3.Business Acquisitions

 

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 is 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 12).  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 September 30, 2015, no amounts have been recognized as it is currently estimated that the performance targets will not be attained in 2015.

 

The consideration transferred in the acquisition 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 condensed consolidated statement of operations beginning February 24, 2015, and are not material to the Company’s results of operations.

 

For the three and nine months ended September 30, 2015, acquisition related costs for Upside totaled $3 and $221 and are included in general and administration expenses.

 

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 liabilities of $2,905,  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 preliminarily 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 as of September 30, 2015 and has not recorded a contingent consideration liability as payment is 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.

 

As of September 30, 2015, the Company has not finalized the opening balance sheet (including taxes), contingent consideration, nor has the Company finalized its valuation of Finance Logix’s intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. The Company expects to finalize the valuation of the intangible assets and deferred revenue, and complete the acquisition accounting as soon as practicable but no later than March 31, 2016.

 

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

 

 

The following table summarizes the preliminary 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 condensed consolidated statement of operations beginning May 6, 2015. Finance Logix’s  revenues for the three and nine month periods ended September 30, 2015 totaled $584 and $1,057, respectively. Finance Logix’s net loss for the three and nine month periods ended September 30, 2015 totaled $479 and $808, respectively. The net loss for the three and nine month period ended September 30, 2015 includes estimated acquired intangible asset amortization of $376 and $626, respectively.

 

For the three and nine months ended September 30, 2015, acquisition related costs for Finance Logix totaled $40 and $415, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the fourth quarter of 2015.

 

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 acquired Castle Rock with plans to combine the Castle Rock offering into Envestnet Retirement Solutions, LLC (“ERS”).  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 preliminary estimated consideration transferred in the acquisition was as follows:

 

In connection with the acquisition of Castle Rock, the Company is required to pay contingent consideration of 45% 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 $2,363, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8.

The preliminary estimated fair value of contingent consideration as of September 30, 2015 was $2,363. This amount is the present value of an undiscounted liability of $2,850, applying a discount rate of 10%.  The first, second and third undiscounted payments are anticipated to be $941 on September 30, 2016, $981 on September 30, 2017 and $928 on September 30, 2018.  Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

 

As of September 30, 2015, the Company has not finalized the opening balance sheet (including taxes), contingent consideration, nor has the Company finalized its valuation of Castle Rock’s intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. The Company expects to finalize the valuation of the intangible assets and deferred revenue, and complete the acquisition accounting as soon as practicable but no later than March 31, 2016.

 

The following table summarizes the preliminary 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 condensed consolidated statement of operations beginning September 1, 2015. Castle Rock’s revenues and net loss for the three and nine month periods ended September 30, 2015 totaled $223 and $59, respectively. The net loss includes estimated acquired intangible asset amortization of $67.

 

For the three and nine months ended September 30, 2015, acquisition related costs for Castle Rock totaled $47 and $161, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the fourth quarter of 2015.

 

 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, LLC 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 condensed consolidated balance sheet.  Subsequent to the subscription of the Castle Rock Parties, the Company’s ownership interest in ERS is 52.8%.  

 

Yodlee, Inc.

 

On August 10, 2015, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Yodlee, Inc., a Delaware corporation (“Yodlee”) and Yale Merger Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into Yodlee, with Yodlee continuing as the surviving corporation (the “Merger”) and a wholly owned indirect subsidiary of the Company.

 

Yodlee is a leading cloud-based platform driving digital financial innovation. Yodlee powers digital financial solutions for over 20 million paid subscribers and over 850 financial institutions and financial technology innovators. Founded in 1999, the company has built a network of over 14,000 data sources and been awarded 72 patents.

 

The merger consideration per share of Yodlee common stock consists of (i) $10.78 per share in cash (the “per share cash consideration”) and (i) a number of shares of Company common stock determined by dividing $8.10 by the volume weighted average (the “Company stock value”) price per share of Company common stock for the 10 consecutive trading days ending on (and including) the second trading day immediately prior to completion of the Merger, subject to a collar of $39.006 to $47.674 per share (the “per share stock consideration”).  In the event that the aggregate number of shares of Company common stock issuable pursuant to the Merger Agreement (the "total stock amount"), would be equal to or greater than 19.9% of the shares of Company common stock outstanding as of immediately prior to the effective time of the Merger (such amount, the "stock threshold"), the per share stock consideration will be decreased to the minimum extent necessary, such that the total stock amount will not exceed the stock threshold. In that event, the per share cash consideration will be increased by an amount equal to the product of (A) the amount of such reduction in the per share stock consideration pursuant to the preceding sentence multiplied by (B) the Company stock value; provided that (i) the aggregate per share cash consideration will in no event be increased by greater than $32,000 and (ii) the total stock amount will in no event exceed the stock threshold.  The Company expects to fund the cash portion of the merger consideration with available balance sheet cash and up to $200,000 in committed debt financing.

 

The Merger Agreement contains certain termination rights, including, among others, the right of either party to terminate the Merger Agreement if the Merger does not occur by February 15, 2016 and the right of the Company to terminate the Merger Agreement due to the withdrawal or adverse change of the recommendation by the Yodlee Board of Directors. If the Merger Agreement is terminated by the Company, in certain circumstances described in the Merger Agreement, a termination fee equal to approximately $18,000 will be payable by Yodlee to the Company.

 

In connection with the definitive agreement, funds affiliated with Warburg Pincus, which collectively own approximately 26.5 percent of Yodlee’s common stock, have entered into a voting agreement pursuant to which it has committed to support the transaction.

 

The transaction is expected to close in the fourth quarter of 2015, subject to approval by Yodlee stockholders at a special meeting on November 19, 2015, and customary closing conditions.  The Company and Yodlee will continue to operate separately until the transaction closes.

 

See “Part II – Item 1A – Legal Proceedings.”

 

Pro forma results for Envestnet, Inc. giving effect to the Placemark, Finance Logix and Castle Rock acquisitions

 

The following pro forma financial information presents the combined results of operations of Envestnet and Castle Rock for the three month period ended September 30, 2015, Envestnet, Finance Logix and Castle Rock for the nine month period ended September 30, 2015 and Envestnet, Placemark, Finance Logix, and Castle Rock for the three and nine months ended September 30, 2014. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2014. The results of Upside are not included in the pro forma financial information presented below as the Upside acquisition was not considered material to the Company’s results of operations.

 

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

 

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 2014.