What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-09 compared with 2021-06-08 · 154 added, 122 removed, 372 unchanged (43% of the section changed)

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Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements.

Such statements include, but are not limited to, statements concerning 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.

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

As of April 30, 2021, we administered 5.8 million HSAs, with balances totaling $15.0 billion, which we call HSA Assets.

Also, as of April 30, 2021, we administered 7.0 million complementary CDBs.

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.

As of July 31, 2021, we administered 6.0 million HSAs, with balances totaling $15.5 billion, which we call HSA Assets.

Also, as of July 31, 2021, we administered 7.2 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 13.1 million as of July 31, 2021.

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

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Our proprietary

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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.

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

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.

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 $70 million were achieved as of July 31, 2021.

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.

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.

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.

We estimate non-recurring costs to achieve these synergies of approximately $100 million 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.

Merger integration expenses attributable to the WageWorks Acquisition are expected to be completed by the end of fiscal year 2022, with the exception of ongoing lease expense related to certain WageWorks offices that have been permanently closed, less any related sublease income.

As of July 31, 2021, we had incurred a total of $96 million of non-recurring merger integration costs related to the WageWorks Acquisition.

Luum Acquisition

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The agreement includes a mechanism to adjust the purchase price based on the amount of HSA Assets actually transferred.

The transaction is subject to regulatory approval and satisfaction of other customary closing conditions.

The transaction is subject to satisfaction of certain customary closing conditions and is expected to close by the end of our fiscal third quarter.

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Further Acquisition

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Further is a leading provider of HSA and other CDB administration services, with approximately 550,000 HSAs and $1.7 billion of HSA Assets.

The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close by September 2021.

In September 2021, the terms of the acquisition were amended pursuant to two agreements:

(1) an agreement to acquire all cash balances and investment assets included in any voluntary employee beneficiary association (“VEBA”) account that is funding a health reimbursement arrangement (either Section 501(c)(9) or Section 115 trusts) and all contracts related exclusively thereto for, which is anticipated to close on January 31, 2022 for a maximum purchase price of $45 million, calculated based on the actual amount of VEBA assets transferred relative to the total amount of VEBA assets as of April 30, 2021, and (2) an amended agreement to acquire the remainder of the Further business for $455 million, with a target closing date on November 1, 2021.

The transactions are subject to satisfaction of certain customary closing conditions.

Key factors affecting our performance

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tax law and regulations.

We believe that the present direction of U.S.

tax policy is favorable to our business, as evidenced for example by recent regulatory action and bipartisan policy proposals to expand the availability of HSAs.

However, changes in tax policy are speculative, and may affect our business in ways that are difficult to predict.

Changes in tax policy are speculative, and may affect our business in ways that are difficult to predict.

Our client base

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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.

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Our proprietary technology

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

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

and leadership position within the HSA sector.

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 and leadership position within the HSA sector.

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

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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.

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.

Although interest rates have improved somewhat, 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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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.

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seen a decline in interchange revenue across all other products.

The extent to which the COVID-19 pandemic will negatively impact our business remains highly uncertain and cannot be accurately predicted.

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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.

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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:

(in thousands, except percentages) April 30, 2021 April 30, 2020 % Change January 31, 2021

(in thousands, except percentages) July 31, 2021 July 31, 2020 % Change January 31, 2021

HSAs 5,972 5,384 11 % 5,782

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

The number of our HSAs increased by approximately 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.

The number of

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.

The number of our HSAs increased by approximately 0.6 million, or 11%, from July 31, 2020 to July 31, 2021, due to further penetration into existing Network Partners and the addition of new Network Partners.

The number of our CDBs increased by approximately 0.1 million, or 1%, from July 31, 2020 to July 31, 2021, driven by an increase in COBRA accounts, largely offset by a 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.

The suspended commuter accounts continue to be administered on our platform and can be reinstated at any time.

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:

(in millions, except percentages) April 30, 2021 April 30, 2020 % Change January 31, 2021

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

(in millions, except percentages) July 31, 2021 July 31, 2020 % Change January 31, 2021

HSA cash with yield (1) $ 9,938 $ 8,626 15 % $ 9,875

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(2) HSA Assets that do not generate custodial revenue.

Our HSA Assets, which are our HSA members' assets for which we are the custodian or administrator, or from which we generate custodial revenue, consist of the following components:

(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.

HSA Assets, which are our HSA members' assets for which we are the custodian or administrator, or from which we generate custodial revenue, consist of the following components:

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

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.

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.

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.

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.

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

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Total HSA cash increased by $1.1 billion, or 12%, from July 31, 2020 to July 31, 2021, due primarily to HSA contributions, new HSAs, and decreased spending per HSA, partially offset by transfers to HSA investments.

HSA investments increased by $2.2 billion, or 68%, from July 31, 2020 to July 31, 2021, due primarily to transfers from HSA cash and appreciation of invested balances.

Total HSA Assets increased by $3.3 billion, or 27%, from July 31, 2020 to July 31, 2021, due primarily to HSA contributions, new HSAs, decreased spending per HSA, and appreciation of invested balances.

Client-held funds

(in millions, except percentages) April 30, 2021 April 30, 2020 % Change January 31, 2021

(in millions, except percentages) July 31, 2021 July 31, 2020 % Change January 31, 2021

Client-held funds (1) $ 810 $ 840 (4) % $ 986

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

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

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

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

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Adjusted EBITDA

We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on marketable equity securities, and certain other non-operating items.

We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of

directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses, and serves as a basis for comparison against other companies in our industry.

We define Adjusted EBITDA, which is a non-GAAP financial metric, as adjusted earnings before interest, taxes, depreciation and amortization, amortization of acquired intangible assets, stock-based compensation expense, merger integration expenses, acquisition costs, gains and losses on equity securities, and certain other non-operating items.

We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses, and serves as a basis for comparison against other companies in our industry.

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

Three months ended April 30,

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

(in thousands) 2021 2020 2021 2020

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Interest expense 7,254 8,895 13,943 21,158

Income tax provision (benefit) (3,451) 218

Income tax benefit (3,967) (543) (7,418) (325)

Depreciation and amortization 12,762 9,522 24,716 18,327

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Merger integration expenses 16,371 10,365 25,178 23,135

Acquisition costs (1) 5,939 94

Acquisition costs (gains) (1) 1,665 (28) 7,604 66

Gain on equity securities (1,677) — (1,677) —

Other (2) 1,552 1,500 999 3,034

Adjusted EBITDA $ 65,515 $ 60,002 $ 124,490 $ 123,010

(1) For the three months ended April 30, 2021, acquisition costs included $0.3 million of stock-based compensation.

(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.

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.

(1) For the six months ended July 31, 2021, acquisition costs included $0.3 million of stock-based compensation.

(2) For the three months ended July 31, 2021 and 2020, other consisted of amortization of incremental costs to obtain a contract of $1.4 million and $0.6 million, respectively, and other costs, net, of $0.2 million and $0.9 million, respectively.

For the six months ended July 31, 2021 and 2020, other consisted of amortization of incremental costs to obtain a contract of $2.6 million and $0.8 million, respectively, and other income of $1.6 million and other costs of $2.2 million, respectively.

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

Three months ended April 30,

(in thousands, except percentages) 2021 2020 $ Change % Change

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

(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change

Adjusted EBITDA $ 65,515 $ 60,002 $ 5,513 9 % $ 124,490 $ 123,010 $ 1,480 1 %

As a percentage of revenue 35 % 34 % 33 % 34 %

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.

The decrease in Adjusted EBITDA was primarily driven by a decrease in revenue of $5.8 million, or 3%, as described below.

Our Adjusted EBITDA increased by $5.5 million, or 9%, from $60.0 million for the three months ended July 31, 2020 to $65.5 million for the three months ended July 31, 2021.

The increase in Adjusted EBITDA was primarily driven by an increase in revenue related to COBRA benefits administration, which increased primarily due to the temporary COBRA subsidy available to eligible individuals under ARPA.

Our Adjusted EBITDA increased by $1.5 million, or 1%, from $123.0 million for the six months ended July 31, 2020 to $124.5 million for the six months ended July 31, 2021.

The increase in Adjusted EBITDA was driven by the increase in revenue related to COBRA benefits administration, partially offset by a decrease in the number of commuter benefit accounts due to accounts being suspended as a result of the COVID-19 pandemic.

Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

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Custodial revenue.

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

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

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

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Additionally, for new accounts, we incur on-boarding costs associated with the new accounts, such as new member welcome kits, the cost associated with issuance of new payment cards, and costs of marketing materials that we produce for our Network Partners.

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Custodial costs.

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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.

Other expense, net

Other expense, net, consists of acquisition costs, partially offset by interest income earned on corporate cash and other miscellaneous income and expense.

Other income (expense), net

Other income (expense), net, consists of acquisition costs, interest income earned on corporate cash and other miscellaneous income and expense.

Income tax provision (benefit)

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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards, and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

Deferred tax assets and liabilities are measured using enacted statutory

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tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

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

As of April 30, 2021, we have recorded an overall net deferred tax liability on our condensed consolidated balance sheet.

Comparison of the three months ended April 30, 2021 and 2020

As of July 31, 2021, we have recorded an overall net deferred tax liability on our condensed consolidated balance sheet.

Comparison of the three and six months ended July 31, 2021 and 2020

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

Three months ended April 30,

(in thousands, except percentages) 2021 2020 $ Change % Change

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

(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change

Service revenue $ 109,182 $ 103,805 $ 5,377 5 % $ 211,716 $ 215,076 $ (3,360) (2) %

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Service revenue.

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.

The $5.4 million, or 5%, increase in service revenue from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to an increase in revenue related to COBRA benefits administration, which increased primarily due to the temporary COBRA subsidy available to eligible individuals under ARPA.

The $3.4 million, or 2%, decrease in service revenue from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to the decrease in the number of commuter benefit accounts due to accounts being suspended as a result of the COVID-19 pandemic, partially offset the increase in revenue related to COBRA benefits administration.

Custodial revenue.

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.

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.

The $1.9 million, or 4%, increase in custodial revenue from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to the $1.5 billion, or 18%, increase in the year-over-year average daily balance of HSA cash with yield.

The increase was partially offset by a decrease in average annualized yield from 2.10% for the three months ended July 31, 2020 to 1.77% for the three months ended July 31, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic.

The $1.9 million, or 2%, increase in custodial revenue from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to the $1.5 billion, or 18%, increase in the year-over-year average daily balance of HSA cash with yield.

The increase was partially offset by a decrease in average annualized yield from 2.11% for the six months ended July 31, 2020 to 1.78% for the six months ended July 31, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic.

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

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Interchange revenue.

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.

The $5.8 million, or 23%, increase in interchange revenue from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to increased spend per account, as healthcare-related restrictions related to the COVID-19 pandemic have decreased.

The $8.7 million, or 15%, increase in interchange revenue from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to increased spend per account, as healthcare-related restrictions related to the COVID-19 pandemic have decreased, 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.

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.

Total revenue increased $13.1 million, or 7%, from the three months ended July 31, 2020 to the three months ended July 31, 2021 due to the increases in interchange, service, and custodial revenues.

Total revenue increased $7.3 million, or 2%, from the six months ended July 31, 2020 to the six months ended July 31, 2021 due to the increases in interchange and custodial revenues, partially offset by the decrease in service revenue.

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Impact of COVID-19.

Our business has been adversely affected by the COVID-19 pandemic, and we expect that it will continue to be adversely affected by 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,

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.

In addition, we are required to support our Clients' open enrollment activities virtually.

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

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

We may be unable to meet our service level commitments to our Clients as a result of disruptions to our work force and disruptions to third party contracts that we rely on to provide our services.

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

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

In particular, the recent increased spread of COVID-19 and the associated decisions by employers to delay return-to-office plans for their employees will further delay the recovery of use of these commuter benefits.

During the initial stages of the COVID-19 pandemic, we saw a negative impact on our members' spend on healthcare, which negatively impacted both our interchange revenue and service revenue.

If the current increase in COVID-19 cases results in new lockdowns or restrictions on elective medical procedures, our interchange revenue and service revenue could again be negatively impacted.

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.

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

Three months ended April 30,

(in thousands, except percentages) 2021 2020 $ Change % Change

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

(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change

Service costs $ 67,334 $ 65,246 $ 2,088 3 % $ 137,966 $ 136,259 $ 1,707 1 %

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Service costs.

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.

The $2.1 million, or 3%, increase in service costs from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to an increase in costs related to COBRA benefits administration, which increased primarily due to efforts to implement the offering of the temporary COBRA subsidy available to eligible individuals under ARPA.

The $1.7 million, or 1%, increase in service costs from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to an increase in costs related to COBRA benefits administration, which increased primarily due to efforts to implement the offering of the temporary COBRA subsidy available to eligible individuals under ARPA.

Custodial costs.

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.

The $0.2 million, or 3%, decrease in custodial costs from the three months ended July 31, 2020 to the three months ended July 31, 2021 was due to a lower average annualized rate of interest retained by HSA members on HSA cash with yield, which decreased from 0.20% for the three months ended July 31, 2020 to 0.16% for the three months ended July 31, 2021, partially offset by an increase in the average daily balance of HSA cash with yield, which increased from $8.4 billion for the three months ended July 31, 2020 to $9.9 billion for the three months ended July 31, 2021.

The $0.2 million, or 2%, decrease in custodial costs from the six months ended July 31, 2020 to the six months ended July 31, 2021 was due to a lower average annualized rate of interest retained by HSA members on HSA cash with yield, which decreased from 0.20% for the six months ended July 31, 2020 to 0.17% for the six months ended July 31, 2021, partially offset by an increase in the average daily balance of HSA cash with yield, which increased from $8.3 billion for the six months ended July 31, 2020 to $9.8 billion for the six months ended July 31, 2021.

Interchange costs.

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.

The $1.0 million, or 24%, increase in interchange costs from the three months ended July 31, 2020 to the three months ended July 31, 2021 was due to higher card spend volumes, as healthcare-related restrictions related to the COVID-19 pandemic have decreased.

The $0.5 million, or 5%, increase in interchange costs from the six months ended July 31, 2020 to the six months ended July 31, 2021 was due to higher card spend volumes, as healthcare-related restrictions related to the COVID-19 pandemic have decreased.

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Total cost of revenue.

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

Three months ended April 30,

(in thousands, except percentages) 2021 2020 $ Change % Change

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

(in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change

Sales and marketing $ 15,476 $ 12,167 $ 3,309 27 % $ 29,562 $ 23,622 $ 5,940 25 %

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Sales and marketing.

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.

The $3.3 million, or 27%, increase in sales and marketing expense from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to an increase in marketing expenses from increased team member and partner commissions, staffing, and marketing materials.

The $5.9 million, or 25%, increase in sales and marketing expense from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to an increase in marketing expenses from increased staffing and marketing collateral and increases in team member and partner commissions.

We expect our sales and marketing expenses to increase for the foreseeable future as we focus on our cross-selling program and marketing campaigns.

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

On an annual basis, we expect our sales and marketing expenses to continue 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.

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.

The $7.2 million, or 24%, increase in technology and development expense from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to increases in amortization, stock-based compensation, and personnel-related expenses.

The $11.6 million, or 19%, increase in technology and development expense from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to increases in amortization, stock-based compensation, and personnel-related expenses.

We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development and security of our proprietary technology.

On an annual basis, we expect our technology and development expenses to increase as a percentage of our total revenue pursuant to our growth initiatives.

On an annual basis, we expect our technology and development expenses to continue to increase as a percentage of our total revenue pursuant to our growth initiatives.

Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses.

General and administrative.

The $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.

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.

The $2.3 million, or 11%, increase in general and administrative expense from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to increases in credit losses on trade receivables and stock-based compensation, partially offset by decreases in personnel-related expenses and professional fees.

The $4.0 million, or 10%, increase in general and administrative expense from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to increases in credit losses on trade receivables and stock-based compensation, partially offset by decreases in personnel-related expenses and professional fees.

We expect our general and administrative expenses to continue 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.

Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

Our general and

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administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

Amortization of acquired intangible assets.

The $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.

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.

The $1.2 million, or 6%, increase in amortization of acquired intangible assets from the three months ended July 31, 2020 to the three months ended July 31, 2021 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Luum Acquisition.

The remainder of the increase was due to amortization of acquired HSA portfolios.

The $2.3 million, or 6%, increase in amortization of acquired intangible assets from the six months ended July 31, 2020 to the six months ended July 31, 2021 was primarily due to the inclusion of amortization related to identified intangible assets acquired through the Luum Acquisition commencing March 8, 2021.

The remainder of the increase was due to amortization of acquired HSA portfolios.

Merger integration.

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.

We expect integration expenses totaling approximately $100 million in the aggregate to be incurred by the end of fiscal year 2022.

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.

The $16.4 million and $25.2 million in merger integration expense for the three and six months ended July 31, 2021, 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 and additional integration expenses incurred related to the acquisition of Further.

We expect integration expenses totaling approximately $100 million and $55 million in the aggregate for the WageWorks and Further acquisitions, respectively.

As of July 31, 2021, we had incurred a total of approximately $103 million of non-recurring merger integration costs related to the WageWorks Acquisition and the Further acquisition.

Interest expense

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.

The $7.3 million and $13.9 million in interest expense for the three and six months ended July 31, 2021, respectively, consisted primarily of interest accrued under our term loan facility and amortization of financing costs.

We expect interest expense to decrease as a result of the principal repayments under our term loan facility and to fluctuate based on changes in prevailing interest rates.

Other expense, net

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)

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.

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.

Other income (expense), net

The $1.2 million change in other income (expense), net, from expense of $0.8 million during the three months ended July 31, 2020 to income of $0.4 million during the three months ended July 31, 2021 was due to a $2.9 million increase in interest income and other income, partially offset by a $1.7 million increase in acquisition costs.

The $1.7 million increase in other expense, net, from $1.6 million during the six months ended July 31, 2020 to $3.3 million during the six months ended July 31, 2021 was due to a $7.5 million increase in acquisition costs, partially offset by a $5.8 million increase in interest income and other income.

Income tax benefit

Income tax benefit for the three and six months ended July 31, 2021 was $4.0 million and $7.4 million, respectively, compared to an income tax benefit of $0.5 million and $0.3 million for the three and six months ended July 31, 2020, respectively.

The $3.5 million and $7.1 million increase in the income tax benefit for the three and six months ended July 31, 2021 compared to the three and six months ended July 31, 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.

Revenue results are seasonally impacted due to ancillary service fees, timing of HSA

contributions, and timing of card spend.

Revenue results are seasonally impacted due to ancillary service fees, timing of HSA contributions, and timing of card spend.

Cost of revenue is seasonally impacted as a significant number of new and existing Network Partners bring us new HSAs and CDBs beginning in January of each year concurrent with the start of many employers’ benefit plan years.

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These expenses begin to ramp up during our third fiscal quarter, with the majority of expenses incurred in our fourth fiscal quarter.

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Liquidity and capital resources

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

As of April 30, 2021 and January 31, 2021, cash and cash equivalents were $736.8 million and $328.8 million, respectively.

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.

As of July 31, 2021 and January 31, 2021, cash and cash equivalents were $753.8 million and $328.8 million, respectively.

Cash and cash equivalents as of July 31, 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

We have a “shelf” registration statement on Form S-3 on file with the SEC.

This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings.

Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to, working capital, sales and marketing activities, general and administrative matters and capital expenditures, and if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business.

We routinely maintain a “shelf” registration statement on Form S-3 on file with the SEC.

A shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings.

Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including, but not limited to, working capital, sales and marketing activities, general and administrative matters, capital expenditures, and repayment of indebtedness, and if opportunities arise, for the acquisition of, or investment in, assets, technologies, solutions or businesses that complement our business.

Pending such uses, we may invest the net proceeds in interest-bearing securities.

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For a description of the terms of the credit agreement, refer to Note 8—Indebtedness.

We were in compliance with all covenants under the credit agreement as of April 30, 2021, and for the period then ended.

We were in compliance with all covenants under the credit agreement as of July 31, 2021, and for the period then ended.

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.

Capital expenditures for the three months ended April 30, 2021 and 2020 were $18.0 million and $19.3 million, respectively.

Capital expenditures for the six months ended July 31, 2021 and 2020 were $38.4 million and $30.8 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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In the event that additional financing is required, we may not be able to raise it on favorable terms, if at all.

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

Three months ended April 30,

Six months ended July 31,

(in thousands) 2021 2020

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Net cash used in investing activities (88,268) (55,696)

Net cash provided by (used in) financing activities 444,853 (10,365)

Increase (decrease) in cash and cash equivalents 407,970 (20,633)

Net cash provided by financing activities 445,053 64,218

Increase in cash and cash equivalents 424,951 77,184

Beginning cash and cash equivalents 328,803 191,726

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Cash flows from operating activities.

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.

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.

Net cash provided by operating activities during the six months ended July 31, 2021 resulted from net loss of $6.4 million, plus depreciation and amortization expense of $64.8 million, stock-based compensation expense of $28.4 million, amortization of debt issuance costs of $2.5 million, and an increase in the fair value of contingent consideration of $1.0 million, partially offset by other non-cash items and working capital changes totaling $22.1 million.

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

Cash flows from investing activities.

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.

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 used in investing activities for the six months ended July 31, 2021 resulted from the Luum Acquisition for $49.5 million, net of cash acquired, $32.1 million in software and capitalized software development, $6.4 million in purchases of property and equipment, and $2.7 million in acquisitions of intangible member assets, partially offset by $2.4 million of proceeds from the sale of equity securities associated with a long-term capital investment.

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

Cash flows from financing activities.

Net cash provided by financing activities during the three months ended April 30, 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.

Net cash provided by financing activities during the six months ended July 31, 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 $6.7 million.

These items were partially offset by $15.6 million of principal payments on our long-term debt and $2.6 million used in the settlement of Client-held funds obligation.

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.

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

Contractual obligations

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Off-balance sheet arrangements

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.

As of July 31, 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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The letters of credit are contingent liabilities, supported by our revolving credit facility, and are not reflected on our condensed consolidated balance sheets.

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Critical accounting policies and significant management estimates

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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.

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.

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

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

During the three months ended April 30, 2021 and 2020, no one customer accounted for greater than 10% of our total revenue.

During the six months ended July 31, 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.

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.

Our cash and cash equivalents as of July 31, 2021 were $753.8 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.

Our accounts receivable balance as of April 30, 2021 was $74.5 million.

Our accounts receivable balance as of July 31, 2021 was $74.2 million.

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

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HSA Assets and Client-held funds.

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

As of April 30, 2021, we had HSA Assets of approximately $15.0 billion.

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

As of July 31, 2021, we held in custody HSA Assets of approximately $15.5 billion.

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

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

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.

As 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 HSA Assets placed among our Depository Partners and insurance

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company partners, and varied contract terms, substantially reduces our exposure to short-term fluctuations in prevailing interest rates and mitigates the short-term impact of a sustained increase or decline in prevailing interest rates on our custodial revenue.

A sustained decline in prevailing interest rates may negatively affect our business by reducing the size of the interest rate yield, or yield, available to us and thus the amount of the custodial revenue we can realize.

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An increase in our yield would increase our custodial revenue as a percentage of total revenue.

In addition, if our yield increases, we expect the spread to also increase between the interest offered to us by our Depository Partners and the interest retained by our members, thus increasing our profitability.

In addition, if our yield increases, we expect the spread to also increase between the interest offered to us by our Depository Partners and insurance company partners and the interest retained by our members, thus increasing our profitability.

However, we may be required to increase the interest retained by our members in a rising prevailing interest rate environment.

Changes in prevailing interest rates are driven by macroeconomic trends

and government policies over which we have no control, 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.

As of April 30, 2021, we had Client-held funds of approximately $903.0 million.

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.

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

As of July 31, 2021, we held Client-held funds of approximately $810.0 million.

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

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

As of April 30, 2021, we had unrestricted cash and cash equivalents of $736.8 million.

As of July 31, 2021, we had unrestricted cash and cash equivalents of $753.8 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.

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.

As of July 31, 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.

The interest rate on our term loan credit facility and revolving credit facility is variable and was 1.86 percent at April 30, 2021.

The interest rate on our term loan credit facility and revolving credit facility is variable and was 1.84 percent at July 31, 2021.

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

For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at April 30, 2021 would result in approximately $9.8 million of additional interest expense over the next 12 months.

For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at July 31, 2021 would result in approximately $9.6 million of additional interest expense over the next 12 months.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis