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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, 2021
☐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 April 30, 2021, Envestnet, Inc. had 54,422,622 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, |
| | 2021 | | 2020 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 371,977 | | | $ | 384,565 | |
Fees receivable, net | | 79,293 | | | 80,064 | |
Prepaid expenses and other current assets | | 37,751 | | | 40,570 | |
Total current assets | | 489,021 | | | 505,199 | |
| | | | |
Property and equipment, net | | 51,077 | | | 47,969 | |
Internally developed software, net | | 105,288 | | | 96,501 | |
Intangible assets, net | | 443,023 | | | 435,041 | |
Goodwill | | 906,756 | | | 906,773 | |
Operating lease right-of-use assets, net | | 99,231 | | | 105,249 | |
Other non-current assets | | 48,592 | | | 47,558 | |
Total assets | | $ | 2,142,988 | | | $ | 2,144,290 | |
| | | | |
Liabilities and Equity | | | | |
Current liabilities: | | | | |
Accrued expenses and other liabilities | | $ | 136,417 | | | $ | 158,548 | |
Accounts payable | | 24,567 | | | 18,003 | |
Operating lease liabilities | | 13,270 | | | 13,649 | |
Contingent consideration | | 11,746 | | | 11,251 | |
Deferred revenue | | 42,921 | | | 34,918 | |
Total current liabilities | | 228,921 | | | 236,369 | |
| | | | |
Long-term debt | | 845,195 | | | 756,503 | |
Non-current operating lease liabilities | | 109,458 | | | 112,182 | |
Deferred tax liabilities, net | | 23,042 | | | 34,740 | |
Other non-current liabilities | | 22,643 | | | 28,678 | |
Total liabilities | | 1,229,259 | | | 1,168,472 | |
| | | | |
Commitments and contingencies | | | | |
| | | | |
Equity: | | | | |
Stockholders’ equity: | | | | |
Preferred stock, par value $0.005, 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2021 and December 31, 2020 | | — | | | — | |
Common stock, par value $0.005, 500,000,000 shares authorized; 68,315,098 and 67,832,706 shares issued as of March 31, 2021 and December 31, 2020, respectively; 54,404,659 and 54,093,535 shares outstanding as of March 31, 2021 and December 31, 2020, respectively | | 341 | | | 339 | |
Additional paid-in capital | | 1,072,839 | | | 1,166,774 | |
Accumulated deficit | | (36,338) | | | (79,912) | |
Treasury stock at cost, 13,910,439 and 13,739,171 shares as of March 31, 2021 and December 31, 2020, respectively | | (121,679) | | | (110,466) | |
Accumulated other comprehensive loss | | (1,022) | | | (398) | |
Total stockholders’ equity | | 914,141 | | | 976,337 | |
Non-controlling interest | | (412) | | | (519) | |
Total equity | | 913,729 | | | 975,818 | |
Total liabilities and equity | | $ | 2,142,988 | | | $ | 2,144,290 | |
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, |
| | | | | | 2021 | | 2020 |
Revenues: | | | | | | | | |
Asset-based | | | | | | $ | 159,375 | | | $ | 134,811 | |
Subscription-based | | | | | | 109,829 | | | 104,551 | |
Total recurring revenues | | | | | | 269,204 | | | 239,362 | |
Professional services and other revenues | | | | | | 5,901 | | | 7,177 | |
Total revenues | | | | | | 275,105 | | | 246,539 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Cost of revenues | | | | | | 92,869 | | | 74,933 | |
Compensation and benefits | | | | | | 100,714 | | | 110,430 | |
General and administration | | | | | | 36,315 | | | 41,110 | |
Depreciation and amortization | | | | | | 28,392 | | | 27,683 | |
Total operating expenses | | | | | | 258,290 | | | 254,156 | |
| | | | | | | | |
Income (loss) from operations | | | | | | 16,815 | | | (7,617) | |
Other expense, net | | | | | | (7,468) | | | (1,537) | |
Income (loss) before income tax benefit | | | | | | 9,347 | | | (9,154) | |
| | | | | | | | |
Income tax benefit | | | | | | (5,588) | | | (1,964) | |
| | | | | | | | |
Net income (loss) | | | | | | 14,935 | | | (7,190) | |
Add: Net (income) loss attributable to non-controlling interest | | | | | | 11 | | | (146) | |
Net income (loss) attributable to Envestnet, Inc. | | | | | | $ | 14,946 | | | $ | (7,336) | |
| | | | | | | | |
Net income (loss) per share attributable to Envestnet, Inc.: | | | | | | | | |
Basic | | | | | | $ | 0.28 | | | $ | (0.14) | |
Diluted | | | | | | $ | 0.27 | | | $ | (0.14) | |
| | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | | | | | 54,208,469 | | | 53,016,511 | |
Diluted | | | | | | 59,917,648 | | | 53,016,511 | |
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, |
| | | | | | 2021 | | 2020 |
Net income (loss) attributable to Envestnet, Inc. | | | | | | $ | 14,946 | | | $ | (7,336) | |
Foreign currency translation losses, net of taxes | | | | | | (624) | | | (3,024) | |
Comprehensive income (loss) attributable to Envestnet, Inc. | | | | | | $ | 14,322 | | | $ | (10,360) | |
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, 2020 | | 67,832,706 | | | $ | 339 | | | (13,739,171) | | | $ | (110,466) | | | $ | 1,166,774 | | | $ | (398) | | | $ | (79,912) | | | $ | (519) | | | $ | 975,818 | |
Adoption of ASU 2020-06, net of taxes of $7,641 (See Note 2) | | — | | | — | | | — | | | — | | | (108,470) | | | — | | | 28,628 | | | — | | | $ | (79,842) | |
Exercise of stock options | | 27,043 | | | — | | | — | | | — | | | 522 | | | — | | | — | | | — | | | 522 | |
Issuance of common stock - vesting of restricted stock units | | 455,349 | | | 2 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 14,013 | | | — | | | — | | | — | | | 14,013 | |
Shares withheld to satisfy tax withholdings | | — | | | — | | | (147,041) | | | (9,541) | | | — | | | — | | | — | | | — | | | (9,541) | |
Share repurchase | | — | | | — | | | (24,227) | | | (1,672) | | | — | | | — | | | — | | | — | | | (1,672) | |
Foreign currency translation loss, net of taxes | | — | | | — | | | — | | | — | | | — | | | (624) | | | — | | | — | | | (624) | |
Other | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 118 | | | 118 | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 14,946 | | | (11) | | | 14,935 | |
Balance, March 31, 2021 | | 68,315,098 | | | $ | 341 | | | (13,910,439) | | | $ | (121,679) | | | $ | 1,072,839 | | | $ | (1,022) | | | $ | (36,338) | | | $ | (412) | | | $ | 913,729 | |
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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, net of taxes | | — | | | — | | | — | | | — | | | — | | | — | | | (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 | |
Shares withheld to satisfy tax withholdings | | — | | | — | | | (130,164) | | | (9,199) | | | — | | | — | | | — | | | — | | | (9,199) | |
Foreign currency translation loss, net of taxes | | — | | | — | | | — | | | — | | | — | | | (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 | |
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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, |
| | 2021 | | 2020 |
OPERATING ACTIVITIES: | | | | |
Net income (loss) | | $ | 14,935 | | | $ | (7,190) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 28,392 | | | 27,683 | |
Provision for doubtful accounts | | 298 | | | 1,026 | |
Deferred income taxes | | (3,581) | | | (1,587) | |
Non-cash compensation expense | | 14,137 | | | 15,985 | |
Non-cash interest expense | | 2,015 | | | 4,463 | |
Accretion on contingent consideration and purchase liability | | 388 | | | 599 | |
Fair market value adjustment to contingent consideration liability | | (140) | | | — | |
Gain on acquisition of equity method investment | | — | | | (4,230) | |
Loss allocation from equity method investments | | 3,288 | | | 2,030 | |
Other | | 165 | | | — | |
Changes in operating assets and liabilities, net of acquisitions: | | | | |
Fees receivable, net | | 473 | | | (14,333) | |
Prepaid expenses and other current assets | | 1,756 | | | (6,793) | |
Other non-current assets | | 3,093 | | | 641 | |
Accrued expenses and other liabilities | | (28,668) | | | (11,554) | |
Accounts payable | | 6,444 | | | (3,205) | |
Deferred revenue | | 7,882 | | | 5,598 | |
Other non-current liabilities | | (1,068) | | | (145) | |
Net cash provided by operating activities | | 49,809 | | | 8,988 | |
| | | | |
INVESTING ACTIVITIES: | | | | |
Purchases of property and equipment | | (7,062) | | | (2,160) | |
Capitalization of internally developed software | | (15,058) | | | (11,572) | |
Investments in private companies | | (2,538) | | | (11,700) | |
Acquisition of proprietary technology | | (25,517) | | | — | |
Acquisitions of businesses, net of cash acquired | | — | | | (20,257) | |
| | | | |
Net cash used in investing activities | | (50,175) | | | (45,689) | |
| | | | |
-continued-
Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2021 | | 2020 |
FINANCING ACTIVITIES: | | | | |
Proceeds from borrowings on revolving credit facility | | — | | | 45,000 | |
Payments on revolving credit facility | | — | | | (15,000) | |
Payments of contingent consideration | | (1,000) | | | — | |
Proceeds from exercise of stock options | | 522 | | | 3,408 | |
Taxes paid in lieu of shares issued for stock-based compensation | | (9,541) | | | (9,199) | |
Share repurchase | | (1,672) | | | — | |
Other | | (479) | | | 2 | |
Net cash (used in) provided by financing activities | | (12,170) | | | 24,211 | |
| | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | (52) | | | (1,496) | |
| | | | |
DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | (12,588) | | | (13,986) | |
| | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | | 384,714 | | | 82,755 | |
| | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) | | $ | 372,126 | | | $ | 68,769 | |
| | | | |
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes | | $ | 1,879 | | | $ | 814 | |
Supplemental disclosure of cash flow information - cash paid during the period for interest | | 2,200 | | | 2,740 | |
Supplemental disclosure of non-cash operating, investing and financing activities: | | | | |
| | | | |
Contingent consideration issued in acquisition of businesses | | — | | | 5,239 | |
Purchase liabilities included in accrued expenses and other liabilities | | — | | | 375 | |
Purchase liabilities included in other non-current liabilities | | — | | | 257 | |
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities | | 1,129 | | | 1,752 | |
Membership interest liabilities included in other non-current liabilities | | 124 | | | 2,220 | |
| | | | |
Leasehold improvements funded by lease incentive | | 127 | | | 894 | |
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1.Organization and Description of Business
Envestnet, Inc. (“Envestnet”) through its subsidiaries (collectively, the “Company”) is transforming the way financial advice and wellness are delivered. Its mission is to empower advisors and financial service providers with innovative technology, solutions and intelligence to make financial wellness a reality for everyone. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet provides a unique financial network connecting technology, solutions and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 14—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, 2021 and for the three months ended March 31, 2021 and 2020 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, 2020 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, 2021 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 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, 2021 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, 2020, filed with the SEC on February 26, 2021.
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.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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, |
| | 2021 | | 2020 |
| | (in thousands) |
Cash and cash equivalents | | $ | 371,977 | | | $ | 68,601 | |
| | | | |
Restricted cash included in other non-current assets | | 149 | | | 168 | |
Total cash, cash equivalents and restricted cash | | $ | 372,126 | | | $ | 68,769 | |
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 continues to cause 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 continue to 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, as 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, 2021, these condensed consolidated financial statements do not reflect any adjustments as a result of the pandemic.
Related Party Transactions
The Company has a 4.3% membership interest in a private services company that it accounts for using the equity method of accounting and is considered to be a related party. Revenues from the private services company totaled $3.8 million and $2.7 million in the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, the Company had recorded a net receivable of $2.6 million and $2.1 million, respectively, from the private services company.
Recent Accounting Pronouncements
Recently 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. These changes became effective for the Company's fiscal year beginning January 1, 2021. This standard will be applied prospectively. Adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.” This update simplifies the accounting for certain convertible instruments by reducing the number of accounting models available for convertible debt instruments and revises Topic 815-40, which provides guidance on how an entity must determine whether a contract qualifies for a scope exception from derivative accounting. Under the new guidance, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. In addition, the new guidance requires the if-converted method to be applied for all convertible instruments. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2021. Early adoption of the standard is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption of the standard requires using either a modified retrospective or a full retrospective approach.
The Company has early adopted this standard as of January 1, 2021 using the modified retrospective approach. Adoption of this standard resulted in a decrease to accumulated deficit of $28.6 million (net of $0.9 million in taxes), a decrease to paid-in capital of $108.5 million (net of $6.7 million in taxes) and an increase to Convertible Notes of $87.5 million. Interest
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
expense recognized in future periods is expected to be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost, with an expected decrease of approximately $22.1 million in 2021 as a result of the adoption. The adoption of ASU 2020-06 had no impact on the Company's consolidated statements of cash flows.
3.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Prepaid technology | | $ | 16,162 | | | $ | 13,165 | |
Non-income tax receivables | | 7,259 | | | 6,571 | |
Prepaid insurance | | 2,069 | | | 1,777 | |
Advance payroll taxes and benefits | | 995 | | | 6,429 | |
Income tax prepayments and receivables | | 3,087 | | | 1,684 | |
Other | | 8,179 | | | 10,944 | |
Total prepaid expenses and other current assets | | $ | 37,751 | | | $ | 40,570 | |
4.Property and Equipment, Net
Property and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | March 31, | | December 31, |
| | Estimated Useful Life | | 2021 | | 2020 |
| | | | (in thousands) |
Cost: | | | | | | |
Computer equipment and software | | 3 years | | $ | 73,176 | | | $ | 72,443 | |
Leasehold improvements | | Shorter of the lease term or useful life of the asset | | 41,925 | | | 37,671 | |
Office furniture and fixtures | | 3-7 years | | 12,180 | | | 11,249 | |
Office equipment and other | | 3-5 years | | 6,858 | | | 7,151 | |
Building and building improvements | | 7-39 years | | 2,669 | | | 2,669 | |
Land | | Not applicable | | 940 | | | 940 | |
| | | | 137,748 | | | 132,123 | |
Less: accumulated depreciation and amortization | | (86,671) | | | (84,154) | |
Total property and equipment, net | | $ | 51,077 | | | $ | 47,969 | |
During the three months ended March 31, 2021, the Company retired property and equipment that was no longer in service for the Envestnet Wealth Solutions segment with an historical cost of $2.7 million. During the three months ended March 31, 2021, the Company retired property and equipment that was no longer in service for the Envestnet Data & Analytics segment with an historical cost of $0.4 million.
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, 2021 and 2020 were not material.
Depreciation and amortization expense was as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (in thousands) |
Depreciation and amortization expense | | | | | | $ | 5,643 | | | $ | 5,317 | |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
5.Internally Developed Software
Internally developed software, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | March 31, | | December 31, |
| | Estimated Useful Life | | 2021 | | 2020 |
| | | | (in thousands) |
Internally developed software | | 5 years | | $ | 174,677 | | | $ | 159,619 | |
Less: accumulated amortization | | | | (69,389) | | | (63,118) | |
Internally developed software, net | | | | $ | 105,288 | | | $ | 96,501 | |
Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (in thousands) |
Amortization expense | | | | | | $ | 6,271 | | | $ | 3,608 | |
6.Intangible Assets, Net
Intangible assets, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| | Gross | | | | Net | | Gross | | | | Net |
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| | (in thousands) |
Customer lists | | $ | 591,520 | | | $ | (210,466) | | | $ | 381,054 | | | $ | 591,520 | | | $ | (198,555) | | | $ | 392,965 | |
Proprietary technologies | | 78,424 | | | (29,334) | | | 49,090 | | | 54,914 | | | (26,949) | | | 27,965 | |
Trade names | | 33,700 | | | (20,821) | | | 12,879 | | | 33,700 | | | (19,589) | | | 14,111 | |
Total intangible assets | $ | 703,644 | | | $ | (260,621) | | | $ | 443,023 | | | $ | 680,134 | | | $ | (245,093) | | | $ | 435,041 | |
There were no material retirements of intangible assets during the three months ended March 31, 2021 and 2020.
Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (in thousands) |
Amortization expense | | | | | | $ | 16,478 | | | $ | 18,758 | |
Acquisition of Proprietary Technology
The Company previously owned approximately 29% of the outstanding units in a privately held company and accounted for it as an equity method investment. On March 11, 2021, the Company entered into an intellectual property purchase agreement with this privately held company to acquire all of the proprietary technology developed by the privately held company for approximately $35.5 million. Concurrent with the intellectual property purchase agreement, the Company also entered into a redemption agreement with the same privately held company to redeem its previously held equity interest for approximately $10.0 million. The Company accounted for these two arrangements as a single unit of account. As of the acquisition date, the net cost of the proprietary technology acquired, including capitalized transaction costs, was approximately $24.5 million, which will be amortized over a five-year period on a straight-line basis. The proprietary technology has been integrated into the Envestnet Wealth Solutions segment.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
7.Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Accrued investment manager fees | | $ | 66,314 | | | $ | 57,894 | |
Accrued compensation and related taxes | | 39,900 | | | 71,039 | |
Non-income tax payables | | 6,400 | | | 8,398 | |
Accrued professional services | | 6,255 | | | 9,240 | |
Accrued technology | | 4,955 | | | 4,701 | |
Accrued purchase consideration | | 3,887 | | | — | |
Other accrued expenses | | 8,706 | | | 7,276 | |
Total accrued expenses and other liabilities | | $ | 136,417 | | | $ | 158,548 | |
In the fourth quarter of 2020, as part of an organizational realignment, the Company entered into separation agreements with several employees. In connection with this realignment, the Company recognized $3.8 million of severance expense in the three months ended March 31, 2021. The Company has approximately $4.6 million and $5.1 million in accrued compensation and related taxes associated with these separation agreements as of March 31, 2021 and December 31, 2020, respectively.
8.Debt
The Company’s outstanding debt obligations as of March 31, 2021 and December 31, 2020 were as follows:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Revolving credit facility balance | | $ | — | | | $ | — | |
| | | | |
Convertible Notes due 2023 | | $ | 345,000 | | | $ | 345,000 | |
Unamortized issuance costs on Convertible Notes due 2023 | | (4,503) | | | (4,306) | |
Unaccreted discount on Convertible Notes due 2023 | | — | | | (24,058) | |
Convertible Notes due 2023 carrying value | | $ | 340,497 | | | $ | 316,636 | |
| | | | |
Convertible Notes due 2025 | | $ | 517,500 | | | $ | 517,500 | |
Unamortized issuance costs on Convertible Notes due 2025 | | (12,802) | | | (11,731) | |
Unaccreted discount on Convertible Notes due 2025 | | — | | | (65,902) | |
Convertible Notes due 2025 carrying value | | $ | 504,698 | | | $ | 439,867 | |
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, |
| | | | | | 2021 | | 2020 |
| | | | | | (in thousands) |
Coupon interest | | | | | | $ | 2,479 | | | $ | 1,501 | |
Amortization of issuance costs | | | | | | 1,423 | | | 631 | |
Undrawn and other fees | | | | | | 313 | | | 153 | |
Interest on revolving credit facility | | | | | | — | | | 2,518 | |
Accretion of debt discount | | | | | | — | | | 2,331 | |
Total interest expense | | | | | | $ | 4,215 | | | $ | 7,134 | |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
For the three months ended March 31, 2021 and 2020, the total interest expense related to the Convertible Notes was $3.7 million and $4.3 million, respectively, with coupon interest expense of $2.5 million and $1.5 million and the amortization of debt discount and issuance costs of $1.2 million and $2.8 million, respectively.
Convertible Notes due 2023
Upon adoption of ASU 2020-06, effective January 1, 2021, the embedded conversion option, or equity component, is no longer separated from the host contract and recognized within additional paid-in capital and is instead accounted for as a single liability measured at amortized cost within Long-term debt in the condensed consolidated balance sheets. Accordingly, the Convertible Notes due 2023 are presented in the condensed consolidated balance sheets at their gross proceeds of $345.0 million less unamortized debt issuance costs of $4.5 million as of March 31, 2021 with no future accretion of the original issue discount necessary.
In connection with the issuance of the Convertible Notes due 2023, the Company incurred $10.0 million of issuance costs in 2018, of which $8.6 million was originally allocated to the debt component and presented net in Long-term debt and $1.4 million was originally allocated to the equity component and presented within additional paid-in capital in the condensed consolidated balance sheets. Upon adoption of ASU 2020-06, effective January 1, 2021, the costs originally allocated to the equity component are reflected within Long-term debt and are being amortized and recorded as additional interest expense over the life of the Convertible Notes due 2023.
The effective interest rate of the Convertible Notes due 2023 for the three months ended March 31, 2021 and 2020 was approximately 2.4% and 6%. The effective interest rate of the Convertible Notes due 2023 is equal to the stated interest rate plus the amortization of the debt issuance costs subsequent to adoption. Prior to the adoption of ASU 2020-06, the effective interest rate calculation also included the amortization of the original issue discount.
Convertible Notes due 2025
Upon adoption of ASU 2020-06, effective January 1, 2021, the embedded conversion option, or equity component, is no longer separated from the host contract and recognized within additional paid-in capital and is instead accounted for as a single liability measured at amortized cost within Long-term debt in the condensed consolidated balance sheets. Accordingly, the Convertible Notes due 2025 are presented in the condensed consolidated balance sheets at their gross proceeds of $517.5 million less unamortized debt issuance costs of $12.8 million as of March 31, 2021 with no future accretion of the original issue discount necessary.
In connection with the issuance of the Convertible Notes due 2025, the Company incurred a total of $14.5 million of issuance costs in 2020, of which $12.6 million was originally allocated to the debt component and presented net in Long-term debt and $1.9 million was originally allocated to the equity component and presented within additional paid-in capital in the condensed consolidated balance sheets. Upon adoption of ASU 2020-06, effective January 1, 2021, the costs originally allocated to the equity component are reflected within Long-term debt and are being amortized and recorded as additional interest expense over the life of the Convertible Notes due 2025.
The effective interest rate of the Convertible Notes due 2025 for the three months ended March 31, 2021 was approximately 1.3%. The effective interest rate of the Convertible Notes due 2025 was equal to the stated interest rate plus the amortization of the debt issuance costs subsequent to adoption.
See “Note 13—Net Income (Loss) Per Share” for further discussion of the effect of conversion on net income per share.
Amended Credit Agreement
The credit agreement under which the Company’s revolving credit facility was issued (the “Amended Credit Agreement”) includes certain financial covenants and, as of March 31, 2021, the Company was in compliance with these requirements.
As of March 31, 2021, the Company had $500.0 million available to borrow under the revolving credit facility, subject to covenant compliance.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
9.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, 2021 and December 31, 2020, based on the three-tier fair value hierarchy, as defined in ASC 820, “Fair Value Measurements and Disclosures”:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Fair Value | | Level I | | Level II | | Level III |
| | (in thousands) |
Assets: | | | | | | | | |
Money market funds | | $ | 67,053 | | | $ | 67,053 | | | $ | — | | | $ | — | |
Assets to fund deferred compensation liability | | 10,169 | | | — | | | — | | | 10,169 | |
Total assets | | $ | 77,222 | | | $ | 67,053 | | | $ | — | | | $ | 10,169 | |
Liabilities: | | | | | | | | |
Contingent consideration | | $ | 11,746 | | | $ | — | | | $ | — | | | $ | 11,746 | |
Deferred compensation liability | | 9,606 | | | 9,606 | | | — | | | — | |
Total liabilities | | $ | 21,352 | | | $ | 9,606 | | | $ | — | | | $ | 11,746 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Fair Value | | Level I | | Level II | | Level III |
| | (in thousands) |
Assets: | | | | | | | | |
Money market funds | | $ | 84,110 | | | $ | 84,110 | | | $ | — | | | $ | — | |
Assets to fund deferred compensation liability | | 9,961 | | | — | | | — | | | 9,961 | |
Total assets | | $ | 94,071 | | | $ | 84,110 | | | $ | — | | | $ | 9,961 | |
Liabilities: | | | | | | | | |
Contingent consideration | | $ | 12,559 | | | $ | — | | | $ | — | | | $ | 12,559 | |
Deferred compensation liability | | 8,720 | | | 8,720 | | | — | | | — | |
Total liabilities | | $ | 21,279 | | | $ | 8,720 | | | $ | — | | | $ | 12,559 | |
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. 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 administration expenses in the condensed consolidated statements of operations.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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, 2020 to March 31, 2021:
| | | | | | | | |
| | Fair Value of Contingent Consideration Liabilities |
| | (in thousands) |
Balance at December 31, 2020 | | $ | 12,559 | |
Fair market value adjustment on contingent consideration liability | | (140) | |
Accretion on contingent consideration | | 327 | |
Payment of contingent consideration | | (1,000) | |
Balance at March 31, 2021 | | $ | 11,746 | |
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, 2020 to March 31, 2021:
| | | | | | | | |
| | Fair Value of Assets to Fund Deferred Compensation Liability |
| | (in thousands) |
Balance at December 31, 2020 | | $ | 9,961 | |
| | |
Fair value adjustments | | 208 | |
Balance at March 31, 2021 | | $ | 10,169 | |
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, increased due to gains on the underlying investment vehicles. These gains are recognized in the Company's earnings and included in general and administration 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 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, 2021.
Fair Value of Debt Agreements and Other Financial Assets and Liabilities
The Company considered the Convertible Notes due 2023 and the Convertible Notes due 2025 to be Level II liabilities at March 31, 2021 and used a market approach to calculate their respective fair values. The estimated fair value for each convertible note was determined based on estimated or actual bids and offers in an over-the-counter market on March 31, 2021 (See “Note 8—Debt”).
As of March 31, 2021, the carrying value of the Convertible Notes due 2023 equaled $340.5 million and represented the aggregate principal amount outstanding less the unamortized debt issuance costs. As of December 31, 2020, the carrying value of the Convertible Notes due 2023 equaled $316.6 million and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2021 and December 31, 2020, the estimated fair value of the Convertible Notes due 2023 was $419.7 million and $460.8 million, respectively.
As of March 31, 2021, the carrying value of the Convertible Notes due 2025 equaled $504.7 million and represented the aggregate principal amount outstanding less the unamortized debt issuance costs. As of December 31, 2020, the carrying value of the Convertible Notes due 2025 equaled $439.9 million and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2021 and December 31, 2020, the estimated fair value of the Convertible Notes due 2025 was $519.1 million and $540.8 million, respectively.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The Company considered the recorded value of its 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, 2021 based upon the short-term nature of these assets and liabilities.
10.Revenues and Cost of Revenues
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by major source:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
| | (in thousands) |
Revenues: | | | | | | | | | | | | |
Asset-based | | $ | 159,375 | | | $ | — | | | $ | 159,375 | | | $ | |