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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(312) 827-2800

 


 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

As of August 1, 2015, 35,617,271 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014

4

Condensed Consolidated Statement of Equity for the six months ended June 30, 2015

5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

6

Notes to Condensed Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

22

Overview

23

Results of Operations

27

Liquidity and Capital Resources

33

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

 

 

Item 4. Controls and Procedures

35

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

37

 

 

Item 1A. Risk Factors

37

 

 

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

38

 

 

Item 3. Defaults Upon Senior Securities

38

 

 

Item 4. Mine Safety Disclosures

38

 

 

Item 5. Other Information

38

 

 

Item 6. Exhibits

38

 

2



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

198,927

 

$

209,754

 

Fees and other receivable, net

 

29,232

 

20,345

 

Deferred tax assets, net

 

4,635

 

4,654

 

Prepaid expenses and other current assets

 

20,653

 

7,242

 

Total current assets

 

253,447

 

241,995

 

 

 

 

 

 

 

Property and equipment, net

 

18,283

 

16,629

 

Internally developed software, net

 

7,999

 

7,023

 

Intangible assets, net

 

67,911

 

58,654

 

Goodwill

 

126,367

 

104,976

 

Deferred tax assets, net

 

 

565

 

Other non-current assets

 

11,621

 

9,516

 

Total assets

 

$

485,628

 

$

439,358

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued expenses

 

$

48,451

 

$

48,247

 

Accounts payable

 

6,402

 

4,869

 

Contingent consideration

 

7,422

 

6,405

 

Deferred revenue

 

7,872

 

5,159

 

Total current liabilities

 

70,147

 

64,680

 

 

 

 

 

 

 

Convertible notes

 

147,627

 

145,203

 

Contingent consideration

 

5,194

 

7,462

 

Deferred revenue

 

11,893

 

6,954

 

Deferred rent

 

4,122

 

3,588

 

Lease incentive

 

5,253

 

5,550

 

Deferred tax liabilities, net

 

224

 

 

Other non-current liabilities

 

2,100

 

2,430

 

Total liabilities

 

246,560

 

235,867

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable units in ERS, LLC

 

1,500

 

1,500

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.005, 50,000,000 shares authorized

 

 

 

Common stock, par value $0.005, 500,000,000 shares authorized; 47,513,468 and 46,345,376 shares issued as of June 30, 2015 and December 31, 2014, respectively; 35,593,544 and 34,544,653 shares outstanding as of June 30, 2015 and December 31, 2014, respectively

 

238

 

232

 

Additional paid-in capital

 

270,967

 

233,888

 

Accumulated deficit

 

(14,396

)

(19,443

)

Treasury stock at cost, 11,919,924 and 11,800,723 shares as of June 30, 2015 and December 31, 2014, respectively

 

(19,797

)

(13,242

)

Total stockholders’ equity

 

237,012

 

201,435

 

Non-controlling interest

 

556

 

556

 

Total equity

 

237,568

 

201,991

 

Total liabilities and equity

 

$

485,628

 

$

439,358

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

83,819

 

$

70,727

 

$

164,896

 

$

137,808

 

Licensing and professional services

 

18,844

 

14,102

 

34,221

 

25,560

 

Total revenues

 

102,663

 

84,829

 

199,117

 

163,368

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

42,486

 

37,955

 

81,181

 

72,392

 

Compensation and benefits

 

31,956

 

25,157

 

63,491

 

48,616

 

General and administration

 

15,512

 

12,936

 

29,721

 

25,086

 

Depreciation and amortization

 

5,725

 

4,615

 

11,058

 

9,037

 

Restructuring charges

 

518

 

 

518

 

 

Total operating expenses

 

96,197

 

80,663

 

185,969

 

155,131

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

6,466

 

4,166

 

13,148

 

8,237

 

Other income (expense)

 

(2,251

)

1,839

 

(4,454

)

1,920

 

Income before income tax provision

 

4,215

 

6,005

 

8,694

 

10,157

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

1,679

 

2,355

 

3,647

 

3,639

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,536

 

3,650

 

5,047

 

6,518

 

 

 

 

 

 

 

 

 

 

 

Add: Net loss attributable to non-controlling interest

 

 

69

 

 

195

 

Net income attributable to Envestnet, Inc.

 

$

2,536

 

$

3,719

 

$

5,047

 

$

6,713

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.11

 

$

0.14

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.07

 

$

0.10

 

$

0.13

 

$

0.18

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

35,776,125

 

34,547,277

 

35,463,623

 

34,332,759

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

37,654,074

 

36,805,758

 

37,504,028

 

36,726,121

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Common
Shares

 

Amount

 

Paid-in
Capital

 

Accumulated
Deficit

 

Non-controlling
Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

46,345,376

 

$

232

 

(11,800,723

)

$

(13,242

)

$

233,888

 

$

(19,443

)

$

556

 

$

201,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

686,516

 

3

 

 

 

5,906

 

 

 

5,909

 

Issuance of common stock for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

vesting of restricted stock

 

358,166

 

2

 

 

 

 

 

 

2

 

acquisition of business

 

123,410

 

1

 

 

 

 

 

8,929

 

 

 

 

 

8,930

 

Stock-based compensation expense

 

 

 

 

 

6,749

 

 

 

6,749

 

Excess tax benefits from stock-based compensation expense

 

 

 

 

 

15,495

 

 

 

15,495

 

Purchase of treasury stock for stock-based minimum tax withholdings

 

 

 

(119,201

)

(6,555

)

 

 

 

(6,555

)

Net income

 

 

 

 

 

 

5,047

 

 

5,047

 

Balance, June 30, 2015

 

47,513,468

 

$

238

 

(11,919,924

)

$

(19,797

)

$

270,967

 

$

(14,396

)

$

556

 

$

237,568

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

5,047

 

$

6,518

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

11,058

 

9,037

 

Deferred rent and lease incentive

 

219

 

1,123

 

Provision for doubtful accounts

 

37

 

 

Deferred income taxes

 

808

 

 

Stock-based compensation

 

6,749

 

5,767

 

Excess tax benefits from stock-based compensation

 

(15,495

)

(3,203

)

Interest expense

 

4,697

 

 

Accretion on contingent consideration

 

651

 

824

 

Fair market value adjustment on contingent consideration

 

(1,902

)

(460

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Fees receivable

 

(8,825

)

(5,009

)

Prepaid expenses and other current assets

 

2,090

 

2,455

 

Other non-current assets

 

(1,244

)

(1,136

)

Accrued expenses

 

(6,323

)

(1,559

)

Accounts payable

 

1,439

 

1,200

 

Deferred revenue

 

5,978

 

2,190

 

Other non-current liabilities

 

(330

)

144

 

Net cash provided by operating activities

 

4,654

 

17,891

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(4,912

)

(4,841

)

Capitalization of internally developed software

 

(2,208

)

(1,651

)

Investment in private company

 

(1,500

)

 

Acquisition of businesses, net of cash acquired

 

(21,712

)

 

Net cash used in investing activities

 

(30,332

)

(6,492

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from exercise of stock options

 

5,909

 

1,615

 

Purchase of treasury stock for stock-based minimum tax withholdings

 

(6,555

)

(1,695

)

Excess tax benefits from stock-based compensation expense

 

15,495

 

3,203

 

Issuance of restricted stock

 

2

 

 

Net cash provided by financing activities

 

14,851

 

3,123

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(10,827

)

14,522

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

209,754

 

49,942

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

198,927

 

$

64,464

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information - cash paid during the period for income taxes, net of refunds

 

$

791

 

$

18

 

Supplemental disclosure of cash flow information - cash paid during the period for interest

 

1,634

 

 

Supplemental disclosure of non-cash operating, investing and financing activities:

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

36

 

 

Settlement of contingent consideration liability upon issuance of ERS, LLC membership interest

 

 

158

 

Stock and stock options issued in acquisition of business

 

8,930

 

 

Purchase of fixed assets included in accounts payable

 

126

 

 

Purchase liabilities included in accrued expenses

 

3,520

 

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

1.                       Organization and Description of Business

 

Envestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provide open-architecture wealth management services and technology to independent financial advisors and financial institutions. These services and related technology are provided via Envestnet’s wealth management software, Envestnet | PMC®, Envestnet | Tamarac™, Vantage Reporting Solution™, Envestnet | WMS™ and Envestnet | Placemark™.

 

Envestnet’s wealth management software is a platform of integrated, internet-based technology applications and related services that provide portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing, and back-office and middle-office operations and administration.

 

The Company’s investment consulting group, Envestnet | PMC, provides investment manager due diligence and research, a full spectrum of investment offerings supported by both proprietary and third-party research and manager selection, and overlay portfolio management services.

 

Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end registered investment advisers (“RIAs”).

 

Vantage Reporting Solution software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice.

 

Envestnet | WMS offers financial institutions access to an integrated wealth platform, which helps construct and manage sophisticated portfolio solutions across an entire account life cycle, particularly in the area of unified managed account trading. Envestnet | WMS’s Overlay Portfolio Management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions.

 

Envestnet | Placemark develops unified managed account (“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.

 

Through these platform and service offerings, the Company provides open-architecture support for a wide range of investment products (separately managed accounts, multi-manager accounts, mutual funds, exchange-traded funds, stock baskets, alternative investments, and other fee-based investment solutions) from Envestnet | PMC and other leading investment providers via multiple custodians, and also account administration and reporting services.

 

Envestnet operates six RIAs and a registered broker-dealer. The RIAs are registered with the Securities and Exchange Commission (“SEC”). The broker-dealer is registered with the SEC, all 50 states and the District of Columbia and is a member of the Financial Industry Regulatory Authority (“FINRA”).

 

2.                       Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 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, 2014 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of June 30, 2015 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2014 was derived from the Company’s audited financial statements for the year ended December 31, 2014 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The results of operations for the three and six months ended June 30, 2015 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 SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. 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, 2014, filed with the SEC on March 2, 2015.

 

7



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, costs capitalized for internally developed software, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.

 

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.

 

The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company may adopt the standard in either its first quarter of 2017 or 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the timing of its adoption and the impact of adopting the new revenue standard on its condensed consolidated financial statements.

 

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 $3,040, subject to certain post-closing adjustments.

 

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 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 13).  If 100 percent of the awards are earned for 2015, 2016 and 2017, the maximum number of shares that could be granted for 2015, 2016 and 2017 equals 22,064, 44,128 and 66,192 shares of common stock, respectively   The Company has determined the payments to be categorized as compensation expense.  As of June 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:

 

Upfront consideration

 

$

2,425

 

Purchase liabilities

 

615

 

Working capital settlement

 

(385

)

Cash acquired

 

(14

)

 

 

$

2,641

 

 

8



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

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

 

Total tangible assets acquired

 

$

6

 

Total liabilities assumed

 

(404

)

Identifiable intangible assets

 

1,450

 

Goodwill

 

1,589

 

Total net assets acquired

 

$

2,641

 

 

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

 

 

 

Amount

 

Weighted Average Useful
Life in Years

 

Amortization
Method

 

Proprietary technology

 

$

1,450

 

4

 

Straight-line

 

 

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

 

For the three and six months ended June 30, 2015, acquisition related costs for Upside totaled $15 and $217 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 us 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 June 30, 2015 and preliminarily did not record a contingent consideration liability as of the date of acquisition 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.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

As of June 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:

 

Cash consideration

 

$

20,595

 

Stock and stock option consideration

 

8,930

 

Purchase liabilities

 

2,905

 

Cash acquired

 

(909

)

 

 

$

31,521

 

 

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

 

Total tangible assets acquired

 

$

99

 

Total liabilities assumed

 

(2,880

)

Identifiable intangible assets

 

14,500

 

Goodwill

 

19,802

 

Total net assets acquired

 

$

31,521

 

 

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

 

 

 

Amount

 

Weighted Average Useful
Life in Years

 

Amortization
Method

 

Customer list

 

$

12,500

 

12

 

Accelerated

 

Proprietary technology

 

2,000

 

4

 

Straight-line

 

Total

 

$

14,500

 

 

 

 

 

 

The results of Finance Logix’s operations are included in the condensed consolidated statement of operations beginning May 6, 2015.  Finance Logix’s revenues and net loss for the three and six month periods ended June 30, 2015 totaled $472 and $328, respectively.  The net loss includes estimated acquired intangible asset amortization of $329.

 

For the three and six months ended June 30, 2015, acquisition related costs for Finance Logix totaled $231 and $375, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the third quarter of 2015.

 

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

 

The following pro forma financial information presents the combined results of operations of Envestnet and Finance Logix for the three and six month periods ended June 30, 2015 and Envestnet, Finance Logix, and Placemark for the three and six months ended June 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.

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

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 acquisition had taken place as of the beginning of 2014.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

102,932

 

90,982

 

200,137

 

175,103

 

Net income

 

2,300

 

2,575

 

4,565

 

4,350

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

0.06

 

0.07

 

0.13

 

0.13

 

Diluted

 

0.06

 

0.07

 

0.12

 

0.12

 

 

4.      Property and Equipment

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Estimated Useful Life

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

 

 

Office furniture and fixtures

 

5-7 years

 

$

4,869

 

$

4,993

 

Computer equipment and software

 

3 years

 

22,459

 

18,540

 

Other office equipment

 

5 years

 

124

 

144

 

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

11,378

 

10,805

 

 

 

 

 

38,830

 

34,482

 

Less accumulated depreciation and amortization

 

 

 

(20,547

)

(17,853

)

Property and equipment, net

 

 

 

$

18,283

 

$

16,629

 

 

During the three and six months ended June 30, 2015, the Company retired fully depreciated property and equipment that were no longer in service with cost and accumulated depreciation amounts of $564.

 

Depreciation and amortization expense was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

$

1,658

 

$

1,553

 

$

3,133

 

$

3,042

 

 

5.                       Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Estimated Useful Life

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Internally developed software

 

5 years

 

$

21,785

 

$

19,577

 

Less accumulated amortization

 

 

 

(13,786

)

(12,554

)

Internally developed software, net

 

 

 

$

7,999

 

$

7,023

 

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

Amortization expense was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

632

 

$

508

 

$

1,232

 

$

997

 

 

6.                                      Goodwill and Intangible Assets

 

Changes in the carrying amount of goodwill were as follows:

 

Balance at December 31, 2014

 

$

104,976

 

Upside acquisition

 

1,589

 

Finance Logix acquisition

 

19,802

 

Balance at June 30, 2015

 

$

126,367

 

 

Intangible assets consist of the following:

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

4 - 12 years

 

$

81,103

 

$

(26,606

)

$

54,497

 

$

68,603

 

$

(21,699

)

$

46,904

 

Proprietary technologies

 

1.5 - 8 years

 

19,128

 

(7,259

)

11,869

 

15,678

 

(5,808

)

9,870

 

Trade names

 

5 years

 

3,090

 

(1,545

)

1,545

 

3,090

 

(1,210

)

1,880

 

Total intangible assets

 

 

 

$

103,321

 

$

(35,410

)

$

67,911

 

$

87,371

 

$

(28,717

)

$

58,654

 

 

Amortization expense was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

3,560

 

$

2,554

 

$

6,693

 

$

4,998

 

 

7.                       Other Non-Current Assets

 

Other non-current assets consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Investment in private companies

 

$

2,750

 

$

1,250

 

Deposits:

 

 

 

 

 

Lease

 

2,180

 

1,811

 

Other

 

474

 

436

 

Unamortized convertible debt issuance costs

 

4,184

 

4,612

 

Other

 

2,033

 

1,407

 

 

 

$

11,621

 

$

9,516

 

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

On April 1, 2015, the Company purchased 150,000 Class B units representing 10.3% of the outstanding membership interests of AlphaHedge Capital Partners, LLC, (“AlphaHedge”) a Delaware limited liability company for cash consideration of $1,500 which is included in investments in private companies.   This amount is included in other non-current assets on the condensed consolidated balance sheet. AlphaHedge is a liquid alternatives platform providing access to strategies from a select group of long/short equity managers in a custodian agnostic, separately managed account format. The Company will use the equity method of accounting to record its portion of the AlphaHedge net income or loss on a one quarter lag from AlphaHedge’s actual results of operations.  No results of their operations have been included in the condensed consolidated financial statements as of June 30, 2015.

 

8.                       Fair Value Measurements

 

The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.

 

Financial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:

 

Level 1:

Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

 

 

Level 2:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data.

 

 

Level 3:

Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

 

Fair Value on a Recurring Basis:

 

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. 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. These money-market funds totaled approximately $41,363 and $70,760 as of June 30, 2015 and December 31, 2014, respectively, and are included in cash and cash equivalents in the condensed consolidated balance sheets.

 

The fair value of the contingent consideration liability related to the WMS acquisition on July 1, 2013 was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows related to our acquisition of WMS during the subsequent three years from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.

 

The Company utilized a discounted cash flow method with expected future performance of WMS, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent consideration at each reporting date until settlement. Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company and included in general and administrative expense on the condensed consolidated statement of operations.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

The fair value of the contingent consideration liability related to the Klein acquisition on July 1, 2014 was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows related to our acquisition of Klein during the subsequent three years from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.

 

The Company utilized a discounted cash flow method with expected future performance of Klein to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent consideration at each reporting date until settlement. Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company and included in general and administrative expense on the condensed consolidated statement of operations.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liability for the six months ended June 30, 2015:

 

 

 

Fair Value of
Contingent
Consideration
Liabilities

 

 

 

 

 

Balance at December 31, 2014

 

$

13,867

 

Fair market value adjustments

 

(1,902

)

Imputed interest

 

651

 

Balance at June 30, 2015

 

$

12,616

 

 

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 change in circumstances that 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 1, 2 and 3 during the quarter.

 

Following are the carrying and fair value of the Company’s debt obligation as of June 30, 2015. The fair value of the Convertible Notes was calculated using observable market data and is considered a Level 1 liability.

 

 

 

June 30, 2015

 

 

 

Carrying

 

Fair

 

 

 

Value

 

Value

 

2019 Convertible Notes (principal amount outstanding of $172,500)

 

$

147,627

(1)

$

169,913

 

 


(1)         Represents the aggregate principal amount outstanding of the Convertible Notes less the unaccreted discount.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

9.                       Accrued Expenses

 

Accrued expenses consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Accrued investment manager fees

 

$

28,170

 

$

25,195

 

Accrued compensation and related taxes

 

12,787

 

18,344

 

Accrued professional services

 

424

 

536

 

Estimated accrued software license fees

 

 

800

 

Acquisition related purchase liabilities

 

3,497

 

 

Accrued restructuring charges

 

518

 

 

Other accrued expenses

 

3,055

 

3,372

 

 

 

$

48,451

 

$

48,247

 

 

Acquisition related purchase liabilities represent future payments to former Upside and Finance Logix owners of $615 and $2,905, respectively, related to indemnity holdback amounts as of June 30, 2015.

 

During the second quarter of 2015, the Company closed its Wellesley office in order to more appropriately align and manage the Company’s resources.  In the three and six months ended June 30, 2015, the Company recognized pre-tax restructuring charges of $518, primarily for future lease payments.

 

10.                Income Taxes

 

The following table includes the Company’s income before income tax provision, income tax provision and effective tax rate:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Income before income tax provision

 

$

4,215

 

$

6,005

 

$

8,694

 

$

10,157

 

Income tax provision

 

1,679

 

2,355

 

3,647

 

3,639

 

Effective tax rate

 

40.0

%

39.2

%

41.9

%

35.8

%

 

The Company’s effective tax rate in the three months ended June 30, 2015, was slightly higher than the effective tax rate in the three months ended June 30, 2014, primarily due to an increase in the blended state tax rate and an uncertain tax position current year accrual related to transfer pricing. The Company’s effective tax rate in the six months ended June 30, 2015, was higher than the effective tax rate in the six months ended June 30, 2014, primarily due to the increase in tax rate for federal purposes from 34% to 35%, an increase in the blended state tax rate, the true-up on India unremitted earnings that was recorded in the six months ended June 30, 2014 and not in the same period in 2015, the release of certain uncertain tax position reserves in the six months ended June 30, 2014 that were not repeated in the same period in 2015 and non-recognition of a loss from a subsidiary due to a full valuation allowance.

 

The liability for unrecognized tax benefits reported in other non-current liabilities was $1,994 and $2,092 at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $1,870. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $1,614 in the next twelve months due to the completion of reviews by tax authorities and the expiration of certain statutes of limitations.

 

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $423 and $594 as of June 30, 2015 and December 31, 2014, respectively.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company’s tax returns for the calendar years ended December 31, 2013, 2012, and 2011 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2013, 2012, 2011, 2010 and 2009 remain open to examination by various state revenue services.

 

The Company’s Indian subsidiary is currently under examination by the India Tax Authority for the fiscal year ended March 31, 2011 and 2012.  It is possible that one or more of these audits may be finalized within the next twelve months.

 

Included in prepaid expenses and other current assets on the condensed consolidated balance sheet as of June 30, 2015, is $16,303 related to tax benefits from stock-based compensation.

 

11. Debt

 

The Company’s outstanding debt obligations were as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Convertible Notes

 

$

172,500

 

$

172,500

 

Unaccreted discount on Convertible Notes

 

(24,873

)

(27,297

)

 

 

$

147,627

 

$

145,203

 

 

Credit Agreement

 

In 2014, the Company and certain of its subsidiaries entered into a credit agreement (the “Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent, pursuant to which the Banks agreed to provide an unsecured revolving credit facility of $100,000 with a sublimit for the issuance of letters of credit of $5,000. Subject to certain conditions, the Company has the right to increase the facility by up to $25,000. The Credit Agreement is scheduled to mature on December 8, 2017, at which time any aggregate principal amount of borrowings outstanding would become payable in full. Any borrowings made under the Credit Agreement accrued interest at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. There is also a commitment fee equal to 0.25 percent per annum on the daily unused portion of the facility.

 

Borrowings under the Credit Agreement will be guaranteed by substantially all of the Company’s U.S. subsidiaries. Proceeds under the Credit Agreement may be used to finance capital expenditures, to finance working capital, to finance permitted acquisitions and for general corporate purposes.

 

The Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum adjusted EBITDA, and provisions that limit the ability of the Company and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities. As of June 30, 2015, there were no amounts outstanding under the Credit Agreement. The Company was in compliance with all covenants of the Credit Agreement as of June 30, 2015.

 

Convertible Notes

 

On December 15, 2014, the Company issued $172,500 of Convertible Notes. Net proceeds from the offering were $166,967. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 15 and December 15 of each year.  The first coupon payment was made on June 15, 2015.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes rank equally in right of payment with all of the Company’s existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated indebtedness. The Convertible Notes will be structurally subordinated to the indebtedness and other liabilities of any of our subsidiaries, other than to the extent the Convertible Notes are guaranteed in the future by our subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness. Certain of our subsidiaries guarantee our obligations under our Credit Agreement.

 

Upon the occurrence of a “fundamental change”, as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at 100% of the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest.

 

The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; or (c) upon the occurrence of specified corporate events as defined in the indenture.

 

Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion.

 

The Company has separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds from issuance of the Convertible Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618 to the equity component, net of offering costs of $882. The Company recorded a discount on the Convertible Notes of $27,500 which will be accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three and six-month periods ended June 30, 2015, the Company recognized $1,214 and $2,424, respectively, in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes for the six-month period ended June 30, 2015 was 6.0%.

 

In connection with the issuance of the Convertible Notes, the Company incurred $4,651 of issuance costs, which are recorded in other non-current assets (see Note 7). These costs are being amortized and are recorded as additional interest expense over the life of the Convertible Notes.

 

Interest expense on the Convertible Notes was comprised of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2015

 

June 30, 2015

 

 

 

 

 

 

 

Coupon interest

 

$

755

 

$

1,510

 

Amortization of issuance costs

 

224

 

465

 

Accretion of debt discount

 

1,214

 

2,424

 

 

 

$

2,193

 

$

4,399

 

 

See Note 13 for further discussion of the effect of conversion on net income per common share.

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

12.                 Stock-Based Compensation

 

The Company has stock options and restricted stock outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). On May 13, 2015, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 2,700,000 shares.  As of June 30, 2015, the maximum number of stock options and restricted stock available for future issuance under the Company’s plans is 3,022,264.

 

Employee stock-based compensation expense under the Company’s plans was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Employee stock-based compensation expense

 

$

3,330

 

$

3,199

 

$

6,749

 

$

5,767

 

Tax effect on employee stock-based compensation expense

 

(1,332

)

(1,280

)

(2,700

)

(2,307

)

Net effect on income

 

$

1,998

 

$

1,919

 

$

4,049

 

$

3,460

 

 

Stock Options

 

The following weighted average assumptions were used to value options granted during the periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Grant date fair value of options

 

$

20.60

 

$

 

$

20.90

 

$

16.81

 

Volatility

 

36.8

%

 

37.2

%

38.7

%

Risk-free interest rate

 

1.8

%

 

1.7

%

1.8

%

Dividend yield

 

0.0

%

 

0.0

%

0.0

%

Expected term (in years)

 

6.0

 

 

6.0

 

6.0

 

 

The following table summarizes option activity under the Company’s plans:

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Life (Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2014

 

4,265,337

 

$

10.73

 

 

 

 

 

Granted

 

148,677

 

54.02

 

 

 

 

 

Exercised

 

(415,512

)

8.93

 

 

 

 

 

Forfeited

 

(9,941

)

24.94

 

 

 

 

 

Outstanding as of March 31, 2015

 

3,988,561

 

12.50

 

4.8

 

$

173,837

 

Granted

 

123,410

 

52.67

 

 

 

 

 

Exercised

 

(271,004

)

8.12

 

 

 

 

 

Forfeited

 

(28,403

)

46.07

 

 

 

 

 

Outstanding as of June 30, 2015

 

3,812,564

 

13.86

 

4.8

 

105,196

 

Options exercisable

 

3,469,757

 

11.03

 

4.4

 

103,576

 

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

Exercise prices of stock options outstanding as of June 30, 2015 range from $0.11 to $55.29. At June 30, 2015, there was $4,834 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 2.3 years.

 

Restricted Stock

 

Periodically, the Company grants restricted stock awards to employees that vest one-third on each of the first three anniversaries of the grant date. The following is a summary of the activity for unvested restricted stock awards granted under the Company’s plans:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average Grant

 

 

 

Number of

 

Date Fair Value

 

 

 

Shares

 

per Share

 

 

 

 

 

 

 

Balance at December 31, 2014

 

1,098,674

 

$

33.72

 

Granted

 

207,531

 

53.89

 

Vested

 

(358,166

)

20.44

 

Forfeited

 

(6,628

)

33.53

 

Balance at March 31, 2015

 

941,411

 

38.61

 

Forfeited

 

(5,869

)

45.98

 

Balance at June 30, 2015

 

935,542

 

43.18

 

 

At June 30, 2015, there was $19,418 of unrecognized stock-based compensation expense related to unvested restricted stock awards, which the Company expects to recognize over a weighted-average period of 2.2 years. At June 30, 2015, there was an additional $1,580 of potential unrecognized stock-based compensation expense related to unvested restricted stock granted under the 2012 Plan that vests based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition, which the Company expects to recognize over the remaining estimated vesting period of 1.75 years.

 

13.                 Earnings Per Share

 

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock and Convertible Notes using the treasury stock method.

 

The Company accounts for the effect of the Convertible Notes on diluted net income per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes have no effect on diluted net income per share until the Company’s stock price exceeds the conversion price of $62.88 per share. In the period of conversion, the Convertible Notes will have no impact on diluted net income if the Convertible Notes are settled in cash and will have an impact on dilutive net income per share if the Convertible Notes are settled in shares upon conversion.

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per share attributable to Envestnet, Inc.:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Envestnet, Inc.

 

$

2,536

 

$

3,719

 

$

5,047

 

$

6,713

 

 

 

 

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

35,776,125

 

34,547,277

 

35,463,623

 

34,332,759

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

1,776,028

 

2,166,237

 

1,887,942

 

2,198,089

 

Unvested restricted stock

 

101,921

 

92,244

 

152,463

 

195,273

 

Diluted number of weighted-average shares outstanding

 

37,654,074

 

36,805,758

 

37,504,028

 

36,726,121

 

 

 

 

 

 

 

 

 

 

 

Net income per share attribuatable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.11

 

$

0.14

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.07

 

$

0.10

 

$

0.13

 

$

0.18

 

 

Common share equivalents for securities that were anti-dilutive or otherwise excluded from the computation of diluted net income per share attributable to Envestnet, Inc. were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

271,181

 

155,753

 

271,181

 

155,753

 

Unvested restricted stock

 

205,786

 

 

137,191

 

 

Ungranted unvested restricted stock related to Upside

 

132,384

 

 

132,384

 

 

Convertible notes

 

2,743,321

 

 

2,743,321

 

 

Total

 

3,352,672

 

155,753

 

3,284,077

 

155,753

 

 

14.                 Major Customers

 

One customer accounted for more than 10% of the Company’s total revenues:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Fidelity

 

18

%

19

%

18

%

19

%

 

15.                               Commitments and Contingencies

 

The Company is involved in litigation arising in the ordinary course of its business. The Company does not believe that the outcome of any of the current litigation, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on the Company’s results of operations, financial condition, cash flows or business.

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.

 

The Company rents office space under leases that expire at various dates through 2026.  Future minimum lease commitments under these operating leases, as of June 30, 2015, were as follows:

 

Years ending December 31:

 

 

 

Remainder of 2015

 

$

3,704

 

2016

 

8,059

 

2017

 

7,143

 

2018

 

6,727

 

2019

 

6,628

 

Thereafter

 

23,238

 

Total

 

$

55,499

 

 

16.                               Subsequent Events

 

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 Company will acquire all of the shares of Yodlee in a cash and stock transaction valued at $18.88 per share, or approximately $660 million on a fully-diluted equity basis.  As Yodlee has approximately $70 million in cash and cash equivalents, the transaction reflects an enterprise value of approximately $590 million. The deal price consists of $10.78 per share in cash and $8.10 per share in Envestnet stock, and is expected to be funded with available balance sheet cash, Envestnet stock and up to $200 million in committed debt financing.

 

The stock portion of the consideration will be determined based upon the volume weighted average price per share of Envestnet common stock for the 10 consecutive trading days ending on (and including) the second trading day immediately prior to completion of the transaction, subject to a collar of $39.006 to $47.674 per share.  The amount of Envestnet stock to be issued in the transaction is limited to 19.9% of Envestnet’s outstanding common stock as of immediately prior to the closing of the transaction.  In order to remain below that threshold, Envestnet will pay up to an additional $32 million in cash in the aggregate at closing.

 

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 Envestnet 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 Envestnet, in certain circumstances described in the Merger Agreement, a termination fee equal to approximately $18 million will be payable by Yodlee to Envestnet.

 

In connection with the definitive agreement, funds affiliated with Warburg Pincus, which collectively own approximately 26.9 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 or in the first quarter of 2016, subject to receipt of regulatory approvals and other customary closing conditions, as well as approval by Yodlee stockholders. Envestnet and Yodlee will continue to operate separately until the transaction closes.

 

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Table of Contents

 

Item 2.                   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless otherwise indicated, the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries.

 

Unless otherwise indicated, all amounts are in thousands, except share and per share information, numbers of financial advisors and client accounts.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:

 

·                       difficulty in sustaining rapid revenue growth, which may place significant demands on the Company’s administrative, operational and financial resources,

 

·                       fluctuations in the Company’s revenue,

 

·                       the concentration of nearly all of the Company’s revenues from the delivery of investment solutions and services to clients in the financial advisory industry,

 

·                       the impact of market and economic conditions on the Company’s revenues,

 

·                       the Company’s reliance on a limited number of clients for a material portion of its revenue,

 

·                       the renegotiation of fee percentages or termination of the Company’s services by its clients,

 

·                       the Company’s ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies, including the acquisition of Yodlee Inc.,

 

·                       compliance failures,

 

·                  regulatory actions against the Company,

 

·                  the failure to protect the Company’s intellectual property rights,

 

·                  the Company’s inability to successfully execute the conversion of its clients’ assets from their technology platform to the Company’s technology platform in a timely and accurate manner,

 

·                  general economic conditions, political and regulatory conditions,

 

·                  the impact of fluctuations in interest rates on the Company’s business

 

·                  market conditions and our ability to issue additional debt and equity, and

 

·                  management’s response to these factors.

 

In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forward-looking statements. All forward-looking statements contained in this annual report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward-looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

 

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Table of Contents

 

Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.

 

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I under “Risk Factors”; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

 

You should read this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”) completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.

 

The following discussion and analysis should also be read along with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 2014 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

 

Overview

 

We are a leading provider of unified wealth management software and services to financial advisors and institutions. By integrating a wide range of investment solutions and services, our technology platforms provide financial advisors with the flexibility to address their clients’ needs. As of June 30, 2015, approximately 42,400 advisors used our technology platforms, supporting approximately $793 billion of assets in approximately 3.1 million investor accounts.

 

Envestnet empowers financial advisors to deliver fee-based advice to their clients. We work with both independent registered investment advisors (“RIAs”), as well as advisors associated with financial institutions such as broker-dealers and banks. The services we offer and market to financial advisors address the advisors’ ability to grow their practice as well as to operate more efficiently—the Envestnet platforms span the various elements of the wealth management process, from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice.

 

Our centrally-hosted technology platforms, which we refer to as having “open architecture” because of their flexibility, provide financial advisors with access to a series of integrated services to help them better serve their clients. These services include risk assessment and selection of investment strategies and solutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party asset custodians.

 

We offer these solutions principally through the following product and service suites:

 

·                  Envestnet’s wealth management software empowers advisors to better manage client outcomes and strengthen their practice. Our software unifies the applications and services advisors use to manage their practice and advise their clients, including financial planning; capital markets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, trading and rebalancing; multi-custodial, aggregated performance reporting; and billing calculation and administration.

 

·                  Envestnet | PMC, provides consulting services provide financial advisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products. Envestnet | PMC’s investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios and Exchange Traded Fund (“ETF”) portfolios. Envestnet | PMC also offers Prima Premium Research, comprising institutional-quality research and due diligence on investment managers, mutual funds, ETFs and liquid alternatives funds.

 

·                  Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management (“CRM”) software, principally to high-end RIAs.

 

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Table of Contents

 

·                  Vantage Reporting Solution software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice and consulting.

 

·                  Envestnet | WMS offers financial institutions access to an integrated wealth platform, which helps construct and manage sophisticated portfolio solutions across an entire account life cycle, particularly in the area of unified managed account (“UMA”) trading. Envestnet | WMS’s Overlay Portfolio Management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions.

 

·                  Envestnet | 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.

 

Operational Highlights

 

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 19% from $70,727 in the three months ended June, 2014 to $83,819 in the three months ended June 30, 2015. Total revenues, which include licensing and professional service fees, increased 21% from $84,829 in the three months ended June 30, 2014 to $102,663 in the three months ended June 30, 2015.

 

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 20% from $137,808 in the six months ended June, 2014 to $164,896 in the six months ended June 30, 2015. Total revenues, which include licensing and professional service fees, increased 22% from $163,368 in the six months ended June 30, 2014 to $199,117 in the six months ended June 30, 2015.

 

The increase in total revenues was a result of the positive effects of new account growth and positive net flows of AUM/AUA, as well as an increase in revenues resulting from the October 2014 acquisition of Placemark Holdings, Inc. (“Placemark”). Net income attributable to Envestnet, Inc. for the three months ended June 30, 2015 was $2,536, or $0.07 per diluted share, compared to $3,719, or $0.10 per diluted share for the three months ended June 30, 2014. Net income attributable to Envestnet, Inc. for the six months ended June 30, 2015 was $5,047, or $0.13 per diluted share, compared to $6,713, or $0.18 per diluted share for the six months ended June 30, 2014.

 

Adjusted revenues for the three months ended June 30, 2015 was $102,663, an increase of 21% from $84,829 in the prior year period. Adjusted EBITDA for the three months ended June 30, 2015 was $17,613, an increase of 37% from $12,828 in the prior year period. Adjusted net income for the three months ended June 30, 2015 was $8,853, or $0.24 per diluted share, compared to adjusted net income of $6,616, or $0.18 per diluted share in the prior year period.

 

Adjusted revenues for the six months ended June 30, 2015 was $199,117, an increase of 22% from $163,368 in the prior year period. Adjusted EBITDA for the six months ended June 30, 2015 was $34,427, an increase of 40% from $24,599 in the prior year period. Adjusted net income for the six months ended June 30, 2015 was $17,101, or $0.46 per diluted share, compared to adjusted net income of $12,917, or $0.35 per diluted share in the prior year period.

 

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a discussion of non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.

 

Recent Events

 

Upside Holdings, Inc.

 

On February 24, 2015, Envestnet acquired all of the stock of Upside Holdings, Inc. (including its subsidiaries “Upside”) for consideration totaling $3,040, subject to certain post-closing adjustments.

 

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.

 

Envestnet acquired Upside to integrate its technology within our unified wealth management platform, which will allow advisors to compete more aggressively to engage their clients online and reach a new class of investors.

 

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Table of Contents

 

As a result of the acquisition of Upside, Envestnet provided for the future grant of unvested restricted stock 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 13).  If 100 percent of the awards are earned for 2015, 2016 and 2017, the maximum number of shares that could be granted for 2015, 2016 and 2017 equals 22,064, 44,128 and 66,192 shares of common stock, respectively. Envestnet has determined the payments to be categorized as compensation expense.  As of June 30, 2015, no amounts have been recognized as it is currently estimated that the performance targets will not be attained in 2015.

 

AlphaHedge Capital Partners, LLC

 

On April 1, 2015, Envestnet purchased 150,000 Class B units representing 10.3% of the outstanding membership interests of AlphaHedge Capital Partners, LLC, (“AlphaHedge”) a Delaware limited liability company for cash consideration of $1,500.  AlphaHedge is a liquid alternatives platform providing access to strategies from a select group of long/short equity managers in a custodian agnostic, separately managed account format.  Envestnet will use the equity method of accounting to record its portion of the AlphaHedge net income or loss on a one quarter lag from AlphaHedge’s actual results of operations.  No results of their operations have been included in condensed financial statements as of June 30, 2015.

 

Oltis Software LLC

 

On May 6, 2015, Envestnet 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 banks, broker-dealers and RIAs.

 

Under the terms of the Agreement, Envestnet 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. Envestnet has also agreed to pay an earn-out (in a mix of cash, stock and options) over a three year period, subject to Finance Logix meeting certain financial targets and other customary conditions as discussed below.  See Note 3 of the notes to the condensed consolidated financial statements.

 

In connection with the acquisition of Finance Logix, Envestnet 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. Envestnet 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.  Envestnet did not record compensation expense as of June 30, 2015 and preliminary did not record a contingent consideration liability as of the date of acquisition.

 

As of June 30, 2015, the Envestnet has not finalized the opening balance sheet (including taxes), contingent consideration, nor has Envestnet finalized its valuation of Finance Logix’s possible intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. Envestnet 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.

 

Yodlee, Inc.

 

On August 10, 2015, Envestnet 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.

 

Envestnet will acquire all of the shares of Yodlee in a cash and stock transaction valued at $18.88 per share, or approximately $660 million on a fully-diluted equity basis.  As Yodlee has approximately $70 million in cash and cash equivalents, the transaction reflects an enterprise value of approximately $590 million. The deal price consists of $10.78 per share in cash and $8.10 per share in Envestnet stock, and is expected to be funded with available balance sheet cash, Envestnet stock and up to $200 million in committed debt financing.

 

The stock portion of the consideration will be determined based upon the volume weighted average price per share of Envestnet common stock for the 10 consecutive trading days ending on (and including) the second trading day immediately prior to completion of the transaction, subject to a collar of $39.006 to $47.674 per share.  The amount of Envestnet stock to be issued in the transaction is limited to 19.9% of Envestnet’s outstanding common stock as of immediately prior to the closing of the transaction.  In order to remain below that threshold, Envestnet will pay up to an additional $32 million in cash in the aggregate at closing.

 

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 Envestnet 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 Envestnet, in certain circumstances described in the Merger Agreement, a termination fee equal to approximately $18 million will be payable by Yodlee to Envestnet.

 

In connection with the definitive agreement, funds affiliated with Warburg Pincus, which collectively own approximately 26.9 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 or in the first quarter of 2016, subject to receipt of regulatory approvals and other customary closing conditions, as well as approval by Yodlee stockholders. Envestnet and Yodlee will continue to operate separately until the transaction closes.

 

25



Table of Contents

 

Key Operating Metrics

 

The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated. AUM/A metrics in the table below include Placemark, which added approximately $15.4 billion in assets, 45,000 accounts and 3,400 advisors as of October 1, 2014.

 

 

 

As of

 

 

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2014

 

2014

 

2014

 

2015

 

2015

 

 

 

(in millions, except accounts and advisor data)

 

Platform Assets

 

 

 

 

 

 

 

 

 

 

 

Assets Under Management (AUM)

 

$

53,063

 

$

54,935

 

$

72,120

 

$

74,643

 

$

75,922

 

Assets Under Administration (AUA)

 

156,723

 

164,639

 

174,249

 

181,239

 

181,922

 

Subtotal AUM/A

 

209,786

 

219,574

 

246,369

 

255,882

 

257,844

 

Licensing

 

412,141

 

448,169

 

466,982

 

493,284

 

534,674

 

Total Platform Assets

 

$

621,927

 

$

667,743

 

$

713,351

 

$

749,166

 

$

792,518

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform Accounts

 

 

 

 

 

 

 

 

 

 

 

AUM

 

239,367

 

255,359

 

310,351

 

319,896

 

332,738

 

AUA

 

596,886

 

642,192

 

667,274

 

679,753

 

695,463

 

Subtotal AUM/A

 

836,253

 

897,551

 

977,625

 

999,649

 

1,028,201

 

Licensing

 

1,659,313

 

1,830,678

 

1,881,352

 

1,982,773

 

2,044,355

 

Total Platform Accounts

 

2,495,566

 

2,728,229

 

2,858,977

 

2,982,422

 

3,072,556

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisors

 

 

 

 

 

 

 

 

 

 

 

AUM/A

 

24,945

 

24,887

 

28,605

 

29,023

 

29,541

 

Licensing

 

8,583

 

11,266

 

11,632

 

12,306

 

12,870

 

Total Advisors

 

33,528

 

36,153

 

40,237

 

41,329

 

42,411

 

 

The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.

 

 

 

Asset Rollforward - Three Months Ended June 30, 2015

 

 

 

As of 3/31/15

 

Gross
Sales

 

Redemptions