UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
¨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 ý  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 ý  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 ý
 
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 ý

As of November 1, 2018, 45,722,068 shares of the common stock with a par value of $0.005 per share were outstanding.
 




TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2





Envestnet, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(unaudited) 
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
153,542

 
$
60,115

Fees receivable, net
 
64,635

 
51,522

Prepaid expenses and other current assets
 
23,965

 
19,470

Total current assets
 
242,142


131,107

 
 
 
 
 
Property and equipment, net
 
44,713

 
35,909

Internally developed software, net
 
34,077

 
22,174

Intangible assets, net
 
318,267

 
222,731

Goodwill
 
519,923

 
432,955

Other non-current assets
 
23,893

 
17,176

Total assets
 
$
1,183,015


$
862,052

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accrued expenses and other liabilities
 
$
124,364

 
$
105,897

Accounts payable
 
20,577

 
11,097

Convertible Notes due 2019
 
164,003

 

Contingent consideration
 
719

 
2,115

Deferred revenue
 
24,423

 
21,246

Total current liabilities
 
334,086


140,355

 
 
 
 
 
Convertible Notes due 2023
 
292,078

 

Convertible Notes due 2019
 

 
158,990

Revolving credit facility
 

 
81,168

Contingent consideration
 

 
666

Deferred revenue
 
7,283

 
12,047

Deferred rent and lease incentive
 
17,373

 
15,185

Deferred tax liabilities, net
 
1,943

 
969

Other non-current liabilities
 
17,437

 
15,102

Total liabilities
 
670,200


424,482

 
 
 
 
 
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; 58,716,254 and 57,450,056 shares issued as of September 30, 2018 and December 31, 2017, respectively; 45,677,135 and 44,700,641 shares outstanding as of September 30, 2018 and December 31, 2017, respectively
 
293

 
287

Additional paid-in capital
 
637,639

 
556,257

Accumulated deficit
 
(59,105
)
 
(73,854
)
Treasury stock at cost, 13,039,119 and 12,749,415 shares as of September 30, 2018 and December 31, 2017, respectively
 
(64,926
)
 
(47,042
)
Accumulated other comprehensive income (loss)
 
(1,847
)
 
624

Total stockholders’ equity
 
512,054


436,272

Non-controlling interest
 
(139
)
 
398

Total equity
 
511,915

 
436,670

Total liabilities and equity
 
$
1,183,015


$
862,052

 
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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Asset-based
 
$
119,097

 
$
106,147

 
$
358,361

 
$
299,268

Subscription-based
 
76,194

 
62,963

 
217,668

 
180,675

Total recurring revenues
 
195,291


169,110


576,029


479,943

Professional services and other revenues
 
7,865

 
6,504

 
26,254

 
20,874

Total revenues
 
203,156

 
175,614

 
602,283

 
500,817

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenues
 
64,964

 
56,070

 
195,525

 
161,031

Compensation and benefits
 
80,424

 
68,551

 
244,174

 
199,079

General and administration
 
34,810

 
31,153

 
101,628

 
90,178

Depreciation and amortization
 
19,563

 
15,492

 
58,294

 
46,792

Total operating expenses
 
199,761


171,266


599,621


497,080

 
 
 
 
 
 
 
 
 
Income from operations
 
3,395

 
4,348

 
2,662

 
3,737

Other expense, net
 
(6,118
)
 
(3,986
)
 
(16,802
)
 
(13,838
)
Income (loss) before income tax provision (benefit)
 
(2,723
)

362


(14,140
)

(10,101
)
 
 
 
 
 
 
 
 
 
Income tax provision (benefit)
 
(5,234
)
 
1,682

 
(18,662
)
 
10,824

 
 
 
 
 
 
 
 
 
Net income (loss)
 
2,511

 
(1,320
)
 
4,522

 
(20,925
)
Add: Net loss attributable to non-controlling interest
 
443

 

 
1,010

 

Net income (loss) attributable to Envestnet, Inc.
 
$
2,954


$
(1,320
)

$
5,532


$
(20,925
)
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to Envestnet, Inc.:
 
 
 
 
 
 
 
 
Basic
 
$
0.06

 
$
(0.03
)
 
$
0.12

 
$
(0.48
)
 
 
 
 
 
 
 
 
 
Diluted
 
$
0.06

 
$
(0.03
)
 
$
0.12

 
$
(0.48
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
45,475,884

 
44,044,527

 
45,087,932

 
43,604,869

 
 
 
 
 
 
 
 
 
Diluted
 
47,519,160

 
44,044,527

 
47,269,479

 
43,604,869


See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4



Envestnet, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss) attributable to Envestnet, Inc.
 
$
2,954

 
$
(1,320
)
 
$
5,532

 
$
(20,925
)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
(1,108
)
 
(217
)
 
(2,471
)
 
592

Comprehensive income (loss) attributable to Envestnet, Inc.
 
$
1,846


$
(1,537
)

$
3,061


$
(20,333
)

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-
 
 
 
 
 
 
 
 
Common
 
 
 
Paid-in
 
Comprehensive
 
Accumulated
 
controlling
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Deficit
 
Interest
 
Equity
Balance, December 31, 2017
 
57,450,056

 
$
287

 
(12,749,415
)
 
$
(47,042
)
 
$
556,257

 
$
624

 
$
(73,854
)
 
$
398

 
$
436,670

Adoption of ASC 606 (See Note 4)
 

 

 

 

 

 

 
9,217

 

 
9,217

Exercise of stock options
 
349,468

 
2

 

 

 
5,197

 

 

 

 
5,199

Issuance of common stock - vesting of restricted stock units
 
916,730

 
4

 

 

 

 

 

 

 
4

Stock-based compensation expense
 

 

 

 

 
29,574

 

 

 

 
29,574

Purchase of treasury stock for stock-based tax withholdings
 

 

 
(289,704
)
 
(17,884
)
 

 

 

 

 
(17,884
)
Issuance of non-controlling units in private company
 

 

 

 

 

 

 

 
473

 
473

Issuance of Convertible Notes due 2023, net of offering costs
 

 

 

 

 
46,611

 

 

 

 
46,611

Foreign currency translation loss
 

 

 

 

 

 
(2,471
)
 

 

 
(2,471
)
Net income (loss)
 

 

 

 

 

 

 
5,532

 
(1,010
)
 
4,522

Balance, September 30, 2018
 
58,716,254

 
$
293


(13,039,119
)

$
(64,926
)

$
637,639


$
(1,847
)

$
(59,105
)

$
(139
)

$
511,915


See accompanying notes to unaudited Condensed Consolidated Financial Statements.


6



Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
4,522

 
$
(20,925
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
58,294

 
46,792

Deferred rent and lease incentive amortization
 
408

 
709

Provision for doubtful accounts
 
1,228

 
828

Deferred income taxes
 
(21,854
)
 
6,646

Stock-based compensation expense
 
29,574

 
23,451

Non-cash interest expense
 
12,337

 
8,711

Accretion on contingent consideration and purchase liability
 
209

 
408

Payments of contingent consideration
 

 
(357
)
Loss allocation from equity method investment
 
1,069

 
984

Loss on disposal of fixed assets
 
57

 
69

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
Fees receivable, net
 
(9,131
)
 
(6,286
)
Prepaid expenses and other current assets
 
(4,739
)
 
(5,316
)
Other non-current assets
 
(2,888
)
 
(1,784
)
Accrued expenses and other liabilities
 
6,710

 
13,289

Accounts payable
 
4,100

 
1,435

Deferred revenue
 
1,147

 
740

Other non-current liabilities
 
2,271

 
1,852

Net cash provided by operating activities
 
83,314


71,246

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
Purchase of property and equipment
 
(17,088
)
 
(11,432
)
Capitalization of internally developed software
 
(17,611
)
 
(9,210
)
Acquisition of businesses
 
(194,959
)
 
(1,450
)
Net cash used in investing activities
 
(229,658
)
 
(22,092
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from issuance of Convertible Notes due 2023
 
345,000

 

Convertible Notes due 2023 issuance costs
 
(9,982
)
 

Proceeds from borrowings on revolving credit facility
 
195,000

 
35,000

Revolving credit facility issuance costs
 

 
(94
)
Payments on revolving credit facility
 
(276,168
)
 
(42,500
)
Payments of contingent consideration
 
(2,193
)
 
(1,929
)
Payments of definite consideration
 

 
(445
)
Payments of purchase consideration liabilities
 

 
(235
)
Payment of Term Notes
 

 
(35,862
)
Proceeds from exercise of stock options
 
5,199

 
4,468

Purchase of treasury stock for stock-based tax withholdings
 
(17,884
)
 
(11,619
)
Issuance of restricted stock units
 
4

 
4

Net cash provided by (used in) financing activities
 
238,976

 
(53,212
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
(1,047
)
 
170

 
 
 
 
 
INCREASE (DECREASE) IN CASH,  CASH EQUIVALENTS AND RESTRICTED CASH
 
91,585


(3,888
)
 
 
 
 
 

7



CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
 
62,115

 
54,592

 
 
 
 
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2)
 
$
153,700


$
50,704

 
 
 
 
 
Supplemental disclosure of cash flow information - net cash paid (refunded) during the period for income taxes
 
$
3,874

 
$
(1,449
)
Supplemental disclosure of cash flow information - cash paid during the period for interest
 
5,780

 
4,887

Supplemental disclosure of non-cash operating, investing and financing activities:
 
 
 
 
Leasehold improvements funded by lease incentive
 
1,780

 
2,098

Non-cash debt issuance costs
 

 
2,230

Purchase liabilities included in accrued expenses and other liabilities
 
719

 
837

Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities
 
1,441

 
505


See accompanying notes to unaudited Condensed Consolidated Financial Statements.


8

Table of Contents
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. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.

The Company offers these solutions principally through the following product and 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 18,100 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.

Envestnet | Tamarac provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high‑end registered investment advisers (“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 nearly 4,000 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as over 1,700 proprietary products, such as quantitative portfolios and fund strategist 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 analytics platform powering dynamic, cloud-based innovation for digital financial 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.

2.
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements of the Company as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 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, 2017 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of September 30, 2018 and the results of operations, equity, comprehensive income (loss) and cash flows for the periods presented herein. The unaudited 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 unaudited condensed consolidated balance sheets as accumulated other comprehensive income (loss) within stockholders’ equity. The results of operations for the three and nine months ended September 30, 2018 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

9

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

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, 2017, filed with the SEC on February 28, 2018.
 
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 unaudited condensed consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, the determination of the period of benefit for deferred sales incentive commissions, 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.
 
The following table reconciles cash, cash equivalents and restricted cash from the condensed consolidated balance sheets to amounts reported within the condensed consolidated statements of cash flows:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Cash and cash equivalents
 
$
153,542

 
$
60,115

Restricted cash included in prepaid expenses and other current assets
 
158

 
2,000

Total cash, cash equivalents and restricted cash
 
$
153,700

 
$
62,115

 
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for revenue recognition. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and have been reflected in these condensed consolidated financial statements (See “Note 4 – Revenue”).
 
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 and will be applied using a modified retrospective approach with optional practical expedients. Early adoption of the standard is permitted. The Company will adopt the new standard on its effective date of January 1, 2019 using the cumulative-effect adjustment transition method approved by the FASB in July 2018 and plans to elect certain available transitional practical expedients. Based on current analysis, the adoption of the standard should have a material impact on our consolidated balance sheets and related disclosures while not significantly impacting financial results. We continue to evaluate the accounting, transition, and disclosure requirements of this standard.  
 
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 standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and have been reflected in these condensed consolidated financial statements. Retrospective adoption of ASU 2016-15 did not have a material impact on the Company’s presentation of the condensed consolidated statements of cash flows.
 
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” which amends ASC 230 to provide clarifying guidance on the classification and presentation of restricted cash in the statement of cash flows. Additional disclosure is required to reconcile between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January

10

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

1, 2018 and included $158 and $2,000 of restricted cash in the total of cash, cash equivalents and restricted cash in the condensed consolidated balance sheets for the nine months ended September 30, 2018 and December 31, 2017, respectively. A reconciliation of restricted cash for each period is included within this footnote.
 
In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business (Topic 805),” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and did not have a material impact to these condensed consolidated financial statements. This standard will be applied to all future business acquisition and disposal transactions.
 
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018. This standard will be applied to all future modifications of share-based payment awards.
 
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This update clarifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees. Specifically, the update aligns the accounting for payments to nonemployees to match the accounting for payments to employees, no longer accounting for these transactions differently. This standard is effective for financial statements issued by public companies for 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. 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This update aims to improve the effectiveness of disclosure requirements on fair value measurement as part of the disclosure framework project. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements. 

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” This update is intended to guide entities in evaluating the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance for determining when the arrangement includes a software license. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements. 

3.
Business Acquisitions
 
FolioDynamix
 
On January 2, 2018, the Company acquired (the “Acquisition”) all of the issued and outstanding membership interests of FolioDynamics Holdings, Inc. (“FolioDynamix”) through a merger of FolioDynamix with and into a wholly owned subsidiary of Envestnet.
 
FolioDynamix provides financial institutions, RIAs, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services. FolioDynamix is included in the Envestnet segment.
 
The Company acquired FolioDynamix to add complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. Envestnet expects to integrate the technology and operations of FolioDynamix into the

11

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Company’s wealth management channel, enabling the Company to further leverage its operating scale and data analytics capabilities.
 
The Company funded the transaction with a combination of cash on the Company’s balance sheet, purchase consideration liabilities and borrowings under its revolving credit facility.
 
The estimated consideration transferred in the acquisition was as follows:
 
 
 
 
Measurement
 
 
 
 
Preliminary
 
Period
 
Revised
 
 
Estimate
 
Adjustments
 
Estimate
Cash consideration
 
$
187,580

 
$
12,297

 
$
199,877

Purchase consideration liability
 
12,297

 
(12,297
)
 

Working capital and other adjustments
 
(3,893
)
 
(2,500
)
 
(6,393
)
Total
 
$
195,984

 
$
(2,500
)
 
$
193,484


The estimated fair values of working capital balances, property and equipment, deferred revenue, deferred income taxes, unrecognized tax benefits, 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 tangible assets and liabilities, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than January 2, 2019.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
 
 
 
Measurement
 
 
 
 
Preliminary
 
Period
 
Revised
 
 
Estimate
 
Adjustments
 
Estimate
Cash and cash equivalents
 
$
4,876

 
$

 
$
4,876

Accounts receivable
 
4,962

 

 
4,962

Prepaid expenses and other current assets
 
1,600

 

 
1,600

Property and equipment, net
 
927

 

 
927

Other non-current assets
 
441

 

 
441

Identifiable intangible assets
 
117,700

 
18,000

 
135,700

Goodwill
 
97,248

 
(16,041
)
 
81,207

Total assets acquired
 
227,754

 
1,959

 
229,713

Accounts payable
 
(5,358
)
 

 
(5,358
)
Accrued expenses
 
(7,173
)
 

 
(7,173
)
Deferred tax liability
 
(18,245
)
 
(4,583
)
 
(22,828
)
Deferred revenue
 
(930
)
 
124

 
(806
)
Other non-current liabilities
 
(64
)
 

 
(64
)
Total liabilities assumed
 
(31,770
)

(4,459
)

(36,229
)
Total net assets acquired
 
$
195,984


$
(2,500
)

$
193,484

 
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible

12

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

for income tax purposes. During the third quarter the estimated fair value of the customer list intangible was revised due to a change in the assumed attrition rate of the customer base acquired.
 
A summary of preliminary estimated identifiable intangible assets acquired, preliminary estimated useful lives and amortization method is as follows: 
 
 
 
 
Measurement
 
 
 
 
 
 
 
 
Preliminary
 
Period
 
Revised
 
Useful Life 
 
Amortization
 
 
Estimate
 
Adjustments
 
Estimate
 
in Years
 
Method
Customer list
 
$
95,000

 
$
18,500

 
$
113,500

 
13
 
Accelerated
Proprietary technology
 
18,000

 
(500
)
 
17,500

 
5
 
Straight-line
Trade names and domains
 
4,700

 

 
4,700

 
6
 
Straight-line
Total
 
$
117,700

 
$
18,000

 
$
135,700

 
 
 
 

The results of FolioDynamix’s operations are included in the condensed consolidated statements of operations beginning January 2, 2018. FolioDynamix’s revenues for the three and nine month periods ended September 30, 2018 totaled $16,404 and $51,204, respectively. FolioDynamix’s pre-tax loss for the three and nine month periods ended September 30, 2018 totaled $4,247 and $12,228, respectively. The pre-tax loss includes estimated acquired intangible asset amortization of $4,706 and $13,407 for the three and nine month periods ended September 30, 2018.

For the three and nine month periods ended September 30, 2018, acquisition related costs for FolioDynamix totaled $260 and $854, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the remainder of 2018.

Acquisition of private company
 
In August 2018, the Company acquired all of the issued and outstanding membership interests of a private technology company that provides market research analytics. The private company is included in the Envestnet | Yodlee segment. In connection with this acquisition, the Company paid estimated net consideration of $6,585, subject to certain closing and post-closing adjustments.
The preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition are not material. As a result the remaining balance was allocated to goodwill in the amount of $6,885. The goodwill is not deductible for income tax purposes.
Pro forma results for Envestnet, Inc. giving effect to the FolioDynamix acquisition

The following pro forma financial information presents the combined results of operations of Envestnet and FolioDynamix for the three and nine month periods ended September 30, 2017. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017. The results of the private company acquisition are not included in the pro forma financial information presented below as they were not considered material to the Company's results of operations.

The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.

Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2017.

13

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2017
Revenues
 
$
185,717

 
$
530,231

Net loss
 
(12,290
)
 
(37,112
)
Net loss per share:
 
 
 
 
Basic
 
(0.28
)
 
(0.85
)
Diluted
 
(0.28
)
 
(0.85
)

4.
Revenue

On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent ASUs that modified Topic 606 (“ASC 606” or “new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The Company recognized the cumulative effect of the initial application of the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and will continue to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to the results of operations on an ongoing basis.

The majority of our revenues continue to be recognized when services are provided. The adoption of the new revenue standard primarily impacts timing of revenue recognition for initial implementation services, deferral of incremental direct costs in obtaining contracts with customers and gross versus net presentation related to certain third party manager agreements.

The cumulative effect of the changes made to the Company’s condensed consolidated balance sheets as of January 1, 2018 for the adoption of the new revenue standard was as follows:
 
 
 
 
Cumulative
 
 
 
 
Balance at
 
Catch-up
 
Balance at
 
 
December 31, 2017
 
Adjustments
 
January 1, 2018
Balance Sheets
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Other non-current assets
 
$
17,176

 
$
5,315

 
$
22,491

Liabilities:
 
 
 
 
 


Deferred revenue, current
 
21,246

 
(1,122
)
 
20,124

Deferred revenue, non-current
 
12,047

 
(2,780
)
 
9,267

Equity:
 
 
 
 
 


Accumulated deficit
 
(73,854
)
 
9,217

 
(64,637
)
 

14

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

In accordance with the new revenue standard requirements, the impact of adoption on the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets was as follows:
 
 
Three Months Ended September 30, 2018
 
 
 
 
Without Adoption of
 
Effect of Change
 
 
As Reported
 
ASC 606
 
Higher/(Lower)
Statements of Operations
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Asset-based
 
$
119,097

 
$
122,770

 
$
(3,673
)
Subscription-based
 
76,194

 
76,194

 

Total recurring revenues
 
195,291

 
198,964

 
(3,673
)
Professional services and other revenues
 
7,865

 
7,849

 
16

Total revenues
 
203,156


206,813


(3,657
)
Operating expenses:
 
 

 
 

 


Cost of revenues
 
64,964

 
68,637

 
(3,673
)
Compensation and benefits
 
80,424

 
80,955

 
(531
)
Total operating expenses
 
199,761

 
203,965

 
(4,204
)
 
 
 
 
 
 


Income from operations
 
3,395

 
2,848

 
547

 
 
 
 
 
 


Net income
 
2,511

 
1,964

 
547

 
 
 
 
 
 


Net income attributable to Envestnet, Inc.
 
2,954

 
2,407

 
547


 
 
Nine months ended September 30, 2018
 
 
 
 
Without Adoption of
 
Effect of Change
 
 
As Reported
 
ASC 606
 
Higher/(Lower)
Statements of Operations
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Asset-based
 
$
358,361

 
$
369,169

 
$
(10,808
)
Subscription-based
 
217,668

 
217,668

 

Total recurring revenues
 
576,029

 
586,837

 
(10,808
)
Professional services and other revenues
 
26,254

 
26,434

 
(180
)
Total revenues
 
602,283


613,271

 
(10,988
)
Operating expenses:
 
 

 
 

 


Cost of revenues
 
195,525

 
206,333

 
(10,808
)
Compensation and benefits
 
244,174

 
245,152

 
(978
)
Total operating expenses
 
599,621

 
611,407

 
(11,786
)
 
 
 
 
 
 


Income from operations
 
2,662

 
1,864

 
798

 
 
 
 
 
 


Net income
 
4,522

 
3,724

 
798

 
 
 
 
 
 


Net income attributable to Envestnet, Inc.
 
5,532

 
4,734

 
798

 

15

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

 
 
At September 30, 2018
 
 
 
 
Without Adoption of
 
Effect of Change
 
 
As Reported
 
ASC 606
 
Higher/(Lower)
Balance Sheets
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Fees receivable, net
 
$
64,635

 
$
63,631

 
$
1,004

Other non-current assets
 
23,893

 
17,600

 
6,293

Liabilities:
 
 
 
 
 


Accounts payable
 
20,577

 
19,573

 
1,004

Deferred revenue, current
 
24,423

 
24,908

 
(485
)
Deferred revenue, non-current
 
7,283

 
10,520

 
(3,237
)
Equity:
 
 
 
 
 

Accumulated deficit
 
(59,105
)
 
(69,120
)
 
10,015

 
The impact of adoption on the Company’s condensed consolidated statements of cash flows is immaterial.
 
Summary of Significant Accounting Policies

Except for the accounting policies for revenue recognition, fees receivable including unbilled receivables and deferred sales incentive compensation that were updated as a result of adopting ASC 606, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.

Revenue Recognition
 
The Company derives revenues from asset-based and subscription-based services and professional services and other sources. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.
 
Asset-based revenue (formerly assets under management or administration revenue)

Asset-based revenue primarily consists of fees for providing customers continuous access to platform services through the Company’s uniquely customized platforms. These platform services include investment manager due diligence and research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration and are made available to customers throughout the contractual term from the date the customized platform is launched. 

The asset-based fees the Company earns are generally based upon variable percentages of assets managed or administered on our platforms. The fee percentage varies based on the level and type of services the Company provides to its customers, as well as the values of existing customer accounts. The values of the customer accounts are affected by inflows or outflows of customer funds and market fluctuations.

The platform services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the customer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our services and each quarter is separately identified in the contract, and are considered to be a single performance obligation under the new revenue standard.

The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the variable amounts earned from the platform services relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.

16

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)


The asset-based contracts generally contain one performance obligation and revenue is recognized on a ratable basis over the quarter beginning on the date that the platform services are made available to the customer as the customer simultaneously consumes and receives the benefits of the services. All asset-based fees are recognized in the Envestnet segment.
 
For certain services provided by third parties, the Company evaluates whether it is the principal (revenues reported on a gross basis) or agent (revenues reported on a net basis). Generally, the Company reports customer fees including charges for third party service providers where the Company has a direct contract with such third party service providers on a gross basis, whereas the amounts billed to its customers are recorded as revenues, and amounts paid to third party service providers are recorded as cost of revenues. The Company is the principal in the transaction because it controls the services before they are transferred to its customers. Control is evidenced by the Company being primarily responsible to its customers and having discretion in establishing pricing.
 
Subscription-based revenue (formerly subscription and licensing revenue)
 
Subscription-based revenue primarily consists of fees for providing customers continuous access to the Company’s platform for wealth management and financial wellness. The subscription-based fees generally include fixed fees and or usage-based fees.
 
Generally, the subscription services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. Quarterly subscription services are considered distinct as the customer can benefit from each increment of services on its own and each quarter is separately identified in the contract, and services are considered to be a single performance obligation under the new revenue standard.
 
The usage-based pricing generally resets each quarter and the pricing structure is generally consistent throughout the term of the contract. The fixed fees are generally calculated and billed quarterly in advance. The usage-based fees are generally calculated and are billed either monthly or quarterly based on the actual usage and relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
 
Certain subscription-based contracts contain multiple performance obligations (i.e. platform services performance obligation and professional services performance obligation). Fixed fees are generally recognized on a ratable basis over the quarter beginning when the subscription services are made available to the customer, as the customer simultaneously receives and consumes the benefits of the subscription services. Usage-based revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the services. Subscription-based fees are recognized in both the Envestnet and Envestnet | Yodlee segments.
 
Professional services and other revenues
 
The Company earns professional services fees by providing contractual customized services and platform software development as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverables in the contract. Certain professional services contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Initial implementation fees are fixed and recognized ratably over the contract term. 
 
Other revenue primarily includes revenue related to the Advisor Summit. Other revenue is recognized when the events are held. Other revenue is not significant.
 
The majority of the professional services and other contracts contain one performance obligation. Professional services and other revenues are recognized in both the Envestnet and Envestnet | Yodlee segments.
 
Arrangements with multiple performance obligations
 
Certain of the Company’s contracts with customers contain multiple performance obligations such as platform services performance obligation and professional services performance obligation.  For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Standalone selling prices of services are

17

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

estimated based on observable transactions when these services are sold on a standalone basis or based on expected cost plus margin.
 
Disaggregation of revenue
 
The following table presents the Company’s revenues disaggregated by major source:
 
 
Three Months Ended September 30,
 
 
2018
 
2017
 
 
Envestnet
 
Envestnet | Yodlee
 
Consolidated
 
Envestnet(1)
 
Envestnet | Yodlee(1)
 
Consolidated(1)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-based
 
$
119,097

 
$

 
$
119,097

 
$
106,147

 
$

 
$
106,147

Subscription-based
 
36,228

 
39,966

 
76,194

 
27,012

 
35,951

 
62,963

Total recurring revenues
 
155,325

 
39,966

 
195,291

 
133,159

 
35,951

 
169,110

Professional services and other revenues
 
2,142

 
5,723

 
7,865

 
2,789

 
3,715

 
6,504

Total revenues
 
$
157,467

 
$
45,689

 
$
203,156

 
$
135,948

 
$
39,666

 
$
175,614

 
(1)
As noted above, prior period amounts have not been adjusted under the modified retrospective method.
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
Envestnet
 
Envestnet | Yodlee
 
Consolidated
 
Envestnet(1)
 
Envestnet | Yodlee(1)
 
Consolidated(1)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-based
 
$
358,361

 
$

 
$
358,361

 
$
299,268

 
$

 
$
299,268

Subscription-based
 
101,836

 
115,832

 
217,668

 
77,720

 
102,955

 
180,675

Total recurring revenues
 
460,197

 
115,832

 
576,029

 
376,988

 
102,955

 
479,943

Professional services and other revenues
 
10,186

 
16,068

 
26,254

 
9,650

 
11,224

 
20,874

Total revenues
 
$
470,383

 
$
131,900

 
$
602,283

 
$
386,638

 
$
114,179

 
$
500,817

(1)
As noted above, prior period amounts have not been adjusted under the modified retrospective method.
 
The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017(2)
 
2018
 
2017(2)
United States
 
$
195,063

 
$
158,750

 
$
576,616

 
$
452,333

International (1)
 
8,093

 
16,864

 
25,667

 
48,484

Total
 
$
203,156

 
$
175,614

 
$
602,283

 
$
500,817

(1)
No foreign country accounted for more than 10% of total revenues.
(2)
As noted above, prior period amounts have not been adjusted under the modified retrospective method.

One customer accounted for more than 10% of the Company’s total revenues:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Fidelity
 
17
%
 
17
%
 
17
%
 
17
%
 

18

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Remaining performance obligations
 
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018:
 
Years ending December 31,
 

Remainder of 2018
$
52,301

2019
168,264

2020
101,449

2021
58,544

2022
44,319

Thereafter
56,336

Total
$
481,213


Only fixed consideration from significant contracts with customers is included in the amounts presented above.

The Company has applied the practical expedients and exemption and does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed; and (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligations or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.

Contract balances

The Company records contract liabilities (deferred revenue) when cash payments are received in advance of its performance. The term between invoicing date and when payment is due is generally not significant. For the majority of its arrangements, the Company requires advance quarterly payments before the services are delivered to the customer.

Deferred revenue primarily consists of implementation fees, professional services, and subscription fee payments received in advance from customers.

Contract assets would exist when revenues have been recorded (i.e. control of goods or services has been transferred to the customer) but customer payment is contingent on a future event beyond the passage of time (i.e. satisfaction of additional performance obligations). The Company does not have any material contract assets. Unbilled receivables, which are not classified as contract assets, represent arrangements in which revenues have been recorded prior to billing and right to payment is unconditional.

The opening and closing balances of the Company’s billed receivables, unbilled receivables, and deferred revenues are as follows:
 
 
Receivables,
 
Unbilled receivables,
 
 
 
 
 
 
which are included in
 
which are included in
 
Deferred Revenue
 
Deferred Revenue
 
 
Fees receivable, net
 
Fees receivable, net
 
(current)
 
(non-current)
Opening balance as of January 1, 2018
 
$
36,605

 
$
13,229

 
$
20,124

 
$
9,267

Increase/(decrease), net
 
11,421

 
3,380

 
4,299

 
(1,984
)
Ending balance as of September 30, 2018
 
$
48,026

 
$
16,609

 
$
24,423

 
$
7,283


The increase in receivables is primarily a result of timing of payments for asset-based and subscription-based revenues relative to the first nine months of 2018 and the acquisition of FolioDynamix.  

The increase in unbilled receivables is primarily driven by revenue recognized in excess of billings related to asset-based services during the nine months ended September 30, 2018.


19

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The increase in deferred revenue is primarily the result of an increase in deferred revenue related to subscription-based services during the nine months ended September 30, 2018, most of which will be recognized over the course of the next twelve months.

The amount of revenue recognized that was included in the opening deferred revenue balance was $3,250 and $16,503 for the three and nine months ended September 30, 2018, respectively. The majority of this revenue consists of  subscription-based revenue and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.

Deferred sales incentive compensation

Sales incentive compensation earned by the Company’s sales force is considered an incremental and recoverable cost to acquire a contract with a customer. Sales incentive compensation for initial contracts is deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five years. The Company determined the period of benefit by taking into consideration its customer contracts, life of the technology and other factors. Sales incentive compensation for renewal contracts are deferred and amortized on a straight-line basis over the related contractual renewal period. Deferred sales incentive compensation is included in other non-current assets on the consolidated balance sheet and amortization expense is included in compensation and benefits expenses on the condensed consolidated statements of operations.
Deferred sales incentive compensation was $6,293 as of September 30, 2018. Amortization expense for the deferred sales incentive compensation was $552 and $1,570 for the three and nine months ended September 30, 2018, respectively. No significant impairment loss for capitalized costs was recorded during the period.

The Company has applied the practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in compensation and benefits expenses on the condensed consolidated statements of operations.

5.
Cost of Revenues
 
The following table summarizes cost of revenues by revenue category for the periods presented herein:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Asset-based
 
$
57,932

 
$
50,597

 
$
172,252

 
$
142,097

Subscription-based
 
6,626

 
5,076

 
18,065

 
14,832

Professional services and other
 
406

 
397

 
5,208

 
4,102

Total
 
$
64,964


$
56,070


$
195,525


$
161,031



20

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

6.
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consist of the following:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Prepaid technology
 
$
7,063

 
$
1,843

Non-income tax receivable
 
3,488

 
2,704

Prepaid outside information services
 
1,488

 
1,395

Prepaid insurance
 
1,413

 
575

Service tax receivable
 
1,268

 
1,507

Prepaid rent
 
995

 
959

Restricted cash
 
158

 
2,000

Income tax receivable
 

 
1,684

Other
 
8,092

 
6,803

 
 
$
23,965

 
$
19,470

 
7.
Property and Equipment, Net
 
Property and equipment, net consists of the following:
 
 
 
 
September 30,
 
December 31,
 
 
Estimated Useful Life
 
2018
 
2017
Cost:
 
 
 
 

 
 

Computer equipment and software
 
3 years
 
$
63,522

 
$
56,192

Leasehold improvements
 
Shorter of the lease term or useful life of the asset
 
27,771

 
23,192

Office furniture and fixtures
 
3-7 years
 
9,199

 
8,110

Other office equipment
 
3-5 years
 
5,416

 
2,052

 
 
 
 
105,908

 
89,546

Less: accumulated depreciation and amortization
 
 
 
(61,195
)
 
(53,637
)
Property and equipment, net
 
 
 
$
44,713

 
$
35,909

 
During the three and nine months ended September 30, 2018, the Company retired property and equipment that was no longer in service in the amount of $1,611 and $8,349, primarily related to fully depreciated computer equipment and software assets. Of the $1,611, $872 of the assets originated in the Envestnet segment and the remaining $739 originated in the Envestnet | Yodlee segment for the three months ended September 30, 2018. Of the $8,349, $4,209 of the assets originated in the Envestnet segment and the remaining $4,140 originated in the Envestnet | Yodlee segment for the nine months ended September 30, 2018. Asset retirements during the three and nine months ended September 30, 2017 were not material. Losses on asset retirements were not material during the three and nine months ended September 30, 2018 and 2017.
 
Depreciation and amortization expense was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Depreciation and amortization expense
 
$
3,917

 
$
3,724

 
$
11,755

 
$
11,668

 

21

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

8.
Internally Developed Software, Net
 
Internally developed software, net consists of the following:
 
 
 
 
September 30,
 
December 31,
 
 
Estimated Useful Life
 
2018
 
2017
Internally developed software
 
5 years
 
$
63,953

 
$
46,342

Less: accumulated amortization
 
 
 
(29,876
)
 
(24,168
)
Internally developed software, net
 
 
 
$
34,077

 
$
22,174

 
Amortization expense was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Amortization expense
 
$
2,169

 
$
1,391

 
$
5,708

 
$
3,791

 
9.
Goodwill & Intangible Assets, Net
 
Changes in the carrying amount of goodwill were as follows:
 
 
Envestnet
 
Envestnet | Yodlee
 
Total
Balance at December 31, 2017
 
$
163,751

 
$
269,204

 
$
432,955

FolioDynamix acquisition
 
81,207

 

 
81,207

Private company acquisition
 

 
6,885

 
6,885

Foreign currency
 

 
(1,124
)
 
(1,124
)
Balance at September 30, 2018
 
$
244,958


$
274,965


$
519,923


Intangible assets, net consist of the following:
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
 
    
 
Gross
 
 
 
Net
 
Gross
 
 
 
Net
 
 
Estimated
 
Carrying
 
Accumulated
 
Carrying
 
Carrying
 
Accumulated
 
Carrying
 
 
Useful Life
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Customer lists
 
7
15
 
years
 
$
372,850

 
$
(105,186
)
 
$
267,664

 
$
259,350

 
$
(78,482
)
 
$
180,868

Proprietary technologies
 
4
8
 
years
 
75,544

 
(41,714
)
 
33,830

 
57,377

 
(31,067
)
 
26,310

Trade names
 
1
7
 
years
 
29,540

 
(12,919
)
 
16,621

 
24,840

 
(9,701
)
 
15,139

Backlog
 
 
 
4
 
years
 
11,000

 
(10,848
)
 
152

 
11,000

 
(10,586
)
 
414

Total intangible assets
 
 
 
 
 
 
 
$
488,934

 
$
(170,667
)
 
$
318,267

 
$
352,567

 
$
(129,836
)
 
$
222,731


Amortization expense was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Amortization expense
 
$
13,477

 
$
10,377

 
$
40,831

 
$
31,333

 
Future amortization expense of the intangible assets as of September 30, 2018, is expected to be as follows:

22

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Years ending December 31,
 

Remainder of 2018
$
12,984

2019
48,334

2020
44,380

2021
35,744

2022
33,266

Thereafter
143,559

 
$
318,267



23

Table of Contents
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

10.
Other Non-Current Assets
 
Other non-current assets consist of the following:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Assets to fund deferred compensation liability
 
$
6,879

 
$
5,185

Deferred sales incentive compensation
 
6,293

 

Lease and other deposits
 
4,251