What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-09 compared with 2020-06-04 · 145 added, 115 removed, 374 unchanged (41% of the section changed)

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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 the impact of the ongoing COVID-19 pandemic on the Company, the anticipated synergies and other benefits of the acquisition of WageWorks, health savings accounts and other tax-advantaged consumer-directed benefits, tax and other regulatory changes, market opportunity, our future financial and operating results, investment and acquisition strategy, 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.

Such statements include, but are not limited to, statements concerning the impact of the ongoing COVID-19 pandemic on the Company, the anticipated synergies and other benefits of the acquisition of WageWorks, 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, 2020, this Quarterly Report on Form 10-Q, and in our other reports filed with the SEC.

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

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

As of April 30, 2020, we administered 5.4 million HSAs, with balances totaling $11.5 billion, which we call HSA Assets.

Also, as of April 30, 2020, we administered 7.3 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs on our platforms as Total Accounts, of which we had 12.7 million as of April 30, 2020.

As of July 31, 2020, we administered 5.4 million HSAs, with balances totaling $12.2 billion, which we call HSA Assets.

Also, as of July 31, 2020, we administered 7.1 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs on our platforms as Total Accounts, of which we had 12.5 million as of July 31, 2020.

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

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With WageWorks’ CDB capabilities, we are working to provide employers with a single partner for both HSAs and other CDBs, which is preferred by the vast majority of employers according to research conducted for us by Aite Group.

For Clients that partner with us in this way, we believe we can produce more value by encouraging both CDB participants to contribute to HSAs and HSA-only members to take advantage of tax savings by increasing their account balances in other CDBs.

Accordingly, we believe that there are significant opportunities to expand the scope of services that we provide to our Clients.

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On August 30, 2019, we completed the Acquisition of WageWorks.

We are now pursuing a multi-year integration effort that we expect will produce long-term cost savings and revenue synergies.

We have identified near-term opportunities, estimated to be approximately $50 million in annualized ongoing net synergies, which we expect to achieve by the end of the second quarter of fiscal 2021.

We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies.

We identified near-term opportunities of approximately $50 million in annualized ongoing net synergies, which we achieved by the end of the second quarter of fiscal 2021.

In light of this progress, the Company raised its net synergy target to $80 million, to be achieved over the next 18 months.

Furthermore, we anticipate generating additional revenue synergies over the longer-term as our combined distribution channels and existing client base take advantage of the broader platform and service offerings and as we continue to drive member engagement.

We estimate non-recurring costs to achieve these synergies of approximately $80 million to $100 million realized within 24 to 36 months of the closing of the Acquisition, resulting from investment in technology platforms, back-office systems and platform integration, as well as rationalization of cost of operations.

As of April 30, 2020, we had incurred a total of approximately $45 million of non-recurring merger integration costs related to the Acquisition of WageWorks.

As of July 31, 2020, we had incurred a total of approximately $55 million of non-recurring merger integration costs related to the Acquisition.

Structural change in U.S.

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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 2014 and 54% since 2009, 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.

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.

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We believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits differentiate us from our competitors and drive our growth.

We plan to build on these innovations by combining our HSA platform with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership position within the HSA sector.

We are building on these innovations by combining our HSA platform with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set and leadership position within the HSA sector.

We intend to continue to invest in our technology development to enhance our platforms' capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data.

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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 generally range from three to five years and may have fixed or variable

interest rate terms.

The lengths of our

agreements with Depository Partners generally range from three to five years and may have fixed or variable interest rate terms.

The terms of new and renewing agreements may be 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.

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Over longer periods, sustained shifts in prevailing interest rates affect the amount of custodial revenue we can realize on custodial assets and the interest retained by our members.

We expect our custodial revenue to be adversely affected by the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to decline significantly and, as a result, funds that we place with our Depository Partners in this environment will receive lower interest rates than we originally expected.

We expect our custodial revenue to continue to be adversely affected by the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic and other market conditions that have caused interest rates to decline significantly and, as a result, funds that we place with our Depository Partners in this environment will receive lower interest rates than we originally expected.

Interest on our long-term debt 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.

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Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics.

As a result of the outbreak of the COVID-19 virus, we have seen some impact on sales opportunities, with some opportunities delayed or now being held virtually.

As an increasing number of companies go out of business, the number of our clients and potential clients would be adversely affected.

As a result of the outbreak of the COVID-19 virus, we have seen an adverse impact on sales opportunities, with some opportunities delayed and most now being held virtually.

As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected.

Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs.

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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.

We have also seen an increase in regulatory changes related to our products 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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The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated:

(in thousands, except percentages) April 30, 2020 April 30, 2019 % Change January 31, 2020

(in thousands, except percentages) July 31, 2020 July 31, 2019 % Change January 31, 2020

HSAs 5,384 4,163 29 % 5,344

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

The number of our HSAs increased by approximately 1.3 million, or 33%, from April 30, 2019 to April 30, 2020, primarily driven by the HSAs acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions, which contributed approximately 757,000 HSAs.

The number of our HSAs increased by approximately 1.2 million, or 29%, from July 31, 2019 to July 31, 2020, including 757,000 HSAs acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions.

The remainder of the increase was due to further penetration into existing Network Partners and the addition of new Network Partners.

The number of our CDBs increased by approximately 6.7 million from April 30, 2019 to April 30, 2020, driven by the CDBs acquired through the Acquisition of WageWorks.

The number of our CDBs increased by approximately 6.4 million from July 31, 2019 to July 31, 2020, driven by the CDBs acquired through the Acquisition of WageWorks.

HSAs are individually owned portable healthcare accounts.

As HSA members transition between employers or health plans, they may no longer be enrolled in an HDHP that qualifies them to continue to make contributions to their HSA.

As HSA members transition between employers or health plans, they may no longer be enrolled in a high deductible health plan that qualifies them to continue to make contributions to their HSA.

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

(in millions, except percentages) April 30, 2020 April 30, 2019 % Change January 31, 2020

(in millions, except percentages) July 31, 2020 July 31, 2019 % Change January 31, 2020

HSA cash with yield (1) $ 8,626 $ 6,460 34 % $ 8,301

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(i) cash deposits, which are deposits with our Depository Partners or other custodians, (ii) custodial cash deposits invested in annuity contracts with our insurance company partners, and (iii) investments in mutual funds through our custodial investment fund partners.

We are working to transition HSA cash without yield to HSA cash with yield in fiscal 2021.

We have begun to transition HSA cash without yield to HSA cash with yield and intend to transition the majority of the remaining balance over the course of fiscal 2021.

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

Our total HSA Assets increased by $3.2 billion, or 38%, from April 30, 2019 to April 30, 2020, including $1.7 billion of HSA Assets acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions and $1.5 billion from existing HSA members and new HSA members.

Our HSA investment assets increased by $0.9 billion, or 45%, from April 30, 2019 to April 30, 2020, reflecting the Acquisition of WageWorks and our strategy of helping our HSA members build wealth and invest for retirement.

Our total HSA Assets increased by $3.7 billion, or 43%, from July 31, 2019 to July 31, 2020, including $1.7 billion of HSA Assets acquired through the Acquisition of WageWorks and other HSA portfolio acquisitions and $2.0 billion from existing HSA members and new HSA members.

Our HSA investment assets increased by $1.2 billion, or 58%, from July 31, 2019 to July 31, 2020, reflecting the Acquisition of WageWorks and our strategy of helping our HSA members build wealth and invest for retirement.

Client-held funds

(in millions, except percentages) April 30, 2020 April 30, 2019 % Change January 31, 2020

(in millions, except percentages) July 31, 2020 July 31, 2019 % Change January 31, 2020

Client-held funds (1) $ 840 $ — n/a $ 779

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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.

Our total Client-held funds increased by $894 million from April 30, 2019 to April 30, 2020, due to the Acquisition of WageWorks.

Our total Client-held funds increased by $840 million from July 31, 2019 to July 31, 2020, due to the Acquisition of WageWorks.

Adjusted EBITDA

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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:

Three months ended April 30,

The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated:

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

(in thousands) 2020 2019 2020 2019

Net income $ 1,826 $ 41,822

Net income (loss) $ (148) $ 19,366 $ 1,678 $ 61,188

Interest income (76) (1,884) (676) (3,227)

Interest expense 8,895 67 21,158 130

Income tax provision 218 9,456

Income tax provision (benefit) (543) 4,370 (325) 13,826

Depreciation and amortization 9,522 3,455 18,327 6,737

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Merger integration expenses 10,365 2,784 23,135 2,784

Acquisition costs 94 1,184

Acquisition costs (gains) (28) 6,596 66 7,780

Gain on marketable equity securities — (3,774) — (27,285)

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Adjusted EBITDA $ 60,002 $ 40,643 $ 123,010 $ 79,566

(1) For the three months ended April 30, 2020, Other consisted of amortization of incremental costs to obtain a contract of $0.3 million and other costs of $1.3 million.

For the three months ended April 30, 2019, Other consisted of amortization of incremental costs to obtain a contract of $0.5 million.

(1) For the three months ended July 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $569 and $456, non-income-based taxes of $390 and $108, and other costs of $541 and $15, respectively.

For the six months ended July 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $834 and $900, non-income-based taxes of $832 and $121, and other costs of $1,368 and $9, respectively.

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

Three months ended April 30,

(in thousands, except percentages) 2020 2019 $ Change % Change

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

(in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change

Adjusted EBITDA $ 60,002 $ 40,643 $ 19,359 48 % $ 123,010 $ 79,566 $ 43,444 55 %

As a percentage of revenue 34 % 47 % 34 % 46 %

Our Adjusted EBITDA increased by $24.1 million, or 62%, from $38.9 million for the three months ended April 30, 2019 to $63.0 million for the three months ended April 30, 2020.

The increase in Adjusted EBITDA was driven by the overall growth of our business and by the Acquisition.

Our Adjusted EBITDA increased by $19.4 million, or 48%, from $40.6 million for the three months ended July 31, 2019 to $60.0 million for the three months ended July 31, 2020.

The increase in Adjusted EBITDA was driven by the Acquisition and by the overall growth of our business.

Our Adjusted EBITDA increased by $43.4 million, or 55%, from $79.6 million for the six months ended July 31, 2019 to $123.0 million for the three months ended July 31, 2020.

The increase in Adjusted EBITDA was driven by the Acquisition and by the overall growth of our business.

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.

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Acquisition of WageWorks

As the Acquisition closed on August 30, 2019, WageWorks' results of operations are included in our consolidated results of operations for the three months ended April 30, 2020, but are not included in our consolidated results of operations for the three months ended April 30, 2019.

As the Acquisition closed on August 30, 2019, WageWorks' results of operations are included in our consolidated results of operations for the three and six months ended July 31, 2020, but are not included in our consolidated results of operations for the three and six months ended July 31, 2019.

In addition, the results of operations attributable to WageWorks may not be directly comparable to WageWorks' results of operations reported by WageWorks prior to the Acquisition.

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We earn a recordkeeping fee, calculated as a percentage of custodial investments.

We are working to transition HSA cash without yield to HSA cash with yield in fiscal 2021.

We have begun to transition HSA cash without yield to HSA cash with yield and intend to transition the majority of the remaining balance over the course of fiscal 2021.

Interchange revenue.

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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.

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.

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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 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, 2020, we have recorded an overall net deferred tax liability with the exception of an insignificant amount of federal capital losses recorded as a net deferred tax asset on our condensed consolidated balance sheet.

Comparison of the three months ended April 30, 2020 and 2019

As of July 31, 2020, we have recorded an overall net deferred tax liability with the exception of an insignificant amount of federal capital losses recorded as a net deferred tax asset on our condensed consolidated balance sheet.

Comparison of the three and six months ended July 31, 2020 and 2019

Impact of Acquisition

The comparability of our operating results is impacted by our Acquisition of WageWorks on August 30, 2019.

Revenue and expense attributable to us or WageWorks generally may not be separately identifiable due to the integration of WageWorks into our existing operations.

Revenue and expense attributable to WageWorks generally may not be separately identifiable due to the integration of WageWorks into our existing operations.

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

Three months ended April 30,

(in thousands, except percentages) 2020 2019 $ Change % Change

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

(in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change

Service revenue $ 103,805 $ 26,282 $ 77,523 295 % $ 215,076 $ 53,090 $ 161,986 305 %

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Service revenue.

The $84.5 million, or 315%, increase in service revenue from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to the inclusion of service revenue associated with the CDBs added through the Acquisition, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs.

The number of our HSAs increased by approximately 1.3 million, or 33%, from April 30, 2019 to April 30, 2020, primarily due to acquiring approximately 757,000 HSAs through the Acquisition of WageWorks and other portfolio acquisitions.

The $77.5 million, or 295%, increase in service revenue from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to the inclusion of service revenue associated with the CDBs added through the Acquisition, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs.

The $162.0 million, or 305%, increase in service revenue from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to the inclusion of service revenue associated with the CDBs added through the Acquisition, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs.

The remainder of the increase was due to further penetration into existing Network Partners and the addition of new Network Partners.

Service revenue as a percentage of our total revenue increased primarily due the service revenue contributed by CDBs added through the Acquisition of WageWorks.

The number of our CDBs increased by approximately 6.4 million, or 943%, from July 31, 2019 to July 31, 2020, primarily due to the Acquisition of WageWorks, partially offset by a decrease in commuter benefit accounts due to the impact of COVID-19 pandemic and local governments restrictions around the country.

Service revenue as a percentage of our total revenue increased primarily due to the service revenue contributed by CDBs added through the Acquisition of WageWorks.

Custodial revenue.

The $4.9 million, or 12%, increase in custodial revenue from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to an increase in the year-over-year average daily balance of HSA cash with yield of $1.9 billion, or 29%.

The increase was partially offset by a decrease in yield from 2.53% for the three months ended April 30, 2019 to 2.12% for the three months ended April 30, 2020, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic and due to the lower yield on HSA cash with yield added through the Acquisition.

The $3.3 million, or 8%, increase in custodial revenue from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to the $2.0 billion, or 31%, increase in the year-over-year average daily balance of HSA cash with yield.

The increase was partially offset by a decrease in yield from 2.54% for the three months ended July 31, 2019 to 2.10% for the three months ended July 31, 2020, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic and due to the lower yield on HSA cash with yield added through the Acquisition.

The $8.2 million, or 10%, increase in custodial revenue from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to the $1.9 billion, or 30%, increase in the year-over-year average daily balance of HSA cash with yield.

The increase was partially offset by a decrease in yield from 2.55% for the six months ended July 31, 2019 to 2.11% for the six months ended July 31, 2020, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic and due to the lower yield on HSA cash with yield added through the Acquisition.

Custodial revenue as a percentage of our total revenue decreased primarily due to the inclusion of WageWorks' financial results following the Acquisition, which included relatively less custodial revenue.

Over the course of fiscal 2021, we intend to move the majority of HSA cash without yield to HSA cash with yield.

This cash will be placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial revenue.

We have begun to transition HSA cash without yield to HSA cash with yield and intend to transition the majority of the remaining balance over the course of fiscal 2021.

This cash is being placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial revenue.

Interchange revenue.

The $13.5 million, or 74%, increase in interchange revenue from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to the inclusion of interchange revenue associated with the CDBs added through the Acquisition, partially offset by a decrease in spend per CDB, primarily with respect to FSA and commuter benefit accounts, as well as lower healthcare spending, during the three months ended April 30, 2020 due to decreased card spend partially attributable to the restrictions imposed by local governments around the country in connection with the COVID-19 pandemic.

The $8.6 million, or 51%, increase in interchange revenue from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to the inclusion of interchange revenue associated with the CDBs added through the Acquisition and an increased average interchange rate.

The increase was partially offset by a decrease in spend per CDB, primarily with respect to FSA and commuter benefit accounts, as well as lower healthcare spending partially attributable to the restrictions imposed by local governments around the country in connection with the COVID-19 pandemic.

The $22.1 million, or 63%, increase in interchange revenue from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to the inclusion of interchange revenue associated with the CDBs added through the Acquisition and an increased average interchange rate.

Interchange revenue as a percentage of our total revenue decreased primarily due to the inclusion of WageWorks' financial results following the Acquisition, which included relatively less interchange revenue.

Total revenue.

Total revenue increased by $103.0 million, or 118%, from the three months ended April 30, 2019 to the three months ended April 30, 2020, due to the impact of the WageWorks acquisition and related realized net revenue synergies.

Total revenue increased by $89.4 million, or 103%, from the three months ended July 31, 2019 to the three months ended July 31, 2020, and by $192.4 million, or 111% from the six months ended July 31, 2019 to the six months ended July 31, 2020, due to the impact of the Acquisition and related realized net revenue synergies.

Impact of COVID-19.

We expect our business to continue to be adversely affected by the recent outbreak of the COVID-19 virus, including as a result of the associated interest rate cuts by the Federal Reserve and other market conditions that have caused interest rates to decline significantly and, as a result, funds that we place with our depository partners in this environment will receive lower interest rates than we originally expected.

Sales opportunities have also been impacted, with some opportunities delayed or now being held virtually.

As an increasing number of companies go out of business, the number of our clients and potential clients would be adversely affected.

Our business has been adversely affected by the recent outbreak of the COVID-19 virus, and we expect that it will continue to be adversely affected, including as a result of the associated interest rate cuts by the Federal Reserve and other market conditions that have caused interest rates to decline significantly.

As a result, funds that we place with our Depository Partners in this environment receive lower interest rates than we originally expected.

Sales opportunities have also been impacted, with some opportunities delayed and most now being held virtually.

In addition, we will likely be required to support our Clients' open enrollment activities virtually.

As an increasing number of companies go out of business, the number of our Clients and potential Clients is adversely affected.

Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs.

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 part contracts that we rely on to provide our services.

Our financial results related to certain of our products may be adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak or other impacts from the outbreak.

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.

Our financial results related to certain of our products have also been adversely affected, such as commuter benefits, due to many of our members working from home during the outbreak and other impacts from the outbreak.

Clients may be unable to pay fees required under contracts and exercise "force majeure" or similar defenses, which would negatively impact our financial results.

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

The extent to which the COVID-19 virus 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.

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) 2020 2019 $ Change % Change

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

(in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change

Service costs $ 65,246 $ 19,745 $ 45,501 230 % $ 136,259 $ 40,394 $ 95,865 237 %

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Service costs.

The $50.4 million, or 244%, increase in service costs from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to the Acquisition and the resulting higher volume of accounts being serviced, including additional hiring of personnel to implement and support our new Network Partners and HSAs, increases in stock-based compensation expense, and increases in other expenses.

The $45.5 million, or 230%, increase in service costs from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to the Acquisition and the resulting higher volume of accounts being serviced, including additional hiring of personnel to implement and support our new Network Partners and HSAs, increases in stock-based compensation expense, and increases in other expenses.

The $95.9 million, or 237%, increase in service costs from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to the Acquisition and the resulting higher volume of accounts being serviced, including additional hiring of personnel to implement and support our new Network Partners and HSAs, increases in stock-based compensation expense, and increases in other expenses.

Custodial costs.

The $0.9 million, or 22%, increase in custodial costs from the three months ended April 30, 2019 to the three months ended April 30, 2020 was due to an increase in the average daily balance of HSA cash with yield, which increased from $6.4 billion for the three months ended April 30, 2019 to $8.3 billion for the three months ended April 30, 2020.

The increase was partially offset by a lower average interest rate paid on HSA assets with yield, which decreased from 0.23% for the three months ended April 30, 2019 to 0.21% for the three months ended April 30, 2020.

The $0.8 million, or 19%, increase in custodial costs from the three months ended July 31, 2019 to the three months ended July 31, 2020 was due to an increase in the average daily balance of HSA cash with yield, which increased from $6.4 billion for the three months ended July 31, 2019 to $8.4 billion for the three months ended July 31, 2020.

The increase was partially offset by a lower average interest rate paid on HSA cash with yield, which decreased from 0.23% for the three months ended July 31, 2019 to 0.20% for the three months ended July 31, 2020.

The $1.7 million, or 21%, increase in custodial costs from the six months ended July 31, 2019 to the six months ended July 31, 2020 was due to an increase in the average daily balance of HSA cash with yield, which increased from $6.4 billion for the six months ended July 31, 2019 to $8.3 billion for the six months ended July 31, 2020.

The increase was partially offset by a lower average interest rate paid on HSA cash with yield, which decreased from 0.24% for the six months ended July 31, 2019 to 0.20% for the six months ended July 31, 2020.

Interchange costs.

The $1.4 million, or 30%, increase in interchange costs for the three months ended April 30, 2019 compared to the three months ended April 30, 2020 was due to an overall increase in average Total Accounts, which increased primarily due to accounts added through the Acquisition of WageWorks, partially offset by decreased card spend per average account.

The $0.2 million, or 5%, decrease in interchange costs from the three months ended July 31, 2019 to the three months ended July 31, 2020 was due to a decrease in card spend per account as a result of the local government restrictions in response to the COVID-19 pandemic, partially offset by an overall increase in average Total Accounts, which increased primarily due to accounts added through the Acquisition of WageWorks.

The $1.1 million, or 13%, increase in interchange costs from the six months ended July 31, 2019 to the six months ended July 31, 2020 was due to an overall increase in average Total Accounts, which increased primarily due to accounts added through the Acquisition of WageWorks, partially offset by a decrease in card spend per account as a result of the local government restrictions in response to the COVID-19 pandemic.

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.

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.

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, 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) 2020 2019 $ Change % Change

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

(in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change

Sales and marketing $ 12,167 $ 8,391 $ 3,776 45 % $ 23,622 $ 17,361 $ 6,261 36 %

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Amortization of acquired intangible assets 19,077 1,494 17,583 1,177 % 37,779 2,985 34,794 1,166 %

Merger integration 12,770 — 12,770 n/a

Merger integration 10,365 2,784 7,581 272 % 23,135 2,784 20,351 731 %

Total operating expenses $ 92,756 $ 33,576 $ 59,180 176 % $ 185,759 $ 63,651 $ 122,108 192 %

Sales and marketing.

The $2.5 million, or 28%, increase in sales and marketing expense from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to increased staffing, increases in other expenses, and higher stock-based compensation expense resulting from the Acquisition.

The $3.8 million, or 45%, increase in sales and marketing expense from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to increased staffing, increases in other expenses, and higher stock-based compensation expense resulting from the Acquisition.

The $6.3 million, or 36%, increase in sales and marketing expense from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to increased staffing, increases in other expenses, and higher stock-based compensation expense resulting from the Acquisition.

We expect our sales and marketing expenses to increase for the foreseeable future as we continue to increase the size of our sales and marketing organization and expand into new markets.

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Technology and development.

The $20.2 million, or 185%, increase in technology and development expense from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases resulting from the Acquisition, which were partially offset by increases in capitalized development.

The $19.0 million, or 163%, increase in technology and development expense from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases resulting from the Acquisition, which were partially offset by increases in capitalized development.

The $39.2 million, or 174%, increase in technology and development expense from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases resulting from the Acquisition, which were partially offset by increases in capitalized development.

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 platforms.

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General and administrative.

The $10.3 million, or 118%, increase in general and administrative expense from the three months ended April 30, 2019 to the three months ended April 30, 2020 was primarily due to increased personnel-related expense, increases in professional fees, and increased stock-based compensation expense resulting from the Acquisition.

The $11.2 million, or 121%, increase in general and administrative expense from the three months ended July 31, 2019 to the three months ended July 31, 2020 was primarily due to increased personnel-related expense, increases in professional fees, and increased stock-based compensation expense resulting from the Acquisition.

The $21.5 million, or 120%, increase in general and administrative expense from the six months ended July 31, 2019 to the six months ended July 31, 2020 was primarily due to increased personnel-related expense, increases in professional fees, and increased stock-based compensation expense resulting from the Acquisition.

We expect our general and administrative expenses to increase for the foreseeable future due to the additional demands on our legal, compliance, accounting, and insurance functions that we incur as we continue to grow our business, as well as other costs associated with being a public company.

On an annual basis, we expect our general and administrative expenses to remain steady as a percentage of our total revenue over the near term pursuant to our growth initiatives.

On an annual basis, we expect our

general and administrative expenses to remain steady as a percentage of our total revenue over the near term pursuant to 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 $17.2 million increase in amortization of acquired intangible assets from the three months ended April 30, 2019 to the three months ended April 30, 2020 was due to identified intangible assets acquired through the Acquisition of WageWorks.

The $17.6 million increase in amortization of acquired intangible assets from the three months ended July 31, 2019 to the three months ended July 31, 2020 was due to identified intangible assets acquired through the Acquisition of WageWorks.

The $34.8 million increase in amortization of acquired intangible assets from the six months ended July 31, 2019 to the six months ended July 31, 2020 was due to identified intangible assets acquired through the Acquisition of WageWorks.

Merger integration.

The $12.8 million in merger integration expense for the three months ended April 30, 2020 was due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, severance, professional fees, technology-related, and facilities expenses directly related to the Acquisition of WageWorks.

The $10.4 million and $23.1 million in merger integration expense for the three and six months ended July 31, 2020, respectively, was due to personnel and related expenses, including expenses incurred in conjunction with the migration of accounts, severance, professional fees, technology-related, and facilities expenses directly related to the Acquisition of WageWorks.

We expect integration expenses totaling $80 million to $100 million in the aggregate to continue for 24 to 36 months following the closing of the Acquisition, which closed on August 30, 2019.

As of April 30, 2020, we had incurred a total of approximately $45 million of non-recurring merger integration costs related to the Acquisition of WageWorks.

As of July 31, 2020, we had incurred a total of approximately $55 million of non-recurring merger integration costs related to the Acquisition of WageWorks.

Interest expense

The $12.3 million in interest expense for the three months ended April 30, 2020 consists primarily of interest accrued under our term loan facility and amortization of financing costs.

We expect interest expense to decrease as a result of interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic and principal repayments required pursuant to our credit agreement.

The $8.9 million and $21.2 million in interest expense for the three and six months ended July 31, 2020 consists primarily of interest accrued under our term loan facility and amortization of financing costs.

We expect interest expense to decrease as a result of the principal repayments made under our term loan facility.

Other income (expense), net

The $24.4 million change in other income (expense), net, from income of $23.7 million during the three months ended April 30, 2019 to expense of $0.8 million during the three months ended April 30, 2020 was primarily due to a $23.5 million gain in connection with our equity investment in WageWorks during the three months ended April 30, 2019.

The remainder of the change was due to a decrease in interest income of $0.7 million, a decrease in acquisition costs of $1.1 million, and an increase in other expense of $1.3 million.

The $0.2 million change in other income (expense), net, from expense of $1.1 million during the three months ended July 31, 2019 to expense of $0.8 million during the three months ended July 31, 2020 was primarily due to a $6.6 million decrease in acquisition costs and a $3.8 million non-recurring gain in connection with our equity investment in WageWorks during the three months ended July 31, 2019.

The remainder of the change was due to a decrease in interest income of $1.8 million and an increase in other expense of $0.8 million.

The $24.2 million change in other income (expense), net, from income of $22.6 million during the six months ended July 31, 2019 to expense of $1.6 million during the six months ended July 31, 2020 was primarily due to a $27.3 million non-recurring gain in connection with our equity investment in WageWorks during the three months ended July 31, 2019 and a $7.7 million decrease in acquisition costs.

The remainder of the change was due to a decrease in interest income of $2.6 million and an increase in other expense of $2.1 million.

Income tax provision

Income tax provision for the three months ended April 30, 2020 was $0.2 million as compared to $9.5 million for the three months ended April 30, 2019.

The decrease in the tax provision for the three months ended April 30, 2020 compared to the three months ended April 30, 2019 of $9.3 million was primarily due to a significant decrease in pre-tax book income netted with a decrease of excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.

Our effective income tax rate for the three months ended April 30, 2020 was a provision of 10.7%, compared to a provision of 18.4% for the three months ended April 30, 2019.

The 7.7 percentage point decrease for the three months ended April 30, 2020 compared to the three months ended April 30, 2019 was primarily due to the impact of excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax book income.

Income tax benefit for the three and six months ended July 31, 2020 was $0.5 million and $0.3 million as compared to income tax provision of $4.4 million and $13.8 million for the three and six months ended July 31, 2019.

The decrease in the tax provision for the three and six months ended July 31, 2020 compared to the three and six months ended July 31, 2019 was $4.9 million and $14.1 million, respectively.

The change was primarily due to a significant decrease in pre-tax book income coupled with a decrease in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.

Our effective income tax benefit rate for the three and six months ended July 31, 2020 was 78.6% and 24.0%, respectively, compared to a provision of 18.4% for each of the three and six months ended July 31, 2019.

The 97.0 and 42.4 percentage point decrease for the three and six months ended July 31, 2020 compared to the three and six months ended July 31, 2019 was primarily due to the impact of excess tax benefits on stock-based compensation expense recognized in the provision for income taxes relative to pre-tax book income.

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

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

As of April 30, 2020 and January 31, 2020, cash and cash equivalents were $171.1 million and $191.7 million, respectively.

As of July 31, 2020 and January 31, 2020, cash and cash equivalents were $268.9 million and $191.7 million, respectively.

Cash and cash equivalents as of July 31, 2020 included approximately $286.8 million of net proceeds we received from our follow-on public offering in July 2020 from the sale of 5,290,000 shares of our common stock, less the $200.0 million we used to prepay long-term debt.

Capital resources

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

In July 2020, we closed a follow-on public offering of 5,290,000 shares of common stock at a public offering price of $56.00 per share, less the underwriters' discount.

We received net proceeds of approximately $286.8 million after deducting underwriting discounts and commissions of approximately $8.9 million and other offering expenses payable of approximately $0.6 million.

Our credit agreement includes a five-year senior secured revolving credit facility in an aggregate principal amount of up to $350.0 million, 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.

We were in compliance with all covenants under the credit agreement as of April 30, 2020.

Capital expenditures for the three months ended April 30, 2020 and 2019 were $19.3 million and $6.6 million, respectively.

We were in compliance with all covenants under the credit agreement as of July 31, 2020, and for the period then ended.

We used a portion of the net proceeds from the follow-on public offering to prepay $200.0 million under our term loan facility, with the remaining proceeds to be used for general corporate purposes, which may include additional prepayments under our term loan facility or potential acquisitions.

Capital expenditures for the six months ended July 31, 2020 and 2019 were $30.8 million and $13.0 million, respectively.

We expect to continue our current level of increased capital expenditures for the remainder of the fiscal year ending January 31, 2021 as we continue to devote a significant amount of our capital expenditures to improving the architecture and functionality of our proprietary systems.

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

Three months ended April 30,

Six months ended July 31,

(in thousands) 2020 2019

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Net cash used in investing activities (55,696) (68,591)

Net cash provided by (used in) financing activities (10,365) 4,229

Net cash provided by financing activities 64,218 465,445

Decrease in cash and cash equivalents 77,184 453,685

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Cash flows from operating activities.

Net cash provided by operating activities during the three months ended April 30, 2020 resulted from net income of $1.8 million, plus depreciation and amortization expense of $27.5 million, stock-based compensation expense of $7.4 million, and amortization of debt issuance costs of $1.2 million, partially offset by non-cash items and working capital changes totaling $22.9 million.

Net cash provided by operating activities during the three months ended April 30, 2019 resulted from net income of $41.8 million, plus depreciation and amortization expense of $4.8 million, stock-based compensation expense of $6.0 million, and gains on marketable equity securities of $23.5 million, partially offset by non-cash items and working capital changes totaling $3.8 million.

Net cash provided by operating activities during the six months ended July 31, 2020 resulted from net income of $1.7 million, plus depreciation and amortization expense of $56.1 million, stock-based compensation expense of $18.8 million, and amortization of debt issuance costs of $2.5 million, partially offset by non-cash items and working capital changes totaling $10.5 million.

Net cash provided by operating activities during the six months ended July 31, 2019 resulted from net income of $61.2 million, plus depreciation and amortization expense of $9.7 million, stock-based compensation expense of $13.6 million, and gains on marketable equity securities of $27.3 million, partially offset by non-cash items and working capital changes totaling $0.4 million.

Cash flows from investing activities.

Net cash used in investing activities for the three months ended April 30, 2020 resulted from $7.5 million in purchases of property and equipment, $11.8 million in software and capitalized software development, and $6.0 million in acquisitions of intangible member assets.

Cash flows used in investing activities during the three months ended April 30, 2019 was primarily the result of purchases of marketable equity securities of $53.8 million.

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

Cash flows used in investing activities during the six months ended July 31, 2019 was primarily the result of purchases of marketable equity securities of $53.8 million.

In addition, we invested $9.5 million in software and capitalized software development, $3.5 million in purchases of property and equipment, and $1.7 million in acquisitions of intangible member assets.

Cash flows from financing activities.

Cash flow used in financing activities during the three months ended April 30, 2020 resulted from $7.8 million of principal payments on our long-term debt and $3.8 million used in the settlement of client-held funds obligation, partially offset by $1.2 million of proceeds associated with the exercise of stock options.

Cash flows provided by financing activities during the three months ended April 30, 2019 resulted from proceeds associated with the exercise of stock options of $4.2 million.

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

Cash flows provided by financing activities during the six months ended July 31, 2019 resulted primarily from $458.9 million of proceeds from our follow-on public offering of 7,762,500 shares of our common stock and the exercise of stock options of $6.6 million.

Contractual obligations

There were no material changes during the three months ended April 30, 2020, outside of the ordinary course of business, in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

Except for the $200.0 million prepayment under our term loan facility, there were no material changes during the three and six months ended July 31, 2020, outside of the ordinary course of business, in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2020.

Off-balance sheet arrangements

As of April 30, 2020, other than outstanding letters of credit issued under our revolving credit facility, we did not have any off-balance sheet arrangements.

As of July 31, 2020, 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.

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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, 2020.

There have been no significant or material changes in our critical accounting policies during the three months ended April 30, 2020, 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, 2020.

There have been no significant or material changes in our critical accounting policies during the six months ended July 31, 2020, 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, 2020.

Recent accounting pronouncements

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A significant downturn in this market or changes in state and/or federal laws impacting the preferential tax treatment of healthcare accounts such as HSAs could have a material adverse effect on our results of operations.

During the three months ended April 30, 2020 and 2019, no one customer accounted for greater than 10% of our total revenue.

During the six months ended July 31, 2020 and 2019, 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.

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We maintain our cash and cash equivalents in bank and other depository accounts, which frequently may exceed federally insured limits.

Our cash and cash equivalents as of April 30, 2020 were $171.1 million, of which $2.3 million was covered by federal depository insurance.

Our cash and cash equivalents as of July 31, 2020 were $268.9 million, of which $2.3 million was covered by federal depository insurance.

We have not experienced any material losses in such accounts and believe we are not exposed to any significant credit risk with respect to our cash and cash equivalents.

Our accounts receivable balance as of April 30, 2020 was $69.8 million.

Our accounts receivable balance as of July 31, 2020 was $70.2 million.

We have not experienced any significant write-offs to our accounts receivable and believe that we are not exposed to significant credit risk with respect to our accounts receivable;

however, the extent to which the ongoing COVID-19 pandemic will negatively

impact our credit risk is highly uncertain and cannot be accurately predicted.

however, the extent to which the ongoing COVID-19 pandemic will negatively impact our credit risk is highly uncertain and cannot be accurately predicted.

We continue to monitor our credit risk and place our cash and cash equivalents with reputable financial institutions.

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Our HSA Assets consists of custodial HSA funds we hold in custody on behalf of our members.

As of April 30, 2020, we had HSA Assets of approximately $11.5 billion.

As of July 31, 2020, we had HSA Assets of approximately $12.2 billion.

As a non-bank custodian, we contract with our Depository Partners and insurance company partners to hold custodial cash assets on behalf of our members, and we earn a significant portion of our total revenue from interest paid to us by these partners.

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As our HSA Assets increase and existing contracts expire, we seek to enter into new contracts with Depository Partners, the terms of which are impacted by the then-prevailing interest rate environment.

The diversification of deposits among Depository 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.

The diversification of deposits among Depository 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.

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Our Client-held funds are interest earning deposits from which we generate custodial revenue.

As of April 30, 2020, we had Client-held funds of approximately $894.0 million.

As of July 31, 2020, we had Client-held funds of approximately $840.0 million.

These deposits are amounts remitted by Clients and held by us on their behalf to pre-fund and facilitate administration of our other CDBs.

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and include deposits in a money market account that is unrestricted as to withdrawal or use.

As of April 30, 2020, we had unrestricted cash and cash equivalents of $171.1 million.

As of July 31, 2020, we had unrestricted cash and cash equivalents of $268.9 million.

Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our cash and cash equivalents as a result of changes in interest rates.

Credit agreement.

As of April 30, 2020, we had $1.23 billion outstanding under our term loan facility and no amounts drawn under our revolving credit facility.

As of July 31, 2020, we had $1.03 billion outstanding under our term loan facility and no amounts drawn under our revolving credit facility.

Our overall interest rate sensitivity under these credit facilities is primarily influenced by any amounts borrowed and the prevailing interest rates on these instruments.

The interest rate on our term loan credit facility and revolving credit facility is variable and was 2.15 percent at April 30, 2020.

The interest rate on our term loan credit facility and revolving credit facility is variable and was 2.16 percent at July 31, 2020.

Accordingly, we may incur additional expense if interest rates increase in future periods.

For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at April 30, 2020 would result in approximately $12.4 million of additional interest expense over the next 12 months.

For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at July 31, 2020 would result in approximately $10.2 million of additional interest expense over the next 12 months.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis