Merger integration.* Merger integration expense decreased $0.3 million, or 13%, from the three months ended July 31, 2023 to the three months ended July 31, 2024. The $1.8 million in merger integration expense for the three months ended July 31, 2024 was primarily due to professional fees, including expenses incurred in conjunction with the migration of accounts, and technology-related expenses directly related to the Further acquisition and certain ongoing merger integration expenses related to the acquisition of WageWorks. Merger integration expense decreased $1.6 million, or 29%, from the six months ended July 31, 2023 to the six months ended July 31, 2024. The $3.9 million in merger integration expense for the six months ended July 31, 2024 was primarily due to professional fees, including expenses incurred in conjunction with the migration of accounts, and technology-related expenses directly related to the Further acquisition and certain ongoing merger integration expenses related to the acquisition of WageWorks. We expect merger integration expenses attributable to the Further acquisition totaling approximately $55 million to be incurred over a period of approximately five to six years from the date of the acquisition, which occurred in November 2021. ### Interest expense The $2.2 million, or 16%, increase in interest expense from the three months ended July 31, 2023 to the three months ended July 31, 2024 was primarily due to a higher average principal balance under our prior credit facilities (the "Prior Credit Facilities") during the three months ended July 31, 2024. The increase was partially offset by the impact of lower interest rates on our Prior Credit Facilities, which had a stated interest rate of 6.70% as of July 31, 2024, down from 6.92% as of July 31, 2023. The $1.0 million, or 4%, decrease in interest expense from the six months ended July 31, 2023 to the six months ended July 31, 2024 was primarily due to a non-recurring $1.2 million loss on extinguishment of debt due to the prepayment of $50.0 million under our prior term loan facility (the "Prior Term Loan Facility") during the six months ended July 31, 2023 and the impact of lower interest rates on our Prior Credit Facilities, which had a stated interest rate of 6.70% as of July 31, 2024, down from 6.92% as of July 31, 2023. The decrease was partially offset by a higher average principal balance under our Prior Credit Facilities during the six months ended July 31, 2024. Our Prior Credit Facilities had an outstanding principal balance of $511.9 million and $286.9 million as of July 31, 2024 and 2023, respectively. The increase was due to $225.0 million of borrowings under our prior revolving credit facility (the "Prior Revolving Credit Facility") during the six months ended July 31, 2024 to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price. On August 23, 2024, we entered into a credit agreement (the "Credit Agreement") pursuant to which the Company established a new five-year senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $1.0 billion, a portion of which was used to repay all outstanding obligations under our prior credit agreement (the "Prior Credit Agreement"). On an annual basis, relative to the fiscal year ended January 31, 2024, we expect our interest expense to increase, primarily due to the additional borrowings used to pay a portion of the BenefitWallet HSA portfolio acquisition purchase price as well as the slightly higher (25 basis points) interest rate under the Revolving Credit Facility as compared to the Prior Credit Facilities. The interest rate on our Revolving Credit Facility is variable and, accordingly, we may incur additional expense if interest rates increase in future periods. ### Other income, net The $0.3 million increase in other income, net, from $2.8 million during the three months ended July 31, 2023 to $3.1 million during the three months ended July 31, 2024 was due to a $0.6 million increase in interest income on corporate cash, partially offset by a $0.3 million decrease in other income, net. The $1.9 million increase in other income, net, from $4.6 million during the six months ended July 31, 2023 to $6.5 million during the six months ended July 31, 2024 was due to a $2.9 million increase in interest income on corporate cash, partially offset by a $1.0 million decrease in other income, net. ### Income tax provision For the three months ended July 31, 2024 and 2023, we recorded an income tax provision of $10.8 million and $3.6 million, respectively. The increase in income tax provision was primarily the result of an increase in pre-tax book income and an increase in nondeductible executive compensation, partially offset by an increase in tax deductible stock-based compensation compared to GAAP stock-based compensation expense and an increase in research and development tax credits. For the six months ended July 31, 2024 and 2023, we recorded an income tax provision of $15.2 million and $9.6 million, respectively. The increase in income tax provision was primarily the result of an increase in pre-tax book income and an increase in nondeductible executive compensation, partially offset by an increase in tax deductible stock-based compensation compared to GAAP stock-based compensation expense and an increase in research and development tax credits. ### Seasonality Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations. Revenue results are seasonally impacted due to ancillary service fees, timing of HSA contributions, and timing of card spend. Cost of revenue is seasonally impacted as a significant number of new and existing Network Partners bring us new HSAs and CDBs beginning in January of each year concurrent with the start of many employers’ benefit plan years. Before we realize any revenue from these new accounts, we incur costs related to implementing and supporting our new Network Partners and new accounts. These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center. These expenses begin to ramp up during our third fiscal quarter, with the majority of 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. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, principal and interest payments on our long-term debt, and capital expenditures. As of July 31, 2024 and January 31, 2024, cash and cash equivalents were $326.9 million and $404.0 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. On August 23, 2024, we entered into a Credit Agreement, which includes a five-year senior secured Revolving Credit Facility in an aggregate principal amount of up to $1.0 billion, a portion of which was used to refinance our Prior Credit Agreement. The Revolving Credit Facility may be used in the future for working capital and general corporate purposes, including the financing of acquisitions and other investments. For a description of the terms of the Credit Agreement, refer to Note 6—Indebtedness. As of August 23, 2024, the outstanding balance under the Revolving Credit Facility was $511.9 million. We were in compliance with all covenants under the Prior Credit Agreement as of July 31, 2024, for the period then ended, and through the date on which the Prior Credit Agreement was terminated. We continue to be in compliance with all covenants under the Credit Agreement through the filing date of this Quarterly Report on Form 10-Q. ### Use of cash During the six months ended July 31, 2024, we used $452.2 million of cash, which includes $225.0 million borrowed under our Prior Revolving Credit Facility, to pay for the BenefitWallet HSA portfolio acquisition. Capital expenditures for the six months ended July 31, 2024 and 2023 were $26.8 million and $19.4 million, respectively. We expect to continue our current level of capital expenditures for the remainder of the fiscal year ending January 31, 2025 as we continue to invest in improving the architecture and functionality of our proprietary systems. 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. The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods: *(in thousands)* | | Six months ended July 31, 2024 | 2023 | | --- | ---: | ---: | | Net cash provided by operating activities | $173,558 | $108,645 | | Net cash used in investing activities | (479,032) | (19,384) | | Net cash provided by (used in) financing activities | 228,388 | (53,182) | | Increase (decrease) in cash and cash equivalents | (77,086) | 36,079 | | Beginning cash and cash equivalents | 403,979 | 254,266 | | Ending cash and cash equivalents | $326,893 | $290,345 | ***Cash flows from operating activities.*** Net cash provided by operating activities increased by $64.9 million from the six months ended July 31, 2023 to the six months ended July 31, 2024 primarily due to increased cash receipts with respect to our custodial, interchange, and service revenues, partially offset by an increase in cash payments with respect to operating expenses, cost of revenue, and interest expense. ***Cash flows from investing activities.*** Net cash used in investing activities increased by $459.6 million from the six months ended July 31, 2023 to the six months ended July 31, 2024 due to $452.2 million of cash used to pay the BenefitWallet HSA portfolio acquisition purchase price, a $6.5 million increase in cash used for purchases of software and capitalized software development costs, and a $0.9 million increase in cash used for purchases of property and equipment. ***Cash flows from financing activities.*** Net cash provided by financing activities was $228.4 million during the six months ended July 31, 2024, compared to $53.2 million of net cash used in financing activities during the six months ended July 31, 2023. The change was due to a $225.0 million increase in proceeds from long-term debt, a $54.4 million decrease in principal payments on our long-term debt, and a $2.9 million increase in proceeds from the exercise of common stock options, partially offset by a $0.7 million increase in net payments made in the settlement of client-held funds obligations. ### Contractual obligations See Note 5—Commitments and contingencies for information about our contractual obligations. ### Off-balance sheet arrangements As of July 31, 2024, other than outstanding letters of credit issued under our Prior Revolving Credit Facility, we did not have any off-balance sheet arrangements. Our letters of credit generally expire within one year. However, in the ordinary course of business, we will continue to renew or modify the terms of the letters of credit to support business requirements. 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. 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, and we evaluate our critical accounting estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 1 of the accompanying unaudited condensed consolidated financial statements and in Note 1 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024. There have been no significant or material changes in our critical accounting policies during the six months ended July 31, 2024, as compared to those disclosed in “Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies and significant management estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024. ### Recent accounting pronouncements See Note 1—Summary of business and significant accounting policies within the interim financial statements included in this Form 10-Q for further discussion. ## Market risk As filed, 7,280 characters. ### Market risk ***Concentration of market risk.*** We derive a substantial portion of our revenue from providing services to tax-advantaged healthcare account holders. A significant downturn in this market or changes in state and/or federal laws impacting the preferential tax treatment of healthcare accounts such as HSAs could have a material adverse effect on our results of operations. During the six months ended July 31, 2024 and 2023, 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 exceed federally insured limits. Our cash and cash equivalents as of July 31, 2024 and January 31, 2024 were $326.9 million and $404.0 million, respectively, the vast majority of which was not covered by federal depository insurance. We have not experienced any material losses in such accounts. Our accounts receivable balance as of July 31, 2024 and January 31, 2024 was $108.5 million and $104.9 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 July 31, 2024 and January 31, 2024, we held in custody HSA Assets of $29.5 billion and $25.2 billion, respectively. As a non-bank custodian, we contract with our Depository Partners and insurance company partners to hold HSA cash on behalf of our members, and we earn a significant portion of our total revenue from interest paid to us by these partners. HSA cash held by our insurance company partners is 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 and insurance company partners, the terms of which are impacted by the then-prevailing interest rate environment. We believe that increased participation in our Enhanced Rates offering, diversification of 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 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 July 31, 2024 and January 31, 2024, we held Client-held funds of $817 million and $842 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 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 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 July 31, 2024 and January 31, 2024, we had unrestricted cash and cash equivalents of $326.9 million and $404.0 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 July 31, 2024 and January 31, 2024, we had $511.9 million and $286.9 million, respectively, outstanding under our Prior Credit Facilities. The stated interest rate on our Prior Credit Facilities was variable and was 6.70% as of July 31, 2024. Our overall interest rate sensitivity under these credit facilities was primarily influenced by any amounts borrowed and the prevailing interest rates on these instruments. For example, a one percent increase in the interest rate on the amount outstanding under our Prior Credit Facilities as of July 31, 2024 would have resulted in approximately $5.2 million of additional interest expense over the next 12 months. On August 23, 2024, we entered into a new Credit Agreement, pursuant to which we established a new Revolving Credit Facility, a portion of which was used to repay all outstanding obligations under the Prior Credit Facilities. As of August 23, 2024, the outstanding balance under the Revolving Credit Facility was $511.9 million. The stated rate on our Revolving Credit Facility is variable. Accordingly, we may incur additional expense if interest rates increase in future periods. The interest rate on our $600 million of unsecured Senior Notes due 2029 is fixed at 4.50%. ## Controls and procedures As filed, 2,196 characters. ### Evaluation of disclosure controls and procedures Management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of July 31, 2024, 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, our CEO and our CFO concluded that as of July 31, 2024, the Company's disclosure controls and procedures were effective at the reasonable assurance level. ### Changes in internal control over financial reporting There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended July 31, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. ## Risk factors As filed, 5,546 characters. The risks described in “Risk factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2024, this Quarterly Report on Form 10-Q, and subsequent periodic reports could materially and adversely affect our business, financial condition and results of operations. 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. ***Cyber-attacks, including ransomware attacks, or other privacy or data security incidents could materially adversely impact our business.*** Our proprietary technology platforms enable the exchange of, and access to, sensitive information, and, as a result, we are frequently the target of cyber-attacks or other privacy or data security incidents. As one of the largest providers of HSAs and other CDBs, we are an attractive target for cyber-attacks, including ransomware attacks, which means we must continue to secure and monitor each of our technology platforms, making sure these platforms are aligned to our industry benchmark security posture. In addition, geopolitical events, including the war between Russia and Ukraine, have resulted in, and may continue to result in, an increase in cyber-attacks. Substantially all of our workforce works remotely. This remote work environment increases the risk of cybersecurity breaches and incidents, and the potential impact of these on our operations is also higher while our team members log into our network remotely. In addition, we use third-party operations partners to service our members. These third-party partners have access to member information in order to provide this service, which further increases the risk of cybersecurity breaches and incidents through those partners. Our ability to ensure the security of our technology platforms and thus sensitive customer and partner information is critical to our operations. We rely on standard Internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. Despite our security measures, our information technology and infrastructure are vulnerable to cybersecurity threats, including attacks by hackers and other malfeasance. Such security breaches could compromise our networks, or those of third-party service providers on which we rely, and result in the information stored or transmitted there to be accessed, modified or used in an unauthorized manner, publicly disclosed, lost, or stolen. Such access, use, disclosure, or other loss of information could result in regulatory scrutiny, legal claims or proceedings leading to liability, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our Clients, damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, operations, and competitive position. Security breaches, including a major breach of our network security and systems, could result in serious negative consequences for our business, including the loss of sensitive information, theft or loss of actual funds, litigation, indemnity obligations to our Clients, fines, penalties and other liabilities, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our members, Clients and Network Partners. Such breaches could damage our reputation and cause a loss of confidence in our products and services, reducing demand and resulting in an unwillingness of members, Clients, Network Partners and other data owners to provide us with their payment information or personal information, and otherwise harm our brand. Furthermore, if third parties improperly obtain and use the personal information of our members, we may be required to expend significant resources to resolve these problems. While we have security measures in place, we have experienced data privacy incidents in the past, including an incident earlier this year in which a business partner's user account containing personally identifiable information was breached, in addition to several incidents in 2018. As a result of the incident earlier this year, we are now subject to several putative class action lawsuits seeking unspecified damages, and we expect to be subject to regulatory investigations related to the incident. Whether as a result of these incidents, or if our security measures are breached again or unauthorized access to data is otherwise obtained as a result of third-party action, team member error or otherwise, our reputation could be significantly damaged, our business may suffer and we could incur substantial liability, which could result in loss of sales, Clients and Network Partners. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and such novel techniques may not be identified until they are launched against a target, we may be unable to anticipate, or to implement adequate preventative measures to address, these techniques. Any or all of these issues could negatively impact our ability to attract new, or increase engagement by, members, Clients and Network Partners, and subject us to third-party lawsuits, regulatory fines, contractual liability, and other action or liability, thereby harming our operating results or financial condition. Filed Sep 3, 2024. Source: SEC EDGAR, the filing index for accession 0001428336-24-000102. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.