10-Q 1 env-20170930x10q.htm 10-Q env_current folio_10Q

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 September 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 November 5, 2017, 44,305,791 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 September 30, 2017 and December 31, 2016 

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 

4

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

5

Condensed Consolidated Statement of Equity for the nine months ended September 30, 2017 

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 

28

Forward-Looking Statements 

28

Overview 

29

Results of Operations 

34

Liquidity and Capital Resources 

50

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

53

 

 

Item 4. Controls and Procedures 

54

 

 

PART II - OTHER INFORMATION 

56

 

 

Item 1. Legal Proceedings 

56

 

 

Item 1A. Risk Factors 

56

 

 

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

56

 

 

Item 3. Defaults Upon Senior Securities 

56

 

 

Item 4. Mine Safety Disclosures 

56

 

 

Item 5. Other Information 

56

 

 

Item 6. Exhibits 

57

 

 

2


 

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,704

 

$

52,592

Fees and other receivables, net

 

 

49,726

 

 

44,268

Prepaid expenses and other current assets

 

 

23,999

 

 

16,224

Total current assets

 

 

122,429

 

 

113,084

 

 

 

 

 

 

 

Property and equipment, net

 

 

35,274

 

 

33,000

Internally developed software, net

 

 

20,279

 

 

14,860

Intangible assets, net

 

 

233,525

 

 

265,558

Goodwill

 

 

432,746

 

 

431,936

Other non-current assets

 

 

17,969

 

 

13,963

Total assets

 

$

862,222

 

$

872,401

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

102,877

 

$

87,763

Accounts payable

 

 

13,215

 

 

11,480

Current portion of debt

 

 

 —

 

 

37,926

Contingent consideration

 

 

2,055

 

 

2,286

Deferred revenue

 

 

18,388

 

 

16,499

Total current liabilities

 

 

136,535

 

 

155,954

 

 

 

 

 

 

 

Convertible Notes

 

 

157,353

 

 

152,575

Revolving credit facility

 

 

101,168

 

 

 —

Term Notes

 

 

 —

 

 

100,409

Contingent consideration

 

 

641

 

 

2,582

Deferred revenue

 

 

14,454

 

 

15,643

Deferred rent and lease incentive

 

 

14,867

 

 

12,060

Deferred tax liabilities, net

 

 

12,216

 

 

5,555

Other non-current liabilities

 

 

14,527

 

 

13,436

Total liabilities

 

 

451,761

 

 

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; 56,918,043 and 55,642,686 shares issued as of September 30, 2017 and December 31, 2016, respectively; 44,213,751 and 43,240,567 shares outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

284

 

 

278

Additional paid-in capital

 

 

544,895

 

 

516,675

Accumulated deficit

 

 

(91,499)

 

 

(70,574)

Treasury stock at cost, 12,704,292 and 12,402,119 shares as of September 30, 2017 and December 31, 2016, respectively

 

 

(44,687)

 

 

(33,068)

Accumulated other comprehensive income (loss)

 

 

170

 

 

(422)

Total stockholders’ equity

 

 

409,163

 

 

412,889

Non-controlling interest

 

 

398

 

 

398

Total equity

 

 

409,561

 

 

413,287

Total liabilities and equity

 

$

862,222

 

$

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

106,147

 

$

90,042

 

$

299,268

 

$

258,969

Subscription and licensing

 

 

62,963

 

 

51,959

 

 

180,675

 

 

142,303

Professional services and other

 

 

6,504

 

 

7,154

 

 

20,874

 

 

21,412

Total revenues

 

 

175,614

 

 

149,155

 

 

500,817

 

 

422,684

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

56,070

 

 

47,259

 

 

161,031

 

 

132,319

Compensation and benefits

 

 

68,551

 

 

60,345

 

 

199,079

 

 

180,625

General and administration

 

 

31,153

 

 

26,150

 

 

90,178

 

 

80,249

Depreciation and amortization

 

 

15,492

 

 

16,692

 

 

46,792

 

 

49,872

Total operating expenses

 

 

171,266

 

 

150,446

 

 

497,080

 

 

443,065

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

4,348

 

 

(1,291)

 

 

3,737

 

 

(20,381)

Other expense, net

 

 

(3,986)

 

 

(4,434)

 

 

(13,838)

 

 

(13,214)

Income (loss) before income tax provision (benefit)

 

 

362

 

 

(5,725)

 

 

(10,101)

 

 

(33,595)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

1,682

 

 

(1,668)

 

 

10,824

 

 

(10,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,320)

 

 

(4,057)

 

 

(20,925)

 

 

(22,993)

Add: Net loss attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to Envestnet, Inc.

 

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

(0.09)

 

$

(0.48)

 

$

(0.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.03)

 

$

(0.09)

 

$

(0.48)

 

$

(0.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4


 

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

    

2016

 

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(217)

 

 

192

 

 

592

 

 

(122)

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

 

 

 —

 

 

(556)

 

 

 —

 

 

(204)

Total other comprehensive income (loss), net of taxes

 

 

(217)

 

 

(364)

 

 

592

 

 

(326)

Comprehensive loss, net of taxes

 

$

(1,537)

 

$

(4,421)

 

$

(20,333)

 

$

(23,319)

 

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

 

428,173

 

 

 2

 

 —

 

 

 —

 

 

4,466

 

 

 —

 

 

 —

 

 

 —

 

 

4,468

Issuance of common stock - vesting of restricted stock units

 

847,184

 

 

 4

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 4

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

23,754

 

 

 —

 

 

 —

 

 

 —

 

 

23,754

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(302,173)

 

 

(11,619)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,619)

Foreign currency translation gain

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

592

 

 

 —

 

 

 —

 

 

592

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,925)

 

 

 —

 

 

(20,925)

Balance, September 30, 2017

 

56,918,043

 

$

284

 

(12,704,292)

 

$

(44,687)

 

$

544,895

 

$

170

 

$

(91,499)

 

$

398

 

$

409,561

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

    

2017

    

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(20,925)

 

$

(22,993)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

46,792

 

 

49,872

Deferred rent and lease incentive amortization

 

 

709

 

 

(324)

Provision for doubtful accounts

 

 

828

 

 

369

Deferred income taxes

 

 

6,646

 

 

(10,273)

Stock-based compensation expense

 

 

23,451

 

 

25,872

Non-cash interest expense

 

 

8,711

 

 

6,955

Accretion on contingent consideration and purchase liability

 

 

408

 

 

143

Fair market value adjustment on contingent consideration

 

 

 —

 

 

838

Loss on disposal of fixed assets

 

 

69

 

 

220

Loss allocation from equity method investment

 

 

984

 

 

1,130

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees and other receivables

 

 

(6,286)

 

 

4,077

Prepaid expenses and other current assets

 

 

(5,316)

 

 

(4,960)

Other non-current assets

 

 

(1,784)

 

 

(4,271)

Accrued expenses and other liabilities

 

 

13,289

 

 

275

Accounts payable

 

 

1,435

 

 

124

Deferred revenue

 

 

740

 

 

1,959

Other non-current liabilities

 

 

1,852

 

 

4,337

Net cash provided by operating activities

 

 

71,603

 

 

53,350

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(11,432)

 

 

(10,839)

Capitalization of internally developed software

 

 

(9,210)

 

 

(6,217)

Investment in private company

 

 

(1,450)

 

 

(738)

Purchase of ERS units

 

 

 —

 

 

(1,500)

Acquisition of businesses, net of cash acquired

 

 

 —

 

 

(18,394)

Net cash used in investing activities

 

 

(22,092)

 

 

(37,688)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Payment of Term Notes

 

 

(35,862)

 

 

(6,000)

Proceeds from borrowings on revolving credit facility

 

 

35,000

 

 

25,000

Payments on revolving credit facility

 

 

(42,500)

 

 

(25,000)

Debt issuance costs

 

 

(94)

 

 

 —

Payments of contingent consideration

 

 

(2,286)

 

 

(2,924)

Payments of definite consideration

 

 

(445)

 

 

 —

Payments of purchase consideration liabilities

 

 

(235)

 

 

 —

Proceeds from exercise of stock options

 

 

4,468

 

 

3,166

Purchase of treasury stock for stock-based tax withholdings

 

 

(11,619)

 

 

(9,517)

Common stock acquired under the share repurchase program

 

 

 —

 

 

(1,448)

Issuance of restricted stock units

 

 

 4

 

 

 5

Net cash used in financing activities

 

 

(53,569)

 

 

(16,718)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

170

 

 

 —

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(3,888)

 

 

(1,056)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

52,592

 

 

51,718

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

48,704

 

$

50,662

 

 

 

 

 

 

 

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

 

$

1,449

 

$

(175)

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

 

 

4,887

 

 

5,390

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

 

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

 

2,098

 

 

1,522

Non-cash debt issuance costs

 

 

2,230

 

 

 —

Purchase liabilities included in accrued expenses and other liabilities

 

 

837

 

 

 —

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

 

 

505

 

 

 —

Contingent consideration issued in a business acquisition

 

 

 —

 

 

1,929

7


 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

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 three 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 September 30, 2017 and for the three and nine months ended September 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 September 30, 2017 and the results of operations, equity, comprehensive loss and cash flows for the periods presented herein. 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 foreign currency functional currency are translated at

8


 

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 stockholders’ equity. The results of operations for the three and nine months ended September 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 September 30, 2017, 1,956,390 shares could still be purchased under this program. For the nine month period ended September 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 and 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. The new revenue standard may have an impact on the Company’s principal versus agent considerations.  We expect to begin capitalizing certain costs to obtain 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 made progress on its contract and business process reviews but 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

9


 

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.

 

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 nine months ended September 30, 2016, net cash provided by operating activities increased by $1,470 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

 

FolioDynamix

 

On September 25, 2017, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Folio Dynamics Holdings, Inc., a Delaware corporation (“FolioDynamix”), FCD Merger Sub, Inc., a Delaware corporation and a wholly

10


 

owned subsidiary of the Company (“Merger Sub”), and Actua USA Corporation, a Delaware corporation, solely in its capacity as the representative of the stockholders of FolioDynamix.  Pursuant to the Merger Agreement, Merger Sub will merge with and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) and a wholly owned subsidiary of the Company. FolioDynamix will be included in the Envestnet segment.

 

FolioDynamix provides financial institutions, registered investment advisors, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services.

 

The Company plans to acquire FolioDynamix to add complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. The Company expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management channel, enabling the Company to further leverage its operating scale and data analytics capabilities.

 

Subject to the terms and conditions of the Merger Agreement, the Company will pay $195,000 in cash for all the outstanding shares of FolioDynamix, subject to certain post-closing adjustments.  The Company will fund the Acquisition price with a combination of cash on the Company’s balance sheet and borrowings under its revolving credit facility. Either the Company or FolioDynamix may terminate the Agreement if the closing does not occur by March 31, 2018.

  

The applicable antitrust pre-clearance filings were made by the parties on October 10, 2017 and October 11, 2017.  The Company is withdrawing its filing and plans to refile it immediately thereafter to allow the Department of Justice additional time to review the filing without having to issue a second request. The Company continues to expect the transaction to close in the first quarter of 2018, subject to satisfaction of the closing conditions.  The Company and FolioDynamix will continue to operate separately until the transaction closes.

 

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.

   

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 estimated consideration transferred in the acquisition was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary

 

Period

 

As of

 

 

Estimate

 

Adjustments

 

September 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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

Preliminary

 

Period

 

As of

 

 

Estimate

 

Adjustments

 

September 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 estimated identifiable intangible assets acquired, estimated useful lives and amortization method is as follows:

AS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

 

 

 

 

Preliminary

 

Period

    

As of

    

Estimated

    

Amortization

 

 

Estimate

 

Adjustments

 

September 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

 

 

 

 

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 nine months ended September 30, 2016.

 

 

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4.      Cost of Revenues

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Assets under management or administration

    

$

50,597

 

$

41,960

 

$

142,097

 

$

117,369

Subscription and licensing

 

 

5,076

 

 

5,110

 

 

14,832

 

 

11,934

Professional services and other

 

 

397

 

 

189

 

 

4,102

 

 

3,016

Total

 

$

56,070

 

$

47,259

 

$

161,031

 

$

132,319

 

 

5.     Property and Equipment, Net

 

Property and equipment, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Cost:

 

 

 

 

 

 

 

 

Computer equipment and software

 

3 years

 

$

60,073

 

$

52,921

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

22,580

 

 

17,286

Office furniture and fixtures

 

3-7 years

 

 

8,048

 

 

6,911

Other office equipment

 

3-5 years

 

 

1,883

 

 

1,367

 

 

 

 

 

92,584

 

 

78,485

Less: accumulated depreciation and amortization

 

 

 

 

(57,310)

 

 

(45,485)

Property and equipment, net

 

 

 

$

35,274

 

$

33,000

 

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Depreciation and amortization expense

 

$

3,724

 

$

3,740

 

$

11,668

 

$

11,147

 

 

 

 

6. Internally Developed Software, Net

 

Internally developed software, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Internally developed software

 

 5 years

 

$

42,928

 

$

33,718

Less: accumulated amortization

 

 

 

 

(22,649)

 

 

(18,858)

Internally developed software, net

 

 

 

$

20,279

 

$

14,860

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Amortization expense

 

$

1,391

 

$

917

 

$

3,791

 

$

2,569

 

 

 

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7.Goodwill & Intangible Assets, Net

 

Changes in the carrying amount of goodwill were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Envestnet

 

Envestnet | Yodlee

 

Total

Balance at December 31, 2016

    

$

163,751

 

$

268,185

 

$

431,936

Purchase accounting adjustments - Wheelhouse

 

 

 —

 

 

457

 

 

457

Foreign currency translation

 

 

 —

 

 

353

 

 

353

Balance at September 30, 2017

 

$

163,751

 

$

268,995

 

$

432,746

 

Intangible assets, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016