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