Envestnet, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Business Acquisitions

Business Acquisitions

12 Months Ended

Dec. 31, 2019

The following acquisitions are included within the Envestnet Wealth Solutions segment, except for the private company acquisitions, which are included within the Envestnet Data & Analytics segment.

FolioDynamix

On January 2, 2018, the Company acquired all of the issued and outstanding membership interests of FolioDynamics Holdings, Inc. (“FolioDynamix”) through a merger of FolioDynamix with and into a wholly owned subsidiary of Envestnet.

FolioDynamix provides financial institutions, RIAs, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research and overlay management services. FolioDynamix is included in the Envestnet Wealth Solutions segment.

The Company acquired FolioDynamix to add complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. Envestnet is continuing to integrate the technology and operations of FolioDynamix into the Company’s wealth management channel, enabling the Company to further leverage its operating scale and data analytics capabilities.

The Company funded the acquisition with a combination of cash on the Company’s consolidated balance sheets and borrowings under its revolving credit facility.

The consideration transferred in the acquisition was as follows:



Cash consideration	$	199,877
Working capital and other adjustments	(6,742		)
Total consideration transferred	$	193,135

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



Cash and cash equivalents	$	4,876
Accounts receivable	4,962
Prepaid expenses and other current assets	3,773
Property and equipment, net	927
Other non-current assets	441
Identifiable intangible assets	135,700
Goodwill	79,891
Total assets acquired	230,570
Accounts payable	(5,358		)
Accrued expenses	(7,907		)
Deferred tax liability	(23,300		)
Deferred revenue	(806		)
Other non-current liabilities	(64		)
Total liabilities assumed	(37,435		)
Total net assets acquired	$	193,135

The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

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



			Estimated	Amortization
	Amount		Useful Life in Years	Method
Customer list	$	113,500	13	Accelerated
Proprietary technology	17,500		5	Straight-line
Trade names and domains	4,700		6	Straight-line
Total intangible assets acquired	$	135,700

The results of FolioDynamix’s operations are included in the consolidated statements of operations beginning January 2, 2018. FolioDynamix’s revenues for the year ended December 31, 2018 totaled $68,122. FolioDynamix’s pre-tax loss for the year ended December 31, 2018 totaled $13,777. The pre-tax loss includes acquired intangible asset amortization of $17,908 for the year ended December 31, 2018.

For the years ended December 31, 2019 and 2018, acquisition related costs for FolioDynamix totaled $1,282 and $1,557, respectively, and are included in general and administration expenses.

Acquisition of private technology company

On August 13, 2018, the Company acquired all of the issued and outstanding membership interests of a private technology company that provides market research analytics (the “private technology company acquisition”). In connection with this acquisition, the Company paid estimated net consideration of $6,585, subject to certain closing and post-closing adjustments.

The technology and operations of the private company are included in the Company’s Envestnet Data & Analytics segment.

The preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition are not material. As a result the remaining balance was allocated to goodwill in the amount of $6,885. The goodwill is not deductible for income tax purposes.

The results of the private technology company's operations are included in the consolidated statements of operations beginning August 13, 2018 and were not considered material to the Company’s results of operations.

For the years ended December 31, 2019 and 2018, acquisition related costs for the private technology company acquisition were not material, and are included in general and administration expenses.

Acquisition of private artificial intelligence (“AI”) company

On January 2, 2019, pursuant to an agreement and plan of merger dated as of January 2, 2019 between Envestnet and a private AI company, the private AI company merged into Yodlee Inc., a wholly owned subsidiary of the Company (the “private AI company acquisition”). The private AI company provides conversational artificial intelligence tools and applications to financial services firms, improves the way Financial Service Providers (“FSPs”) can interact with their customers, and supports these FSPs to better engage, support and assist their consumers leveraging this latest wave of customer-centric capabilities.

The technology and operations of the private company are included in the Company’s Envestnet Data & Analytics segment.

The seller of the private AI company is also entitled to an additional unlimited earn-out payment with an estimated fair value of $7,580 as of the acquisition date. The unlimited earn-out payment is based on the private company's revenue and other retention targets for the twelve-month period beginning January 1, 2021.

The consideration transferred in the acquisition was as follows:



Cash consideration	$	11,173
Purchase consideration liability	6,240
Contingent consideration liability	7,580
Working capital adjustment	70
Total consideration transferred	$	25,063

In December 2019, the Company determined that revenue targets for this acquisition would not be met. As a result, the Company reduced the contingent consideration liability plus accrued interest associated with this acquisition by $8,126 and recorded this as a reduction to general and administration expenses.

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



Total tangible assets acquired	$	144
Total liabilities assumed	(688		)
Identifiable intangible assets	4,100
Goodwill	21,507
Total net assets acquired	$	25,063

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



	Preliminary		Estimated	Amortization
	Estimate		Useful Life in Years	Method
Proprietary technology	$	4,100	4	Straight-line

The results of the private AI company's operations are included in the consolidated statements of operations beginning January 2, 2019 and were not considered material to the Company’s results of operations.

For the year ended December 31, 2019, acquisition related costs for the private AI company acquisition were not material, and are included in general and administration expenses. The Company may incur additional acquisition related costs in 2020.

Acquisition of PortfolioCenter business

On April 1, 2019, pursuant to an asset purchase agreement, Tamarac, Inc. (“Tamarac”), a wholly owned subsidiary of Envestnet, acquired certain of the assets, primarily consisting of intangible assets, and the assumption of certain of the liabilities of the PortfolioCenter business (“PortfolioCenter”) from Performance Technologies, Inc. (the “PC Seller”), a wholly owned subsidiary of The Charles Schwab Corporation (“PortfolioCenter acquisition”). The PortfolioCenter business provides investment advisors and investment advisory service providers with desktop, hosted and outsourced multicustodial software solutions. These solutions provide data-management and performance-measurement tools, as well as customizable accounting, reporting, and billing functions delivered through the commercial software application products known as PortfolioCenter Desktop, PortfolioCenter Hosted, PortfolioServices and Service Bureau.

Tamarac acquired the PortfolioCenter business to better serve small and mid-size RIA firms. The PortfolioCenter business is included in the Company’s Envestnet Wealth Solutions segment.

In connection with the PortfolioCenter acquisition, Tamarac paid $17,500 in cash. Tamarac funded the PortfolioCenter acquisition with available cash resources. The PC Seller is also entitled to an earn-out payment based on PortfolioCenter's revenue for the twelve-month period beginning April 1, 2020. The discounted amount of the contingent consideration liability is

estimated to be $8,200 and is included as a non-current liability in the consolidated balance sheets.

The preliminary consideration transferred in the acquisition was as follows:



			Measurement
	Preliminary		Period			Revised
	Estimate		Adjustments			Estimate
Cash consideration	$	17,500	$	—		$	17,500
Contingent consideration liability	8,300		(100		)	8,200
Total consideration transferred	$	25,800	$	(100	)	$	25,700

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



				Measurement
	Preliminary			Period			Revised
	Estimate			Adjustments			Estimate
Total tangible assets acquired	$	13		$	—		$	13
Total liabilities assumed	(1,600		)	—			(1,600		)
Identifiable intangible assets	12,400			(700		)	11,700
Goodwill	14,987			600			15,587
Total net assets acquired	$	25,800		$	(100	)	$	25,700

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 expanding market opportunities within the mid-size and small RIA market, potential cross selling opportunities, and lower future operating expenses. The goodwill is deductible for income tax purposes.

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



			Measurement
	Preliminary		Period			Revised		Estimated	Amortization
	Estimate		Adjustments			Estimate		Useful Life in Years	Method
Customer list	$	9,100	$	(600	)	$	8,500	10	Accelerated
Proprietary technology	3,300		(100		)	3,200		5	Straight-line
Total intangible assets acquired	$	12,400	$	(700	)	$	11,700

The results of PortfolioCenter's operations are included in the consolidated statements of operations beginning April 1, 2019. PortfolioCenter's revenues for the year ended December 31, 2019 totaled $6,705. PortfolioCenter's pre-tax loss for the year ended December 31, 2019 totaled $2,568. The pre-tax loss includes acquired intangible asset amortization of $1,459 for the year ended December 31, 2019.

For the year ended December 31, 2019, acquisition related costs for the PortfolioCenter acquisition were not material, and are included in general and administration expenses. The Company may incur additional acquisition related costs in 2020.

Acquisition of PIEtech

On May 1, 2019, the Company acquired all of the outstanding shares of capital stock of PIEtech, Inc., a Virginia corporation (“PIEtech”). PIEtech empowers financial advisors to use financial planning to efficiently motivate their clients to create, implement and maintain financial plans that best meet their lifetime financial goals. The technology and operations of PIEtech, which now operates as Envestnet | MoneyGuide, are included in the Envestnet Wealth Solutions segment.

The acquisition of PIEtech (the “PIEtech acquisition”) establishes Envestnet as a leader in financial planning solutions, providing advisors and their clients with access to a full spectrum of financial planning capabilities, and offering a broad range of data-driven, financial plan-informed financial wellness solutions, both domestically and internationally over

time. Integration of PIEtech's MoneyGuide software with the Company's integrated technology platform is expected to reduce friction and enhance productivity for advisors.

In connection with the PIEtech acquisition, the Company paid net cash consideration of $298,714, subject to a working capital adjustment, and issued 3,184,713 shares of Envestnet common stock to the sellers. The Company funded the PIEtech acquisition with available cash resources and borrowings under its revolving credit facility.

In connection with the PIEtech acquisition, the Company established a retention bonus pool consisting of approximately $30,000 of cash and restricted stock units to be granted to employees and management of PIEtech as inducement grants. As a result, the Company adopted the Envestnet, Inc. 2019 Acquisition Equity Incentive Plan (the “2019 Equity Plan”) in order to make inducement grants to certain PIEtech employees who will join Envestnet | MoneyGuide (See “Note 15—Stock-Based Compensation”). Envestnet agreed to grant at future dates, not earlier than the sixty day anniversary of the PIEtech acquisition, up to 301,469 shares of Envestnet common stock in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) pursuant to the 2019 Equity Plan and made cash retention payments of approximately $8,800 to certain legacy PIEtech employees who joined Envestnet | MoneyGuide. As of December 31, 2019, the Company has issued approximately 62,400 and 24,900 RSUs and PSUs, respectively, under the 2019 Equity Plan to legacy PIEtech employees. At this time the Company expects to issue approximately 214,000 additional RSUs and PSUs and expects to pay approximately $5,300 in cash bonus payments over the next three years in connection with the PIEtech acquisition.

The Company also granted membership interests in certain of the Company's equity method investments to two legacy PIEtech executives with an estimated grant date fair market value of $8,900. These membership interests will vest on May 1, 2020 and become exercisable in future periods. As of December 31, 2019, the Company has recorded approximately $5,920 as a component of compensation and benefits in the consolidated statements of operations with a corresponding liability in other non-current liabilities in the consolidated balance sheets.

The preliminary consideration transferred in the acquisition was as follows:



				Measurement
	Preliminary			Period			Revised
	Estimate			Adjustments			Estimate
Cash consideration	$	299,370		$	(656	)	$	298,714
Stock consideration	222,484			—			222,484
Less: cash acquired	(6,360		)	—			(6,360		)
Total estimated fair value of consideration transferred, net of cash acquired	$	515,494		$	(656	)	$	514,838

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



				Measurement
	Preliminary			Period			Revised
	Estimate			Adjustments			Estimate
Cash and cash equivalents	$	6,360		$	—		$	6,360
Accounts receivable	3,782			—			3,782
Prepaid expenses and other current assets	969			—			969
Other non-current assets	4,274			—			4,274
Property and equipment, net	6,057			—			6,057
Operating lease right-of-use assets, net	1,688			324			2,012
Identifiable intangible assets	217,000			36,000			253,000
Goodwill	353,085			(29,134		)	323,951
Total assets acquired	593,215			7,190			600,405
Accounts payable and accrued expenses	(2,166		)	505			(1,661		)
Operating lease liabilities	(2,012		)	—			(2,012		)
Deferred income taxes	(59,643		)	(8,891		)	(68,534		)
Deferred revenue	(7,540		)	540			(7,000		)
Total liabilities assumed	(71,361		)	(7,846		)	(79,207		)
Total net assets acquired	$	521,854		$	(656	)	$	521,198

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 new business and cross selling opportunities. The goodwill is not deductible for income tax purposes. In December 2019, the Company finalized its acquisition accounting for the PIEtech acquisition, resulting in adjustments to previously reported allocations of the purchase consideration. The adjustments were a result of changes to the original fair value estimates of certain items acquired. These changes are the result of additional information obtained during 2019 that related to facts and circumstances that existed as of the acquisition date.

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



			Measurement
	Preliminary		Period			Revised		Estimated	Amortization
	Estimate		Adjustments			Estimate		Useful Life in Years	Method
Customer lists	$	181,000	$	41,000		$	222,000	10-20	Accelerated
Proprietary technologies	25,000		(2,000		)	23,000		4	Straight-line
Trade names	11,000		(3,000		)	8,000		7	Straight-line
Total intangible assets acquired	$	217,000	$	36,000		$	253,000

The results of PIEtech's operations are included in the consolidated statements of operations beginning May 1, 2019. PIEtech's revenues for the year ended December 31, 2019 totaled $30,315. PIEtech's pre-tax loss for the year ended December 31, 2019 totaled $12,374. The pre-tax loss includes acquired intangible asset amortization of $17,634 for the year ended December 31, 2019.

For the year ended December 31, 2019, acquisition related costs for the PIEtech acquisition totaled approximately $16,738, and are included in general and administration expenses. Included in this amount is approximately $8,800 in one-time cash retention bonuses plus related tax witholding, which are included in compensation and benefits in the consolidated statements of operations. The Company may incur additional acquisition related costs in 2020.

Pro forma financial information (unaudited)

The following pro forma financial information presents the combined results of operations of Envestnet, PortfolioCenter and PIEtech for the years ended December 31, 2019 and 2018. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2018. The results of the private company acquisitions are not included in the pro forma financial information presented below as they were not considered material to the Company's results of operations.

The unaudited pro forma results presented include estimated amortization charges for acquired intangible assets, interest expense, stock-based compensation expense and income tax. The Company's 2018 pro forma information includes the reversal of a valuation allowance on its deferred tax assets, transaction fee payments and retention bonus payments that were incurred in 2019 as a result of these acquisitions and reverses these amounts from the appropriate periods in 2019. All intercompany revenues have been eliminated within this pro forma information.

Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2018.



	Year Ended			Year Ended
	December 31, 2019			December 31, 2018
Revenues	$	919,291		$	869,247
Net loss attributable to Envestnet, Inc.	(16,860		)	(1,367		)
Net loss per share attributable to Envestnet, Inc.:
Basic	$	(0.32	)	$	(0.03	)
Diluted	$	(0.32	)	$	(0.03	)