Table of Contents

3

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

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

 

20-1409613

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S Employer
Identification No.)

 

 

35 East Wacker Drive, Suite 2400, Chicago, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

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 ☒  No ☐

 

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 ☒  No ☐

 

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

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of May 3, 2017, 43,828,109 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

1


 

Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION 

3

 

 

Item 1. Financial Statements (Unaudited) 

3

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 

3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 

4

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016 

5

Condensed Consolidated Statement of Equity for the three months ended March 31, 2017 

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 

7

Notes to Unaudited Condensed Consolidated Financial Statements 

8

 

 

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

26

Forward-Looking Statements 

26

Overview 

27

Results of Operations 

31

Liquidity and Capital Resources 

41

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

43

 

 

Item 4. Controls and Procedures 

44

 

 

PART II - OTHER INFORMATION 

46

 

 

Item 1. Legal Proceedings 

46

 

 

Item 1A. Risk Factors 

46

 

 

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

46

 

 

Item 3. Defaults Upon Senior Securities 

47

 

 

Item 4. Mine Safety Disclosures 

47

 

 

Item 5. Other Information 

47

 

 

Item 6. Exhibits 

47

 

 

2


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,479

 

$

52,592

Fees and other receivables, net

 

 

44,731

 

 

44,268

Prepaid expenses and other current assets

 

 

20,156

 

 

16,224

Total current assets

 

 

104,366

 

 

113,084

 

 

 

 

 

 

 

Property and equipment, net

 

 

33,540

 

 

33,000

Internally developed software, net

 

 

15,792

 

 

14,860

Intangible assets, net

 

 

254,973

 

 

265,558

Goodwill

 

 

432,339

 

 

431,936

Other non-current assets

 

 

13,135

 

 

13,963

Total assets

 

$

854,145

 

$

872,401

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

79,272

 

$

87,763

Accounts payable

 

 

12,618

 

 

11,480

Current portion of debt

 

 

60,221

 

 

37,926

Contingent consideration

 

 

 —

 

 

2,286

Deferred revenue

 

 

19,591

 

 

16,499

Total current liabilities

 

 

171,702

 

 

155,954

 

 

 

 

 

 

 

Convertible Notes

 

 

154,146

 

 

152,575

Term Notes

 

 

70,448

 

 

100,409

Contingent consideration

 

 

2,700

 

 

2,582

Deferred revenue

 

 

15,170

 

 

15,643

Deferred rent and lease incentive

 

 

12,327

 

 

12,060

Deferred tax liabilities, net

 

 

8,239

 

 

5,555

Other non-current liabilities

 

 

14,614

 

 

13,436

Total liabilities

 

 

449,346

 

 

458,214

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units in ERS

 

 

900

 

 

900

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; 56,364,799 and 55,642,686 shares issued as of March 31, 2017 and December 31, 2016, respectively; 43,785,653 and 43,240,567 shares outstanding as of March 31, 2017 and December 31, 2016, respectively

 

 

282

 

 

278

Additional paid-in capital

 

 

526,335

 

 

516,675

Accumulated deficit

 

 

(83,709)

 

 

(70,574)

Treasury stock at cost, 12,579,146 and 12,402,119 shares as of March 31, 2017 and December 31, 2016, respectively

 

 

(39,718)

 

 

(33,068)

Accumulated other comprehensive income (loss)

 

 

311

 

 

(422)

Total stockholders’ equity

 

 

403,501

 

 

412,889

Non-controlling interest

 

 

398

 

 

398

Total equity

 

 

403,899

 

 

413,287

Total liabilities and equity

 

$

854,145

 

$

872,401

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Revenues:

 

 

 

 

 

 

Assets under management or administration

 

$

94,162

 

$

82,871

Subscription and licensing

 

 

57,910

 

 

43,620

Professional services and other

 

 

5,714

 

 

5,330

Total revenues

 

 

157,786

 

 

131,821

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Cost of revenues

 

 

49,226

 

 

40,158

Compensation and benefits

 

 

65,532

 

 

62,616

General and administration

 

 

30,547

 

 

25,727

Depreciation and amortization

 

 

15,835

 

 

16,080

Total operating expenses

 

 

161,140

 

 

144,581

 

 

 

 

 

 

 

Loss from operations

 

 

(3,354)

 

 

(12,760)

Other expense, net

 

 

(5,483)

 

 

(3,949)

Loss before income tax provision

 

 

(8,837)

 

 

(16,709)

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

4,298

 

 

(5,716)

 

 

 

 

 

 

 

Net loss

 

 

(13,135)

 

 

(10,993)

Add: Net loss attributable to non-controlling interest

 

 

 —

 

 

 —

Net loss attributable to Envestnet, Inc.

 

$

(13,135)

 

$

(10,993)

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

Basic

 

$

(0.30)

 

$

(0.26)

 

 

 

 

 

 

 

Diluted

 

$

(0.30)

 

$

(0.26)

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

 

43,362,037

 

 

42,506,557

 

 

 

 

 

 

 

Diluted

 

 

43,362,037

 

 

42,506,557

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(13,135)

 

$

(10,993)

Other comprehensive income, net of taxes

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

733

 

 

(15)

Gains on foreign currency contracts designated as cash flow hedges reclassified to earnings

 

 

 —

 

 

177

Total other comprehensive income, net of taxes

 

 

733

 

 

162

Comprehensive loss, net of taxes

 

$

(12,402)

 

$

(10,831)

 

 

 

 

 

 

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

 

 

5


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Other

 

 

 

 

Non-

 

Total

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Stockholders’

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Interest

    

Equity

Balance, December 31, 2016

 

55,642,686

 

$

278

 

(12,402,119)

 

$

(33,068)

 

$

516,675

 

$

(422)

 

$

(70,574)

 

$

398

 

$

413,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

208,334

 

 

 1

 

 —

 

 

 —

 

 

1,899

 

 

 —

 

 

 —

 

 

 —

 

 

1,900

Issuance of common stock - vesting of restricted stock units

 

513,779

 

 

 3

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,761

 

 

 —

 

 

 —

 

 

 —

 

 

7,761

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(177,027)

 

 

(6,650)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,650)

Foreign currency translation loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

733

 

 

 —

 

 

 —

 

 

733

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,135)

 

 

 —

 

 

(13,135)

Balance, March 31, 2017

 

56,364,799

 

$

282

 

(12,579,146)

 

$

(39,718)

 

$

526,335

 

$

311

 

$

(83,709)

 

$

398

 

$

403,899

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(13,135)

 

$

(10,993)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

15,835

 

 

16,080

Deferred rent and lease incentive

 

 

182

 

 

(171)

Provision for doubtful accounts

 

 

82

 

 

23

Deferred income taxes

 

 

2,684

 

 

3,599

Stock-based compensation expense

 

 

7,458

 

 

11,615

Non-cash interest expense

 

 

3,522

 

 

2,013

Accretion on contingent consideration and purchase liability

 

 

156

 

 

62

Fair market value adjustment on contingent consideration

 

 

 —

 

 

50

Loss allocation from equity method investment

 

 

285

 

 

 —

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees and other receivables

 

 

(545)

 

 

11,278

Prepaid expenses and other current assets

 

 

(3,932)

 

 

(9,780)

Other non-current assets

 

 

543

 

 

(1,556)

Accrued expenses and other liabilities

 

 

(8,758)

 

 

(11,335)

Accounts payable

 

 

865

 

 

32

Deferred revenue

 

 

2,619

 

 

2,181

Other non-current liabilities

 

 

1,140

 

 

418

Net cash provided by operating activities

 

 

9,001

 

 

13,516

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,007)

 

 

(1,811)

Capitalization of internally developed software

 

 

(2,091)

 

 

(1,388)

Purchase of ERS units

 

 

 —

 

 

(1,500)

Acquisition of businesses, net of cash acquired

 

 

 —

 

 

(18,125)

Net cash used in investing activities

 

 

(6,098)

 

 

(22,824)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings on revolving credit facility

 

 

25,000

 

 

15,000

Payment on revolving credit facility

 

 

 —

 

 

(13,000)

Payments of contingent consideration

 

 

(2,286)

 

 

 —

Payments of definite consideration

 

 

(445)

 

 

 —

Payment of term notes

 

 

(33,862)

 

 

(2,000)

Proceeds from exercise of stock options

 

 

1,900

 

 

1,207

Purchase of treasury stock for stock-based tax withholdings

 

 

(6,650)

 

 

(7,071)

Issuance of restricted stock units

 

 

 3

 

 

 4

Net cash used in financing activities

 

 

(16,340)

 

 

(5,860)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

324

 

 

 —

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(13,113)

 

 

(15,168)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

52,592

 

 

51,718

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

39,479

 

$

36,550

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information - net cash refunded during the period for income taxes

 

$

(716)

 

$

(1,513)

Supplemental disclosure of cash flow information - cash paid during the period for interest

 

 

1,414

 

 

2,079

Supplemental disclosure of non-cash operating, investing and financing activities:

 

 

 

 

 

 

Contingent consideration issued in a business acquisition

 

 

 —

 

 

1,929

Purchase liabilities included in accrued expenses

 

 

 —

 

 

269

Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities

 

 

471

 

 

 —

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

7


 

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 intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting software, services and data, delivering better intelligence and enabling its customers to drive better outcomes.

 

The Company offers these solutions principally through the following product/services suites:

·

Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting.  Advisors have access to over 17,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.

 

·

Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management (“CRM”) software, principally to highend registered investment advisers (“RIA”).

 

·

Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services for advisor-sold retirement plans. Leveraging integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically.

 

·

Envestnet | PMC®, or Portfolio Management Consultants (“PMC”) – provides research due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 4,000 vetted managed account products, multi-manager portfolios, fund strategist portfolios, as well as proprietary products, such as Quantitative Portfolios.  PMC also offers an Overlay Service, which includes patented portfolio overlay and tax optimization services.

 

·

Envestnet | Yodlee is a leading data aggregation and data intelligence platform.  As a “big data” specialist, Yodlee gathers, refines and aggregates a massive set of end-user permissioned transaction level data, which it then provides to customers as data analytics solutions and market research 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 March 31, 2017 and for the three months ended March 31, 2017 and 2016 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, 2016 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2017 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of March 31, 2017 was derived from the Company’s audited financial statements for the year ended December 31, 2016 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet segment that are denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet | Yodlee segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a foreign currency functional currency are translated at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates. Differences arising from these foreign currency translations are recorded in the condensed consolidated balance sheets as accumulated other comprehensive income (loss) within shareholders' equity. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.


 

Table of Contents

 

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, 2016, filed with the SEC on March 24, 2017.

 

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 to prepare these condensed consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of restricted stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, fair value of the liability portion of the convertible debt and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.

 

Share repurchase program – On February 25, 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other transactions or otherwise, all in compliance with applicable laws and other restrictions. As of March 31, 2017, 1,956,390 shares could still be purchased under this program. For the three month period ended March 31, 2017 the Company purchased no shares with respect to this program. 

 

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” 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. However, 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 will adopt the standard in its first quarter of 2018.

 

In 2016, the Company began evaluating the impact of the adoption of the new revenue standard on its consolidated financial statements, including enhanced disclosures, as well as assessing the impact on systems, processes, controls. The Company expects the new revenue standard to have an impact on the estimation of variable transaction considerations, the allocation of variable considerations across distinct services, and the tracking and amortization of contract costs.  We expect to begin capitalizing certain costs to obtain and fulfill a contract upon adoption of the new standard and are currently in the process of evaluating the period over which to amortize these capitalized costs. The Company has not yet quantified these amounts.

 

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. Although the Company has not finalized the adoption disclosure approach, the Company currently anticipates applying the standard retrospectively with the cumulative effect recognized as of the date of adoption.

 

In February 2016, the FASB issued ASU 2016-02, “Leases.” This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from the lease, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

9


 

Table of Contents

In March 2016, The FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This update is intended to reduce the cost and complexity of accounting for share-based payments; however, some changes may also increase volatility in reported earnings. Under the new guidance, all excess tax benefits and deficiencies will be recorded as an income tax benefit or expense in the income statement and excess tax benefits will be recorded as an operating activity in the statements of cash flows.   Upon adoption, we determined that we did not have previously unrecognized excess tax benefits to be recognized on a modified retrospective transition method as an adjustment to retained earnings.  The new guidance also allows withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. We did not elect an accounting policy change to withhold at the maximum individual statutory tax rate.  The cash paid to satisfy the statutory income tax withholding obligation will continue to be classified as a financing activity in the statements of cash flows.  Lastly, the update allows forfeitures to be estimated or recognized when they occur. The requirements for the excess tax effects related to share-based payments at settlement must be applied on a prospective basis, and the other requirements under this standard are to be applied on a retrospective basis. We did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.  This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. These changes became effective for the Company’s fiscal year beginning January 1, 2017 and have been reflected in these condensed consolidated financial statements. As a result of the adoption of ASU 2016-09, for the three months ended March 31, 2016, net cash provided by operating activities decreased by $275 with a corresponding offset to net cash used for financing activities.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. The ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. Upon adoption, the Company does not anticipate significant changes to the Company’s existing accounting policies or presentation of the consolidated statements of cash flows.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),” which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the timing of adoption; however it does not believe this ASU will have material impact on the Company’s consolidated financial statements. 

 

3.Business Acquisitions

 

Wheelhouse Analytics LLC 

   

On October 3, 2016, the Company acquired all of the issued and outstanding membership interests of Wheelhouse Analytics LLC (“Wheelhouse”). Wheelhouse is a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. Wheelhouse is included in the Yodlee segment.

   

The Company acquired Wheelhouse to be integrated with Yodlee’s industry-leading data and analytics solutions to strengthen Envestnet’s data-driven insights to financial advisors, asset managers and enterprises enabling them to better manage their businesses and client relationships and deliver better outcomes to their clients. Envestnet expects to deeply integrate Wheelhouse’s tools, delivering robust online dashboards and reporting that provides actionable intelligence.

   

In connection with the acquisition of Wheelhouse, the Company paid cash consideration of $13,299 and is required to pay contingent consideration with the aggregate amount not to exceed $4,000 and certain holdbacks upon release. Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

   

10


 

Table of Contents

The preliminary estimated consideration transferred in the acquisition was as follows:

 

 

 

 

 

Cash consideration

 

$

13,299

Contingent consideration liability

 

 

2,582

Purchase consideration liability

 

 

887

Working capital adjustment

 

 

110

Cash acquired

 

 

(80)

Total

 

$

16,798

The estimated fair values of certain working capital balances, contingent consideration, deferred revenue, identifiable intangible assets and goodwill are provisional and are based on the information that was available as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of working capital balances, contingent consideration, deferred revenue, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than October 3, 2017.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

 

 

 

 

Preliminary

 

 

Estimate at

 

 

March 31, 2017

Total tangible assets acquired

 

$

399

Total liabilities assumed

 

 

(1,459)

Identifiable intangible assets

 

 

7,300

Goodwill

 

 

10,558

Total net assets acquired

 

$

16,798

A summary of preliminary estimated identifiable intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

 

 

 

 

 

 

 

    

    

 

    

Estimated

    

Amortization

 

 

Amount

    

Useful Life in Years

 

Method

Customer list

 

$

4,100

    

12

 

Accelerated

Proprietary technology

 

 

3,000

 

 5

 

Straight-line

Trade names and domains

 

 

200

 

 5

 

Straight-line

Total

 

$

7,300

 

 

 

 

 

The results of Wheelhouse’s operations are included in the condensed consolidated statements of operations beginning October 3, 2016, and are not considered material to the Company’s results of operations.  As such, no pro forma information is presented for the three months ended March 31, 2016.

 

 

4.      Cost of Revenues

 

The following table summarizes cost of revenues by revenue category for the periods ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

Assets under management or administration

    

$

44,485

 

$

36,909

Subscription and licensing

 

 

4,614

 

 

3,104

Professional services and other

 

 

127

 

 

145

Total

 

$

49,226

 

$

40,158

11


 

Table of Contents

 

 

5.     Property and Equipment

 

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Cost:

 

 

 

 

 

 

 

 

Computer equipment and software

 

3 years

 

$

56,293

 

$

52,921

Office furniture and fixtures

 

3-7 years

 

 

7,365

 

 

6,911

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

18,177

 

 

17,286

Other office equipment

 

3-5 years

 

 

1,554

 

 

1,367

 

 

 

 

 

83,389

 

 

78,485

Less accumulated depreciation and amortization

 

 

 

 

(49,849)

 

 

(45,485)

Property and equipment, net

 

 

 

$

33,540

 

$

33,000

 

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Depreciation and amortization expense

 

$

4,091

 

$

3,359

 

 

 

 

6. Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Internally developed software

 

5 years

 

$

35,809

 

$

33,718

Less accumulated amortization

 

 

 

 

(20,017)

 

 

(18,858)

Internally developed software, net

 

 

 

$

15,792

 

$

14,860

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Amortization expense

 

$

1,159

 

$

795

 

 

 

12


 

Table of Contents

7.Intangible Assets

 

Intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

    

 

 

 

    

    

Gross

    

    

 

    

Net

    

Gross

    

    

 

    

Net

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Customer lists

 

4

-

15

years

 

$

259,490

 

$

(60,879)

 

$

198,611

 

$

259,490

 

$

(54,861)

 

$

204,629

Backlog

 

 

 

4

years

 

 

11,000

 

 

(7,489)

 

 

3,511

 

 

11,000

 

 

(6,456)

 

 

4,544

Proprietary technologies

 

2

-

8

years

 

 

57,770

 

 

(22,886)

 

 

34,884

 

 

57,770

 

 

(20,214)

 

 

37,556

Trade names

 

2

-

7

years

 

 

24,995

 

 

(7,028)

 

 

17,967

 

 

25,007

 

 

(6,178)

 

 

18,829

Total intangible assets

 

 

 

 

 

 

$

353,255

 

$

(98,282)

 

$

254,973

 

$

353,267

 

$

(87,709)

 

$

265,558

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Amortization expense

 

$

10,585

 

$

11,926

 

Future amortization expense of the intangible assets as of March 31, 2017, is expected to be as follows:

 

 

 

 

 

 

 

Years ending December 31:

 

    

Remainder of 2017

$

31,383

2018

 

35,948

2019

 

32,361

2020

 

28,615

2021

 

20,746

2022

 

18,729

Thereafter

 

87,191

 

$

254,973

 

 

8.Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Non-income tax receivable

 

$

4,370

 

$

3,879

Income tax receivable

 

 

2,255

 

 

1,864

Prepaid insurance

 

 

1,125

 

 

552

Prepaid technology

 

 

1,188

 

 

1,318

FinaConnect escrow

 

 

2,000

 

 

429

Other

 

 

9,218

 

 

8,182

 

 

$

20,156

 

$

16,224

13


 

Table of Contents

 

 

9.Other Non-Current Assets

 

Other non-current assets consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Investments in private companies

 

$

2,465

 

$

2,750

Deposits:

 

 

 

 

 

 

Lease

 

 

4,373

 

 

4,262

Other

 

 

512

 

 

2,083

Assets to fund deferred compensation liability

 

 

3,761

 

 

2,738

Other

 

 

2,024

 

 

2,130

 

 

$

13,135

 

$

13,963

 

 

The Company owns 756,347 Class B Units in a privately held company at a historical purchase price of $1,250. The Company uses the cost method of accounting for this investment.

   

The Company owns 1,500,000 Class A units representing 21.4% of the outstanding membership interests of a privately held company for cash consideration of $1,500. Upon the approval by a majority of the Board of Directors of the privately held company in its sole discretion, prior to December 31, 2017, the privately held company may require that Envestnet purchase up to an additional 1,500,000 Class A units.

   

The Company uses the equity method of accounting to record its portion of this privately held company’s net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50 percent ownership. The Company’s interest in the earnings or losses of the privately held company is reflected in other expense, net on the condensed consolidated statements of operations.

 

 

10.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 company’s 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 at fair value 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 I:

 

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

 

 

 

Level II:

 

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 III:

 

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.

 

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value in the condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016, based on the three-tier fair value hierarchy.

 

14


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

   

As of March 31, 2017

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds(1)

$

17,683

   

$

17,683

   

$

 

$

Assets to fund deferred compensation liability(2)

 

3,761

 

 

 

 

 

 

3,761

Total assets

$

21,444

   

$

17,683

   

$

 

$

3,761

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

2,700

 

$

 

$

 

$

2,700

Deferred compensation liability(3)

 

3,898

 

 

3,898

 

 

 

 

Total liabilities

$

6,598

 

$

3,898

 

$

 

$

2,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds(1)

$

31,644

   

$

31,644

   

$

 

$

Assets to fund deferred compensation liability(2)

 

2,738

 

 

 

 

 

 

2,738

Total assets

$

34,382

 

$

31,644

 

$

 

$

2,738

Liabilities

   

   

   

   

   

   

   

   

 

   

   

Contingent consideration

$

4,868

 

$

 

$

 

$

4,868

Deferred compensation liability(3)

 

2,885

   

 

2,885

   

 

 

 

Total liabilities

$

7,753

 

$

2,885

 

$

 

$

4,868

 

(1)

The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds.

(2)

The fair value of assets to fund deferred compensation liability approximates the cash surrender value of the life insurance premiums and is included in other non-current assets in the condensed consolidated balance sheets.

(3)

The deferred compensation liability is included in other non-current liabilities in the condensed consolidated balance sheets and its fair market value is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected.

 

Level I assets and liabilities include money-market funds not insured by the FDIC and deferred compensation liability. 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. These money-market funds are considered Level 1 and are included in cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the deferred compensation liability is based upon the daily quoted market prices for net asset value on the various funds selected by participants.

   

Level III assets and liabilities consist of the estimated fair value of contingent consideration as well as the assets to fund deferred compensation liability. The fair market value of the assets to fund deferred compensation liability is based upon the cash surrender value of the life insurance premiums.

   

The fair value of the contingent consideration liabilities related to the FinaConnect and Wheelhouse acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represent a Level III fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level III measurement not supported by market activity included our assessments of expected future cash flows related to our acquisitions of FinaConnect and Wheelhouse during the subsequent periods 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 FinaConnect and Wheelhouse, and their ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair values of their respective contingent consideration. The Company will continue to reassess the fair value of the contingent consideration for each acquisition at each reporting date until settlement. Changes to the estimated fair values of the contingent consideration will be recognized in earnings of the Company and included in general and administration on the consolidated statements of operations.

15


 

Table of Contents

 

The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to March 31, 2017:

 

 

 

 

 

 

    

Fair Value of

 

 

Contingent

 

 

Consideration

 

 

Liabilities

Balance at December 31, 2016

 

$

4,868

Settlement of contingent consideration liabilities

 

 

(2,286)

Accretion on contingent consideration

 

 

118

Balance at March 31, 2017

 

$

2,700

 

The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to March 31, 2017:

 

 

 

 

 

 

 

Fair Value of

 

    

Assets to Fund

 

 

Deferred

 

 

Compensation

 

 

Liability

Balance at December 31, 2016

 

$

2,738

Contributions

 

 

1,023

Balance at March 31, 2017

 

$

3,761

 

 

 

 

During the three months ended March 31, 2017, the Company recognized no income or expense on the assets to fund deferred compensation liability, identified as Level III, on the condensed consolidated statements of operations. The asset value was increased due to funding of the plan, which resulted in an asset value as of March 31, 2017 of $3,761, which was included in other non-current assets on the condensed consolidated balance sheets.

 

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 I, II and III during the three months ended March 31, 2017.

 

On December 15, 2014, the Company issued $172,500 of Convertible Notes. As of March 31, 2017 and December 31, 2016, the carrying value of the 2019 Convertible Notes equaled $154,146 and $152,575, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2017 and December 31, 2016, the fair value of the Convertible Notes was $160,817 and $164,824, respectively. The Company considers the Convertible Notes to be a Level II liability and uses a market approach to calculate the fair value of the Convertible Notes. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on March 31, 2017 (see Note 14).

 

As of March 31, 2017 and December 31, 2016, there was $108,138 and $142,000, respectively, of Term Notes outstanding. As of March 31, 2017 and December 31, 2016, there was $25,000 and $0 of revolving credit amounts outstanding under the Amended and Restated Credit Agreement. The outstanding value of our Term Notes and revolving credit facility approximated fair value as they bear interest at variable rates and we believe our credit risk quality is consistent with when the debt originated. As of March 31, 2017 and December 31, 2016, the carrying value of the Term Notes equaled $105,669 and $138,335, respectively, and represents the aggregate principal amount outstanding less the unamortized debt issuance costs. The Company considers the Term Notes and revolving credit facility to be a Level II liability as of March 31, 2017.

 

We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2017 based upon the short-term nature of the assets and liabilities.

 

16


 

Table of Contents

11.Accrued Expenses

 

Accrued expenses and other liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Accrued investment manager fees

 

$

32,329

 

$

31,278

Accrued compensation and related taxes

 

 

23,053

 

 

35,287

Sales and use tax payable

 

 

11,348

 

 

10,108

Accrued professional services

 

 

5,153

 

 

3,213

Definite consideration

 

 

1,250

 

 

445

Other accrued expenses

 

 

6,139

 

 

7,432

 

 

$

79,272

 

$

87,763

 

 

 

12.    Other Non-Current Liabilities

 

Other non-current liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Uncertain tax positions

 

$

9,663

 

$

7,762

Accrued deferred compensation

 

 

3,898

 

 

2,885

Accrued purchase liability

 

 

 —

 

 

1,250

Other

 

 

1,053

 

 

1,539

 

 

$

14,614

 

$

13,436

 

 

13.    Income Taxes

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

 

2016

 

Loss before income tax provision (benefit)

 

$

(8,837)

 

$

(16,709)

 

Income tax provision (benefit)

 

 

4,298

 

 

(5,716)

 

Effective tax rate

 

 

(48.6)

%

 

34.2

%

 

The Company’s effective tax rates in the three months ended March 31, 2017 and 2016 were (48.6)% and 34.2%, respectively. The change was primarily due to the valuation allowance the company has put on all U.S. deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the U.S.

 

The gross liability for unrecognized tax benefits was $16,972 and $16,476 at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $16,972. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will not decrease in the next twelve months.

 

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $510 and $880 as of March 31, 2017 and December 31, 2016, 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, 2016, 2015, 2014, and 2013 remain open to examination by the Internal Revenue Service in their entirety.  With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2016, 2015, 2014, 2013, 2012 and 2011 remain open to examination by various state revenue services.

 

17


 

Table of Contents

The Company’s Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2006 and forward. 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.

 

 

14.    Debt

 

The Company’s outstanding debt obligations as of March 31, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Convertible Notes

 

$

172,500

 

$

172,500

Unaccreted discount on Convertible Notes

 

 

(15,812)

 

 

(17,149)

Unamortized issuance costs on Convertible Notes

 

 

(2,542)

 

 

(2,776)

Convertible Notes carrying value

 

$

154,146

 

$

152,575

 

 

 

 

 

 

 

Term Notes

 

$

108,138

 

$

142,000

Unamortized issuance costs on Term Notes

 

 

(2,469)

 

 

(3,665)

Term Notes carrying value

 

$

105,669

 

$

138,335

 

 

 

 

 

 

 

Revolving credit facility balance

 

$

25,000

 

$

 —

 

Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statement of operations:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

 

2016

Coupon interest

 

$

755

 

$

755

Amortization of issuance costs

 

 

1,430

 

 

725

Accretion of debt discount

 

 

1,337

 

 

1,286

Interest on credit agreement

 

 

1,345

 

 

1,262

Undrawn and other fees

 

 

69

 

 

64

 

 

$

4,936

 

$

4,092

 

Credit Agreement

On November 19, 2015, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”).  The Amended and Restated Credit Agreement amended and restated the Credit Agreement, dated as of June 19, 2014, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent. Pursuant to the Amended and Restated Credit Agreement, the Banks agreed to provide (i) term loans (“Term Notes”) in the aggregate principal amount of $160,000, which were used to fund a portion of the cash consideration paid by the Company in connection with the acquisition of Yodlee, and (ii) revolving credit commitments in the aggregate amount of up to $100,000, which includes a $5,000 subfacility for the issuance of letters of credit.

Obligations under the Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Security Agreement, dated November 19, 2015 (the “Security Agreement”), among the Company, the Debtors party thereto, the Banks and the Administrative Agent, obligations under the Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Future borrowings under the Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.

18


 

Table of Contents

Envestnet will pay interest on borrowings made under the Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Amended and Restated Credit Agreement are scheduled to mature on November 19, 2018. The Term Notes are payable in quarterly installments of $2,000 per installment and commenced in March 2016, with the final payment of all remaining term loan principal due and payable on the scheduled maturity date. Within 90 days of each year-end, beginning December 31, 2016, an excess cash flow prepayment, as defined in the Amended and Restated Credit Agreement, may also be required if the Company’s total leverage ratio is greater than 2.0 to 1.0 as of the end of the mostly recently completed two consecutive fiscal quarters of the Company. During the first quarter of 2017, the Company made an excess cash flow payment of $31,862. As of March 31, 2017, the Company has estimated the 2018 prepayment to be approximately $28,730.

The Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants and events of default. The covenants include certain financial covenants requiring Envestnet 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 Envestnet 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.

As of March 31, 2017, there was $108,138 of Term Notes and $25,000 revolving credit amount outstanding under the Amended and Restated Credit Agreement. The revolving credit amount is included in the current portion of debt on the condensed consolidated balance sheets as the intent of the Company is to repay the outstanding amount within twelve months of March 31, 2107. The Company was in compliance with all covenants under the Amended and Restated Credit Agreement as of March 31, 2017.

 

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, beginning on June 15, 2015.

 

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 Company’s existing and future senior indebtedness and will be senior in right of payment to any of the Company’s 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 Company’s 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 Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle the debt component of the Convertible Notes at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.

19


 

Table of Contents

 

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 is being accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three month periods ended March 31, 2017 and 2016, the Company recognized $1,337 and $1,286, 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 three month periods ended March 31, 2017 and 2016 was 6.0% and 6.1%, respectively.

See Note 16 for further discussion of the effect of conversion on net income per common share.

15.Stock-Based Compensation

 

The Company has stock options and restricted stock units 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.

 

In connection with the Yodlee merger (see Note 3), the Company adopted the 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the grant of restricted common stock units for certain Envestnet | Yodlee employees. The maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,052,000.  These awards vest over a period of 43 months subsequent to the acquisition date of November 19, 2015. As of March 31, 2017, the remaining amount of unrecognized expense totaled $9,438.

 

As of March 31, 2017, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 417,317.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Stock-based compensation expense

 

$

7,458

 

$

11,615

Tax effect on stock-based compensation expense

 

 

(2,800)

 

 

(4,646)

Net effect on income

 

$

4,658

 

$

6,969

 

The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 37.5% and 40.0% for the three months ended March 31, 2017 and 2016, respectively.  However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the three months ended March 31, 2017.

 

Stock Options

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

    

Grant date fair value of options

 

$

14.51

 

$

20.51

 

Volatility

 

 

43.8

%  

 

42.1

%  

Risk-free interest rate

 

 

2.1

%  

 

1.4

%  

Dividend yield

 

 

 —

%  

 

 —

%  

Expected term (in years)

 

 

6.3

 

 

6.6

 

20


 

Table of Contents

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted-Average

    

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

 

 

 

 

 

 

Average

 

Contractual Life

 

Aggregate

 

 

 

Options

 

Exercise Price

 

(Years)

 

Intrinsic Value

 

Outstanding as of December 31, 2016

 

3,033,194

 

$

16.33

 

4.3

 

$

63,264

 

  Granted

 

75,238

 

 

31.70

 

 

 

 

 

 

  Exercised

 

(208,334)

 

 

9.12

 

 

 

 

 

 

  Forfeited

 

(9,062)

 

 

45.81

 

 

 

 

 

 

Outstanding as of March 31, 2017

 

2,891,036

 

 

17.15

 

4.5

 

 

50,792

 

Options exercisable

 

2,612,682

 

 

15.50

 

4.0

 

 

49,767

 

 

Exercise prices of stock options outstanding as of March 31, 2017 range from $0.11 to $55.29. At March 31, 2017, there was $4,792 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 Units

 

Periodically, the Company grants restricted stock unit awards to employees that vest one-third on each of the first three anniversaries of the grant date. Beginning with grants issued in February 2016, restricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. The following is a summary of the activity for unvested restricted stock unit awards granted under the Company’s plans:

 

 

 

 

 

 

 

 

    

    

    

Weighted-

 

 

 

 

Average Grant

 

 

Number of

 

Date Fair Value

 

 

Shares

 

per Share

Outstanding as of December 31, 2016

 

1,894,759

 

$

30.40

Granted

 

872,941

 

 

31.89

Vested

 

(526,572)

 

 

31.68

Forfeited

 

(20,084)

 

 

27.52

Outstanding as of March 31, 2017

 

2,221,044

 

 

31.98

 

At March 31, 2017, there was $64,056 of unrecognized stock-based compensation expense related to unvested restricted stock unit awards, which the Company expects to recognize over a weighted-average period of 2.4 years.

 

16.Net Loss Per Share

 

Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted loss per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock units and Convertible Notes using the treasury stock method, if dilutive.

 

The Company accounts for the effect of the Convertible Notes on diluted earnings per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes have no effect on diluted earnings per share until the Company’s stock price exceeds the conversion price of $62.88 per share, or if the trading price of the Convertible Notes meets certain criteria as described in Note 14 at which point, the effect of the conversion feature would be included in the Company’s calculation of diluted earnings per share. In the period of conversion, the Convertible Notes will have no impact on diluted earnings if the Convertible Notes are settled in cash and will have an impact on dilutive earnings per share if the Convertible Notes are settled in shares upon conversion.

 

21


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(13,135)

 

$

(10,993)

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

 

43,362,037

 

 

42,506,557

Effect of dilutive shares:

 

 

 

 

 

 

Options to purchase common stock

 

 

 —

 

 

 —

Unvested restricted stock units

 

 

 —

 

 

 —

Diluted number of weighted-average shares outstanding

 

 

43,362,037

 

 

42,506,557

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.

 

 

 

 

 

 

Basic

 

$

(0.30)

 

$

(0.26)

 

 

 

 

 

 

 

Diluted

 

$

(0.30)

 

$

(0.26)

 

Securities that were anti-dilutive and therefore excluded from the computation of diluted earnings per share are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Options to purchase common stock

 

2,891,036

 

3,448,439

Unvested restricted stock units

 

2,221,044

 

1,707,944

Convertible Notes

 

2,743,321

 

2,743,321

Total

 

7,855,401

 

7,899,704

 

 

 

17.Major Customers

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

    

Fidelity

 

16

%  

15

%  

 

 

 

18.Commitments and Contingencies

 

Purchase Obligations and Indemnifications

 

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 enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.

 

22


 

Table of Contents

Litigation

 

In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had and was continuing to infringe on seven of Yodlee’s U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer to Yodlee’s complaint as well as counterclaims seeking declaratory judgment that Yodlee’s patents were not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims also alleged, among other things, violation of federal antitrust and false advertising laws and unfair competition under California state law and common law. The counterclaims sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. During the course of the litigation, Plaid also filed petitions for review before the Patent Office’s Board of Patent Trials and Appeals against the seven Yodlee patents that were the subject of the lawsuit as well as a petition for reexamination against one of the patents.

 

On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office.  Plaid also agreed not to participate further in the reexamination proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.

 

The Company is involved in litigation arising in the ordinary course of its business.  Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of March 31, 2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.

 

Contingencies  

Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. As of March 31, 2017, the Company estimated a sales and use tax liability of $11,348. This amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheets. The Company also estimated a sales and use tax receivable of $4,370 related to estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. As a result, net sales and use taxes of $6,978 were probable of being assessed related to multiple jurisdictions with respect to revenues in the three month period ended March 31, 2017 and prior years. Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.

Leases

 

The Company rents office space under leases that expire at various dates through 2030.  Future minimum lease commitments under these operating leases, as of March 31, 2017, were as follows:

 

 

 

 

 

Years ending December 31:

    

 

 

Remainder of 2017

 

$

9,814

2018

 

 

13,677

2019

 

 

14,151

2020

 

 

14,003

2021

 

 

13,193

Thereafter

 

 

52,568

Total

 

$

117,406

 

 

23


 

Table of Contents

 

 

 

19.Segment Information

 

Business segments are generally organized around our business services. Our business segments are:

 

·

Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.

 

·

Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.

 

The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes.  Nonsegment expenses include salary and benefits for certain corporate officers, certain types of professional service expenses, insurance, acquisition related transaction costs, restructuring charges, and other non-recurring and/or non-operationally related expenses.

 

The following table presents revenue by segment:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

    

2016

Revenue:

 

 

 

 

 

 

Envestnet

 

$

121,318

 

$

103,190

Envestnet | Yodlee

 

 

36,468

 

 

28,631

Consolidated revenue

 

$

157,786

 

$

131,821

 

 

 

 

 

 

 

Fidelity revenue as a percentage of Envestnet segment revenue:

 

 

19%

 

 

20%

 

No single customer amounts for Envestnet | Yodlee exceeded 10% of the segment total.

 

The following table presents a reconciliation from income (loss) from operations by segment to consolidated net loss attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2017

    

2016

Envestnet

$

13,511

 

$

9,574

Envestnet | Yodlee

 

(7,708)

 

 

(14,041)

  Total segment income (loss) from operations

 

5,803

 

 

(4,467)

Nonsegment operating expenses

 

(9,157)

 

 

(8,293)

Other expense, net

 

(5,483)

 

 

(3,949)

Consolidated loss before income taxes (benefit)

 

(8,837)

 

 

(16,709)

Income tax provision (benefit)

 

4,298

 

 

(5,716)

Consolidated net loss

 

(13,135)

 

 

(10,993)

  Add: Net loss attributable to non-controlling interest

 

 —

 

 

 —

Consolidated net loss attributable to Envestnet, Inc.

$

(13,135)

 

$

(10,993)

 

Segment assets consist of cash, accounts receivable, prepaid expenses and other current assets, property, plant and equipment goodwill, and other intangibles, net, and other non-current assets.

 

A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures follows:

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2017

    

2016

Segment assets:

 

 

 

 

 

Envestnet

$

328,887

 

$

341,602

Envestnet | Yodlee

 

525,258

 

 

530,799

Consolidated total assets

$

854,145

 

$

872,401

24


 

Table of Contents

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2017

    

2016

Segment depreciation and amortization:

 

 

 

 

 

Envestnet

$

6,421

 

$

6,065

Envestnet | Yodlee

 

9,414

 

 

10,015

Consolidated depreciation and amortization

$

15,835

 

$

16,080

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2017

    

2016

Segment capital expenditures:

 

 

 

 

 

Envestnet

$

5,351

 

$

2,029

Envestnet | Yodlee

 

747

 

 

1,170

Consolidated capital expenditures

$

6,098

 

$

3,199

 

 

 

 

20.    Geographical Information

 

Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area:

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2017

    

2016

United States

$

141,962

 

$

120,291

International (1)

 

15,824

 

 

11,530

Total

$

157,786

 

$

131,821

 

(1)

No foreign country accounted for more than 10% of total revenues.

 

The following table sets forth property, plant, and equipment, net by geographic area:

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2017

    

2016

United States

$

28,884

 

$

28,713

India

 

4,036

 

 

3,596

Other

 

620

 

 

691

Total

$

33,540

 

$

33,000

 

 

25


 

Table of Contents

 

 

 

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

 

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

 

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

 

Forward-Looking Statements

 

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

 

·

difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources,

·

the concentration of nearly all of our revenues from the delivery of our solutions and services to clients in the financial services industry,

·

our reliance on a limited number of clients for a material portion of our revenue,

·

the renegotiation of fee percentages or termination of our services by our clients,

·

our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies,

·

the impact of market and economic conditions on revenues,

·

our inability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner,

·

our ability to expand our relationships with existing customers, grow the number of customers and derive revenue from new offerings such as our data analytic solutions and market research services and premium financial applications (“FinApps”),

·

compliance failures,

·

adverse judicial or regulatory proceedings against us,

·

liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest,

·

changes in laws and regulations,

·

general economic conditions, political and regulatory conditions,

·

the impact of fluctuations in market condition and interest rates on the demand for our products and services and the value of assets under management or administration,

·

the impact of market conditions on our ability to issue debt and equity,

·

the impact of fluctuations in interest rates on our cost of borrowing,

·

our financial performance,

·

the results of our investments in research and development, our data center and other infrastructure,

26


 

Table of Contents

·

our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information,

·

failure of our systems to work properly,

·

our ability to realize operating efficiencies,

·

the advantages of our solutions as compared to those of others,

·

the failure to protect our intellectual property rights,

·

our ability to establish and maintain intellectual property rights,

·

our ability to retain and hire necessary employees and appropriately staff our operations, and

·

management’s response to these factors. 

 

In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forwardlooking statements. All forwardlooking statements contained in this quarterly report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. Forwardlooking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forwardlooking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events, except as required by applicable law. If we do update one or more forwardlooking statements, no inference should be made that we will make additional updates with respect to those or other forwardlooking 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, 2016 (the “2016 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 2016 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

 

Overview

 

Envestnet is a leading provider of intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.

 

More than 2,500 companies, including 16 of the 20 largest U.S. banks, 38 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”), and hundreds of Internet services companies, leverage Envestnet technology and services. Envestnet solutions enhance knowledge of the client, accelerate client on-boarding, improve client digital experiences, and help drive better outcomes for enterprises, advisors, and their clients.

 

Founded in 1999, Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic, end-to-end wealth management platform that supports advisors and their clients.  

 

27


 

Table of Contents

Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting software, services and data, delivering better intelligence and enabling its customers to drive better outcomes.

 

Envestnet serves clients from its headquarters based in Chicago, Illinois, as well as other locations throughout the United States and India.

 

Segments

 

Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in Note 19 to the notes to condensed consolidated financial statements. Our business segments are as follows:

 

·

Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.

 

·

Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.

 

Envestnet Segment

 

Envestnet empowers financial advisors at broker-dealers, banks, and RIAs with all the tools they require to deliver holistic wealth management to their end clients. In addition, the firm provides advisors with practice management support so that they can grow their practices and operate more efficiently. In the first quarter of 2017, Envestnet’s platform assets grew to over $1.1 trillion in approximately 6 million accounts overseen by more than 55,000 advisors.

 

Services provided to advisors include:  financial planning, 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 multicustodian performance reporting and communication tools, plus data analytics. Envestnet has access to a wide range of leading thirdparty asset custodians.

 

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

·

Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to over 17,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.

 

·

Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management (“CRM”) software, principally to highend RIAs.

 

·

Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services for advisor-sold retirement plans. Leveraging integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically.

 

·

Envestnet | PMC®, or Portfolio Management Consultants (“PMC”) – provides research due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 4,000 vetted managed account products, multi-manager portfolios, fund strategist portfolios, as well as proprietary products, such as Quantitative Portfolios. PMC also offers an Overlay Service, which includes patented portfolio overlay and tax optimization services.

28


 

Table of Contents

Key Metrics

 

The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

    

2016

    

2016

    

2016

    

2016

    

2017

 

 

(in millions except accounts and advisors data)

Platform Assets

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Assets Under Management (AUM)

 

$

95,489

 

$

96,700

 

$

101,924

 

$

105,178

 

$

113,544

Assets Under Administration (AUA)

 

 

207,537

 

 

220,690

 

 

231,831

 

 

241,682

 

 

248,445

Subtotal AUM/A

 

 

303,026

 

 

317,390

 

 

333,755

 

 

346,860

 

 

361,989

Licensing

 

 

576,988

 

 

685,952

 

 

721,690

 

 

748,125

 

 

763,372

Total Platform Assets

 

$

880,014

 

$

1,003,342

 

$

1,055,445

 

$

1,094,985

 

$

1,125,361

Platform Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

 

498,449

 

 

503,147

 

 

519,717

 

 

545,130

 

 

574,132

AUA

 

 

904,373

 

 

935,870

 

 

961,590

 

 

994,583

 

 

986,554

Subtotal AUM/A

 

 

1,402,822

 

 

1,439,017

 

 

1,481,307

 

 

1,539,713

 

 

1,560,686

Licensing

 

 

2,237,427

 

 

4,304,645

 

 

4,394,670

 

 

4,558,883

 

 

4,263,002

Total Platform Accounts

 

 

3,640,249

 

 

5,743,662

 

 

5,875,977

 

 

6,098,596

 

 

5,823,688

Advisors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM/A

 

 

35,718

 

 

35,067

 

 

35,861

 

 

36,483

 

 

36,985

Licensing

 

 

13,675

 

 

16,081

 

 

16,191

 

 

17,852

 

 

18,159

Total Advisors

 

 

49,393

 

 

51,148

 

 

52,052

 

 

54,335

 

 

55,144

 

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 March 31, 2017

 

 

As of

 

Gross

 

 

 

 

Net

 

Market

 

Reclass (to) from

 

As of

 

 

12/31/2016

 

Sales

 

Redemptions

 

Flows

 

Impact

 

Licensing

 

3/31/2017

 

 

(in millions except account data)

Assets under Management (AUM)

    

$

105,178

    

$

11,838

    

$

(7,489)

    

$

4,349

    

$

4,017

    

$

 —

    

$

113,544

Assets under Administration (AUA)

 

 

241,682

 

 

19,483

 

 

(16,718)

 

 

2,765

 

 

8,889

 

 

(4,891)

 

 

248,445

Total AUM/A

 

$

346,860

 

$

31,321

 

$

(24,207)

 

$

7,114

 

$

12,906

 

$

(4,891)

 

$

361,989

Fee-Based Accounts

 

 

1,539,713

 

 

 

 

 

 

 

 

43,737

 

 

 

 

 

(22,764)

 

 

1,560,686

 

The above AUM/A gross sales figures include $0.3 billion in new client conversions. The Company onboarded an additional $13.4 billion in licensing conversions during the three months ended March 31, 2017, bringing total conversions for the quarter to $13.7 billion.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

December 31,

 

 

March 31,

 

 

2016

    

 

2016

    

 

2016

    

 

2016

    

 

2017

 

Assets under management (AUM)

32

%  

 

30

%  

 

31

%  

 

30

%  

 

31

%  

Assets under administration (AUA)

68

%  

 

70

%  

 

69

%  

 

70

%  

 

69

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

Envestnet | Yodlee Segment

 

Envestnet | Yodlee is a leading data aggregation and data intelligence platform.  As a “big data” specialist, Yodlee gathers, refines and aggregates a massive set of end-user permissioned transaction level data, which it then provides to customers as data analytics solutions and market research services.

29


 

Table of Contents

 

More than 1,000 financial institutions, financial technology innovators and financial advisory firms, including 12 of the 20 largest U.S. banks, subscribe to the Envestnet | Yodlee platform to underpin personalized financial apps and services for over 21 million paid subscribers.

 

Yodlee serves two main customer groups:  financial institutions (“FI”) and financial technology innovators, which we refer to as Yodlee Interactive (“YI”) customers.

 

·

The Financial Institutions group provides customers with secure access to open application programming interfaces (“APIs”), end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Yodlee also enables customers to develop their own applications through its open APIs, which deliver secure data, money movement solutions, and other functionality. FinApps can be subscribed to individually or in combinations that include personal financial management, wealth management, card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, card, lenders, and other financial services sectors. These FinApps help consumers and small businesses simplify and manage their finances, review their financial accounts, track their spending, calculate their net worth, and perform a variety of other activities. For example, Yodlee’s Expense FinApp helps consumers track their spending, and a Payroll FinApp from a third party helps small businesses process their payroll. The suite of reports is designed to supplement traditional credit reports by utilizing consumer permissioned aggregated data from over 15,500 sources, including banking, investment, loan, and credit card information.

 

·

The Yodlee Interactive group enables customers to develop new applications and enhance existing solutions.  These customers operate in a number of sub-vertical markets, including wealth management, personal financial management, small business accounting, small business lending and authentication. They use the Envestnet | Yodlee platform to build solutions that leverage our open APIs and access to a large end user base. In addition to aggregated transaction-level account data elements, we provide YI customers with secure access to account verification, money movement and risk assessment tools via our APIs. We play a critical role in transferring innovation from financial technology innovators to financial institutions. For example, YI customers use Yodlee applications to provide working capital to small businesses online; personalized financial management, planning and advisory services; e-commerce payment solutions; and online accounting systems for small businesses. We provide access to our solutions across multiple channels, including web, tablet and mobile.

 

Both FI and YI segments benefit customers by improving end-user satisfaction and retention, accelerating speed to market, creating technology savings and enhancing their data analytics solutions and market research capabilities. End users receive better access to their financial information and more control over their finances, leading to more informed and personalized decision making. For customers who are members of the developer community, Yodlee solutions provide access to critical data and payments solutions, faster speed to market and enhanced distribution.

 

·

Envestnet Analytics provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises.  These tools empower financial services firms to extract key business insights to run their business better and provide timely and focused support to advisors.

 

We believe that our brand leadership, innovative technology and intellectual property, large customer base, and unique data gathering and enrichment provide us with competitive advantages that have enabled us to generate strong growth.

 

We believe that our business model results in a high degree of recurring and predictable financial results.

 

Operational Highlights

 

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 14% from $82,871 in the three months ended March 31, 2016 to $94,162 in the three months ended March 31, 2017. Subscription and licensing revenues increased 33% from $43,620 in the three months ended March 31, 2016 to $57,910 in the three months ended March 31, 2017. Total revenues, which include professional service and other fees, increased 20% from $131,821 in the three months ended March 31, 2016 to $157,786 in the three months ended March 31, 2017. 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 related to Envestnet | Yodlee totaling $7,837.

 

30


 

Table of Contents

The net loss attributable to Envestnet, Inc. for the three months ended March 31, 2017 was $13,135, or $0.30 per diluted share, compared to net loss attributable to Envestnet, Inc. of $10,993 or $0.26 per diluted share for the three months ended March 31, 2016.

 

Adjusted revenues for the three months ended March 31, 2017 was $157,839, an increase of 20% from $132,032 in the prior year period. Adjusted EBITDA for the three months ended March 31, 2017 was $25,838, an increase of 35% from $19,193 in the prior year period. Adjusted net income for the three months ended March 31, 2017 was $11,517, or $0.25 per diluted share, compared to adjusted net income of $7,784, or $0.18 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.

 

Results of Operations

 

Three months ended March 31, 2017 compared to three months March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2017

    

2016

    

Percent Change

 

 

(in thousands)

 

 

 

Revenues:

 

 

    

 

    

 

 

 

 

Assets under management or administration

$

94,162

 

 

$

82,871

 

14

%  

Subscription and licensing

 

57,910

 

 

 

43,620

 

33

%  

Professional services and other

 

5,714

 

 

 

5,330

 

 7

%  

Total revenues

 

157,786

 

 

 

131,821

 

20

%  

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

49,226

 

 

 

40,158

 

23

%  

Compensation and benefits

 

65,532

 

 

 

62,616

 

 5

%  

General and administration

 

30,547

 

 

 

25,727

 

19

%  

Depreciation and amortization

 

15,835

 

 

 

16,080

 

(2)

%  

Total operating expenses

 

161,140

 

 

 

144,581

 

11

%  

Loss from operations

 

(3,354)

 

 

 

(12,760)

 

(74)

%  

Other expense, net

 

(5,483)

 

 

 

(3,949)

 

39

%  

Loss before income tax provision (benefit)

 

(8,837)

 

 

 

(16,709)

 

(47)

%  

Income tax provision (benefit)

 

4,298

 

 

 

(5,716)

 

*

 

Net loss

 

(13,135)

 

 

 

(10,993)

 

19

%  

Add: Net loss attributable to non-controlling interest

 

 —

 

 

 

 —

 

 —

%  

Net loss attributable to Envestnet, Inc.

$

(13,135)

 

 

$

(10,993)

 

19

%  

 


*Not meaningful.

 

Revenues

 

Total revenues increased 20% from $131,821 in the three months ended March 31, 2016 to $157,786 in the three months ended March 31, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $14,290. Revenues from AUM/A decreased as a percentage of total revenues from 63% to 60% in the three months ended March 31, 2016 and 2017, respectively, primarily as the increase in AUM/A related revenue was lower than the increase in revenues from subscription and licensing.

 

Assets under management or administration

 

Revenues earned from AUM/AUA increased 14% from $82,871 in the three months ended March 31, 2016 to $94,162 in the three months ended March 31, 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2017, relative to the corresponding period in 2016. In the first quarter of 2017, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during 2016.

31


 

Table of Contents

 

The number of financial advisors with AUM or AUA on our technology platforms increased from 35,718 as of March 31, 2016 to 36,985 as of March 31, 2017 and the number of AUM or AUA client accounts increased from approximately 1,400,000 as of March 31, 2016 to approximately 1,600,000 as of March 31, 2017.

 

Subscription and licensing

 

Subscription and licensing revenues increased 33% from $43,620 in the three months ended March 31, 2016 to $57,910 in the three months ended March 31, 2017. This increase was primarily due to an increase in Envestnet related revenue of $3,233 and an increase in Envestnet | Tamarac related revenue of $3,428 and Envestnet | Yodlee contributing an additional $7,628. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee revenue is primarily due to an increase in revenue from existing customers of $2,589, new customers of $2,107 and Wheelhouse related revenue of $748.

 

Professional services and other

 

Professional services and other revenues increased 7% from $5,330 in the three months ended March 31, 2016 to $5,714 in the three months ended March 31, 2017. This increase was primarily due to an increase in Envestnet | Tamarac related revenue of $308 and Envestnet | Yodlee contributing an additional $209. The increase in Envestnet and Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients. The increase in Envestnet | Yodlee is primarily due to increased professional services revenue from data solutions.

 

Cost of revenues

 

Cost of revenues increased 23% from $40,158 in the three months ended March 31, 2016 to $49,226 in the three months ended March 31, 2017, primarily due to a corresponding increase in revenues from AUM or AUA, the mix of such revenues from AUM or AUA, and an increase in cost of revenues associated with subscription and licensing revenues. As a percentage of total revenues, cost of revenues increased from 30% in the three months ended March 31, 2016 to 31% in the three months ended March 31, 2017.

 

Compensation and benefits

 

Compensation and benefits increased 5% from $62,616 in the three months ended March 31, 2016 to $65,532 in the three months ended March 31, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $7,180, primarily a result of an increase in headcount to support organic growth, as well as increases in headcount related to the FinaConnect and Wheelhouse acquisitions. The increase in salaries, benefits and related payroll taxes was offset by a decrease in stock-based compensation expense of $4,157. As a percentage of total revenues, compensation and benefits decreased from 48% in the three months ended March 31, 2016 to 42% in the three months ended March 31, 2017. The decrease in the compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.

 

General and administration

 

General and administration expenses increased 19% from $25,727 in the three months ended March 31, 2016 to $30,547 in the three months ended March 31, 2017, primarily due to increases in audit related services of $2,252, marketing of $1,259, professional and legal fees of $580, and occupancy costs of $1,029. As a percentage of total revenues, general and administration expenses decreased from 20% in the three months ended March 31, 2016 to 19% in the three months ended March 31, 2017. 

 

Depreciation and amortization

 

Depreciation and amortization expense decreased 2% from $16,080 in the three months ended March 31, 2016 to $15,835 in the three months ended March 31, 2017, primarily due to a decrease in intangible asset amortization of $1,341 offset by an increase in depreciation of $1,096. As a percentage of total revenues, depreciation and amortization expense decreased from 12% in the three months ended March 31, 2016 to 10% in the three months ended March 31, 2017.

 

Other expense, net

 

Other expense, net includes an increase in interest expense of $844 primarily as a result of an increase in debt issuance cost amortization.

 

32


 

Table of Contents

Income tax provision (benefit)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

 

2016

 

Loss before income tax provision (benefit)

 

$

(8,837)

 

$

(16,709)

 

Income tax provision (benefit)

 

 

4,298

 

 

(5,716)

 

Effective tax rate

 

 

(48.6)

%

 

34.2

%

 

For the three months ended March 31, 2017, our effective tax rate differs from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a result of the valuation allowance on domestic deferreds, compared to the book loss in 2016 with the absence of a valuation allowance.

 

For the three months ended March 31, 2016, our effective tax rate differs from the statutory rate primarily due to various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.

 

Segments

 

Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Note 19 to the notes to the condensed consolidated financial statements. Our business segments are as follows:

 

·

Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.

 

·

Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.

 

The following table presents income (loss) by segment:

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2017

    

2016

Envestnet

$

13,511

 

$

9,574

Envestnet | Yodlee

 

(7,708)

 

 

(14,041)

  Total segment income (loss) from operations

 

5,803

 

 

(4,467)

Nonsegment operating expenses

 

(9,157)

 

 

(8,293)

Other expense, net

 

(5,483)

 

 

(3,949)

Consolidated loss before income taxes (benefit)

 

(8,837)

 

 

(16,709)

Income tax provision (benefit)

 

4,298

 

 

(5,716)

Consolidated net loss

 

(13,135)

 

 

(10,993)

  Add: Net loss attributable to non-controlling interest

 

 —

 

 

 —

Consolidated net loss attributable to Envestnet, Inc.

$

(13,135)

 

$

(10,993)

33


 

Table of Contents

 

Envestnet

 

The following table presents income from operations for the Envestnet segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

     

2017

     

2016

     

Percent Change

 

 

(in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

94,162

 

$

82,871

 

14

%

Subscription and licensing

 

 

25,237

 

 

18,576

 

36

%

Professional services and other

 

 

1,919

 

 

1,743

 

10

%

Total revenues

 

 

121,318

 

 

103,190

 

18

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

46,071

 

 

38,353

 

20

%

Compensation and benefits

 

 

39,478

 

 

35,116

 

12

%

General and administration

 

 

15,837

 

 

14,082

 

12

%

Depreciation and amortization

 

 

6,421

 

 

6,065

 

 6

%

Total operating expenses

 

 

107,807

 

 

93,616

 

15

%

Income from operations

 

$

13,511

 

$

9,574

 

41

%

 

Three months ended March 31, 2017 compared to three months March 31, 2016 for the Envestnet segment

 

Revenues

 

Total revenues increased 18% from $103,190 in the three months ended March 31, 2016 to $121,318 in the three months ended March 31, 2017. The increase was primarily due to an increase in revenues from AUM/A of $11,291 and an increase in revenues from subscription and licensing of $6,661. Revenues from AUM/A were 80% and 78% of total revenues in the three months ended March 31, 2016 and 2017, respectively.

 

Assets under management or administration

 

Revenues earned from AUM/AUA increased 14% from $82,871 in the three months ended March 31, 2016 to $94,162 in the three months ended March 31, 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2017, relative to the corresponding period in 2016.

 

The number of financial advisors with AUM or AUA on our technology platforms increased from 35,718 as of March 31, 2016 to 36,985 as of March 31, 2017 and the number of AUM or AUA client accounts increased from approximately 1,400,000 as of March 31, 2016 to approximately 1,600,000 as of March 31, 2017.

 

Subscription and licensing

 

Subscription and licensing revenues increased 36% from $18,576 in the three months ended March 31, 2016 to $25,237 in the three months ended March 31, 2017, primarily due to an increase in Envestnet related revenue of $3,233 and an increase in Envestnet | Tamarac related revenue of $3,428. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.

 

Professional services and other

 

Professional services and other revenues increased 10% from $1,743 in the three months ended March 31, 2016 to $1,919 in the three months ended March 31, 2017, primarily due to an increase in Envestnet | Tamarac professional services related revenue of $308. The increase in Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients.

 

34


 

Table of Contents

Cost of revenues

 

Cost of revenues increased 20% from $38,353 in the three months ended March 31, 2016 to $46,071 in the three months ended March 31, 2017, primarily due to the corresponding increase in revenues from AUM or AUA, and the mix of such revenues. As a percentage of total revenues, cost of revenues increased from 37% in the three months ended March 31, 2016 to 38% in the three months ended March 31, 2017.

 

Compensation and benefits

 

Compensation and benefits increased 12% from $35,116 in the three months ended March 31, 2016 to $39,478 in the three months ended March 31, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $3,286, primarily a result of an increase in headcount to support organic growth as well as increases in headcount related to the FinaConnect acquisition. An increase in non-cash compensation expense of $459 also contributed to the increase in compensation and benefits. As a percentage of total revenues, compensation and benefits decreased from 34% in the three months ended March 31, 2016 to 33% in the three months ended March 31, 2017.

 

General and administration

 

General and administration expenses increased 12% from $14,082 in the three months ended March 31, 2016 to $15,837 in the three months ended March 31, 2017, primarily due to increases in sales tax expense of $749, marketing expenses of $682, occupancy costs of $634, and external data and research services expenses of $480, offset by a decrease in website and systems costs of $1,076. As a percentage of total revenues, general and administration expenses decreased from 14% in the three months ended March 31, 2016 to 13% in the three months ended March 31, 2017.

 

Depreciation and amortization

 

Depreciation and amortization expense increased 6% from $6,065 in the three months ended March 31, 2016 to $6,421 in the three months ended March 31, 2017, primarily due to an increase in depreciation of $869 offset by a decrease in amortization of $513. As a percentage of total revenues, depreciation and amortization expense decreased from 6% in the three months ended March 31, 2016 to 5% in the three months ended March 31, 2017.

 

Envestnet | Yodlee

 

The following table presents loss from operations for the Envestnet | Yodlee segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

    

2017

    

2016

 

Percent Change

 

 

(in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Subscription and licensing

 

$

32,673

 

$

25,045

 

30

%

Professional services and other

 

 

3,795

 

 

3,586

 

 6

%

Total revenues

 

 

36,468

 

 

28,631

 

27

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

3,155

 

 

1,806

 

75

%

Compensation and benefits

 

 

23,250

 

 

23,641

 

(2)

%

General and administration

 

 

8,357

 

 

7,210

 

16

%

Depreciation and amortization

 

 

9,414

 

 

10,015

 

(6)

%

Total operating expenses

 

 

44,176

 

 

42,672

 

 4

%

Loss from operations

 

$

(7,708)

 

$

(14,041)

 

(45)

%

 

35


 

Table of Contents

Three months ended March 31, 2017 compared to three months ended March 31, 2016 for the Envestnet | Yodlee segment

 

Revenues

 

Total revenues increased 27% from $28,631 in the three months ended March 31, 2016 to $36,468 in the three months ended March 31, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $7,628. Revenues from professional services and other were 13% and 10% of total revenues in the three months ended March 31, 2016 and 2017, respectively.

 

Subscription and licensing

 

Subscription and licensing revenues increased 30% from $25,045 in the three months ended March 31, 2016 to $32,673 in the three months ended March 31, 2017, primarily due to an increase in revenue from existing customers of $2,589, new customers of $2,107 and Wheelhouse related revenue of $748.

 

Professional services and other

 

Professional services and other revenues increased 6% from $3,586 in the three months ended March 31, 2016 to $3,795 in the three months ended March 31, 2017, primarily due to increased professional services revenue from data solutions.

 

Cost of revenues

 

Cost of revenues increased 75% from $1,806 in the three months ended March 31, 2016 to $3,155 in the three months ended March 31, 2017, primarily due to an increase in third party consulting and professional services of $864 and hosting and payment processing services of $483 to support our overall revenue growth. As a percentage of total revenues, cost of revenues increased from 6% in the three months ended March 31, 2016 to 9% in the three months ended March 31, 2017.

 

Compensation and benefits

 

Compensation and benefits decreased 2% from $23,641 in the three months ended March 31, 2016 to $23,250 in the three months ended March 31, 2017, primarily due to a decrease in non-cash compensation expense of $3,407 offset by an increase in salaries, incentive compensation, benefits and related payroll taxes of $3,135, as a result of increased headcount to support organic growth and an increase related to the Wheelhouse acquisition. As a percentage of total revenues, compensation and benefits decreased from 83% in the three months ended March 31, 2016 to 64% in the three months ended March 31, 2017.

 

General and administration

 

General and administration expenses increased 16% from $7,210 in the three months ended March 31, 2016 to $8,357 in the three months ended March 31, 2017, primarily due to increases in software purchase and maintenance of $525, legal expense of $478, employee travel expenses of $433, and occupancy cost of $397, offset by a decrease in communication and research costs of $930. As a percentage of total revenues, general and administration expenses were 23% and 25% for the three months ended March 31, 2017 and 2016, respectively. As a percentage of total revenues, general and administration expenses decreased from 25% in the three months ended March 31, 2016 to 23% in the three months ended March 31, 2017.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased 6% from $10,015 in the three months ended March 31, 2016 to $9,414 in the three months ended March 31, 2017, primarily due to decrease in intangible asset amortization of $1,122 related to the Yodlee acquisition. The decrease was offset by an increase of $271 in intangible asset amortization as a result of the Wheelhouse acquisition and an increase in depreciation expense of $190 primarily related to purchases of computers and equipment. As a percentage of total revenues, depreciation and amortization expense decreased from 35% in the three months ended March 31, 2016 to 26% in the three months ended March 31, 2017.

 

36


 

Table of Contents

Nonsegment

 

The following table presents nonsegment loss from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

Operating expenses:

 

2017

    

2016

 

Percent Change

Cost of revenues

 

$

 —

 

$

 —

 

*

%

Compensation and benefits

 

 

2,804

 

 

3,851

 

(27)

%

General and administration

 

 

6,353

 

 

4,442

 

43

%

Depreciation and amortization

 

 

 —

 

 

 —

 

*

%

Total operating expenses

 

 

9,157

 

 

8,293

 

10

%

Loss from operations

 

$

(9,157)

 

$

(8,293)

 

10

%

 


*Not meaningful.

 

Compensation and benefits

 

Compensation and benefits decreased 27% from $3,851 in the three months ended March 31, 2016 to $2,804 in the three months ended March 31, 2017, primarily due to a decrease in non-cash compensation expense of $1,208, offset by increases in salaries, benefits and related payroll taxes of $487 and severance expense of $318.

 

General and administration

 

General and administration expenses increased 43% from $4,442 in the three months ended March 31, 2016 to $6,353 in the three months ended March 31, 2017, primarily due to increases in audit related services of $2,252, professional and legal fees of $474, marketing expense of $290, and employee travel expenses of $99, offset by a decrease in transaction costs of $676. 

 

Non-GAAP Financial Measures

 

In addition to reporting results according to U.S. GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues”, “adjusted EBITDA”, “adjusted net income”, and “adjusted net income per share”.

 

“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under U.S. GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑alone entities.

 

“Adjusted EBITDA” represents net loss before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration, income tax provision (benefit), depreciation and amortization, noncash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to noncontrolling interest.

 

“Adjusted net income” represents net loss before deferred revenue fair value adjustment, accretion on contingent consideration, noncash interest expense, noncash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fairmarket value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to noncontrolling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income.

 

“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weightedaverage shares outstanding.

37


 

Table of Contents

 

Our Board of Directors and our management use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share:

 

·

As measures of operating performance;

 

·

For planning purposes, including the preparation of annual budgets;

 

·

To allocate resources to enhance the financial performance of our business;

 

·

To evaluate the effectiveness of our business strategies; and

 

·

In communications with our Board of Directors concerning our financial performance.

 

Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.

 

We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measures because we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provide comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, income tax provision, non-income tax expense, restructuring charges and transaction costs, accretion on contingent consideration, fair market value adjustments on contingent consideration, severance, litigation related expense, pre-tax loss attributable to non-controlling interest, and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense from adjusted EBITDA and adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.

 

We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.

 

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards we had net refunds of ($716) and ($1,513) for the three months ended March 31, 2017 and 2016, respectively. In the event

38


 

Table of Contents

that we begin to generate taxable income and our existing net operating loss carryforwards for federal and state income taxes have been fully utilized or have expired, income tax payments will be higher; and

 

·

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

 

 

(in thousands)

Total revenues

 

$

157,786

    

$

131,821

Deferred revenue fair value adjustment

 

 

53

 

 

211

Adjusted revenues

 

$

157,839

 

$

132,032

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

 

 

(in thousands)

Net loss

 

$

(13,135)

    

$

(10,993)

Add (deduct):

 

 

 

 

 

 

Deferred revenue fair value adjustment

 

 

53

 

 

211

Interest income

 

 

(21)

 

 

(14)

Interest expense

 

 

4,936

 

 

4,092

Accretion on contingent consideration and purchase liability

 

 

156

 

 

62

Income tax provision (benefit)

 

 

4,298

 

 

(5,716)

Depreciation and amortization

 

 

15,835

 

 

16,080

Non-cash compensation expense

 

 

7,458

 

 

11,491

Restructuring charges and transaction costs

 

 

3,378

 

 

2,329

Severance

 

 

325

 

 

627

Fair market value adjustment on contingent consideration

 

 

 —

 

 

50

Litigation related expense

 

 

981

 

 

499

Foreign currency and related hedging activity

 

 

290

 

 

(162)

Non-income tax expense adjustment

 

 

749

 

 

 —

Loss allocation from equity method investment

 

 

285

 

 

43

Loss attributable to non-controlling interest

 

 

250

 

 

594

Adjusted EBITDA

 

$

25,838

 

$

19,193

 

39


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

 

 

(in thousands)

Net loss

 

$

(13,135)

    

$

(10,993)

Income tax provision (benefit) (1)

 

 

4,298

 

 

(5,716)

Loss before income tax provision (benefit)

 

 

(8,837)

 

 

(16,709)

Add (deduct):

 

 

 

 

 

 

Deferred revenue fair value adjustment

 

 

53

 

 

211

Accretion on contingent consideration and purchase liability

 

 

156

 

 

62

Non-cash interest expense

 

 

3,522

 

 

2,013

Non-cash compensation expense

 

 

7,458

 

 

11,491

Restructuring charges and transaction costs

 

 

3,378

 

 

2,329

Severance

 

 

325

 

 

627

Amortization of acquired intangibles

 

 

10,585

 

 

11,926

Fair market value adjustment on contingent consideration

 

 

 —

 

 

50

Litigation related expense

 

 

981

 

 

499

Foreign currency and related hedging activity

 

 

290

 

 

(162)

Non-income tax expense adjustment

 

 

749

 

 

 —

Loss allocation from equity method investment

 

 

285

 

 

43

Loss attributable to non-controlling interest

 

 

250

 

 

594

Adjusted net income before income tax effect

 

 

19,195

 

 

12,974

Income tax effect (2)

 

 

(7,678)

 

 

(5,190)

Adjusted net income

 

$

11,517

 

$

7,784

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

 

43,362,037

 

 

42,506,557

Effect of dilutive shares:

 

 

 

 

 

 

Options to purchase common stock

 

 

1,744,020

 

 

1,209,397

Unvested restricted stock units

 

 

582,641

 

 

76,357

Diluted number of weighted-average shares outstanding

 

 

45,688,698

 

 

43,792,311

Adjusted net income per share - diluted

 

$

0.25

 

$

0.18

 


(1)

For the three months ended March 31, 2017 and 2016, the effective tax (benefit) rate computed in accordance with US GAAP equaled 48.6% and (34.2%), respectively. 

(2)

For both periods shown, an estimated normalized effective tax rate of 40% has been used to compute adjusted net income.

 

Note on Income Taxes: As of March 31, 2017 the Company had NOL carryforwards of $261,475 and $164,397 for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes the Company pays for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with U.S. GAAP, and from the normalized rate shown above.

 

 

 

 

 

 

 

 

 

 

40


 

Table of Contents

 

The following tables set forth the reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2017

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Non-Segment

 

 

Total

 

(in thousands)

Revenues

$

121,318

 

$

36,468

 

$

 —

 

$

157,786

  Deferred revenue fair value adjustment

 

29

 

 

24

 

 

 —

 

 

53

Adjusted revenues

$

121,347

 

$

36,492

 

$

 —

 

$

157,839

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

13,511

 

$

(7,708)

 

$

(9,157)

 

$

(3,354)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

29

 

 

24

 

 

 —

 

 

53

  Accretion on contingent consideration and purchase liability

 

156

 

 

 —

 

 

 —

 

 

156

  Depreciation and amortization

 

6,421

 

 

9,414

 

 

 —

 

 

15,835

  Non-cash compensation expense

 

3,674

 

 

2,741

 

 

1,043

 

 

7,458

  Restructuring charges and transaction costs

 

95

 

 

 —

 

 

3,283

 

 

3,378

  Non-income tax expense adjustment

 

749

 

 

 —

 

 

 —

 

 

749

  Severance

 

116

 

 

209

 

 

 —

 

 

325

  Fair market value adjustment on contingent consideration

 

 —

 

 

 —

 

 

 —

 

 

 —

  Litigation related expense

 

 —

 

 

981

 

 

 —

 

 

981

  Other loss

 

 —

 

 

 —

 

 

 7

 

 

 7

  Loss attributable to non-controlling interest

 

250

 

 

 —

 

 

 —

 

 

250

Adjusted EBITDA

$

25,001

 

$

5,661

 

$

(4,824)

 

$

25,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2016

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Non-Segment

 

 

Total

 

(in thousands)

Revenues

$

103,190

 

$

28,631

 

$

 —

 

$

131,821

  Deferred revenue fair value adjustment

 

(11)

 

 

222

 

 

 —

 

 

211

Adjusted revenues

$

103,179

 

$

28,853

 

$

 —

 

$

132,032

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

9,574

 

$

(14,041)

 

$

(8,293)

 

$

(12,760)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

(11)

 

 

222

 

 

 —

 

 

211

  Accretion on contingent consideration and purchase liability

 

62

 

 

 —

 

 

 —

 

 

62

  Depreciation and amortization

 

6,065

 

 

10,015

 

 

 —

 

 

16,080

  Non-cash compensation expense

 

3,215

 

 

6,025

 

 

2,251

 

 

11,491

  Restructuring charges and transaction costs

 

87

 

 

 4

 

 

2,238

 

 

2,329

  Severance

 

 —

 

 

309

 

 

318

 

 

627

  Fair market value adjustment on contingent consideration

 

 —

 

 

 —

 

 

50

 

 

50

  Litigation related expense

 

 —

 

 

499

 

 

 —

 

 

499

  Other loss

 

 —

 

 

 —

 

 

10

 

 

10

  Loss attributable to non-controlling interest

 

594

 

 

 —

 

 

 —

 

 

594

Adjusted EBITDA

$

19,586

 

$

3,033

 

$

(3,426)

 

$

19,193

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

As of March 31, 2017, we had total cash and cash equivalents of $39,479 compared to $52,592 as of December 31, 2016. We plan to use existing cash as of March 31, 2017 and cash generated in the ongoing operations of our business to fund our current operations, capital expenditures, repay debt and for possible acquisitions or other strategic activity.  If the cash generated in the ongoing operations of our business is insufficient to fund these requirements we may be required to borrow under our bank credit agreement to fund our ongoing operations or to fund potential acquisitions or other strategic activities.

 

41


 

Table of Contents

Cash Flows

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

    

    

2017

    

2016

 

 

 

(in thousands)

Net cash provided by operating activities

 

 

$

9,001

    

$

13,516

Net cash used in investing activities

 

 

 

(6,098)

 

 

(22,824)

Net cash used in financing activities

 

 

 

(16,340)

 

 

(5,860)

Net decrease in cash and cash equivalents

 

 

 

(13,113)

 

 

(15,168)

Cash and cash equivalents, end of period

 

 

 

39,479

 

 

36,550

 

Operating Activities

 

Net cash provided by operating activities for the three months ended March 31, 2017 decreased by $4,515 compared to the same period in 2016, primarily due to a decrease in non-cash adjustments of $3,067 and net income of $2,142, offset by changes in operating assets and liabilities, net of acquisition of $1,018.

 

Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2017 decreased by $16,726 compared to the same period in 2016. The decrease is primarily a result of a decrease in cash disbursements for acquisitions of $18,125, offset by increases in purchase of property and equipment purchases of $2,196 and capitalization of internally developed software of $703.

 

Financing Activities

 

Net cash used in financing activities for the three months ended March 31, 2017 increased $10,480 compared to the same period in 2016. The change was primarily the result of increases in payments on Term Notes of $31,862 and payments of contingent consideration of $2,286, offset by an increase in proceeds from borrowings on revolving credit facility of $10,000 and a decrease in payments on our revolving credit facility of $13,000.

 

Critical Accounting Estimates

 

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

 

Commitments and Off-Balance Sheet Arrangements

 

Purchase Obligations and Indemnifications

 

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 enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.

 

42


 

Table of Contents

Litigation

 

In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had and was continuing to infringe on seven of Yodlee’s U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer to Yodlee’s complaint as well as counterclaims seeking declaratory judgment that Yodlee’s patents were not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims also alleged, among other things, violation of federal antitrust and false advertising laws and unfair competition under California state law and common law. The counterclaims sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. During the course of the litigation, Plaid also filed petitions for review before the Patent Office’s Board of Patent Trials and Appeals against the seven Yodlee patents that were the subject of the lawsuit as well as a petition for reexamination against one of the patents.

 

On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office.  Plaid also agreed not to participate further in the reexamination proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.

 

The Company is involved in litigation arising in the ordinary course of its business.  Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of March 31, 2017.  Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.

 

Leases

 

The Company rents office space under leases that expire at various dates through 2030.  Future minimum lease commitments under these operating leases, as of March 31, 2017, were as follows:

 

 

 

 

 

Years ending December 31:

    

 

 

Remainder of 2017

 

$

9,814

2018

 

 

13,677

2019

 

 

14,151

2020

 

 

14,003

2021

 

 

13,193

Thereafter

 

 

52,568

Total

 

$

117,406

 

 

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Market risk

 

Our exposure to market risk is directly related to revenues from asset management or administration services earned based upon a contractual percentage of AUM or AUA. In the three months ended March 31, 2017, 60% of our revenues were derived from revenues based on the market value of AUM or AUA. We expect this percentage to vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue to decline and our net loss to increase.

 

43


 

Table of Contents

Foreign currency risk

 

The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. For the three months ended March 31, 2017, we estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of $855 to pretax earnings and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of $1,046 to pretax earnings.

 

A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly revenues into U.S. dollars. For the three months ended March 31, 2017, we estimate that a hypothetical 10% increase or decrease in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $690 to pretax earnings.

 

Interest rate risk

 

We are subject to market risk from changes in interest rates. The Company has Term Notes and a revolving credit facility that bears interest at LIBOR plus an applicable margin between 1.50 percent and 3.25 percent. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the Amended and Restated Credit Agreement. As of March 31, 2017, there was $108,138 of Term Notes and $25,000 revolving credit amounts outstanding under the Amended and Restated Credit Agreement.  The Company incurred interest expense of $2,610 for the three months ended March 31, 2017 related to the Amended and Restated Credit Agreement. A sensitivity analysis performed on the interest expense indicated that a hypothetical 0.25% increase or decrease in our interest rate would increase or decrease interest expense on an annual basis by approximately $355.

 

 

Item 4.Controls and Procedures

 

Disclosure Controls and Procedures

 

Our  management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Management concluded there were material weaknesses as identified below in internal control over financial reporting as of March 31, 2017.  The control deficiencies identified below were previously identified by management as of December 31, 2016.

 

The following control deficiencies were identified as material weaknesses:

·

Ineffective design and operation of internal controls over the accounting for non-routine transactions and the relevance and reliability of data used to prepare financial statement disclosures. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over non-routine transactions and financial statement disclosures.

·

Ineffective design and operation of management review controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over the acquisitions.

·

Ineffective design and operation of internal controls related to our state and local tax compliance process. Specifically, it was determined that we did not have adequate procedures and controls to appropriately determine compliance with, and accounting for, certain state and local non-income tax regulations.

44


 

Table of Contents

 

These control deficiencies create a reasonable possibility that a material misstatement to the condensed consolidated  financial statements will not be prevented or detected on a timely basis.  Due to the material weaknesses described above, our management, including our chief executive officer  and chief financial officer, concluded that our disclosure controls and procedures were not effective as of March 31, 2017.

 

Remediation Plans

 

Management, under the supervision of our Audit Committee, is committed to remediating these material weaknesses in a timely fashion. We have begun executing remediation plans that address the material weaknesses in internal control over financial reporting. Specifically, we have hired and continue to actively recruit additional resources including personnel dedicated to provide additional management oversight over the documentation of non-routine accounting matters and accounting for acquisitions and to enhance our expertise in determining the appropriate accounting and reporting in these areas.

 

In addition, management’s planned actions to further address the material weaknesses include:

 

·

Review of the quarterly and annual financial reporting processes to identify and implement enhanced accounting processes and related internal control procedures;

 

·

Enhancement of our process and internal controls related to the preparation of accounting position papers documenting our analysis and conclusions for all non-routine accounting matters including purchase accounting over acquisitions;

 

·

Establishment of training and education programs for financial personnel responsible for the drafting of our consolidated financial statements and disclosures and accounting for newly acquired businesses and non-routine accounting matters; and

 

·

Update of our systems in order to collect the necessary data to comply with all required tax obligations.

 

The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

 

Management believes the measures described above and others that may be implemented will remediate the control deficiencies identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of our internal control processes and will continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above. Subject to the foregoing, we expect these remedial actions and or other remedial actions related to these material weaknesses will be completed in 2017.

 

If the remedial measures described above are insufficient to address the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual consolidated financial statements may occur in the future. Among other things, any unremediated material weakness could result in material post-closing adjustments in future financial statements. Furthermore, any such unremediated material weakness could have the effects described in “Risk Factors” in Part I, Item 1A of our 2016 Form 10-K that was filed with the Securities and Exchange Commission on March 24, 2017.

 

Changes in Internal Control Over Financial Reporting

 

During the three months ended March 31, 2017, there were no changes to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

45


 

Table of Contents

 

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

 

From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we are currently involved in the following matters:

 

In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had been infringing on seven of its U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer and counterclaims to Yodlee’s complaint.  Plaid’s counterclaims sought declaratory judgment that Yodlee’s patents are not infringed, invalid, and unenforceable.  In addition, Plaid’s counterclaims alleged an antitrust violation under federal law, unfair competition under California State Law and common law, and violation of the federal Lanham Act.  The counterclaims sought seek unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee.  On June 24, 2016, Yodlee filed its answer to Plaid’s counterclaims in which it denied Plaid’s allegations and denied that Plaid is entitled to any relief.  On January 31, 2017, Yodlee and Plaid executed a Settlement Agreement and Patent License which, among other terms, fully disposed of all claims and counterclaims in the above-described Delaware litigation.  On February 3, 2016, the parties jointly filed a stipulation of dismissal of prejudice of all claims and counterclaims.  On February 6, 2017, the Court formally closed the case. 

 

In December 2015, Plaid filed petitions for Inter-Partes Review (“IPR”) before the Patent Office’s Board of Patent Trials and Appeals (“PTAB”) against the Yodlee patents that are the subject of the lawsuit described in the immediately preceding paragraph.  In 2016, Plaid filed a series of Covered Business Method (“CBM”) Reviews against the Yodlee patents already at issue in the IPR Petitions and the litigation described above.  As part of the January 31, 2017 Settlement Agreement and Patent License, Yodlee and Plaid submitted joint requests for the PTAB to terminate all of the pending IPR and CBM proceedings and the PTAB issued an order on February 8, 2017 terminating all of the pending IPR and CBM proceedings.

 

In January 2017, Plaid requested an Ex Parte re-examination on one of Yodlee’s patents with the U.S. Patent Office (the “USPTO”). On January 26, 2017, the USPTO determined that a substantial new question of patentability and granted the request for re-examination. On February 8, 2017, Plaid filed notice with the Patent Office stating that the related litigation has been resolved and that Plaid does not intend to participate further in the reexamination proceedings. The USPTO may continue the reexamination without Plaid’s participation. On March 27, 2017, the Company filed a Patent Owner’s Statement with the USPTO addressing the grounds in the Re-examination. In response to that statement, the Patent Office may either dismiss the re-examination or issue a first office action rejecting one or more of the claims of the patent. At that point, Yodlee will be permitted another response. As of April 20, 2017, the USPTO had not responded to that statement.

 

 

Item 1A.  Risk Factors

 

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our 2016 Form 10-K, when making investment decisions regarding our securities. The risk factors that were disclosed in our 2016 Form 10-K have not materially changed since the date our 2016 Form 10-K was filed.

 

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

 

(c) Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

Maximum number (or

 

 

 

 

 

 

Total number of

 

approximate dollar

 

 

 

 

 

 

shares purchased

 

value) of shares

 

 

Total number

 

Average

 

as part of publically

 

that may yet be

 

 

of shares

 

price paid

 

announced plans

 

purchased under the

 

    

purchased

    

per share

    

or programs

    

plans or programs

January 1, 2017 through January 31, 2017

 

8,690

$

36.80

 

 —

 

1,956,390

February 1, 2017 through February 28, 2017

 

135,478

 

38.27

 

 —

 

1,956,390

March 1, 2017 through March 31, 2017

 

32,859

 

34.54

 

 —

 

1,956,390

 

 

On February 25, 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be

46


 

Table of Contents

determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other forward transactions or otherwise, all in compliance with applicable laws and other restrictions. As of March 31, 2017, 1,956,390 of shares could still be purchased under this program.

 

 

 

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

(a) Exhibits

 

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

 

47


 

Table of Contents

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10, 2017.

 

 

ENVESTNET, INC.

 

 

 

 

By:

/s/ Judson Bergman

 

 

Judson Bergman

 

 

Chairman and Chief Executive Officer

 

 

Principal Executive Officer

 

 

 

 

By:

/s/ Peter H. D’Arrigo

 

 

Peter H. D’Arrigo

 

 

Chief Financial Officer

 

 

Principal Financial Officer

 

 

 

 

By:

/s/ Matthew J. Majoros

 

 

Matthew J. Majoros

 

 

Senior Vice President, Financial Reporting

 

 

Principal Accounting Officer

 

48


 

Table of Contents

INDEX TO EXHIBITS

 

Exhibit
No.

 

Description

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1(1)

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2(1)

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document *

101.SCH

 

XBRL Taxonomy Extension Schema Document *

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document *

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document *

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document *

 


(1)

The material contained in Exhibit 32.1 and 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.

 

*Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016; (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016; (iii) the Condensed Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2017 and 2016; (iv) the Condensed Consolidated Statement of Equity for the three months ended March 31, 2017; (v) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; (vi) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.

 

 

 

49