What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-09 compared with 2020-09-09 · 135 added, 138 removed, 381 unchanged (42% of the section changed)

11 unchanged sentences

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

Consumers and employers use our platforms to manage tax-advantaged health savings accounts ("HSAs") and other consumer-directed benefits ("CDBs") offered by employers, flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”), Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, commuter and other benefits, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit information, access remote and telemedicine benefits, earn wellness incentives, and receive investment advice to grow their tax-advantaged healthcare savings.

Consumers and employers use our platforms to manage 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”), Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration, commuter and other benefits, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit information, access remote and telemedicine benefits, earn wellness incentives, and receive investment advice to grow their tax-advantaged healthcare savings.

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

As of July 31, 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.

As of October 31, 2020, we administered 5.5 million HSAs, with balances totaling $12.4 billion, which we call HSA Assets.

Also, as of October 31, 2020, we administered 7.0 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 October 31, 2020.

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

23 unchanged sentences

The Acquisition has significantly increased the number of our Total Accounts, HSA Assets, Client-held funds, Adjusted EBITDA, total revenue, total cost of revenue, operating expenses, and other financial results.

These increases are reflected in the period-over-period results described in this report.

These increases impact the comparability of the period-over-period results described in this report.

Key factors affecting our performance

5 unchanged sentences

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.

We have identified opportunities of approximately $80 million in annualized ongoing net synergies to be achieved by the end of the fiscal year ending January 31, 2022, of which approximately $55 million have been achieved as of October 31, 2020.

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

We estimate non-recurring costs to achieve these synergies of approximately $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 October 31, 2020, we had incurred a total of approximately $63 million of non-recurring merger integration costs related to the Acquisition.

Structural change in U.S.

6 unchanged sentences

healthcare are uncertain.

Moreover, changes in healthcare policy, such as proposed "Medicare for all" plans, could materially and adversely affect our business in ways that are difficult to predict.

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.

14 unchanged sentences

Our Clients and their benefits advisors increasingly seek HSA providers that can deliver an integrated offering of HSAs and complementary CDBs.

With our newly acquired 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.

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.

12 unchanged sentences

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

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.

16 unchanged sentences

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

We have seen a significant decline in the use of commuter benefits due to many of our members working from home during the outbreak or other impacts from the outbreak, which has negatively impacted both our interchange revenue and service revenue.

We have also seen a decline in interchange revenue across all other products.

6 unchanged sentences

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.

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.

10 unchanged sentences

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

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

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

HSAs 5,460 5,031 9 % 5,344

1 unchanged sentence

New HSAs from Sales - Year-to-date 317 344 (8) % 724

New HSAs from Acquisitions - Year-to-date — — n/a 757

New HSAs from Acquisitions - Year-to-date — 757 (100) % 757

HSAs with investments 302 197 54 % 220

4 unchanged sentences

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 1.2 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 6.4 million from July 31, 2019 to July 31, 2020, driven by the CDBs acquired through the Acquisition of WageWorks.

The number of our HSAs increased by approximately 0.4 million, or 9%, from October 31, 2019 to October 31, 2020, due to further penetration into existing Network Partners and the addition of new Network Partners.

The number of our CDBs decreased by approximately 0.4 million, or 6%, from October 31, 2019 to October 31, 2020, driven primarily by a decrease in commuter benefit accounts resulting from the impact of the COVID-19 pandemic and associated local governmental restrictions around the country.

HSAs are individually owned portable healthcare accounts.

1 unchanged sentence

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

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

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

HSA cash with yield (1) $ 8,759 $ 7,564 16 % $ 8,301

HSA cash without yield (2) 344 — n/a 383

HSA cash without yield (2) 258 381 (32) % 383

Total HSA cash 9,017 7,945 13 % 8,684

HSA investments with yield (1) 3,255 2,188 49 % 2,495

HSA investments without yield (2) 195 — n/a 362

HSA investments without yield (2) 168 326 (48) % 362

Total HSA investments 3,423 2,514 36 % 2,857

6 unchanged sentences

(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 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.

We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022.

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 $3.7 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.

Our total HSA Assets increased by $2.0 billion, or 19%, from October 31, 2019 to October 31, 2020, due primarily to HSA contributions, decreased spending per HSA, and appreciation of invested balances.

Total HSA cash increased by $1.1 billion, or 13%, from October 31, 2019 to October 31, 2020, due primarily to HSA contributions and decreased spending per HSA.

Our HSA investment assets increased by $0.9 billion, or 36%, from October 31, 2019 to October 31, 2020, reflecting our strategy of helping our HSA members build wealth and invest for retirement.

Client-held funds

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

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

Average daily Client-held funds - Year-to-date (1) 861 — n/a 382

Average daily Client-held funds - Quarter-to-date (1) 891 — n/a 727

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

Client-held funds (1) $ 798 $ 670 19 % $ 779

Average daily Client-held funds - Year-to-date (1) 847 268 216 % 382

Average daily Client-held funds - Quarter-to-date (1) 819 500 64 % 727

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

The Company did not hold material Client-held funds prior to the Acquisition.

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

1 unchanged sentence

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 $840 million from July 31, 2019 to July 31, 2020, due to the Acquisition of WageWorks.

Client-held funds fluctuate depending on the timing of funding and spending of CDB balances.

Adjusted EBITDA

2 unchanged sentences

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,

Three months ended October 31, Nine months ended October 31,

(in thousands) 2020 2019 2020 2019

7 unchanged sentences

Merger integration expenses (1) 8,193 17,675 31,328 20,459

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

Acquisition costs (2) 13 32,932 79 40,712

Gain on marketable equity securities — (285) — (27,570)

1 unchanged sentence

Adjusted EBITDA $ 61,139 $ 55,549 $ 184,149 $ 135,115

(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.

(1) For the three and nine months ended October 31, 2019, includes $1.2 million of stock-based compensation expense from post-Acquisition merger integration activities.

(2) For the three and nine months ended October 31, 2019, includes $13.7 million of stock-based compensation expense from Acquisition-related cash and equity accelerations.

(3) For the three months ended October 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $0.6 million and $0.5 million, non-income-based taxes of $0.4 million and $0.2 million, and other costs of $0.2 million and $0.1 million, respectively.

For the nine months ended October 31, 2020 and 2019, Other consisted of amortization of incremental costs to obtain a contract of $1.4 million and $1.4 million, non-income-based taxes of $1.2 million and $0.4 million, and other costs of $1.5 million and $0.1 million, respectively.

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

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

Three months ended October 31, Nine months ended October 31,

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

1 unchanged sentence

As a percentage of revenue 34 % 35 % 34 % 41 %

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.

Our Adjusted EBITDA increased by $5.6 million, or 10%, from $55.5 million for the three months ended October 31, 2019 to $61.1 million for the three months ended October 31, 2020.

The increase in Adjusted EBITDA was driven by the inclusion of WageWorks' results of operations for the full period of the current year, increased efficiency, and the overall growth of our business.

Our Adjusted EBITDA increased by $49.0 million, or 36%, from $135.1 million for the nine months ended October 31, 2019 to $184.1 million for the nine months ended October 31, 2020.

The increase in Adjusted EBITDA was driven by the inclusion of WageWorks' results of operations for the full period of the current year, increased efficiency, and 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 nor as a substitute for analysis of our results as reported under GAAP.

Key components of our results of operations

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 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.

As the Acquisition closed on August 30, 2019, WageWorks' results of operations are included in our consolidated results of operations for the three and nine months ended October 31, 2020, but are only included in our consolidated results of operations for approximately two months out of each of the three and nine months ended October 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.

8 unchanged sentences

We earn custodial revenue primarily from our HSA Assets deposited with our Depository Partners and with our insurance company partners, Client-held funds deposited with our Depository Partners, and recordkeeping fees we earn in respect of mutual funds in which our members invest.

We deposit HSA cash with our Depository Partners pursuant to contracts that (i) generally have terms ranging from three to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant Depository Partner, and (iii) have minimum and maximum required deposit balances.

We deposit HSA cash with our Depository Partners pursuant to contracts that (i) typically have terms ranging from three to five years, (ii) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant Depository Partner, and (iii) have minimum and maximum required deposit balances.

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.

2 unchanged sentences

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

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.

We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022.

Interchange revenue.

We earn interchange revenue each time one of our members uses one of our payment cards to make a purchase.

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.

20 unchanged sentences

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.

expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense allocations.

Technology and development.

2 unchanged sentences

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.

6 unchanged sentences

Merger integration.

Merger integration expenses include personnel and related expenses, including severance, professional fees, and technology-related expenses directly related to the integration activities to merge operations as a result of the Acquisition.

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

Interest expense

4 unchanged sentences

Income tax provision

We are subject to federal and state income taxes in the United States based on a calendar tax year-end through December 31, 2019;

however, beginning January 31, 2020, the Company will report for federal and state income tax purposes using a January 31 year-end, consistent with the financial reporting fiscal year.

As of December 31, 2019, we were subject to federal and state income taxes in the United States based on a calendar tax year-end;

however, beginning January 31, 2020, we began reporting federal and state income taxes using a January 31 year-end, consistent with the financial reporting fiscal year.

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.

2 unchanged sentences

Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.

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

As of October 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 nine months ended October 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 WageWorks generally may not be separately identifiable due to the integration of WageWorks into our existing operations.

Revenue and expense attributable to WageWorks generally is not 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 July 31, Six months ended July 31,

Three months ended October 31, Nine months ended October 31,

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

4 unchanged sentences

Service revenue.

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.

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.

The $16.9 million, or 19%, increase in service revenue from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the inclusion for the full period of service revenue associated with the CDBs added through the Acquisition in the current year, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs.

The $178.9 million, or 127%, increase in service revenue from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the inclusion for the full period of service revenue associated with the CDBs added through the Acquisition in the current year, partially offset by the negative impact of the COVID-19 pandemic on service revenues related to commuter benefits and other CDBs.

Custodial revenue.

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.

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.

The $1.6 million, or 3%, increase in custodial revenue from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the $1.5 billion, or 21%, 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 2.43% for the three months ended October 31, 2019 to 2.08% for the three months ended October 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 $9.8 million, or 7%, increase in custodial revenue from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the $1.8 billion, or 27%, 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 2.50% for the nine months ended October 31, 2019 to 2.10% for the nine months ended October 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.

We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022.

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

Interchange revenue.

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 $3.7 million, or 17%, increase in interchange revenue from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the inclusion for the full period of interchange revenue associated with the CDBs added through the Acquisition in the current year 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.

The $25.9 million, or 45%, increase in interchange revenue from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the inclusion for the full period of interchange revenue associated with the CDBs added through the Acquisition in the current year 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 $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.

Total revenue increased by $22.2 million, or 14%, from the three months ended October 31, 2019 to the three months ended October 31, 2020, and by $214.6 million, or 65% from the nine months ended October 31, 2019 to the nine months ended October 31, 2020, due to the inclusion for the full period of WageWorks' results of operations and related realized net revenue synergies in the current year.

Impact of COVID-19.

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.

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.

In addition, we are 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.

1 unchanged sentence

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.

2 unchanged sentences

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

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

Three months ended October 31, Nine months ended October 31,

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

4 unchanged sentences

Service costs.

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.

The $13.7 million, or 26%, increase in service costs from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year 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 $109.5 million, or 118%, increase in service costs from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year 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 $0.8 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.

The $0.4 million, or 9%, increase in custodial costs from the three months ended October 31, 2019 to the three months ended October 31, 2020 was due to an increase in the average daily balance of HSA cash with yield, which increased from $7.1 billion for the three months ended October 31, 2019 to $8.7 billion for the three months ended October 31, 2020.

The increase was partially offset by a lower average interest rate paid on HSA cash with yield, which decreased from 0.21% for the three months ended October 31, 2019 to 0.18% for the three months ended October 31, 2020.

The $2.1 million, or 16%, increase in custodial costs from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was due to an increase in the average daily balance of HSA cash with yield, which increased from $6.7 billion for the nine months ended October 31, 2019 to $8.4 billion for the nine months ended October 31, 2020.

The increase was partially offset by a lower average interest rate paid on HSA cash with yield, which decreased from 0.22% for the nine months ended October 31, 2019 to 0.20% for the nine months ended October 31, 2020.

Interchange costs.

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.

The $0.3 million, or 7%, decrease in interchange costs from the three months ended October 31, 2019 to the three months ended October 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 the inclusion for the full period of accounts added through the Acquisition of WageWorks in the current year.

The $0.8 million, or 6%, increase in interchange costs from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was due to an overall increase in average Total Accounts, which increased primarily due to the inclusion for the full period of accounts added through the Acquisition of WageWorks in the

current year, 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.

3 unchanged sentences

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

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

Three months ended October 31, Nine months ended October 31,

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

6 unchanged sentences

Sales and marketing.

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.

The $0.2 million, or 2%, increase in sales and marketing expense from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year, which resulted in increased staffing, increases in other expenses, and higher stock-based compensation expense, partially offset by increased efficiencies.

The $6.5 million, or 22%, increase in sales and marketing expense from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year, which resulted in increased staffing, increases in other expenses, and higher stock-based compensation expense, partially offset by increased efficiencies.

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.

On an annual basis, we expect our sales and marketing expenses to remain steady as a percentage of our total revenue.

On an annual basis, we expect our sales and marketing expenses to remain relatively steady as a percentage of our total revenue.

However, our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.

Technology and development.

The $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.

The $7.2 million, or 31%, increase in technology and development expense from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year, which resulted in increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases, which were partially offset by increases in capitalized development and operating efficiencies.

The $46.4 million, or 101%, increase in technology and development expense from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year, which resulted in increased personnel-related expense, increases in professional fees, increased stock-based compensation expense, increases in amortization and depreciation, and other increases, which were partially offset by increases in capitalized development and operating efficiencies.

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.

2 unchanged sentences

General and administrative.

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.

The $2.9 million, or 15%, increase in general and administrative expense from the three months ended October 31, 2019 to the three months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year, which resulted in increased

personnel-related expense, increases in professional fees, and increased stock-based compensation expense, partially offset by increased efficiencies.

The $24.4 million, or 66%, increase in general and administrative expense from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was primarily due to the inclusion for the full period of WageWorks' results of operations in the current year, which resulted in increased personnel-related expense, increases in professional fees, and increased stock-based compensation expense, partially offset by increased efficiencies.

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 relatively 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 $17.6 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.

The $6.1 million increase in amortization of acquired intangible assets from the three months ended October 31, 2019 to the three months ended October 31, 2020 was due to the inclusion for the full period of amortization related to identified intangible assets acquired through the Acquisition of WageWorks in the current year.

The $40.9 million increase in amortization of acquired intangible assets from the nine months ended October 31, 2019 to the nine months ended October 31, 2020 was due to the inclusion for the full period of amortization related to identified intangible assets acquired through the Acquisition of WageWorks in the current year.

Merger integration.

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

The $8.2 million and $31.3 million in merger integration expense for the three and nine months ended October 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 approximately $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 October 31, 2020, we had incurred a total of approximately $63 million of non-recurring merger integration costs related to the Acquisition of WageWorks.

Interest expense

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 $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 $7.0 million and $28.1 million in interest expense for the three and nine months ended October 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 under our term loan facility.

Other expense, net

The $30.5 million decrease in other expense, net, from $30.9 million during the three months ended October 31, 2019 to $0.4 million during the three months ended October 31, 2020 was primarily due to a $32.9 million decrease in acquisition costs.

The remainder of the change was due to a decrease in interest income of $1.9 million, an increase in other expense of $0.2 million, and a $0.3 million non-recurring gain in connection with our equity investment in WageWorks during the three months ended October 31, 2019.

The $6.3 million decrease in other expense, net, from $8.3 million during the nine months ended October 31, 2019 to $2.0 million during the nine months ended October 31, 2020 was primarily due to a $40.6 million decrease in acquisition costs and a $27.6 million non-recurring gain in connection with our equity investment in WageWorks during the three months ended October 31, 2019.

The remainder of the change was due to a decrease in interest income of $4.4 million and an increase in other expense of $2.3 million.

Income tax provision

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.

Income tax provision (benefit)

Income tax expense for the three and nine months ended October 31, 2020 was $2.3 million and $2.0 million, respectively, as compared to income tax benefit of $9.9 million and income tax expense of $3.9 million for the three and nine months ended October 31, 2019, respectively.

The tax provision for the three months ended October 31, 2020 increased $12.2 million compared to the three months ended October 31, 2019.

The tax provision for the nine months ended October 31, 2020 decreased $1.9 million compared to the nine months ended October 31, 2019.

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 and return-to-provision adjustments, which were partially offset by state apportionment changes recognized in the provision for income taxes.

Our effective income tax provision rate for the three and nine months ended October 31, 2020 was 56.7% and 36.8%, respectively, compared to an income tax benefit rate of 31.7% and income tax provision rate of 8.9% for the three and nine months ended October 31, 2019, respectively.

The 88.4 and 27.9 percentage point increase for the three and nine months ended October 31, 2020, respectively, compared to the three and nine months ended October 31, 2019 was primarily due to the impact of excess tax benefits on stock-based compensation expense and return-to-provision adjustments, which were partially offset by state apportionment changes 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.

8 unchanged sentences

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 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.

As of October 31, 2020 and January 31, 2020, cash and cash equivalents were $299.4 million and $191.7 million, respectively.

Cash and cash equivalents as of October 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

5 unchanged sentences

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.

We received net proceeds of approximately $286.8 million after deducting underwriting discounts and commissions of approximately $8.9 million and other offering expenses 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 July 31, 2020, and for the period then ended.

We were in compliance with all covenants under the credit agreement as of October 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.

Capital expenditures for the nine months ended October 31, 2020 and 2019 were $48.6 million and $22.4 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.

4 unchanged sentences

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

Six months ended July 31,

Nine months ended October 31,

(in thousands) 2020 2019

6 unchanged sentences

Cash flows from operating activities.

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.

Net cash provided by operating activities during the nine months ended October 31, 2020 resulted from net income of $3.5 million, plus depreciation and amortization expense of $85.5 million, stock-based compensation expense of $30.3 million, and amortization of debt issuance costs of $3.8 million, partially offset by other non-cash items and working capital changes totaling $2.4 million.

Net cash provided by operating activities during the nine months ended October 31, 2019 resulted from net income of $39.9 million, plus stock-based compensation expense of $31.2 million, depreciation and amortization expense of $28.8 million, amortization of debt issuance costs of $1.1 million, and other non-cash items and working capital changes totaling $0.7 million, partially offset by gains on marketable equity securities of $27.6 million.

Cash flows from investing activities.

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.

Cash used in investing activities for the nine months ended October 31, 2020 resulted from $37.2 million in software and capitalized software development, $28.1 million in acquisitions of intangible member assets, and $11.4 million in purchases of property and equipment.

Cash used in investing activities during the nine months ended October 31, 2019 was primarily the result of the Acquisition of WageWorks for $1.63 billion, net of cash acquired, and purchases of marketable equity securities of $53.8 million.

In addition, we invested $17.2 million in software and capitalized software development, $5.2 million in purchases of property and equipment, and $9.1 million in acquisitions of intangible member assets.

Cash flows from financing activities.

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.

Net cash provided by financing activities during the nine months ended October 31, 2020 resulted from $286.8 million of net proceeds from our July 2020 follow-on public offering of 5,290,000 shares of common stock and the exercise of stock options of $4.5 million.

These items were partially offset by $223.4 million of principal payments on our long-term debt and $4.2 million used in the settlement of Client-held funds obligation.

Net cash provided by financing activities during the nine months ended October 31, 2019 resulted from net borrowings of $1.22 billion under our term loan facility, net proceeds of $458.5 million from the sale of 7,762,500 shares of our common stock in our July 2019 follow-on offering, and the exercise of stock options of $7.3 million.

These items were partially offset by $230.9 million of cash used to settle Client-held funds obligations.

Contractual obligations

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.

Except for the $200.0 million prepayment under our term loan facility in July 2020, there were no material changes during the nine months ended October 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 July 31, 2020, other than outstanding letters of credit issued under our revolving credit facility, we did not have any off-balance sheet arrangements.

As of October 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.

8 unchanged sentences

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 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.

There have been no significant or material changes in our critical accounting policies during the nine months ended October 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

4 unchanged sentences

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

During the six months ended July 31, 2020 and 2019, no one customer accounted for greater than 10% of our total revenue.

During the nine months ended October 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.

4 unchanged sentences

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

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

Our cash and cash equivalents as of October 31, 2020 were $299.4 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 July 31, 2020 was $70.2 million.

Our accounts receivable balance as of October 31, 2020 was $64.3 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;

4 unchanged sentences

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

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

As of October 31, 2020, we had HSA Assets of approximately $12.4 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.

The contract terms generally range from three to five years and have either fixed or variable interest rates.

The contract terms typically range from three to five years and have either fixed or variable interest rates.

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.

5 unchanged sentences

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

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

As of October 31, 2020, we had Client-held funds of approximately $798.0 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.

7 unchanged sentences

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

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

As of October 31, 2020, we had unrestricted cash and cash equivalents of $299.4 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 July 31, 2020, we had $1.03 billion outstanding under our term loan facility and no amounts drawn under our revolving credit facility.

As of October 31, 2020, we had $1.02 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 2.16 percent at July 31, 2020.

The interest rate on our term loan credit facility and revolving credit facility is variable and was 1.65 percent at October 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 July 31, 2020 would result in approximately $10.2 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 October 31, 2020 would result in approximately $10.1 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