Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

For the quarterly period ended June 30, 2014

 

 

Commission file number 001-34835

 

 

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Registrant’s telephone number, including area code:

(312) 827-2800

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

As of August 1, 2014, 34,162,619 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

	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

 

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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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