UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34835
Envestnet, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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20-1409613 |
(State or other jurisdiction of |
|
(I.R.S Employer |
35 East Wacker Drive, Suite 2400, Chicago, IL |
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60601 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants 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 x |
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Accelerated filer o |
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Non-accelerated filer o |
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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, 2015, 35,617,271 shares of the common stock with a par value of $0.005 per share were outstanding.
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Page |
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PART I - FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited) |
|
Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 |
3 |
4 | |
Condensed Consolidated Statement of Equity for the six months ended June 30, 2015 |
5 |
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 |
6 |
7 | |
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|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
|
22 | |
23 | |
27 | |
33 | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
35 |
|
|
35 | |
|
|
| |
|
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37 | |
|
|
37 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
38 |
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38 | |
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38 | |
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38 | |
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38 |
Envestnet, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(unaudited)
|
|
June 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
198,927 |
|
$ |
209,754 |
|
Fees and other receivable, net |
|
29,232 |
|
20,345 |
| ||
Deferred tax assets, net |
|
4,635 |
|
4,654 |
| ||
Prepaid expenses and other current assets |
|
20,653 |
|
7,242 |
| ||
Total current assets |
|
253,447 |
|
241,995 |
| ||
|
|
|
|
|
| ||
Property and equipment, net |
|
18,283 |
|
16,629 |
| ||
Internally developed software, net |
|
7,999 |
|
7,023 |
| ||
Intangible assets, net |
|
67,911 |
|
58,654 |
| ||
Goodwill |
|
126,367 |
|
104,976 |
| ||
Deferred tax assets, net |
|
|
|
565 |
| ||
Other non-current assets |
|
11,621 |
|
9,516 |
| ||
Total assets |
|
$ |
485,628 |
|
$ |
439,358 |
|
|
|
|
|
|
| ||
Liabilities and Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accrued expenses |
|
$ |
48,451 |
|
$ |
48,247 |
|
Accounts payable |
|
6,402 |
|
4,869 |
| ||
Contingent consideration |
|
7,422 |
|
6,405 |
| ||
Deferred revenue |
|
7,872 |
|
5,159 |
| ||
Total current liabilities |
|
70,147 |
|
64,680 |
| ||
|
|
|
|
|
| ||
Convertible notes |
|
147,627 |
|
145,203 |
| ||
Contingent consideration |
|
5,194 |
|
7,462 |
| ||
Deferred revenue |
|
11,893 |
|
6,954 |
| ||
Deferred rent |
|
4,122 |
|
3,588 |
| ||
Lease incentive |
|
5,253 |
|
5,550 |
| ||
Deferred tax liabilities, net |
|
224 |
|
|
| ||
Other non-current liabilities |
|
2,100 |
|
2,430 |
| ||
Total liabilities |
|
246,560 |
|
235,867 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Redeemable units in ERS, LLC |
|
1,500 |
|
1,500 |
| ||
|
|
|
|
|
| ||
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; 47,513,468 and 46,345,376 shares issued as of June 30, 2015 and December 31, 2014, respectively; 35,593,544 and 34,544,653 shares outstanding as of June 30, 2015 and December 31, 2014, respectively |
|
238 |
|
232 |
| ||
Additional paid-in capital |
|
270,967 |
|
233,888 |
| ||
Accumulated deficit |
|
(14,396 |
) |
(19,443 |
) | ||
Treasury stock at cost, 11,919,924 and 11,800,723 shares as of June 30, 2015 and December 31, 2014, respectively |
|
(19,797 |
) |
(13,242 |
) | ||
Total stockholders equity |
|
237,012 |
|
201,435 |
| ||
Non-controlling interest |
|
556 |
|
556 |
| ||
Total equity |
|
237,568 |
|
201,991 |
| ||
Total liabilities and equity |
|
$ |
485,628 |
|
$ |
439,358 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
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, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
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|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Assets under management or administration |
|
$ |
83,819 |
|
$ |
70,727 |
|
$ |
164,896 |
|
$ |
137,808 |
|
Licensing and professional services |
|
18,844 |
|
14,102 |
|
34,221 |
|
25,560 |
| ||||
Total revenues |
|
102,663 |
|
84,829 |
|
199,117 |
|
163,368 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Cost of revenues |
|
42,486 |
|
37,955 |
|
81,181 |
|
72,392 |
| ||||
Compensation and benefits |
|
31,956 |
|
25,157 |
|
63,491 |
|
48,616 |
| ||||
General and administration |
|
15,512 |
|
12,936 |
|
29,721 |
|
25,086 |
| ||||
Depreciation and amortization |
|
5,725 |
|
4,615 |
|
11,058 |
|
9,037 |
| ||||
Restructuring charges |
|
518 |
|
|
|
518 |
|
|
| ||||
Total operating expenses |
|
96,197 |
|
80,663 |
|
185,969 |
|
155,131 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income from operations |
|
6,466 |
|
4,166 |
|
13,148 |
|
8,237 |
| ||||
Other income (expense) |
|
(2,251 |
) |
1,839 |
|
(4,454 |
) |
1,920 |
| ||||
Income before income tax provision |
|
4,215 |
|
6,005 |
|
8,694 |
|
10,157 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax provision |
|
1,679 |
|
2,355 |
|
3,647 |
|
3,639 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
2,536 |
|
3,650 |
|
5,047 |
|
6,518 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Add: Net loss attributable to non-controlling interest |
|
|
|
69 |
|
|
|
195 |
| ||||
Net income attributable to Envestnet, Inc. |
|
$ |
2,536 |
|
$ |
3,719 |
|
$ |
5,047 |
|
$ |
6,713 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share attributable to Envestnet, Inc.: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.07 |
|
$ |
0.11 |
|
$ |
0.14 |
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted |
|
$ |
0.07 |
|
$ |
0.10 |
|
$ |
0.13 |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
35,776,125 |
|
34,547,277 |
|
35,463,623 |
|
34,332,759 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Diluted |
|
37,654,074 |
|
36,805,758 |
|
37,504,028 |
|
36,726,121 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statement of Equity
(in thousands, except share information)
(unaudited)
|
|
Common Stock |
|
Treasury Stock |
|
Additional |
|
|
|
|
|
|
| ||||||||||
|
|
Shares |
|
Amount |
|
Common |
|
Amount |
|
Paid-in |
|
Accumulated |
|
Non-controlling |
|
Total Equity |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2014 |
|
46,345,376 |
|
$ |
232 |
|
(11,800,723 |
) |
$ |
(13,242 |
) |
$ |
233,888 |
|
$ |
(19,443 |
) |
$ |
556 |
|
$ |
201,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercise of stock options |
|
686,516 |
|
3 |
|
|
|
|
|
5,906 |
|
|
|
|
|
5,909 |
| ||||||
Issuance of common stock for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
vesting of restricted stock |
|
358,166 |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
| ||||||
acquisition of business |
|
123,410 |
|
1 |
|
|
|
|
|
8,929 |
|
|
|
|
|
8,930 |
| ||||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
6,749 |
|
|
|
|
|
6,749 |
| ||||||
Excess tax benefits from stock-based compensation expense |
|
|
|
|
|
|
|
|
|
15,495 |
|
|
|
|
|
15,495 |
| ||||||
Purchase of treasury stock for stock-based minimum tax withholdings |
|
|
|
|
|
(119,201 |
) |
(6,555 |
) |
|
|
|
|
|
|
(6,555 |
) | ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
5,047 |
|
|
|
5,047 |
| ||||||
Balance, June 30, 2015 |
|
47,513,468 |
|
$ |
238 |
|
(11,919,924 |
) |
$ |
(19,797 |
) |
$ |
270,967 |
|
$ |
(14,396 |
) |
$ |
556 |
|
$ |
237,568 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
Six Months Ended |
| ||||
|
|
June 30, |
| ||||
|
|
2015 |
|
2014 |
| ||
OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income |
|
$ |
5,047 |
|
$ |
6,518 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
11,058 |
|
9,037 |
| ||
Deferred rent and lease incentive |
|
219 |
|
1,123 |
| ||
Provision for doubtful accounts |
|
37 |
|
|
| ||
Deferred income taxes |
|
808 |
|
|
| ||
Stock-based compensation |
|
6,749 |
|
5,767 |
| ||
Excess tax benefits from stock-based compensation |
|
(15,495 |
) |
(3,203 |
) | ||
Interest expense |
|
4,697 |
|
|
| ||
Accretion on contingent consideration |
|
651 |
|
824 |
| ||
Fair market value adjustment on contingent consideration |
|
(1,902 |
) |
(460 |
) | ||
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
| ||
Fees receivable |
|
(8,825 |
) |
(5,009 |
) | ||
Prepaid expenses and other current assets |
|
2,090 |
|
2,455 |
| ||
Other non-current assets |
|
(1,244 |
) |
(1,136 |
) | ||
Accrued expenses |
|
(6,323 |
) |
(1,559 |
) | ||
Accounts payable |
|
1,439 |
|
1,200 |
| ||
Deferred revenue |
|
5,978 |
|
2,190 |
| ||
Other non-current liabilities |
|
(330 |
) |
144 |
| ||
Net cash provided by operating activities |
|
4,654 |
|
17,891 |
| ||
|
|
|
|
|
| ||
INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchase of property and equipment |
|
(4,912 |
) |
(4,841 |
) | ||
Capitalization of internally developed software |
|
(2,208 |
) |
(1,651 |
) | ||
Investment in private company |
|
(1,500 |
) |
|
| ||
Acquisition of businesses, net of cash acquired |
|
(21,712 |
) |
|
| ||
Net cash used in investing activities |
|
(30,332 |
) |
(6,492 |
) | ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES: |
|
|
|
|
| ||
Proceeds from exercise of stock options |
|
5,909 |
|
1,615 |
| ||
Purchase of treasury stock for stock-based minimum tax withholdings |
|
(6,555 |
) |
(1,695 |
) | ||
Excess tax benefits from stock-based compensation expense |
|
15,495 |
|
3,203 |
| ||
Issuance of restricted stock |
|
2 |
|
|
| ||
Net cash provided by financing activities |
|
14,851 |
|
3,123 |
| ||
|
|
|
|
|
| ||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
(10,827 |
) |
14,522 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
209,754 |
|
49,942 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
198,927 |
|
$ |
64,464 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information - cash paid during the period for income taxes, net of refunds |
|
$ |
791 |
|
$ |
18 |
|
Supplemental disclosure of cash flow information - cash paid during the period for interest |
|
1,634 |
|
|
| ||
Supplemental disclosure of non-cash operating, investing and financing activities: |
|
|
|
|
| ||
Leasehold improvements funded by lease incentive |
|
36 |
|
|
| ||
Settlement of contingent consideration liability upon issuance of ERS, LLC membership interest |
|
|
|
158 |
| ||
Stock and stock options issued in acquisition of business |
|
8,930 |
|
|
| ||
Purchase of fixed assets included in accounts payable |
|
126 |
|
|
| ||
Purchase liabilities included in accrued expenses |
|
3,520 |
|
|
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
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 Envestnets wealth management software, Envestnet | PMC®, Envestnet | Tamarac, Vantage Reporting Solution, Envestnet | WMS and Envestnet | Placemark.
Envestnets 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 Companys 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 advisers (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 | WMSs Overlay Portfolio Management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions.
Envestnet | 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.
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 six 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, 2015 and for the three and six months ended June 30, 2015 and 2014 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, 2014 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Companys financial position as of June 30, 2015 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2014 was derived from the Companys audited financial statements for the year ended December 31, 2014 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, 2015 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 Companys Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015.
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.
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.
The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company may adopt the standard in either its first quarter of 2017 or 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its condensed consolidated financial statements.
3. Business Acquisitions
Upside Holdings, Inc.
On February 24, 2015, Envestnet, Inc. (the Company) acquired all of the stock of Upside Holdings, Inc. (including its subsidiaries Upside) for consideration totaling $3,040, subject to certain post-closing adjustments.
Upside is a technology company that is registered as an Internet Investment Adviser under Rule 203A-2(f) of the Investment Advisers Act of 1940 (Advisers Act). Upside helps financial advisors compete against other digital advisors, or robo advisors, by leveraging technology and algorithms to advise, manage, and serve clients who want personalized investment services.
The Company acquired Upside to integrate its technology within the Companys unified wealth management platform, which will allow advisors to compete more aggressively to engage their clients online and reach a new class of investors. The goodwill arising from the acquisition represents the advantage of this integrated technology, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
As a result of the acquisition of Upside, the Company provided for the future grant of unvested restricted stock awards to Upside employees at the end of each year in 2015, 2016 and 2017 upon Upside meeting certain performance conditions and then a subsequent two year service condition (Note 13). If 100 percent of the awards are earned for 2015, 2016 and 2017, the maximum number of shares that could be granted for 2015, 2016 and 2017 equals 22,064, 44,128 and 66,192 shares of common stock, respectively The Company has determined the payments to be categorized as compensation expense. As of June 30, 2015, no amounts have been recognized as it is currently estimated that the performance targets will not be attained in 2015.
The consideration transferred in the acquisition was as follows:
Upfront consideration |
|
$ |
2,425 |
|
Purchase liabilities |
|
615 |
| |
Working capital settlement |
|
(385 |
) | |
Cash acquired |
|
(14 |
) | |
|
|
$ |
2,641 |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Total tangible assets acquired |
|
$ |
6 |
|
Total liabilities assumed |
|
(404 |
) | |
Identifiable intangible assets |
|
1,450 |
| |
Goodwill |
|
1,589 |
| |
Total net assets acquired |
|
$ |
2,641 |
|
The estimated useful life and amortization method of the intangible asset acquired is as follows:
|
|
Amount |
|
Weighted Average Useful |
|
Amortization |
| |
Proprietary technology |
|
$ |
1,450 |
|
4 |
|
Straight-line |
|
The results of Upsides operations are included in the condensed consolidated statement of operations beginning February 24, 2015, and are not considered material to the Companys results of operations.
For the three and six months ended June 30, 2015, acquisition related costs for Upside totaled $15 and $217 and are included in general and administration expenses.
Oltis Software LLC
On May 6, 2015, the Company acquired all of the issued and outstanding membership interests of Oltis Software LLC (d/b/a Finance Logix®), an Arizona limited liability company (Finance Logix). Finance Logix provides financial planning and wealth management software solutions to banks, broker-dealers and RIAs.
The Company paid upfront consideration of $20,595 in cash, purchase liabilities of $2,905, 123,410 in shares of Envestnet common stock with a fair value of $6,388 and 123,410 stock options to acquire Envestnet common stock at $52.67 per share with an estimated fair value of $2,542.
The Company acquired Finance Logix to integrate its technology within the Companys unified wealth management platform, which will allow advisors to offer financial planning that flows seamlessly into portfolio construction and ongoing management on a single platform. Finance Logix allows us to deliver that capability and increase the breadth of our platform and the functionality gap between our platform and competing platforms. The goodwill arising from the acquisition represents cross-selling opportunities, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is deductible for income tax purposes.
In connection with the acquisition of Finance Logix, the Company is required to pay the former owner of Finance Logix future payments in a mix of cash, stock and stock options, based on Finance Logix meeting annual net revenue targets of $5,000, $10,000 and $16,000 for calendar years 2015, 2016 and 2017, respectively, with lower payments for performance below the three yearly targets and a higher payment in 2017 for performance above the target. The Company has preliminarily determined the first payment related to the 2015 target to be categorized as compensation expense and the payments, if any, related to 2016 and 2017 targets, to be categorized as contingent consideration. The Company did not record compensation expense as of June 30, 2015 and preliminarily did not record a contingent consideration liability as of the date of acquisition as payment is not expected to occur at this time.
Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
As of June 30, 2015, the Company has not finalized the opening balance sheet (including taxes), contingent consideration, nor has the Company finalized its valuation of Finance Logixs intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. The Company expects to finalize the valuation of the intangible assets and deferred revenue, and complete the acquisition accounting as soon as practicable but no later than March 31, 2016.
The preliminary estimated consideration transferred in the acquisition was as follows:
Cash consideration |
|
$ |
20,595 |
|
Stock and stock option consideration |
|
8,930 |
| |
Purchase liabilities |
|
2,905 |
| |
Cash acquired |
|
(909 |
) | |
|
|
$ |
31,521 |
|
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Total tangible assets acquired |
|
$ |
99 |
|
Total liabilities assumed |
|
(2,880 |
) | |
Identifiable intangible assets |
|
14,500 |
| |
Goodwill |
|
19,802 |
| |
Total net assets acquired |
|
$ |
31,521 |
|
A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:
|
|
Amount |
|
Weighted Average Useful |
|
Amortization |
| |
Customer list |
|
$ |
12,500 |
|
12 |
|
Accelerated |
|
Proprietary technology |
|
2,000 |
|
4 |
|
Straight-line |
| |
Total |
|
$ |
14,500 |
|
|
|
|
|
The results of Finance Logixs operations are included in the condensed consolidated statement of operations beginning May 6, 2015. Finance Logixs revenues and net loss for the three and six month periods ended June 30, 2015 totaled $472 and $328, respectively. The net loss includes estimated acquired intangible asset amortization of $329.
For the three and six months ended June 30, 2015, acquisition related costs for Finance Logix totaled $231 and $375, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the third quarter of 2015.
Pro forma results for Envestnet, Inc. giving effect to the Placemark and Finance Logix acquisitions
The following pro forma financial information presents the combined results of operations of Envestnet and Finance Logix for the three and six month periods ended June 30, 2015 and Envestnet, Finance Logix, and Placemark for the three and six months ended June 30, 2014. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2014. The results of Upside are not included in the pro forma financial information presented below as the Upside acquisition was not considered material to the Companys results of operations.
The unaudited pro forma results presented include amortization charges for acquired intangible assets, stock-based compensation expense and the related tax effect on the aforementioned items.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
Pro forma financial information 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 2014.
|
|
Three Months Ended |
|
Six Months Ended |
| ||||
|
|
June 30, |
|
June 30, |
| ||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
102,932 |
|
90,982 |
|
200,137 |
|
175,103 |
|
Net income |
|
2,300 |
|
2,575 |
|
4,565 |
|
4,350 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
0.06 |
|
0.07 |
|
0.13 |
|
0.13 |
|
Diluted |
|
0.06 |
|
0.07 |
|
0.12 |
|
0.12 |
|
4. Property and Equipment
|
|
|
|
June 30, |
|
December 31, |
| ||
|
|
Estimated Useful Life |
|
2015 |
|
2014 |
| ||
|
|
|
|
|
|
|
| ||
Cost: |
|
|
|
|
|
|
| ||
Office furniture and fixtures |
|
5-7 years |
|
$ |
4,869 |
|
$ |
4,993 |
|
Computer equipment and software |
|
3 years |
|
22,459 |
|
18,540 |
| ||
Other office equipment |
|
5 years |
|
124 |
|
144 |
| ||
Leasehold improvements |
|
Shorter of the lease term or useful life of the asset |
|
11,378 |
|
10,805 |
| ||
|
|
|
|
38,830 |
|
34,482 |
| ||
Less accumulated depreciation and amortization |
|
|
|
(20,547 |
) |
(17,853 |
) | ||
Property and equipment, net |
|
|
|
$ |
18,283 |
|
$ |
16,629 |
|
During the three and six months ended June 30, 2015, the Company retired fully depreciated property and equipment that were no longer in service with cost and accumulated depreciation amounts of $564.
Depreciation and amortization expense was as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
|
$ |
1,658 |
|
$ |
1,553 |
|
$ |
3,133 |
|
$ |
3,042 |
|
5. Internally Developed Software
Internally developed software consists of the following:
|
|
|
|
June 30, |
|
December 31, |
| ||
|
|
Estimated Useful Life |
|
2015 |
|
2014 |
| ||
|
|
|
|
|
|
|
| ||
Internally developed software |
|
5 years |
|
$ |
21,785 |
|
$ |
19,577 |
|
Less accumulated amortization |
|
|
|
(13,786 |
) |
(12,554 |
) | ||
Internally developed software, net |
|
|
|
$ |
7,999 |
|
$ |
7,023 |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
Amortization expense was as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization expense |
|
$ |
632 |
|
$ |
508 |
|
$ |
1,232 |
|
$ |
997 |
|
6. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows:
Balance at December 31, 2014 |
|
$ |
104,976 |
|
Upside acquisition |
|
1,589 |
| |
Finance Logix acquisition |
|
19,802 |
| |
Balance at June 30, 2015 |
|
$ |
126,367 |
|
Intangible assets consist of the following:
|
|
|
|
June 30, 2015 |
|
December 31, 2014 |
| ||||||||||||||
|
|
|
|
Gross |
|
|
|
Net |
|
Gross |
|
|
|
Net |
| ||||||
|
|
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Carrying |
|
Accumulated |
|
Carrying |
| ||||||
|
|
Useful Life |
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer lists |
|
4 - 12 years |
|
$ |
81,103 |
|
$ |
(26,606 |
) |
$ |
54,497 |
|
$ |
68,603 |
|
$ |
(21,699 |
) |
$ |
46,904 |
|
Proprietary technologies |
|
1.5 - 8 years |
|
19,128 |
|
(7,259 |
) |
11,869 |
|
15,678 |
|
(5,808 |
) |
9,870 |
| ||||||
Trade names |
|
5 years |
|
3,090 |
|
(1,545 |
) |
1,545 |
|
3,090 |
|
(1,210 |
) |
1,880 |
| ||||||
Total intangible assets |
|
|
|
$ |
103,321 |
|
$ |
(35,410 |
) |
$ |
67,911 |
|
$ |
87,371 |
|
$ |
(28,717 |
) |
$ |
58,654 |
|
Amortization expense was as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization expense |
|
$ |
3,560 |
|
$ |
2,554 |
|
$ |
6,693 |
|
$ |
4,998 |
|
7. Other Non-Current Assets
Other non-current assets consist of the following:
|
|
June 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Investment in private companies |
|
$ |
2,750 |
|
$ |
1,250 |
|
Deposits: |
|
|
|
|
| ||
Lease |
|
2,180 |
|
1,811 |
| ||
Other |
|
474 |
|
436 |
| ||
Unamortized convertible debt issuance costs |
|
4,184 |
|
4,612 |
| ||
Other |
|
2,033 |
|
1,407 |
| ||
|
|
$ |
11,621 |
|
$ |
9,516 |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
On April 1, 2015, the Company purchased 150,000 Class B units representing 10.3% of the outstanding membership interests of AlphaHedge Capital Partners, LLC, (AlphaHedge) a Delaware limited liability company for cash consideration of $1,500 which is included in investments in private companies. This amount is included in other non-current assets on the condensed consolidated balance sheet. AlphaHedge is a liquid alternatives platform providing access to strategies from a select group of long/short equity managers in a custodian agnostic, separately managed account format. The Company will use the equity method of accounting to record its portion of the AlphaHedge net income or loss on a one quarter lag from AlphaHedges actual results of operations. No results of their operations have been included in the condensed consolidated financial statements as of June 30, 2015.
8. Fair Value Measurements
The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the companys choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
Financial assets and liabilities recorded at fair value in the 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 managements 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. |
Fair Value on a Recurring Basis:
The Company periodically invests excess cash in money-market funds not insured by the FDIC. 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 Companys investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds. These money-market funds totaled approximately $41,363 and $70,760 as of June 30, 2015 and December 31, 2014, 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 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 and included in general and administrative expense on the condensed consolidated statement of operations.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
The fair value of the contingent consideration liability related to the Klein acquisition on July 1, 2014 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 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 Klein 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 Klein 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 and included in general and administrative expense on the condensed consolidated statement of operations.
The table below sets forth a summary of changes in the fair value of the Companys Level 3 liability for the six months ended June 30, 2015:
|
|
Fair Value of |
| |
|
|
|
| |
Balance at December 31, 2014 |
|
$ |
13,867 |
|
Fair market value adjustments |
|
(1,902 |
) | |
Imputed interest |
|
651 |
| |
Balance at June 30, 2015 |
|
$ |
12,616 |
|
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 Companys 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 quarter.
Following are the carrying and fair value of the Companys debt obligation as of June 30, 2015. The fair value of the Convertible Notes was calculated using observable market data and is considered a Level 1 liability.
|
|
June 30, 2015 |
| ||||
|
|
Carrying |
|
Fair |
| ||
|
|
Value |
|
Value |
| ||
2019 Convertible Notes (principal amount outstanding of $172,500) |
|
$ |
147,627 |
(1) |
$ |
169,913 |
|
(1) Represents the aggregate principal amount outstanding of the Convertible Notes less the unaccreted discount.
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, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Accrued investment manager fees |
|
$ |
28,170 |
|
$ |
25,195 |
|
Accrued compensation and related taxes |
|
12,787 |
|
18,344 |
| ||
Accrued professional services |
|
424 |
|
536 |
| ||
Estimated accrued software license fees |
|
|
|
800 |
| ||
Acquisition related purchase liabilities |
|
3,497 |
|
|
| ||
Accrued restructuring charges |
|
518 |
|
|
| ||
Other accrued expenses |
|
3,055 |
|
3,372 |
| ||
|
|
$ |
48,451 |
|
$ |
48,247 |
|
Acquisition related purchase liabilities represent future payments to former Upside and Finance Logix owners of $615 and $2,905, respectively, related to indemnity holdback amounts as of June 30, 2015.
During the second quarter of 2015, the Company closed its Wellesley office in order to more appropriately align and manage the Companys resources. In the three and six months ended June 30, 2015, the Company recognized pre-tax restructuring charges of $518, primarily for future lease payments.
10. Income Taxes
The following table includes the Companys income before income tax provision, income tax provision and effective tax rate:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income tax provision |
|
$ |
4,215 |
|
$ |
6,005 |
|
$ |
8,694 |
|
$ |
10,157 |
|
Income tax provision |
|
1,679 |
|
2,355 |
|
3,647 |
|
3,639 |
| ||||
Effective tax rate |
|
40.0 |
% |
39.2 |
% |
41.9 |
% |
35.8 |
% | ||||
The Companys effective tax rate in the three months ended June 30, 2015, was slightly higher than the effective tax rate in the three months ended June 30, 2014, primarily due to an increase in the blended state tax rate and an uncertain tax position current year accrual related to transfer pricing. The Companys effective tax rate in the six months ended June 30, 2015, was higher than the effective tax rate in the six months ended June 30, 2014, primarily due to the increase in tax rate for federal purposes from 34% to 35%, an increase in the blended state tax rate, the true-up on India unremitted earnings that was recorded in the six months ended June 30, 2014 and not in the same period in 2015, the release of certain uncertain tax position reserves in the six months ended June 30, 2014 that were not repeated in the same period in 2015 and non-recognition of a loss from a subsidiary due to a full valuation allowance.
The liability for unrecognized tax benefits reported in other non-current liabilities was $1,994 and $2,092 at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the amount of unrecognized tax benefits that would benefit the Companys effective tax rate, if recognized, was $1,870. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $1,614 in the next twelve months due to the completion of reviews by tax authorities 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 $423 and $594 as of June 30, 2015 and December 31, 2014, respectively.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
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 Companys tax returns for the calendar years ended December 31, 2013, 2012, and 2011 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Companys tax returns for calendar years ended December 31, 2013, 2012, 2011, 2010 and 2009 remain open to examination by various state revenue services.
The Companys Indian subsidiary is currently under examination by the India Tax Authority for the fiscal year ended March 31, 2011 and 2012. It is possible that one or more of these audits may be finalized within the next twelve months.
Included in prepaid expenses and other current assets on the condensed consolidated balance sheet as of June 30, 2015, is $16,303 related to tax benefits from stock-based compensation.
11. Debt
The Companys outstanding debt obligations were as follows:
|
|
June 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Convertible Notes |
|
$ |
172,500 |
|
$ |
172,500 |
|
Unaccreted discount on Convertible Notes |
|
(24,873 |
) |
(27,297 |
) | ||
|
|
$ |
147,627 |
|
$ |
145,203 |
|
Credit Agreement
In 2014, the Company and certain of its subsidiaries entered into a credit agreement (the Credit Agreement) with a group of banks (the Banks), for which Bank of Montreal is acting as administrative agent, pursuant to which the Banks agreed to provide an unsecured revolving credit facility of $100,000 with a sublimit for the issuance of letters of credit of $5,000. Subject to certain conditions, the Company has the right to increase the facility by up to $25,000. The Credit Agreement is scheduled to mature on December 8, 2017, at which time any aggregate principal amount of borrowings outstanding would become payable in full. Any borrowings made under the Credit Agreement accrued interest at rates between 1.50 percent and 3.25 percent above LIBOR based on the Companys total leverage ratio. There is also a commitment fee equal to 0.25 percent per annum on the daily unused portion of the facility.
Borrowings under the Credit Agreement will be guaranteed by substantially all of the Companys U.S. subsidiaries. Proceeds under the Credit Agreement may be used to finance capital expenditures, to finance working capital, to finance permitted acquisitions and for general corporate purposes.
The Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum adjusted EBITDA, and provisions that limit the ability of the Company and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities. As of June 30, 2015, there were no amounts outstanding under the Credit Agreement. The Company was in compliance with all covenants of the Credit Agreement as of June 30, 2015.
Convertible Notes
On December 15, 2014, the Company issued $172,500 of Convertible Notes. Net proceeds from the offering were $166,967. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 15 and December 15 of each year. The first coupon payment was made on June 15, 2015.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes rank equally in right of payment with all of the Companys existing and future senior indebtedness and will be senior in right of payment to any of the Companys future subordinated indebtedness. The Convertible Notes will be structurally subordinated to the indebtedness and other liabilities of any of our subsidiaries, other than to the extent the Convertible Notes are guaranteed in the future by our subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness. Certain of our subsidiaries guarantee our obligations under our Credit Agreement.
Upon the occurrence of a fundamental change, as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at 100% of the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest.
The Convertible Notes are convertible into shares of the Companys common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; or (c) upon the occurrence of specified corporate events as defined in the indenture.
Upon conversion, the Company may pay cash, shares of the Companys common stock or a combination of cash and stock, as determined by the Company in its discretion.
The Company has separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds from issuance of the Convertible Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618 to the equity component, net of offering costs of $882. The Company recorded a discount on the Convertible Notes of $27,500 which will be accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three and six-month periods ended June 30, 2015, the Company recognized $1,214 and $2,424, respectively, in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes for the six-month period ended June 30, 2015 was 6.0%.
In connection with the issuance of the Convertible Notes, the Company incurred $4,651 of issuance costs, which are recorded in other non-current assets (see Note 7). These costs are being amortized and are recorded as additional interest expense over the life of the Convertible Notes.
Interest expense on the Convertible Notes was comprised of the following:
|
|
Three Months Ended |
|
Six Months Ended |
| ||
|
|
June 30, 2015 |
|
June 30, 2015 |
| ||
|
|
|
|
|
| ||
Coupon interest |
|
$ |
755 |
|
$ |
1,510 |
|
Amortization of issuance costs |
|
224 |
|
465 |
| ||
Accretion of debt discount |
|
1,214 |
|
2,424 |
| ||
|
|
$ |
2,193 |
|
$ |
4,399 |
|
See Note 13 for further discussion of the effect of conversion on net income per common share.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
12. 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). On May 13, 2015, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 2,700,000 shares. As of June 30, 2015, the maximum number of stock options and restricted stock available for future issuance under the Companys plans is 3,022,264.
Employee stock-based compensation expense under the Companys plans was as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Employee stock-based compensation expense |
|
$ |
3,330 |
|
$ |
3,199 |
|
$ |
6,749 |
|
$ |
5,767 |
|
Tax effect on employee stock-based compensation expense |
|
(1,332 |
) |
(1,280 |
) |
(2,700 |
) |
(2,307 |
) | ||||
Net effect on income |
|
$ |
1,998 |
|
$ |
1,919 |
|
$ |
4,049 |
|
$ |
3,460 |
|
Stock Options
The following weighted average assumptions were used to value options granted during the periods indicated:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Grant date fair value of options |
|
$ |
20.60 |
|
$ |
|
|
$ |
20.90 |
|
$ |
16.81 |
|
Volatility |
|
36.8 |
% |
|
|
37.2 |
% |
38.7 |
% | ||||
Risk-free interest rate |
|
1.8 |
% |
|
|
1.7 |
% |
1.8 |
% | ||||
Dividend yield |
|
0.0 |
% |
|
|
0.0 |
% |
0.0 |
% | ||||
Expected term (in years) |
|
6.0 |
|
|
|
6.0 |
|
6.0 |
| ||||
The following table summarizes option activity under the Companys plans:
|
|
Options |
|
Weighted- |
|
Weighted- |
|
Aggregate |
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding as of December 31, 2014 |
|
4,265,337 |
|
$ |
10.73 |
|
|
|
|
| |
Granted |
|
148,677 |
|
54.02 |
|
|
|
|
| ||
Exercised |
|
(415,512 |
) |
8.93 |
|
|
|
|
| ||
Forfeited |
|
(9,941 |
) |
24.94 |
|
|
|
|
| ||
Outstanding as of March 31, 2015 |
|
3,988,561 |
|
12.50 |
|
4.8 |
|
$ |
173,837 |
| |
Granted |
|
123,410 |
|
52.67 |
|
|
|
|
| ||
Exercised |
|
(271,004 |
) |
8.12 |
|
|
|
|
| ||
Forfeited |
|
(28,403 |
) |
46.07 |
|
|
|
|
| ||
Outstanding as of June 30, 2015 |
|
3,812,564 |
|
13.86 |
|
4.8 |
|
105,196 |
| ||
Options exercisable |
|
3,469,757 |
|
11.03 |
|
4.4 |
|
103,576 |
| ||
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
Exercise prices of stock options outstanding as of June 30, 2015 range from $0.11 to $55.29. At June 30, 2015, there was $4,834 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 2.3 years.
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 Companys plans:
|
|
|
|
Weighted- |
| |
|
|
|
|
Average Grant |
| |
|
|
Number of |
|
Date Fair Value |
| |
|
|
Shares |
|
per Share |
| |
|
|
|
|
|
| |
Balance at December 31, 2014 |
|
1,098,674 |
|
$ |
33.72 |
|
Granted |
|
207,531 |
|
53.89 |
| |
Vested |
|
(358,166 |
) |
20.44 |
| |
Forfeited |
|
(6,628 |
) |
33.53 |
| |
Balance at March 31, 2015 |
|
941,411 |
|
38.61 |
| |
Forfeited |
|
(5,869 |
) |
45.98 |
| |
Balance at June 30, 2015 |
|
935,542 |
|
43.18 |
| |
At June 30, 2015, there was $19,418 of unrecognized stock-based compensation expense related to unvested restricted stock awards, which the Company expects to recognize over a weighted-average period of 2.2 years. At June 30, 2015, there was an additional $1,580 of potential unrecognized stock-based 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 over the remaining estimated vesting period of 1.75 years.
13. Earnings Per Share
Basic net income per common share 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, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock and Convertible Notes using the treasury stock method.
The Company accounts for the effect of the Convertible Notes on diluted net income per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Companys option. As a result, the Convertible Notes have no effect on diluted net income per share until the Companys stock price exceeds the conversion price of $62.88 per share. In the period of conversion, the Convertible Notes will have no impact on diluted net income if the Convertible Notes are settled in cash and will have an impact on dilutive net income per share if the Convertible Notes are settled in shares upon conversion.
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, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Envestnet, Inc. |
|
$ |
2,536 |
|
$ |
3,719 |
|
$ |
5,047 |
|
$ |
6,713 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic number of weighted-average shares outstanding |
|
35,776,125 |
|
34,547,277 |
|
35,463,623 |
|
34,332,759 |
| ||||
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
| ||||
Options to purchase common stock |
|
1,776,028 |
|
2,166,237 |
|
1,887,942 |
|
2,198,089 |
| ||||
Unvested restricted stock |
|
101,921 |
|
92,244 |
|
152,463 |
|
195,273 |
| ||||
Diluted number of weighted-average shares outstanding |
|
37,654,074 |
|
36,805,758 |
|
37,504,028 |
|
36,726,121 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income per share attribuatable to Envestnet, Inc.: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.07 |
|
$ |
0.11 |
|
$ |
0.14 |
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted |
|
$ |
0.07 |
|
$ |
0.10 |
|
$ |
0.13 |
|
$ |
0.18 |
|
Common share equivalents for securities that were anti-dilutive or otherwise 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, |
| ||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
271,181 |
|
155,753 |
|
271,181 |
|
155,753 |
|
Unvested restricted stock |
|
205,786 |
|
|
|
137,191 |
|
|
|
Ungranted unvested restricted stock related to Upside |
|
132,384 |
|
|
|
132,384 |
|
|
|
Convertible notes |
|
2,743,321 |
|
|
|
2,743,321 |
|
|
|
Total |
|
3,352,672 |
|
155,753 |
|
3,284,077 |
|
155,753 |
|
14. Major Customers
One customer accounted for more than 10% of the Companys total revenues:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||
|
|
June 30, |
|
June 30, |
| ||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
Fidelity |
|
18 |
% |
19 |
% |
18 |
% |
19 |
% |
15. 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 Companys results of operations, financial condition, cash flows or business.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
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.
The Company rents office space under leases that expire at various dates through 2026. Future minimum lease commitments under these operating leases, as of June 30, 2015, were as follows:
Years ending December 31: |
|
|
| |
Remainder of 2015 |
|
$ |
3,704 |
|
2016 |
|
8,059 |
| |
2017 |
|
7,143 |
| |
2018 |
|
6,727 |
| |
2019 |
|
6,628 |
| |
Thereafter |
|
23,238 |
| |
Total |
|
$ |
55,499 |
|
16. Subsequent Events
Yodlee, Inc.
On August 10, 2015, the Company entered into an agreement and plan of merger (the Merger Agreement) with Yodlee, Inc., a Delaware corporation (Yodlee) and Yale Merger Corp., a Delaware corporation and a wholly owned subsidiary of the Company (Merger Sub). Pursuant to the Merger Agreement, Merger Sub will merge with and into Yodlee, with Yodlee continuing as the surviving corporation (the Merger) and a wholly owned indirect subsidiary of the Company.
Yodlee is a leading cloud-based platform driving digital financial innovation. Yodlee powers digital financial solutions for over 20 million paid subscribers and over 850 financial institutions and financial technology innovators. Founded in 1999, the company has built a network of over 14,000 data sources and been awarded 72 patents.
The Company will acquire all of the shares of Yodlee in a cash and stock transaction valued at $18.88 per share, or approximately $660 million on a fully-diluted equity basis. As Yodlee has approximately $70 million in cash and cash equivalents, the transaction reflects an enterprise value of approximately $590 million. The deal price consists of $10.78 per share in cash and $8.10 per share in Envestnet stock, and is expected to be funded with available balance sheet cash, Envestnet stock and up to $200 million in committed debt financing.
The stock portion of the consideration will be determined based upon the volume weighted average price per share of Envestnet common stock for the 10 consecutive trading days ending on (and including) the second trading day immediately prior to completion of the transaction, subject to a collar of $39.006 to $47.674 per share. The amount of Envestnet stock to be issued in the transaction is limited to 19.9% of Envestnets outstanding common stock as of immediately prior to the closing of the transaction. In order to remain below that threshold, Envestnet will pay up to an additional $32 million in cash in the aggregate at closing.
The Merger Agreement contains certain termination rights, including, among others, the right of either party to terminate the Merger Agreement if the Merger does not occur by February 15, 2016 and the right of Envestnet to terminate the Merger Agreement due to the withdrawal or adverse change of the recommendation by the Yodlee Board of Directors. If the Merger Agreement is terminated by Envestnet, in certain circumstances described in the Merger Agreement, a termination fee equal to approximately $18 million will be payable by Yodlee to Envestnet.
In connection with the definitive agreement, funds affiliated with Warburg Pincus, which collectively own approximately 26.9 percent of Yodlees common stock, have entered into a voting agreement pursuant to which it has committed to support the transaction.
The transaction is expected to close in the fourth quarter of 2015 or in the first quarter of 2016, subject to receipt of regulatory approvals and other customary closing conditions, as well as approval by Yodlee stockholders. Envestnet and Yodlee will continue to operate separately until the transaction closes.
Item 2. Managements 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, numbers of financial advisors and client accounts.
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 Managements 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 Companys administrative, operational and financial resources,
· fluctuations in the Companys revenue,
· the concentration of nearly all of the Companys 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 Companys revenues,
· the Companys reliance on a limited number of clients for a material portion of its revenue,
· the renegotiation of fee percentages or termination of the Companys services by its clients,
· the Companys ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies, including the acquisition of Yodlee Inc.,
· compliance failures,
· regulatory actions against the Company,
· the failure to protect the Companys intellectual property rights,
· the Companys inability to successfully execute the conversion of its clients assets from their technology platform to the Companys technology platform in a timely and accurate manner,
· general economic conditions, political and regulatory conditions,
· the impact of fluctuations in interest rates on the Companys business
· market conditions and our ability to issue additional debt and equity, and
· managements 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 annual report and documents incorporated herein by reference 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.
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; 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 annual report on Form 10-K for the year ended December 31, 2014 (the 2014 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 2014 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.
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 provide financial advisors with the flexibility to address their clients needs. As of June 30, 2015, approximately 42,400 advisors used our technology platforms, supporting approximately $793 billion of assets in approximately 3.1 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 efficientlythe 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 service suites:
· Envestnets 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, provides consulting services provide financial advisors with additional support in addressing their clients needs, as well as the creation of proprietary investment solutions and products. Envestnet | PMCs 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 (CRM) 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.
· 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 (UMA) trading. Envestnet | WMSs Overlay Portfolio Management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions.
· Envestnet | Placemark develops 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.
Operational Highlights
Revenues from assets under management (AUM) or assets under administration (AUA) or collectively (AUM/A) increased 19% from $70,727 in the three months ended June, 2014 to $83,819 in the three months ended June 30, 2015. Total revenues, which include licensing and professional service fees, increased 21% from $84,829 in the three months ended June 30, 2014 to $102,663 in the three months ended June 30, 2015.
Revenues from assets under management (AUM) or assets under administration (AUA) or collectively (AUM/A) increased 20% from $137,808 in the six months ended June, 2014 to $164,896 in the six months ended June 30, 2015. Total revenues, which include licensing and professional service fees, increased 22% from $163,368 in the six months ended June 30, 2014 to $199,117 in the six months ended June 30, 2015.
The increase in total revenues was a result of the positive effects of new account growth and positive net flows of AUM/AUA, as well as an increase in revenues resulting from the October 2014 acquisition of Placemark Holdings, Inc. (Placemark). Net income attributable to Envestnet, Inc. for the three months ended June 30, 2015 was $2,536, or $0.07 per diluted share, compared to $3,719, or $0.10 per diluted share for the three months ended June 30, 2014. Net income attributable to Envestnet, Inc. for the six months ended June 30, 2015 was $5,047, or $0.13 per diluted share, compared to $6,713, or $0.18 per diluted share for the six months ended June 30, 2014.
Adjusted revenues for the three months ended June 30, 2015 was $102,663, an increase of 21% from $84,829 in the prior year period. Adjusted EBITDA for the three months ended June 30, 2015 was $17,613, an increase of 37% from $12,828 in the prior year period. Adjusted net income for the three months ended June 30, 2015 was $8,853, or $0.24 per diluted share, compared to adjusted net income of $6,616, or $0.18 per diluted share in the prior year period.
Adjusted revenues for the six months ended June 30, 2015 was $199,117, an increase of 22% from $163,368 in the prior year period. Adjusted EBITDA for the six months ended June 30, 2015 was $34,427, an increase of 40% from $24,599 in the prior year period. Adjusted net income for the six months ended June 30, 2015 was $17,101, or $0.46 per diluted share, compared to adjusted net income of $12,917, or $0.35 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
Upside Holdings, Inc.
On February 24, 2015, Envestnet acquired all of the stock of Upside Holdings, Inc. (including its subsidiaries Upside) for consideration totaling $3,040, subject to certain post-closing adjustments.
Upside is a technology company that is registered as an Internet Investment Adviser under Rule 203A-2(f) of the Investment Advisers Act of 1940 (Advisers Act). Upside helps financial advisors compete against other digital advisors, or robo advisors, by leveraging technology and algorithms to advise, manage, and serve clients who want personalized investment services.
Envestnet acquired Upside to integrate its technology within our unified wealth management platform, which will allow advisors to compete more aggressively to engage their clients online and reach a new class of investors.
As a result of the acquisition of Upside, Envestnet provided for the future grant of unvested restricted stock awards to Upside employees at the end of each year in 2015, 2016 and 2017 upon Upside meeting certain performance conditions and then a subsequent two year service condition (Note 13). If 100 percent of the awards are earned for 2015, 2016 and 2017, the maximum number of shares that could be granted for 2015, 2016 and 2017 equals 22,064, 44,128 and 66,192 shares of common stock, respectively. Envestnet has determined the payments to be categorized as compensation expense. As of June 30, 2015, no amounts have been recognized as it is currently estimated that the performance targets will not be attained in 2015.
AlphaHedge Capital Partners, LLC
On April 1, 2015, Envestnet purchased 150,000 Class B units representing 10.3% of the outstanding membership interests of AlphaHedge Capital Partners, LLC, (AlphaHedge) a Delaware limited liability company for cash consideration of $1,500. AlphaHedge is a liquid alternatives platform providing access to strategies from a select group of long/short equity managers in a custodian agnostic, separately managed account format. Envestnet will use the equity method of accounting to record its portion of the AlphaHedge net income or loss on a one quarter lag from AlphaHedges actual results of operations. No results of their operations have been included in condensed financial statements as of June 30, 2015.
Oltis Software LLC
On May 6, 2015, Envestnet acquired all of the issued and outstanding membership interests of Oltis Software LLC (d/b/a Finance Logix®), an Arizona limited liability company (Finance Logix). Finance Logix provides financial planning and wealth management software solutions banks, broker-dealers and RIAs.
Under the terms of the Agreement, Envestnet paid upfront consideration of $20,595 in cash, purchase liabilities of $2,905, 123,410 in shares of Envestnet common stock with a fair value of $6,388 and 123,410 stock options to acquire Envestnet common stock at $52.67 per share, with an estimated fair value of $2,542. Envestnet has also agreed to pay an earn-out (in a mix of cash, stock and options) over a three year period, subject to Finance Logix meeting certain financial targets and other customary conditions as discussed below. See Note 3 of the notes to the condensed consolidated financial statements.
In connection with the acquisition of Finance Logix, Envestnet is required to pay the former owner of Finance Logix future payments in a mix of cash, stock and stock options, based on Finance Logix meeting annual net revenue targets of $5,000, $10,000 and $16,000 for calendar years 2015, 2016 and 2017, respectively, with lower payments for performance below the three yearly targets and a higher payment in 2017 for performance above the target. Envestnet has preliminarily determined the first payment related to the 2015 target to be categorized as compensation expense and the payments, if any, related to 2016 and 2017 targets, to be categorized as contingent consideration. Envestnet did not record compensation expense as of June 30, 2015 and preliminary did not record a contingent consideration liability as of the date of acquisition.
As of June 30, 2015, the Envestnet has not finalized the opening balance sheet (including taxes), contingent consideration, nor has Envestnet finalized its valuation of Finance Logixs possible intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. Envestnet expects to finalize the valuation of the intangible assets and deferred revenue, and complete the acquisition accounting as soon as practicable but no later than March 31, 2016.
Yodlee, Inc.
On August 10, 2015, Envestnet entered into an agreement and plan of merger (the Merger Agreement) with Yodlee, Inc., a Delaware corporation (Yodlee) and Yale Merger Corp., a Delaware corporation and a wholly owned subsidiary of the Company (Merger Sub). Pursuant to the Merger Agreement, Merger Sub will merge with and into Yodlee, with Yodlee continuing as the surviving corporation (the Merger) and a wholly owned indirect subsidiary of the Company.
Yodlee is a leading cloud-based platform driving digital financial innovation. Yodlee powers digital financial solutions for over 20 million paid subscribers and over 850 financial institutions and financial technology innovators. Founded in 1999, the company has built a network of over 14,000 data sources and been awarded 72 patents.
Envestnet will acquire all of the shares of Yodlee in a cash and stock transaction valued at $18.88 per share, or approximately $660 million on a fully-diluted equity basis. As Yodlee has approximately $70 million in cash and cash equivalents, the transaction reflects an enterprise value of approximately $590 million. The deal price consists of $10.78 per share in cash and $8.10 per share in Envestnet stock, and is expected to be funded with available balance sheet cash, Envestnet stock and up to $200 million in committed debt financing.
The stock portion of the consideration will be determined based upon the volume weighted average price per share of Envestnet common stock for the 10 consecutive trading days ending on (and including) the second trading day immediately prior to completion of the transaction, subject to a collar of $39.006 to $47.674 per share. The amount of Envestnet stock to be issued in the transaction is limited to 19.9% of Envestnets outstanding common stock as of immediately prior to the closing of the transaction. In order to remain below that threshold, Envestnet will pay up to an additional $32 million in cash in the aggregate at closing.
The Merger Agreement contains certain termination rights, including, among others, the right of either party to terminate the Merger Agreement if the Merger does not occur by February 15, 2016 and the right of Envestnet to terminate the Merger Agreement due to the withdrawal or adverse change of the recommendation by the Yodlee Board of Directors. If the Merger Agreement is terminated by Envestnet, in certain circumstances described in the Merger Agreement, a termination fee equal to approximately $18 million will be payable by Yodlee to Envestnet.
In connection with the definitive agreement, funds affiliated with Warburg Pincus, which collectively own approximately 26.9 percent of Yodlees common stock, have entered into a voting agreement pursuant to which it has committed to support the transaction.
The transaction is expected to close in the fourth quarter of 2015 or in the first quarter of 2016, subject to receipt of regulatory approvals and other customary closing conditions, as well as approval by Yodlee stockholders. Envestnet and Yodlee will continue to operate separately until the transaction closes.
Key Operating Metrics
The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated. AUM/A metrics in the table below include Placemark, which added approximately $15.4 billion in assets, 45,000 accounts and 3,400 advisors as of October 1, 2014.
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|
As of |
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|
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
| |||||
|
|
2014 |
|
2014 |
|
2014 |
|
2015 |
|
2015 |
| |||||
|
|
(in millions, except accounts and advisor data) |
| |||||||||||||
Platform Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Assets Under Management (AUM) |
|
$ |
53,063 |
|
$ |
54,935 |
|
$ |
72,120 |
|
$ |
74,643 |
|
$ |
75,922 |
|
Assets Under Administration (AUA) |
|
156,723 |
|
164,639 |
|
174,249 |
|
181,239 |
|
181,922 |
| |||||
Subtotal AUM/A |
|
209,786 |
|
219,574 |
|
246,369 |
|
255,882 |
|
257,844 |
| |||||
Licensing |
|
412,141 |
|
448,169 |
|
466,982 |
|
493,284 |
|
534,674 |
| |||||
Total Platform Assets |
|
$ |
621,927 |
|
$ |
667,743 |
|
$ |
713,351 |
|
$ |
749,166 |
|
$ |
792,518 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Platform Accounts |
|
|
|
|
|
|
|
|
|
|
| |||||
AUM |
|
239,367 |
|
255,359 |
|
310,351 |
|
319,896 |
|
332,738 |
| |||||
AUA |
|
596,886 |
|
642,192 |
|
667,274 |
|
679,753 |
|
695,463 |
| |||||
Subtotal AUM/A |
|
836,253 |
|
897,551 |
|
977,625 |
|
999,649 |
|
1,028,201 |
| |||||
Licensing |
|
1,659,313 |
|
1,830,678 |
|
1,881,352 |
|
1,982,773 |
|
2,044,355 |
| |||||
Total Platform Accounts |
|
2,495,566 |
|
2,728,229 |
|
2,858,977 |
|
2,982,422 |
|
3,072,556 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Advisors |
|
|
|
|
|
|
|
|
|
|
| |||||
AUM/A |
|
24,945 |
|
24,887 |
|
28,605 |
|
29,023 |
|
29,541 |
| |||||
Licensing |
|
8,583 |
|
11,266 |
|
11,632 |
|
12,306 |
|
12,870 |
| |||||
Total Advisors |
|
33,528 |
|
36,153 |
|
40,237 |
|
41,329 |
|
42,411 |
|
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, 2015 |
| |||||||||||||||||||
|
|
As of 3/31/15 |
|
Gross |
|
Redemptions |
|
Net Flows |
|
Market |
|
Reclass to |
|
As of 6/30/15 |
| |||||||
|
|
(in millions except accounts) |
| |||||||||||||||||||
Assets under Management (AUM) |
|
$ |
74,643 |
|
$ |
6,665 |
|
$ |
(4,629 |
) |
$ |
2,036 |
|
$ |
(757 |
) |
$ |
|
|
$ |
75,922 |
|
Assets under Administration (AUA) |
|
181,239 |
|
15,330 |
|
(10,352 |
) |
4,978 |
|
(1,157 |
) |
(3,138 |
) |
181,922 |
| |||||||
Total AUM/A |
|
$ |
255,882 |
|
$ |
21,995 |
|
$ |
(14,981 |
) |
$ |
7,014 |
|
$ |
(1,914 |
) |
$ |
(3,138 |
) |
$ |
257,844 |
|
Fee-Based Accounts |
|
999,649 |
|
86,218 |
|
(47,859 |
) |
38,359 |
|
|
|
(9,807 |
) |
1,028,201 |
|
The above AUM/A gross sales figures include $1.3 billion in new client conversions. The Company onboarded an additional $44.4 billion in licensing conversions during the three months ended June 30, 2015. Also during the second quarter, approximately $3.1 billion in assets were reclassified from AUA to Licensing in connection with client conversion activity.
|
|
Asset Rollforward - Six Months Ended June 30, 2015 |
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|
|
As of 12/31/14 |
|
Gross |
|
Redemptions |
|
Net Flows |
|
Market Impact |
|
Reclass to |
|
As of 6/30/15 |
| |||||||
|
|
(in millions except accounts) |
| |||||||||||||||||||
Assets under Management (AUM) |