3.        Business Acquisitions

 

The following acquisitions are included within the Envestnet segment, except for Yodlee and Wheelhouse, which comprise the Envestnet | Yodlee segment.

 

Klein Decisions, Inc.

 

On July 1, 2014, ERS completed the acquisition of Klein. In accordance with the stock purchase agreement, ERS acquired all of the outstanding shares of Klein for cash consideration of approximately $1,288, a promissory note in the amount of $1,500, and estimated fair value of $2,800 in contingent consideration (with a minimum guaranteed amount of $1,175), to be paid over three years. The promissory note was paid by ERS on July 31, 2014. Klein develops dynamic decision systems that incorporate investor preferences, goals, and priorities into the investment process. ERS acquired Klein for its capabilities in delivering personal participant solutions, as well as its personnel to further build out ERS’s business of serving advisors who support the small retirement plan market. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, which relate to an increase in future ERS revenues as a result of leveraging Klein’s systems and expertise of its employees. The goodwill is not deductible for income tax purposes.

 

The estimated consideration transferred in the acquisition as of the acquisition date was as follows:

 

 

The contingent consideration liability of $2,800 is the present value of an undiscounted liability of $3,520, applying a discount rate of 9% and is considered a Level III fair value measurement as described in Note 9. The first undiscounted payment of $230 was paid on September 2, 2015. Changes to the estimated fair value of the contingent consideration are recognized in earnings of the Company.

 

For the year ended December 31, 2015, the Company recognized imputed interest expense on contingent consideration of $117 and a decrease in the fair value of contingent consideration of $1,231, which are included in general and administration expense in the consolidated statements of operations.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

The results of Klein’s operations are included in the consolidated statements of operations beginning July 1, 2014. Klein’s revenues and pre-tax net loss for the six-month period ended December 31, 2014 totaled $468 and ($926), respectively. The loss includes acquired intangible asset amortization of $286, accretion on contingent consideration of $75 and an estimated fair value adjustment to decrease the contingent consideration liability by $675.

 

On July 9, 2014, the former owners of Klein (the “Klein Parties”) purchased an 11.7% ownership interest in ERS for $1,500. The Klein Parties have the right to require ERS to repurchase units issued anytime between 18 and approximately 36 months after July 1, 2014 for the amount of $1,500. 

 

In December of 2015, the Klein Parties exercised their right to require ERS to repurchase their units in the amount of $1,500. In addition, the Company reached a settlement agreement with the Klein Parties and agreed to pay the minimum guaranteed contingent consideration payment of $1,175 and a payment of $1,825 to eliminate all future claims.  All amounts are included in accrued expenses and other liabilities on the consolidated balance sheet and an expense totaling $2,160 is recorded in general and administration in the consolidated statements of operations for the year ended December 31, 2015.

 

Placemark Holdings, Inc.

 

On October 1, 2014, Envestnet, Inc. completed the acquisition (the “Acquisition”) of Placemark Holdings, Inc., a Delaware corporation (“Placemark”). Under the terms of the Acquisition, total consideration was $58,282 for all of the outstanding capital stock of Placemark. Envestnet funded the Acquisition with available cash and borrowings under its Credit Agreement (see Note 12).

 

Placemark develops UMA programs and other portfolio management outsourcing solutions, including patented portfolio overlay and tax optimization services, for banks, full-service broker-dealers and RIA firms. Envestnet acquired Placemark for its UMA and overlay capabilities, to strengthen the Company’s position as a leading provider of UMA offerings, and to expand its presence in the full-service broker-dealer and RIA markets. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, which relate to an increase in future Envestnet revenues as a result of leveraging Placemark’s systems and expertise of its employees, and lower future operating expenses and technology platform-related costs due to the migration of Placemark’s clients to the Envestnet technology platform. The goodwill is not deductible for income tax purposes.

 

The estimated consideration transferred in the acquisition as of the acquisition date was as follows:

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

The results of Placemark’s operations are included in the consolidated statements of operations beginning October 1, 2014. Placemark’s revenues and pre-tax income for the three-month period ended December 31, 2014 totaled $6,157 and $209, respectively. The loss includes acquired intangible asset amortization of $1,254.  

 

Upside Holdings, Inc.

 

On February 24, 2015, Envestnet, Inc. (the “Company”) acquired all of the stock of Upside Holdings, Inc. (including its subsidiaries “Upside”) for consideration totaling $2,641.  

 

Upside is a technology company that was previously registered as an Internet Investment Adviser under Rule 203A-2(f) of the Investment Advisers Act of 1940 (“Advisers Act”). Upside helps financial advisors compete against other digital advisors, or “robo advisors,” by leveraging technology and algorithms to advise, manage, and serve clients who want personalized investment services. 

 

The Company acquired Upside to integrate its technology within the Company’s unified wealth management platform, which will allow advisors to compete more aggressively to engage their clients online and reach a new class of investors. The goodwill arising from the acquisition represents the advantage of this integrated technology, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

 

As a result of the acquisition of Upside, the Company provided for the future grant of unvested restricted stock unit awards to Upside employees at the end of each year in 2015, 2016 and 2017 upon Upside meeting certain performance conditions and then a subsequent two-year service condition (Note 15).  If 100 percent of the awards are earned for 2015, 2016 and 2017, the maximum number of units that could be granted for 2015, 2016 and 2017 equals 22,064,  44,128 and 66,192 units, respectively. Each unit represents the right to receive one share of common stock of the Company, subject to the terms and conditions of the award. The Company has determined the payments to be categorized as compensation expense.  As of December 31, 2016, no amounts have been recognized as the performance targets were not attained in 2016 or 2015.

 

The estimated consideration transferred in the acquisition as of the acquisition date was as follows:

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

The estimated useful life and amortization method of the intangible asset acquired is as follows:

 

 

The results of Upside’s operations are included in the consolidated statements of operations beginning February 24, 2015, and are not material to the Company’s results of operations.

 

For the year ended December 31, 2015, acquisition related costs for Upside totaled $230 and are included in general and administration in the consolidated statements of operations.

 

Oltis Software LLC

 

On May 6, 2015, the Company acquired all of the issued and outstanding membership interests of Oltis Software LLC (d/b/a Finance Logix®), an Arizona limited liability company (“Finance Logix”). Finance Logix provides financial planning and wealth management software solutions to banks, broker-dealers and RIAs.

 

The Company paid upfront consideration of $20,595 in cash, purchase consideration liability of $3,000, 123,410 in shares of Envestnet common stock with a fair value of $6,388 and 123,410 stock options to acquire Envestnet common stock at $52.67 per share with an estimated fair value of $2,542.

 

The Company acquired Finance Logix to integrate its technology within the Company’s unified wealth management platform, which will allow advisors to offer financial planning that flows seamlessly into portfolio construction and ongoing management on a single platform. Finance Logix allows the Company to deliver that capability and increase the breadth of our platform and the functionality gap between our platform and competing platforms.  The goodwill arising from the acquisition represents cross-selling opportunities, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is deductible for income tax purposes.

 

In connection with the acquisition of Finance Logix, the Company is required to pay the former owner of Finance Logix future payments in a mix of cash, stock and stock options, based on Finance Logix meeting annual net revenue targets of $5,000,  $10,000 and $16,000 for calendar years 2015, 2016 and 2017, respectively, with lower payments for performance below the three yearly targets and a higher payment in 2017 for performance above the target. The Company has determined the first payment related to the 2015 target to be categorized as compensation expense and the payments, if any, related to 2016 and 2017 targets, to be categorized as contingent consideration. The Company did not record compensation expense in 2015 and has not recorded a contingent consideration liability as of December 31, 2016, as future payments are not expected to occur at this time.

 

Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

 

The estimated consideration transferred in the acquisition as of the acquisition date was as follows:

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

The results of Finance Logix’s operations are included in the consolidated statements of operations beginning May 6, 2015. Finance Logix’s revenues for the period ended December 31, 2015 totaled $1,892. Finance Logix’s net loss for the period ended December 31, 2015 totaled $999. The net loss for the period ended December 31, 2015 includes acquired intangible asset amortization of $974.

 

For the period ended December 31, 2016 and 2015, acquisition related costs for Finance Logix totaled $548 and $465, respectively, and are included in general and administration expenses.

 

Castle Rock Innovations, Inc.

 

On August 30, 2015, the Company acquired all of the outstanding shares of capital stock of Castle Rock Innovations, Inc., a Delaware corporation (“Castle Rock”). Castle Rock provides data aggregation and plan benchmark solutions to retirement plan record-keepers, broker-dealers, and advisors.

 

The Company combined the acquired Castle Rock assets with ERS on December 1, 2016.  Castle Rock’s AXIS Retirement Plan Analytics Platform enables retirement plan fiduciaries to comply with 408(b)(2) and 404a-5 regulatory fee disclosure reporting requirements. The AXIS platform offers a single web-based interface and data repository to service the reporting needs of all types of retirement plans, and can be integrated with all record-keeping systems. AXIS also includes features for editing and generating reports for filings, reporting plan expenses, and comparing retirement plans and participants to those of their peers by industry, company size, and other characteristics. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

 

The estimated consideration transferred in the acquisition as of the acquisition date was as follows:

 

 

In connection with the acquisition of Castle Rock, the Company is required to pay contingent consideration of 40% of the first annual post-closing period revenues minus $100,  35% of the second annual post-closing period revenue minus $100 and 30% of the third annual post-closing period revenue minus $100. The Company recorded a preliminary estimated liability as of the date of acquisition of $1,500, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level III fair value measurement as described in Note 9.

 

On December 1, 2016, the Company and Castle Rock amended the stock purchase agreement to fix the remaining post-closing period payments. The first post-closing payment was made during October 2016 in the amount of $805. The second post-closing period payment of $445 was paid in January 2017 and the third post-closing payment of $1,250 will be payable in January 2018.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

The results of Castle Rock’s operations are included in the consolidated statements of operations beginning September 1, 2015. Castle Rock’s revenues and net income for the period ended December 31, 2015 totaled $1,011 and $109, respectively. The net income includes acquired intangible asset amortization of $178.

 

For the period ended December 31, 2016 and 2015, acquisition related costs for Castle Rock totaled $110 and $170, respectively, and are included in general and administration expenses.

 

On September 1, 2015, ERS accepted the subscription of certain former owners of Castle Rock (the “Castle Rock Parties”) to purchase a 6.5% ownership interest of ERS for $900.  The Castle Rock Parties have the right to require ERS to repurchase units issued pursuant to the subscription in approximately 36 months after September 1, 2015 for the amount of $900.  This purchase obligation is guaranteed by the Company and is reflected outside of permanent equity in the consolidated balance sheet. 

 

Yodlee, Inc.

 

On November 19, 2015, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated August 10, 2015, among Yodlee, the Company and Yale Merger Corp. (“Merger Sub”), a wholly owned subsidiary of Envestnet, Merger Sub was merged (the “Merger”) with and into Yodlee with Yodlee continuing as a wholly owned subsidiary of Envestnet.

 

Yodlee, operating as Envestnet | Yodlee is a leading data aggregation and data analytics platform powering dynamic, cloud-based innovation for digital financial services. Yodlee powers digital financial solutions for approximately 22 million paid subscribers and over 1,000 financial institutions, financial technology innovators and financial advisory firms. Founded in 1999, the company has built a network of over 15,000 data sources and been awarded 78 patents.

 

Under the terms of the Merger Agreement, Yodlee stockholders received $11.51 in cash and 0.1889 of a share of Envestnet common stock per Yodlee share.  Based upon the volume weighted average price per share of Envestnet common stock for the ten consecutive trading days ending on (and including) November 17, 2015, the second trading day immediately prior to completion of the Merger, Yodlee stockholders received total consideration with a value of $17.49 per share.

 

Net cash consideration totaled approximately $375,658 and the Company issued approximately 5,974,000 shares of Envestnet common stock to Yodlee stockholders in the Merger. Holders of 577,829 shares of Yodlee common stock have exercised their statutory appraisal rights under Delaware law. As of December 31, 2015 the Company recognized a liability in the amount of $10,061, which represented $17.49 in cash for each share of Yodlee common stock held by them. Although the Company believed the fair value of these shares did not exceed the consideration paid in the Acquisition, nevertheless, during the first quarter of 2016, the Company settled the appraisal claim in order to avoid the costs, uncertainties, disruptions and distraction of potential litigation. The difference between the liability as of December 31, 2015 and the settlement amount resulted in an increase to goodwill and total consideration paid.

 

The Company acquired Yodlee to enhance the Company’s wealth management solutions with a deeply integrated data aggregation capability, expand the Company’s addressable market by delivering the Company’s wealth management solutions to Yodlee’s clients and partners, and benefit from the revenue potential resulting from Yodlee’s fast growing data analytics solutions.

 

The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to an increase in future revenues as a result of potential cross selling opportunities and new lines of business, as well as lower future operating expenses.  The goodwill is also related to the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

 

The estimated consideration transferred in the acquisition was as follows:

 

 

In connection with the Yodlee merger, the Company issued 1,052,000 shares of Envestnet restricted stock awards (“replacement awards”) issued in connection with unvested Yodlee employee equity awards. The Yodlee unvested stock options and unvested restricted stock units were canceled and exchanged for the replacement awards. See Note 14 for additional information related to the replacement awards.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

 

 

As part of the final acquisition accounting, management assigned $24,613 of the total acquired goodwill of $282,429 to the Envestnet segment given the expected benefit to that segment related to the synergies resulting from the combination.   

 

A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

The results of Envestnet | Yodlee’s operations are included in the consolidated statements of operations beginning November 20, 2015. Envestnet | Yodlee’s revenues and net loss for the period ended December 31, 2015 totaled $14,081 and $5,963, respectively. The net loss includes acquired intangible asset amortization of $3,953.

 

For the period ended December 31, 2016 and 2015, acquisition related costs for Yodlee totaled $2,186 and $6,624, respectively, and are included in general and administration expenses.

 

FinaConnect, Inc.

 

On February 1, 2016 Envestnet acquired all of the outstanding shares of capital stock of FinaConnect, Inc. (“FinaConnect”).  FinaConnect is a software as a service (SaaS) platform that provides reporting and practice management capabilities to financial professionals servicing the retirement plan market and is the technology platform supporting the ERS service offering.  FinaConnect is included in the Envestnet segment.

 

On May 1, 2016, the Company combined the assets of FinaConnect with ERS. In addition to adding the client list serviced directly by FinaConnect, the goodwill arising from the acquisition represents the advantage of ownership of the technology powering the ERS solution, removal of ongoing licensing payments made to FinaConnect and the full integration of the knowledge and experience of the FinaConnect workforce. The goodwill is deductible for income tax purposes.

 

In connection with the acquisition of FinaConnect, the Company paid upfront cash consideration of $6,425 and Company is required to pay contingent consideration of four times the incremental revenue on a certain book of business for the next two years, not to exceed a total amount of $3,500.  

 

The estimated consideration transferred in the acquisition as of the acquisition date was as follows:

 

 

As of December 31, 2016, the estimated fair market value of contingent consideration liability for FinaConnect increased from $1,929 to $2,286. As a result, the Company recorded a fair market value adjustment of $357 which is recognized in general and administration in the consolidated statements of operations.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

 

A summary of intangible assets acquired, estimated useful lives and amortization methods are as follows:

 

 

The results of FinaConnect’s operations are included in the consolidated statements of operations beginning February 1, 2016, and are not considered material to the Company’s results of operations.

 

For the period ended December 31, 2016, acquisition related costs for FinaConnect totaled $116 and are included in general and administration in the consolidated statements of operations.  

 

Wheelhouse Analytics LLC

 

On October 3, 2016, the Company acquired all of the issued and outstanding membership interests of Wheelhouse Analytics LLC (“Wheelhouse”). Wheelhouse is a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. Wheelhouse is included in the Yodlee segment.

 

The Company acquired Wheelhouse to be integrated with Yodlee’s industry-leading data and analytics solutions to strengthen Envestnet’s data-driven insights to financial advisors, asset managers and enterprises enabling them to better manage their businesses and client relationships and deliver better outcomes to their clients. Envestnet expects to deeply integrate Wheelhouse’s tools, delivering robust online dashboards and reporting that provides actionable intelligence.

 

In connection with the acquisition of Wheelhouse, the Company paid cash consideration of $13,299 and is required to pay contingent consideration with the aggregate amount not to exceed $4,000 and certain holdbacks upon release. Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

 

The preliminary estimated consideration transferred in the acquisition was as follows:

 

 

The estimated fair values of certain working capital balances, contingent consideration, deferred revenue, identifiable intangible assets and goodwill are provisional and are based on the information that was available as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of working capital balances, contingent consideration, deferred revenue, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than October 3, 2017.

 

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

A summary of preliminary estimated intangible assets acquired, estimated useful lives and amortization method is as follows:

 

 

The results of Wheelhouse’s operations are included in the consolidated statements of operations beginning October 3, 2016. Wheelhouse’s revenues and loss from operations for the period ended December 31, 2016 totaled $557 and $799, respectively. Income from operations includes estimated acquired intangible asset amortization of $240.

 

For the period ended December 31, 2016, acquisition costs for Wheelhouse totaled $383 and are included in general and administration in the consolidated statements of operations. The Company may incur additional acquisition related costs during 2017.

 

Acquisition related costs for all acquisitions, totaled $3,343,  $9,792 and $2,430 for the years ended December 31, 2016, 2015, and 2014, respectively and are included in general and administration in the consolidated statements of operations.

 

Unaudited pro forma results for Envestnet, Inc. giving effect to the Finance Logix, Castle Rock and Yodlee acquisitions

 

The following unaudited pro forma financial information presents the combined results of operations of Envestnet, Finance Logix, Castle Rock, and Yodlee for the year ended December 31, 2015. The unaudited pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2015.  The results of Klein, Upside, FinaConnect and Wheelhouse are not included in the pro forma financial information presented below as these acquisitions were not material to the Company’s results of operations. The results of FinaConnect and Wheelhouse are not included in the pro forma financial information presented below as the FinaConnect and Wheelhouse acquisitions were not considered material to the Company’s results of operations and as such no pro forma information is presented below for the year ended December 31, 2016.

 

The unaudited pro forma results presented primarily include adjustments for amortization charges for acquired intangible assets and stock-based compensation expense, imputed interest expense, and transaction-related expenses and the related tax effect on the aforementioned items.

 

Pro forma financial information as of December 31, 2015 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 2015.