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 |
|
(I.R.S Employer |
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
2
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
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
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
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
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 high‑end 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.
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
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
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
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
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
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
|
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
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 |
|
|