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

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2022

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 consolidated balance sheets as of December 31, 2022 and December 31, 2021, based on the three-tier

fair value hierarchy:


	December 31, 2022
	Fair Value		Level I		Level II		Level III
	(in thousands)
Assets:
Money market funds	$	2,628	$	2,628	$	—	$	—
Assets to fund deferred compensation liability	10,074		—		—		10,074
Total assets	$	12,702	$	2,628	$	—	$	10,074
Liabilities:

Deferred compensation liability	$	8,088	$	8,088	$	—	$	—
Total liabilities	$	8,088	$	8,088	$	—	$	—


	December 31, 2021
	Fair Value		Level I		Level II		Level III
	(in thousands)
Assets:
Money market funds	$	2,684	$	2,684	$	—	$	—
Assets to fund deferred compensation liability	11,140		—		—		11,140
Total assets	$	13,824	$	2,684	$	—	$	11,140
Liabilities:
Contingent consideration	$	743	$	—	$	—	$	743
Deferred compensation liability	10,418		10,418		—		—
Total liabilities	$	11,161	$	10,418	$	—	$	743

Level I assets and liabilities include money-market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”) and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the consolidated balance sheets. The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds. The fair market value of the deferred compensation liability is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected, and is included in other non-current liabilities in the consolidated balance sheets.

Level III assets and liabilities consist of the estimated fair values of contingent consideration as well as the assets to fund the Company's deferred compensation liability. The fair market value of the assets used to fund the Company's deferred compensation liability approximates the cash surrender value of the Company's life insurance premiums and is included in other non-current assets in the consolidated balance sheets.

Fair Value of Contingent Consideration Liabilities

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 consolidated statements of operations.

The table below presents a reconciliation of the Company's contingent consideration liabilities, which were measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2021 to December 31, 2022:


	Fair Value of Contingent Consideration Liabilities
	(in thousands)
Balance at December 31, 2021	$	743
Payments of contingent consideration liability	(743)


Balance at December 31, 2022	$	—

The table below presents a reconciliation of assets used to fund deferred compensation liability, which was measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2021 to December 31, 2022:


	Fair Value of Assets Used to Fund Deferred Compensation Liability
	(in thousands)
Balance at December 31, 2021	$	11,140
Contributions	649
Fair value adjustments and fees	(1,715)
Balance at December 31, 2022	$	10,074

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 consolidated balance sheets, decreased due to losses on the underlying investment vehicles. These losses are recognized in the Company's earnings and included in general and administration expenses in the 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 cause 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 year ended December 31, 2022.

Fair Value of Debt Agreements and Other Financial Assets and Liabilities

The Company considered its Convertible Notes due 2023, Convertible Notes due 2025 and Convertible Notes due 2027 to be Level II liabilities as of December 31, 2022 and 2021, and used a market approach to calculate their respective fair values. The estimated fair value for each convertible note was determined based on the estimated or actual bids and offers in an over-the-counter market on December 31, 2022 and 2021 (See “Note 10—Debt”).

In May 2018, the Company issued $345.0 million of Convertible Notes due 2023. As of December 31, 2022 and 2021, the carrying value of the Convertible Notes due 2023 equaled $44.9 million and $342.0 million, respectively, and represented the aggregate principal amount outstanding less the debt issuance costs. As of December 31, 2022 and 2021, the estimated fair value of the Convertible Notes due 2023 was $46.1 million and $439.9 million, respectively.

In August 2020, the Company issued $517.5 million of Convertible Notes due 2025. As of December 31, 2022 and 2021, the carrying value of the Convertible Notes due 2025 equaled $312.7 million and $506.8 million, and represented the aggregate principal amount outstanding less the debt issuance costs. As of December 31, 2022 and 2021, the estimated fair value of the Convertible Notes due 2025 was $293.7 million and $526.1 million, respectively.

In November 2022, the Company issued $575.0 million of Convertible Notes due 2027. As of December 31, 2022, the carrying value of the Convertible Notes due 2027 equaled $559.0 million and represented the aggregate principal amount outstanding less the debt issuance costs. As of December 31, 2022, the estimated fair value of the Convertible Notes due 2027 was $606.1 million.

As of December 31, 2022 and 2021, no advances were outstanding on the revolving credit facility under the Credit Agreement. The Company considered the revolving credit facility to be a Level I liability as of December 31, 2022 and 2021 (See “Note 10—Debt”).

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 December 31, 2022 based upon the short-term nature of these assets and liabilities.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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