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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 June 30, 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 August 4, 2017, 44,020,006 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

 


 

TABLE OF CONTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION 

3

 

 

Item 1. Financial Statements (Unaudited) 

3

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016 

4

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016 

5

Condensed Consolidated Statement of Equity for the six months ended June 30, 2017 

6

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

27

Forward-Looking Statements 

27

Overview 

28

Results of Operations 

33

Liquidity and Capital Resources 

48

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

51

 

 

Item 4. Controls and Procedures 

52

 

 

PART II - OTHER INFORMATION 

53

 

 

Item 1. Legal Proceedings 

53

 

 

Item 1A. Risk Factors 

54

 

 

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

54

 

 

Item 3. Defaults Upon Senior Securities 

54

 

 

Item 4. Mine Safety Disclosures 

54

 

 

Item 5. Other Information 

54

 

 

Item 6. Exhibits 

54

 

 

2


 

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,730

 

$

52,592

Fees and other receivables, net

 

 

49,566

 

 

44,268

Prepaid expenses and other current assets

 

 

18,938

 

 

16,224

Total current assets

 

 

96,234

 

 

113,084

 

 

 

 

 

 

 

Property and equipment, net

 

 

34,787

 

 

33,000

Internally developed software, net

 

 

18,111

 

 

14,860

Intangible assets, net

 

 

243,902

 

 

265,558

Goodwill

 

 

432,850

 

 

431,936

Other non-current assets

 

 

13,782

 

 

13,963

Total assets

 

$

839,666

 

$

872,401

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

86,230

 

$

87,763

Accounts payable

 

 

11,542

 

 

11,480

Current portion of debt

 

 

38,696

 

 

37,926

Contingent consideration

 

 

1,995

 

 

2,286

Deferred revenue

 

 

19,055

 

 

16,499

Total current liabilities

 

 

157,518

 

 

155,954

 

 

 

 

 

 

 

Convertible Notes

 

 

155,729

 

 

152,575

Term Notes

 

 

65,350

 

 

100,409

Contingent consideration

 

 

617

 

 

2,582

Deferred revenue

 

 

14,865

 

 

15,643

Deferred rent and lease incentive

 

 

14,398

 

 

12,060

Deferred tax liabilities, net

 

 

12,094

 

 

5,555

Other non-current liabilities

 

 

15,027

 

 

13,436

Total liabilities

 

 

435,598

 

 

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; 56,661,704 and 55,642,686 shares issued as of June 30, 2017 and December 31, 2016, respectively; 43,998,099 and 43,240,567 shares outstanding as of June 30, 2017 and December 31, 2016, respectively

 

 

283

 

 

278

Additional paid-in capital

 

 

534,997

 

 

516,675

Accumulated deficit

 

 

(90,179)

 

 

(70,574)

Treasury stock at cost, 12,663,605 and 12,402,119 shares as of June 30, 2017 and December 31, 2016, respectively

 

 

(42,718)

 

 

(33,068)

Accumulated other comprehensive income (loss)

 

 

387

 

 

(422)

Total stockholders’ equity

 

 

402,770

 

 

412,889

Non-controlling interest

 

 

398

 

 

398

Total equity

 

 

403,168

 

 

413,287

Total liabilities and equity

 

$

839,666

 

$

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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

    

2016

 

2017

    

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

98,959

 

$

86,056

 

$

193,121

 

$

168,927

Subscription and licensing

 

 

59,802

 

 

47,037

 

 

117,712

 

 

90,657

Professional services and other

 

 

8,656

 

 

8,615

 

 

14,370

 

 

13,945

Total revenues

 

 

167,417

 

 

141,708

 

 

325,203

 

 

273,529

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

55,735

 

 

44,902

 

 

104,961

 

 

85,060

Compensation and benefits

 

 

64,996

 

 

57,664

 

 

130,528

 

 

120,280

General and administration

 

 

28,478

 

 

28,372

 

 

59,025

 

 

54,099

Depreciation and amortization

 

 

15,465

 

 

17,100

 

 

31,300

 

 

33,180

Total operating expenses

 

 

164,674

 

 

148,038

 

 

325,814

 

 

292,619

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

2,743

 

 

(6,330)

 

 

(611)

 

 

(19,090)

Other expense, net

 

 

(4,369)

 

 

(4,831)

 

 

(9,852)

 

 

(8,780)

Loss before income tax provision (benefit)

 

 

(1,626)

 

 

(11,161)

 

 

(10,463)

 

 

(27,870)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

4,844

 

 

(3,218)

 

 

9,142

 

 

(8,934)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(6,470)

 

 

(7,943)

 

 

(19,605)

 

 

(18,936)

Add: Net loss attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to Envestnet, Inc.

 

$

(6,470)

 

$

(7,943)

 

$

(19,605)

 

$

(18,936)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.15)

 

$

(0.19)

 

$

(0.45)

 

$

(0.44)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.15)

 

$

(0.19)

 

$

(0.45)

 

$

(0.44)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,855,479

 

 

42,752,465

 

 

43,513,074

 

 

42,632,964

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

43,855,479

 

 

42,752,465

 

 

43,513,074

 

 

42,632,964

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4


 

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

    

2016

 

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(6,470)

 

$

(7,943)

 

$

(19,605)

 

$

(18,936)

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

76

 

 

(299)

 

 

809

 

 

(314)

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

 

 

 —

 

 

175

 

 

 —

 

 

352

Total other comprehensive income (loss), net of taxes

 

 

76

 

 

(124)

 

 

809

 

 

38

Comprehensive loss, net of taxes

 

$

(6,394)

 

$

(8,067)

 

$

(18,796)

 

$

(18,898)

 

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-

 

 

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Total

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

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

 

293,283

 

 

 1

 

 —

 

 

 —

 

 

2,616

 

 

 —

 

 

 —

 

 

 —

 

 

2,617

Issuance of common stock - vesting of restricted stock units

 

725,735

 

 

 4

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 4

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

15,706

 

 

 —

 

 

 —

 

 

 —

 

 

15,706

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(261,486)

 

 

(9,650)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,650)

Foreign currency translation gain

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

809

 

 

 —

 

 

 —

 

 

809

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(19,605)

 

 

 —

 

 

(19,605)

Balance, June 30, 2017

 

56,661,704

 

$

283

 

(12,663,605)

 

$

(42,718)

 

$

534,997

 

$

387

 

$

(90,179)

 

$

398

 

$

403,168

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2017

    

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(19,605)

 

$

(18,936)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

31,300

 

 

33,180

Deferred rent and lease incentive

 

 

583

 

 

(325)

Provision for doubtful accounts

 

 

341

 

 

106

Deferred income taxes

 

 

6,524

 

 

3,504

Stock-based compensation expense

 

 

15,403

 

 

18,318

Non-cash interest expense

 

 

4,853

 

 

4,031

Accretion on contingent consideration and purchase liability

 

 

304

 

 

120

Fair market value adjustment on contingent consideration

 

 

 —

 

 

489

Loss on disposal of fixed assets

 

 

69

 

 

220

Loss allocation from equity method investment

 

 

702

 

 

 —

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees and other receivables

 

 

(5,639)

 

 

4,242

Prepaid expenses and other current assets

 

 

(2,681)

 

 

(17,116)

Other non-current assets

 

 

(514)

 

 

(2,320)

Accrued expenses and other liabilities

 

 

(752)

 

 

(4,967)

Accounts payable

 

 

(184)

 

 

2,597

Deferred revenue

 

 

1,818

 

 

1,447

Other non-current liabilities

 

 

3,022

 

 

1,535

Net cash provided by operating activities

 

 

35,544

 

 

26,125

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,181)

 

 

(4,632)

Capitalization of internally developed software

 

 

(5,651)

 

 

(3,245)

Purchase of ERS units

 

 

 —

 

 

(1,500)

Acquisition of businesses, net of cash acquired

 

 

 —

 

 

(18,394)

Net cash used in investing activities

 

 

(14,832)

 

 

(27,771)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings on revolving credit facility

 

 

25,000

 

 

15,000

Payments on revolving credit facility

 

 

(25,000)

 

 

(15,000)

Payments of contingent consideration

 

 

(2,286)

 

 

 —

Payments of definite consideration

 

 

(445)

 

 

 —

Payments of purchase consideration liabilities

 

 

(235)

 

 

 —

Payment of term notes

 

 

(35,862)

 

 

(4,000)

Proceeds from exercise of stock options

 

 

2,617

 

 

2,279

Purchase of treasury stock for stock-based tax withholdings

 

 

(9,650)

 

 

(9,834)

Issuance of restricted stock units

 

 

 4

 

 

 5

Net cash used in financing activities

 

 

(45,857)

 

 

(11,550)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

283

 

 

 —

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(24,862)

 

 

(13,196)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

52,592

 

 

51,718

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

27,730

 

$

38,522

 

 

 

 

 

 

 

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

 

$

275

 

$

(915)

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

 

 

3,960

 

 

4,192

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

 

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

 

281

 

 

 —

Purchase liabilities included in accrued expenses and other liabilities

 

 

818

 

 

 —

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

 

 

260

 

 

 —

Contingent consideration issued in a business acquisition

 

 

 —

 

 

1,929

 

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 June 30, 2017 and for the three and six months ended June 30, 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 June 30, 2017 and the results of operations, equity, comprehensive (income) loss and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of June 30, 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 unaudited 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

8


 

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 unaudited condensed consolidated balance sheets as accumulated other comprehensive income (loss) within shareholders’ equity. The results of operations for the three and six months ended June 30, 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 unaudited 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 June 30, 2017, 1,956,390 shares could still be purchased under this program. For the six month period ended June 30, 2017, the Company purchased no shares under 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. The Company plans to adopt the standard using the modified retrospective approach 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

9


 

of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

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 retrospective adoption of ASU 2016-09, for the six months ended June 30, 2016, net cash provided by operating activities decreased by $183 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 has adopted this standard as of April 1, 2017, however it did not have a material impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will be effective for public companies for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted effective for transactions not yet reported in financial statements issued or made available for issuance. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.  This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. The ASU is effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2017. Early adoption of the standard is permitted. The standard will be applied prospectively to awards modified on or after the adoption date. The Company is currently evaluating the potential impact of our adoption of this guidance on our 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 Envestnet | Yodlee segment.

   

10


 

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 are recognized in earnings of the Company.

   

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary

 

Period

 

Estimate as of

 

 

Estimate

 

Adjustments

 

June 30, 2017

Cash consideration

 

$

13,299

 

$

 —

 

$

13,299

Contingent consideration liability

 

 

2,582

 

 

(218)

 

 

2,364

Purchase consideration liability

 

 

887

 

 

 —

 

 

887

Working capital adjustment

 

 

110

 

 

 —

 

 

110

Cash acquired

 

 

(80)

 

 

 —

 

 

(80)

Total

 

$

16,798

 

$

(218)

 

$

16,580

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

Preliminary

 

Period

 

Estimate as of

 

 

Estimate

 

Adjustments

 

June 30, 2017

Total tangible assets acquired

 

$

399

 

$

(14)

 

$

385

Total liabilities assumed

 

 

(1,459)

 

 

39

 

 

(1,420)

Identifiable intangible assets

 

 

7,300

 

 

(700)

 

 

6,600

Goodwill

 

 

10,558

 

 

457

 

 

11,015

Total net assets acquired

 

$

16,798

 

$

(218)

 

$

16,580

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

 

 

 

 

Preliminary

 

Period

    

Estimate as of

    

Estimated

    

Amortization

 

 

Estimate

 

Adjustments

 

June 30, 2017

    

Useful Life in Years

 

Method

Customer list

 

$

4,100

 

$

(100)

 

$

4,000

    

15

 

Accelerated

Proprietary technology

 

 

3,000

 

 

(500)

 

 

2,500

 

 6

 

Straight-line

Trade names and domains

 

 

200

 

 

(100)

 

 

100

 

 2

 

Straight-line

Total

 

$

7,300

 

$

(700)

 

$

6,600

 

 

 

 

11


 

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 and six months ended June 30, 2016.

 

 

4.      Cost of Revenues

 

The following table summarizes cost of revenues by revenue category for the periods presented herein:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

Assets under management or administration

    

$

47,015

 

$

38,500

 

$

91,500

 

$

75,409

Subscription and licensing

 

 

5,142

 

 

3,720

 

 

9,756

 

 

6,824

Professional services and other

 

 

3,578

 

 

2,682

 

 

3,705

 

 

2,827

Total

 

$

55,735

 

$

44,902

 

$

104,961

 

$

85,060

 

 

5.     Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

    

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Cost:

 

 

 

 

 

 

 

 

Computer equipment and software

 

3 years

 

$

58,442

 

$

52,921

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

20,524

 

 

17,286

Office furniture and fixtures

 

3-7 years

 

 

7,710

 

 

6,911

Other office equipment

 

3-5 years

 

 

1,764

 

 

1,367

 

 

 

 

 

88,440

 

 

78,485

Less: accumulated depreciation and amortization

 

 

 

 

(53,653)

 

 

(45,485)

Property and equipment, net

 

 

 

$

34,787

 

$

33,000

 

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

    

2016

 

2017

    

2016

Depreciation and amortization expense

 

$

3,853

 

$

4,048

 

$

7,944

 

$

7,407

 

 

 

 

6. Internally Developed Software, Net

 

Internally developed software, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Internally developed software

 

5 years

 

$

39,369

 

$

33,718

Less: accumulated amortization

 

 

 

 

(21,258)

 

 

(18,858)

Internally developed software, net

 

 

 

$

18,111

 

$

14,860

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

    

2016

 

2017

    

2016

Amortization expense

 

$

1,241

 

$

857

 

$

2,400

 

$

1,652

 

 

12


 

 

7.Intangible Assets, Net

 

Intangible assets, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

    

 

 

 

    

    

Gross

    

    

 

    

Net

    

Gross

    

    

 

    

Net

 

 

Estimated

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Customer lists

 

4

-

15

years

 

$

259,350

 

$

(66,820)

 

$

192,530

 

$

259,490

 

$

(54,861)

 

$

204,629

Proprietary technologies

 

2

-

8

years

 

 

57,328

 

 

(25,419)

 

 

31,909

 

 

57,770

 

 

(20,214)

 

 

37,556

Trade names

 

2

-

7