What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-09 compared with 2021-09-09 · 149 added, 145 removed, 381 unchanged (44% 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 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.

Such statements include, but are not limited to, statements concerning our ability to integrate 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 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.

As of October 31, 2021, we administered 6.2 million HSAs, with balances totaling $16.4 billion, which we call HSA Assets.

Also, as of October 31, 2021, we administered 7.1 million complementary CDBs.

We refer to the aggregate number of HSAs and other CDBs that we administer as Total Accounts, of which we had 13.3 million as of October 31, 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.

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.

We have increased our share of the growing HSA market from 4% in calendar year 2010 to 17% as of October 31, 2021, measured by HSA Assets.

According to Devenir, we are the largest HSA provider by accounts and second largest by assets as of June 2021.

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

We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-driven culture.

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.

We seek to differentiate ourselves through our proprietary technology, product breadth, ecosystem connectivity, and service-

driven culture.

Our proprietary technology allows us to help consumers optimize the value of their HSAs and other CDBs and gain confidence and skills in managing their healthcare costs as part of their financial security.

Our ability to assist consumers is enhanced by our capacity to securely share data in both directions with others in the health, benefits, and retirement ecosystems.

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On August 30, 2019, we completed the acquisition of WageWorks, Inc.

(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.

(the "WageWorks Acquisition") and paid approximately $2.0 billion in cash to WageWorks stockholders, financed through net borrowings of approximately $1.22 billion under our prior term loan facility and approximately $816.9 million of cash on hand.

As a result of the WageWorks Acquisition, WageWorks Inc.

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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 $70 million were achieved as of July 31, 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 $75 million were achieved as of October 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.

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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.

As of October 31, 2021, we had incurred a total of $104 million of non-recurring merger integration costs related to the WageWorks Acquisition.

Luum Acquisition

In March 2021, we bolstered our commuter offering by acquiring 100% of the outstanding capital stock of Fort Effect Corp, d/b/a Luum (the "Luum Acquisition") 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.

On October 31, 2021, we entered into an amendment to the purchase agreement to pay $6.0 million in satisfaction of the contingent consideration liability.

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.

Fifth Third Bank HSA portfolio acquisition

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.

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.

In April 2021, we entered into a definitive agreement with Fifth Third Bank, National Association ("Fifth Third"), to transition the custody of Fifth Third’s HSA portfolio to HealthEquity.

On September 29, 2021, the transaction was closed, in which we paid a $60.8 million purchase price for a transfer of approximately 160,000 HSAs and

$491.0 million of HSA Assets.

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

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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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.

(1) an amended agreement to acquire Further (other than VEBA, as described below) for $455 million, which closed on November 1, 2021, and (2) 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, subject to satisfaction of certain customary closing conditions, 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.

On December 3, 2021, the parties agreed to terminate the agreement to acquire the Further VEBA business.

HealthSavings HSA portfolio acquisition

On December 6, 2021, we entered into a definitive agreement with Health Savings Administrators, L.L.C.

(“HealthSavings”) to transition the custody of HealthSavings’ HSA portfolio to HealthEquity.

The definitive agreement provides a $60 million purchase price for approximately $1.3 billion of HSA assets held in approximately 87,000 HSAs.

Given that a significant portion of the HSA assets are currently invested, HealthSavings and HealthEquity are working closely to coordinate an in-kind transfer of most of the invested assets.

The transition of HealthSavings’ HSAs to the HealthEquity platform is expected to be completed in the first quarter of fiscal 2023.

Key factors affecting our performance

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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 built 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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We earn a material portion of our total revenue from interest paid to us by these partners.

Custodial cash assets held by our insurance company partners are held in group annuity contracts and similar arrangements.

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.

The terms of new and renewing agreements with our Depository Partners may be impacted by the then-prevailing interest rate environment, which in turn is driven by macroeconomic factors and government policies over which we have no control.

Such factors, and the response of our competitors to them, also determine the amount of interest retained by our members.

We believe that diversification of Depository Partners, varied contract terms and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue.

We believe that diversification of Depository Partners and insurance company partners, varied contract terms and other factors reduce our exposure to short-term fluctuations in prevailing interest rates and mitigate the short-term impact of sustained increases or declines in prevailing interest rates on our custodial revenue.

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

Although interest rates have 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.

Interest on our five-year senior secured term loan A facility (the “Term Loan Facility”) changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.

Our competition and industry

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Many of these are state or federally chartered banks and other financial institutions for which we believe benefits administration services are not a core business.

Some of our direct competitors (including healthcare service companies such as United Health Group's Optum, Webster Bank, and well-known retail investment companies, such as Fidelity Investments) are in a position to devote more resources to the development, sale, and support of their products and services than we have at our disposal.

devote more resources to the development, sale, and support of their products and services than we have at our disposal.

In addition, numerous indirect competitors, including benefits administration service providers, partner with banks and other HSA custodians to compete with us.

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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.

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.

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seen a decline in interchange revenue across all other products.

We have also 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) July 31, 2021 July 31, 2020 % Change January 31, 2021

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

HSAs 6,241 5,460 14 % 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 0.6 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 number of our HSAs increased by approximately 0.8 million, or 14%, from October 31, 2020 to October 31, 2021, due to further penetration into existing Network Partners, the addition of new Network Partners, and HSA portfolio acquisitions.

The number of our CDBs increased slightly from October 31, 2020 to October 31, 2021, driven by an increase in COBRA and HRA accounts, largely offset by a decrease in FSA accounts and also 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.

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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

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

HSA cash with yield (1) $ 10,410 $ 8,759 19 % $ 9,875

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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.

(i) HSA cash, which includes cash deposits with our Depository Partners or other custodians and cash placed in group 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 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.

Total HSA cash increased by $1.5 billion, or 16%, from October 31, 2020 to October 31, 2021, due primarily to HSA contributions, new HSAs, and acquisitions of HSA portfolios, partially offset by transfers to HSA investments.

HSA investments increased by $2.5 billion, or 74%, from October 31, 2020 to October 31, 2021, due primarily to transfers from HSA cash and appreciation of invested balances.

Total HSA Assets increased by $4.0 billion, or 32%, from October 31, 2020 to October 31, 2021, due primarily to HSA contributions, new HSAs, acquisitions of HSA portfolios, and appreciation of invested balances.

Client-held funds

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

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

Client-held funds (1) $ 811 $ 798 2 % $ 986

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

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

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

(in thousands) 2021 2020 2021 2020

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Interest expense 11,881 6,952 25,824 28,110

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

Income tax provision (benefit) (4,087) 2,340 (11,505) 2,015

Depreciation and amortization 13,904 10,253 38,619 28,580

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Adjusted EBITDA $ 61,087 $ 61,139 $ 185,576 $ 184,149

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

(2) For the three months ended October 31, 2021, other consisted of amortization of incremental costs to obtain a contract of $0.8 million and other expenses, net, of $0.6 million.

For the three months ended October 31, 2020, other consisted of amortization of incremental costs to obtain a contract of $0.6 million and other expenses, net, of $0.6 million.

For the nine months ended October 31, 2021, other consisted of amortization of incremental costs to obtain a contract of $3.5 million, partially offset by other income, net, of $1.0 million.

For the nine months ended October 31, 2020, other consisted of amortization of incremental costs to obtain a contract of $1.4 million and other expenses, net, of $2.8 million.

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

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

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

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

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As a percentage of revenue 34 % 34 % 34 % 34 %

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 Adjusted EBITDA was $61.1 million for each of the three month periods ended October 31, 2021 and 2020.

Our Adjusted EBITDA increased by $1.4 million, or 1%, from $184.1 million for the nine months ended October 31, 2020 to $185.6 million for the nine months ended October 31, 2021, which reflects a similar increase in total revenue from the nine months ended October 31, 2020 to the nine months ended October 31, 2021.

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 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, recordkeeping fees we earn in respect of mutual funds in which our members invest, and Client-held funds deposited with our Depository Partners.

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.

HSA cash placed with our insurance company partners is placed in group annuity contracts or similar arrangements.

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.

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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.

Custodial costs are comprised of interest retained by our HSA members, in respect of HSA cash with yield, and fees we pay to banking consultants whom we use to help secure agreements with our Depository Partners.

Interest retained by HSA members is calculated on a tiered basis.

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Interest expense

Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with our credit agreement.

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.

Interest expense consists of accrued interest expense and amortization of deferred financing costs associated with our long-term debt.

Interest on our Term Loan Facility changes frequently due to variable interest rate terms, and as a result, our interest expense is expected to fluctuate based on changes in prevailing interest rates.

Other income (expense), net

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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

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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 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

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

Valuation allowances are established when necessary to reduce net deferred tax assets to the

amount expected to be realized.

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

Comparison of the three and nine months ended October 31, 2021 and 2020

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

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

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

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

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Service revenue.

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.

The $1.8 million, or 2%, decrease in service revenue from the three months ended October 31, 2020 to the three months ended October 31, 2021 was primarily due to a decrease in CDB accounts due to the COVID-19 pandemic and efforts to simplify our CDB administrative engagements on our go-forward platform, partially offset by new revenue from the Luum Acquisition.

The $5.2 million, or 2%, decrease in service revenue from the nine months ended October 31, 2020 to the nine months ended October 31, 2021 was primarily due to a decrease in CDB accounts due to the COVID-19 pandemic and efforts to simplify our CDB administrative engagements on our go-forward platform, partially offset by new revenue from the Luum Acquisition and an increase in revenue related to COBRA benefits administration.

Custodial revenue.

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.

The $0.5 million, or 1%, increase in custodial revenue from the three months ended October 31, 2020 to the three months ended October 31, 2021 was primarily due to the $1.4 billion, or 16%, 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 2.08% for the three months ended October 31, 2020 to 1.72% for the three months ended October 31, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic, and by increased transfers from HSA cash to HSA investments.

The $2.4 million, or 2%, increase in custodial revenue from the nine months ended October 31, 2020 to the nine months ended October 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 nine months ended October 31, 2020 to 1.76% for the nine months ended October 31, 2021, which was due in part to the interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic, and by increased transfers from HSA cash to HSA investments.

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 $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.

The $2.0 million, or 8%, increase in interchange revenue from the three months ended October 31, 2020 to the three months ended October 31, 2021 was primarily due to increased spend per account and an increase in accounts.

The $10.6 million, or 13%, increase in interchange revenue from the nine months ended October 31, 2020 to the nine months ended October 31, 2021 was primarily due to increased spend per account and an increase in accounts.

Total 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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Total revenue increased $0.6 million, or less than one percent, from the three months ended October 31, 2020 to the three months ended October 31, 2021 due to the increases in custodial and interchange revenues, largely offset by the decrease in service revenue.

Total revenue increased $7.9 million, or 1%, from the nine months ended October 31, 2020 to the nine months ended October 31, 2021 due to the increases in custodial and interchange revenues, partially offset by the decrease in service revenue.

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.

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 and insurance company 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.

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.

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.

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, and the current increase in COVID-19 cases has negatively impacted our interchange revenue and service revenue.

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

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

The extent to which the COVID-19 pandemic 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 July 31, Six months ended July 31,

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

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

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Service costs.

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.

The $0.3 million, or less than one percent, increase in service costs from the three months ended October 31, 2020 to the three months ended October 31, 2021 reflects a similar increase in total revenue from the three months ended October 31, 2020 to the three months ended October 31, 2021.

The $2.0 million, or 1%, increase in service costs from the nine months ended October 31, 2020 to the nine months ended October 31, 2021 reflects a similar increase in total revenue from the three months ended October 31, 2020 to the three months ended October 31, 2021.

Custodial costs.

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.

The $1.0 million, or 20%, increase in custodial costs from the three months ended October 31, 2020 to the three months ended October 31, 2021 was due to an increase in the average daily balance of HSA cash with yield, which increased from $8.7 billion for the three months ended October 31, 2020 to $10.1 billion for the three months ended October 31, 2021 and an associated increase in interest retained by HSA members, partially offset by a lower average annualized rate of interest retained by HSA members on HSA cash with yield, which decreased from 0.18% for the three months ended October 31, 2020 to 0.17% for the three months ended October 31, 2021.

The $0.8 million, or 5%, increase in custodial costs from the nine months ended October 31, 2020 to the nine months ended October 31, 2021 was due to an increase in the average daily balance of HSA cash with yield, which increased from $8.4 billion for the nine months ended October 31, 2020 to $9.9 billion for the nine months ended October 31, 2021 and an associated increase in interest retained by HSA members, partially offset by a lower average annualized rate of interest retained by HSA members on HSA cash with yield, which decreased from 0.20% for the nine months ended October 31, 2020 to 0.17% for the nine months ended October 31, 2021.

Interchange costs.

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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The $0.6 million, or 14%, increase in interchange costs from the three months ended October 31, 2020 to the three months ended October 31, 2021 was due to increased spend per account and an increase in accounts.

The $1.1 million, or 8%, increase in interchange costs from the nine months ended October 31, 2020 to the nine months ended October 31, 2021 was due to increased spend per account and an increase in accounts.

Total cost of revenue.

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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.

We expect our cost

of revenue to increase as a percentage of our total revenue, primarily due to the Further acquisition and stock-based compensation.

Operating expenses

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

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

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

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

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Sales and marketing.

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.

Sales and marketing expense decreased by $0.2 million, or 1%, from the three months ended October 31, 2020 to the three months ended October 31, 2021.

The $5.8 million, or 16%, increase in sales and marketing expense from the nine months ended October 31, 2020 to the nine months ended October 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.

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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.

We expect our sales and marketing expenses to increase as a percentage of our total revenue, primarily due to the Further acquisition and stock-based compensation.

Technology and development.

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.

The $7.3 million, or 24%, increase in technology and development expense from the three months ended October 31, 2020 to the three months ended October 31, 2021 was primarily due to increases in amortization, stock-based compensation, and personnel-related expenses.

The $18.9 million, or 20%, increase in technology and development expense from the nine months ended October 31, 2020 to the nine months ended October 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.

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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.

We expect our technology and development expenses to increase as a percentage of our total revenue, primarily due to the Further acquisition and stock-based compensation.

General and administrative.

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.

The $2.1 million, or 9%, decrease in general and administrative expense from the three months ended October 31, 2020 to the three months ended October 31, 2021 was primarily due to temporary decreases in personnel-related expenses and professional fees.

The $1.9 million, or 3%, increase in general and administrative expense from the nine months ended October 31, 2020 to the nine months ended October 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

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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.

On an annual basis, we expect our general and administrative expenses to increase 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.

We expect our technology and development expenses to increase as a percentage of our total revenue, primarily due to the Further acquisition and stock-based compensation.

Amortization of acquired intangible assets.

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 $0.5 million, or 3%, increase in amortization of acquired intangible assets from the three months ended October 31, 2020 to the three months ended October 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 the Fifth Third Bank HSA portfolio and other acquired HSA portfolios.

The $2.8 million, or 5%, increase in amortization of acquired intangible assets from the nine months ended October 31, 2020 to the nine months ended October 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 $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.

The $13.2 million and $38.4 million in merger integration expense for the three and nine months ended October 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 $110 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.

As of October 31, 2021, we had incurred a total of approximately $117 million of non-recurring merger integration costs related to the WageWorks Acquisition and the Further acquisition.

Interest expense

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.

The $11.9 million and $25.8 million in interest expense for the three and nine months ended October 31, 2021, respectively, consisted primarily of interest accrued on our long-term debt and amortization of debt discount and issuance costs, as well as a $4.0 million loss on extinguishment of debt recorded during the three months ended October 31, 2021 as a result of the refinancing of our prior credit facility.

We expect interest expense to increase, primarily as a result of the interest expense we will incur on the $600.0 million aggregate principal amount of the Notes issued during the quarter.

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.

The $3.5 million change in other income (expense), net, from expense of $0.4 million during the three months ended October 31, 2020 to income of $3.1 million during the three months ended October 31, 2021 was due to a $3.2 million gain resulting from a change in the fair value of contingent acquisition consideration from the Luum Acquisition and a $0.3 million increase in net other income.

The $1.8 million decrease in other expense, net, from $2.0 million during the nine months ended October 31, 2020 to $0.2 million during the nine months ended October 31, 2021 was due to a $1.7 million gain on the sale of equity securities, a $0.6 million increase in interest income, and a $4.4 million increase in net other income, partially offset by a $4.9 million increase in net acquisition costs, which includes a $2.1 million gain resulting from a change in the fair value of contingent acquisition consideration from the Luum Acquisition.

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.

Income tax benefit for the three and nine months ended October 31, 2021 was $4.1 million and $11.5 million, respectively, compared to income tax expense of $2.3 million and $2.0 million for the three and nine months ended October 31, 2020, respectively.

The $6.4 million and $13.5 million increase in the income tax benefit for the three and nine months ended October 31, 2021 compared to the three and nine months ended October 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.

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Before we realize any revenue from these new accounts, we incur costs related to implementing and supporting our new Network Partners and new accounts.

These costs of services relate to activating accounts and hiring additional staff, including seasonal help to support our member support center.

These costs of services relate

to activating accounts and hiring additional staff, including seasonal help to support our member support center.

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

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Liquidity and capital resources

Cash and cash equivalents overview

Our principal sources of liquidity are our current cash and cash equivalents balances, collections from our service, custodial, and interchange revenue activities, and availability under our revolving credit facility 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.

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.

As of October 31, 2021 and January 31, 2021, cash and cash equivalents were $649.1 million and $328.8 million, respectively.

Cash and cash equivalents as of October 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, and an additional $60.8 million used to acquire the Fifth Third Bank HSA portfolio.

Subsequent to October 31, 2021, the Company used the remaining net proceeds from the offering, and other cash on hand, for the acquisition of Further.

Capital resources

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

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

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

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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.

On October 8, 2021, the Company completed its offering of $600.0 million aggregate principal amount of its 4.50% Senior Notes due 2029.

In addition, on October 8, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) which includes a five-year senior secured term loan A facility, in an aggregate principal amount of $350.0 million, and a five-year senior secured revolving credit facility (the “Revolving Credit Facility”), in an aggregate principal amount of up to $1.0 billion, which may be used for working capital and general corporate purposes, including the financing of acquisitions and other investments.

The net proceeds from the issuance of the Notes together with borrowings under the Credit Agreement and $31.8 million of cash on hand, were used to repay the outstanding borrowings under the prior credit agreement, dated August 20, 2019.

For a description of the terms of the Credit Agreement, refer to Note 8—Indebtedness.

We were in compliance with all covenants under the credit agreement as of July 31, 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 six months ended July 31, 2021 and 2020 were $38.4 million and $30.8 million, respectively.

As of October 31, 2021, there were no amounts outstanding under the Revolving Credit Facility.

We were in compliance with all covenants under the Credit Agreement as of October 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 and used an additional $60.8 million to acquire the Fifth Third Bank HSA portfolio.

Subsequent to October 31, 2021, the Company used the remaining net proceeds from the offering, and other cash on hand, for the acquisition of Further.

Capital expenditures for the nine months ended October 31, 2021 and 2020 were $56.3 million and $48.6 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:

Six months ended July 31,

Nine months ended October 31,

(in thousands) 2021 2020

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Cash flows from operating activities.

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.

Net cash provided by operating activities during the nine months ended October 31, 2021 resulted from net loss of $11.5 million, plus depreciation and amortization expense of $98.4 million, stock-based compensation expense of $41.7 million, amortization of debt discount and issuance costs of $3.6 million, and a loss on extinguishment of debt of $4.0 million, partially offset by a decrease in the fair value of contingent consideration of $2.1 million and other non-cash items and working capital changes totaling $43.7 million.

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

Cash flows from investing activities.

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 used in investing activities for the nine months ended October 31, 2021 resulted from the Luum Acquisition for $49.5 million, net of cash acquired, $49.0 million in software and capitalized software development, $7.3 million in purchases of property and equipment, and $64.5 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 nine months ended October 31, 2020 resulted from $37.2 million in software and capitalized software development, $11.4 million in purchases of property and equipment, and $28.1 million in acquisitions of intangible member assets.

Cash flows from financing activities.

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

Net cash provided by financing activities during the nine months ended October 31, 2021 resulted from $938.2 million of net proceeds from the issuance of long-term debt, $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 $7.7 million.

These items were partially offset by $1.0 billion of principal payments on our long-term debt and $1.6 million used in the settlement of Client-held funds obligations.

Net cash provided by financing activities during the nine months ended October 31, 2020 resulted primarily from $286.8 million of net proceeds from our follow-on public offering of 5,290,000 shares of common stock and the exercise of stock options of $4.5 million, partially offset by $223.4 million of principal payments on our long-term debt and $4.2 million used in the settlement of Client-held funds obligations.

Contractual obligations

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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.

As of October 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 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.

There have been no significant or material changes in our critical accounting policies during the nine months ended October 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 six months ended July 31, 2021 and 2020, no one customer accounted for greater than 10% of our total revenue.

During the nine months ended October 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 July 31, 2021 were $753.8 million, the vast majority of which was not covered by federal depository insurance.

Our cash and cash equivalents as of October 31, 2021 were $649.1 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 July 31, 2021 was $74.2 million.

Our accounts receivable balance as of October 31, 2021 was $84.1 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 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 of October 31, 2021, we held in custody HSA Assets of approximately $16.4 billion.

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

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

Custodial cash assets held by our insurance company partners are held in group annuity contracts and similar arrangements.

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

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.

The diversification of HSA Assets placed among our Depository Partners and insurance 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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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.

As of October 31, 2021, we held Client-held funds of approximately $811.0 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 July 31, 2021, we had unrestricted cash and cash equivalents of $753.8 million.

As of October 31, 2021, we had unrestricted cash and cash equivalents of $649.1 million.

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

Credit agreement.

As of July 31, 2021, we had $987.5 million outstanding under our term loan facility and no amounts drawn under our revolving credit facility.

Long-term debt.

As of October 31, 2021, we had $350.0 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 1.84 percent at July 31, 2021.

The interest rate on our term loan credit facility and Revolving Credit Facility is variable and was 1.88% at October 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 July 31, 2021 would result in approximately $9.6 million of additional interest expense over the next 12 months.

For example, a one percent increase in the interest rate on the amount outstanding under our credit facilities at October 31, 2021 would result in approximately $3.5 million of additional interest expense over the next 12 months.

The interest rate on our Notes is fixed at 4.50%.

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