env-20210331

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

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


			Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020			3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020			4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020			5
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2021 and 2020			6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020			7
Notes to Unaudited Condensed Consolidated Financial Statements			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements			26
Overview			28
Results of Operations			32
Liquidity and Capital Resources			43

Item 3. Quantitative and Qualitative Disclosures About Market Risk			44

Item 4. Controls and Procedures			44

PART II - OTHER INFORMATION

Item 1. Legal Proceedings			44

Item 1A. Risk Factors			44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45

Item 3. Defaults Upon Senior Securities			45

Item 4. Mine Safety Disclosures			45

Item 5. Other Information			45

Item 6. Exhibits			45

Index to Exhibits			46

Signatures			47

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






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

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.

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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.

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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

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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

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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.

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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

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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.

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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.

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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.

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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	$