Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

	June 30,			December 31,
	2014			2013
Assets
Current assets:
Cash and cash equivalents	$	64,464		$	49,942
Fees and other receivables, net	24,857			19,848
Deferred tax assets, net	3,705			2,462
Prepaid expenses and other current assets	6,660			7,155
Total current assets	99,686			79,407

Property and equipment, net	14,565			12,766
Internally developed software, net	6,394			5,740
Intangible assets, net	31,398			35,698
Goodwill	74,868			74,335
Deferred tax assets, net	8,367			8,367
Other non-current assets	5,110			4,929
Total assets	$	240,388		$	221,242

Liabilities and Equity
Current liabilities:
Accrued expenses	$	33,683		$	35,242
Accounts payable	6,728			5,528
Contingent consideration	6,000			6,008
Deferred revenue	6,566			6,245
Total current liabilities	52,977			53,023

Contingent consideration	11,389			11,297
Deferred revenue	3,017			1,148
Deferred rent	2,575			2,051
Lease incentive	4,146			3,547
Other non-current liabilities	2,548			2,404
Total liabilities	76,652			73,470

Commitments and contingencies

Equity:
Stockholders’ equity:
Preferred stock, par value $0.005, 50,000,000 shares authorized	—			—
Common stock, par value $0.005, 500,000,000 shares authorized; 45,942,152 and 45,628,814 shares issued as of June 30, 2014 and December 31, 2013, respectively; 34,149,003 and 33,876,020 shares outstanding as of June 30, 2014 and December 31, 2013, respectively	230			228
Additional paid-in capital	202,729			192,341
Accumulated deficit	(26,904		)	(33,617		)
Treasury stock at cost, 11,793,149 and 11,752,794 shares as of June 30, 2014 and December 31, 2013, respectively	(12,875		)	(11,180		)
Total stockholders’ equity	163,180			147,772
Non-controlling interest	556			—
Total equity	163,736			147,772
Total liabilities and equity	$	240,388		$	221,242

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenues:
Assets under management or administration	$	70,727	$	41,234	$	137,808	$	77,570
Licensing and professional services	14,102		10,398		25,560		20,687
Total revenues	84,829		51,632		163,368		98,257

Operating expenses:
Cost of revenues	37,955		19,638		72,392		36,446
Compensation and benefits	25,157		17,194		48,616		34,412
General and administration	12,936		9,962		25,086		18,855
Depreciation and amortization	4,615		3,081		9,037		6,199
Total operating expenses	80,663		49,875		155,131		95,912

Income from operations	4,166		1,757		8,237		2,345
Other income	1,839		186		1,920		191
Income before income tax provision	6,005		1,943		10,157		2,536

Income tax provision	2,355		825		3,639		877

Net income	3,650		1,118		6,518		1,659

Add: Net loss attributable to non-controlling interest	69		—		195		—
Net income attributable to Envestnet, Inc.	$	3,719	$	1,118	$	6,713	$	1,659

Net income per share attributable to Envestnet, Inc.:

Basic	$	0.11	$	0.03	$	0.20	$	0.05

Diluted	$	0.10	$	0.03	$	0.18	$	0.05

Weighted average common shares outstanding:
Basic	34,547,277		32,661,196		34,332,759		32,518,943

Diluted	36,805,758		35,164,106		36,726,121		34,760,568

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

	Common Stock			Treasury Stock					Additional
	Shares	Amount		Common Shares		Amount			Paid-in Capital		Accumulated Deficit			Non-controlling Interest			Total Equity

Balance, December 31, 2013	45,628,814	$	228	(11,752,794	)	$	(11,180	)	$	192,341	$	(33,617	)	$	—		$	147,772

Exercise of stock options	190,961	2		—		—			1,613		—			—			1,615
Issuance of common stock - vesting of restricted stock	122,377	—		—		—			—		—			—			—
Purchase of treasury stock for stock-based minimum tax withholdings	—	—		(40,355	)	(1,695		)	—		—			—			(1,695		)
Stock-based compensation	—	—		—		—			5,572		—			195			5,767
Excess tax benefits from stock-based compensation expense	—	—		—		—			3,203		—			—			3,203
Issuance of membership interest in ERS, LLC	—	—		—		—			—		—			556			556
Net income (loss)	—	—		—		—			—		6,713			(195		)	6,518
Balance, June 30, 2014	45,942,152	$	230	(11,793,149	)	$	(12,875	)	$	202,729	$	(26,904	)	$	556		$	163,736

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended
	June 30,
	2014			2013
OPERATING ACTIVITIES:
Net income	$	6,518		$	1,659
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,037			6,199
Deferred rent and lease incentive	1,123			(48		)
Provision for doubtful accounts	—			60
Deferred income taxes	—			(1,094		)
Stock-based compensation	5,767			4,266
Excess tax benefits from stock-based compensation	(3,203		)	(1,047		)
Imputed interest expense	824			—
Fair market value adjustment on contingent consideration	(460		)	—
Changes in operating assets and liabilities:
Fees and other receivables, net	(5,009		)	(3,672		)
Prepaid expenses and other current assets	2,455			(672		)
Other non-current assets	(1,136		)	(568		)
Accrued expenses	(1,559		)	3,490
Accounts payable	1,200			1,489
Deferred revenue	2,190			80
Other non-current liabilities	144			25
Net cash provided by operating activities	17,891			10,167

INVESTING ACTIVITIES:
Purchase of property and equipment	(4,841		)	(1,638		)
Capitalization of internally developed software	(1,651		)	(1,503		)
Net cash used in investing activities	(6,492		)	(3,141		)

FINANCING ACTIVITIES:
Proceeds from exercise of warrants	—			4
Proceeds from exercise of stock options	1,615			2,204
Issuance of restricted stock	—			1
Purchase of treasury stock for stock-based minimum tax withholdings	(1,695		)	(586		)
Excess tax benefits from stock-based compensation expense	3,203			1,047
Net cash provided by financing activities	3,123			2,670

INCREASE IN CASH AND CASH EQUIVALENTS	14,522			9,696

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	49,942			29,983

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	64,464		$	39,679

Supplemental disclosure of cash flow information - cash paid during the period for income taxes, net of refunds	$	18		$	2,955
Supplemental disclosure of non-cash operating, investing and financing activities:
Settlement of contingent consideration liability upon issuance of ERS, LLC membership interest	158			—

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

1. Organization and Description of Business

Envestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provide open-architecture wealth management services and technology to independent financial advisors and financial institutions. These services and related technology are provided via Envestnet’s wealth management software, Envestnet | PMC®, Envestnet | Tamarac™, Vantage Reporting Solution™ and Envestnet | WMS™.

Envestnet’s wealth management software is a platform of integrated, internet-based technology applications and related services that provide portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing, and back-office and middle-office operations and administration.

The Company’s investment consulting group, Envestnet | PMC, provides investment manager due diligence and research, a full spectrum of investment offerings supported by both proprietary and third-party research and manager selection, and overlay portfolio management services.

Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end Registered Investment Advisors (“RIAs”).

Vantage Reporting Solution software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice.

Envestnet | WMS offers financial institutions access to an integrated wealth platform, which helps construct and manage sophisticated portfolio solutions across an entire account life cycle, particularly in the area of unified managed account trading. Envestnet | WMS’s Overlay Portfolio Management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions.

Through these platform and service offerings, the Company provides open-architecture support for a wide range of investment products (separately managed accounts, multi-manager accounts, mutual funds, exchange-traded funds, stock baskets, alternative investments, and other fee-based investment solutions) from Envestnet | PMC and other leading investment providers via multiple custodians, and also account administration and reporting services.

Envestnet operates four RIAs and a registered broker-dealer. The RIAs are registered with the Securities and Exchange Commission (“SEC”). The broker-dealer is registered with the SEC, all 50 states and the District of Columbia and is a member of the Financial Industry Regulatory Authority (“FINRA”).

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2013 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of June 30, 2014 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2013 was derived from the Company’s audited financial statements for the year ended December 31, 2013 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, costs capitalized for internally developed software, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.

Other Income - On June 18, 2014, the Company reached an agreement with a vendor regarding the recovery of certain expenses the Company incurred in 2013. Under the terms of the agreement, the vendor agreed to pay the Company $1,825. The Company recognized a pre-tax gain of $1,825 resulting from the agreement, which is included in “Other income” in the condensed consolidated statements of operations for the three and six months ended June 30, 2014.

Non-controlling Interest - Effective February 1, 2014, the Company formed Envestnet Retirement Solutions, LLC (“ERS, LLC”) with various third parties. ERS, LLC offers advisory and technology enabled services to financial advisors and retirement plans. In exchange for a 64.5% ownership interest in ERS, LLC, the Company contributed certain assets and has agreed to fund a certain amount of the operating expenses of ERS, LLC.

The allocation of gains and losses to the members of ERS, LLC is based on a hypothetical liquidation book value method in accordance with the ERS, LLC operating agreement. In the three and six months ended June 30, 2014, losses of $69 and $195, respectively, are reflected as non-controlling interest in the condensed consolidated statements of operations.

Recent Accounting Pronouncements - On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

3. Business Acquisitions

Acquisition of Klein Decisions, Inc.

On May 20, 2014, ERS, LLC entered into a stock purchase agreement with Klein Decisions, Inc. (“Klein”). In accordance with the stock purchase agreement, ERS, LLC acquired all of the outstanding shares of Klein for cash consideration of approximately $1,500, a promissory note in the amount of $1,500, and contingent consideration with a minimum guaranteed amount of $1,175, to be paid over three years. The promissory note is payable by ERS, LLC on July 31, 2014. Klein develops dynamic decision systems that incorporate investor preferences, goals, and priorities into the investment process.

On July 1, 2014, ERS, LLC completed the acquisition of Klein. ERS, LLC is currently in the initial phase of gathering financial information and has not completed the estimated fair values of the assets acquired and liabilities assumed.

On July 9, 2014, ERS, LLC accepted the subscription of former owners of Klein (the “Klein Parties”) to purchase an 11.7% ownership interest of ERS, LLC for $1,500. The Klein Parties have the right to require ERS, LLC to repurchase units issued pursuant to the subscription anytime between 18 and approximately 36 months after July 1, 2014 for the amount of $1,500. This purchase obligation is guaranteed by the Company.

After taking into account the subscription of the Klein Parties, the Company’s ownership interest in ERS, LLC is 57%.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

Agreement to Acquire Placemark Holdings, Inc.

On June 30, 2014, Envestnet, Inc. (“Envestnet”) entered into an acquisition agreement and plan of merger (which was amended and restated on August 11, 2014, the “Agreement”) with Placemark Holdings, Inc., a Delaware corporation (“Placemark”), and certain of its shareholders pursuant to which Envestnet will acquire Placemark (the “Acquisition”). Placemark develops Unified Managed Account (“UMA”) programs and other portfolio management outsourcing solutions, including patented portfolio overlay and tax optimization services, for banks, full-service broker-dealers and RIA firms.

Under the terms of the Agreement, Envestnet has agreed to pay an aggregate of $66,000 in cash upon closing of the Acquisition, subject to certain post-closing adjustments. Envestnet expects to fund the Acquisition with available cash and borrowings under its credit agreement (see Note 15).

The Acquisition is subject to customary closing conditions, including certain customer consents, and is expected to be completed during the second half of 2014.

Acquisition of Wealth Management Solutions

On July 1, 2013, the Company acquired the Wealth Management Solutions (“WMS”) division of Prudential Investments LLC. In accordance with the purchase agreement, the Company acquired substantially all of the assets and assumed certain liabilities of WMS for total consideration of $24,730. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings.

The consideration in the acquisition was as follows:

Cash consideration	$	8,992
Contingent consideration	15,738
	$	24,730

In connection with the acquisition of WMS, the Company is required to pay Prudential Investments LLC contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets. The Company recorded a liability as of the date of acquisition of $15,738, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8.

The estimated fair value of contingent consideration as of June 30, 2014 was $17,389. This amount is the present value of an undiscounted liability of $19,137, applying a discount rate of 10%. Payments will be made at the end of three twelve month closing periods. The future undiscounted payments are anticipated to be $6,000 on August 15, 2014, $6,437 on August 15, 2015 and $6,700 on August 15, 2016. The final future payments may be greater or lower than these amounts, based upon the attainment of performance targets. Changes to the estimated fair value of the contingent consideration are recognized in earnings of the Company.

For the three and six months ended June 30, 2014, the Company recognized imputed interest expense on contingent consideration of $412 and $824, respectively. During the three months ended June 30, 2014, the Company recorded a fair value adjustment to decrease the contingent consideration liability by $460 which is included in general and administration expense in the condensed consolidated statement of operations.

Pro forma results for Envestnet, Inc. giving effect to the WMS acquisition

The following pro forma financial information presents the combined results of operations of Envestnet and WMS, acquired on July 1, 2013, for the three and six months ended June 30, 2013. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2013.

The unaudited pro forma results presented include amortization charges for acquired intangible assets, imputed interest expense, stock-based compensation expense and the related tax effect on the aforementioned items.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

Pro forma financial information for the three and six months ended June 30, 2013 is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of the beginning of 2013.

	Three Months Ended			Six Months Ended

Revenues	$	68,247		$	130,705
Net loss	(6,677		)	(11,276		)
Net loss per share:
Basic	(0.21		)	(0.35		)
Diluted	(0.21		)	(0.35		)

4. Property and Equipment

		June 30,			December 31,
	Estimated Useful Life	2014			2013

Cost:
Office furniture and fixtures	5-7 years	$	4,921		$	4,266
Computer equipment and software	3 years	29,743			26,910
Other office equipment	5 years	598			598
Leasehold improvements	Shorter of the lease term or useful life of the asset	9,652			8,299
		44,914			40,073
Less accumulated depreciation and amortization		(30,349		)	(27,307		)
Property and equipment, net		$	14,565		$	12,766

Depreciation and amortization expense was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013

Depreciation and amortization expense	$	1,553	$	1,095	$	3,042	$	2,218

5. Internally Developed Software

Internally developed software consists of the following:

		June 30,			December 31,
	Estimated Useful Life	2014			2013

Internally developed software	5 years	$	18,025		$	16,374
Less accumulated amortization		(11,631		)	(10,634		)
Internally developed software, net		$	6,394		$	5,740

Amortization expense was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013

Amortization expense	$	508	$	418	$	997	$	829

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

6. Intangible Assets

Intangible assets consist of the following:

		June 30, 2014							December 31, 2013
		Gross					Net		Gross					Net
		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Useful Life	Amount		Amortization			Amount		Amount		Amortization			Amount

Customer lists	4 - 12 years	$	42,403	$	(17,665	)	$	24,738	$	42,103	$	(14,593	)	$	27,510
Proprietary technologies	1.5 - 8 years	9,978		(4,482		)	5,496		9,580		(2,792		)	6,788
Trade names	5 years	2,090		(926		)	1,164		2,090		(690		)	1,400
Total intangible assets		$	54,471	$	(23,073	)	$	31,398	$	53,773	$	(18,075	)	$	35,698

Amortization expense was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013

Amortization expense	$	2,554	$	1,568	$	4,998	$	3,152

7. Other Non-Current Assets

Other non-current assets consist of the following:

	June 30,		December 31,
	2014		2013

Investment in private company	$	1,250	$	1,250
Deposits:
Lease	1,784		1,751
Other	436		286
Other	1,640		1,642
	$	5,110	$	4,929

8. Fair Value Measurements

Financial assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:


Level 1:		Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2:		Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data.

Level 3:		Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

The Company periodically invests excess cash in money-market funds not insured by the Federal Deposit Insurance Corporation. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. The fair values of the Company’s investments in money market funds are based on the daily quoted market prices of the net asset value of the various money market funds. These money market funds are considered Level 1 assets, totaled approximately $44,829 and $32,358 as of June 30, 2014 and December 31, 2013, respectively, and are included in cash and cash equivalents in the condensed consolidated balance sheets.

The fair value of the contingent consideration liability related to the WMS acquisition on July 1, 2013 was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASB’s Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows related to our acquisition of WMS during the subsequent three years from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.

The Company utilized a discounted cash flow method with expected future performance of WMS, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent consideration at each reporting date until settlement. Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company.

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liability for the six months ended June 30, 2014:

	Fair Value of Contingent Consideration Liability

Balance at December 31, 2013	$	17,305

Settlement of contingent consideration liability	(158		)
Measurement period adjustment	(122		)
Fair market value adjustment	(460		)
Imputed interest	824
Balance at June 30, 2014	$	17,389

The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels 1, 2 and 3 during the six months ended June 30, 2014.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

9. Accrued Expenses

Accrued expenses consist of the following:

	June 30,		December 31,
	2014		2013

Accrued investment manager fees	$	22,398	$	19,310
Accrued compensation and related taxes	9,181		12,125
Accrued professional services	500		694
Accrued restructuring charges	—		551
Other accrued expenses	1,604		2,562
	$	33,683	$	35,242

10. Income Taxes

The following table includes the Company’s income before income tax provision, income tax provision and effective tax rate:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013

Income before income tax provision	$	6,005		$	1,943		$	10,157		$	2,536
Income tax provision	2,355			825			3,639			877
Effective tax rate	39.2		%	42.5		%	35.8		%	34.6		%

The Company’s effective tax rate in the three months ended June 30, 2014, was lower than the effective tax rate in the three months ended June 30, 2013, primarily due to a decrease in permanent items and a change in the tax rate expected to apply to taxable income. The Company’s effective tax rate in the six months ended June 30, 2014, was higher than the effective tax rate in the six months ended June 30, 2013, due to a benefit recorded in 2013 resulting from a change in the tax rate expected to apply to taxable income.

The liability for unrecognized tax benefits reported in other non-current liabilities was $2,426 and $2,693 at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $1,673. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $200 in the next twelve months due to the completion of reviews by tax authorities, the voluntary filing of certain state income taxes and the expiration of certain statutes of limitations.

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $562 and $636 as of June 30, 2014 and December 31, 2013, respectively.

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company’s tax returns for the calendar years ended December 31, 2013, 2012, 2011 and 2010 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for the calendar years ended December 31, 2013, 2012, 2011, 2010 and 2009 remain open to examination by various state revenue services.

The Company’s Indian subsidiary is currently under examination by the India Tax Authority for the fiscal years ended March 31, 2009, 2011 and 2012. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

11. Stock-Based Compensation

The Company has stock options and restricted stock outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). As of June 30, 2014, the maximum number of stock options and restricted stock available for future issuance under the Company’s plans is 921,799.

Employee stock-based compensation expense under the Company’s plans was as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013

Employee stock-based compensation expense	$	3,199		$	1,960		$	5,767		$	4,266
Tax effect on employee stock-based compensation expense	(1,280		)	(832		)	(2,307		)	(1,475		)
Net effect on income	$	1,919		$	1,128		$	3,460		$	2,791

Stock Options

The following weighted average assumptions were used to value stock options granted during the periods indicated:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014			2013

Grant date fair value of stock options	$	—	$	—	$	16.81		$	6.11
Volatility	—		—		38.7		%	40.4		%
Risk-free interest rate	—		—		1.8		%	1.0		%
Dividend yield	—		—		0.0		%	0.0		%
Expected term (in years)	—		—		6.0			6.0

The following table summarizes stock option activity under the Company’s plans:

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value

Outstanding as of December 31, 2013	4,637,471		$	9.04
Granted	155,753		41.84
Exercised	(95,609	)	8.77
Forfeited	(4,150	)	9.00
Outstanding as of March 31, 2014	4,693,465		10.13		5.3	$	141,293
Granted	—
Exercised	(95,352	)	8.14
Forfeited	(3,300	)	7.80
Outstanding as of June 30, 2014	4,594,813		10.17		5.0	$	178,031
Options exercisable	3,748,286		8.73		4.5	$	150,653

Exercise prices of stock options outstanding as of June 30, 2014 range from $0.11 to $41.84. At June 30, 2014, there was $3,633 of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 2.3 years.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

Restricted Stock

Periodically, the Company grants restricted stock awards to employees that vest one-third on each of the first three anniversaries of the grant date. The following is a summary of the activity for unvested restricted stock awards granted under the Company’s plans:

			Weighted-
			Average Grant
	Number of		Date Fair Value
	Shares		per Share

Balance at December 31, 2013	901,551		$	16.50
Granted	240,626		41.83
Vested	(116,706	)	14.22
Forfeited	(10,324	)	26.94
Balance at March 31, 2014	1,015,147		22.69
Granted	—		—
Vested	(5,671	)	24.60
Forfeited	(4,312	)	29.79
Balance at June 30, 2014	1,005,164		22.65

At June 30, 2014, there was $11,178 of unrecognized compensation expense related to unvested restricted stock awards, which the Company expects to recognize over a weighted-average period of 2.4 years. At June 30, 2014, there was an additional $4,240 of potential unrecognized stock compensation expense related to unvested restricted stock granted under the 2012 Plan that vests based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition, which the Company expects to recognize, if earned, over the remaining estimated vesting period of 0.75 to 2.75 years.

12. Earnings Per Share

Basic net income per share attributable to Envestnet, Inc. is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earnings per share attributable to Envestnet, Inc., the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants and restricted stock using the treasury-stock method.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per share attributable to Envestnet, Inc.:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013

Net income attributable to Envestnet, Inc.	$	3,719	$	1,118	$	6,713	$	1,659

Basic number of weighted-average shares outstanding	34,547,277		32,661,196		34,332,759		32,518,943
Effect of dilutive shares:
Options to purchase common stock	2,166,237		1,805,969		2,198,089		1,605,065
Common warrants	—		609,489		—		523,020
Unvested restricted stock	92,244		87,452		195,273		113,540
Diluted number of weighted-average shares outstanding	36,805,758		35,164,106		36,726,121		34,760,568

Net income per share attribuatable to Envestnet, Inc.:
Basic	$	0.11	$	0.03	$	0.20	$	0.05

Diluted	$	0.10	$	0.03	$	0.18	$	0.05

Common share equivalents for securities that were anti-dilutive and therefore excluded from the computation of diluted net income per share attributable to Envestnet, Inc. were as follows:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013

Options to purchase common stock	155,753	—	155,753	—
Unvested restricted stock	—	348,139	—	348,139

13. Major Customers

One customer accounted for more than 10% of the Company’s total revenues:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013

Fidelity	19	%	23	%	19	%	22	%

14. Commitments and Contingencies

The Company is involved in litigation arising in the ordinary course of its business. The Company does not believe that the outcome of any of the current litigation, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on the Company’s results of operations, financial condition, cash flows or business.

The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries.

Unless otherwise indicated, all amounts are in thousands, except share and per share information, financial advisors and investor accounts.

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:

· difficulty in sustaining rapid revenue growth, which may place significant demands on the Company’s administrative, operational and financial resources;

· fluctuations in the Company’s revenue;

· the concentration of nearly all of the Company’s revenues from the delivery of investment solutions and services to clients in the financial advisory industry;

· the impact of market and economic conditions on the Company’s revenues;

· the Company’s reliance on a limited number of clients for a material portion of its revenue;

· the renegotiation of fee percentages or termination of the Company’s services by its clients;

· the Company’s ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;

· compliance failures;

· regulatory actions against the Company;

· the failure to protect the Company’s intellectual property rights;

· the Company’s inability to successfully execute the conversion of its clients’ assets from their technology platform to the Company’s technology platform in a timely and accurate manner;

· general economic conditions, political and regulatory conditions, and

· management’s response to these factors.

In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forward-looking statements. All forward-looking statements contained in this quarterly report are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward-looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

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Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I under “Risk Factors” in our 2013 Form 10-K; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

You should read this quarterly report on Form 10-Q and our 2013 Form 10-K completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.

The following discussion and analysis should also be read along with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 2013 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

Overview

We are a leading provider of unified wealth management software and services to financial advisors and institutions. By integrating a wide range of investment solutions and services, our technology platforms provides financial advisors with the flexibility to address their clients’ needs. As of June 30, 2014, approximately 33,500 advisors used our technology platforms, supporting approximately $622 billion of assets in approximately 2.5 million investor accounts.

Envestnet empowers financial advisors to deliver fee-based advice to their clients. We work with both Independent Registered Investment Advisors (“RIAs”), as well as advisors associated with financial institutions such as broker-dealers and banks. The services we offer and market to financial advisors address the advisors’ ability to grow their practice as well as to operate more efficiently—the Envestnet platforms span the various elements of the wealth management process, from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice.

Our centrally-hosted technology platforms, which we refer to as having “open architecture” because of their flexibility, provide financial advisors with access to a series of integrated services to help them better serve their clients. These services include risk assessment and selection of investment strategies and solutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party asset custodians.

We offer these solutions principally through the following product and services suites:

· Envestnet’s wealth management software empowers advisors to better manage client outcomes and strengthen their practice. Our software unifies the applications and services advisors use to manage their practice and advise their clients, including financial planning; capital markets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, trading and rebalancing; multi-custodial, aggregated performance reporting; and billing calculation and administration.

· Envestnet | PMC, our Portfolio Management Consultants group primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products. Envestnet | PMC’s investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios and Exchange Traded Fund (“ETF”) portfolios. Envestnet | PMC also offers Prima Premium Research, comprising institutional-quality research and due diligence on investment managers, mutual funds, ETFs and liquid alternatives funds.

· Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end RIAs.

· Vantage Reporting Solution software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice and consulting.

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· Envestnet | WMS offers financial institutions access to an integrated wealth platform, which helps construct and manage sophisticated portfolio solutions across an entire account life cycle, particularly in the area of unified managed account trading. Envestnet | WMS’s Overlay Portfolio Management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions.

Operational Highlights

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 72% from $41,234 in the three months ended June 30, 2013 to $70,727 in the three months ended June 30, 2014. Total revenues, which include licensing and professional service fees, increased 64% from $51,632 in the three months ended June 30, 2013 to $84,829 in the three months ended June 30, 2014.

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 78% from $77,570 in the six months ended June 30, 2013 to $137,808 in the six months ended June 30, 2014. Total revenues, which include licensing and professional service fees, increased 66% from $98,257 in the six months ended June 30, 2013 to $163,368 in the six months ended June 30, 2014.

The increase in total revenues was a result of the positive effects of new account growth and positive net flows of AUM or AUA, as well as an increase in revenues related to the WMS acquisition. Net income attributable to Envestnet, Inc. for the three months ended June 30, 2014 was $3,719, or $0.10 per diluted share, compared to $1,118, or $0.03 per diluted share for the three months ended June 30, 2013. Net income attributable to Envestnet, Inc. for the six months ended June 30, 2014 was $6,713, or $0.18 per diluted share, compared to $1,659, or $0.05 per diluted share for the six months ended June 30, 2013.

Adjusted revenues for the three months ended June 30, 2014 was $84,829, an increase of 64% from $51,655 in the prior year period. Adjusted EBITDA for the three months ended June 30, 2014 was $12,828, an increase of 38% from $9,305 in the prior year period. Adjusted net income for the three months ended June 30, 2014 was $6,616, or $0.18 per diluted share, compared to adjusted net income of $4,513, or $0.13 per diluted share in the prior year period.

Adjusted revenues for the six months ended June 30, 2014 was $163,368, an increase of 66% from $98,417 in the prior year period. Adjusted EBITDA for the six months ended June 30, 2014 was $24,599, an increase of 40% from $17,513 in the prior year period. Adjusted net income for the six months ended June 30, 2014 was $12,917, or $0.35 per diluted share, compared to adjusted net income of $8,584, or $0.25 per diluted share in the prior year period.

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a discussion of non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.

Recent Events

Non-controlling Interest

Effective February 1, 2014, Envestnet formed Envestnet Retirement Solutions, LLC (“ERS, LLC”) with various third parties. ERS, LLC offers advisory and technology enabled services to financial advisors and retirement plans. In exchange for a 64.5% ownership interest in ERS, LLC, Envestnet contributed certain assets and has agreed to fund a certain amount of the operating expenses of ERS, LLC.

Acquisition of Klein Decisions, Inc.

On July 9, 2014, ERS, LLC accepted the subscription of former owners of Klein (the “Klein Parties”) to repurchase an 11.7% ownership interest of ERS, LLC for $1,500. The Klein Parties have the right to require ERS, LLC to purchase units issued pursuant to

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	As of
	June 30,		September 30,		December 31,		March 31,		June 30,
	2013		2013		2013		2014		2014
	(in millions, except accounts and advisors)
Platform Assets
Assets Under Management (AUM)	$	38,705	$	41,932	$	45,706	$	49,383	$	53,063
Assets Under Administration (AUA)	85,601		118,228		132,215		146,748		156,723
Subtotal AUM/A	124,306		160,160		177,921		196,131		209,786
Licensing	302,604		326,567		358,919		376,341		412,141
Total Platform Assets	$	426,910	$	486,727	$	536,840	$	572,472	$	621,927

Platform Accounts
AUM	190,883		200,648		211,039		226,452		239,367
AUA	357,283		456,461		524,806		566,139		596,886
Subtotal AUM/A	548,166		657,109		735,845		792,591		836,253
Licensing	1,365,773		1,425,102		1,508,254		1,559,188		1,659,313
Total Platform Accounts	1,913,939		2,082,211		2,244,099		2,351,779		2,495,566

Advisors
AUM/A	18,154		21,759		22,838		24,369		24,945
Licensing	7,261		7,511		7,794		8,025		8,583
Total Advisors	25,415		29,270		30,632		32,394		33,528

The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.

	Asset Rollforward - Three Months Ended June 30, 2014
	As of 3/31/14		Gross Sales		Redemptions			Net Flows		Market Impact		As of 6/30/14
	(in millions except accounts)
Assets under Management (AUM)	$	49,383	$	4,949	$	(2,789	)	$	2,161	$	1,520	$	53,063
Assets under Administration (AUA)	146,748		13,581		(8,485		)	5,095		4,879		156,723
Total AUM/A	$	196,131	$	18,530	$	(11,274	)	$	7,256	$	6,399	$	209,786
Fee-Based Accounts	792,591		75,442		(31,780		)	43,662				836,253

Gross sales for the three months ended June 30, 2014 included $2.0 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $19.3 billion of conversions in Licensing.

	Asset Rollforward - Six Months Ended June 30, 2014
	As of 12/31/13		Gross Sales		Redemptions			Net Flows		Market Impact		As of 6/30/14
	(in millions except accounts)
Assets under Management (AUM)	$	45,706	$	11,105	$	(5,698	)	$	5,407	$	1,950	$	53,063
Assets under Administration (AUA)	132,215		33,470		(15,618		)	17,852		6,656		156,723
Total AUM/A	$	177,921	$	44,575	$	(21,316	)	$	23,259	$	8,606	$	209,786
Fee-Based Accounts	735,845		160,332		(59,924		)	100,408				836,253

Gross sales for the six months ended June 30, 2014 included $10.4 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $24.4 billion of conversions in Licensing.

The mix of AUM and AUA was as follows for the periods indicated:

	June 30,		September 30,		December 31,		March 31,		June 30,
	2013		2013		2013		2014		2014
Assets under management (AUM)	31	%	31	%	26	%	25	%	25	%
Assets under administration (AUA)	69	%	69	%	74	%	75	%	75	%
	100	%	100	%	100	%	100	%	100	%

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Results of Operations

Three months ended June 30, 2014 compared to three months ended June 30, 2013

	Three Months Ended June 30,				Increase (Decrease)
	2014		2013		Amount		%
			(in thousands)
Revenues:
Assets under management or administration	$	70,727	$	41,234	$	29,493	72	%
Licensing and professional services	14,102		10,398		3,704		36	%
Total revenues	84,829		51,632		33,197		64	%

Operating expenses:
Cost of revenues	37,955		19,638		18,317		93	%
Compensation and benefits	25,157		17,194		7,963		46	%
General and administration	12,936		9,962		2,974		30	%
Depreciation and amortization	4,615		3,081		1,534		50	%
Total operating expenses	80,663		49,875		30,788		62	%
Income from operations	4,166		1,757		2,409		137	%
Other income	1,839		186		1,653		*
Income before income tax provision	6,005		1,943		4,062		209	%
Income tax provision	2,355		825		1,530		185	%
Net income	3,650		1,118		2,532		226	%
Add: Net loss attributable to non-controlling interest	69		—		69		*
Net income attributable to Envestnet, Inc.	$	3,719	$	1,118	$	2,601	233	%

*Not meaningful.

Revenues

Total revenues increased 64% from $51,632 in the three months ended June 30, 2013 to $84,829 in the three months ended June 30, 2014. The increase was primarily due to an increase in revenues from AUM or AUA of $29,493. Revenues from AUM/A were 83% and 80% of total revenues in the three months ended June 30, 2014 and 2013, respectively.

Assets under management or administration

Revenues earned from AUM or AUA increased 72% from $41,234 in the three months ended June 30, 2013 to $70,727 in the three months ended June 30, 2014. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2014, relative to the corresponding period in 2013. In the second quarter of 2014, revenues were positively affected by new account growth and positive net flows of AUM or AUA during 2013 and the first quarter of 2014, as well as an increase in revenues related to the WMS acquisition.

The number of financial advisors with AUM or AUA on our technology platforms increased from 18,154 as of June 30, 2013 to 24,945 as of June 30, 2014 and the number of AUM or AUA investor accounts increased from approximately 548,000 as of June 30, 2013 to approximately 836,000 as of June 30, 2014.

Licensing and professional services

Licensing and professional services revenues increased 36% from $10,398 in the three months ended June 30, 2013 to $14,102 in the three months ended June 30, 2014, primarily due to an increase in licensing revenue of $2,700 and other revenue of $1,630 related to our annual Advisor Summit, offset by a decrease in professional services revenue of $626.

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Cost of revenues

Cost of revenues increased 93% from $19,638 in the three months ended June 30, 2013 to $37,955 in the three months ended June 30, 2014, primarily due to a corresponding increase in revenues from AUM or AUA, an increase related to the additional cost attributable to WMS revenues which have a higher cost profile than our non-WMS business, and costs incurred related to the Advisor Summit of $1,647. As a percentage of total revenues, cost of revenues increased from 38% in the three months ended June 30, 2013 to 45% in the three months ended June 30, 2014.

Compensation and benefits

Compensation and benefits increased 46% from $17,194 in the three months ended June 30, 2013 to $25,157 in the three months ended June 30, 2014, primarily due to an increase in salaries, stock-based compensation and incentive compensation of $7,656 related to an increase in headcount, primarily a result of an increase in headcount associated with the WMS acquisition. As a percentage of total revenues, compensation and benefits decreased from 33% in the three months ended June 30, 2013 to 30% in the three months ended June 30, 2014.

General and administration

General and administration expenses increased 30% from $9,962 in the three months ended June 30, 2013 to $12,936 in the three months ended June 30, 2014, primarily due to increases in professional and legal fees of $1,405, website and systems development costs of $1,052, occupancy costs of $843, communication, research and data services expenses of $348, and travel and entertainment expenses of $392, offset by a decrease in transaction related expenses of $144. As a percentage of total revenues, general and administration expenses decreased from 19% in the three months ended June 30, 2013 to 18% in the three months ended June 30, 2014.

Depreciation and amortization

Depreciation and amortization expense increased 50% from $3,081 in the three months ended June 30, 2013 to $4,615 in the three months ended June 30, 2014, primarily due to an increase in intangible asset amortization of $986 as a result of the WMS acquisition. As a percentage of total revenues, depreciation and amortization expense decreased from 6% in the three months ended June 30, 2013 to 5% in the three months ended June 30, 2014.

Other income

Other income increased by $1,653 primarily as a result of an agreement reached with a vendor regarding the recovery of certain expenses totaling $1,825, which we incurred in 2013.

Income tax provision

	Three Months Ended June 30,
	2014			2013
	(in thousands)
Income tax provision	$	2,355		$	825
Effective tax rate	39.2		%	42.5		%

For the three months ended June 30, 2014, our effective tax rate differs from the statutory rate primarily due to the effect of state taxes, permanent differences and foreign tax expense. For the three months ended June 30, 2013, our effective tax rate differs from the statutory rate primarily due to the effect of state taxes and permanent differences including non-deductible transaction costs.

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Six months ended June 30, 2014 compared to six months ended June 30, 2013

	Six Months Ended June 30,				Increase (Decrease)
	2014		2013		Amount		%
			(in thousands)
Revenues:
Assets under management or administration	$	137,808	$	77,570	$	60,238	78	%
Licensing and professional services	25,560		20,687		4,873		24	%
Total revenues	163,368		98,257		65,111		66	%

Operating expenses:
Cost of revenues	72,392		36,446		35,946		99	%
Compensation and benefits	48,616		34,412		14,204		41	%
General and administration	25,086		18,855		6,231		33	%
Depreciation and amortization	9,037		6,199		2,838		46	%
Total operating expenses	155,131		95,912		59,219		62	%
Income from operations	8,237		2,345		5,892		251	%
Other income	1,920		191		1,729		*
Income before income tax provision	10,157		2,536		7,621		301	%
Income tax provision	3,639		877		2,762		315	%
Net income	6,518		1,659		4,859		293	%
Add: Net loss attributable to non-controlling interest	195		—		195		*
Net income attributable to Envestnet, Inc.	$	6,713	$	1,659	$	5,054	305	%

*Not meaningful.

Revenues

Total revenues increased 66% from $98,257 in the six months ended June 30, 2013 to $163,368 in the six months ended June 30, 2014. The increase was primarily due to an increase in revenues from AUM or AUA of $60,238. Revenues from AUM/A were 84% and 79% of total revenues in the six months ended June 30, 2014 and 2013, respectively.

Assets under management or administration

Revenues earned from AUM or AUA increased 78% from $77,570 in the six months ended June 30, 2013 to $137,808 in the six months ended June 30, 2014. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2014, relative to the corresponding period in 2013. In 2014, revenues were positively affected by new account growth and positive net flows of AUM or AUA during 2013 and the first quarter of 2014, as well as an increase in revenues related to the WMS acquisition.

Licensing and professional services

Licensing and professional services revenues increased 24% from $20,687 in the six months ended June 30, 2013 to $25,560 in the six months ended June 30, 2014, primarily due to an increase in licensing revenue of $4,686 and other revenue of $1,630 related to our annual Advisor Summit, offset by a decrease in professional services revenue of $1,443.

Cost of revenues

Cost of revenues increased 99% from $36,446 in the six months ended June 30, 2013 to $72,392 in the six months ended June 30, 2014, primarily due to a corresponding increase in revenues from AUM or AUA, an increase related to the additional cost attributable to WMS revenues which have a higher cost profile than our non-WMS business, and costs incurred related to the Advisor

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Summit of $1,647. As a percentage of total revenues, cost of revenues increased from 37% in the six months ended June 30, 2013 to 44% in the six months ended June 30, 2014.

Compensation and benefits

Compensation and benefits increased 41% from $34,412 in the six months ended June 30, 2013 to $48,616 in the six months ended June 30, 2014, primarily due to an increase in salaries, stock-based compensation and incentive compensation of $12,653 related to an increase in headcount, primarily a result of an increase in headcount associated with the WMS acquisition. As a percentage of total revenues, compensation and benefits decreased from 35% in the six months ended June 30, 2013 to 30% in the six months ended June 30, 2014.

General and administration

General and administration expenses increased 33% from $18,885 in the six months ended June 30, 2013 to $25,086 in the six months ended June 30, 2014, primarily due to increases in professional and legal fees of $3,065, website and systems development costs of $1,899, occupancy costs of $1,524, communication, research and data services expenses of $840, and travel and entertainment expenses of $728, offset by a decrease in transaction related expenses of $401. As a percentage of total revenues, general and administration expenses decreased from 19% in the six months ended June 30, 2013 to 15% in the six months ended June 30, 2014.

Depreciation and amortization

Depreciation and amortization expense increased 46% from $6,199 in the six months ended June 30, 2013 to $9,037 in the six months ended June 30, 2014, primarily due to an increase in intangible asset amortization of $1,845 as a result of the WMS acquisition. As a percentage of total revenues, depreciation and amortization expense was 6% in the six months ended June 30, 2013 and 2014.

Other income

Other income increased by $1,729 primarily as a result of an agreement reached with a vendor regarding the recovery of certain expenses totaling $1,825, which we incurred in 2013.

Income tax provision

	Six Months Ended June 30,
	2014			2013
	(in thousands)
Income tax provision	$	3,639		$	877
Effective tax rate	35.8		%	34.6		%

For the six months ended June 30, 2014, our effective tax rate differs from the statutory rate primarily due to the effect of permanent differences and the recognition of previously unrecognized tax benefits. For the six months June 30, 2013, our effective tax rate differs from the statutory rate primarily due to the effect of state taxes, permanent differences, the recognition of previously unrecognized tax benefits, and a change in the tax rate expected to apply to taxable income when deferred income taxes are realized.

Non-GAAP Financial Measures

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
	(in thousands)				(in thousands)
Adjusted revenues	$	84,829	$	51,655	$	163,368	$	98,417
Adjusted EBITDA	12,828		9,305		24,599		17,513
Adjusted net income	6,616		4,513		12,917		8,584
Adjusted net income per share	0.18		0.13		0.35		0.25

“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently,

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We understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider:

· Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

· Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect changes in, or cash requirements for, our working capital needs;

· Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect non-cash components of employee compensation;

· Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;

· Due to either net losses before income tax expenses or the use of federal and state net operating loss carryforwards in 2014 and 2013, we had cash income tax payments, net of refunds, of $18 and $2,955 for the six months ended June 30, 2014 and 2013, respectively. Income tax payments will be higher if we continue to generate taxable income and our existing net operating loss carryforwards for federal and state income taxes have been fully utilized or have expired; and

· Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share differently than we do, limiting their usefulness as a comparative measure.

Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted operating income, adjusted net income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable U.S. GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per share to net income and net income per share, the most directly comparable U.S. GAAP measure. Further, our management also reviews U.S. GAAP measures and evaluates individual measures that are not included in some or all of our non-U.S. GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.

The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
	(in thousands)
Total revenues	$	84,829	$	51,632	$	163,368	$	98,257
Deferred revenue fair value adjustment	—		23		—		160
Adjusted revenues	$	84,829	$	51,655	$	163,368	$	98,417

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The following table sets forth a reconciliation of net income to adjusted EBITDA based on our historical results:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(in thousands)
Net income	$	3,650		$	1,118		$	6,518		$	1,659
Add (deduct):
Deferred revenue fair value adjustment	—			23			—			160
Interest income	(14		)	(4		)	(95		)	(9		)
Imputed interest expense on contingent consideration	412			—			824			—
Fair market value adjustment on contingent consideration	(460		)	—			(460		)	—
Income tax provision	2,355			825			3,639			877
Depreciation and amortization	4,615			3,081			9,037			6,199
Non-cash compensation expense	3,199			1,960			5,767			4,447
Restructuring charges and transaction costs	583			704			687			1,054
Re-audit related expenses	—			1,554			—			2,887
Severance	—			44			4			232
Litigation related expense	17			—			17			7
Other income	(1,825		)	—			(1,825		)	—
Pre-tax loss attributable to non-controlling interest*	296			—			486			—
Adjusted EBITDA	$	12,828		$	9,305		$	24,599		$	17,513

* Pre-tax loss attributable to non-controlling interest assumes losses are allocated to ERS, LLC members pro-rata based on ownership percentage.

The following table sets forth the reconciliation of net income to adjusted net income and adjusted net income per share based on our historical results:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014*			2013*		2014*			2013*
	(in thousands)
Net income	$	3,650		$	1,118	$	6,518		$	1,659
Add:
Deferred revenue fair value adjustment	—			13		—			93
Imputed interest expense on contingent consideration	247			—		494			—
Fair market value adjustment on contingent consideration	(276		)			(276		)
Non-cash compensation expense	1,920			1,137		3,461			2,579
Restructuring charges and transaction costs	451			408		513			611
Re-audit related expenses	—			901		—			1,674
Severance	—			26		2			135
Amortization of acquired intangibles	1,532			910		2,998			1,829
Litigation related expense	10			—		10			4
Other income	(1,095		)	—		(1,095		)	—
Net loss attributable to non-controlling interest	177			—		292			—
Adjusted net income	$	6,616		$	4,513	$	12,917		$	8,584

Diluted number of weighted-average shares outstanding	36,805,758			35,164,106		36,726,121			34,760,568

Adjusted net income per share	$	0.18		$	0.13	$	0.35		$	0.25

* Adjustments, excluding non-deductible transaction costs, are tax effected using an income tax rate of 40.0% and 42.0% for 2014 and 2013, respectively.

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Liquidity and Capital Resources

As of June 30, 2014, we had total cash and cash equivalents of $64,464 compared to $49,942 as of December 31, 2013. We plan to use existing cash as of June 30, 2014 and cash generated in the ongoing operations of our business to fund our current operations, capital expenditures, and acquisitions for the remainder of 2014.

Cash Flows

The following table presents information regarding our cash flows and cash and cash equivalents for the periods indicated:

	Six Months Ended
	June 30,
	2014			2013
	(in thousands)

Net cash provided by operating activities	$	17,891		$	10,167
Net cash used in investing activities	(6,492		)	(3,141		)
Net cash provided by financing activities	3,123			2,670
Net increase in cash and cash equivalents	14,522			9,696
Cash and cash equivalents, end of period	64,464			39,679

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2014 increased by $7,724 compared to the same period in 2013, primarily due to an increase in net income of $4,859 and an increase in non-cash adjustments totaling $4,752, offset by a decrease in the change in operating assets and liabilities totaling $1,887.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2014 increased by $3,351 compared to the same period in 2013. The increase is primarily a result of an increase in cash disbursements for the purchase of property and equipment of $3,203.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2014 increased by $453 compared to the same period in 2013, primarily due to an increase in excess tax benefits from stock-based compensation expense of $2,156, offset by an increase in purchase of treasury stock for stock-based minimum tax withholdings of $1,109 and a decrease in proceeds from the issuance of stock options of $589.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K, include the discussion of estimates used for recognition of revenues, purchase accounting, internally developed software, non-cash stock-based compensation expense, and income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from the amounts reported.

Commitments and Off-Balance Sheet Arrangements

Leases and Purchase Obligations

We lease facilities under non-cancelable operating leases expiring at various dates through 2026. See our Form 10-K for the year ended December 31, 2013 for our contractual obligations relating to operating leases and purchase obligations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk

Our exposure to market risk is directly related to revenues from asset management or administration services earned based upon a contractual percentage of AUM or AUA. In the six months ended June 30, 2014, 84% of our revenues were derived from revenues based on the market value of AUM or AUA. We expect this percentage to vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue and income to decline.

Foreign currency risk

The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. For the three and six months ended June 30, 2014, we estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of approximately $238 and $446 to pre-tax earnings, respectively, and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of approximately $195 and $365 to pre-tax earnings, respectively.

Interest rate risk

We have no floating interest rate debt and therefore we are not directly exposed to interest rate risk.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the six months ended June 30, 2014, there were no changes to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in litigation arising in the ordinary course of our business. We do not believe that the outcome of any of the current litigation, individually or in the aggregate, would, if determined adversely to us, have a material adverse effect on our results of operations, financial condition or business.

Item 1A. Risk Factors

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our 2013 Form 10-K, when making investment decisions regarding our securities. The risk factors that were disclosed in our 2013 Form 10-K have not materially changed since the date our 2013 Form 10-K was filed.

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Item 2. Unregistered Sales of Equity Securities

Unregistered Sales of Equity Securities

(c) Issuer Purchases of Equity Securities

					Maximum number (or
				Total number of	approximate dollar
				shares purchased	value) of shares
	Total number	Average		as part of publicaly	that may yet be
	of shares	price paid		announced plans	purchased under the
	purchased	per share		or programs	plans or programs
April 1, 2014 through April 30, 2014	—	$	—	—	—
May 1, 2014 through May 31, 2014	1,200	45.75		—	—
June 1, 2014 through June 30, 2014	746	49.30		—	—

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

See the exhibit index, which is incorporated herein by reference.

Delaware		20-1409613
(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)

35 East Wacker Drive, Suite 2400, Chicago, IL		60601
(Address of principal executive offices)		(Zip Code)

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o

	Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013	4
Condensed Consolidated Statement of Equity for the six months ended June 30, 2014	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	6
Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Forward-Looking Statements	18
Overview	19
Results of Operations	23
Liquidity and Capital Resources	30

Item 3. Quantitative and Qualitative Disclosures About Market Risk	31

Item 4. Controls and Procedures	31

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	31

Item 1A. Risk Factors	31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6. Exhibits	32

	ENVESTNET, INC.

	By:	/s/ Judson Bergman
		Judson Bergman
		*Chairman and Chief Executive Officer*
		*Principal Executive Officer*

	By:	/s/ Peter H. D’Arrigo
		Peter H. D’Arrigo
		*Chief Financial Officer*
		*Principal Financial Officer*

	By:	/s/ Matthew J. Majoros
		Matthew J. Majoros
		*Vice President, Financial Reporting*
		*Principal Accounting Officer*

Exhibit No.		Description
10.1		Amended and Restated Acquisition Agreement and Plan of Merger among Envestnet, Inc., Poseidon Merger Corp., Placemark Holdings, Inc., the Selling Securityholders and Fortis Advisors, LLC, as Securityholder Representative, dated as of August 11, 2014
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1(1)		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document *
101.SCH		XBRL Taxonomy Extension Schema Document *
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB		XBRL Taxonomy Extension Label Linkbase Document *
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *
101 DEF		XBRL Taxonomy Extension Definition Linkbase Document *