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3

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


 

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

 

For the quarterly period ended March 31, 2017

 

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 ☒  No ☐

 

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 ☒  No ☐

 

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

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of May 3, 2017, 43,828,109 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

1


 

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION 

3

 

 

Item 1. Financial Statements (Unaudited) 

3

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 

3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 

4

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016 

5

Condensed Consolidated Statement of Equity for the three months ended March 31, 2017 

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 

7

Notes to Unaudited Condensed Consolidated Financial Statements 

8

 

 

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

26

Forward-Looking Statements 

26

Overview 

27

Results of Operations 

31

Liquidity and Capital Resources 

41

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

43

 

 

Item 4. Controls and Procedures 

44

 

 

PART II - OTHER INFORMATION 

46

 

 

Item 1. Legal Proceedings 

46

 

 

Item 1A. Risk Factors 

46

 

 

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

46

 

 

Item 3. Defaults Upon Senior Securities 

47

 

 

Item 4. Mine Safety Disclosures 

47

 

 

Item 5. Other Information 

47

 

 

Item 6. Exhibits 

47

 

 

2


 

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,479

 

$

52,592

Fees and other receivables, net

 

 

44,731

 

 

44,268

Prepaid expenses and other current assets

 

 

20,156

 

 

16,224

Total current assets

 

 

104,366

 

 

113,084

 

 

 

 

 

 

 

Property and equipment, net

 

 

33,540

 

 

33,000

Internally developed software, net

 

 

15,792

 

 

14,860

Intangible assets, net

 

 

254,973

 

 

265,558

Goodwill

 

 

432,339

 

 

431,936

Other non-current assets

 

 

13,135

 

 

13,963

Total assets

 

$

854,145

 

$

872,401

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

79,272

 

$

87,763

Accounts payable

 

 

12,618

 

 

11,480

Current portion of debt

 

 

60,221

 

 

37,926

Contingent consideration

 

 

 —

 

 

2,286

Deferred revenue

 

 

19,591

 

 

16,499

Total current liabilities

 

 

171,702

 

 

155,954

 

 

 

 

 

 

 

Convertible Notes

 

 

154,146

 

 

152,575

Term Notes

 

 

70,448

 

 

100,409

Contingent consideration

 

 

2,700

 

 

2,582

Deferred revenue

 

 

15,170

 

 

15,643

Deferred rent and lease incentive

 

 

12,327

 

 

12,060

Deferred tax liabilities, net

 

 

8,239

 

 

5,555

Other non-current liabilities

 

 

14,614

 

 

13,436

Total liabilities

 

 

449,346

 

 

458,214

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units in ERS

 

 

900

 

 

900

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; 56,364,799 and 55,642,686 shares issued as of March 31, 2017 and December 31, 2016, respectively; 43,785,653 and 43,240,567 shares outstanding as of March 31, 2017 and December 31, 2016, respectively

 

 

282

 

 

278

Additional paid-in capital

 

 

526,335

 

 

516,675

Accumulated deficit

 

 

(83,709)

 

 

(70,574)

Treasury stock at cost, 12,579,146 and 12,402,119 shares as of March 31, 2017 and December 31, 2016, respectively

 

 

(39,718)

 

 

(33,068)

Accumulated other comprehensive income (loss)

 

 

311

 

 

(422)

Total stockholders’ equity

 

 

403,501

 

 

412,889

Non-controlling interest

 

 

398

 

 

398

Total equity

 

 

403,899

 

 

413,287

Total liabilities and equity

 

$

854,145

 

$

872,401

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3


 

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Revenues:

 

 

 

 

 

 

Assets under management or administration

 

$

94,162

 

$

82,871

Subscription and licensing

 

 

57,910

 

 

43,620

Professional services and other

 

 

5,714

 

 

5,330

Total revenues

 

 

157,786

 

 

131,821

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Cost of revenues

 

 

49,226

 

 

40,158

Compensation and benefits

 

 

65,532

 

 

62,616

General and administration

 

 

30,547

 

 

25,727

Depreciation and amortization

 

 

15,835

 

 

16,080

Total operating expenses

 

 

161,140

 

 

144,581

 

 

 

 

 

 

 

Loss from operations

 

 

(3,354)

 

 

(12,760)

Other expense, net

 

 

(5,483)

 

 

(3,949)

Loss before income tax provision

 

 

(8,837)

 

 

(16,709)

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

4,298

 

 

(5,716)

 

 

 

 

 

 

 

Net loss

 

 

(13,135)

 

 

(10,993)

Add: Net loss attributable to non-controlling interest

 

 

 —

 

 

 —

Net loss attributable to Envestnet, Inc.

 

$

(13,135)

 

$

(10,993)

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

Basic

 

$

(0.30)

 

$

(0.26)

 

 

 

 

 

 

 

Diluted

 

$

(0.30)

 

$

(0.26)

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

 

43,362,037

 

 

42,506,557

 

 

 

 

 

 

 

Diluted

 

 

43,362,037

 

 

42,506,557

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4


 

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(13,135)

 

$

(10,993)

Other comprehensive income, net of taxes

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

733

 

 

(15)

Gains on foreign currency contracts designated as cash flow hedges reclassified to earnings

 

 

 —

 

 

177

Total other comprehensive income, net of taxes

 

 

733

 

 

162

Comprehensive loss, net of taxes

 

$

(12,402)

 

$

(10,831)

 

 

 

 

 

 

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

 

 

5


 

Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Other

 

 

 

 

Non-

 

Total

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Stockholders’

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Interest

    

Equity

Balance, December 31, 2016

 

55,642,686

 

$

278

 

(12,402,119)

 

$

(33,068)

 

$

516,675

 

$

(422)

 

$

(70,574)

 

$

398

 

$

413,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

208,334

 

 

 1

 

 —

 

 

 —

 

 

1,899

 

 

 —

 

 

 —

 

 

 —

 

 

1,900

Issuance of common stock - vesting of restricted stock units

 

513,779

 

 

 3

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,761

 

 

 —

 

 

 —

 

 

 —

 

 

7,761

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(177,027)

 

 

(6,650)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,650)

Foreign currency translation loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

733

 

 

 —

 

 

 —

 

 

733

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,135)

 

 

 —

 

 

(13,135)

Balance, March 31, 2017

 

56,364,799

 

$

282

 

(12,579,146)

 

$

(39,718)

 

$

526,335

 

$

311

 

$

(83,709)

 

$

398

 

$

403,899

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(13,135)

 

$

(10,993)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

15,835

 

 

16,080

Deferred rent and lease incentive

 

 

182

 

 

(171)

Provision for doubtful accounts

 

 

82

 

 

23

Deferred income taxes

 

 

2,684

 

 

3,599

Stock-based compensation expense

 

 

7,458

 

 

11,615

Non-cash interest expense

 

 

3,522

 

 

2,013

Accretion on contingent consideration and purchase liability

 

 

156

 

 

62

Fair market value adjustment on contingent consideration

 

 

 —

 

 

50

Loss allocation from equity method investment

 

 

285

 

 

 —

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees and other receivables

 

 

(545)

 

 

11,278

Prepaid expenses and other current assets

 

 

(3,932)

 

 

(9,780)

Other non-current assets

 

 

543

 

 

(1,556)

Accrued expenses and other liabilities

 

 

(8,758)

 

 

(11,335)

Accounts payable

 

 

865

 

 

32

Deferred revenue

 

 

2,619

 

 

2,181

Other non-current liabilities

 

 

1,140

 

 

418

Net cash provided by operating activities

 

 

9,001

 

 

13,516

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,007)

 

 

(1,811)

Capitalization of internally developed software

 

 

(2,091)

 

 

(1,388)

Purchase of ERS units

 

 

 —

 

 

(1,500)

Acquisition of businesses, net of cash acquired

 

 

 —

 

 

(18,125)

Net cash used in investing activities

 

 

(6,098)

 

 

(22,824)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings on revolving credit facility

 

 

25,000

 

 

15,000

Payment on revolving credit facility

 

 

 —

 

 

(13,000)

Payments of contingent consideration

 

 

(2,286)

 

 

 —

Payments of definite consideration

 

 

(445)

 

 

 —

Payment of term notes

 

 

(33,862)

 

 

(2,000)

Proceeds from exercise of stock options

 

 

1,900

 

 

1,207

Purchase of treasury stock for stock-based tax withholdings

 

 

(6,650)

 

 

(7,071)

Issuance of restricted stock units

 

 

 3

 

 

 4

Net cash used in financing activities

 

 

(16,340)

 

 

(5,860)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

324

 

 

 —

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(13,113)

 

 

(15,168)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

52,592

 

 

51,718

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

39,479

 

$

36,550

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information - net cash refunded during the period for income taxes

 

$

(716)

 

$

(1,513)

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

 

 

1,414

 

 

2,079

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

 

 

 

 

 

 

Contingent consideration issued in a business acquisition

 

 

 —

 

 

1,929

Purchase liabilities included in accrued expenses

 

 

 —

 

 

269

Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities

 

 

471

 

 

 —

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

7


 

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 intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting software, services and data, delivering better intelligence and enabling its customers to drive better outcomes.

 

The Company offers these solutions principally through the following product/services suites:

·

Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting.  Advisors have access to over 17,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.

 

·

Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management (“CRM”) software, principally to highend registered investment advisers (“RIA”).

 

·

Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services for advisor-sold retirement plans. Leveraging integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically.

 

·

Envestnet | PMC®, or Portfolio Management Consultants (“PMC”) – provides research due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 4,000 vetted managed account products, multi-manager portfolios, fund strategist portfolios, as well as proprietary products, such as Quantitative Portfolios.  PMC also offers an Overlay Service, which includes patented portfolio overlay and tax optimization services.

 

·

Envestnet | Yodlee is a leading data aggregation and data intelligence platform.  As a “big data” specialist, Yodlee gathers, refines and aggregates a massive set of end-user permissioned transaction level data, which it then provides to customers as data analytics solutions and market research services. 

Envestnet operates four 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 March 31, 2017 and for the three months ended March 31, 2017 and 2016 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, 2016 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2017 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of March 31, 2017 was derived from the Company’s audited financial statements for the year ended December 31, 2016 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet segment that are denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet | Yodlee segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a foreign currency functional currency are translated at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates. Differences arising from these foreign currency translations are recorded in the condensed consolidated balance sheets as accumulated other comprehensive income (loss) within shareholders' equity. The results of operations for the three months ended March 31, 2017 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, 2016, filed with the SEC on March 24, 2017.

 

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 to prepare these condensed consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of restricted stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, fair value of the liability portion of the convertible debt and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.

 

Share repurchase program – On February 25, 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other transactions or otherwise, all in compliance with applicable laws and other restrictions. As of March 31, 2017, 1,956,390 shares could still be purchased under this program. For the three month period ended March 31, 2017 the Company purchased no shares with respect to this program. 

 

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” 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. However, 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 will adopt the standard in its first quarter of 2018.

 

In 2016, the Company began evaluating the impact of the adoption of the new revenue standard on its consolidated financial statements, including enhanced disclosures, as well as assessing the impact on systems, processes, controls. The Company expects the new revenue standard to have an impact on the estimation of variable transaction considerations, the allocation of variable considerations across distinct services, and the tracking and amortization of contract costs.  We expect to begin capitalizing certain costs to obtain and fulfill a contract upon adoption of the new standard and are currently in the process of evaluating the period over which to amortize these capitalized costs. The Company has not yet quantified these amounts.

 

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. Although the Company has not finalized the adoption disclosure approach, the Company currently anticipates applying the standard retrospectively with the cumulative effect recognized as of the date of adoption.

 

In February 2016, the FASB issued ASU 2016-02, “Leases.” This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from the lease, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

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In March 2016, The FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This update is intended to reduce the cost and complexity of accounting for share-based payments; however, some changes may also increase volatility in reported earnings. Under the new guidance, all excess tax benefits and deficiencies will be recorded as an income tax benefit or expense in the income statement and excess tax benefits will be recorded as an operating activity in the statements of cash flows.   Upon adoption, we determined that we did not have previously unrecognized excess tax benefits to be recognized on a modified retrospective transition method as an adjustment to retained earnings.  The new guidance also allows withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. We did not elect an accounting policy change to withhold at the maximum individual statutory tax rate.  The cash paid to satisfy the statutory income tax withholding obligation will continue to be classified as a financing activity in the statements of cash flows.  Lastly, the update allows forfeitures to be estimated or recognized when they occur. The requirements for the excess tax effects related to share-based payments at settlement must be applied on a prospective basis, and the other requirements under this standard are to be applied on a retrospective basis. We did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.  This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. These changes became effective for the Company’s fiscal year beginning January 1, 2017 and have been reflected in these condensed consolidated financial statements. As a result of the adoption of ASU 2016-09, for the three months ended March 31, 2016, net cash provided by operating activities decreased by $275 with a corresponding offset to net cash used for financing activities.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. The ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. Upon adoption, the Company does not anticipate significant changes to the Company’s existing accounting policies or presentation of the consolidated statements of cash flows.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),” which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the timing of adoption; however it does not believe this ASU will have material impact on the Company’s consolidated financial statements. 

 

3.Business Acquisitions

 

Wheelhouse Analytics LLC 

   

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

   

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

   

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

   

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

 

 

 

 

 

Cash consideration

 

$

13,299

Contingent consideration liability

 

 

2,582

Purchase consideration liability

 

 

887

Working capital adjustment

 

 

110

Cash acquired

 

 

(80)

Total

 

$

16,798

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

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

 

 

 

 

 

 

Preliminary

 

 

Estimate at

 

 

March 31, 2017

Total tangible assets acquired

 

$

399

Total liabilities assumed

 

 

(1,459)

Identifiable intangible assets

 

 

7,300

Goodwill

 

 

10,558

Total net assets acquired

 

$

16,798

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

 

 

 

 

 

 

 

 

 

    

    

 

    

Estimated

    

Amortization

 

 

Amount

    

Useful Life in Years

 

Method

Customer list

 

$

4,100

    

12

 

Accelerated

Proprietary technology

 

 

3,000

 

 5

 

Straight-line

Trade names and domains

 

 

200

 

 5

 

Straight-line

Total

 

$

7,300

 

 

 

 

 

The results of Wheelhouse’s operations are included in the condensed consolidated statements of operations beginning October 3, 2016, and are not considered material to the Company’s results of operations.  As such, no pro forma information is presented for the three months ended March 31, 2016.

 

 

4.      Cost of Revenues

 

The following table summarizes cost of revenues by revenue category for the periods ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

Assets under management or administration

    

$

44,485

 

$

36,909

Subscription and licensing

 

 

4,614

 

 

3,104

Professional services and other

 

 

127

 

 

145

Total

 

$

49,226

 

$

40,158

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5.     Property and Equipment

 

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Cost:

 

 

 

 

 

 

 

 

Computer equipment and software

 

3 years

 

$

56,293

 

$

52,921

Office furniture and fixtures

 

3-7 years

 

 

7,365

 

 

6,911

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

18,177

 

 

17,286

Other office equipment

 

3-5 years

 

 

1,554

 

 

1,367

 

 

 

 

 

83,389

 

 

78,485

Less accumulated depreciation and amortization

 

 

 

 

(49,849)

 

 

(45,485)

Property and equipment, net

 

 

 

$

33,540

 

$

33,000

 

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Depreciation and amortization expense

 

$

4,091

 

$

3,359

 

 

 

 

6. Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Internally developed software

 

5 years

 

$

35,809

 

$

33,718

Less accumulated amortization

 

 

 

 

(20,017)

 

 

(18,858)

Internally developed software, net

 

 

 

$

15,792

 

$

14,860

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Amortization expense

 

$

1,159

 

$

795

 

 

 

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7.Intangible Assets

 

Intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

    

 

 

 

    

    

Gross

    

    

 

    

Net

    

Gross

    

    

 

    

Net

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Customer lists

 

4

-

15

years

 

$

259,490

 

$

(60,879)

 

$

198,611

 

$

259,490

 

$

(54,861)

 

$

204,629

Backlog

 

 

 

4

years

 

 

11,000

 

 

(7,489)

 

 

3,511

 

 

11,000

 

 

(6,456)

 

 

4,544

Proprietary technologies

 

2

-

8

years

 

 

57,770

 

 

(22,886)

 

 

34,884

 

 

57,770

 

 

(20,214)

 

 

37,556

Trade names

 

2

-

7

years

 

 

24,995

 

 

(7,028)

 

 

17,967

 

 

25,007

 

 

(6,178)

 

 

18,829

Total intangible assets

 

 

 

 

 

 

$

353,255

 

$

(98,282)

 

$

254,973

 

$

353,267

 

$

(87,709)

 

$

265,558

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Amortization expense

 

$

10,585

 

$

11,926

 

Future amortization expense of the intangible assets as of March 31, 2017, is expected to be as follows:

 

 

 

 

 

 

 

Years ending December 31:

 

    

Remainder of 2017

$

31,383

2018

 

35,948

2019

 

32,361

2020

 

28,615

2021

 

20,746

2022

 

18,729

Thereafter

 

87,191

 

$

254,973

 

 

8.Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Non-income tax receivable

 

$

4,370

 

$

3,879

Income tax receivable

 

 

2,255

 

 

1,864

Prepaid insurance

 

 

1,125

 

 

552

Prepaid technology

 

 

1,188

 

 

1,318

FinaConnect escrow

 

 

2,000

 

 

429

Other

 

 

9,218

 

 

8,182

 

 

$

20,156

 

$

16,224

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9.Other Non-Current Assets

 

Other non-current assets consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2017

    

2016

Investments in private companies

 

$

2,465

 

$

2,750

Deposits:

 

 

 

 

 

 

Lease

 

 

4,373

 

 

4,262

Other

 

 

512

 

 

2,083

Assets to fund deferred compensation liability

 

 

3,761

 

 

2,738

Other

 

 

2,024

 

 

2,130

 

 

$

13,135

 

$

13,963

 

 

The Company owns 756,347 Class B Units in a privately held company at a historical purchase price of $1,250. The Company uses the cost method of accounting for this investment.

   

The Company owns 1,500,000 Class A units representing 21.4% of the outstanding membership interests of a privately held company for cash consideration of $1,500. Upon the approval by a majority of the Board of Directors of the privately held company in its sole discretion, prior to December 31, 2017, the privately held company may require that Envestnet purchase up to an additional 1,500,000 Class A units.

   

The Company uses the equity method of accounting to record its portion of this privately held company’s net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50 percent ownership. The Company’s interest in the earnings or losses of the privately held company is reflected in other expense, net on the condensed consolidated statements of operations.

 

 

10.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 at fair value 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 I:

 

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

 

 

 

Level II:

 

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 III:

 

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.

 

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value in the condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016, based on the three-tier fair value hierarchy.

 

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As of March 31, 2017

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds(1)

$

17,683

   

$

17,683

   

$

 

$

Assets to fund deferred compensation liability(2)

 

3,761

 

 

 

 

 

 

3,761

Total assets

$

21,444

   

$

17,683

   

$

 

$

3,761

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

2,700

 

$

 

$

 

$

2,700

Deferred compensation liability(3)

 

3,898

 

 

3,898

 

 

 

 

Total liabilities

$

6,598

 

$

3,898

 

$

 

$

2,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds(1)

$

31,644

   

$

31,644

   

$

 

$

Assets to fund deferred compensation liability(2)

 

2,738

 

 

 

 

 

 

2,738

Total assets

$

34,382

 

$

31,644

 

$

 

$

2,738

Liabilities