HEALTHEQUITY, INC. Administration’s dialogue and evaluation of monetary situation and outcomes of operations (kind 10-Q)

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

of the COVID-19 pandemic and resulting societal and economic changes on the

Company, 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, 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, we administered 7.4 million HSAs, with balances

totaling $20.3 billion, which we call HSA Assets, as well as 7.1 million

complementary CDBs. We refer to the aggregate number of HSAs and other CDBs that

we administer as Total Accounts, of which we had 14.5 million as of April 30,

2022.

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% as of December 2021, measured by HSA Assets. According to Devenir, we are

the largest HSA provider by accounts and second largest by assets as of December

2021. In addition, we believe we are the largest provider of other CDBs. We seek

to differentiate ourselves through our proprietary technology, product breadth,

ecosystem connectivity, and service-

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driven culture. Our proprietary technology allows us to help consumers optimize

the value of their HSAs and other CDBs and gain confidence and skills in

managing their healthcare costs as part of their financial security.

Our ability to assist consumers is enhanced by our capacity to securely share

data in both directions with others in the health, benefits, and retirement

ecosystems. Our commuter benefits offering also leverages connectivity to an

ecosystem of mass transit, ride hailing, and parking providers. These strengths

reflect our “DEEP Purple” culture of remarkable service to customers and

teammates, achieved by driving excellence, ethics, and process into everything

we do.

We earn revenue primarily from three sources: service, custodial, and

interchange. We earn service revenue mainly from fees paid by Clients on a

recurring per-account per-month basis. We earn custodial revenue mainly from HSA

Assets held at our members’ direction in federally insured cash deposits,

insurance contracts or mutual funds, and from investment of Client-held funds.

We earn interchange revenue mainly from fees paid by merchants on payments that

our members make using our physical payment cards and on our virtual payment

system. See “Key components of our results of operations” for additional

information on our sources of revenue, including the adverse impacts caused by

the COVID-19 pandemic and resulting societal and economic changes.

Recent acquisitions

Luum acquisition. In March 2021, we bolstered our commuter offering by acquiring

100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the “Luum

Acquisition”). 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.

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, and our

other reports filed with the SEC.

Our acquisition and integration strategy

We have historically acquired HSA portfolios and businesses that strengthen our

service offerings. We plan to continue this growth strategy and are regularly

engaged in evaluating different opportunities. We have developed an internal

capability to source, evaluate, and integrate acquired HSA portfolios. Our

success depends in part on our ability to successfully integrate acquired

businesses and HSA portfolios with our business in an efficient and effective

manner and to realize anticipated synergies.

Structural change in U.S. health insurance

We derive revenue primarily from healthcare-related saving and spending by

consumers in the U.S., which are driven by changes in the broader healthcare

industry, including the structure of health insurance. The average premium for

employer-sponsored health insurance has risen by 22% since 2016 and 47% since

2011, resulting in increased participation in HSA-qualified health plans and

HSAs and increased consumer cost-sharing in health insurance more generally. We

believe that continued growth in healthcare costs and related factors will spur

continued growth in HSA-qualified health plans and HSAs and may encourage policy

changes making HSAs or similar vehicles available to new populations such as

individuals in Medicare. However, the timing and impact of

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these and other developments in U.S. healthcare are uncertain. Moreover, changes

in healthcare policy, such as “Medicare for all” plans, could materially and

adversely affect our business in ways that are difficult to predict.

Trends in U.S. tax law

Tax law has a profound impact on our business. Our offerings to members,

Clients, and Network Partners consist primarily of services enabled, mandated,

or advantaged by provisions of U.S. tax law and regulations. Changes in tax

policy are speculative and may affect our business in ways that are difficult to

predict.

Our client base

Our business model is based on a B2B2C distribution strategy, whereby we work

with Network Partners and Clients to reach consumers to increase the number of

our members with HSA accounts and complementary CDBs. We believe that there are

significant opportunities to expand the scope of services that we provide to our

current Clients.

Broad distribution footprint

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

Network Partners. Our sales force calls on enterprise and regional employers in

industries across the U.S., as well as potential Network Partners from among

health plans, benefits administrators, and retirement plan record keepers.

Product breadth

We are the largest custodian and administrator of HSAs (by number of accounts),

as well as a market-share leader in each of the major categories of

complementary CDBs, including FSAs and HRAs, COBRA and commuter benefits

administration. Our Clients and their benefits advisors increasingly seek HSA

providers that can deliver an integrated offering of HSAs and complementary

CDBs. With our CDB capabilities, we can provide employers with a single partner

for both HSAs and complementary CDBs, which is preferred by the vast majority of

employers, according to research conducted for us by Aite Group. We believe that

the combination of HSA and complementary CDB offerings significantly strengthens

our value proposition to employers, health benefits brokers and consultants, and

Network Partners as a leading single-source provider.

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

impacted by the then-prevailing interest rate environment, which in turn is

driven by macroeconomic factors and

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government policies over which we have no control. Such factors, and the

response of our competitors to them, also determine the amount of interest

retained by our members.

HSA members who place their HSA cash into our Enhanced Rates offering receive a

higher yield compared to our Basic Rates offering. An increase in the percentage

of HSA cash held in our Enhanced Rates offering also positively impacts our

custodial revenues, as we generally receive a higher yield on HSA cash held by

our insurance company partners compared to cash held by our Depository Partners.

As with our Depository Partners, yields paid by our insurance company partners

may be impacted by the prevailing interest rate environment, which in turn is

driven by macroeconomic factors and government policies over which we have no

control. Such factors, and the response of our competitors to them, also

determine the amount of interest retained by our members.

We believe that diversification of Depository Partners and insurance company

partners, varied contract terms, and other factors reduce our exposure to

short-term fluctuations in prevailing interest rates and mitigate the short-term

impact of sustained increases or declines in prevailing interest rates on our

custodial revenue. Over longer periods, sustained shifts in prevailing interest

rates affect the amount of custodial revenue we can realize on custodial assets

and the interest retained by our members.

Although interest rates have 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, the lack of demand from

Depository Partners for deposits, and other market conditions that have caused

our average annualized yield on HSA cash to decline significantly.

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.

Our competition and industry

Our direct competitors are HSA custodians and other CDB providers. Many of these

are state or federally chartered banks and other financial institutions for

which we believe benefits administration services are not a core business. Some

of our direct competitors (including healthcare service companies such as United

Health Group’s Optum, Webster Bank, and well-known retail investment companies,

such as Fidelity Investments) are in a position to devote more resources to the

development, sale, and support of their products and services than we have at

our disposal. Our other CDB administration competitors include health insurance

carriers, human resources consultants and outsourcers, payroll providers,

national CDB specialists, regional third-party administrators, and commercial

banks. In addition, numerous indirect competitors, including benefits

administration service providers, partner with banks and other HSA custodians to

compete with us. Our Network Partners may also choose to offer competitive

services directly, as some health plans have done. Our success depends on our

ability to predict and react quickly to these and other industry and competitive

dynamics.

As a result of the COVID-19 pandemic, we have seen 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 the California Consumer Privacy Act broadly regulating California

residents’ personal information and providing California residents with various

rights to access and control their data, and the new California Privacy Rights

Act. We have also seen an increase in regulatory changes related to our services

due to government responses to the COVID-19 pandemic and may continue to see

additional regulatory changes. Our ability to predict and react quickly to

relevant legal and regulatory trends and to correctly interpret their market and

competitive implications is important to our success.

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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) April 30, 2022 April 30, 2021 % Change January 31, 2022

HSAs 7,359 5,846 26 % 7,207

New HSAs from sales – Quarter-to-date 159 115 38 % 472

New HSAs from sales – Year-to-date 159 115 38 % 918

New HSAs from acquisitions – Year-to-date 90 – n/a 740

HSAs with investments 506 371 36 % 455

CDBs 7,095 6,986 2 % 7,192

Total Accounts 14,454 12,832 13 % 14,399

Average Total Accounts – Quarter-to-date 14,427 12,870 12 % 14,326

Average Total Accounts – Year-to-date 14,427 12,870 12 % 13,450

The number of our HSAs and CDBs are key metrics because our revenue is driven by

the amount we earn from them. The number of our HSAs increased by 1.5 million,

or 26%, from April 30, 2021 to April 30, 2022, 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. The number of our CDBs increased by 0.1 million, or 2%, from

April 30, 2021 to April 30, 2022, primarily driven by CDBs acquired through the

Further Acquisition, partially offset by a decrease in FSA accounts and COBRA

accounts.

HSA Assets

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

(in millions, except percentages)

April 30, 2022 April 30, 2021 % Change January 31, 2022

HSA cash $ 12,935 $ 10,026 29 % $ 12,943

HSA investments 7,330 4,987 47 % 6,675

Total HSA Assets 20,265 15,013 35 % 19,618

Average daily HSA cash – Year-to-date 12,910 10,051 28 % 10,579

Average daily HSA cash – Quarter-to-date 12,910 10,051 28 % 12,118

HSA Assets 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 billion, or 29%, from April 30, 2021 to April 30,

2022, 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 billion, or 47%, from April 30, 2021 to

April 30, 2022, due primarily to the HealthSavings acquisition, other HSA

portfolio acquisitions, and transfers from HSA cash.

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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, the most comparable

GAAP financial measure, to Adjusted EBITDA for the periods indicated:

Three months ended April 30,

(in thousands) 2022 2021

Net loss $ (13,639) $ (2,615)

Interest income (52) (408)

Interest expense 10,461 6,689

Income tax benefit (4,412) (3,451)

Depreciation and amortization 15,788 11,954

Amortization of acquired intangible assets 23,698 19,814

Stock-based compensation expense 13,986 12,799

Merger integration expenses 9,294 8,807

Acquisition costs (1) 6 5,939

Amortization of incremental costs to obtain a contract 1,067 1,272

Costs associated with unused office space 1,294 –

Other 844 (1,826)

Adjusted EBITDA $ 58,335 $ 58,974

(1)For the three months ended April 30, 2021, acquisition costs included $0.3

million of stock-based compensation expense.

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 %

Our Adjusted EBITDA decreased by $0.6 million, less than 1%, from $59.0 million

for the three months ended April 30, 2021 to $58.3 million for the three months

ended April 30, 2022, primarily due to increases in personnel and related costs,

largely offset by an increase in total revenue.

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

not be considered in isolation or as a substitute for analysis of our results as

reported under GAAP.

Key components of our results of operations

Revenue

We generate revenue from three primary sources: service revenue, custodial

revenue, and interchange revenue.

Service revenue. We earn service revenue from the fees we charge our Network

Partners, Clients, and members for the administration services we provide in

connection with the HSAs and other CDBs we offer. With respect to our Network

Partners and Clients, our fees are generally based on a fixed tiered structure

for the duration of the relevant service agreement and are paid to us on a

monthly basis. We recognize revenue on a monthly basis as services are rendered

to our members and Clients.

Custodial revenue. We earn custodial revenue primarily from HSA Assets 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 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 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, 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, net

Other expense, net, consists of acquisition costs, interest income earned on

corporate cash and other miscellaneous income and expense.

Income tax 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, we have recorded a valuation

allowance on certain state deferred tax assets and maintained an overall net

federal and state deferred tax liability on our condensed consolidated balance

sheet.

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

Revenue

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

Three months ended April

30,

(in thousands, except percentages) 2022 2021 $ Change % Change

Service revenue $ 104,348 $ 102,534 $ 1,814 2 %

Custodial revenue 59,365 46,978 12,387 26 %

Interchange revenue 41,966 34,690 7,276 21 %

Total revenue $ 205,679 $ 184,202 $ 21,477 12 %

Service revenue. The $1.8 million, or 2%, increase in service revenue from the

three months ended April 30, 2021 to the three months ended April 30, 2022 was

primarily due to new revenue from acquired businesses and HSA portfolios, and

new HSAs from sales, partially offset by lower average service fees per account.

Custodial revenue. The $12.4 million, or 26%, increase in custodial revenue from

the three months ended April 30, 2021 to the three months ended April 30, 2022

was primarily due to the $2.9 billion, or 28%, increase in the year-over-year

average daily balance of HSA cash. The increase was partially offset by a

decrease in 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 HSA cash that was placed with our Depository Partners following the

interest rate cuts made by the Federal Reserve at the beginning of the COVID-19

pandemic, and by transfers from HSA cash to HSA investments.

Interchange revenue. The $7.3 million, or 21%, increase in interchange revenue

from the three months ended April 30, 2021 to the three months ended April 30,

2022 was primarily due to an increase in accounts and increased spend per

account.

Total revenue. Total revenue increased $21.5 million, or 12%, from the three

months ended April 30, 2021 to the three months ended April 30, 2022 due to the

increases in service, custodial, and interchange revenues described above.

Impact of COVID-19. Our business has been adversely affected by the COVID-19

pandemic, and we expect that it will continue to be adversely affected by

related societal and economic changes. 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 yield we currently receive from our Depository

Partners and insurance company partners remains significantly below the levels

seen before the pandemic. Our financial results related to certain of our

products have also been adversely affected, such as commuter benefits, due to

many of our members working from home during the outbreak, and the “work from

home” trend, or hybrid work environments, may continue indefinitely. In

particular, the increased spread of COVID-19 in early 2022 and the associated

decisions by employers to delay return-to-office plans for their employees

further delayed the recovery of use of these commuter benefits. During the

initial stages of the COVID-19 pandemic, and during subsequent increases in

COVID-19 cases, we saw a negative impact on our members’ spend on healthcare,

which negatively impacted both our interchange revenue and service revenue. 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 may be unable to meet our service level commitments to our

Clients as a result of disruptions to our work force and disruptions to

third-party contracts that we rely on to provide our services. The extent to

which the COVID-19 pandemic and any longer lasting impacts on the usage of our

services will continue to negatively impact our business remains highly

uncertain and as a result may have a material adverse impact on our business and

financial results.

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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,

(in thousands, except percentages) 2022 2021 $ Change % Change

Service costs $ 80,874 $ 70,632 $ 10,242 15 %

Custodial costs 6,641 5,009 1,632 33 %

Interchange costs 6,991 5,445 1,546 28 %

Total cost of revenue $ 94,506 $ 81,086 $ 13,420 17 %

Service costs. The $10.2 million, or 15%, increase in service costs from the

three months ended April 30, 2021 to the three months ended April 30, 2022 was

primarily due to the inclusion of Further’s results of operations and an

increase in personnel costs to support the increase in average Total Accounts.

Custodial costs. The $1.6 million, or 33%, increase in custodial costs from the

three months ended April 30, 2021 to the three months ended April 30, 2022 was

due to an increase in the average daily balance of HSA cash, which increased

from $10.1 billion for the three months ended April 30, 2021 to $12.9 billion

for the three months ended April 30, 2022 and an associated increase in interest

retained by HSA members, partially offset by a lower average annualized rate of

interest retained by HSA members on HSA cash, which decreased from 0.18% for the

three months ended April 30, 2021 to 0.16% for the three months ended April 30,

2022.

Interchange costs. The $1.5 million, or 28%, increase in interchange costs from

the three months ended April 30, 2021 to the three months ended April 30, 2022

was due to an increase in 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. On an annual basis, we expect our cost of revenue to

continue to increase as a percentage of our total revenue, primarily due to the

inclusion of a full year of Further’s results of operations and expected

increases in stock-based compensation. Cost of revenue will continue to be

affected by a number of different factors, including our ability to scale our

service delivery, Network Partner implementation, account management functions,

realized synergies, and the impact of the COVID-19 pandemic.

Operating expenses

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

Three months ended April 30,

(in thousands, except percentages) 2022 2021 $ Change % Change

Sales and marketing $ 16,560 $ 14,086 $ 2,474 18 %

Technology and development 45,183 35,469 9,714 27 %

General and administrative 23,727 20,687 3,040 15 %

Amortization of acquired intangible

assets 23,698 19,814 3,884 20 %

Merger integration 9,294 8,807 487 6 %

Total operating expenses $ 118,462 $ 98,863 $ 19,599 20 %

Sales and marketing. The $2.5 million, or 18%, increase in sales and marketing

expense from the three months ended April 30, 2021 to the three months ended

April 30, 2022 was primarily due to the inclusion of Further’s results of

operations, an increase in marketing expenses from increased staffing and

marketing collateral costs, and increases in team member and partner

commissions.

We expect our sales and marketing expenses to increase for the foreseeable

future as we focus on our cross-selling program and marketing campaigns. On an

annual basis, we expect our sales and marketing expenses to continue to increase

as a percentage of our total revenue, primarily due to the inclusion of a full

year of Further’s results of operations and expected increases in stock-based

compensation. However, our sales and marketing expenses may fluctuate as a

percentage of our total revenue from period to period due to the seasonality of

our total revenue and the timing and extent of our sales and marketing expenses.

Technology and development. The $9.7 million, or 27%, increase in technology and

development expense from the three months ended April 30, 2021 to the three

months ended April 30, 2022 was primarily due to the inclusion

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of Further’s results of operations and increases in amortization, stock-based

compensation, and personnel-related expenses.

We expect our technology and development expenses to increase for the

foreseeable future as we continue to invest in the development and security of

our proprietary technology. On an annual basis, we expect our technology and

development expenses to continue to increase as a percentage of our total

revenue, primarily due to the inclusion of a full year of Further’s results of

operations, expected increases in stock-based compensation, and our growth

initiatives. Our technology and development expenses may fluctuate as a

percentage of our total revenue from period to period due to the seasonality of

our total revenue and the timing and extent of our technology and development

expenses.

General and administrative. The $3.0 million, or 15%, increase in general and

administrative expense from the three months ended April 30, 2021 to the three

months ended April 30, 2022 was primarily due to the inclusion of Further’s

results of operations and increases 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 functions that we incur as we continue to grow our business. On an

annual basis, we expect our general and administrative expenses to increase 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 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 million, or 20%, increase

in amortization of acquired intangible assets from the three months ended

April 30, 2021 to the three months ended April 30, 2022 was primarily due to the

inclusion 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.

Merger integration. The $9.3 million in merger integration expense for the three

months ended April 30, 2022 was primarily due to personnel and related expenses,

including expenses incurred in conjunction with the migration of accounts,

professional fees, and technology-related expenses directly related to the

Further Acquisition and certain ongoing merger integration expenses related to

the acquisition of our wholly owned subsidiary WageWorks, Inc. (“WageWorks”),

including ongoing lease expense related to WageWorks offices that have been

permanently closed, less any related sublease income, professional fees

associated with the remediation of remaining material weaknesses in internal

control over financial reporting, and costs associated with remaining platform

migrations. We expect merger integration expenses attributable to the Further

Acquisition totaling approximately $55 million to be incurred over a period of

approximately three years from the acquisition date.

Interest expense

The $10.5 million in interest expense for the three months ended April 30, 2022

consisted primarily of interest accrued on our long-term debt and amortization

of debt discount and issuance costs. On an annual basis, we expect interest

expense to increase, primarily from the inclusion of a full year of interest

expense we will incur on the $600.0 million aggregate principal amount of the

Notes, which were issued in October 2021, and due to the impact of increased

interest rates on our term loan facility, which had an outstanding principal

balance of $347.8 million as of April 30, 2022. The interest rate on our term

loan facility and Revolving Credit Facility is variable and, accordingly, we may

incur additional expense if interest rates increase in future periods.

Other expense, net

The $3.3 million decrease in other expense, net, from $3.6 million during the

three months ended April 30, 2021 to $0.3 million during the three months ended

April 30, 2022 was primarily due to a $5.9 million decrease in acquisition

costs, partially offset by a $2.6 million decrease in interest and other income,

net.

Income tax benefit

For the three months ended April 30, 2022 and 2021, we recorded an income tax

benefit of $4.4 million and $3.5 million, respectively. The increase in income

tax benefit was primarily the result of increased pre-tax book loss and a

corresponding increase in benefit for state income taxes, partially offset by 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 to activating accounts

and hiring additional staff, including seasonal help to support our member

support center. These expenses begin to ramp up during our third fiscal quarter,

with the majority of expenses incurred in our fourth fiscal quarter.

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 and January 31, 2022, cash and cash equivalents were $161.2

million and $225.4 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-Indebtedness.

As of April 30, 2022, there were no amounts outstanding under the Revolving

Credit Facility. We were in compliance with all covenants under the credit

agreement as of April 30, 2022, and for the period then ended.

Use of cash

On March 2, 2022, we completed our acquisition of the HealthSavings HSA

portfolio in exchange for a purchase price of $60 million in cash.

Capital expenditures for the three months ended April 30, 2022 and 2021 were

$14.8 million and $18.0 million, respectively. We expect to continue our current

level of increased capital expenditures for the remainder of the fiscal year

ending January 31, 2023 as we continue to devote a significant amount of our

capital expenditures to improving the architecture and functionality of our

proprietary systems. Costs to improve the architecture of our proprietary

systems include computer hardware, personnel and related costs for software

engineering and outsourced software engineering services.

We believe our existing cash, cash equivalents, and Revolving Credit Facility

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,

(in thousands) 2022 2021

Net cash provided by operating activities $ 7,077 $ 30,918

Net cash used in investing activities (74,203) (67,801)

Net cash provided by financing activities 2,959 444,853

Increase (decrease) in cash and cash equivalents (64,167) 407,970

Beginning cash and cash equivalents 225,414 328,803

Ending cash and cash equivalents $ 161,247

$ 736,773

Cash flows from operating activities. Net cash provided by operating activities

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.

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 used in investing activities for 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 the three months ended April 30, 2021

resulted from the Luum Acquisition for $49.5 million, net of cash acquired,

$15.5 million in software and capitalized software development, $2.5 million in

purchases of property and equipment, and $0.3 million in acquisitions of

intangible member assets.

Cash flows from financing activities. Net cash provided by financing activities

during the three months ended April 30, 2022 resulted from $2.3 million received

in the settlement of Client-held funds obligations, net, and the exercise of

stock options of $2.8 million. These items were partially offset by $2.2 million

of principal payments on our long-term debt.

Net cash provided by financing activities during the three months ended April

30, 2021 resulted from $456.6 million of net proceeds from our follow-on public

offering of 5,750,000 shares of common stock and the exercise of stock options

of $4.2 million. These items were partially offset by $15.6 million of principal

payments on our long-term debt and $0.4 million used in the settlement of

Client-held funds obligation, net.

Contractual obligations

See Note 6-Commitments and contingencies for information about our contractual

obligations.

Off-balance sheet arrangements

As of April 30, 2022, 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 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. There have been no

significant or material changes in our critical accounting policies during the

three months ended April 30, 2022, as compared to those disclosed in

“Management’s discussion and analysis of financial condition and results of

operations – Critical accounting policies and significant management estimates”

in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

Recent accounting pronouncements

See Note 1-Summary of business and significant accounting policies within the

interim financial statements included in this Form 10-Q for further discussion.

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