Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020

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

For the transition period from __________ to __________

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,	Illinois	60601
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code:

(312) 827-2800

Securities registered pursuant to Section 12(b) of the Act:



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.



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 ☒

As of May 1, 2020, Envestnet, Inc. had 53,513,623 shares of common stock outstanding.

TABLE OF CONTENTS



	Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019	4
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019	5
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2020 and 2019	6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	7
Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements	24
Overview	26
Results of Operations	32
Liquidity and Capital Resources	43

Item 3. Quantitative and Qualitative Disclosures About Market Risk	44

Item 4. Controls and Procedures	45

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	45

Item 1A. Risk Factors	45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3. Defaults Upon Senior Securities	46

Item 4. Mine Safety Disclosures	46

Item 5. Other Information	46

Item 6. Exhibits	46

Index to Exhibits	47

Signatures	48

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)



	March 31,			December 31,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	68,601		$	82,505
Fees receivable, net	81,133			67,815
Prepaid expenses and other current assets	37,699			32,183
Total current assets	187,433			182,503

Property and equipment, net	53,190			53,756
Internally developed software, net	68,227			60,263
Intangible assets, net	489,840			505,589
Goodwill	906,501			879,850
Operating lease right-of-use assets, net	78,860			82,796
Other non-current assets	46,407			37,127
Total assets	$	1,830,458		$	1,801,884

Liabilities and Equity
Current liabilities:
Accrued expenses and other liabilities	$	132,142		$	137,944
Accounts payable	14,294			17,277
Operating lease liabilities	13,736			13,816
Contingent consideration	2,569			—
Deferred revenue	40,177			34,753
Total current liabilities	202,918			203,790

Convertible Notes due 2023	308,262			305,513
Revolving credit facility	290,000			260,000
Contingent consideration	12,222			9,045
Deferred revenue	6,277			5,754
Non-current operating lease liabilities	84,935			88,365
Deferred tax liabilities, net	26,680			29,481
Other non-current liabilities	34,967			32,360
Total liabilities	966,261			934,308

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; 67,077,561 and 66,320,706 shares issued as of March 31, 2020 and December 31, 2019, respectively; 53,468,397 and 52,841,706 shares outstanding as of March 31, 2020 and December 31, 2019, respectively	335			331
Additional paid-in capital	1,054,312			1,037,141
Accumulated deficit	(84,141		)	(75,664		)
Treasury stock at cost, 13,609,164 and 13,479,000 shares as of March 31, 2020 and December 31, 2019, respectively	(100,164		)	(90,965		)
Accumulated other comprehensive loss	(4,773		)	(1,749		)
Total stockholders’ equity	865,569			869,094
Non-controlling interest	(1,372		)	(1,518		)
Total equity	864,197			867,576
Total liabilities and equity	$	1,830,458		$	1,801,884

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,
	2020			2019
Revenues:
Asset-based	$	134,811		$	108,934
Subscription-based	104,551			83,087
Total recurring revenues	239,362			192,021
Professional services and other revenues	7,177			7,645
Total revenues	246,539			199,666

Operating expenses:
Cost of revenues	74,933			61,645
Compensation and benefits	110,430			86,717
General and administration	41,110			40,524
Depreciation and amortization	27,683			19,517
Total operating expenses	254,156			208,403

Loss from operations	(7,617		)	(8,737		)
Other expense, net	(1,537		)	(5,763		)
Loss before income tax provision (benefit)	(9,154		)	(14,500		)

Income tax provision (benefit)	(1,964		)	3,768

Net loss	(7,190		)	(18,268		)
Add: Net (income) loss attributable to non-controlling interest	(146		)	83
Net loss attributable to Envestnet, Inc.	$	(7,336	)	$	(18,185	)

Net loss per share attributable to Envestnet, Inc.:
Basic	$	(0.14	)	$	(0.38	)
Diluted	$	(0.14	)	$	(0.38	)

Weighted average common shares outstanding:
Basic	53,016,511			48,237,265
Diluted	53,016,511			48,237,265

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)



	Three Months Ended
	March 31,
	2020			2019
Net loss attributable to Envestnet, Inc.	$	(7,336	)	$	(18,185	)
Other comprehensive loss, net of taxes:
Foreign currency translation gains (losses), net	(3,024		)	222
Comprehensive loss attributable to Envestnet, Inc.	$	(10,360	)	$	(17,963	)

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Envestnet, Inc.

Condensed Consolidated Statements of Stockholders' 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, 2019	66,320,706	$	331	(13,479,000	)	$	(90,965	)	$	1,037,141	$	(1,749	)	$	(75,664	)	$	(1,518	)	$	867,576
Adoption of ASC 326	—	—		—		—			—		—			(1,141		)	—			$	(1,141	)
Exercise of stock options	357,974	2		—		—			3,406		—			—			—			3,408
Issuance of common stock - vesting of restricted stock units	398,881	2		—		—			—		—			—			—			2
Stock-based compensation expense	—	—		—		—			13,765		—			—			—			13,765
Purchase of treasury stock for stock-based tax withholdings	—	—		(130,164	)	(9,199		)	—		—			—			—			(9,199		)
Foreign currency translation loss	—	—		—		—			—		(3,024		)	—			—			(3,024		)
Net income (loss)	—	—		—		—			—		—			(7,336		)	146			(7,190		)
Balance, March 31, 2020	67,077,561	$	335	(13,609,164	)	$	(100,164	)	$	1,054,312	$	(4,773	)	$	(84,141	)	$	(1,372	)	$	864,197



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

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,
	2020			2019
OPERATING ACTIVITIES:
Net loss	$	(7,190	)	$	(18,268	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	27,683			19,517
Provision for doubtful accounts	1,026			451
Deferred income taxes	(1,587		)	169
Non-cash compensation expense	15,985			12,864
Non-cash interest expense	4,463			6,880
Accretion on contingent consideration and purchase liability	599			240
Gain on acquisition of equity method investment	(4,230		)	—
Loss allocation from equity method investments	2,030			203
Changes in operating assets and liabilities, net of acquisitions:
Fees receivable, net	(14,333		)	1,198
Prepaid expenses and other current assets	(6,793		)	(13,346		)
Other non-current assets	641			(1,060		)
Accrued expenses and other liabilities	(11,554		)	(34,495		)
Accounts payable	(3,205		)	5,179
Deferred revenue	5,598			7,039
Other non-current liabilities	(145		)	854
Net cash provided by (used in) operating activities	8,988			(12,575		)

INVESTING ACTIVITIES:
Purchases of property and equipment	(2,160		)	(5,247		)
Capitalization of internally developed software	(11,572		)	(7,185		)
Investments in private companies	(11,700		)	(1,000		)
Acquisitions of businesses, net of cash acquired	(20,257		)	(11,061		)
Net cash used in investing activities	(45,689		)	(24,493		)

FINANCING ACTIVITIES:
Proceeds from borrowings on revolving credit facility	45,000			—
Payments on revolving credit facility	(15,000		)	—
Proceeds from exercise of stock options	3,408			3,163
Purchase of treasury stock for stock-based tax withholdings	(9,199		)	(9,819		)
Issuance of restricted stock units	2			2
Net cash provided by (used in) financing activities	24,211			(6,654		)

EFFECT OF EXCHANGE RATE CHANGES ON CASH	(1,496		)	112

DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(13,986		)	(43,610		)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	82,755			289,671

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2)	$	68,769		$	246,061

Supplemental disclosure of cash flow information - net cash paid during the period for income taxes	$	814		$	4,998
Supplemental disclosure of cash flow information - cash paid during the period for interest	2,740			216
Supplemental disclosure of non-cash operating, investing and financing activities:
Contingent consideration issued in acquisition of businesses	5,239			7,580
Purchase liabilities included in accrued expenses and other liabilities	375			—
Purchase liabilities included in other non-current liabilities	257			5,468
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities	1,752			359
Membership interest liabilities included in other non-current liabilities	2,220			—
Common stock issued to settle purchase liability	—			772
Leasehold improvements funded by lease incentive	894			489

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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.

Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 16—Segment Information” to the condensed consolidated financial statements.


2.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 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, 2019 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, 2020 and the results of operations, equity, comprehensive 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 Solutions 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 Data & Analytics segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a functional currency other than the U.S. dollar 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 Company is also subject to gains and losses from foreign currency denominated transactions and the remeasurement of foreign currency denominated balance sheet accounts, both of which are included in other expense, net in the condensed consolidated statements of operations.

The results of operations for the three months ended March 31, 2020 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 U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. References to GAAP in these notes are to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™, sometimes referred to as the codification or “ASC.” 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, 2019, filed with the SEC on February 28, 2020.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

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,		March 31,
	2020		2019
Cash and cash equivalents	$	68,601	$	245,735
Restricted cash included in prepaid expenses and other current assets	—		158
Restricted cash included in other non-current assets	168		168
Total cash, cash equivalents and restricted cash	$	68,769	$	246,061

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Financial Impacts Related To COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict. Although the Company is unable to estimate the overall financial effect of the pandemic at this time, if the pandemic continues, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. As of March 31, 2020, these condensed consolidated financial statements do not reflect any adjustments as a result of the pandemic.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements—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. This 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 standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. These changes became effective for the Company's fiscal year beginning January 1, 2020. The Company recognized the cumulative effect of the initial application of ASU 2016-13 as an adjustment of $1,141 to the opening balance of accumulated deficit. The Company does not expect the adoption of ASU 2016-13 to have a material impact to the results of its operations on an ongoing basis.

Not Yet Adopted Accounting Pronouncements—In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This update aims to reduce complexity within the accounting for income taxes as part of the simplification initiative. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2020. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on its condensed consolidated financial statements.


3.	Acquisitions and Other Investments

Investment in Private Services Company

On January 8, 2020, the Company acquired a 4.25% membership interest in a private services company for cash consideration of $11,000. The private services company partners with independent network advisory firms to help them grow, become more profitable and run more efficiently. The Company will use the equity method of accounting to record its portion of the private services company’s net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50% ownership and lack of control and does not otherwise exercise control over the significant economic decisions of the private services company.

The private services company is and remains a client of the Company and has thus been determined to be a related party. Revenues from the private services company totaled $2,689 in the three months ended March 31, 2020. As of March 31, 2020, the Company had recorded a net receivable of $1,963 from the private services company.

Acquisition of Private Technology Company

On February 18, 2020, the Company, through it's wholly owned subsidiary Yodlee, Inc. (“Yodlee”), acquired a private technology company (the “Private Technology Company Acquisition”). The private technology company enables the consent generation and data flow between financial information providers, such as banks and financial institutions, and financial information users, such as financial technology lenders and other financial services agencies, through a network of cloud-based interoperable interfaces or application programming interfaces. The technology and operations of the private technology company have been integrated into our Envestnet Data & Analytics segment.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

In connection with the Private Technology Company Acquisition, the Company acquired all of the outstanding shares and paid cash consideration of $2,343, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6,750 in contingent consideration, based upon achieving certain performance targets. The Company recorded a liability as of the date of acquisition of $5,239, which represented the estimated fair value of contingent consideration on the date of acquisition. Future changes to the estimated fair value of the contingent consideration, if any, are recognized in earnings of the Company.

The Company recorded estimated goodwill of $7,017, which is not deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $1,000. The tangible assets acquired and liabilities assumed were not material.

The results of the private technology company's operations are included in the condensed consolidated statements of operations beginning February 18, 2020 and were not considered material to the Company’s results of operations.

Acquisition of Private Cloud Technology Company

On March 2, 2020, the Company acquired certain assets of a private cloud technology company (the “Private Cloud Technology Company Acquisition”). The private cloud technology company enables enterprises to design and implement the digital transition from legacy systems and applications to a modern cloud computing platform. The technology and operations of the private cloud technology company have been integrated into our Envestnet Wealth Solutions segment.

In connection with the Private Cloud Technology Company Acquisition, the Company paid estimated consideration of $11,968, net of cash acquired. In connection with the acquisition, the Company recorded estimated goodwill of $10,932, which is deductible for income tax purposes. The tangible assets acquired and liabilities assumed were not material.

The results of the private cloud technology company's operations are included in the condensed consolidated statements of operations beginning March 2, 2020 and were not considered material to the Company’s results of operations.

Acquisition of Private Financial Technology Design Company

On March 3, 2020, the Company acquired the outstanding units of a private financial technology design company that were not owned by the Company and merged the acquired company into a wholly owned subsidiary of the Company (the “Private Financial Technology Design Company Acquisition”). The private financial technology design company designs integrated, intuitive digital technology applications for institutional financial services firms, bank wealth management organizations, independent advisor networks, and broker-dealers. The technology and operations of the private financial technology design company have been integrated into our Envestnet Wealth Solutions segment.

The Company previously owned approximately 45% of the outstanding units in this private financial technology design company, and accounted for it as an equity method investment. Based upon the estimated value of the private financial technology design company of $11,026, the Company paid estimated consideration of $5,946, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, the Company recognized a gain of $4,230 on the re-measurement to fair value of its previously held interest, which is included in other expense, net in the condensed consolidated statements of operations

In connection with the Private Financial Technology Design Company Acquisition, the Company recorded estimated total goodwill of $9,241, of which approximately $1,800 is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2,000. The tangible assets acquired and liabilities assumed were not material.

The results of the private financial technology design company's operations are included in the condensed consolidated statements of operations beginning March 3, 2020 and were not considered material to the Company’s results of operations.

For the three months ended March 31, 2020, acquisition related costs for all of the Company's first quarter 2020 acquisitions were not material, and are included in general and administration expenses. The Company may incur additional acquisition related costs over the remainder of 2020.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

The goodwill arising from these acquisitions represents the expected synergistic benefits of these transactions, primarily related to an increase in future revenues as a result of potential new business and cross selling opportunities as well as enhancements to our existing technologies.

Pro Forma Financial Information

On April 1, 2019, the Company acquired certain of the assets, primarily consisting of intangible assets, and the assumption of certain liabilities of the PortfolioCenter business (“PortfolioCenter”) from Performance Technologies, Inc., a wholly-owned subsidiary of The Charles Schwab Corporation. On May 1, 2019, the Company acquired all of the outstanding shares of capital stock of PIEtech, Inc. (“PIEtech”). The following pro forma financial information presents the combined results of operations of Envestnet, PortfolioCenter and PIEtech for the three months ended March 31, 2019 and assumes the acquisitions of PortfolioCenter and PIEtech had occurred as of the beginning of 2018. The results of the Company's other acquisitions since January 1, 2019 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 below include amortization charges for acquired intangible assets, interest expense, stock-based compensation expense and income tax. The Company's pro forma information below includes the reversal of a valuation allowance on its deferred tax assets as of January 1, 2018 and the reversal of transaction costs that were incurred in 2019 as a result of these acquisitions and reverses these amounts from the appropriate periods in 2019. All intercompany revenues have been eliminated within this pro forma information.

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 2018.



	Three Months Ended March 31,
	2019
Revenues	$	214,753
Net loss attributable to Envestnet, Inc.	(11,245		)
Net loss per share attributable to Envestnet, Inc.:
Basic	$	(0.22	)
Diluted	$	(0.22	)


4.	Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:



	March 31,		December 31,
	2020		2019
Prepaid technology	$	10,653	$	8,178
Non-income tax receivables	6,357		5,555
Advance payroll taxes and benefits	5,329		5,446
Prepaid insurance	2,509		1,919
Prepaid outside information services	2,131		2,209
Other	10,720		8,876
Total prepaid expenses and other current assets	$	37,699	$	32,183

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


5.	Property and Equipment, Net

Property and equipment, net consists of the following:



		March 31,			December 31,
	Estimated Useful Life	2020			2019
Cost:
Computer equipment and software	3 years	$	72,700		$	72,190
Leasehold improvements	Shorter of the lease term or useful life of the asset	36,180			34,645
Office furniture and fixtures	3-7 years	10,846			10,832
Office equipment and other	3-5 years	6,898			6,850
Building and building improvements	7-39 years	2,647			2,647
Land	Not applicable	940			940
		130,211			128,104
Less: accumulated depreciation and amortization		(77,021		)	(74,348		)
Total property and equipment, net		$	53,190		$	53,756

During the three months ended March 31, 2020, the Company retired an immaterial amount of property and equipment that was no longer in service. Gains and losses on asset retirements during the three months ended March 31, 2020 and 2019 were not material.

Depreciation and amortization expense was as follows:



	Three Months Ended
	March 31,
	2020		2019
Depreciation and amortization expense	$	5,317	$	4,366


6.	Internally Developed Software

Internally developed software consists of the following:



		March 31,			December 31,
	Estimated Useful Life	2020			2019
Internally developed software	5 years	$	116,275		$	104,703
Less: accumulated amortization		(48,048		)	(44,440		)
Internally developed software, net		$	68,227		$	60,263

Amortization expense was as follows:



	Three Months Ended
	March 31,
	2020		2019
Amortization expense	$	3,608	$	2,623


7.	Goodwill and Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:



	Envestnet Wealth Solutions			Envestnet Data & Analytics			Total
Balance at December 31, 2019	$	583,247		$	296,603		$	879,850
Acquisitions	20,173			7,017			27,190
Foreign currency and other	(70		)	(469		)	(539		)
Balance at March 31, 2020	$	603,350		$	303,151		$	906,501

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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, 2020							December 31, 2019
		Gross					Net		Gross					Net
	Estimated	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Useful Life	Amount		Amortization			Amount		Amount		Amortization			Amount
Customer lists	7-16 years	$	591,520	$	(161,339	)	$	430,181	$	591,520	$	(148,517	)	$	443,003
Proprietary technologies	4-8 years	90,719		(48,865		)	41,854		87,714		(44,165		)	43,549
Trade names	2-7 years	33,700		(15,895		)	17,805		33,700		(14,663		)	19,037
Total intangible assets		$	715,939	$	(226,099	)	$	489,840	$	712,934	$	(207,345	)	$	505,589

There were no retirements of intangible assets during the three months ended March 31, 2020.

Amortization expense was as follows:



	Three Months Ended
	March 31,
	2020		2019
Amortization expense	$	18,758	$	12,528


8.	Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following:



	March 31,		December 31,
	2020		2019
Accrued compensation and related taxes	$	54,336	$	53,627
Accrued investment manager fees	40,221		48,720
Non-income tax payables	11,249		11,040
Accrued professional services	4,271		3,833
Accrued technology	3,967		3,042
Accrued transaction costs	2,456		2,482
Accrued charitable contribution	—		5,020
Other accrued expenses	15,642		10,180
Total accrued expenses and other liabilities	$	132,142	$	137,944

In the fourth quarter of 2019, the Company offered a voluntary early retirement program (the “Early Retirement Program”) to employees over a certain age, who have a combined age and years of experience with the Company of at least 65 years. Employees had until January 31, 2020 to voluntarily accept the program with separation of service no later than March 31, 2020. In connection with this program, the Company recorded $11,966 of severance expense during the three months ended March 31, 2020. As of March 31, 2020, the Company has accrued approximately $10,670 in accrued compensation and related taxes and $2,336 recorded in other non-current liabilities. As of December 31, 2019, the Company had accrued approximately $1,733 in accrued compensation and related taxes and $599 recorded in other non-current liabilities. The Company anticipates approximately $12,000 of payments in 2020 with the remainder paid through 2030.

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


9.	Debt

The Company’s outstanding debt obligations as of March 31, 2020 and December 31, 2019 were as follows:



	March 31,			December 31,
	2020			2019
Revolving credit facility balance	$	290,000		$	260,000

Convertible Notes due 2023	$	345,000		$	345,000
Unaccreted discount on Convertible Notes due 2023	(31,160		)	(33,491		)
Unamortized issuance costs on Convertible Notes due 2023	(5,578		)	(5,996		)
Convertible Notes due 2023 carrying value⁽¹⁾	$	308,262		$	305,513

⁽¹⁾The effective interest rate on the liability component of the Convertible Notes due 2023 was 6% for the three months ended March 31, 2020 and 2019.

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,
	2020		2019
Interest on revolving credit facility	$	2,518	$	—
Accretion of debt discount	2,331		3,758
Coupon interest	1,501		2,264
Amortization of issuance costs	631		858
Undrawn and other fees	153		216
Total interest expense	$	7,134	$	7,096

The credit agreement under which the above revolving credit facility was issued (the “Amended Credit Agreement”) includes certain financial covenants and, as of March 31, 2020, the Company was in compliance with these requirements.

See “Note 15—Net Loss Per Share” for further discussion of the effect of conversion on net income (loss) per common share.


10.	Fair Value Measurements

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, 2020 and December 31, 2019, based on the three-tier fair value hierarchy:



	March 31, 2020
	Fair Value		Level I		Level II		Level III
Assets:
Money market funds	$	29,076	$	29,076	$	—	$	—
Assets to fund deferred compensation liability	7,173		—		—		7,173
Total assets	$	36,249	$	29,076	$	—	$	7,173
Liabilities:
Contingent consideration	$	14,791	$	—	$	—	$	14,791
Deferred compensation liability	6,911		6,911		—		—
Total liabilities	$	21,702	$	6,911	$	—	$	14,791

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



	December 31, 2019
	Fair Value		Level I		Level II		Level III
Assets:
Money market funds	$	37,730	$	37,730	$	—	$	—
Assets to fund deferred compensation liability	8,390		—		—		8,390
Total assets	$	46,120	$	37,730	$	—	$	8,390
Liabilities:
Contingent consideration	$	9,045	$	—	$	—	$	9,045
Deferred compensation liability	8,208		8,208		—		—
Total liabilities	$	17,253	$	8,208	$	—	$	9,045

The fair value of the contingent consideration liabilities related to certain of the Company's acquisitions 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 Company's Level III fair value measurement not supported by market activity included its assessments of expected future cash flows related to these acquisitions and their ability to meet the target performance objectives during the subsequent periods from the date of acquisition, which management believes are appropriately discounted considering the uncertainties associated with these obligations, and are calculated in accordance with the terms of their respective agreements.

The Company will continue to reassess the fair values of the contingent consideration liabilities at each reporting date until settlement. Changes to these estimated fair values will be recognized in the Company's earnings and included in general and administrative expenses in the condensed consolidated statements of operations.

The table below presents a reconciliation of the Company's contingent consideration liabilities, which were measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2019 to March 31, 2020:



	Fair Value of Contingent Consideration Liabilities
Balance at December 31, 2019	$	9,045
Private technology company acquisition	5,239
Accretion on contingent consideration	507
Balance at March 31, 2020	$	14,791

The table below presents a reconciliation of the assets used to fund deferred the Company's deferred compensation liability, which is measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2019 to March 31, 2020:



	Fair Value of Assets to Fund Deferred Compensation Liability
Balance at December 31, 2019	$	8,390
Fair value adjustments	(1,217		)
Balance at March 31, 2020	$	7,173

The fair market value of the assets used to fund the Company's deferred compensation liability is based upon the cash surrender value of the Company's life insurance premiums. The value of the assets used to fund the Company's deferred compensation liability, which are included in other non-current assets in the condensed consolidated balance sheets, decreased due to losses on the underlying investment vehicles. These losses are recognized in the Company's earnings and included in general and administrative expenses in the condensed consolidated statements of operations.

The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or when changes in circumstances caused the transfer, in

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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, 2020.

As of March 31, 2020 and December 31, 2019, the carrying value of the Convertible Notes due 2023 equaled $308,262 and $305,513, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2020 and December 31, 2019, the estimated fair value of the Convertible Notes due 2023 was $369,074 and $414,852, respectively. The Company considered the Convertible Notes due 2023 to be a Level II liability at March 31, 2020 and used 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, 2020 (See “Note 9—Debt”).

As of March 31, 2020 and December 31, 2019, there was $290,000 and $260,000, respectively, outstanding on the revolving credit facility under the Amended Credit Agreement. As of March 31, 2020, the outstanding balance on the revolving credit facility approximated fair value as borrowings under the revolving credit facility bore interest at variable rates and the Company believes its credit risk quality was consistent with when the debt originated. The Company considered the revolving credit facility to be a Level I liability as of March 31, 2020 and December 31, 2019 (See “Note 9—Debt”).

The Company considered 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, 2020 based upon the short-term nature of these asse