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 March 31, 2019
¨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.) |
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| | |
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):
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| | |
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
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| | |
Title of each class | Trading symbol(s) | Name of exchange on which registered |
Common Stock, par value $0.005 per share | ENV | New York Stock Exchange |
As of May 2, 2019, Envestnet, Inc. had 51,870,583 shares of common stock outstanding.
TABLE OF CONTENTS
Envestnet, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(unaudited)
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 245,735 |
| | $ | 289,345 |
|
Fees receivable, net | | 66,365 |
| | 68,004 |
|
Prepaid expenses and other current assets | | 36,916 |
| | 23,557 |
|
Total current assets | | 349,016 |
|
| 380,906 |
|
| | | | |
Property and equipment, net | | 46,794 |
| | 44,991 |
|
Internally developed software, net | | 42,771 |
| | 38,209 |
|
Intangible assets, net | | 296,813 |
| | 305,241 |
|
Goodwill | | 540,524 |
| | 519,102 |
|
Operating lease right-of-use assets, net | | 67,728 |
| | — |
|
Other non-current assets | | 26,945 |
| | 25,298 |
|
Total assets | | $ | 1,370,591 |
|
| $ | 1,313,747 |
|
| | | | |
Liabilities and Equity: | | | | |
Current liabilities: | | | | |
Accrued expenses and other liabilities | | $ | 101,457 |
| | $ | 133,298 |
|
Accounts payable | | 25,135 |
| | 19,567 |
|
Operating lease liabilities | | 12,309 |
| | — |
|
Convertible Notes due 2019 | | 167,442 |
| | 165,711 |
|
Contingent consideration | | 744 |
| | 732 |
|
Deferred revenue | | 31,639 |
| | 23,988 |
|
Total current liabilities | | 338,726 |
|
| 343,296 |
|
| | | | |
Convertible Notes due 2023 | | 297,392 |
| | 294,725 |
|
Contingent consideration | | 7,717 |
| | — |
|
Deferred revenue | | 6,580 |
| | 6,910 |
|
Non-current operating lease liabilities | | 73,377 |
| | — |
|
Deferred rent and lease incentive | | — |
| | 17,569 |
|
Deferred tax liabilities, net | | 809 |
| | 640 |
|
Other non-current liabilities | | 24,452 |
| | 18,005 |
|
Total liabilities | | 749,053 |
| | 681,145 |
|
| | | | |
Commitments and contingencies | |
|
| |
|
|
| | | | |
Equity: | | | | |
Stockholders’ equity: | | | | |
Preferred stock, par value $0.005, 50,000,000 shares authorized | | — |
| | — |
|
Common stock, par value $0.005, 500,000,000 shares authorized; 61,934,458 and 61,238,898 shares issued as of March 31, 2019 and December 31, 2018, respectively; 48,656,904 and 48,121,800 shares outstanding as of March 31, 2019 and December 31, 2018, respectively | | 309 |
| | 306 |
|
Additional paid-in capital | | 777,926 |
| | 761,128 |
|
Accumulated deficit | | (77,067 | ) | | (58,882 | ) |
Treasury stock at cost, 13,277,554 and 13,117,098 shares as of March 31, 2019 and December 31, 2018, respectively | | (77,677 | ) | | (67,858 | ) |
Accumulated other comprehensive loss | | (772 | ) | | (994 | ) |
Total stockholders’ equity | | 622,719 |
| | 633,700 |
|
Non-controlling interest | | (1,181 | ) | | (1,098 | ) |
Total equity | | 621,538 |
| | 632,602 |
|
Total liabilities and equity | | $ | 1,370,591 |
|
| $ | 1,313,747 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share information)
(unaudited)
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Revenues: | | | | |
Asset-based | | $ | 108,934 |
| | $ | 121,153 |
|
Subscription-based | | 83,087 |
| | 69,695 |
|
Total recurring revenues | | 192,021 |
|
| 190,848 |
|
Professional services and other revenues | | 7,645 |
| | 7,163 |
|
Total revenues | | 199,666 |
|
| 198,011 |
|
| | | | |
Operating expenses: | | | | |
Cost of revenues | | 61,645 |
| | 62,934 |
|
Compensation and benefits | | 86,717 |
| | 83,540 |
|
General and administration | | 40,524 |
| | 32,729 |
|
Depreciation and amortization | | 19,517 |
| | 19,546 |
|
Total operating expenses | | 208,403 |
|
| 198,749 |
|
| | | | |
Loss from operations | | (8,737 | ) | | (738 | ) |
Other expense, net | | (5,763 | ) |
| (5,254 | ) |
Loss before income tax provision (benefit) | | (14,500 | ) |
| (5,992 | ) |
| | | | |
Income tax provision (benefit) | | 3,768 |
| | (13,994 | ) |
| | | | |
Net income (loss) | | (18,268 | ) |
| 8,002 |
|
Add: Net loss attributable to non-controlling interest | | 83 |
| | 102 |
|
Net income (loss) attributable to Envestnet, Inc. | | $ | (18,185 | ) |
| $ | 8,104 |
|
| | | | |
Net income (loss) per share attributable to Envestnet, Inc.: | | | | |
Basic | | $ | (0.38 | ) | | $ | 0.18 |
|
Diluted | | $ | (0.38 | ) | | $ | 0.17 |
|
| | | | |
Weighted average common shares outstanding: | | | | |
Basic | | 48,237,265 |
| | 44,782,982 |
|
Diluted | | 48,237,265 |
| | 47,145,560 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Net income (loss) attributable to Envestnet, Inc. | | $ | (18,185 | ) | | $ | 8,104 |
|
Other comprehensive income (loss), net of taxes: | | | | |
Foreign currency translation gain (loss) | | 222 |
| | (327 | ) |
Comprehensive income (loss) attributable to Envestnet, Inc. | | $ | (17,963 | ) |
| $ | 7,777 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
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, 2018 | | 61,238,898 |
| | $ | 306 |
| | (13,117,098 | ) | | $ | (67,858 | ) | | $ | 761,128 |
| | $ | (994 | ) | | $ | (58,882 | ) | | $ | (1,098 | ) | | $ | 632,602 |
|
Exercise of stock options | | 200,326 |
| | 1 |
| | — |
| | — |
| | 3,162 |
| | — |
| | — |
| | — |
| | 3,163 |
|
Issuance of common stock - vesting of restricted stock units | | 479,479 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Acquisition of business | | 15,755 |
| | — |
| | — |
| | — |
| | 772 |
| | — |
| | — |
| | — |
| | 772 |
|
Stock-based compensation expense | | — |
| | — |
| | — |
| | — |
| | 12,864 |
| | — |
| | — |
| | — |
| | 12,864 |
|
Purchase of treasury stock for stock-based tax withholdings | | — |
| | — |
| | (160,456 | ) | | (9,819 | ) | | — |
| | — |
| | — |
| | — |
| | (9,819 | ) |
Foreign currency translation gain | | — |
| | — |
| | — |
| | — |
| | — |
| | 222 |
| | — |
| | — |
| | 222 |
|
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18,185 | ) | | (83 | ) | | (18,268 | ) |
Balance, March 31, 2019 | | 61,934,458 |
|
| $ | 309 |
|
| (13,277,554 | ) |
| $ | (77,677 | ) |
| $ | 777,926 |
|
| $ | (772 | ) |
| $ | (77,067 | ) |
| $ | (1,181 | ) |
| $ | 621,538 |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
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 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,217 |
| | — |
| | 9,217 |
|
Exercise of stock options | | 162,857 |
| | 1 |
| | — |
| | — |
| | 2,403 |
| | — |
| | — |
| | — |
| | 2,404 |
|
Issuance of common stock - vesting of restricted stock units | | 503,668 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Stock-based compensation expense | | — |
| | — |
| | — |
| | — |
| | 8,495 |
| | — |
| | — |
| | — |
| | 8,495 |
|
Purchase of treasury stock for stock-based tax withholdings | | — |
| | — |
| | (166,217 | ) | | (9,296 | ) | | — |
| | — |
| | — |
| | — |
| | (9,296 | ) |
Issuance of non-controlling units in private company | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 873 |
| | 873 |
|
Foreign currency translation loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (327 | ) | | — |
| | — |
| | (327 | ) |
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,104 |
| | (102 | ) | | 8,002 |
|
Balance, March 31, 2018 | | 58,116,581 |
| | $ | 290 |
| | (12,915,632 | ) | | $ | (56,338 | ) | | $ | 567,155 |
| | $ | 297 |
| | $ | (56,533 | ) | | $ | 1,169 |
| | $ | 456,040 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
OPERATING ACTIVITIES: | | | | |
Net income (loss) | | $ | (18,268 | ) | | $ | 8,002 |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | |
Depreciation and amortization | | 19,517 |
| | 19,546 |
|
Deferred rent and lease incentive amortization | | — |
| | 385 |
|
Provision for doubtful accounts | | 451 |
| | 461 |
|
Deferred income taxes | | 169 |
| | (17,923 | ) |
Stock-based compensation expense | | 12,864 |
| | 8,495 |
|
Non-cash interest expense | | 6,880 |
| | 3,209 |
|
Accretion on contingent consideration and purchase liability | | 240 |
| | 101 |
|
Loss allocation from equity method investment | | 203 |
| | 660 |
|
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Fees receivable, net | | 1,198 |
| | (10,191 | ) |
Prepaid expenses and other current assets | | (13,346 | ) | | (3,665 | ) |
Other non-current assets | | (1,060 | ) | | (2,461 | ) |
Accrued expenses and other liabilities | | (34,495 | ) | | (17,404 | ) |
Accounts payable | | 5,179 |
| | 1,594 |
|
Deferred revenue | | 7,039 |
| | 7,056 |
|
Other non-current liabilities | | 854 |
| | 1,382 |
|
Net cash used in operating activities | | (12,575 | ) | | (753 | ) |
| | | | |
INVESTING ACTIVITIES: | | | | |
Purchase of property and equipment | | (5,247 | ) | | (4,988 | ) |
Capitalization of internally developed software | | (7,185 | ) | | (4,599 | ) |
Acquisition of business | | (11,061 | ) | | (178,583 | ) |
Other | | (1,000 | ) | | — |
|
Net cash used in investing activities | | (24,493 | ) | | (188,170 | ) |
| | | | |
FINANCING ACTIVITIES: | | | | |
Proceeds from borrowings on revolving credit facility | | — |
| | 195,000 |
|
Payments on revolving credit facility | | — |
| | (15,000 | ) |
Proceeds from exercise of stock options | | 3,163 |
| | 2,404 |
|
Purchase of treasury stock for stock-based tax withholdings | | (9,819 | ) | | (9,296 | ) |
Issuance of restricted stock units | | 2 |
| | 2 |
|
Net cash provided by (used in) financing activities | | (6,654 | ) | | 173,110 |
|
| | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | 112 |
| | (109 | ) |
| | | | |
DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | (43,610 | ) |
| (15,922 | ) |
| | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | | 289,671 |
| | 62,115 |
|
| | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) | | $ | 246,061 |
| | $ | 46,193 |
|
| | | | |
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes | | $ | 4,998 |
| | $ | 1,359 |
|
Supplemental disclosure of cash flow information - cash paid during the period for interest | | 216 |
| | 1,974 |
|
Supplemental disclosure of non-cash operating, investing and financing activities: | | | | |
Common stock issued to settle purchase liability | | 772 |
| | — |
|
Contingent consideration issued in business acquisition | | 7,580 |
| | — |
|
Purchase liabilities included in other non-current liabilities | | 5,468 |
| | — |
|
Purchase liabilities included in accrued expenses and other liabilities | | — |
| | 13,172 |
|
Accrued payment to fund deferred compensation liability included in accounts payable | | — |
| | 1,551 |
|
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities | | 359 |
| | 1,331 |
|
Leasehold improvements funded by lease incentive | | 489 |
| | — |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
| |
1. | Organization and Description of Business |
Envestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provide 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.
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 20—Segment Information” to the condensed consolidated financial statements. The business segments are as follows:
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• | Envestnet Wealth – a leading provider of unified wealth management software and services to empower financial advisors and institutions. |
Within Envestnet Wealth, the Company offers these solutions principally through the following products 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 19,500 investment products. Envestnet | Enterprise also offers 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 and consulting services to assist advisors in creating investment solutions for their clients. These solutions include nearly 4,300 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as over 1,100 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 Data & Analytics – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services, and includes product offerings from Envestnet | Yodlee and Envestnet | Analytics. |
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”).
The accompanying unaudited condensed consolidated financial statements of the Company as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 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, 2018 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, 2019 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 the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet Wealth segment that are denominated in a non-U.S. currency
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet Data & Analytics 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 months ended March 31, 2019 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 Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“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, 2018, filed with the SEC on March 1, 2019.
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:
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Cash and cash equivalents | | $ | 245,735 |
| | $ | 289,345 |
|
Restricted cash included in prepaid expenses and other current assets | | 158 |
| | 158 |
|
Restricted cash included in other non-current assets | | 168 |
| | 168 |
|
Total cash, cash equivalents and restricted cash | | $ | 246,061 |
| | $ | 289,671 |
|
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements—In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting standards update (“ASU”) 2016-02, “Leases,” which amends the requirements for assets and liabilities recognized for all leases longer than twelve months. This standard is effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. These changes became effective for the Company’s fiscal year beginning January 1, 2019 and have been reflected in these condensed consolidated financial statements (See “Note 19—Leases”).
In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting.” This update clarifies the accounting for share-based payment transactions for acquiring goods and services from non-employees. Specifically, the update aligns the accounting for payments to non-employees 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 has elected to early adopt this standard beginning January 1, 2019, noting that this standard will be applied prospectively to all future non-employee share-based payments and is reflected in these condensed 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
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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 has elected to early adopt this standard beginning January 1, 2019, however it did not have a material impact on the Company's condensed consolidated financial statements.
Not Yet Adopted—In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326).” This update significantly changes the way that entities will be required to measure credit losses. The new standard requires that entities estimate credit losses based upon an “expected credit loss” approach rather than the “incurred loss” approach, which is currently used. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable forecasts of collectability. The change in approach is anticipated to impact the timing of recognition of credit losses. This ASU will become effective for beginning January 1, 2020. Early adoption is permitted for fiscal years beginning January 1, 2019. The Company is currently evaluating the potential impact of this guidance on its condensed 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 its condensed consolidated financial statements.
Acquisition of private company
On January 2, 2019 pursuant to an agreement and plan of merger dated as of January 2, 2019 between Envestnet and a private company that provides conversational artificial intelligence tools and applications to financial services firms, the private company merged into Yodlee Inc. (the “Private Company Acquisition”). The completion of the Private Company Acquisition on January 2, 2019 followed the receipt of all necessary and regulatory approvals and third party consents. In connection with the Private Company Acquisition, the Company incurred consideration of approximately $25,063, including estimated contingent consideration of $7,580, for all the outstanding shares of the private company, subject to certain closing and post-closing adjustments. The private company improves the way Financial Service Providers (“FSPs”) can interact with their customers, and supports these FSPs to better engage, support and assist their consumers leveraging this latest wave of customer-centric capabilities.
The preliminary consideration transferred in the acquisition was as follows:
|
| | | |
| Preliminary Estimate |
Upfront cash consideration | $ | 11,173 |
|
Purchase consideration liability | 6,240 |
|
Contingent liability | 7,580 |
|
Working capital adjustment | 70 |
|
Total | $ | 25,063 |
|
The estimated fair values of deferred income taxes, identifiable intangible assets, and goodwill balances are provisional and 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 proves 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 and goodwill balances and complete the acquisition accounting as soon as practicable but no later than January 2, 2020.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
| | | |
| Preliminary Estimate |
Total tangible assets acquired | $ | 144 |
|
Total liabilities assumed | (629 | ) |
Identifiable intangible assets | 4,100 |
|
Goodwill | 21,448 |
|
Total net assets acquired | $ | 25,063 |
|
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
|
| | | | | | | |
| Amount | | Estimated Useful Life in Years | | Amortization Method |
Proprietary technology | $ | 4,100 |
| | 4 | | Straight-line |
For the three months ended March 31, 2019, acquisition related costs for the private company totaled $90, and are included in general and administration expenses. The Company may incur additional acquisition related costs over the remainder of 2019.
The results of the private company's operations are included in the condensed consolidated statements of operations beginning January 2, 2019 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, 2018.
| |
4. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following:
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Prepaid technology | | $ | 7,835 |
| | $ | 6,766 |
|
Advance payroll taxes | | 7,803 |
| | — |
|
Non-income tax receivable | | 5,893 |
| | 5,628 |
|
Prepaid conference | | 2,805 |
| | — |
|
Prepaid outside information services | | 1,951 |
| | 1,515 |
|
Restricted cash | | 158 |
| | 158 |
|
Other | | 10,471 |
| | 9,490 |
|
Total | | $ | 36,916 |
| | $ | 23,557 |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Property and equipment consists of the following:
|
| | | | | | | | | | |
| | | | March 31, | | December 31, |
| | Estimated Useful Life | | 2019 | | 2018 |
Cost: | | | | |
| | |
|
Computer equipment and software | | 3 years | | $ | 65,905 |
| | $ | 64,346 |
|
Leasehold improvements | | Shorter of the lease term or useful life of the asset | | 28,817 |
| | 28,191 |
|
Office furniture and fixtures | | 3-7 years | | 9,455 |
| | 9,291 |
|
Other office equipment | | 3-5 years | | 5,791 |
| | 5,577 |
|
| | | | 109,968 |
| | 107,405 |
|
Less: accumulated depreciation and amortization | | (63,174 | ) | | (62,414 | ) |
Total property and equipment, net | | $ | 46,794 |
| | $ | 44,991 |
|
During the three months ended March 31, 2019, the Company retired property and equipment that was no longer in service for the Envestnet Wealth segment in the amount of $1,246. During the three months ended March 31, 2019, the Company retired property and equipment that was no longer in service for the Envestnet Data & Analytics segment in the amount of $2,481. Gains and losses on asset retirements during the three months ended March 31, 2019 were not material.
Depreciation and amortization expense was as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Depreciation and amortization expense | | $ | 4,366 |
| | $ | 3,918 |
|
| |
6. | Internally Developed Software |
Internally developed software consists of the following:
|
| | | | | | | | | | |
| | | | March 31, | | December 31, |
| | Estimated Useful Life | | 2019 | | 2018 |
Internally developed software | | 5 years | | $ | 77,616 |
| | $ | 70,410 |
|
Less: accumulated amortization | | | | (34,845 | ) | | (32,201 | ) |
Internally developed software, net | | | | $ | 42,771 |
| | $ | 38,209 |
|
Amortization expense was as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Amortization expense | | $ | 2,623 |
| | $ | 1,693 |
|
| |
7. | Goodwill & Intangible Assets, Net |
Changes in the carrying amount of goodwill were as follows:
|
| | | | | | | | | | | | |
| | Envestnet Wealth | | Envestnet Data & Analytics | | Total |
Balance at December 31, 2018 | | $ | 243,809 |
| | $ | 275,293 |
| | $ | 519,102 |
|
Private company acquisition | | — |
| | 21,448 |
| | 21,448 |
|
Foreign currency | | — |
| | 71 |
| | 71 |
|
Other | | (97 | ) | | — |
| | (97 | ) |
Balance at March 31, 2019 | | $ | 243,712 |
| | $ | 296,812 |
| | $ | 540,524 |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Intangible assets, net consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2019 | | December 31, 2018 |
| | | | Gross | | | | Net | | Gross | | | | Net |
| | Estimated | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Useful Life | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
Customer lists | | 7-15 years | | $ | 361,020 |
| | $ | (110,250 | ) | | $ | 250,770 |
| | $ | 361,020 |
| | $ | (102,077 | ) | | $ | 258,943 |
|
Proprietary technologies | | 4-8 years | | 69,396 |
| | (38,054 | ) | | 31,342 |
| | 66,746 |
| | (36,151 | ) | | 30,595 |
|
Trade names | | 2-7 years | | 27,990 |
| | (13,336 | ) | | 14,654 |
| | 27,990 |
| | (12,352 | ) | | 15,638 |
|
Backlog | | 8 years | | 11,000 |
| | (10,953 | ) | | 47 |
| | 11,000 |
| | (10,935 | ) | | 65 |
|
Total intangible assets | | $ | 469,406 |
| | $ | (172,593 | ) | | $ | 296,813 |
| | $ | 466,756 |
| | $ | (161,515 | ) | | $ | 305,241 |
|
Amortization expense was as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Amortization expense | | $ | 12,528 |
| | $ | 13,935 |
|
Future amortization expense of the intangible assets as of March 31, 2019, is expected to be as follows:
|
| | | |
Years ending December 31, | |
|
Remainder of 2019 | $ | 36,831 |
|
2020 | 45,364 |
|
2021 | 36,740 |
|
2022 | 34,291 |
|
2023 | 24,920 |
|
Thereafter | 118,667 |
|
Total | $ | 296,813 |
|
| |
8. | Other Non-Current Assets |
Other non-current assets consist of the following:
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Deferred sales incentive compensation | | $ | 7,081 |
| | $ | 7,014 |
|
Assets to fund deferred compensation liability | | 6,746 |
| | 6,346 |
|
Lease and other deposits | | 4,341 |
| | 4,341 |
|
Investments in private companies | | 3,659 |
| | 2,862 |
|
Unamortized issuance costs on revolving credit facility | | 2,032 |
| | 2,251 |
|
Other | | 3,086 |
| | 2,484 |
|
Total | | $ | 26,945 |
| | $ | 25,298 |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
| |
9. | Accrued Expenses and Other Liabilities |
Accrued expenses and other liabilities consist of the following:
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Accrued investment manager fees | | $ | 38,367 |
| | $ | 50,635 |
|
Accrued compensation and related taxes | | 28,847 |
| | 50,598 |
|
Sales and use tax payable | | 10,214 |
| | 9,733 |
|
Accrued transaction costs | | 6,149 |
| | 4,543 |
|
Accrued professional services | | 5,334 |
| | 4,517 |
|
Other accrued expenses | | 12,546 |
| | 13,272 |
|
Total | | $ | 101,457 |
| | $ | 133,298 |
|
The Company’s outstanding debt obligations as of March 31, 2019 and December 31, 2018 were as follows:
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Convertible Notes due 2019 | | $ | 172,500 |
| | $ | 172,500 |
|
Unaccreted discount on Convertible Notes due 2019 | | (4,393 | ) | | (5,890 | ) |
Unamortized issuance costs on Convertible Notes due 2019 | | (665 | ) | | (899 | ) |
Convertible Notes due 2019 carrying value | | $ | 167,442 |
| | $ | 165,711 |
|
| | | | |
Convertible Notes due 2023 | | $ | 345,000 |
| | $ | 345,000 |
|
Unaccreted discount on Convertible Notes due 2023 | | (40,379 | ) | | (42,641 | ) |
Unamortized issuance costs on Convertible Notes due 2023 | | (7,229 | ) | | (7,634 | ) |
Convertible Notes due 2023 carrying value | | $ | 297,392 |
| | $ | 294,725 |
|
| | | | |
Revolving credit facility balance | | $ | — |
| | $ | — |
|
Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statement of operations:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Accretion of debt discount | | $ | 3,758 |
| | $ | 1,418 |
|
Coupon interest | | 2,264 |
| | 755 |
|
Amortization of issuance costs | | 858 |
| | 450 |
|
Undrawn and other fees | | 216 |
| | 48 |
|
Interest on revolving credit facility | | — |
| | 2,565 |
|
Total | | $ | 7,096 |
| | $ | 5,236 |
|
Convertible Notes due 2019
In 2014, the Company issued $172,500 of Convertible Notes due 2019 that mature on December 15, 2019. The Convertible Notes due 2019 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015. The Convertible Notes due 2019 are general, unsecured obligations, subordinated in right of payment to the Company's obligations under its Credit Agreement.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes due 2019 for cash at 100% of the principal amount of the Convertible Notes due 2019 being purchased, plus any accrued and unpaid interest.
The Convertible Notes due 2019 are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per one thousand principal amount of the Convertible Notes due 2019, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes due 2019 at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, under certain circumstances. The Company’s stated policy is to settle the debt component of the Convertible Notes due 2019 at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash. Beginning July 1, 2019 the Convertible Notes due 2019 become freely convertible and therefore are presented in current liabilities on the condensed consolidated balance sheet as of March 31, 2019.
The effective interest rate of the liability component of the Convertible Notes due 2019 is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes due 2019 for three months ended March 31, 2019 and 2018 was 6%.
Convertible Notes due 2023
In May 2018, the Company issued $345,000 of Convertible Notes due 2023 that mature on June 1, 2023. The Convertible Notes due 2023 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018. The Convertible Notes due 2023 are general unsecured obligations, subordinated in right of payment to the Company's obligations under its Credit Agreement. The notes are structurally subordinated to the indebtedness and other liabilities of any of the Company's subsidiaries, other than its wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis. The Convertible Notes due 2023 rank equally in right of payment with all its other existing and future senior indebtedness.
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes due 2023 for cash at 100% of the principal amount of the Convertible Notes due 2023 being purchased, plus any accrued and unpaid interest. The Company may redeem for cash all or any portion of the notes, at its option, on or after June 5, 2021 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, consecutive or non-consecutive, within a 30 consecutive trading day period ending on, and including, any of the five trading days immediately preceding the date on which the Company provides notice of redemption.
The Convertible Notes due 2023 are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 14.6381 shares per one thousand principal amount of the Convertible Notes due 2023, which represents a conversion price of $68.31 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes due 2023 at their option at any time prior to the close of business on the business day immediately preceding December 15, 2022, under certain circumstances. The Company’s stated policy is to settle the debt component of the Convertible Notes due 2023 at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.
The effective interest rate of the liability component of the Convertible Notes due 2023 is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes due 2023 for the three months ended March 31, 2019 was 6%.
See “Note 17—Net Income (Loss) Per Share” for further discussion of the effect of conversion on net income (loss) per common share.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Credit Agreement
In July 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) with a group of banks (“Banks”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments (“Revolving Credit Facility”) in the aggregate amount of up to $350,000 which amount may be increased by $50,000.
The Company incurs interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. The Second Amended and Restated Credit Agreement includes certain financial covenants and, as of March 31, 2019, the Company was in compliance with these requirements.
| |
11. | Other Non-Current Liabilities |
Other non-current liabilities consist of the following:
|
| | | | | | | | |
| | March 31, | | December 31, |
| | 2019 | | 2018 |
Uncertain tax positions | | $ | 11,084 |
| | $ | 10,394 |
|
Deferred compensation liability | | 7,381 |
| | 6,196 |
|
Accrued purchase liability | | 5,408 |
| | — |
|
Other | | 579 |
| | 1,415 |
|
Total | | $ | 24,452 |
| | $ | 18,005 |
|
| |
12. | 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 recorded at fair value in the condensed consolidated balance sheet 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. |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, based on the three-tier fair value hierarchy:
|
| | | | | | | | | | | | | | | | |
| | March 31, 2019 |
| | Fair Value | | Level I | | Level II | | Level III |
Assets: | | | | | | | | |
Money market funds and other (1) | | $ | 214,715 |
| | $ | 214,715 |
| | $ | — |
| | $ | — |
|
Assets to fund deferred compensation liability(2) | | 6,746 |
| | — |
| | — |
| | 6,746 |
|
Total assets | | $ | 221,461 |
| | $ | 214,715 |
| | $ | — |
| | $ | 6,746 |
|
Liabilities: | | |
| | |
| | |
| | |
|
Contingent consideration | | $ | 8,461 |
| | $ | — |
| | $ | — |
| | $ | 8,461 |
|
Deferred compensation liability(3) | | 7,381 |
| | 7,381 |
| | — |
| | — |
|
Total liabilities | | $ | 15,842 |
| | $ | 7,381 |
| | $ | — |
| | $ | 8,461 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Fair Value | | Level I | | Level II | | Level III |
Assets: | | | | | | | | |
Money market funds(1) | | $ | 265,554 |
| | $ | 265,554 |
| | $ | — |
| | $ | — |
|
Assets to fund deferred compensation liability(2) | | 6,346 |
| | — |
| | — |
| | 6,346 |
|
Total assets | | $ | 271,900 |
|
| $ | 265,554 |
| | $ | — |
| | $ | 6,346 |
|
Liabilities: | | |
| | |
| | |
| | |
|
Contingent consideration | | $ | 732 |
| | $ | — |
| | $ | — |
| | $ | 732 |
|
Deferred compensation liability(3) | | 6,196 |
| | 6,196 |
| | — |
| | — |
|
Total liabilities | | $ | 6,928 |
|
| $ | 6,196 |
| | $ | — |
| | $ | 732 |
|
| |
(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 the 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 Federal Deposit Insurance Corporation (“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 I 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. Time deposit account fair values are determined by trade confirmations which mature daily and therefore are considered highly liquid investments.
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 prior year acquisition of Wheelhouse and the private company acquisition were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents 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 the acquisitions of Wheelhouse and the private company during the subsequent periods
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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 Wheelhouse and the private company, 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 the Wheelhouse and private company acquisitions 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 condensed consolidated statements of operations.
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, 2018 to March 31, 2019:
|
| | | |
| Fair Value of Assets to Fund Deferred Compensation Liability |
Balance at December 31, 2018 | $ | 6,346 |
|
Fair value adjustments | 400 |
|
Balance at March 31, 2019 | $ | 6,746 |
|
The asset value increased due to gains on the underlying investment vehicles, which resulted in an asset value of $6,746 as of March 31, 2019, which is included in other non-current assets on the condensed consolidated balance sheets.
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, 2018 to March 31, 2019:
|
| | | |
| Fair Value of Contingent Consideration Liabilities |
Balance at December 31, 2018 | $ | 732 |
|
Private company acquisition | 7,580 |
|
Accretion on contingent consideration | 149 |
|
Balance at March 31, 2019 | $ | 8,461 |
|
The Company assesses categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the three months ended March 31, 2019.
On December 15, 2014, the Company issued $172,500 of Convertible Notes due 2019. As of March 31, 2019 and December 31, 2018, the carrying value of the Convertible Notes due 2019 equaled $167,442 and $165,711, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2019 and December 31, 2018, the estimated fair value of the Convertible Notes due 2019 was $192,165 and $174,101, respectively. The Company considered the Convertible Notes due 2019 to be a Level II liability March 31, 2019 and uses a market approach to calculate the fair value. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes due 2019 in an over-the-counter market on March 31, 2019 (see “Note 10—Debt”).
On May 25, 2018, the Company issued $345,000 of Convertible Notes due 2023. As of March 31, 2019 and December 31, 2018, the carrying value of the Convertible Notes due 2023 equaled $297,392 and $294,725, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2019 and December 31, 2018, the fair value of the Convertible Notes due 2023 was $397,544 and $339,024, respectively. The
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Company considered the Convertible Notes due 2023 to be a Level II liability and uses a market approach to calculate the fair value. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes due 2023 in an over-the-counter market on March 31, 2019 (see “Note 10—Debt”).
We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2019 based upon the short-term nature of the assets and liabilities.
Disaggregation of revenue
The following table presents the Company’s revenues disaggregated by major source:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2018 |
| | Envestnet Wealth | | Envestnet Data & Analytics | | Consolidated | | Envestnet Wealth | | Envestnet Data & Analytics | | Consolidated |
Revenues: | | | | | | | | | | | | |
Asset-based | | $ | 108,934 |
| | $ | — |
| | $ | 108,934 |
| | $ | 121,153 |
| | $ | — |
| | $ | 121,153 |
|
Subscription-based | | 41,026 |
| | 42,061 |
| | 83,087 |
| | 32,585 |
| | 37,110 |
| | 69,695 |
|
Total recurring revenues | | 149,960 |
| | 42,061 |
| | 192,021 |
| | 153,738 |
| | 37,110 |
| | 190,848 |
|
Professional services and other revenues | | 2,745 |
| | 4,900 |
| | 7,645 |
| | 2,250 |
| | 4,913 |
| | 7,163 |
|
Total revenues | | $ | 152,705 |
| | $ | 46,961 |
| | $ | 199,666 |
| | $ | 155,988 |
| | $ | 42,023 |
| | $ | 198,011 |
|
The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
United States | | $ | 192,119 |
| | $ | 188,315 |
|
International (1) | | 7,547 |
| | 9,696 |
|
Total | | $ | 199,666 |
| | $ | 198,011 |
|
| |
(1) | No foreign country accounted for more than 10% of total revenues. |
One customer accounted for more than 10% of the Company’s total revenues:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Fidelity | | 16 | % | | 16 | % |
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 March 31, 2019:
|
| | | | |
Years ending December 31, | | |
|
Remainder of 2019 | | $ | 159,916 |
|
2020 | | 138,921 |
|
2021 | | 83,286 |
|
2022 | | 55,311 |
|
2023 | | 24,807 |
|
Thereafter | | 36,640 |
|
Total | | $ | 498,881 |
|
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
Total deferred revenue as of March 31, 2019 increased by $7,321, which is primarily the result of an increase in deferred revenue related to subscription-based services during the three months ended March 31, 2019, 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 $9,723 and $7,516 for the three months ended March 31, 2019 and 2018, respectively. The majority of this revenue consists of subscription-based services and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Deferred sales incentive compensation
Deferred sales incentive compensation was $7,081 as of March 31, 2019. Amortization expense for the deferred sales incentive compensation was $651 and $482 for the three months ended March 31, 2019, and 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.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes cost of revenues by revenue category:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Asset-based | | $ | 53,842 |
| | $ | 57,572 |
|
Subscription-based | | 7,677 |
| | 5,226 |
|
Professional services and other | | 126 |
| | 136 |
|
Total |
| $ | 61,645 |
| | $ | 62,934 |
|
| |
15. | Stock-Based Compensation |
The Company has stock options and restricted stock units outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2010 Long-Term Incentive Plan (the “2010 Plan”).
As of March 31, 2019, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 2,081,905.
Stock-based compensation expense under the Company’s plans was as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Stock-based compensation expense | | $ | 12,864 |
| | $ | 8,495 |
|
Tax effect on stock-based compensation expense | | (3,256 | ) | | (2,149 | ) |
Net effect on income | | $ | 9,608 |
| | $ | 6,346 |
|
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.3% for the three months ended March 31, 2019 and 2018. However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the three months ended March 31, 2019.
Stock Options
The following weighted average assumptions were used to value options granted during the periods indicated:
|
| | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Grant date fair value of options | | $21.55 | | $ | — |
|
Volatility | | 40.0 | % | | — | % |
Risk-free interest rate | | 2.5 | % | | — | % |
Dividend yield | | — | % | | — | % |
Expected term (in years) | | 6.5 |
| | — |
|
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes option activity under the Company’s plans:
|
| | | | | | | | | | | | | |
| | | | | | Weighted-Average | | |
| | | | Weighted- | | Remaining | | |
| | | | Average | | Contractual Life | | Aggregate |
| | Options | | Exercise Price | | (Years) | | Intrinsic Value |
Outstanding as of December 31, 2018 | | 1,887,969 |
| | $ | 20.05 |
| | 3.4 | | $ | 56,046 |
|
Granted | | 81,807 |
| | 49.02 |
| | | | |
Exercised | | (200,326 | ) | | 16.91 |
| | | | |
Forfeited | | (1,100 | ) | | 31.70 |
| | | | |
Outstanding as of March 31, 2019 | | 1,768,350 |
| | 21.74 |
| | 3.5 | | 77,197 |
|
Options exercisable | | 1,655,119 |
| | $ | 20.23 |
| | 3.1 | | $ | 74,744 |
|
Exercise prices of stock options outstanding as of March 31, 2019 range from $7.15 to $55.29. At March 31, 2019, there was $2,050 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 2.5 years.
Restricted Stock Units and Restricted Stock Awards
Periodically, the Company grants restricted stock unit awards to employees. The following is a summary of the activity for unvested restricted stock units and awards granted under the Company’s plans:
|
| | | | | | | |
| | | | Weighted- |
| | | | Average Grant |
| | Number of | | Date Fair Value |
| | Shares | | per Share |
Outstanding as of December 31, 2018 | | 1,585,788 |
| | $ | 46.33 |
|
Granted | | 940,614 |
| | 61.18 |
|
Vested | | (479,479 | ) | | 45.98 |
|
Forfeited | | (24,866 | ) | | 51.27 |
|
Outstanding as of March 31, 2019 | | 2,022,057 |
| | $ | 53.26 |
|
At March 31, 2019, there was $99,802 of unrecognized stock-based compensation expense related to unvested restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 2.4 years.
In February 2019, the Company granted approximately 69,000 performance-based restricted stock unit awards to certain employees. These performance-based restricted unit awards vest upon the achievement of certain pre-established business and financial metrics as well as service condition. The business and financial metrics governing the vesting of these performance-based restricted stock unit awards provide thresholds which dictate the number of shares to vest upon each evaluation date, which range from 50% to 150%. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest three years from the grant date.
The following table includes the Company’s loss before income tax provision (benefit), income tax provision (benefit) and effective tax rate:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Loss before income tax provision (benefit) | | $ | (14,500 | ) | | $ | (5,992 | ) |
Income tax provision (benefit) | | 3,768 |
| | (13,994 | ) |
Effective tax rate | | (26.0 | )% | | 233.5 | % |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
For the three months ended March 31, 2019, our effective tax rate differed from the statutory rate primarily due to the impact of the Base Erosion and Anti-Abuse Tax (“BEAT”) and the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles. For the three months ended March 31, 2018, our effective tax rate differed from the statutory rate primarily due to the release of the Company's valuation allowance as a result of additional deferred tax liabilities recorded with the FolioDynamix Acquisition as well as the impact of the BEAT.
For the three months ended March 31, 2019, the Company's quarterly provision for income taxes is based on the discrete method. The Company's quarterly provision for income taxes also includes the impact of certain unusual or infrequently occurring items, if any, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
In December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into United States law. Beginning in 2018, the Tax Act includes the global intangible low-taxed income (“GILTI”) and BEAT provisions. We elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We expect to fully offset any GILTI income with Net Operating Losses (“NOLs”). Additionally, BEAT requires us to calculate a minimum tax on our foreign earnings and profits; As a result of the BEAT provision our provision for income taxes for the three months ended March 31, 2019, increased by $2,040.
The total gross liability for unrecognized tax benefits, exclusive of interest and penalties, was $16,147 and $15,628 at March 31, 2019 and December 31, 2018, respectively. Of this amount, a portion of the unrecognized tax benefits was recorded as a reduction of deferred tax assets instead of a non-current liability. The portion of the unrecognized tax benefits, exclusive of interest and penalties, recorded as a non-current liability is $4,702 and $4,429 at March 31, 2019 and December 31, 2018, respectively.
At March 31, 2019, the amount of unrecognized tax benefits, including interest and penalties, that would benefit the Company’s effective tax rate, if recognized, was $11,084. At this time, the Company estimates that the liability for unrecognized tax benefits could decrease in the next twelve months as it is anticipated that reviews by tax authorities will be completed.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. Income tax expense includes $373 and $287 of potential interest and penalties related to unrecognized tax benefits for the three months ended March 31, 2019 and 2018, respectively. The Company had accrued interest and penalties of $6,370 and $5,977 as of March 31, 2019 and December 31, 2018, respectively.
| |
17. | Net Income (Loss) Per Share |
Basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted income (loss) per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock awards, restricted stock units and Convertible Notes using the treasury stock method, if dilutive.
The Company accounts for the effect of the Convertible Notes on diluted earnings per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes due 2019 and Convertible Notes due 2023 will have no effect on diluted earnings per share until the Company’s stock price exceeds the conversion price of $62.88 and $68.31 per share and certain other criteria are met, respectively, or if the trading price of the Convertible Notes meets certain criteria as described in “Note 10—Debt.” In the period of conversion, the Convertible Notes will have no impact on diluted earnings if the Convertible Notes are settled in cash and will have an impact on dilutive earnings per share if the Convertible Notes are settled in shares upon conversion.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table provides the numerators and denominators used in computing basic and diluted net loss per share attributable to Envestnet, Inc.:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Basic income (loss) per share calculation: | | | | |
Net loss attributable to Envestnet, Inc. | | $ | (18,185 | ) | | $ | 8,104 |
|
| | | | |
Basic number of weighted-average shares outstanding | | 48,237,265 |
| | 44,782,982 |
|
Basic net income (loss) per share | | $ | (0.38 | ) | | $ | 0.18 |
|
| | | | |
Diluted income (loss) per share calculation: | | | | |
Net income (loss) attributable to Envestnet, Inc. | | $ | (18,185 | ) | | $ | 8,104 |
|
| | | | |
Basic number of weighted-average shares outstanding | | 48,237,265 |
| | 44,782,982 |
|
Effect of dilutive shares: | | | | |
Options to purchase common stock | | — |
| | 1,396,091 |
|
Unvested restricted stock units | | — |
| | 966,487 |
|
Diluted number of weighted-average shares outstanding | | 48,237,265 |
| | 47,145,560 |
|
Diluted net income (loss) per share | | $ | (0.38 | ) | | $ | 0.17 |
|
Securities that were anti-dilutive and therefore excluded from the computation of diluted loss per share are as follows:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2019 | | 2018 |
Options to purchase common stock | | 1,768,350 |
| | 9,045 |
|
Unvested restricted stock awards and units | | 2,022,057 |
| | 8,510 |
|
Warrants - private placement | | 470,000 |
| | — |
|
Convertible Notes | | 7,793,826 |
| | 2,743,321 |
|
Total | | 12,054,233 |
| | 2,760,876 |
|
| |
18. | Commitments and Contingencies |
Purchase Obligations and Indemnifications
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Legal Proceedings
The Company is involved in legal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of March 31, 2019. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on the Company's results of operations or cash flow in a particular quarter or year.
Contingencies
Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. As of March 31, 2019 and December 31, 2018, the Company estimated a sales and use tax liability of $9,353 and $8,643, respectively, related to multiple jurisdictions with respect to revenues in the three months ended March 31, 2019 and prior periods. This amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheets. The Company also estimated a sales and use tax receivable of $5,510 and $5,246, respectively, related to estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. Additional future information obtained from the applicable jurisdictions may affect the Company's estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.
On January 1, 2019, the Company adopted ASU 2016-02 and all subsequent ASUs that modified Topic 842 ("ASC 842") using the effective date transition method. We elected the available package of practical expedients. The Company has elected to apply the short-term lease exemption to all of its classes of underlying assets.
The standard had a material impact on the Company's condensed consolidated balance sheets, but did not have an impact on the Company's condensed consolidated statements of operations. The most significant impact was the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases. Adoption of the standard had no impact to previously reported results.
The Company determines if an arrangement is a lease at inception. Operating leases are included in ROU assets, current lease liabilities and non-current lease liabilities on our consolidated balance sheets. The Company does not have material finance leases.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the remaining lease term. As none of the Company's leases provide an implicit rate, the Company uses an estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes prepaid payments and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for non-lease components as part of the lease component for all asset classes. The majority of the Company's lease agreements are real estate leases.
The Company has operating leases for corporate offices and certain equipment, some of which may include options to extend the leases for up to 20 years, and some of which may include options to terminate the leases within 90 days. The
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Company's leases have remaining lease terms of 1 to 14 years. For the three months ended March 31, 2019, the total operating lease cost was $4,118. The Company did not have significant sublease income, short-term lease cost, or variable lease cost for the three months ended March 31, 2019. Other information related to operating leases as follows: