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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.
−Removed: 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.
+Added: Such statements include, but are not limited to, statements concerning our ability to close the acquisition of Further, the impact of the ongoing COVID-19 pandemic on the Company, the anticipated synergies and other benefits of the WageWorks acquisition, 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.
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Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such events.
−Removed: We are a leader and an innovator in providing technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions.
−Removed: 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.
+Added: We are a leader and an innovator in providing technology-enabled services that empower consumers to make healthcare saving and spending decisions.
+Added: We use our innovative technology to manage consumers' tax-advantaged health savings accounts ("HSAs") and other consumer-directed benefits ("CDBs") offered by employers, including flexible spending accounts and health reimbursement arrangements (“FSAs” and “HRAs”), and to administer Consolidated Omnibus Budget Reconciliation Act (“COBRA”), commuter and other benefits.
+Added: As part of our services, we and our subsidiaries provide consumers with healthcare bill evaluation and payment processing services, personalized benefit information including information on treatment options and comparative pricing, access to remote and telemedicine benefits, the ability to earn wellness incentives, and investment advice to grow their tax-advantaged healthcare savings.
The core of our offerings is the HSA, a financial account through which consumers spend and save long-term for healthcare expenses on a tax-advantaged basis.
−Removed: As of October 31, 2020, we administered 5.5 million HSAs, with balances totaling $12.4 billion, which we call HSA Assets.
−Removed: Also, as of October 31, 2020, we administered 7.0 million complementary CDBs.
−Removed: 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.
+Added: As of April 30, 2021, we administered 5.8 million HSAs, with balances totaling $15.0 billion, which we call HSA Assets.
+Added: Also, as of April 30, 2021, we administered 7.0 million complementary CDBs.
+Added: We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 12.8 million as of April 30, 2021.
We reach consumers primarily through relationships with their employers, which we call Clients.
We reach Clients primarily through a sales force that calls on Clients directly, relationships with benefits brokers and advisors, and integrated partnerships with a network of health plans, benefits administrators, benefits brokers and consultants, and retirement plan recordkeepers, which we call Network Partners.
−Removed: We have grown our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2020, including by 2% as a result of the acquisition (the "Acquisition") of WageWorks, Inc.
−Removed: ("WageWorks") on August 30, 2019.
+Added: We have increased our share of the growing HSA market from 4% in calendar year 2010 to 16% in 2020, measured by HSA Assets.
According to Devenir, today we are the largest HSA provider by accounts and second largest by assets.
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We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-driven culture.
−Removed: Our proprietary technology is designed to help consumers optimize the value of their HSAs and other CDBs, as they gain confidence and skill in their management of financial responsibility for lifetime healthcare.
−Removed: Our ability to engage consumers is enhanced by our platforms' capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems, which we call Ecosystem Partners.
+Added: Our proprietary
+Added: technology allows us to help consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security.
+Added: Our ability to assist consumers is enhanced by our capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems.
Our commuter benefits offering also leverages connectivity to an ecosystem of mass transit, ride hailing, and parking providers.
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We earn custodial revenue mainly from HSA Assets held at our members’ direction in federally insured cash deposits, insurance contracts or mutual funds, and from investment of Client-held funds.
−Removed: We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and virtual platforms.
−Removed: See “Key components of our results of operations” for additional information on our sources of revenue, including regarding the adverse impacts caused by the ongoing COVID-19 pandemic.
−Removed: Acquisition of WageWorks
−Removed: On August 30, 2019, we completed the Acquisition of WageWorks and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under a new term loan facility and approximately $816.9 million of cash on hand.
−Removed: We expect the Acquisition to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs.
−Removed: WageWorks’ historic strength of selling to employers directly and through health benefits brokers and advisors complements our distribution through health plans, benefit administrators and retirement record-keeping partners.
−Removed: 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.
+Added: We earn interchange revenue mainly from fees paid by merchants on payments that our members make using our physical payment cards and on our virtual payment system.
+Added: See “Key components of our results of operations” for additional information on our sources of revenue, including the adverse impacts caused by the ongoing COVID-19 pandemic.
+Added: WageWorks Acquisition
+Added: On August 30, 2019, we completed the acquisition of WageWorks, Inc.
+Added: (the "WageWorks Acquisition") and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under a new term loan facility and approximately $816.9 million of cash on hand.
+Added: As a result of the WageWorks Acquisition, WageWorks Inc.
+Added: became a wholly owned subsidiary of HealthEquity, Inc.
+Added: The key strategy of the WageWorks Acquisition was to enable us to increase the number of our employer sales opportunities, the conversion of these opportunities to Clients, and the value of Clients in generating members, HSA Assets and complementary CDBs.
+Added: WageWorks’ historic strength of selling to employers directly and through health benefits brokers and advisors complemented our distribution through Network Partners.
+Added: With WageWorks’ CDB capabilities, we 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 available through other CDBs.
Accordingly, we believe that there are significant opportunities to expand the scope of services that we provide to our Clients.
−Removed: 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.
−Removed: These increases impact the comparability of the period-over-period results described in this report.
+Added: We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies.
+Added: We have identified opportunities of approximately $80 million in annualized ongoing net synergies to be achieved by the end of fiscal year 2022, of which approximately $65 million were achieved as of April 30, 2021.
+Added: 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 service offerings and as we continue to drive member engagement.
+Added: We estimate non-recurring costs to achieve these synergies of approximately $100 million incurred by the end of fiscal year 2022, resulting from investment in technology we use to provide our services, and to run our back-office systems, and from integration of technology, as well as rationalization of cost of operations.
+Added: As of April 30, 2021, we had incurred a total of approximately $87 million of non-recurring merger integration costs related to the WageWorks Acquisition.
+Added: Luum Acquisition
+Added: In March 2021, we bolstered our commuter offering by acquiring 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition") for an aggregate purchase price consisting of $50.2 million in cash and up to $20.0 million in contingent payments payable during the two-year period following the closing of the Luum Acquisition.
+Added: Luum provides employers with a suite of commute tools as well as real-time commute data, to help them design and implement flexible return-to-office and hybrid-workplace strategies and benefits.
+Added: Fifth Third Bank HSA portfolio acquisition
+Added: In April 2021, we entered into a definitive agreement with Fifth Third Bank, National Association ("Fifth Third"), to transition custodianship of Fifth Third’s HSA portfolio to HealthEquity.
+Added: The definitive agreement contemplates a $60.8 million dollar purchase price for a transfer of approximately 149,000 HSA members and their approximately $477.0 million of HSA Assets.
+Added: The agreement includes a mechanism to adjust the purchase price based on the amount of HSA Assets actually transferred.
+Added: The transaction is subject to regulatory approval and satisfaction of other customary closing conditions.
+Added: Further Acquisition
+Added: In April 2021, we entered into a definitive agreement to acquire Further for $500 million.
+Added: Further is a leading provider of HSA and other CDB administration services, with approximately 550,000 HSAs and $1.7 billion of HSA Assets.
+Added: The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close by September 2021.
Key factors affecting our performance
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See also "Results of operations - Revenue" for information relating to the ongoing COVID-19 pandemic and also the section entitled “Risk factors” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, this Quarterly Report on Form 10-Q, and our other reports filed with the SEC.
−Removed: WageWorks integration
−Removed: On August 30, 2019, we completed the Acquisition of WageWorks.
−Removed: We are continuing our multi-year integration effort that we expect will produce long-term cost savings and revenue synergies.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
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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.
−Removed: The average premium for employer-sponsored health insurance has risen by 22% since 2015 and 55% since 2010, resulting in increased participation in HSA-qualified health plans and HSAs and increased consumer cost-sharing in health
−Removed: insurance more generally.
+Added: The average premium for employer-sponsored health insurance has risen by 22% since 2015 and 55% since 2010, 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.
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Our client base
−Removed: Our business model is based on a B2B2C distribution strategy, meaning that we attract Clients and Network Partners to reach consumers to increase the number of our members with HSA accounts and complementary CDBs.
+Added: Our business model is based on a B2B2C distribution strategy, whereby we work with Network Partners and Clients to reach consumers to increase the number of our members with HSA accounts and complementary CDBs.
We believe that there are significant opportunities to expand the scope of services that we provide to our current Clients.
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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.
−Removed: Our proprietary technology platforms
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: For example, we are making significant investments in our platforms' architecture and related platform infrastructure to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement.
+Added: Our proprietary technology
+Added: We believe that innovations incorporated in our technology, which enable us to better assist consumers to make healthcare saving and spending decisions and maximize the value of their tax-advantaged benefits, differentiate us from our competitors and drive our growth.
+Added: We are building on these innovations by combining our HSA offering with WageWorks' complementary CDB offerings, giving us a full suite of CDB products, and adding to our solutions set
+Added: and leadership position within the HSA sector.
+Added: We intend to continue to invest in our technology development to enhance our capabilities and infrastructure, while maintaining a focus on data security and the privacy of our customers' data.
+Added: For example, we are making significant investments in the architecture and infrastructure of the technology that we use to provide our services to improve our transaction processing capabilities and support continued account and transaction growth, as well as in data-driven personalized engagement to help our members spend less, save more, and build wealth for retirement.
Our “DEEP Purple” service culture
−Removed: The successful healthcare consumer needs education and guidance delivered by people as well as technology.
+Added: The successful healthcare consumer needs education and guidance delivered by people as well as by technology.
We believe that our "DEEP Purple" culture, which we define as driving excellence, ethics, and process while providing remarkable service, is a significant factor in our ability to attract and retain customers and to address nimbly, opportunities in the rapidly changing healthcare sector.
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Interest rates
−Removed: As a non-bank custodian, we contract with federally insured banks, credit unions, and insurance company partners, which we collectively call our Depository Partners, to hold custodial cash assets on behalf of our members.
+Added: As a non-bank custodian, we contract with federally insured banks and credit unions, which we collectively call our Depository Partners, and also with insurance company partners, to hold custodial cash assets on behalf of our members.
We earn a material portion of our total revenue from interest paid to us by these partners.
−Removed: The lengths of our agreements with Depository Partners typically range from three to five years and may have fixed or variable interest
+Added: The lengths of our agreements with Depository Partners typically range from three to five years and may have fixed or variable interest rate terms.
The terms of new and renewing agreements 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.
−Removed: 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.
+Added: Although interest rates have improved, 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, the lack of demand from Depository Partners for deposits, and other market conditions that have caused the interest rates offered by our Depository Partners to decline significantly.
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 direct competitors are HSA custodians and other CDB providers.
−Removed: Many of these are state or federally chartered banks and other financial institutions for which we believe technology-based healthcare services are not a core business.
−Removed: Certain of our direct competitors have chosen to exit the market despite increased demand for these services.
−Removed: This has created, and we believe will continue to create, opportunities for us to leverage our technology platforms and capabilities to increase our market share.
−Removed: However, some of our direct competitors (including well-known mutual fund companies such as Fidelity Investments and healthcare service companies such as United Health Group's Optum) are in a position, should they choose, to devote more resources to the development, sale, and support of their products and services than we have at our disposal.
−Removed: In addition, numerous indirect competitors, including benefits administration technology and service providers, partner with banks and other HSA custodians to compete with us.
+Added: Many of these are state or federally chartered banks and other financial institutions for which we believe benefits administration services are not a core business.
+Added: Some of our direct competitors (including healthcare service companies such as United Health Group's Optum, Webster Bank, and well-known retail investment companies, such as Fidelity Investments) are in a position to devote more resources to the development, sale, and support of their products and services than we have at our disposal.
+Added: In addition, numerous indirect competitors, including benefits administration service providers, partner with banks and other HSA custodians to compete with us.
Our Network Partners may also choose to offer competitive services directly, as some health plans have done.
Our success depends on our ability to predict and react quickly to these and other industry and competitive dynamics.
−Removed: 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.
+Added: As a result of the COVID-19 pandemic, 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.
−Removed: Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs or other CDBs.
+Added: Increased unemployment may mean that fewer of our members contribute to HSAs, FSAs, or other CDBs and reduce overall demand for our products.
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, and this "work from home" trend may continue after the pandemic.
We have also seen a decline in interchange revenue across all other products.
−Removed: The extent to which the COVID-19 virus will negatively impact our business is highly uncertain and cannot be accurately predicted.
+Added: The extent to which the COVID-19 pandemic will negatively impact our business remains highly uncertain and cannot be accurately predicted.
Regulatory environment
−Removed: Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, the Employee Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the provision of health insurance and provide the tax advantages associated with our products, play a pivotal role in determining our market opportunity.
+Added: Federal law and regulations, including the Affordable Care Act, the Internal Revenue Code, the Employee Retirement Income Security Act and Department of Labor regulations, and public health regulations that govern the provision of health insurance and provide the tax advantages associated with our services, play a pivotal role in determining our market opportunity.
Privacy and data security-related laws such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, laws governing the provision of investment advice to consumers, such as the Investment Advisers Act of 1940, or the Advisers Act, the USA PATRIOT Act, anti-money laundering laws, and the Federal Deposit Insurance Act, all play a similar role in determining our competitive landscape.
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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, and the new California Privacy Rights Act.
−Removed: 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.
+Added: We have also seen an increase in regulatory changes related to our services due to government responses to the COVID-19 pandemic and may continue to see additional regulatory changes.
Our ability to predict and react quickly to relevant legal and regulatory trends and to correctly interpret their market and competitive implications is important to our success.
+Added: On March 21, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law.
+Added: ARPA temporarily increased the dependent care flexible spending account contribution limit for the 2021 plan year.
+Added: It also provided a temporary 100% subsidy of COBRA premium payments for eligible individuals who lost coverage due to an involuntary termination or a reduction of hours for up to 6 months.
Our acquisition strategy
−Removed: In addition to the WageWorks acquisition, we have a successful history of acquiring HSA portfolios from competitors who have chosen to exit the industry and complementary assets and businesses that strengthen our platform.
+Added: We have a successful history of acquiring HSA portfolios and businesses that strengthen our service offerings.
We seek to continue this growth strategy and are regularly engaged in evaluating different opportunities.
We have developed an internal capability to source, evaluate, and integrate acquired HSA portfolios.
−Removed: We intend to continue to thoughtfully pursue acquisitions of complementary assets and businesses that we believe will strengthen our platform.
+Added: We intend to continue to pursue acquisitions of complementary assets and businesses that we believe will strengthen our service offering, and our success depends in part on our ability to successfully integrate acquired businesses and HSA portfolios with our business in an efficient and effective manner.
Key financial and operating metrics
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The following table sets forth our HSAs, CDBs, and Total Accounts as of and for the periods indicated:
−Removed: (in thousands, except percentages) October 31, 2020 October 31, 2019 % Change January 31, 2020
+Added: (in thousands, except percentages) April 30, 2021 April 30, 2020 % Change January 31, 2021
HSAs 5,846 5,380 9 % 5,782
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New HSAs from sales - Year-to-date 115 104 11 % 687
−Removed: New HSAs from Acquisitions - Year-to-date — 757 (100) % 757
+Added: New HSAs from acquisitions - Year-to-date — — n/a —
HSAs with investments 371 245 51 % 333
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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.
−Removed: 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.
−Removed: 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.
−Removed: HSAs are individually owned portable healthcare accounts.
−Removed: 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.
+Added: The number of our HSAs increased by approximately 0.5 million, or 9%, from April 30, 2020 to April 30, 2021, due to further penetration into existing Network Partners and the addition of new Network Partners.
+Added: The number of
+Added: our CDBs decreased by approximately 0.4 million, or 5%, from April 30, 2020 to April 30, 2021, driven by a 0.7 million decrease in commuter benefit accounts that are currently suspended due to the COVID-19 pandemic and fewer workers being required to commute to an office, partially offset by an increase in COBRA accounts.
+Added: The suspended commuter accounts continue to be administered on our platform and can be reinstated at any time.
+Added: We have excluded the suspended commuter accounts from our account totals because they are currently not generating revenue for the Company.
The following table sets forth our HSA Assets as of and for the periods indicated:
−Removed: (in millions, except percentages) October 31, 2020 October 31, 2019 % Change January 31, 2020
+Added: (in millions, except percentages) April 30, 2021 April 30, 2020 % Change January 31, 2021
HSA cash with yield (1) $ 9,809 $ 8,338 18 % $ 9,875
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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.
−Removed: We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022.
+Added: We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: Total HSA cash increased by $1.3 billion, or 15%, from April 30, 2020 to April 30, 2021, due primarily to HSA contributions, new HSAs, and decreased spending per HSA, partially offset by transfers to HSA investments.
+Added: Our HSA investment assets increased by $2.2 billion, or 79%, from April 30, 2020 to April 30, 2021, due primarily to transfers from HSA cash and appreciation of invested balances.
+Added: Our total HSA Assets increased by $3.5 billion, or 31%, from April 30, 2020 to April 30, 2021, due primarily to HSA contributions, new HSAs, decreased spending per HSA, and appreciation of invested balances.
Client-held funds
−Removed: (in millions, except percentages) October 31, 2020 October 31, 2019 % Change January 31, 2020
+Added: (in millions, except percentages) April 30, 2021 April 30, 2020 % Change January 31, 2021
Client-held funds (1) $ 903 $ 894 1 % $ 986
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We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on marketable equity securities, and certain other non-operating items.
−Removed: 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.
+Added: 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
+Added: 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 (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the periods indicated:
−Removed: Three months ended October 31, Nine months ended October 31,
+Added: Three months ended April 30,
(in thousands) 2021 2020
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Acquisition costs (1) 5,939 94
−Removed: Gain on marketable equity securities — (285) — (27,570)
Other (2) (554) 1,535
Adjusted EBITDA $ 58,974 $ 63,009
−Removed: (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.
−Removed: (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.
−Removed: (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.
−Removed: 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.
+Added: (1) For the three months ended April 30, 2021, acquisition costs included $0.3 million of stock-based compensation.
+Added: (2) For the three months ended April 30, 2021, other consisted of amortization of incremental costs to obtain a contract of $1.3 million offset by other income, net, of $1.8 million.
+Added: For the three months ended April 30, 2020, other consisted of incremental costs to obtain a contract of $0.3 million and other costs of $1.3 million.
The following table further sets forth our Adjusted EBITDA as a percentage of revenue:
−Removed: Three months ended October 31, Nine months ended October 31,
−Removed: (in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
+Added: Three months ended April 30,
+Added: (in thousands, except percentages) 2021 2020 $ Change % Change
Adjusted EBITDA $ 58,974 $ 63,009 $ (4,035) (6) %
As a percentage of revenue 32 % 33 %
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: Our Adjusted EBITDA decreased by $4.0 million, or 6%, from $63.0 million for the three months ended April 30, 2020 to $59.0 million for the three months ended April 30, 2021.
+Added: The decrease in Adjusted EBITDA was primarily driven by a decrease in revenue of $5.8 million, or 3%, as described below.
+Added: Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
Key components of our results of operations
−Removed: Acquisition of WageWorks
−Removed: 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.
−Removed: 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.
We generate revenue from three primary sources:
4 unchanged sentences
We recognize revenue on a monthly basis as services are rendered to our members and Clients.
−Removed: As a result of the WageWorks Acquisition, service revenue now comprises a majority of our revenue.
Custodial revenue.
2 unchanged sentences
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.
−Removed: We earn custodial revenue on HSA Assets and Client-held funds that is based on the interest rates offered to us by these Depository Partners.
+Added: We earn custodial revenue on HSA Assets and Client-held funds that is based on the interest rates offered to us by these Depository Partners and insurance company partners.
In addition, once a member’s HSA cash balance reaches a certain threshold, the member is able to invest his or her HSA Assets in mutual funds through our custodial investment partner.
We earn a recordkeeping fee, calculated as a percentage of custodial investments.
−Removed: We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022.
+Added: We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.
Interchange revenue.
22 unchanged sentences
Sales and marketing.
−Removed: 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
−Removed: expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense allocations.
+Added: Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including sales commissions for our direct sales force, external agent/broker commission expenses, marketing expenses, depreciation, amortization, stock-based compensation, and common expense allocations.
Technology and development.
11 unchanged sentences
Merger integration.
−Removed: 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.
+Added: Merger integration expenses include personnel and related expenses, including severance, professional fees, legal expenses, and facilities and technology expenses directly related to integration activities to merge operations as a result of acquisitions.
Interest expense
2 unchanged sentences
Other expense, net
−Removed: Other expense, net, primarily consists of acquisition costs, gains and losses on marketable equity securities, and non-income-based taxes, less interest income earned on corporate cash.
−Removed: Income tax provision
−Removed: 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;
−Removed: 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.
+Added: Other expense, net, consists of acquisition costs, partially offset by interest income earned on corporate cash and other miscellaneous income and expense.
+Added: Income tax provision (benefit)
+Added: We are subject to federal and state income taxes in the United States based on a January 31 fiscal year end.
We use the asset and liability method to account for income taxes, under which current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current fiscal year.
2 unchanged sentences
Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.
−Removed: 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.
−Removed: Comparison of the three and nine months ended October 31, 2020 and 2019
−Removed: Impact of Acquisition
−Removed: The comparability of our operating results is impacted by our Acquisition of WageWorks on August 30, 2019.
−Removed: 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.
−Removed: Revenue and expense attributable to WageWorks generally is not separately identifiable due to the integration of WageWorks into our existing operations.
+Added: As of April 30, 2021, we have recorded an overall net deferred tax liability on our condensed consolidated balance sheet.
+Added: Comparison of the three months ended April 30, 2021 and 2020
The following table sets forth our revenue for the periods indicated:
−Removed: Three months ended October 31, Nine months ended October 31,
−Removed: (in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
+Added: Three months ended April 30,
+Added: (in thousands, except percentages) 2021 2020 $ Change % Change
Service revenue $ 102,534 $ 111,271 $ (8,737) (8) %
3 unchanged sentences
Service revenue.
−Removed: 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.
−Removed: 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.
+Added: The $8.7 million, or 8%, decrease in service revenue from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to the 0.7 million decrease in the number of commuter benefit accounts due to accounts being suspended as a result of the COVID-19 pandemic.
Custodial revenue.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal 2022.
+Added: The $0.1 million, or less than 1%, increase in custodial revenue from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to the $1.5 billion, or 19%, increase in the year-over-year average daily balance of HSA cash with yield.
+Added: The increase was largely offset by a decrease in average annualized yield from 2.12% for the three months ended April 30, 2020 to 1.79% for the three months ended April 30, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic.
+Added: We are continuing to transition HSA cash without yield to HSA cash with yield and expect to complete the transition in fiscal year 2022.
This cash is being placed with our Depository Partners at prevailing interest rates, which we expect will generate additional custodial revenue.
Interchange revenue.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: The $2.8 million, or 9%, increase in interchange revenue from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to increased spend per HSA, partially offset by a decrease in spend with respect to commuter benefit accounts partially attributable to the COVID-19 pandemic and fewer workers being required to commute to an office.
Total revenue.
−Removed: 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.
+Added: Total revenue decreased by $5.8 million, or 3%, from the three months ended April 30, 2020 to the three months ended April 30, 2021, primarily due to the decrease in service revenue associated with suspended commuter benefit accounts, partially offset by an increase in interchange revenue.
Impact of COVID-19.
−Removed: 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.
−Removed: result, funds that we place with our Depository Partners in this environment receive lower interest rates than we originally expected.
+Added: Our business has been adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by the COVID-19 pandemic, 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,
+Added: which reduces the yield on funds placed with our Depository Partners in this environment.
Sales opportunities have also been impacted, with some opportunities delayed and most now being held virtually.
5 unchanged sentences
Clients may be unable to pay fees required under contracts and exercise "force majeure" or similar defenses, which would negatively impact our financial results.
−Removed: 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.
+Added: The extent to which the COVID-19 pandemic 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:
−Removed: Three months ended October 31, Nine months ended October 31,
−Removed: (in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
+Added: Three months ended April 30,
+Added: (in thousands, except percentages) 2021 2020 $ Change % Change
Service costs $ 70,632 $ 71,013 $ (381) (1) %
3 unchanged sentences
Service costs.
−Removed: 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.
−Removed: 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.
+Added: The $0.4 million, or 1%, decrease in service costs from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to decreases in service costs related to commuter benefit accounts.
Custodial costs.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: The $36,000, or 1%, decrease in custodial costs from the three months ended April 30, 2020 to the three months ended April 30, 2021 was due to a lower average annualized rate of interest retained by HSA members on HSA cash with yield, which decreased from 0.21% for the three months ended April 30, 2020 to 0.18% for the three months ended April 30, 2021, largely offset by an increase in the average daily balance of HSA cash with yield, which increased from $8.3 billion for the three months ended April 30, 2020 to $9.8 billion for the three months ended April 30, 2021.
Interchange costs.
−Removed: 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.
−Removed: 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
−Removed: 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.
+Added: The $0.4 million, or 7%, decrease in interchange costs from the three months ended April 30, 2020 to the three months ended April 30, 2021 was due to realized synergies attributable to the WageWorks Acquisition.
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.
−Removed: 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.
+Added: Cost of revenue will continue to be affected by a number of different factors, including our ability to scale our service delivery, Network Partner implementation, account management functions, realized synergies, and the impact of the COVID-19 pandemic.
Operating expenses
The following table sets forth our operating expenses for the periods indicated:
−Removed: Three months ended October 31, Nine months ended October 31,
−Removed: (in thousands, except percentages) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
+Added: Three months ended April 30,
+Added: (in thousands, except percentages) 2021 2020 $ Change % Change
Sales and marketing $ 14,086 $ 11,455 $ 2,631 23 %
5 unchanged sentences
Sales and marketing.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: On an annual basis, we expect our sales and marketing expenses to remain relatively steady as a percentage of our total revenue.
+Added: The $2.6 million, or 23%, increase in sales and marketing expense from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to an increase in marketing expenses from increased staffing and marketing collateral and increases in team member and partner commissions.
+Added: We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns.
+Added: On an annual basis, we expect our sales and marketing expenses to increase 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: The $4.4 million, or 14%, increase in technology and development expense from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to increases in amortization, stock-based compensation, and personnel-related expenses.
+Added: We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary technology.
On an annual basis, we expect our technology and development expenses to increase as a percentage of our total revenue pursuant to our growth initiatives.
1 unchanged sentence
General and administrative.
−Removed: 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
−Removed: personnel-related expense, increases in professional fees, and increased stock-based compensation expense, partially offset by increased efficiencies.
−Removed: 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.
−Removed: 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.
+Added: The $1.7 million, or 9%, increase in general and administrative expense from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to increases in stock-based compensation, partially offset by decreases in personnel-related expenses.
+Added: 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.
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.
1 unchanged sentence
Amortization of acquired intangible assets.
−Removed: 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.
−Removed: 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.
+Added: The $1.1 million increase in amortization of acquired intangible assets from the three months ended April 30, 2020 to the three months ended April 30, 2021 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Luum Acquisition commencing March 8, 2021.
+Added: The remainder of the increase was due to the inclusion of amortization related to HSA portfolios acquired during the fiscal year ended January 31, 2021.
Merger integration.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: The $8.8 million and $12.8 million in merger integration expense for the three months ended April 30, 2021 and 2020, respectively, was primarily 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 WageWorks Acquisition.
+Added: We expect integration expenses totaling approximately $100 million in the aggregate to be incurred by the end of fiscal year 2022.
+Added: As of April 30, 2021, we had incurred a total of approximately $87 million of non-recurring merger integration costs related to the WageWorks Acquisition.
Interest expense
−Removed: 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.
−Removed: We expect interest expense to decrease as a result of the principal repayments under our term loan facility.
+Added: The $6.7 million and $12.3 million in interest expense for the three months ended April 30, 2021 and 2020 consisted primarily of interest accrued under our term loan facility and amortization of financing costs.
+Added: We expect interest expense to decrease as a result of the principal repayments under our term loan facility and to fluctuate based on changes in prevailing interest rates.
Other expense, net
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: The $2.9 million increase in other expense, net, from $0.8 million during the three months ended April 30, 2020 to $3.6 million during the three months ended April 30, 2021 was due to a $5.8 million increase in acquisition costs, partially offset by a $2.9 million increase in other income, net.
Income tax provision (benefit)
−Removed: 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.
−Removed: The tax provision for the three months ended October 31, 2020 increased $12.2 million compared to the three months ended October 31, 2019.
−Removed: The tax provision for the nine months ended October 31, 2020 decreased $1.9 million compared to the nine months ended October 31, 2019.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: Income tax benefit for the three months ended April 30, 2021 was $3.5 million, compared to income tax expense of $0.2 million for the three months ended April 30, 2020.
+Added: The $3.7 million decrease in the tax provision for the three months ended April 30, 2021 compared to the three months ended April 30, 2020 was primarily due to a decrease in pre-tax book income and an increase in excess tax benefits on stock-based compensation expense recognized in the provision for income taxes.
Seasonal concentration of our growth combined with our recurring revenue model create seasonal variation in our results of operations.
−Removed: Revenue results are seasonally impacted due to ancillary service fees, timing of HSA contributions, and timing of card spend.
+Added: Revenue results are seasonally impacted due to ancillary service fees, timing of HSA
+Added: contributions, and timing of card spend.
Cost of revenue is seasonally impacted as a significant number of new and existing Network Partners bring us new HSAs and CDBs beginning in January of each year concurrent with the start of many employers’ benefit plan years.
4 unchanged sentences
Cash and cash equivalents overview
−Removed: Our principal source of liquidity is our current cash and cash equivalents balances, collections from our service, custodial, and interchange revenue activities, and availability under our revolving credit facility described below.
+Added: Our principal sources of liquidity are our current cash and cash equivalents balances, collections from our service, custodial, and interchange revenue activities, and availability under our revolving credit facility described below.
We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, payments under our term loan facility, and capital expenditures.
−Removed: As of October 31, 2020 and January 31, 2020, cash and cash equivalents were $299.4 million and $191.7 million, respectively.
−Removed: 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.
+Added: As of April 30, 2021 and January 31, 2021, cash and cash equivalents were $736.8 million and $328.8 million, respectively.
+Added: Cash and cash equivalents as of April 30, 2021 included $456.6 million of net proceeds we received from our follow-on public offering in the first quarter of fiscal year 2022 from the sale of 5,750,000 shares of our common stock, partially offset by $50.2 million used for the Luum Acquisition.
Capital resources
4 unchanged sentences
In addition, we may conduct concurrent or other financings at any time.
−Removed: 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.
−Removed: 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.
+Added: In the first quarter of fiscal year 2022, we closed a follow-on public offering of 5,750,000 shares of common stock at a public offering price of $80.30 per share, less the underwriters' discount.
+Added: We received net proceeds of $456.6 million after deducting underwriting discounts and commissions of $4.6 million and other offering expenses of approximately $0.5 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.
−Removed: We were in compliance with all covenants under the credit agreement as of October 31, 2020, and for the period then ended.
−Removed: 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.
−Removed: Capital expenditures for the nine months ended October 31, 2020 and 2019 were $48.6 million and $22.4 million, respectively.
+Added: We were in compliance with all covenants under the credit agreement as of April 30, 2021, and for the period then ended.
+Added: We used $50.2 million of the net proceeds from the follow-on public offering for the Luum Acquisition, with the remaining proceeds to be used for general corporate purposes, which may include prepayments under our term loan facility or potential acquisitions, including the acquisitions of Further and the Fifth Third Bank HSA portfolio.
+Added: Capital expenditures for the three months ended April 30, 2021 and 2020 were $18.0 million and $19.3 million, respectively.
We expect to continue our current level of increased capital expenditures for the remainder of the fiscal year ending January 31, 2022 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:
−Removed: Nine months ended October 31,
+Added: Three months ended April 30,
(in thousands) 2021 2020
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Net cash used in investing activities (67,801) (25,294)
−Removed: Net cash provided by financing activities 63,643 1,454,405
−Removed: Decrease in cash and cash equivalents 107,630 (186,918)
+Added: Net cash provided by (used in) financing activities 444,853 (10,365)
+Added: Increase (decrease) in cash and cash equivalents 407,970 (20,633)
Beginning cash and cash equivalents 328,803 191,726
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Cash flows from operating activities.
−Removed: 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.
−Removed: 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.
+Added: Net cash provided by operating activities during the three months ended April 30, 2021 resulted from net loss of $2.6 million, plus depreciation and amortization expense of $31.8 million, stock-based compensation expense of $12.8 million, and amortization of debt issuance costs of $1.2 million, partially offset by other non-cash items and working capital changes totaling $12.3 million.
+Added: 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, amortization of debt issuance costs of $1.2 million, and other non-cash items and working capital changes totaling $22.9 million.
Cash flows from investing activities.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: Cash used in investing activities for the three months ended April 30, 2021 resulted from the Luum Acquisition for $49.5 million, net of cash acquired, $15.5 million in software and capitalized software development, $2.5 million in purchases of property and equipment, and $0.3 million in acquisitions of intangible member assets.
+Added: Net cash used in investing activities for the three months ended April 30, 2020 resulted from $11.8 million in software and capitalized software development, $7.5 million in purchases of property and equipment, and $6.0 million in acquisitions of intangible member assets.
Cash flows from financing activities.
−Removed: 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.
+Added: Net cash provided by financing activities during the three months ended April 30, 2021 resulted from $456.6 million of net proceeds from our follow-on public offering of 5,750,000 shares of common stock and the exercise of stock options of $4.2 million.
These items were partially offset by $15.6 million of principal payments on our long-term debt and $0.4 million used in the settlement of Client-held funds obligation.
−Removed: 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.
−Removed: These items were partially offset by $230.9 million of cash used to settle Client-held funds obligations.
+Added: Net cash 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.
Contractual obligations
−Removed: 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.
+Added: See Note 6—Commitments and contingencies for information about our contractual obligations.
Off-balance sheet arrangements
−Removed: 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.
+Added: As of April 30, 2021, 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, 2021.
−Removed: 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.
+Added: There have been no significant or material changes in our critical accounting policies during the three months ended April 30, 2021, 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, 2021.
Recent accounting pronouncements
−Removed: Summary of business and significant accounting policies within the interim financial statements included in this Form 10-Q for further discussion.
+Added: See Note 1—Summary of business and significant accounting policies within the interim financial statements included in this Form 10-Q for further discussion.
Qualitative and quantitative disclosures about market risk
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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.
−Removed: During the nine months ended October 31, 2020 and 2019, no one customer accounted for greater than 10% of our total revenue.
+Added: During the three months ended April 30, 2021 and 2020, 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.
−Removed: 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.
+Added: Our cash and cash equivalents as of April 30, 2021 were $736.8 million, the vast majority of which was not covered by federal depository insurance.
We have not experienced any material losses in such accounts and believe we are not exposed to any significant credit risk with respect to our cash and cash equivalents.
−Removed: Our accounts receivable balance as of October 31, 2020 was $64.3 million.
+Added: Our accounts receivable balance as of April 30, 2021 was $74.5 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;
−Removed: however, the extent to which the ongoing COVID-19 pandemic will negatively impact our credit risk is highly uncertain and cannot be accurately predicted.
+Added: however, the extent to which the ongoing COVID-19 pandemic will negatively impact our credit risk remains 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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HSA Assets and Client-held funds.
−Removed: Our HSA Assets consists of custodial HSA funds we hold in custody on behalf of our members.
−Removed: As of October 31, 2020, we had HSA Assets of approximately $12.4 billion.
+Added: Our HSA Assets consist of custodial HSA funds we hold in custody on behalf of our members.
+Added: As of April 30, 2021, we had HSA Assets of approximately $15.0 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.
−Removed: The contract terms typically range from three to five years and have either fixed or variable interest rates.
−Removed: 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.
+Added: The contract terms with our Depository Partners typically range from three to five years and have either fixed or variable interest rates.
+Added: As our HSA Assets increase and existing contracts with Depository Partners expire, we seek to enter into new contracts with Depository Partners, the terms of which are impacted by the then-prevailing interest rate environment.
The diversification of 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.
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However, we may be required to increase the interest retained by our members in a rising prevailing interest rate environment.
−Removed: Changes in prevailing interest rates are driven by macroeconomic trends and government policies over which we have no control, such as the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic.
+Added: Changes in prevailing interest rates are driven by macroeconomic trends
+Added: and government policies over which we have no control, such as the interest rate cuts by the Federal Reserve associated with the ongoing COVID-19 pandemic.
Our Client-held funds are interest earning deposits from which we generate custodial revenue.
−Removed: As of October 31, 2020, we had Client-held funds of approximately $798.0 million.
+Added: As of April 30, 2021, we had Client-held funds of approximately $903.0 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.
−Removed: As of October 31, 2020, we had unrestricted cash and cash equivalents of $299.4 million.
+Added: As of April 30, 2021, we had unrestricted cash and cash equivalents of $736.8 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.
−Removed: 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.
+Added: As of April 30, 2021, we had $987.5 million 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.
−Removed: The interest rate on our term loan credit facility and revolving credit facility is variable and was 1.65 percent at October 31, 2020.
+Added: The interest rate on our term loan credit facility and revolving credit facility is variable and was 1.86 percent at April 30, 2021.
Accordingly, we may incur additional expense if interest rates increase in future periods.
−Removed: 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.
+Added: For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at April 30, 2021 would result in approximately $9.8 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.