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 SeptemberJune 30, 20162017
☐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 |
| (I.R.S Employer |
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, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“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 1, 2016, 43,053,724August 4, 2017, 44,020,006 shares of the common stock with a par value of $0.005 per share were outstanding.
2
Envestnet, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(unaudited)
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|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
Assets |
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Current assets: |
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|
|
|
Cash and cash equivalents |
| $ | 50,662 |
| $ | 51,718 |
| $ | 27,730 |
| $ | 52,592 |
Fees and other receivables, net |
|
| 42,451 |
|
| 46,756 |
|
| 49,566 |
|
| 44,268 |
Prepaid expenses and other current assets |
|
| 19,811 |
|
| 13,239 |
|
| 18,938 |
|
| 16,224 |
Total current assets |
|
| 112,924 |
|
| 111,713 |
|
| 96,234 |
|
| 113,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 32,566 |
|
| 28,681 |
|
| 34,787 |
|
| 33,000 |
Internally developed software, net |
|
| 13,544 |
|
| 9,897 |
|
| 18,111 |
|
| 14,860 |
Intangible assets, net |
|
| 262,234 |
|
| 292,675 |
|
| 243,902 |
|
| 265,558 |
Goodwill |
|
| 422,565 |
|
| 421,273 |
|
| 432,850 |
|
| 431,936 |
Deferred tax assets, net |
|
| 12,961 |
|
| 2,688 | ||||||
Other non-current assets |
|
| 13,156 |
|
| 9,322 |
|
| 13,782 |
|
| 13,963 |
Total assets |
| $ | 869,950 |
| $ | 876,249 |
| $ | 839,666 |
| $ | 872,401 |
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Liabilities and Equity |
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Current liabilities: |
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Accrued expenses and other liabilities |
| $ | 74,650 |
| $ | 83,411 |
| $ | 86,230 |
| $ | 87,763 |
Accounts payable |
|
| 10,456 |
|
| 10,420 |
|
| 11,542 |
|
| 11,480 |
Current portion of debt |
|
| 33,177 |
|
| 6,064 |
|
| 38,696 |
|
| 37,926 |
Contingent consideration |
|
| 1,929 |
|
| 2,537 |
|
| 1,995 |
|
| 2,286 |
Deferred revenue |
|
| 15,379 |
|
| 15,089 |
|
| 19,055 |
|
| 16,499 |
Total current liabilities |
|
| 135,591 |
|
| 117,521 |
|
| 157,518 |
|
| 155,954 |
|
|
|
|
|
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|
|
|
|
|
Convertible notes |
|
| 151,019 |
|
| 146,418 | ||||||
Term notes |
|
| 106,674 |
|
| 138,335 | ||||||
Convertible Notes |
|
| 155,729 |
|
| 152,575 | ||||||
Term Notes |
|
| 65,350 |
|
| 100,409 | ||||||
Contingent consideration |
|
| 1,295 |
|
| 1,506 |
|
| 617 |
|
| 2,582 |
Deferred revenue |
|
| 16,220 |
|
| 14,378 |
|
| 14,865 |
|
| 15,643 |
Deferred rent and lease incentive |
|
| 12,174 |
|
| 10,976 |
|
| 14,398 |
|
| 12,060 |
Deferred tax liabilities, net |
|
| 12,094 |
|
| 5,555 | ||||||
Other non-current liabilities |
|
| 10,625 |
|
| 6,288 |
|
| 15,027 |
|
| 13,436 |
Total liabilities |
|
| 433,598 |
|
| 435,422 |
|
| 435,598 |
|
| 458,214 |
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Commitments and contingencies |
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Redeemable units in ERS |
|
| 900 |
|
| 900 |
|
| 900 |
|
| 900 |
Equity: |
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Stockholders’ equity: |
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Preferred stock, par value $0.005, 50,000,000 shares authorized |
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|
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|
|
|
|
| — |
|
| — |
Common stock, par value $0.005, 500,000,000 shares authorized; 55,279,299 and 53,925,415 shares issued as of September 30, 2016 and December 31, 2015, respectively; 42,917,855 and 41,979,126 shares outstanding as of September 30, 2016 and December 31, 2015, respectively |
|
| 276 |
|
| 270 | ||||||
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 |
|
| 504,529 |
|
| 474,726 |
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| 534,997 |
|
| 516,675 |
Accumulated deficit |
|
| (38,000) |
|
| (15,007) |
|
| (90,179) |
|
| (70,574) |
Treasury stock at cost, 12,361,444 and 11,946,289 shares as of September 30, 2016 and December 31, 2015, respectively |
|
| (31,619) |
|
| (20,654) | ||||||
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) |
|
| (132) |
|
| 194 |
|
| 387 |
|
| (422) |
Total stockholders’ equity |
|
| 435,054 |
|
| 439,529 |
|
| 402,770 |
|
| 412,889 |
Non-controlling interest |
|
| 398 |
|
| 398 |
|
| 398 |
|
| 398 |
Total equity |
|
| 435,452 |
|
| 439,927 |
|
| 403,168 |
|
| 413,287 |
Total liabilities and equity |
| $ | 869,950 |
| $ | 876,249 |
| $ | 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)
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| Three Months Ended |
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| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
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| September 30, |
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| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
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| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Revenues: |
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Assets under management or administration |
| $ | 90,042 |
| $ | 85,576 |
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|
| $ | 258,969 |
| $ | 250,472 |
| $ | 98,959 |
| $ | 86,056 |
| $ | 193,121 |
| $ | 168,927 |
Subscription and licensing |
|
| 51,959 |
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| 16,163 |
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|
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| 142,303 |
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| 45,257 |
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| 59,802 |
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| 47,037 |
|
| 117,712 |
|
| 90,657 |
Professional services and other |
|
| 7,154 |
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| 1,628 |
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| 21,412 |
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| 6,755 |
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| 8,656 |
|
| 8,615 |
|
| 14,370 |
|
| 13,945 |
Total revenues |
|
| 149,155 |
|
| 103,367 |
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|
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| 422,684 |
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| 302,484 |
|
| 167,417 |
|
| 141,708 |
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| 325,203 |
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| 273,529 |
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Operating expenses: |
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Cost of revenues |
|
| 47,259 |
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| 41,027 |
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| 132,319 |
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| 122,208 |
|
| 55,735 |
|
| 44,902 |
|
| 104,961 |
|
| 85,060 |
Compensation and benefits |
|
| 60,345 |
|
| 32,671 |
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|
|
| 180,625 |
|
| 96,162 |
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| 64,996 |
|
| 57,664 |
|
| 130,528 |
|
| 120,280 |
General and administration |
|
| 26,150 |
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| 15,184 |
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|
|
| 80,097 |
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| 44,905 |
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| 28,478 |
|
| 28,372 |
|
| 59,025 |
|
| 54,099 |
Depreciation and amortization |
|
| 16,692 |
|
| 6,157 |
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|
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| 49,872 |
|
| 17,215 |
|
| 15,465 |
|
| 17,100 |
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| 31,300 |
|
| 33,180 |
Restructuring charges |
|
| — |
|
| — |
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|
|
| 152 |
|
| 518 | ||||||||||||
Total operating expenses |
|
| 150,446 |
|
| 95,039 |
|
|
|
| 443,065 |
|
| 281,008 |
|
| 164,674 |
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| 148,038 |
|
| 325,814 |
|
| 292,619 |
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Income (loss) from operations |
|
| (1,291) |
|
| 8,328 |
|
|
|
| (20,381) |
|
| 21,476 |
|
| 2,743 |
|
| (6,330) |
|
| (611) |
|
| (19,090) |
Other expense, net |
|
| (4,434) |
|
| (2,347) |
|
|
|
| (13,214) |
|
| (6,801) |
|
| (4,369) |
|
| (4,831) |
|
| (9,852) |
|
| (8,780) |
Income (loss) before income tax provision |
|
| (5,725) |
|
| 5,981 |
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|
|
| (33,595) |
|
| 14,675 | ||||||||||||
Loss before income tax provision (benefit) |
|
| (1,626) |
|
| (11,161) |
|
| (10,463) |
|
| (27,870) | ||||||||||||||
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Income tax provision (benefit) |
|
| (1,668) |
|
| 2,679 |
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|
|
| (10,602) |
|
| 6,326 |
|
| 4,844 |
|
| (3,218) |
|
| 9,142 |
|
| (8,934) |
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Net income (loss) |
|
| (4,057) |
|
| 3,302 |
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|
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| (22,993) |
|
| 8,349 | ||||||||||||
Add: Net income (loss) attributable to non-controlling interest |
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| — |
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| — |
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|
| — |
|
| — | ||||||||||||
Net income (loss) attributable to Envestnet, Inc. |
| $ | (4,057) |
| $ | 3,302 |
|
|
| $ | (22,993) |
| $ | 8,349 | ||||||||||||
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) | ||||||||||||||
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Net income (loss) per share attributable to Envestnet, Inc.: |
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Net loss per share attributable to Envestnet, Inc.: |
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Basic |
| $ | (0.09) |
| $ | 0.09 |
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|
| $ | (0.54) |
| $ | 0.23 |
| $ | (0.15) |
| $ | (0.19) |
| $ | (0.45) |
| $ | (0.44) |
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Diluted |
| $ | (0.09) |
| $ | 0.09 |
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| $ | (0.54) |
| $ | 0.22 |
| $ | (0.15) |
| $ | (0.19) |
| $ | (0.45) |
| $ | (0.44) |
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Weighted average common shares outstanding: |
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Basic |
|
| 42,843,103 |
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| 36,021,784 |
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| 42,704,383 |
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| 35,651,508 |
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| 43,855,479 |
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| 42,752,465 |
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| 43,513,074 |
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| 42,632,964 |
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Diluted |
|
| 42,843,103 |
|
| 37,614,701 |
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|
| 42,704,383 |
|
| 37,563,815 |
|
| 43,855,479 |
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| 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 IncomeLoss
(in thousands)
(unaudited)
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| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Net income (loss) attributable to Envestnet, Inc. |
| $ | (4,057) |
| $ | 3,302 |
| $ | (22,993) |
| $ | 8,349 |
Other comprehensive income (loss), net of taxes |
|
|
|
|
|
|
|
|
|
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|
|
Foreign currency translation gain (loss) |
|
| 192 |
|
| — |
|
| (122) |
|
| — |
Losses on foreign currency contracts designated as cash flow hedges reclassified to earnings |
|
| (556) |
|
| — |
|
| (204) |
|
| — |
Total other comprehensive loss, net of taxes |
|
| (364) |
|
| — |
|
| (326) |
|
| — |
Comprehensive income (loss), net of taxes |
| $ | (4,421) |
| $ | 3,302 |
| $ | (23,319) |
| $ | 8,349 |
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| 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)
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| Accumulated |
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| |
|
| Common Stock |
| Treasury Stock |
| Additional |
| Other |
|
|
|
| Non- |
| Total | ||||||||||
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|
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| Common |
|
|
|
| Paid-in |
| Comprehensive |
| Accumulated |
| controlling |
| Stockholders’ | |||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income |
| Deficit |
| Interest |
| Equity | |||||||
Balance, December 31, 2015 |
| 53,925,415 |
| $ | 270 |
| (11,946,289) |
| $ | (20,654) |
| $ | 474,726 |
| $ | 194 |
| $ | (15,007) |
| $ | 398 |
| $ | 439,927 |
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Exercise of stock options |
| 348,245 |
|
| 1 |
| — |
|
| — |
|
| 3,165 |
|
| — |
|
| — |
|
| — |
|
| 3,166 |
Issuance of common stock - vesting of restricted stock units |
| 1,005,639 |
|
| 5 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 5 |
Stock-based compensation expense |
| — |
|
| — |
| — |
|
| — |
|
| 25,168 |
|
| — |
|
| — |
|
| — |
|
| 25,168 |
Excess tax benefits from stock-based compensation expense |
| — |
|
| — |
| — |
|
| — |
|
| 1,470 |
|
| — |
|
| — |
|
| — |
|
| 1,470 |
Purchase of treasury stock for stock-based minimum tax withholdings |
| — |
|
| — |
| (371,545) |
|
| (9,517) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (9,517) |
Common stock shares repurchased |
| — |
|
| — |
| (43,610) |
|
| (1,448) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,448) |
Foreign currency translation loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (122) |
|
| — |
|
| — |
|
| (122) |
Losses on foreign currency contracts designated as cash flow hedges reclassified to earnings |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (204) |
|
| — |
|
| — |
|
| (204) |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (22,993) |
|
| — |
|
| (22,993) |
Balance, September 30, 2016 |
| 55,279,299 |
| $ | 276 |
| (12,361,444) |
| $ | (31,619) |
| $ | 504,529 |
| $ | (132) |
| $ | (38,000) |
| $ | 398 |
| $ | 435,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| Six Months Ended | ||||||||
|
| September 30, |
| June 30, | ||||||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (22,993) |
| $ | 8,349 | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
| ||||||
Net loss |
| $ | (19,605) |
| $ | (18,936) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
| ||||||
Depreciation and amortization |
|
| 49,872 |
|
| 17,215 |
|
| 31,300 |
|
| 33,180 |
Deferred rent and lease incentive |
|
| (324) |
|
| 628 |
|
| 583 |
|
| (325) |
Provision for doubtful accounts |
|
| 369 |
|
| 31 |
|
| 341 |
|
| 106 |
Deferred income taxes |
|
| (10,273) |
|
| (264) |
|
| 6,524 |
|
| 3,504 |
Stock-based compensation expense |
|
| 25,872 |
|
| 10,157 |
|
| 15,403 |
|
| 18,318 |
Excess tax benefits from stock-based compensation expense |
|
| (1,470) |
|
| (18,010) | ||||||
Non-cash interest expense |
|
| 6,955 |
|
| 7,081 |
|
| 4,853 |
|
| 4,031 |
Accretion on contingent consideration |
|
| 143 |
|
| 794 | ||||||
Accretion on contingent consideration and purchase liability |
|
| 304 |
|
| 120 | ||||||
Fair market value adjustment on contingent consideration |
|
| 838 |
|
| (3,791) |
|
| — |
|
| 489 |
Loss on disposal of fixed assets |
|
| 69 |
|
| 220 | ||||||
Loss allocation from equity method investment |
|
| 1,130 |
|
| — |
|
| 702 |
|
| — |
Loss on disposal of fixed assets |
|
| 220 |
|
| — | ||||||
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Fees and other receivables |
|
| 4,077 |
|
| (4,817) |
|
| (5,639) |
|
| 4,242 |
Prepaid expenses and other current assets |
|
| (4,960) |
|
| 4,534 |
|
| (2,681) |
|
| (17,116) |
Other non-current assets |
|
| (4,271) |
|
| (1,024) |
|
| (514) |
|
| (2,320) |
Accrued expenses and other liabilities |
|
| 275 |
|
| (2,068) |
|
| (752) |
|
| (4,967) |
Accounts payable |
|
| 124 |
|
| 113 |
|
| (184) |
|
| 2,597 |
Deferred revenue |
|
| 1,959 |
|
| 7,331 |
|
| 1,818 |
|
| 1,447 |
Other non-current liabilities |
|
| 4,337 |
|
| (428) |
|
| 3,022 |
|
| 1,535 |
Net cash provided by operating activities |
|
| 51,880 |
|
| 25,831 |
|
| 35,544 |
|
| 26,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (10,839) |
|
| (6,852) |
|
| (9,181) |
|
| (4,632) |
Capitalization of internally developed software |
|
| (6,217) |
|
| (3,782) |
|
| (5,651) |
|
| (3,245) |
Investment in private company |
|
| (738) |
|
| (1,500) | ||||||
Purchase of ERS units |
|
| (1,500) |
|
| (100) |
|
| — |
|
| (1,500) |
Acquisition of businesses, net of cash acquired |
|
| (18,394) |
|
| (27,332) |
|
| — |
|
| (18,394) |
Net cash used in investing activities |
|
| (37,688) |
|
| (39,566) |
|
| (14,832) |
|
| (27,771) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on revolving credit facility |
|
| 25,000 |
|
| — |
|
| 25,000 |
|
| 15,000 |
Payment on revolving credit facility |
|
| (25,000) |
|
| — | ||||||
Payments on revolving credit facility |
|
| (25,000) |
|
| (15,000) | ||||||
Payments of contingent consideration |
|
| (2,924) |
|
| (7,219) |
|
| (2,286) |
|
| — |
Payments of definite consideration |
|
| (445) |
|
| — | ||||||
Payments of purchase consideration liabilities |
|
| (235) |
|
| — | ||||||
Payment of term notes |
|
| (6,000) |
|
| — |
|
| (35,862) |
|
| (4,000) |
Issuance of redeemable units in ERS |
|
| — |
|
| 900 | ||||||
Proceeds from exercise of stock options |
|
| 3,166 |
|
| 7,448 |
|
| 2,617 |
|
| 2,279 |
Excess tax benefits from stock-based compensation expense |
|
| 1,470 |
|
| 18,010 | ||||||
Purchase of treasury stock for stock-based minimum tax withholdings |
|
| (9,517) |
|
| (6,812) | ||||||
Common stock acquired under the share repurchase program |
|
| (1,448) |
|
| — | ||||||
Purchase of treasury stock for stock-based tax withholdings |
|
| (9,650) |
|
| (9,834) | ||||||
Issuance of restricted stock units |
|
| 5 |
|
| 2 |
|
| 4 |
|
| 5 |
Net cash provided by (used in) financing activities |
|
| (15,248) |
|
| 12,329 | ||||||
Net cash used in financing activities |
|
| (45,857) |
|
| (11,550) | ||||||
|
|
|
|
|
|
| ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
| 283 |
|
| — | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
| (1,056) |
|
| (1,406) |
|
| (24,862) |
|
| (13,196) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 51,718 |
|
| 209,754 |
|
| 52,592 |
|
| 51,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 50,662 |
| $ | 208,348 |
| $ | 27,730 |
| $ | 38,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information - net cash paid (refunded) during the period for income taxes |
| $ | (175) |
| $ | 937 | ||||||
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 |
|
| 5,390 |
|
| 2,454 |
|
| 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 |
|
| 2,363 |
|
| — |
|
| 1,929 |
Stock and stock options issued in acquisition of business |
|
| — |
|
| 8,930 | ||||||
Purchase liabilities included in accrued expenses |
|
| — |
|
| 3,520 | ||||||
Leasehold improvements funded by lease incentive |
|
| 1,522 |
|
| 330 | ||||||
Purchase of fixed assets included in accounts payable |
|
| — |
|
| 209 |
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 open-architectureintelligent 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 technologydata, delivering better intelligence and enabling its customers to independent financial advisors and financial institutions. These services and related technology are provided via Envestnet’s wealth management software, Envestnet | PMC®, Envestnet | Tamarac™, Vantage Reporting Solution™, Envestnet | WMS™, Envestnet | Placemark™, Envestnet | Retirement Solutions, Envestnet | Yodlee™ and Envestnet | Finance Logix™.drive better outcomes.
We offerThe Company offers these solutions principally through the following product and product/services suites:
· | Envestnet | |
· | Envestnet | |
|
|
|
|
|
|
|
|
· | Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services |
· | Envestnet | |
· | 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 |
Through these platform and service offerings, the Company provides open-architecture support for a wide range of investment products (separately managed accounts, multi-manager accounts, mutual funds, exchange-traded funds, stock baskets, alternative investments, and other fee-based investment solutions) from Envestnet | PMC and other leading investment providers via multiple custodians, and also account administration and reporting services.
Envestnet operates fivefour 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”).
8
2.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company as of SeptemberJune 30, 20162017 and for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 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, 20152016 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of SeptemberJune 30, 20162017 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 SeptemberJune 30, 20162017 was derived from the Company’s audited financial statements for the year ended December 31, 20152016 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 ninesix months ended SeptemberJune 30, 20162017 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, 2015,2016, filed with the SEC on February 29, 2016.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 SeptemberJune 30, 2016,2017, 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. InHowever, 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 is currently evaluatingplans to adopt the impactstandard using the modified retrospective approach with the cumulative effect recognized as of the adoptiondate of the new revenue standard on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis,” which amends the consolidation requirements in ASC 810. These changes became effective for the Company’s fiscal year beginning January 1, 2016. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs related to a recognized debt liability be presented as a reduction to the carrying amount of that debt liability, not as an
9
asset. The Company adopted the guidance for the Company’s fiscal year beginning January 1, 2016 and resulted in a decrease in current assets and current liabilities of $1,936 and decreases in non-current assets and non-current liabilities of $7,380 in the prior year.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. The updated guidance became effective under early adoption for the Company’s fiscal year beginning January 1, 2015 and resulted in a reclassification of $4,654 from current deferred tax assets to non-current deferred tax assets in the prior year.
In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. This standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. This standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. These changes became effective for the Company’s fiscal year beginning January 1, 2016 and have been reflected in these financial statements.adoption.
In February 2016, the FASB issued ASU 2016-02, “Leases”.“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”.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 statementstatements 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 statementstatements 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 will beis effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. The Company is currently evaluatingThese changes became effective for the potential impact of this guidance on ourCompany’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. Upon adoption, theThe 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'sCompany’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
FinaConnect, Inc.Wheelhouse Analytics LLC
On February 1,October 3, 2016, Envestnetthe Company acquired all of the issued and outstanding sharesmembership interests of capital stock of FinaConnect, Inc.Wheelhouse Analytics LLC (“FinaConnect”Wheelhouse”). FinaConnectWheelhouse is a software as a services (SaaS) platformtechnology company that provides reportingdata analytics, mobile sales solutions, and practice management capabilitiesonline education tools to financial professionals servicing the retirement plan marketadvisors, asset managers and is the technology platform supporting the ERS service offering. FinaConnectenterprises. Wheelhouse is included in the Envestnet | Yodlee segment.
The Company acquired FinaConnect with plans to combine the FinaConnect assets with ERS. In addition to adding the client list serviced directly by FinaConnect, the goodwill arising from the acquisition represents the advantage of ownership of the technology powering the ERS solution, removal of ongoing licensing payments made to FinaConnect and the full integration of the knowledge and experience of the FinaConnect workforce. The goodwill is deductible for income tax purposes.
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 FinaConnect,Wheelhouse, the Company paid upfront cash consideration of $6,425$13,299 and Company is required to pay contingent consideration of four timeswith the incremental revenue on a certain book of business for the next two years,aggregate amount not to exceed a total amount$4,000 and certain holdbacks upon release. Changes to the estimated fair value of $3,500.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 internal valuations and are 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 contingent consideration, deferred revenue, deferred income taxes and intangible assets, and complete the acquisition accounting as soon as practicable but no later than January 31, 2017.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the adjustments made since the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
| |
|
| Preliminary |
| Period |
| Estimate as of | |||
|
| Estimate |
| Adjustments |
| September 30, 2016 | |||
Total tangible assets acquired |
| $ | 136 |
| $ | 147 |
| $ | 283 |
Total liabilities assumed |
|
| (556) |
|
| 83 |
|
| (473) |
Identifiable intangible assets |
|
| 5,425 |
|
| — |
|
| 5,425 |
Goodwill |
|
| 3,617 |
|
| (230) |
|
| 3,387 |
Total net assets acquired |
| $ | 8,622 |
| $ | — |
| $ | 8,622 |
A summary of preliminary intangible assets acquired, estimated useful lives and amortization methods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
| Amount |
| Useful Life in Years |
| Method | |
Customer list |
| $ | 4,300 |
| 12 |
| Accelerated |
Proprietary technology |
|
| 800 |
| 5 |
| Straight-line |
Trade names and domains |
|
| 325 |
| 2 |
| Straight-line |
Total |
| $ | 5,425 |
|
|
|
|
The results of FinaConnect’s operations are included in the condensed consolidated statement of operations beginning February 1, 2016, and are not considered material to the Company’s results of operations.
Castle Rock Innovations, Inc.
On August 31, 2015, the Company acquired all of the outstanding shares of capital stock of Castle Rock Innovations, Inc., a Delaware corporation (“Castle Rock”). Castle Rock provides data aggregation and plan benchmark solutions to retirement plan record-keepers, broker-dealers, and advisors.
11
The Company acquired Castle Rock with plans to combine the Castle Rock offering into ERS. Castle Rock’s AXIS Retirement Plan Analytics Platform enables retirement plan fiduciaries to comply with 408(b)(2) and 404a-5 regulatory fee disclosure reporting requirements. The AXIS platform offers a single web-based interface and data repository to service the reporting needs of all types of retirement plans, and can be integrated with all record-keeping systems. AXIS also includes features for editing and generating reports for filings, reporting plan expenses, and comparing retirement plans and participants to those of their peers by industry, company size, and other characteristics. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
The estimated consideration transferred in the acquisition was as follows:
|
| ||
| |||
| |||
|
|
In connection with the acquisition of Castle Rock, the Company is required to pay contingent consideration of 40% of the first annual post-closing period revenues minus $100, 35% of the second annual post-closing period revenue minus $100 and 30% of the third annual post-closing period revenue minus $100. The Company recorded a preliminary estimated liability as of the date of acquisition of $1,500, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level III fair value measurement as described in Note 9.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the adjustments made since the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
| |
|
| Preliminary |
| Period |
| As of | |||
|
| Estimate |
| Adjustments |
| September 30, 2016 | |||
Total tangible assets acquired |
| $ | 255 |
| $ | (112) |
| $ | 143 |
Total liabilities assumed |
|
| (1,305) |
|
| — |
|
| (1,305) |
Identifiable intangible assets |
|
| 3,400 |
|
| 500 |
|
| 3,900 |
Goodwill |
|
| 5,020 |
|
| (388) |
|
| 4,632 |
Total net assets acquired |
| $ | 7,370 |
| $ | — |
| $ | 7,370 |
A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
|
| Amount |
| Useful Life in Years |
| Method |
| |
Customer list |
| $ | 3,000 |
| 12 |
| Accelerated |
|
Proprietary technology |
|
| 800 |
| 5 |
| Straight-line |
|
Trade names and domains |
|
| 100 |
| 4 |
| Straight-line |
|
Total |
| $ | 3,900 |
|
|
|
|
|
For the three and nine months ended September 30, 2016, acquisition related costs for Castle Rock totaled $25 and $110 respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during 2016.
On September 1, 2015, ERS accepted the subscription of certain former owners of Castle Rock (the “Castle Rock Parties”) to purchase a 6.5% ownership interest of ERS for $900. The Castle Rock Parties have the right to require ERS to repurchase units issued pursuant to the subscription in approximately 36 months after September 1, 2015 for the amount of $900. This purchase obligation is guaranteed by the Company and is reflected outside of permanent equity in the condensed consolidated balance sheet.
12
Yodlee, Inc.
On November 19, 2015, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated August 10, 2015, among Yodlee, the Company and Yale Merger Corp. (“Merger Sub”), a wholly owned subsidiary of Envestnet, Merger Sub was merged (the “Merger”) with and into Yodlee with Yodlee continuing as a wholly owned subsidiary of Envestnet.
Yodlee, operating as Envestnet | Yodlee, is a leading data aggregation and data analytics platform powering dynamic, cloud-based innovation for digital financial services. Yodlee powers digital financial solutions for over 22 million paid subscribers and over 1,000 financial institutions, financial technology innovators and financial advisory firms. Founded in 1999, the company has built a network of over 15,500 data sources and been awarded 78 patents.
Under the terms of the Merger Agreement, Yodlee stockholders received $11.51 in cash and 0.1889 of a share of Envestnet common stock per Yodlee share. Based upon the volume weighted average price per share of Envestnet common stock for the ten consecutive trading days ending on (and including) November 17, 2015, the second trading day immediately prior to completion of the Merger, Yodlee stockholders received total consideration with a value of $17.49 per share.
Net cash consideration totaled approximately $375,658 and the Company issued approximately 5,974,000 shares of Envestnet common stock to Yodlee stockholders in the Merger. Holders of 577,829 shares of Yodlee common stock exercised their statutory appraisal rights under Delaware law. As of December 31, 2015 the Company recognized a liability in the amount of $10,061, which represented $17.49 in cash for each share of Yodlee common stock held by them. Although the Company believed the fair value of these shares did not exceed the consideration paid in the Acquisition, nevertheless, during the first quarter of 2016, the Company settled the appraisal claim in order to avoid the costs, uncertainties, disruptions and distraction of potential litigation. The difference between the liability as of December 31, 2015 and the settlement amount resulted in an increase to goodwill and total consideration paid.
The Company acquired Yodlee to enhance the Company’s wealth management solutions with a deeply integrated data aggregation capability, expand the Company’s addressable market by delivering the Company’s wealth management solutions to Yodlee’s clients and partners, and benefit from the revenue potential resulting from Yodlee’s fast growing data analytics solutions.
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to an increase in future revenues as a result of potential cross selling opportunities and new lines of business, as well as lower future operating expenses. The goodwill is also related to the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
The preliminary estimated consideration transferred in the acquisition was as follows:
|
| ||
| |||
| |||
| |||
|
|
In connection with the Yodlee merger, the Company issued 1,052,000 shares of Envestnet restricted stock awards (“replacement awards”) in connection with unvested Yodlee employee equity awards. The Yodlee unvested stock options and unvested restricted stock units were canceled and exchanged for the replacement awards. In accordance with ASC 805, these awards are considered to be replacement awards. Exchanges of share options or other share-based payment awards in conjunction with a business combination are modifications of share-based payment awards in accordance with ASC Topic 718. As a result, a portion of the fair-value-based measure of Envestnet’s replacement awards are included in measuring the consideration transferred in the business combination. To determine the portion of the replacement award that is part of consideration transferred to acquire Yodlee, we have measured both the replacement awards granted by Envestnet and the historical Yodlee awards as of November 19, 2015 in accordance with ASC 718. The portion of the fair-value-based measure of the replacement award that is part of the consideration transferred in exchange for the acquisition of Yodlee, equals the portion of the Yodlee award that is attributable to pre-combination service. Envestnet is attributing a portion of the replacement awards to post-combination service as these awards require post-combination service. The fair value of the replacement awards was estimated to be $32,836 of which $4,318 was attributable to pre-acquisition services. The remaining fair value of $28,518 will be amortized over a period of 43 months subsequent to the acquisition date.
13
The estimated fair values of certain working capital balances, property and equipment, deferred revenue, deferred income taxes, unrecognized tax benefits, attribution of the fair market value of replacement awards, 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 tangible assets and liabilities,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 November 18, 2016.October 3, 2017.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the cumulative adjustments made since the dateacquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
| |
|
| Preliminary |
| Period |
| As of | |||
|
| Estimate |
| Adjustments |
| September 30, 2016 | |||
Total tangible assets acquired |
| $ | 33,815 |
| $ | 2,799 |
| $ | 36,614 |
Total liabilities assumed |
|
| (55,240) |
|
| — |
|
| (55,240) |
Identifiable intangible assets |
|
| 237,000 |
|
| — |
|
| 237,000 |
Goodwill |
|
| 286,049 |
|
| (1,159) |
|
| 284,890 |
Total net assets acquired |
| $ | 501,624 |
| $ | 1,640 |
| $ | 503,264 |
A preliminary summary ofestimated identifiable intangible assets acquired, estimated useful lives and amortization method is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Amortization |
|
| Preliminary |
| Period |
| Estimate as of |
| Estimated |
| Amortization | |||
|
| Amount |
| Useful Life in Years |
| Method |
|
| Estimate |
| Adjustments |
| June 30, 2017 |
| Useful Life in Years |
| Method | ||||
Customer list |
| $ | 178,000 |
| 12 |
| Accelerated |
|
| $ | 4,100 |
| $ | (100) |
| $ | 4,000 |
| 15 |
| Accelerated |
Backlog |
|
| 11,000 |
| 4 |
| Accelerated |
| |||||||||||||
Proprietary technology |
|
| 35,000 |
| 5 |
| Straight-line |
|
|
| 3,000 |
|
| (500) |
|
| 2,500 |
| 6 |
| Straight-line |
Trade names |
|
| 13,000 |
| 6 |
| Straight-line |
| |||||||||||||
Trade names and domains |
|
| 200 |
|
| (100) |
|
| 100 |
| 2 |
| Straight-line | ||||||||
Total |
| $ | 237,000 |
|
|
|
|
|
| $ | 7,300 |
| $ | (700) |
| $ | 6,600 |
|
|
|
|
The results of Envestnet | Yodlee’s operations are included in the condensed consolidated statement of operations beginning November 20, 2015. Envestnet | Yodlee’s revenues for the three and nine month periods ended September 30, 2016 totaled $34,644 and $94,267, respectively. Envestnet | Yodlee’s pre-tax loss for the three and nine month periods ended September 30, 2016 totaled $8,416 and $33,728, respectively. The pre-tax losses include estimated acquired intangible asset amortization of $8,571 and $25,712 for the three and nine month periods ended September 30, 2016, respectively.
For the three and nine month periods ended September 30, 2016, acquisition related costs for Yodlee totaled $214 and $1,788, respectively, and are included in general and administration expenses. The Company will incur additional acquisition related costs during 2016.
Pro forma results for Envestnet, Inc. giving effect to the Finance Logix, Castle Rock and Yodlee acquisitions
The acquisition accounting for Finance Logix was completed in 2015 and therefore the business acquisition disclosure does not appear in Note 3. The following pro forma financial information presents the combined results of operations of Envestnet, Finance Logix, Castle Rock and Yodlee for the three and nine month periods ended September 30, 2015. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2015. The results of FinaConnect are not included in the pro forma financial information presented below as the FinaConnect acquisition was not considered material to the Company’s results of operations.
The unaudited pro forma results presented include amortization charges for acquired intangible assets, stock-based compensation expense and the related tax effect on the aforementioned items.
1411
ProThe 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 financial information is presented for informational purposesthe three and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2015.
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||
| September 30, |
| September 30, | ||
Revenues | $ | 132,389 |
| $ | 384,154 |
Net loss |
| (6,505) |
|
| (21,587) |
Net loss per share: |
|
|
|
|
|
Basic |
| (0.15) |
|
| (0.51) |
Diluted |
| (0.15) |
|
| (0.51) |
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| Estimated Useful Life |
| 2016 |
| 2015 | |||
Cost: |
|
|
|
|
|
|
|
|
|
Computer equipment and software |
| 3 | years |
| $ | 52,518 |
| $ | 44,470 |
Office furniture and fixtures |
| 7 | years |
|
| 7,024 |
|
| 5,785 |
Leasehold improvements |
| Shorter of the lease term or useful life of the asset |
|
| 17,924 |
|
| 15,123 | |
Other office equipment |
| 5 | years |
|
| 1,207 |
|
| 683 |
|
|
|
|
|
| 78,673 |
|
| 66,061 |
Less accumulated depreciation and amortization |
|
|
|
|
| (46,107) |
|
| (37,380) |
Property and equipment, net |
|
|
|
| $ | 32,566 |
| $ | 28,681 |
During the nine months ended September 30, 2016, the Company retired property and equipment that were no longer in service in the amount of $2,396 and recognized a loss of $220.
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Depreciation and amortization expense |
| $ | 3,740 |
| $ | 1,967 |
| $ | 11,147 |
| $ | 5,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
5.6. Internally Developed Software, Net
Internally developed software, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
|
| June 30, |
| December 31, | ||||
|
| Estimated Useful Life |
| 2016 |
| 2015 |
| Estimated Useful Life |
| 2017 |
| 2016 | ||||
Internally developed software |
| 5 years |
| $ | 31,325 |
| $ | 25,109 |
| 5 years |
| $ | 39,369 |
| $ | 33,718 |
Less accumulated amortization |
|
|
|
| (17,781) |
|
| (15,212) | ||||||||
Less: accumulated amortization |
|
|
|
| (21,258) |
|
| (18,858) | ||||||||
Internally developed software, net |
|
|
| $ | 13,544 |
| $ | 9,897 |
|
|
| $ | 18,111 |
| $ | 14,860 |
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Amortization expense |
| $ | 917 |
| $ | 682 |
| $ | 2,569 |
| $ | 1,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Amortization expense |
| $ | 1,241 |
| $ | 857 |
| $ | 2,400 |
| $ | 1,652 |
1512
6.7.Goodwill and Intangible Assets, Net
Changes in the carrying amount of goodwill by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
| Envestnet |
| Envestnet | Yodlee |
| Total | |||
Balance at December 31, 2015 |
| $ | 135,224 |
| $ | 286,049 |
| $ | 421,273 |
FinaConnect acquisition |
|
| 3,617 |
|
| — |
|
| 3,617 |
Purchase accounting adjustments - FinaConnect |
|
| (230) |
|
| — |
|
| (230) |
Purchase accounting adjustments - Yodlee |
|
| — |
|
| (1,159) |
|
| (1,159) |
Purchase accounting adjustments - Castle Rock |
|
| (388) |
|
| — |
|
| (388) |
Other |
|
| (490) |
|
| (58) |
|
| (548) |
Balance at September 30, 2016 |
| $ | 137,733 |
| $ | 284,832 |
| $ | 422,565 |
Intangible assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| September 30, 2016 |
| December 31, 2015 |
|
|
|
|
|
| June 30, 2017 |
| December 31, 2016 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net |
|
|
|
|
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net | ||||||||
|
|
|
|
|
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| Estimated |
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying | |||||||||||||||
|
| Useful Life |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| Useful Life |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||||||||||||||
Customer lists |
| 4 | - | 12 | years |
| $ | 262,000 |
| $ | (55,451) |
| $ | 206,549 |
| $ | 257,410 |
| $ | (33,668) |
| $ | 223,742 |
| 4 | - | 15 | years |
| $ | 259,350 |
| $ | (66,820) |
| $ | 192,530 |
| $ | 259,490 |
| $ | (54,861) |
| $ | 204,629 |
Backlog |
|
|
| 4 | years |
|
| 11,000 |
|
| (5,017) |
|
| 5,983 |
|
| 11,000 |
|
| (703) |
|
| 10,297 | |||||||||||||||||||||||
Proprietary technologies |
| 2.5 | - | 8 | years |
|
| 54,728 |
|
| (17,536) |
|
| 37,192 |
|
| 53,928 |
|
| (9,833) |
|
| 44,095 |
| 2 | - | 8 | years |
|
| 57,328 |
|
| (25,419) |
|
| 31,909 |
|
| 57,770 |
|
| (20,214) |
|
| 37,556 |
Trade names |
| 2 | - | 6 | years |
|
| 17,015 |
|
| (4,505) |
|
| 12,510 |
|
| 16,690 |
|
| (2,149) |
|
| 14,541 |
| 2 | - | 7 | years |
|
| 24,889 |
|
| (7,905) |
|
| 16,984 |
|
| 25,007 |
|
| (6,178) |
|
| 18,829 |
Backlog |
|
|
| 4 | years |
|
| 11,000 |
|
| (8,521) |
|
| 2,479 |
|
| 11,000 |
|
| (6,456) |
|
| 4,544 | |||||||||||||||||||||||
Total intangible assets |
|
|
|
|
|
| $ | 344,743 |
| $ | (82,509) |
| $ | 262,234 |
| $ | 339,028 |
| $ | (46,353) |
| $ | 292,675 |
|
|
|
|
|
| $ | 352,567 |
| $ | (108,665) |
| $ | 243,902 |
| $ | 353,267 |
| $ | (87,709) |
| $ | 265,558 |
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Amortization expense |
| $ | 12,035 |
| $ | 3,508 |
| $ | 36,156 |
| $ | 10,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Amortization expense |
| $ | 10,371 |
| $ | 12,195 |
| $ | 20,956 |
| $ | 24,121 |
Future amortization expense of the intangible assets as of SeptemberJune 30, 2016,2017, is expected to be as follows:
|
|
|
|
|
Years ending December 31: |
|
|
|
|
Remainder of 2016 | $ | 11,829 | ||
2017 |
| 43,059 | ||
Remainder of 2017 | $ | 20,645 | ||
2018 |
| 36,936 |
| 35,691 |
2019 |
| 33,201 |
| 32,092 |
2020 |
| 29,239 |
| 28,368 |
2021 |
| 20,678 | ||
Thereafter |
| 107,970 |
| 106,428 |
| $ | 262,234 | $ | 243,902 |
7.8.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
Non-income tax receivable |
| $ | 4,633 |
| $ | 3,879 | ||||||
FinaConnect escrow |
|
| 2,000 |
|
| 429 | ||||||
Income tax receivable |
| $ | 8,692 |
| $ | 5,118 |
|
| 1,324 |
|
| 1,864 |
Prepaid technology |
|
| 1,103 |
|
| 1,318 | ||||||
Prepaid insurance |
|
| 1,000 |
|
| 171 |
|
| 1,063 |
|
| 552 |
Prepaid rent |
|
| 691 |
|
| — | ||||||
FinaConnect escrow - current portion |
|
| 429 |
|
| — | ||||||
Other |
|
| 8,999 |
|
| 7,950 |
|
| 8,815 |
|
| 8,182 |
|
| $ | 19,811 |
| $ | 13,239 |
| $ | 18,938 |
| $ | 16,224 |
1613
8.9.Other Non-Current Assets
Other non-current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | June 30, |
| December 31, | ||||
|
| 2016 |
| 2015 | 2017 |
| 2016 | ||||
Investment in private companies |
| $ | 2,274 |
| $ | 2,666 | |||||
Investments in private companies | $ | 2,048 |
| $ | 2,750 | ||||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
| 3,722 |
|
| 3,198 |
| 4,635 |
|
| 4,262 |
Other |
|
| 2,083 |
|
| 515 |
| 512 |
|
| 2,083 |
Assets to fund deferred compensation liability |
| 4,776 |
|
| 2,738 | ||||||
Other |
|
| 5,077 |
|
| 2,943 |
| 1,811 |
|
| 2,130 |
|
| $ | 13,156 |
| $ | 9,322 | $ | 13,782 |
| $ | 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.
9.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 SeptemberJune 30, 20162017 and December 31, 2015,2016, based on the three-tier fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2016 | ||||||||||
| Fair Value |
| Level I |
| Level II |
| Level III | ||||
Assets |
|
|
|
|
|
|
|
| |||
Money market funds | $ | 22,935 |
| $ | 22,935 |
| $ | — |
| $ | — |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration | $ | 3,224 |
| $ | — |
| $ | — |
| $ | 3,224 |
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2015 | ||||||||||
| Fair Value |
| Level I |
| Level II |
| Level III | ||||
Assets |
|
|
|
|
|
|
|
| |||
Money market funds | $ | 24,422 |
| $ | 24,422 |
| $ | — |
| $ | — |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration | $ | 4,043 |
| $ | — |
| $ | — |
| $ | 4,043 |
Foreign currency forward contracts(1) |
| 140 |
|
| — |
|
| 140 |
|
| — |
Total liabilities | $ | 4,183 |
| $ | — |
| $ | 140 |
| $ | 4,043 |
|
|
1714
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 | ||||||||||
| Fair Value |
| Level I |
| Level II |
| Level III | ||||
Assets |
|
|
|
|
|
|
|
| |||
Money market funds(1) | $ | 12,160 |
| $ | 12,160 |
| $ | — |
| $ | — |
Assets to fund deferred compensation liability(2) |
| 4,776 |
|
| — |
|
| — |
|
| 4,776 |
Total assets | $ | 16,936 |
| $ | 12,160 |
| $ | — |
| $ | 4,776 |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration | $ | 2,612 |
| $ | — |
| $ | — |
| $ | 2,612 |
Deferred compensation liability(3) |
| 4,211 |
|
| 4,211 |
|
| — |
|
| — |
Total liabilities | $ | 6,823 |
| $ | 4,211 |
| $ | — |
| $ | 2,612 |
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration | $ | 4,868 |
| $ | — |
| $ | — |
| $ | 4,868 |
Deferred compensation liability(3) |
| 2,885 |
|
| 2,885 |
|
| — |
|
| — |
Total liabilities | $ | 7,753 |
| $ | 2,885 |
| $ | — |
| $ | 4,868 |
Level I assets and liabilities included in the table above include government money-market funds not insured by the FDIC.
(1) | The fair values of the Company’s investments in |
(2) | The fair value of assets to fund deferred compensation liability approximates the cash surrender value of the life insurance premiums and is included in other non-current assets in the condensed consolidated balance sheets. |
(3) | The deferred compensation liability is included in other non-current liabilities in the condensed consolidated balance sheets and its fair market value is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected. |
Level I assets and liabilities include money-market funds not insured by the FDIC and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the condensed consolidated balance sheets.
Level II assets and liabilities included in The fair value of the table above include unrealized gain or lossdeferred compensation liability is based upon the daily quoted market prices for net asset value on forward currency contracts. The forward currency contracts are measured using the difference between the market quotes of trading currencies adjusted for forward points and the executed contract rate.various funds selected by participants.
Level III assets and liabilities included in the table above consist of the estimated fair value of contingent consideration. A sensitivity analysis performed on our contingent consideration indicated that a hypothetical 10% increase in applicable revenue for Castle Rock and FinaConnect from theiras well as the assets to fund deferred compensation liability. The fair market value at September 30, 2016 would result in a fairof the assets to fund deferred compensation liability is based upon the cash surrender value increase of $327 in the Company’s contingent consideration balance. A hypothetical 10% decrease in applicable revenue for Castle Rock and FinaConnect from their value at September 30, 2016 would result in a fair value decrease of $345 in the Company’s contingent consideration balance.life insurance premiums.
The fair value of the contingent consideration liabilities related to the Castle RockFinaConnect and FinaConnectWheelhouse acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus representsrepresent a Level III fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures.Disclosures. The significant inputs in the Level III measurement not supported by market activity included our assessments of expected future cash flows related to our acquisitions of Castle RockFinaConnect and FinaConnectWheelhouse during the subsequent three yearsperiods from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.
The Company utilized a discounted cash flow method with expected future performance of Castle RockFinaConnect and FinaConnectWheelhouse, and their ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair values of their respective contingent consideration. The Company will continue to reassess the fair value of the contingent consideration made subsequent to the measurement period for each acquisition at each reporting date until settlement. Changes to the estimated fair values
15
of the contingent consideration will be recognized in earnings of the Company and included in general and administrative expenseadministration on the condensed consolidated statementstatements of operations.
The table below presents a reconciliation of all assets andcontingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 20152016 to SeptemberJune 30, 2016:2017:
The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to June 30, 2017:
The asset value was increased due to funding of the plan, which resulted in an asset value as of June 30, 2017 of $4,776, which was included in other non-current assets on the condensed consolidated balance sheets. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the ninesix months ended SeptemberJune 30, 2016.2017.
18
On December 15, 2014, the Company issued $172,500 of Convertible Notes. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the carrying value of the 2019 Convertible Notes equaled $1$51,019155,729 and $146,418,$152,575, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the fair value of the Convertible Notes was $167,109$167,325 and $152,878,$164,824, respectively. The Company considers the Convertible Notes to be a Level II liabilityliabilities and uses a market approach to calculate the fair value of the Convertible Notes. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on SeptemberJune 30, 2016.2017 (see Note 14).
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, there was $144,000$106,138 and $150,000,$142,000, respectively, of Term Notes outstanding. As of June 30, 2017 and December 31, 2016, there were no amounts outstanding on the revolving credit amounts outstandingfacility under the Amended and Restated Credit Agreement. The outstanding value of our Term Notes and revolving credit facility approximated fair value as theythe Term Notes bear interest at variable rates and we believe our credit risk quality is consistent with when the debt originated. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the carrying value of the Term Notes equaled $139,85104,046 and $144,39$9138,335, respectively, and represents the aggregate principal amount outstanding less the unamortized debt issuance costs. The Company considers the Term Notes and revolving credit facility to be a Level II liability as of SeptemberJune 30, 2016. As of December 31, 2015 the Company considered the Term Notes to be a Level I liability, due to the proximity to the date of origination.2017.
We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at SeptemberJune 30, 20162017 based upon the short-term nature of the assets and liabilities.
16
10.11.Accrued Expensesand Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
Accrued investment manager fees |
| $ | 29,909 |
| $ | 28,179 |
| $ | 34,510 |
| $ | 31,278 |
Accrued compensation and related taxes |
|
| 29,773 |
|
| 29,493 |
|
| 27,874 |
|
| 35,287 |
Sales and use tax payable |
|
| 12,115 |
|
| 10,108 | ||||||
Accrued professional services |
|
| 4,472 |
|
| 1,201 |
|
| 3,157 |
|
| 3,213 |
Purchase consideration liabilities |
|
| 3,343 |
|
| 13,676 | ||||||
Accrued restructuring charges |
|
| 292 |
|
| 513 | ||||||
Definite consideration |
|
| 1,250 |
|
| 445 | ||||||
Other accrued expenses |
|
| 6,861 |
|
| 10,349 |
|
| 7,324 |
|
| 7,432 |
|
| $ | 74,650 |
| $ | 83,411 |
| $ | 86,230 |
| $ | 87,763 |
12. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Uncertain tax positions |
| $ | 10,069 |
| $ | 7,762 |
Accrued deferred compensation |
|
| 4,211 |
|
| 2,885 |
Accrued purchase liability |
|
| — |
|
| 1,250 |
Other |
|
| 747 |
|
| 1,539 |
|
| $ | 15,027 |
| $ | 13,436 |
11.13.Income Taxes
The following table includes the Company’s income (loss)loss before income tax provision (benefit), income tax provision (benefit) and effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| ||||||||
Income (loss) before income tax provision (benefit) |
| $ | (5,725) |
| $ | 5,981 |
| $ | (33,595) |
| $ | 14,675 |
| ||||||||||||||
Loss before income tax provision (benefit) |
| $ | (1,626) |
| $ | (11,161) |
|
| $ | (10,463) |
| $ | (27,870) |
| |||||||||||||
Income tax provision (benefit) |
|
| (1,668) |
|
| 2,679 |
|
| (10,602) |
|
| 6,326 |
|
|
| 4,844 |
|
| (3,218) |
|
|
| 9,142 |
|
| (8,934) |
|
Effective tax rate |
|
| 29.1 | % |
| 44.8 | % |
| 31.6 | % |
| 43.1 | % |
|
| (297.9) | % |
| 28.8 | % |
|
| (87.4) | % |
| 32.1 | % |
The Company’s effective tax rate in the three and six months ended SeptemberJune 30, 2016, was lower than2017 differed from the effective tax rate in the three and six months ended SeptemberJune 30, 2015,2016, primarily due to various permanent itemsthe valuation allowance the company has put on all U.S. deferreds with the exception of indefinite-lived intangibles and accrualunrepatriated foreign earnings and profits, resulting in no benefit being recognized for reserves for uncertainthe tax positions. The Company’s effective tax rateloss in the nine months ended September 30, 2016, was lower than the effective tax rate in the nine months ended September 30, 2015, primarily due to a decrease in the tax rate for federal purposes from 35% to 34%, various permanent items and accrual for reserves for uncertain tax positions.U.S.
The liability forGross unrecognized tax benefits was $15,060were $17,414 and $14,129$16,476 at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively. At SeptemberJune 30, 2016,2017, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $15,060. At this time, the Company does not believe the liability will materially decrease in the next twelve months.$17,414.
19
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognizedrecorded interest and penalties of $723$373 and $(158) during$890 for the ninethree and twelvesix months period ended SeptemberJune 30, 2017, respectively. The Company recorded interest and penalties of $156 and $388 for the three and six months period ended June 30, 2016, and December 31, 2015, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company’s tax returns for the calendar years ended December 31, 2016, 2015, 2014, and 2013 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2016, 2015, 2014, 2013, 2012 and 20132011 remain open to examination by various state revenue services.
17
Our
The Company’s Indian subsidiaries are currently under examination by the India tax authoritiesTax Authority for the fiscal years endingended March 31, 20052006 and forward. Based on the outcome of the examinations of our subsidiaries or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months however, at this time we have not been notified by the India Tax Authority of any audit scheduled for finalization within the next twelve months.
12.14. Debt
The Company’s outstanding debt obligations as of SeptemberJune 30, 20162017 and December 31, 20152016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| June 30, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
Convertible Notes |
| $ | 172,500 |
| $ | 172,500 |
| $ | 172,500 |
| $ | 172,500 |
Unaccreted discount on Convertible Notes |
|
| (18,470) |
|
| (22,367) |
|
| (14,468) |
|
| (17,149) |
Unamortized issuance costs on Convertible Notes |
|
| (3,011) |
|
| (3,715) |
|
| (2,303) |
|
| (2,776) |
|
| $ | 151,019 |
| $ | 146,418 | ||||||
Convertible Notes carrying value |
| $ | 155,729 |
| $ | 152,575 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Notes |
| $ | 144,000 |
| $ | 150,000 |
| $ | 106,138 |
| $ | 142,000 |
Unamortized issuance costs on Term Notes |
|
| (4,149) |
|
| (5,601) |
|
| (2,092) |
|
| (3,665) |
|
| $ | 139,851 |
| $ | 144,399 | ||||||
Term Notes carrying value |
| $ | 104,046 |
| $ | 138,335 |
Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Coupon interest |
| $ | 754 |
| $ | 755 |
| $ | 2,264 |
| $ | 2,265 |
| $ | 754 |
| $ | 755 |
| $ | 1,509 |
| $ | 1,510 |
Amortization of issuance costs |
|
| 737 |
|
| 308 |
|
| 2,169 |
|
| 939 |
|
| 616 |
|
| 719 |
|
| 2,046 |
|
| 1,438 |
Accretion of debt discount |
|
| 1,323 |
|
| 1,258 |
|
| 3,901 |
|
| 3,682 |
|
| 1,344 |
|
| 1,292 |
|
| 2,681 |
|
| 2,578 |
Interest on credit agreement |
|
| 1,255 |
|
| — |
|
| 3,792 |
|
| — |
|
| 1,110 |
|
| 1,263 |
|
| 2,455 |
|
| 2,531 |
Undrawn and other fees |
|
| 53 |
|
| 63 |
|
| 219 |
|
| 195 |
|
| 53 |
|
| 102 |
|
| 122 |
|
| 166 |
|
| $ | 4,122 |
| $ | 2,384 |
| $ | 12,345 |
| $ | 7,081 |
| $ | 3,877 |
| $ | 4,131 |
| $ | 8,813 |
| $ | 8,223 |
Credit Agreement
On November 19, 2015, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Amended and Restated Credit Agreement amended and restated the Credit Agreement, dated as of June 19, 2014, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent. Pursuant to the Amended and Restated Credit Agreement, the Banks agreed to provide (i) term loans (“Term Notes”) in the aggregate principal amount of $160,000, which were used to fund a portion of the cash consideration paid by the Company in connection with the acquisition of Yodlee, and (ii) revolving credit commitments in the aggregate amount of up to $100,000, which includes a $5,000 subfacility for the issuance of letters of credit.
20
Obligations under the Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Security Agreement, dated November 19, 2015 (the “Security Agreement”), among the Company, the Debtors party thereto, the Banks and the Administrative Agent, obligations under the Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Future borrowings under the Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
18
Envestnet will pay interest on borrowings made under the Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Amended and Restated Credit Agreement are scheduled to mature on November 19, 2018. The Term Notes are payable in quarterly installments of $2,000 per installment and commenced in March 2016, with the final payment of all remaining term loan principal due and payable on the scheduled maturity date. Within 90 days of each year-end, beginning December 31, 2016, an excess cash flow prepayment, as defined in the Amended and Restated Credit Agreement, may also be required if the Company’s total leverage ratio is greater than 2.0 to 1.0 as of the end of the mostly recently completed two consecutive fiscal quarters of the Company. During the first quarter of 2017, the Company made an excess cash flow payment of $31,862. As of SeptemberJune 30, 2016,2017, the Company has estimated the 20172018 prepayment to be approximately $27,113.$32,206.
The Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants and events of default. The covenants include certain financial covenants requiring Envestnet to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum adjusted EBITDA, and provisions that limit the ability of Envestnet and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business.
As of SeptemberJune 30, 2016,2017, there was $144,000$106,138 of Term Notes and no amounts outstanding on the revolving credit amounts outstandingfacility under the Amended and Restated Credit Agreement. The Company was in compliance with all covenants under the Amended and Restated Credit Agreement as of SeptemberJune 30, 2016.2017.
On July 18, 2017, the Company and certain of its subsidiaries amended and restated the Amended and Restated Credit Agreement. See Note 21 for further discussion.
Convertible Notes
On December 15, 2014, the Company issued $172,500 of Convertible Notes. Net proceeds from the offering were $166,967. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 15 and December 15 of each year.year, beginning on June 15, 2015.
The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes rank equally in right of payment with all of the Company’s existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated indebtedness. The Convertible Notes will be structurally subordinated to the indebtedness and other liabilities of any of our subsidiaries, other than to the extent the Convertible Notes are guaranteed in the future by our subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness. Certain of our subsidiaries guarantee our obligations under our Credit Agreement.
Upon the occurrence of a “fundamental change”,change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at 100% of the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest.
The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible
21
Notes for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; or (c) upon the occurrence of specified corporate events as defined in the indenture.
Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle the debt component of the Convertible Notes at
19
least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.
The Company has separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds from issuance of the Convertible Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618 to the equity component, net of offering costs of $882. The Company recorded a discount on the Convertible Notes of $27,500 which will beis being accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three and ninesix month periods ended SeptemberJune 30, 2017, the Company recognized $1,344 and $2,681, respectively, in accretion related to the discount. During the three and six month periods ended June 30, 2016, the Company recognized $1,323$1,292 and $3,901,$2,578 respectively, in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes for the three and ninesix month periods ended SeptemberJune 30, 2017 was 5.3%. The effective interest rate on the liability component of the Convertible Notes for the three and six month periods ended June 30, 2016 was 6.0%6.1%.
See Note 1416 for further discussion of the effect of conversion on net incomeloss per common share.
13.15.Stock-Based Compensation
The Company has stock options and restricted stock units outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). On May 13, 2015, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 2,700,000 shares.
In connection with the Yodlee merger, (see Note 3), the Company adopted the 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the grant of restricted common stock units for certain Envestnet | Yodlee employees. The maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,052,000. These awards vest over a period of 43 months subsequent to the acquisition date of November 19, 2015. As of June 30, 2017, the remaining amount of unrecognized expense totaled $6,634.
As of SeptemberJune 30, 2016,2017, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 1,311,693.416,967. See Note 21.
Stock-based compensation expense under the Company’s plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Stock-based compensation expense |
| $ | 7,554 |
| $ | 3,408 |
| $ | 25,872 |
| $ | 10,157 |
| $ | 7,945 |
| $ | 6,703 |
| $ | 15,403 |
| $ | 18,318 |
Tax effect on stock-based compensation expense |
|
| (3,022) |
|
| (1,363) |
|
| (10,349) |
|
| (4,063) |
|
| (2,983) |
|
| (2,681) |
|
| (5,784) |
|
| (7,327) |
Net effect on income |
| $ | 4,532 |
| $ | 2,045 |
| $ | 15,523 |
| $ | 6,094 |
| $ | 4,962 |
| $ | 4,022 |
| $ | 9,619 |
| $ | 10,991 |
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 37.5% and 40.0% for the three months ended June 30, 2017 and 2016, respectively. However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the three and six months ended June 30, 2017.
20
Stock Options
The following weighted average assumptions were used to value options granted during the periods indicated:
|
| |||||||||||||
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| ||||||||
Grant date fair value of options |
| $ | 14.46 |
| $ | — |
|
| $ | 9.56 |
| $ | 20.90 |
|
| $ | — |
| $ | 13.26 |
|
| $ | 14.51 |
| $ | 9.49 |
|
Volatility |
|
| 42.2 | % |
| — | % |
|
| 42.2 | % |
| 37.2 | % |
|
| — | % |
| 42.4 | % |
|
| 43.8 | % |
| 42.2 | % |
Risk-free interest rate |
|
| 1.1 | % |
| — | % |
|
| 1.4 | % |
| 1.7 | % |
|
| — | % |
| 1.4 | % |
|
| 2.1 | % |
| 1.4 | % |
Dividend yield |
|
| — | % |
| — | % |
|
| — | % |
| — | % |
|
| — | % |
| — | % |
|
| — | % |
| — | % |
Expected term (in years) |
|
| 5.0 |
|
| — |
|
|
| 6.3 |
|
| 6.0 |
|
|
| — |
|
| 6.2 |
|
|
| 6.3 |
|
| 6.3 |
|
The following table summarizes option activity under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
|
|
| Weighted- |
| Remaining |
|
|
|
|
|
| Weighted- |
| Remaining |
|
|
| ||
|
|
|
| Average |
| Contractual Life |
| Aggregate |
|
|
| Average |
| Contractual Life |
| Aggregate | ||||
|
| Options |
| Exercise Price |
| (Years) |
| Intrinsic Value |
| Options |
| Exercise Price |
| (Years) |
| Intrinsic Value | ||||
Outstanding as of December 31, 2015 |
| 3,533,791 |
| $ | 15.03 |
| 4.7 |
| $ | 61,199 | ||||||||||
Outstanding as of December 31, 2016 |
| 3,033,194 |
| $ | 16.33 |
| 4.3 |
| $ | 63,264 | ||||||||||
Granted |
| 105,645 |
|
| 20.51 |
|
|
|
|
|
| 75,238 |
|
| 31.70 |
|
|
|
|
|
Exercised |
| (152,220) |
|
| 7.93 |
|
|
|
|
|
| (208,334) |
|
| 9.12 |
|
|
|
|
|
Forfeited |
| (38,777) |
|
| 35.93 |
|
|
|
|
|
| (9,062) |
|
| 45.81 |
|
|
|
|
|
Outstanding as of March 31, 2016 |
| 3,448,439 |
|
| 15.27 |
| 4.7 |
|
| 50,987 | ||||||||||
Outstanding as of March 31, 2017 |
| 2,891,036 |
|
| 17.15 |
| 4.5 |
|
| 50,792 | ||||||||||
Granted |
| 55,719 |
|
| 31.03 |
|
|
|
|
|
| — |
|
| — |
|
|
|
|
|
Exercised |
| (96,068) |
|
| 11.17 |
|
|
|
|
|
| (84,949) |
|
| 8.46 |
|
|
|
|
|
Forfeited |
| (24,191) |
|
| 33.35 |
|
|
|
|
|
| (1,667) |
|
| 32.46 |
|
|
|
|
|
Outstanding as of June 30, 2016 |
| 3,383,899 |
|
| 15.43 |
| 4.5 |
|
| 67,219 | ||||||||||
Granted |
| 2,500 |
|
| 38.05 |
|
|
|
|
| ||||||||||
Exercised |
| (99,957) |
|
| 8.88 |
|
|
|
|
| ||||||||||
Forfeited |
| (3,111) |
|
| 45.51 |
|
|
|
|
| ||||||||||
Outstanding as of September 30, 2016 |
| 3,283,331 |
|
| 15.62 |
| 4.3 |
|
| 73,756 | ||||||||||
Outstanding as of June 30, 2017 |
| 2,804,420 |
|
| 17.41 |
| 4.3 |
|
| 66,206 | ||||||||||
Options exercisable |
| 2,922,108 |
|
| 13.22 |
| 3.8 |
|
| 71,331 |
| 2,549,439 |
|
| 15.85 |
| 3.8 |
|
| 63,824 |
Exercise prices of stock options outstanding as of SeptemberJune 30, 20162017 range from $0.11 to $55.29. At SeptemberJune 30, 2016,2017, there was $3,665$2,956 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.9 years.
23
Restricted Stock Units and Restricted Stock Awards
Periodically, the Company grants restricted stock unit awards to employees that vest one-third on each of the first three anniversaries of the grant date. Beginning with grants issued in February 2016, restricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. The Company entered into employment agreements with certain executive officers, three of whom received performance-based restricted stock unit awards in May 2016 which vest upon the achievement of certain “Target Performance Measures” as defined in the employment agreements, for the periods ending December 31, 2016, December 31, 2017 and December 31, 2018 and four of whom received restricted stock units awards in August 2016 which vest quarterly thereafter. The following is a summary of the activity for unvested restricted stock unitunits and awards granted under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
| Weighted- | ||
|
|
|
| Average Grant |
|
|
| Average Grant | ||
|
| Number of |
| Date Fair Value |
| Number of |
| Date Fair Value | ||
|
| Shares |
| per Share |
| Shares |
| per Share | ||
Outstanding as of December 31, 2015 |
| 2,153,211 |
|
| 35.63 | |||||
Outstanding as of December 31, 2016 |
| 1,894,759 |
| $ | 30.40 | |||||
Granted |
| 424,844 |
|
| 20.57 |
| 872,941 |
|
| 31.89 |
Vested |
| (782,598) |
|
| 35.09 |
| (526,572) |
|
| 31.68 |
Forfeited |
| (87,513) |
|
| 32.94 |
| (20,084) |
|
| 27.52 |
Outstanding as of March 31, 2016 |
| 1,707,944 |
|
| 33.40 | |||||
Outstanding as of March 31, 2017 |
| 2,221,044 |
|
| 31.98 | |||||
Granted |
| 237,605 |
|
| 30.97 |
| 47,700 |
|
| 35.05 |
Vested |
| (110,999) |
|
| 31.40 |
| (199,163) |
|
| 30.59 |
Forfeited |
| (42,781) |
|
| 27.33 |
| (45,683) |
|
| 30.11 |
Outstanding as of June 30, 2016 |
| 1,791,769 |
|
| 31.57 | |||||
Granted |
| 290,000 |
|
| 38.05 | |||||
Vested |
| (75,642) |
|
| 31.20 | |||||
Forfeited |
| (24,352) |
|
| 30.60 | |||||
Outstanding as of September 30, 2016 |
| 1,981,775 |
|
| 31.76 | |||||
Outstanding as of June 30, 2017 |
| 2,023,898 |
|
| 32.17 |
At SeptemberJune 30, 2016,2017, there was $51,824$56,907 of unrecognized stock-based compensation expense related to unvested restricted stock unitunits and awards, which the Company expects to recognize over a weighted-average period of 2.2 years.
21
14.16.EarningsNet Loss Per Share
Basic earningsloss per common share is computed by dividing net income (loss)loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earningsloss per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants,restricted stock awards, restricted stock units and Convertible Notes using the treasury stock method, if dilutive.No items were included in the computation of diluted loss per share in the three and six months ended June 30, 2016 and 2017 because the Company incurred a net loss attributable to Envestnet, Inc. in each of these periods and therefore these items were considered anti-dilutive.
The Company accounts for the effect of the Convertible Notes on diluted earnings per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes have no effect on diluted earnings per share until the Company’s stock price exceeds the conversion price of $62.88 per share, or if the trading price of the Convertible Notes meets certain criteria as described in Note 1214 at which point, the effect of the conversion feature would be included in the Company’s calculation of diluted earnings per share. In the period of conversion, the Convertible Notes will have no impact on diluted earnings if the Convertible Notes are settled in cash and will have an impact on dilutive earnings per share if the Convertible Notes are settled in shares upon conversion.
24
The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss)loss per share attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Net income (loss) attributable to Envestnet, Inc. |
| $ | (4,057) |
| $ | 3,302 |
| $ | (22,993) |
| $ | 8,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 42,843,103 |
|
| 36,021,784 |
|
| 42,704,383 |
|
| 35,651,508 |
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
| — |
|
| 1,554,564 |
|
| — |
|
| 1,784,442 |
Unvested restricted stock units |
|
| — |
|
| 38,353 |
|
| — |
|
| 127,865 |
Diluted number of weighted-average shares outstanding |
|
| 42,843,103 |
|
| 37,614,701 |
|
| 42,704,383 |
|
| 37,563,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Envestnet, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.09) |
| $ | 0.09 |
| $ | (0.54) |
| $ | 0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | (0.09) |
| $ | 0.09 |
| $ | (0.54) |
| $ | 0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 43,855,479 |
|
| 42,752,465 |
|
| 43,513,074 |
|
| 42,632,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted number of weighted-average shares outstanding |
|
| 43,855,479 |
|
| 42,752,465 |
|
| 43,513,074 |
|
| 42,632,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
Common share equivalents for securitiesSecurities that were anti-dilutive or otherwise excluded fromfor the computation of diluted net income (loss) per share attributable to Envestnet, Inc.three and six months ended June 30, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Options to purchase common stock |
| 3,283,331 |
| 447,354 |
| 3,283,331 |
| 270,728 |
| 2,804,420 |
| 3,383,899 |
| 2,804,420 |
| 3,383,899 |
Unvested restricted stock units |
| 1,981,775 |
| 475,462 |
| 1,981,775 |
| 208,679 | ||||||||
Ungranted unvested restricted stock units related to Upside |
| — |
| 132,284 |
| — |
| 132,284 | ||||||||
Unvested restricted stock awards and units |
| 2,023,898 |
| 1,791,769 |
| 2,023,898 |
| 1,791,769 | ||||||||
Convertible Notes |
| 2,743,321 |
| 2,743,321 |
| 2,743,321 |
| 2,743,321 |
| 2,743,321 |
| 2,743,321 |
| 2,743,321 |
| 2,743,321 |
Total |
| 8,008,427 |
| 3,798,421 |
| 8,008,427 |
| 3,355,012 |
| 7,571,639 |
| 7,918,989 |
| 7,571,639 |
| 7,918,989 |
15.17.Major Customers
One customer accounted for more than 10% of the Company’s total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||
|
| September 30, |
|
| September 30, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
Fidelity |
| 15 | % | 18 | % |
| 15 | % | 18 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||
|
| June 30, |
|
| June 30, |
| ||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
Fidelity |
| 16 | % | 15 | % |
| 16 | % | 15 | % |
22
16.Commitments18.Commitments and Contingencies
Purchase Obligations and Indemnifications
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.
25
Litigation
In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had and was continuing to infringe on seven of Yodlee’s U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer to Yodlee’s complaint as well as counterclaims seeking declaratory judgment that Yodlee’s patents were not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims also alleged, among other things, violation of federal antitrust and false advertising laws and unfair competition under California state law and common law. The counterclaims sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. During the course of the litigation, Plaid also filed petitions for review before the Patent Office’s Board of Patent Trials and Appeals against the seven Yodlee patents that were the subject of the lawsuit as well as a petition for reexamination against one of the patents.
On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office. Plaid also agreed not to participate further in the reexamination proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.
The Company is involved in litigation arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it isboth probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of SeptemberJune 30, 2016.2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.
Contingencies
Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. As of June 30, 2017, the Company estimated a sales and use tax liability of $12,115. This amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheet. The Company also estimated a sales and use tax receivable of $4,633 related to estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the condensed consolidated balance sheet. As a result, net sales and use taxes of $7,482 were probable of being assessed related to multiple jurisdictions with respect to revenues in the six month period ended June 30, 2017 and prior years. Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.
23
Leases
The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of SeptemberJune 30, 2016,2017, were as follows:
|
|
|
|
|
|
|
Years ending December 31: |
|
|
|
|
|
|
Remainder of 2016 |
| $ | 2,954 | |||
2017 |
|
| 10,873 | |||
Remainder of 2017 |
| $ | 7,003 | |||
2018 |
|
| 10,768 |
|
| 13,982 |
2019 |
|
| 11,263 |
|
| 14,851 |
2020 |
|
| 11,562 |
|
| 14,721 |
2021 |
|
| 13,933 | |||
Thereafter |
|
| 56,116 |
|
| 55,198 |
Total |
| $ | 103,536 |
| $ | 119,688 |
26
17.19.Segment Information
Business segments are generally organized around our business services. Our business segments are:
· Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions. · Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services. The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes. Nonsegment expenses include salary and benefits for certain corporate officers, certain types of professional service expenses, insurance, acquisition related transaction costs, restructuring charges, and other non-recurring and/or non-operationally related expenses. The following table presents revenue by segment: Three Months Ended Nine Months Ended Three Months Ended Six Months Ended September 30, September 30, June 30, June 30, 2016 2015 2016 2015 2017 2016 2017 2016 Revenue: Envestnet $ $ $ $ $ 129,372 $ 110,716 $ 250,690 $ 213,906 Envestnet | Yodlee — — 38,045 30,992 74,513 59,623 Consolidated revenue $ $ $ $ $ 167,417 $ 141,708 $ 325,203 $ 273,529 Fidelity revenue as a percentage of Envestnet segment revenue: Envestnet is a leading provider of unified wealth management software and services empoweringEnvestnet | Yodlee is a leading data aggregation and data analytics114,511 103,367 328,417 302,484 34,644 94,267 149,155 103,367 422,684 302,484 19% 18% 19% 18% 20% 19% 20% 19%
No single customer amounts for Envestnet | Yodlee exceeded 10% of the segment total.
24
The following table presents a reconciliation from income (loss) from operations by segment to consolidated net income (loss)loss attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| September 30, |
| September 30, | June 30, |
| June 30, | ||||||||||||||||
| 2016 |
| 2015 |
| 2016 |
| 2015 | 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Envestnet | $ | 12,361 |
| $ | 11,897 |
| $ | 32,425 |
| $ | 31,945 | $ | 15,811 |
| $ | 10,490 |
| $ | 29,322 |
| $ | 20,064 |
Envestnet | Yodlee |
| (8,416) |
|
| — |
|
| (33,728) |
|
| — |
| (5,635) |
|
| (11,271) |
|
| (13,343) |
|
| (25,312) |
Total segment income (loss) from operations |
| 3,945 |
|
| 11,897 |
|
| (1,303) |
|
| 31,945 |
| 10,176 |
|
| (781) |
|
| 15,979 |
|
| (5,248) |
Nonsegment operating expenses |
| (5,236) |
|
| (3,569) |
|
| (19,078) |
|
| (10,469) |
| (7,433) |
|
| (5,549) |
|
| (16,590) |
|
| (13,842) |
Other expense, net |
| (4,434) |
|
| (2,347) |
|
| (13,214) |
|
| (6,801) |
| (4,369) |
|
| (4,831) |
|
| (9,852) |
|
| (8,780) |
Consolidated income (loss) before income taxes (benefit) |
| (5,725) |
|
| 5,981 |
|
| (33,595) |
|
| 14,675 | |||||||||||
Consolidated loss before income taxes (benefit) |
| (1,626) |
|
| (11,161) |
|
| (10,463) |
|
| (27,870) | |||||||||||
Income tax provision (benefit) |
| (1,668) |
|
| 2,679 |
|
| (10,602) |
|
| 6,326 |
| 4,844 |
|
| (3,218) |
|
| 9,142 |
|
| (8,934) |
Consolidated net income (loss) |
| (4,057) |
|
| 3,302 |
|
| (22,993) |
|
| 8,349 | |||||||||||
Consolidated net loss |
| (6,470) |
|
| (7,943) |
|
| (19,605) |
|
| (18,936) | |||||||||||
Add: Net loss attributable to non-controlling interest |
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
Consolidated net income (loss) attributable to Envestnet, Inc. | $ | (4,057) |
| $ | 3,302 |
| $ | (22,993) |
| $ | 8,349 | |||||||||||
Consolidated net loss attributable to Envestnet, Inc. | $ | (6,470) |
| $ | (7,943) |
| $ | (19,605) |
| $ | (18,936) |
Segment assets consist of cash, accounts receivable, prepaid expenses and other current assets, property, plant and equipment, internally developed software, goodwill, and other intangibles, net, deferred tax assets and other non-current assets. Segment capital expenditures consist of property and equipment and internally developed software expenditures.
27
A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | June 30, |
| December 31, | ||||
|
|
|
|
|
|
| 2016 |
| 2015 | 2017 |
| 2016 | ||||
Segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Envestnet |
|
|
|
|
|
| $ | 330,535 |
| $ | 323,292 | $ | 320,709 |
| $ | 341,602 |
Envestnet | Yodlee |
|
|
|
|
|
|
| 539,415 |
|
| 552,957 |
| 518,957 |
|
| 530,799 |
Consolidated total assets |
|
|
|
|
|
| $ | 869,950 |
| $ | 876,249 | $ | 839,666 |
| $ | 872,401 |
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Three Months Ended |
| Nine Months Ended | |||||||||||||
| September 30, |
| September 30, | |||||||||||||
| 2016 |
| 2015 |
| 2016 |
| 2015 | |||||||||
Segment depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
| |||||
Envestnet | $ | 6,362 |
| $ | 6,157 |
| $ | 18,786 |
| $ | 17,215 | |||||
Envestnet | Yodlee |
| 10,330 |
|
| — |
|
| 31,086 |
|
| — | |||||
Consolidated depreciation and amortization | $ | 16,692 |
| $ | 6,157 |
| $ | 49,872 |
| $ | 17,215 | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Three Months Ended |
| Nine Months Ended | |||||||||||||
| September 30, |
| September 30, | |||||||||||||
| 2016 |
| 2015 |
| 2016 |
| 2015 | |||||||||
Segment capital expenditures: |
|
|
|
|
|
|
|
|
|
|
| |||||
Envestnet | $ | 4,355 |
| $ | 1,940 |
| $ | 6,913 |
| $ | 6,852 | |||||
Envestnet | Yodlee |
| 1,212 |
|
| — |
|
| 3,926 |
|
| — | |||||
Consolidated capital expenditures | $ | 5,567 |
| $ | 1,940 |
| $ | 10,839 |
| $ | 6,852 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Segment depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
Envestnet | $ | 6,361 |
| $ | 6,360 |
| $ | 12,782 |
| $ | 12,424 |
Envestnet | Yodlee |
| 9,104 |
|
| 10,740 |
|
| 18,518 |
|
| 20,756 |
Consolidated depreciation and amortization | $ | 15,465 |
| $ | 17,100 |
| $ | 31,300 |
| $ | 33,180 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Segment capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
Envestnet | $ | 7,580 |
| $ | 3,134 |
| $ | 12,931 |
| $ | 5,163 |
Envestnet | Yodlee |
| 1,154 |
|
| 1,544 |
|
| 1,901 |
|
| 2,714 |
Consolidated capital expenditures | $ | 8,734 |
| $ | 4,678 |
| $ | 14,832 |
| $ | 7,877 |
18.
25
20. Geographical Information
Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
United States | $ | 135,160 |
| $ | 94,133 |
| $ | 381,628 |
| $ | 274,487 |
International (1) |
| 13,995 |
|
| 9,234 |
|
| 41,056 |
|
| 27,997 |
Total | $ | 149,155 |
| $ | 103,367 |
| $ | 422,684 |
| $ | 302,484 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
United States | $ | 151,621 |
| $ | 127,070 |
| $ | 293,583 |
| $ | 251,004 |
International (1) |
| 15,796 |
|
| 14,638 |
|
| 31,620 |
|
| 22,525 |
Total | $ | 167,417 |
| $ | 141,708 |
| $ | 325,203 |
| $ | 273,529 |
(1) | No foreign country accounted for more than 10% of total revenues. |
The following table sets forth property, plant, and equipment net by geographic area:
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | June 30, |
| December 31, | ||||
| 2016 |
| 2015 | 2017 |
| 2016 | ||||
United States | $ | 28,535 |
| $ | 24,423 | $ | 29,897 |
| $ | 28,713 |
India |
| 3,302 |
|
| 3,687 |
| 4,370 |
|
| 3,596 |
Other |
| 729 |
|
| 571 |
| 520 |
|
| 691 |
Total | $ | 32,566 |
| $ | 28,681 | $ | 34,787 |
| $ | 33,000 |
21. Subsequent Events
Credit Agreement
On July 18, 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Second Amended and Restated Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated as of November 19, 2015, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Facility”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments in the aggregate amount of up to $350,000 which amount may be increased by $50,000. The Second Amended and Restated Credit Agreement also includes a $5,000 subfacility for the issuance of letters of credit.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Amended and Restated Security Agreement, dated July 18, 2017 (the “Security Agreement”), among the Company, the Debtors party thereto and the Administrative Agent, obligations under the Second Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Proceeds under the Second Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
The Company will pay interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
The Second Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum liquidity requirement, and provisions that limit the ability of the Company and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities.
2010 Long-Term Incentive Plan Amendment
On July 13, 2017, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 3,525,000 shares.
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19. Subsequent Event
On October 3, 2016, the Company acquired Wheelhouse Analytics, LLC (“Wheelhouse”) for approximately $14,400 in upfront cash consideration and additional contingent consideration to be earned upon completion of certain milestones. Wheelhouse is a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises, which the Company plans to integrate into our various customer solutions.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries.
Unless otherwise indicated, all amounts are in thousands, except share and per share information, numbers of financial advisors and client accounts.
This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:
· | difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources, |
· | the concentration of nearly all of our revenues from the delivery of our solutions and services to clients in the financial services industry, |
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· | our reliance on a limited number of clients for a material portion of our revenue, |
· | the renegotiation of fee percentages or termination of our services by our clients, |
· | our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies, |
· | the impact of market and economic conditions on |
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· | our inability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner, |
· |
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| ability to expand our relationships with existing customers, grow the number of customers and derive revenue from new offerings such as our data analytic solutions and market research services and premium |
· | compliance failures, |
· | adverse judicial or regulatory proceedings against us, |
· | liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest, |
· | changes in laws and regulations, |
· | general economic conditions, political and regulatory conditions, |
· | the impact of fluctuations in market condition and interest rates on the demand for our products and services and the value of assets under management or administration, |
· | the impact of market conditions on our ability to issue debt and equity, |
· | the impact of fluctuations in interest rates on our cost of borrowing, |
· | our financial performance, |
· | the results of our investments in research and development, our data center and other infrastructure, |
27
· | our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information, |
· | failure of our systems to work properly, |
· | our ability to realize operating efficiencies, |
· | the advantages of our solutions as compared to those of others, |
· | the failure to protect our intellectual property rights, |
· | our ability to establish and maintain intellectual property rights, |
· | our ability to retain and hire necessary employees and appropriately staff our operations, |
· | management’s response to these factors. |
In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forward‑looking statements. All forward‑looking statements contained in this quarterly report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. Forward‑looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward‑looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events, except as required by applicable law. If we do update one or more forward‑looking statements, no inference should be made that we will make additional updates with respect to those or other forward‑looking statements.
Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.
These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I under “Risk Factors”; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.
You should read this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 20152016 (the “2015“2016 Form 10-K”) completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.
The following discussion and analysis should also be read along with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 20152016 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.
We areEnvestnet is a leading provider of unifiedintelligent systems for wealth management software and servicesfinancial 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 financial advisorsmore fully understand their clients and institutions. By integrating a wide range of investment solutions and services, our Web‑based platforms provide financial advisors with the flexibility to address their clients’ needs.deliver better outcomes.
With our acquisitionMore than 2,500 companies, including 16 of Yodlee, Inc.the 20 largest U.S. banks, 38 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”), now operating as Envestnet | Yodlee, we now offer a leading data aggregation and data analytics platform powering dynamic, cloud-based innovation for digital financial services. Our customers for this service include financial institutions,hundreds of Internet services companies, providing innovative financialleverage Envestnet technology and services. Envestnet solutions enhance knowledge of the client, accelerate client on-boarding, improve client digital experiences, and third-party developershelp drive better outcomes for enterprises, advisors, and their clients.
Founded in 1999, Envestnet has been a leader in helping transform wealth management, working towards its goal of financial applications.building a holistic, end-to-end wealth management platform that supports advisors and their clients.
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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.
Envestnet serves clients from its headquarters based in Chicago, Illinois, as well as other locations throughout the United States and internationally, primarily India.
Segments
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in Note 19 to the notes to condensed consolidated financial statements. Our business segments are as follows:
· | Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions. |
· | Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services. |
Envestnet Segment
Envestnet empowers financial advisors at broker-dealers, banks, and RIAs with all the tools they require to deliver fee‑based adviceholistic wealth management to their end clients. We workIn addition, the firm provides advisors with both independent advisors as well as advisors associated with financial institutions (broker‑dealers, banks). The services we offer and market to financial advisors address advisors’ ability topractice management support so that they can grow their practice as well aspractices and operate more efficiently—efficiently. In the Envestnet platforms span from the initial meeting an advisor has with a prospective clientfirst half of 2017, Envestnet’s platform assets grew to the ongoing day‑to‑day operations of managing an advisory practice.
Our financial institution customers subscribe to the Envestnet | Yodlee platform to power offerings that improve consumer satisfaction and enhance engagement, while capturing cross-sell and up-sell opportunities. We estimate that our current network of financial institution customers alone reachesover $1.2 trillion in 6.5 million accounts overseen by more than 100 million end users as of September 30, 2016, representing a significant opportunity to grow our paid user base within existing customers. Our customers that are Internet service companies have an increasingly large and diverse base of users that also provides additional growth opportunities.57,000 advisors.
Our centrally‑hosted technology platforms, which we referServices provided to as having “open architecture” because of their flexibility, provideadvisors include: financial advisors with access to a series of integrated services to help them better serve their clients. These services includeplanning, risk assessment and selection of investment strategies and solutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi‑custodian performance reporting and communication tools, as well asplus data analytics. Envestnet has access to a wide range of leading third‑party asset custodians.
Our Envestnet | Yodlee technology platform infrastructure is designed to provide a highly available and secure multi-tenant cloud-based platform across hundreds of customers and millions of end users. Our solutions use a single code base for all customers and are globally accessible across multiple digital channels. Our multi-tenancy model uses a common data model for all customers but isolates data with logical controls and separate encryption keys for each customer. Our architecture utilizes state-of-the-art technologies to achieve enhanced availability, scalability and security.
The services delivered through our software are enabled and supported by our employees. In addition to the U.S.‑based employees that provide operations, investment management and research, and other support services to our advisor clients, we maintain a presence in India where our employees provide back‑office support, including overnight data reconciliation services, as well as quality control, technology operations support and software development.
We offer these solutions principally through the following product and serviceproduct/services suites:
· | Envestnet | |
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· | Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, |
· | Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services |
· | 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. |
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Key Metrics
The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated.
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| As of | |||||||||||||
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| June 30, |
| September 30, |
| December 31, |
| March 31, |
| June 30, | |||||
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| 2016 |
| 2016 |
| 2016 |
| 2017 |
| 2017 | |||||
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| (in millions except accounts and advisors data) | |||||||||||||
Platform Assets |
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Assets Under Management (AUM) |
| $ | 96,700 |
| $ | 101,924 |
| $ | 105,178 |
| $ | 113,544 |
| $ | 122,543 |
Assets Under Administration (AUA) |
|
| 220,690 |
|
| 231,831 |
|
| 241,682 |
|
| 248,445 |
|
| 271,450 |
Subtotal AUM/A |
|
| 317,390 |
|
| 333,755 |
|
| 346,860 |
|
| 361,989 |
|
| 393,993 |
Licensing |
|
| 685,952 |
|
| 721,690 |
|
| 748,125 |
|
| 763,372 |
|
| 825,829 |
Total Platform Assets |
| $ | 1,003,342 |
| $ | 1,055,445 |
| $ | 1,094,985 |
| $ | 1,125,361 |
| $ | 1,219,822 |
Platform Accounts |
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|
|
|
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|
AUM |
|
| 503,147 |
|
| 519,717 |
|
| 545,130 |
|
| 574,132 |
|
| 614,973 |
AUA |
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| 935,870 |
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| 961,590 |
|
| 994,583 |
|
| 986,554 |
|
| 1,083,417 |
Subtotal AUM/A |
|
| 1,439,017 |
|
| 1,481,307 |
|
| 1,539,713 |
|
| 1,560,686 |
|
| 1,698,390 |
Licensing |
|
| 4,304,645 |
|
| 4,394,670 |
|
| 4,558,883 |
|
| 4,263,002 |
|
| 4,811,390 |
Total Platform Accounts |
|
| 5,743,662 |
|
| 5,875,977 |
|
| 6,098,596 |
|
| 5,823,688 |
|
| 6,509,780 |
Advisors |
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AUM/A |
|
| 35,067 |
|
| 35,861 |
|
| 36,483 |
|
| 36,985 |
|
| 38,498 |
Licensing |
|
| 16,081 |
|
| 16,191 |
|
| 17,852 |
|
| 18,159 |
|
| 19,007 |
Total Advisors |
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| 51,148 |
|
| 52,052 |
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| 54,335 |
|
| 55,144 |
|
| 57,505 |
The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.
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| Asset Rollforward - Three Months Ended June 30, 2017 | ||||||||||||||||
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| As of |
| Gross |
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| Net |
| Market |
| As of | |||||
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| 3/31/2017 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| 6/30/2017 | ||||||
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| (in millions except account data) | ||||||||||||||||
Assets under Management (AUM) |
| $ | 113,544 |
| $ | 13,690 |
| $ | (7,222) |
| $ | 6,468 |
| $ | 2,531 |
| $ | 122,543 |
Assets under Administration (AUA) |
|
| 248,445 |
|
| 30,282 |
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| (12,667) |
|
| 17,615 |
|
| 5,390 |
|
| 271,450 |
Total AUM/A |
| $ | 361,989 |
| $ | 43,972 |
| $ | (19,889) |
| $ | 24,083 |
| $ | 7,921 |
| $ | 393,993 |
Fee-Based Accounts |
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| 1,560,686 |
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| 137,704 |
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| 1,698,390 |
The above AUM/A gross sales figures include $10.9 billion in new client conversions. The Company onboarded an additional $8.9 billion in licensing conversions during the three months ended June 30, 2017, bringing total conversions for the quarter to $19.8 billion.
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| Asset Rollforward - Six Months Ended June 30, 2017 | |||||||||||||||||||
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| As of |
| Gross |
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| Net |
| Market |
| Reclass (to) from |
| As of | ||||||
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| 12/31/2016 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| Licensing |
| 6/30/2017 | |||||||
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| (in millions except account data) | |||||||||||||||||||
Assets under Management (AUM) |
| $ | 105,178 |
| $ | 25,528 |
| $ | (14,711) |
| $ | 10,817 |
| $ | 6,548 |
| $ | — |
| $ | 122,543 |
Assets under Administration (AUA) |
|
| 241,682 |
|
| 49,765 |
|
| (29,385) |
|
| 20,380 |
|
| 14,279 |
|
| (4,891) |
|
| 271,450 |
Total AUM/A |
| $ | 346,860 |
| $ | 75,293 |
| $ | (44,096) |
| $ | 31,197 |
| $ | 20,827 |
| $ | (4,891) |
| $ | 393,993 |
Fee-Based Accounts |
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| 1,539,713 |
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| 181,441 |
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| (22,764) |
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| 1,698,390 |
The above AUM/A gross sales figures include $11.2 billion in new client conversions. The Company onboarded an additional $22.3 billion in licensing conversions during the six months ended June 30, 2017, bringing total conversions for the half to $33.5 billion.
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The mix of AUM and AUA was as follows for the periods indicated:
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| June 30, |
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| September 30, |
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| December 31, |
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| March 31, |
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| June 30, |
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| 2016 |
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| 2016 |
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| 2016 |
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| 2017 |
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| 2017 |
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Assets under management (AUM) | 30 | % |
| 31 | % |
| 30 | % |
| 31 | % |
| 31 | % |
Assets under administration (AUA) | 70 | % |
| 69 | % |
| 70 | % |
| 69 | % |
| 69 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
Envestnet | Yodlee Segment
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.
More than 1,000 financial institutions, financial technology innovators and financial advisory firms, including 13 of the 20 largest U.S. banks, subscribe to the Envestnet | Yodlee platform to underpin personalized financial apps and services for over 21 million paid subscribers.
Yodlee serves two main customer groups: financial institutions (“FI”) and financial technology innovators, which we refer to as Yodlee Interactive (“YI”) customers.
· | The Financial Institutions group provides customers with secure access to open application programming interfaces (“APIs”), end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Yodlee also enables customers to develop their own applications through its open APIs, which deliver secure data, money movement solutions, and other functionality. FinApps can be subscribed to individually or in combinations that include personal financial management, wealth management, card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, card, lenders, and other financial services sectors. These FinApps help consumers and small businesses simplify and manage their finances, review their financial accounts, track their spending, calculate their net worth, and perform a variety of other activities. For example, Yodlee’s Expense FinApp helps consumers track their spending, and a Payroll FinApp from a third party helps small businesses process their payroll. The suite of reports is designed to supplement traditional credit reports by utilizing consumer permissioned aggregated data from over 15,500 sources, including banking, investment, loan, and credit card information. |
· | The Yodlee Interactive group enables customers to develop new applications and enhance existing solutions. These customers operate in a number of sub-vertical markets, including wealth management, personal financial management, small business accounting, small business lending and authentication. They use the Envestnet | Yodlee platform to build solutions that leverage our open APIs and access to a large end user base. In addition to aggregated transaction-level account data elements, we provide YI customers with secure access to account verification, money movement and risk assessment tools via our APIs. We play a critical role in transferring innovation from financial technology innovators to financial institutions. For example, YI customers use Yodlee applications to provide working capital to small businesses online; personalized financial management, planning and advisory services; e-commerce payment solutions; and online accounting systems for small businesses. We provide access to our solutions across multiple channels, including web, tablet and mobile. |
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Both FI and YI segments benefit customers by improving end-user satisfaction and retention, accelerating speed to market, creating technology savings and enhancing their data analytics solutions and market research capabilities. End users receive better access to their financial information and more control over their finances, leading to more informed and personalized decision making. For customers who are members of the developer community, Yodlee solutions provide access to critical data and payments solutions, faster speed to market and enhanced distribution. |
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· | Envestnet |
We believe that our brand leadership, innovative technology and intellectual property, large customer base, and unique data gathering and enrichment provide us with competitive advantages that have enabled us to generate strong growth. |
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We believe that our business model results in a high degree of recurring and predictable financial results.
Operational Highlights
The results of Envestnet | Yodlee’s operations are included in the condensed consolidated statement of operations beginning November 20, 2015, the date of its acquisition by Envestnet. As a result, Envestnet’s results for the three and nine month periods ended September 30, 2016 may not be comparable with Envestnet’s results for the same periods in 2015.
Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 5%15% from $85,576$86,056 in the three months ended SeptemberJune 30, 20152016 to $90,042$98,959 in the three months ended SeptemberJune 30, 2016.2017. Subscription and licensing revenues increased 221%27% from $16,163$47,037 in the three months ended SeptemberJune 30, 20152016 to $51,959$59,802 in the three months ended SeptemberJune 30, 2016.2017. Total revenues, which include professional service and other fees, increased 44%18% from $103,367$141,708 in the three months ended SeptemberJune 30, 20152016 to $149,155$167,417 in the three months ended SeptemberJune 30, 2016.2017. The increase in total revenues was a result of the positive effects of new account growth and positive net flows of AUM/AUA as well as an increase in revenues related to Envestnet | Yodlee totaling $34,644.$7,053.
Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 3%14% from $250,472$168,927 in the ninesix months ended SeptemberJune 30, 20152016 to $258,969$193,121 in the ninesix months ended SeptemberJune 30, 2016.2017. Subscription and licensing revenues increased 214%30% from $45,257$90,657 in the ninesix months ended SeptemberJune 30, 20152016 to $142,303$117,712 in the ninesix months ended SeptemberJune 30, 2016.2017. Total revenues, which include professional service and other fees, increased 40%19% from $302,484$273,529 in the ninesix months ended SeptemberJune 30, 20152016 to $422,684$325,203 in the ninesix months ended SeptemberJune 30, 2016.2017. The increase in total revenues was a result of the positive effects of new account growth and positive net flows of AUM/AUA as well as an increase in revenues related to Envestnet | Yodlee totaling $94,267.$14,890.
The net loss attributable to Envestnet, Inc. for the three months ended SeptemberJune 30, 20162017 was $4,057,$6,470, or $0.09$0.15 per diluted share, compared to net incomeloss attributable to Envestnet, Inc. of $3,302$7,943 or $0.09$0.19 per diluted share for the three months ended SeptemberJune 30, 2015.2016. The net loss attributable to Envestnet, Inc. for the ninesix months ended SeptemberJune 30, 20162017 was $22,993$19,605, or $0.54$0.45 per diluted share, compared to net incomeloss attributable to Envestnet, Inc. of $8,349$18,936 or $0.22$0.44 per diluted share for the ninesix months ended SeptemberJune 30, 2015.2016.
Adjusted revenues for the three months ended SeptemberJune 30, 20162017 was $149,486,$167,469, an increase of 44%18% from $103,501$141,948 in the prior year period. Adjusted EBITDA for the three months ended SeptemberJune 30, 20162017 was $27,505,$29,525, an increase of 43%32% from $19,215$22,304 in the prior year period. Adjusted net income for the three months ended SeptemberJune 30, 20162017 was $12,463,$13,148, or $0.28$0.29 per diluted share, compared to adjusted net income of $9,271,$9,177, or $0.25$0.21 per diluted share in the prior year period.
Adjusted revenues for the ninesix months ended SeptemberJune 30, 20162017 was $423,465,$325,308, an increase of 40%19% from $302,618$273,979 in the prior year period. Adjusted EBITDA for the ninesix months ended SeptemberJune 30, 20162017 was $69,126,$55,363, an increase of 29%33% from $53,640$41,497 in the prior year period. Adjusted net income for the ninesix months ended SeptemberJune 30, 20162017 was $29,498,$24,665, or $0.67$0.54 per diluted share, compared to adjusted net income of $26,372,$16,961, or $0.70$0.39 per diluted share in the prior year period.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a discussion of non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.
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Key Metrics
The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated.
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| As of | |||||||||||||
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| September 30, |
| December 31, |
| March 31, |
| June 30, |
| September 30, | |||||
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| 2015 |
| 2015 |
| 2016 |
| 2016 |
| 2016 | |||||
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| (in millions except accounts and advisors data) | |||||||||||||
Platform Assets |
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Assets Under Management (AUM) |
| $ | 73,164 |
| $ | 92,559 |
| $ | 95,489 |
| $ | 96,700 |
| $ | 101,924 |
Assets Under Administration (AUA) |
|
| 177,121 |
|
| 197,177 |
|
| 207,537 |
|
| 220,690 |
|
| 231,831 |
Subtotal AUM/A |
|
| 250,285 |
|
| 289,736 |
|
| 303,026 |
|
| 317,390 |
|
| 333,755 |
Licensing |
|
| 538,271 |
|
| 561,699 |
|
| 576,988 |
|
| 685,952 |
|
| 721,690 |
Total Platform Assets |
| $ | 788,556 |
| $ | 851,435 |
| $ | 880,014 |
| $ | 1,003,342 |
| $ | 1,055,445 |
Platform Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM |
|
| 344,321 |
|
| 490,471 |
|
| 498,449 |
|
| 503,147 |
|
| 519,717 |
AUA |
|
| 718,637 |
|
| 807,708 |
|
| 904,373 |
|
| 935,870 |
|
| 961,590 |
Subtotal AUM/A |
|
| 1,062,958 |
|
| 1,298,179 |
|
| 1,402,822 |
|
| 1,439,017 |
|
| 1,481,307 |
Licensing |
|
| 2,140,672 |
|
| 2,176,068 |
|
| 2,237,427 |
|
| 4,304,645 |
|
| 4,394,670 |
Total Platform Accounts |
|
| 3,203,630 |
|
| 3,474,247 |
|
| 3,640,249 |
|
| 5,743,662 |
|
| 5,875,977 |
Advisors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM/A |
|
| 30,177 |
|
| 33,775 |
|
| 35,718 |
|
| 35,067 |
|
| 35,861 |
Licensing |
|
| 13,409 |
|
| 13,553 |
|
| 13,675 |
|
| 16,081 |
|
| 16,191 |
Total Advisors |
|
| 43,586 |
|
| 47,328 |
|
| 49,393 |
|
| 51,148 |
|
| 52,052 |
The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset Rollforward - Three Months Ended September 30, 2016 | ||||||||||||||||
|
| As of |
| Gross |
|
|
|
| Net |
| Market |
| As of | |||||
|
| 6/30/2016 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| 9/30/2016 | ||||||
|
| (in millions except account data) | ||||||||||||||||
Assets under Management (AUM) |
| $ | 96,700 |
| $ | 9,310 |
| $ | (6,302) |
| $ | 3,008 |
| $ | 2,216 |
| $ | 101,924 |
Assets under Administration (AUA) |
|
| 220,690 |
|
| 19,701 |
|
| (14,697) |
|
| 5,004 |
|
| 6,137 |
|
| 231,831 |
Total AUM/A |
| $ | 317,390 |
| $ | 29,011 |
| $ | (20,999) |
| $ | 8,012 |
| $ | 8,353 |
| $ | 333,755 |
Fee-Based Accounts |
|
| 1,439,017 |
|
|
|
|
|
|
|
| 42,290 |
|
|
|
|
| 1,481,307 |
The above AUM/A gross sales figures include $3.4 billion in new client conversions. The Company onboarded an additional $9.1 billion in licensing conversions during the three months ended September 30, 2016, bringing total conversions for the quarter to $12.5 billion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset Rollforward - Nine Months Ended September 30, 2016 | ||||||||||||||||
|
| As of |
| Gross |
|
|
|
| Net |
| Market |
| As of | |||||
|
| 12/31/2015 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| 9/30/2016 | ||||||
|
| (in millions except account data) | ||||||||||||||||
Assets under Management (AUM) |
| $ | 92,559 |
| $ | 24,588 |
| $ | (20,063) |
| $ | 4,525 |
| $ | 4,840 |
| $ | 101,924 |
Assets under Administration (AUA) |
|
| 197,177 |
|
| 60,853 |
|
| (39,052) |
|
| 21,801 |
|
| 12,853 |
|
| 231,831 |
Total AUM/A |
| $ | 289,736 |
| $ | 85,441 |
| $ | (59,115) |
| $ | 26,326 |
| $ | 17,693 |
| $ | 333,755 |
Fee-Based Accounts |
|
| 1,298,179 |
|
|
|
|
|
|
|
| 183,128 |
|
|
|
|
| 1,481,307 |
The above AUM/A gross sales figures include $11.7 billion in new client conversions. The Company onboarded an additional $118.4 billion in licensing conversions during the nine months ended September 30, 2016, bringing total conversions for the three quarter period to $130.1 billion.
33
The mix of AUM and AUA was as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| September 30, |
| December 31, |
| March 31, |
| September 30, |
|
| 2015 |
| 2015 |
| 2015 |
| 2015 |
| 2016 |
|
Assets under management (AUM) | 29 | % | 32 | % | 32 | % | 32 | % | 31 | % |
Assets under administration (AUA) | 71 | % | 68 | % | 68 | % | 68 | % | 69 | % |
| 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Six Months Ended |
|
|
| ||||||||
| June 30, |
|
|
|
| June 30, |
|
|
| ||||||||
| 2017 |
| 2016 |
| Percent Change |
| 2017 |
| 2016 |
| Percent Change | ||||||
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management or administration | $ | 98,959 |
| $ | 86,056 |
| 15 | % |
| $ | 193,121 |
| $ | 168,927 |
| 14 | % |
Subscription and licensing |
| 59,802 |
|
| 47,037 |
| 27 | % |
|
| 117,712 |
|
| 90,657 |
| 30 | % |
Professional services and other |
| 8,656 |
|
| 8,615 |
| — | % |
|
| 14,370 |
|
| 13,945 |
| 3 | % |
Total revenues |
| 167,417 |
|
| 141,708 |
| 18 | % |
|
| 325,203 |
|
| 273,529 |
| 19 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
| 55,735 |
|
| 44,902 |
| 24 | % |
|
| 104,961 |
|
| 85,060 |
| 23 | % |
Compensation and benefits |
| 64,996 |
|
| 57,664 |
| 13 | % |
|
| 130,528 |
|
| 120,280 |
| 9 | % |
General and administration |
| 28,478 |
|
| 28,372 |
| — | % |
|
| 59,025 |
|
| 54,099 |
| 9 | % |
Depreciation and amortization |
| 15,465 |
|
| 17,100 |
| (10) | % |
|
| 31,300 |
|
| 33,180 |
| (6) | % |
Total operating expenses |
| 164,674 |
|
| 148,038 |
| 11 | % |
|
| 325,814 |
|
| 292,619 |
| 11 | % |
Income (loss) from operations |
| 2,743 |
|
| (6,330) |
| (143) | % |
|
| (611) |
|
| (19,090) |
| (97) | % |
Other expense, net |
| (4,369) |
|
| (4,831) |
| (10) | % |
|
| (9,852) |
|
| (8,780) |
| 12 | % |
Loss before income tax provision (benefit) |
| (1,626) |
|
| (11,161) |
| (85) | % |
|
| (10,463) |
|
| (27,870) |
| * | % |
Income tax provision (benefit) |
| 4,844 |
|
| (3,218) |
| * |
|
|
| 9,142 |
|
| (8,934) |
| * | % |
Net loss |
| (6,470) |
|
| (7,943) |
| (19) | % |
|
| (19,605) |
|
| (18,936) |
| * | % |
Add: Net loss attributable to non-controlling interest |
| — |
|
| — |
| — | % |
|
| — |
|
| — |
| — | % |
Net loss attributable to Envestnet, Inc. | $ | (6,470) |
| $ | (7,943) |
| (19) | % |
| $ | (19,605) |
| $ | (18,936) |
| * | % |
*Not meaningful.
Three months ended SeptemberJune 30, 20162017 compared to three months SeptemberJune 30, 2015
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
| |||||
| September 30, |
|
|
| |||||
| 2016 |
| 2015 |
| Percent Change |
| |||
|
| (in thousands) |
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
Assets under management or administration | $ | 90,042 |
|
| $ | 85,576 |
| 5 | % |
Subscription and licensing |
| 51,959 |
|
|
| 16,163 |
| 221 | % |
Professional services and other |
| 7,154 |
|
|
| 1,628 |
| 339 | % |
Total revenues |
| 149,155 |
|
|
| 103,367 |
| 44 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenues |
| 47,259 |
|
|
| 41,027 |
| 15 | % |
Compensation and benefits |
| 60,345 |
|
|
| 32,671 |
| 85 | % |
General and administration |
| 26,150 |
|
|
| 15,184 |
| 72 | % |
Depreciation and amortization |
| 16,692 |
|
|
| 6,157 |
| 171 | % |
Total operating expenses |
| 150,446 |
|
|
| 95,039 |
| 58 | % |
Income (loss) from operations |
| (1,291) |
|
|
| 8,328 |
| * | % |
Other expense, net |
| (4,434) |
|
|
| (2,347) |
| 89 | % |
Income (loss) before income tax provision (benefit) |
| (5,725) |
|
|
| 5,981 |
| * | % |
Income tax provision (benefit) |
| (1,668) |
|
|
| 2,679 |
| * | % |
Net income (loss) |
| (4,057) |
|
|
| 3,302 |
| * | % |
Add: Net loss attributable to non-controlling interest |
| — |
|
|
| — |
| — | % |
Net income (loss) attributable to Envestnet, Inc. | $ | (4,057) |
|
| $ | 3,302 |
| * | % |
*Not meaningful.2016
Revenues
Total revenues increased 44%18% from $103,367$141,708 in the three months ended SeptemberJune 30, 20152016 to $149,155$167,417 in the three months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in revenues from subscription and licensing of $35,554.$12,765. Revenues from AUM/A decreased as a percentage of total revenues from 61% to 60% from 83%59% in the three months ended SeptemberJune 30, 2016 and 2015,2017, respectively, primarily asbecause the increasegrowth in AUM/A was lower than the increase in revenues from subscription and licensing.licensing revenue exceeded the growth in AUM/A.
Assets under management or administration
Revenues earned from AUM/AUA increased 5%15% from $85,576$86,056 in the three months ended SeptemberJune 30, 20152016 to $90,042$98,959 in the three months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2016,2017, relative to the corresponding period in 2015.2016. In the thirdsecond quarter of 2016,2017, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during the first sixquarter of 2017.
The number of financial advisors with AUM or AUA on our technology platforms increased from 35,067 as of June 30, 2016 to 38,489 as of June 30, 2017 and the number of AUM or AUA client accounts increased from approximately 1,400,000 as of June 30, 2016 to approximately 1,700,000 as of June 30, 2017.
Subscription and licensing
Subscription and licensing revenues increased 27% from $47,037 in the three months ended June 30, 2016 to $59,802 in the three months ended June 30, 2017.This increase was primarily due to an increase in Envestnet related revenue of $3,035 and an increase in Envestnet | Tamarac related revenue of $2,596 and Envestnet | Yodlee contributing an additional $7,134. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee revenue is primarily due to an increase in revenue from new and existing customers of $6,193 and Wheelhouse related revenue of $941.
33
Professional services and other
Professional services and other revenues remained consistent from $8,615 in the three months ended June 30, 2016 as well as during 2015, partially offset byto $8,656 in the three months ended June 30, 2017.
Cost of revenues
Cost of revenues increased 24% from $44,902 in the three months ended June 30, 2016 to $55,735 in the three months ended June 30, 2017, primarily due to a lower overall effective fee rate on AUM/corresponding increase in revenues from AUM or AUA, the mix of such revenues from AUM or AUA, and an increase in cost of revenues associated with subscription and licensing revenues. As a percentage of total revenues, cost of revenues increased from 32% in the three months ended June 30, 2016 to 33% in the three months ended June 30, 2017.
Compensation and benefits
Compensation and benefits increased 13% from $57,664 in the three months ended June 30, 2016 to $64,996 in the three months ended June 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $5,001, primarily a result of an increase in headcount to support organic growth. Also contributing to the transitiongrowth were increases in incentive compensation and stock-based compensation of $1,136 and $1,242, respectively. As a WMS clientpercentage of total revenues, compensation and benefits decreased from 41% in the three months ended June 30, 2016 to 39% in the three months ended June 30, 2017. The decrease in the compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower priced solution.compensation and benefit increase.
General and administration
General and administration expenses remained consistent from $28,372 in the three months ended June 30, 2016 to $28,478 in the three months ended June 30, 2017. As a percentage of total revenues, general and administration expenses decreased from 20% in the three months ended June 30, 2016 to 17% in the three months ended June 30, 2017.
Depreciation and amortization
Depreciation and amortization expense decreased 10% from $17,100 in the three months ended June 30, 2016 to $15,465 in the three months ended June 30, 2017, primarily due to a decrease in intangible asset amortization of $1,824. As a percentage of total revenues, depreciation and amortization expense decreased from 12% in the three months ended June 30, 2016 to 9% in the three months ended June 30, 2017.
Other expense, net
Other expense, net decreased 10% from $4,831 in the three months ended June 30, 2016 to $4,369 in the three months ended June 30, 2017, due to a decrease in loss on investments in privately held companies of $420.
Income tax provision (benefit)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Loss before income tax provision (benefit) |
| $ | (1,626) |
| $ | (11,161) |
|
Income tax provision (benefit) |
|
| 4,844 |
|
| (3,218) |
|
Effective tax rate |
|
| (297.9) | % |
| 28.8 | % |
34
The number of financial advisors with AUM or AUA on our technology platforms increased from 30,177 as of September 30, 2015 to 35,861 as of September 30, 2016 and the number of AUM or AUA client accounts increased from approximately 1,063,000 as of September 30, 2015 to approximately 1,481,000 as of September 30, 2016.
Subscription and licensing
Subscription and licensing revenues increased 221% from $16,163 inFor the three months ended SeptemberJune 30, 2015 to $51,959 in2017, our effective tax rate differs from the three months ended September 30, 2016.This increase wasstatutory rate primarily due to an increase in Envestnet | Tamarac related revenue of $3,347 and Envestnet | Yodlee contributing an additional $29,761. The increase in Envestnet | Tamarac revenue is a result of Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. Envestnet | Yodlee was acquired in November 2015 and its revenues were not included in the 2015 period.
Professional services and other
Professional services and other revenues increased 339%book loss with no resulting benefit from $1,628 in the three months ended September 30, 2015 to $7,154 in the three months ended September 30, 2016. This increase was primarily due to an increase in Envestnet | Tamarac related revenue of $378 and Envestnet | Yodlee contributing an additional $4,883. The increase in Envestnet and Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients. Envestnet | Yodlee was acquired in November 2015 and its revenues were not included in the 2015 period.
Cost of revenues
Cost of revenues increased 15% from $41,027 in the three months ended September 30, 2015 to $47,259 in the three months ended September 30, 2016, primarily due to a corresponding increase in revenues from AUM or AUA. As a percentage of total revenues, cost of revenues decreased from 40% in the three months ended September 30, 2015 to 32% in the three months ended September 30, 2016 primarilynet operating loss generation as a result of the inclusion of Envestnet | Yodlee segment revenues which have a lower cost of revenue profile.
Compensation and benefits
Compensation and benefits increased 85% from $32,671 in the three months ended September 30, 2015 to $60,345 in the three months ended September 30, 2016, primarily due to an increase in salaries, benefits and related payroll taxes of $18,324, primarily a result of an increase in headcount, including headcount relatedvaluation allowance on all domestic deferreds, compared to the Yodlee acquisition and an increasebook loss in headcount to support organic growth. An increase in non-cash stock compensation expense2016 with the absence of $4,146 and an increase in incentive compensation of $2,465 also contributed to the increase in compensation and benefits. As a percentage of total revenues, compensation and benefits increased from 32% in the three months ended September 30, 2015 to 40% in the three months ended September 30, 2016. The increase in the compensation and benefits as a percentage of total revenues is primarily due to the inclusion of the Envestnet | Yodlee segment which has a higher compensation and benefits profile.valuation allowance.
General and administration
General and administration expenses increased 72% from $15,184 in the three months ended September 30, 2015 to $26,150 in the three months ended September 30, 2016, primarily due to general and administration expense increases related to the Envestnet | Yodlee segment of $8,341. As a percentage of total revenues, general and administration expenses increased from 15% in the three months ended September 30, 2015 to 18% in the three months ended September 30, 2016.The increase in general and administration expense as a percentage of total revenues is primarily due to the inclusion of the Envestnet | Yodlee segment which has a higher general and administrative expense profile.
Depreciation and amortization
Depreciation and amortization expense increased 171% from $6,157 in the three months ended September 30, 2015 to $16,692 in the three months ended September 30, 2016, primarily due to an increase in intangible asset amortization of $8,534, primarily a result of the Yodlee acquisition. As a percentage of total revenues, depreciation and amortization expense increased from 6% in the three months ended September 30, 2015 to 11% in the three months ended September 30, 2016, primarily a result of Envestnet | Yodlee intangible asset amortization.
35
Other expense, net
Other expense, net includes an increase in interest expense of $1,738 as a result of additional borrowings under the November 19, 2015 Amended and Restated Credit Agreement (see Note 12 to the notes to the condensed consolidated financial statements).
Income tax provision (benefit)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2016 |
| 2015 |
| ||
Income (loss) before income tax provision (benefit) |
| $ | (5,725) |
| $ | 5,981 |
|
Income tax provision (benefit) |
|
| (1,668) |
|
| 2,679 |
|
Effective tax rate |
|
| 29.1 | % |
| 44.8 | % |
For the three months ended SeptemberJune 30, 2016, our effective tax rate differs from the statutory rate primarily due to various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.
For the threeSix months ended SeptemberJune 30, 2015, our effective tax rate differs from the statutory rate primarily due to the effect of an increase in the blended state tax rate, permanent differences, an uncertain tax position current year accrual related to transfer pricing and non-recognition of a loss from a subsidiary due to a full valuation allowance.
Nine months ended September 30, 20162017 compared to ninesix months SeptemberJune 30, 2015
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
| |||||
| September 30, |
|
|
| |||||
| 2016 |
| 2015 |
| Percent Change |
| |||
|
| (in thousands) |
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
Assets under management or administration | $ | 258,969 |
|
| $ | 250,472 |
| 3 | % |
Subscription and licensing |
| 142,303 |
|
|
| 45,257 |
| 214 | % |
Professional services and other |
| 21,412 |
|
|
| 6,755 |
| 217 | % |
Total revenues |
| 422,684 |
|
|
| 302,484 |
| 40 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenues |
| 132,319 |
|
|
| 122,208 |
| 8 | % |
Compensation and benefits |
| 180,625 |
|
|
| 96,162 |
| 88 | % |
General and administration |
| 80,097 |
|
|
| 44,905 |
| 78 | % |
Depreciation and amortization |
| 49,872 |
|
|
| 17,215 |
| 190 | % |
Restructuring charges |
| 152 |
|
|
| 518 |
| (71) | % |
Total operating expenses |
| 443,065 |
|
|
| 281,008 |
| 58 | % |
Income (loss) from operations |
| (20,381) |
|
|
| 21,476 |
| * | % |
Other expense, net |
| (13,214) |
|
|
| (6,801) |
| 94 | % |
Income (loss) before income tax provision (benefit) |
| (33,595) |
|
|
| 14,675 |
| * | % |
Income tax provision (benefit) |
| (10,602) |
|
|
| 6,326 |
| * | % |
Net income (loss) |
| (22,993) |
|
|
| 8,349 |
| * | % |
Add: Net loss attributable to non-controlling interest |
| — |
|
|
| — |
| — | % |
Net income (loss) attributable to Envestnet, Inc. | $ | (22,993) |
|
| $ | 8,349 |
| * | % |
*Not meaningful.2016
Revenues
Total revenues increased 40%19% from $302,484$273,529 in the ninesix months ended SeptemberJune 30, 20152016 to $422,684$325,203 in the ninesix months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in revenues from subscription and licensing of $97,117.$27,055. Revenues from AUM/A were 61% and 83%decreased as a percentage of total revenues from 62% to 59% in the ninesix months ended SeptemberJune 30, 2016 and 2015, respectively.
36
2017, respectively, primarily because the growth in subscription and licensing revenue exceeded the growth in AUM/A.
Assets under management or administration
Revenues earned from AUM/AUA increased 3%14% from $250,472$168,927 in the ninesix months ended SeptemberJune 30, 20152016 to $258,969$193,121 in the ninesix months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cyclescycle in 2016,2017, relative to the corresponding periodsperiod in 2015.2016. In the nine months ended September 30, 2016,first half of 2017, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during 2016 and 2015, partially offset by a lower overall effective fee rate on AUM/AUA primarily related to the transitionfirst quarter of a WMS client to a lower priced solution.2017.
The number of financial advisors with AUM or AUA on our technology platforms increased from 30,17735,067 as of SeptemberJune 30, 20152016 to 35,86138,489 as of SeptemberJune 30, 20162017 and the number of AUM or AUA client accounts increased from approximately 1,063,0001,400,000 as of SeptemberJune 30, 20152016 to approximately 1,481,0001,700,000 as of SeptemberJune 30, 2016.2017.
Subscription and licensing
Subscription and licensing revenues increased 214%30% from $45,257$90,657 in the ninesix months ended SeptemberJune 30, 20152016 to $142,303$117,712 in the ninesix months ended SeptemberJune 30, 2016.2017. This increase was primarily due to an increase in Envestnet related revenue of $6,268 and an increase in Envestnet | Tamarac related revenue of $9,384$6,024 and Envestnet | Yodlee contributing an additional $82,002.$14,763. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee was acquiredrevenue is primarily due to an increase in November 2015revenue from new and its revenues were not included in the entire 2015 period.existing customers of $13,074 and Wheelhouse related revenue of $1,689.
Professional services and other
Professional services and other revenues increased 217%3% from $6,755$13,945 in the ninesix months ended SeptemberJune 30, 20152016 to $21,412$14,370 in the ninesix months ended SeptemberJune 30, 2016. This increase was primarily due to an increase in Envestnet | Tamarac related revenue of $1,258 and Envestnet | Yodlee contributing an additional $12,265. The increase in Envestnet and Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients. Envestnet | Yodlee was acquired in November 2015 and its revenues were not included in the entire 2015 period.2017.
Cost of revenues
Cost of revenues increased 8%23% from $122,208$85,060 in the ninesix months ended SeptemberJune 30, 20152016 to $132,319$104,961 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to a corresponding increase in revenues from AUM or AUA.AUA, the mix of such revenues from AUM or AUA, and an increase in cost of revenues associated with subscription and licensing revenues. As a percentage of total revenues, cost of revenues decreasedincreased from 40% in the nine months ended September 30, 2015 to 31% in the ninesix months ended SeptemberJune 30, 2016 primarily as a result of Envestnet | Yodlee segment revenues with a lower cost of revenue profile.to 32% in the six months ended June 30, 2017.
Compensation and benefits
Compensation and benefits increased 88%9% from $96,162$120,280 in the ninesix months ended SeptemberJune 30, 20152016 to $180,625$130,528 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to an increase in salaries, benefits and related payroll taxes of $54,634,$12,181, primarily a result of an increase in headcount including headcount related to the Yodlee acquisition and an increase in headcount to support organic growth. Angrowth and short-term variable compensation of $1,710. The increase in non-cash stocksalaries, benefits and related payroll taxes was offset by a decrease in stock-based compensation expense of $15,715$2,915 and an increase in incentive compensationseverance of $8,581 also contributed to the increase in compensation and benefits.$1,383. As a percentage of total revenues, compensation and benefits increaseddecreased from 32%44% in the ninesix months ended SeptemberJune 30, 20152016 to 43%40% in the ninesix months ended SeptemberJune 30, 2016.2017. The increasedecrease in the compensation and benefits as a percentage of total revenues is primarily due to the Envestnet | Yodlee segment having a higher cost profile.
Generalrevenue increase compared to a lower compensation and administration
General and administration expenses increased 78% from $44,905 in the nine months ended September 30, 2015 to $80,097 in the nine months ended September 30, 2016, primarily due to general and administration expense increases related to the Envestnet | Yodlee segment of $23,853, increases in non-Envestnet | Yodlee fair market value adjustments to contingent consideration of $4,629, non-Envestnet | Yodlee occupancy costs of $2,329 and non-Envestnet | Yodlee travel and entertainment of $962. As a percentage of total revenues, general and administration expenses increased from 15% in the nine months ended September 30, 2015 to 19% in the nine months ended September 30, 2016.The increase in general and administration expense as a percentage of total revenues is primarily due to the Envestnet | Yodlee segment having a higher cost profile.
benefit increase.
3735
General and administration
General and administration expenses increased 9% from $54,099 in the six months ended June 30, 2016 to $59,025 in the six months ended June 30, 2017, primarily due to increases audit and related fees of $2,493, occupancy costs of $1,617, marketing of $1,408, professional and legal fees of $1,075, and travel and entertainment of $758 offset by a decrease in website and systems development costs of $1,658, litigation related expense of $935 and fair market value adjustments on contingent consideration of $489. As a percentage of total revenues, general and administration expenses decreased from 20% in the six months ended June 30, 2016 to 18% in the six months ended June 30, 2017.
Depreciation and amortization
Depreciation and amortization expense increased 190%decreased 6% from $17,215$33,180 in the ninesix months ended SeptemberJune 30, 20152016 to $49,872$31,300 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to an increasea decrease in intangible asset amortization of $25,955 and$3,165 offset by an increase in amortization of internally developed software of $748 and depreciation expense of $6,702, primarily a resultfixed assets of the Yodlee acquisition.$537. As a percentage of total revenues, depreciation and amortization expense increaseddecreased from 6% in the nine months ended September 30, 2015 to 12% in the ninesix months ended SeptemberJune 30, 2016 primarily a result of Envestnet | Yodlee intangible asset amortization.
Restructuring
Into 10% in the ninesix months ended SeptemberJune 30, 2016 and 2015, the Company incurred restructuring charges of $152 and $518, respectively, primarily related to lease abandonment charges for the former Placemark office located in Wellesley, Massachusetts.2017.
Other expense, net
Other expense, net includesincreased 12% from $8,780 in the six months ended June 30, 2016 to $9,852 in the six months ended June 30, 2017, due to an increase in interest expense of $5,264$590 primarily as a result of additional borrowings under the November 19, 2015 Amendedan increase in debt issuance cost amortization and Restated Credit Agreement (see Note 12 to the notes to the condensed consolidated financial statements).a loss on foreign currency exchange of $567.
Income tax provision (benefit)
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|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||
|
| September 30, |
|
| June 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2017 |
| 2016 |
| ||||
Income (loss) before income tax provision (benefit) |
| $ | (33,595) |
| $ | 14,675 |
| |||||||
Loss before income tax provision (benefit) |
| $ | (10,463) |
| $ | (27,870) |
| |||||||
Income tax provision (benefit) |
|
| (10,602) |
|
| 6,326 |
|
|
| 9,142 |
|
| (8,934) |
|
Effective tax rate |
|
| 31.6 | % |
| 43.1 | % |
|
| (87.4) | % |
| 32.1 | % |
For the ninesix months ended SeptemberJune 30, 2017, our effective tax rate differs from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a result of the valuation allowance on all domestic deferreds, compared to the book loss in 2016 with the absence of a valuation allowance.
For the six months ended June 30, 2016, our effective tax rate differs from the statutory rate primarily due to the effect of state taxes, various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.
For the nine months ended September 30, 2015, our effective tax rate differs from the statutory rate primarily due to the effect of an increase in the blended state tax rate, permanent differences, an uncertain tax position current year accrual related to transfer pricing and non-recognition of a loss from a subsidiary due to a full valuation allowance.
Segments
Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Note 1719 to the notes to the condensed consolidated financial statements. Our business segments are as follows:
· | Envestnet – a leading provider of unified wealth management software and services |
· | Envestnet | Yodlee – a leading data aggregation and data |
3836
The following table presents income (loss) from operations by segment:
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|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| September 30, |
| September 30, | June 30, |
| June 30, | ||||||||||||||||
| 2016 |
| 2015 |
| 2016 |
| 2015 | 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Envestnet | $ | 12,361 |
| $ | 11,897 |
| $ | 32,425 |
| $ | 31,945 | $ | 15,811 |
| $ | 10,490 |
| $ | 29,322 |
| $ | 20,064 |
Envestnet | Yodlee |
| (8,416) |
|
| — |
|
| (33,728) |
|
| — |
| (5,635) |
|
| (11,271) |
|
| (13,343) |
|
| (25,312) |
Total segment income (loss) from operations |
| 3,945 |
|
| 11,897 |
|
| (1,303) |
|
| 31,945 |
| 10,176 |
|
| (781) |
|
| 15,979 |
|
| (5,248) |
Nonsegment operating expenses |
| (5,236) |
|
| (3,569) |
|
| (19,078) |
|
| (10,469) |
| (7,433) |
|
| (5,549) |
|
| (16,590) |
|
| (13,842) |
Other expense, net |
| (4,434) |
|
| (2,347) |
|
| (13,214) |
|
| (6,801) |
| (4,369) |
|
| (4,831) |
|
| (9,852) |
|
| (8,780) |
Consolidated income (loss) before income taxes (benefit) |
| (5,725) |
|
| 5,981 |
|
| (33,595) |
|
| 14,675 | |||||||||||
Consolidated loss before income taxes (benefit) |
| (1,626) |
|
| (11,161) |
|
| (10,463) |
|
| (27,870) | |||||||||||
Income tax provision (benefit) |
| (1,668) |
|
| 2,679 |
|
| (10,602) |
|
| 6,326 |
| 4,844 |
|
| (3,218) |
|
| 9,142 |
|
| (8,934) |
Consolidated net income (loss) |
| (4,057) |
|
| 3,302 |
|
| (22,993) |
|
| 8,349 | |||||||||||
Consolidated net loss |
| (6,470) |
|
| (7,943) |
|
| (19,605) |
|
| (18,936) | |||||||||||
Add: Net loss attributable to non-controlling interest |
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
Consolidated net income (loss) attributable to Envestnet, Inc. | $ | (4,057) |
| $ | 3,302 |
| $ | (22,993) |
| $ | 8,349 | |||||||||||
Consolidated net loss attributable to Envestnet, Inc. | $ | (6,470) |
| $ | (7,943) |
| $ | (19,605) |
| $ | (18,936) |
Envestnet
The following table presents income from operations for the Envestnet segment:
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|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
| Three Months Ended |
|
|
|
| Six Months Ended |
|
|
| ||||||||||||||||
|
| September 30, |
|
|
|
| September 30, |
|
|
|
| June 30, |
|
|
|
| June 30, |
|
|
| ||||||||||||||||
|
| 2016 |
| 2015 |
| Percent Change |
|
| 2016 |
| 2015 |
| Percent Change |
|
| 2017 |
| 2016 |
| Percent Change |
| 2017 |
| 2016 |
| Percent Change | ||||||||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
|
| (in thousands) |
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|
|
| (in thousands) |
|
|
| ||||||||||||||||
Revenues: |
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Assets under management or administration |
| $ | 90,042 |
| $ | 85,576 |
| 5 | % |
| $ | 258,969 |
| $ | 250,472 |
| 3 | % |
| $ | 98,959 |
| $ | 86,056 |
| 15 | % |
| $ | 193,121 |
| $ | 168,927 |
| 14 | % |
Subscription and licensing |
|
| 22,198 |
|
| 16,163 |
| 37 | % |
|
| 60,301 |
|
| 45,257 |
| 33 | % |
|
| 25,471 |
|
| 19,840 |
| 28 | % |
|
| 50,708 |
|
| 38,416 |
| 32 | % |
Professional services and other |
|
| 2,271 |
|
| 1,628 |
| 39 | % |
|
| 9,147 |
|
| 6,755 |
| 35 | % |
|
| 4,942 |
|
| 4,820 |
| 3 | % |
|
| 6,861 |
|
| 6,563 |
| 5 | % |
Total revenues |
|
| 114,511 |
|
| 103,367 |
| 11 | % |
|
| 328,417 |
|
| 302,484 |
| 9 | % |
|
| 129,372 |
|
| 110,716 |
| 17 | % |
|
| 250,690 |
|
| 213,906 |
| 17 | % |
|
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|
|
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|
|
Operating expenses: |
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Cost of revenues |
|
| 43,806 |
|
| 41,027 |
| 7 | % |
|
| 124,649 |
|
| 122,208 |
| 2 | % |
|
| 52,402 |
|
| 42,490 |
| 23 | % |
|
| 98,473 |
|
| 80,843 |
| 22 | % |
Compensation and benefits |
|
| 37,067 |
|
| 31,314 |
| 18 | % |
|
| 106,648 |
|
| 92,316 |
| 16 | % |
|
| 38,742 |
|
| 34,466 |
| 12 | % |
|
| 78,220 |
|
| 69,581 |
| 12 | % |
General and administration |
|
| 14,915 |
|
| 12,972 |
| 15 | % |
|
| 45,757 |
|
| 38,282 |
| 20 | % |
|
| 16,056 |
|
| 16,910 |
| (5) | % |
|
| 31,893 |
|
| 30,994 |
| 3 | % |
Depreciation and amortization |
|
| 6,362 |
|
| 6,157 |
| 3 | % |
|
| 18,786 |
|
| 17,215 |
| 9 | % |
|
| 6,361 |
|
| 6,360 |
| — | % |
|
| 12,782 |
|
| 12,424 |
| 3 | % |
Restructuring charges |
|
| — |
|
| — |
| — | % |
|
| 152 |
|
| 518 |
| (71) | % | ||||||||||||||||||
Total operating expenses |
|
| 102,150 |
|
| 91,470 |
| 12 | % |
|
| 295,992 |
|
| 270,539 |
| 9 | % |
|
| 113,561 |
|
| 100,226 |
| 13 | % |
|
| 221,368 |
|
| 193,842 |
| 14 | % |
Income from operations |
| $ | 12,361 |
| $ | 11,897 |
| 4 | % |
| $ | 32,425 |
| $ | 31,945 |
| 2 | % |
| $ | 15,811 |
| $ | 10,490 |
| 51 | % |
| $ | 29,322 |
| $ | 20,064 |
| 46 | % |
Three months ended SeptemberJune 30, 20162017 compared to three months SeptemberJune 30, 20152016 for the Envestnet segment
Revenues
Total revenues increased 11%17% from $103,367$110,716 in the three months ended SeptemberJune 30, 20152016 to $114,511$129,372 in the three months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in revenues from AUM/A of $12,903 and an increase in revenues from subscription and licensing of $5,793.$5,631. Revenues from AUM/A were 79%78% and 83%76% of total revenues in the three months ended SeptemberJune 30, 2016 and 2015,2017, respectively.
Assets under management or administration
Revenues earned from AUM/AUA increased 5%15% from $85,576$86,056 in the three months ended SeptemberJune 30, 20152016 to $90,042$98,959 in the three months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2016,2017, relative to the corresponding period in 2015. In the third quarter of 2016, revenues were positively affected by new account growth and positive net flows of AUM or AUA during the first six months of 2016 as well as during 2015, partially offset by a lower overall effective fee rate on AUM/AUA primarily related to the transition of a WMS client to a lower priced solution.2016.
3937
The number of financial advisors with AUM or AUA on our technology platforms increased from 30,17735,067 as of SeptemberJune 30, 20152016 to 35,86138,489 as of SeptemberJune 30, 20162017 and the number of AUM or AUA client accounts increased from approximately 1,063,0001,400,000 as of SeptemberJune 30, 20152016 to approximately 1,481,0001,700,000 as of SeptemberJune 30, 2016.2017.
Subscription and licensing
Subscription and licensing revenues increased 37%28% from $16,163$19,840 in the three months ended SeptemberJune 30, 20152016 to $22,198$25,471 in the three months ended SeptemberJune 30, 2016,2017, primarily due to an increase in Envestnet related revenue of $2,6883,035 and an increase in Envestnet | Tamarac related revenue of $3,347.$2,596. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.
Professional services and other
Professional services and other revenues increased 39%3% from $1,628$4,820 in the three months ended SeptemberJune 30, 20152016 to $2,271$4,942 in the three months ended SeptemberJune 30, 2016, primarily due to an increase in Envestnet professional service related revenue of $194 and Envestnet | Tamarac professional services related revenue of $378.The increase in Envestnet and Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients.2017.
Cost of revenues
Cost of revenues increased 7%23% from $41,027$42,490 in the three months ended SeptemberJune 30, 20152016 to $43,806$52,402 in the three months ended SeptemberJune 30, 2016,2017, primarily due to the corresponding increase in revenues from AUM or AUA.AUA, and the mix of such revenues. As a percentage of total revenues, cost of revenues decreasedincreased from 40% in the three months ended September 30, 2015 to 38% in the three months ended SeptemberJune 30, 2016.2016 to 41% in the three months ended June 30, 2017.
Compensation and benefits
Compensation and benefits increased 18%12% from $31,314$34,466 in the three months ended SeptemberJune 30, 20152016 to $37,067$38,742 in the three months ended SeptemberJune 30, 2016,2017, primarily due to an increase in salaries, benefits and related payroll taxes of $3,431,$2,117, primarily a result of an increase in headcount, including headcount related to the FinaConnect and Castle Rock acquisitions and headcount to support organic growth. An increase in non-cash compensation expense of $541 and severance expense of $968$1,847 also contributed to the increase in compensation and benefits. As a percentage of total revenues, compensation and benefits increaseddecreased from 31% in the three months ended June 30, 2016 to 30% in the three months ended SeptemberJune 30, 2015 to 32% in the three months ended September 30, 2016.2017.
General and administration
General and administration expenses increased 15%decreased 5% from $12,972$16,910 in the three months ended SeptemberJune 30, 20152016 to $14,915$16,056 in the three months ended SeptemberJune 30, 2016,2017, primarily due to decreases in website and systems costs of $1,663, offset by increases in occupancy costs of $897external data and nonrecurring corporateresearch services expenses of $383.$439 and sales tax expense of $414. As a percentage of total revenues, general and administration expenses remained consistent year over year at 13%decreased from 15% in the three months ended SeptemberJune 30, 2015 and 2016 respectively.to 12% in the three months ended June 30, 2017.
Depreciation and amortization
Depreciation and amortization expense increased 3%remained consistent from $6,157$6,360 in the three months ended SeptemberJune 30, 20152016 to $6,362$6,361 in the three months ended SeptemberJune 30, 2016, primarily due to increases in depreciation of $241 from fixed asset purchases.2017. As a percentage of total revenues, depreciation and amortization expense remained consistent year over year atdecreased from 6% in the three months ended SeptemberJune 30, 2015 and 2016 respectively.to 5% in the three months ended June 30, 2017.
NineSix months ended SeptemberJune 30, 20162017 compared to ninesix months SeptemberJune 30, 20152016 for the Envestnet segment
Revenues
Total revenues increased 9%17% from $302,484$213,906 in the ninesix months ended SeptemberJune 30, 20152016 to $328,417$250,690 in the ninesix months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in revenues from AUM/A of $24,194 and an increase in revenues from subscription and licensing of $15,115.$12,292. Revenues from AUM/A were 79% and 83%77% of total revenues in the ninesix months ended SeptemberJune 30, 2016 and 2015,2017, respectively.
4038
Assets under management or administration
Revenues earned from AUM/AUA increased 3%14% from $250,472$168,927 in the ninesix months ended SeptemberJune 30, 20152016 to $258,969$193,121 in the ninesix months ended SeptemberJune 30, 2016.2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2016,2017, relative to the corresponding period in 2015. In the nine months ended September 30, 2016, revenues were positively affected by new account growth and positive net flows of AUM or AUA during 2016 and 2015, partially offset by a lower overall effective fee rate on AUM/AUA primarily related to the transition of a WMS client to a lower priced solution.2016.
The number of financial advisors with AUM or AUA on our technology platforms increased from 30,17735,067 as of SeptemberJune 30, 20152016 to 35,86138,489 as of SeptemberJune 30, 20162017 and the number of AUM or AUA client accounts increased from approximately 1,063,0001,400,000 as of SeptemberJune 30, 20152016 to approximately 1,481,0001,700,000 as of SeptemberJune 30, 2016.2017.
Subscription and licensing
Subscription and licensing revenues increased 33%32% from $45,257$38,416 in the ninesix months ended SeptemberJune 30, 20152016 to $60,301$50,708 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to an increase in Envestnet related revenue of $6,268 and an increase in Envestnet | Tamarac related revenue of $9,384. $6,024.The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.
Professional services and other
Professional services and other revenues increased 35%5% from $6,755$6,563 in the ninesix months ended SeptemberJune 30, 20152016 to $9,147$6,861 in the ninesix months ended SeptemberJune 30, 2016, primarily due to an increase in Envestnet | Tamarac professional services related revenue of $1,258.The increase in Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients.2017.
Cost of revenues
Cost of revenues increased 2%22% from $122,208$80,843 in the ninesix months ended SeptemberJune 30, 20152016 to $124,649$98,473 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to the corresponding increase in revenues from AUM or AUA.AUA, and the mix of such revenues. As a percentage of total revenues, cost of revenues decreasedincreased from 40% in the nine months ended September 30, 2015 to 38% in the ninesix months ended SeptemberJune 30, 2016.2016 to 39% in the six months ended June 30, 2017.
Compensation and benefits
Compensation and benefits increased 16%12% from $92,316$69,581 in the ninesix months ended SeptemberJune 30, 20152016 to $106,648$78,220 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to an increase in salaries, benefits and related payroll taxes of $10,626,$5,403, primarily a result of an increase in headcount including headcount related to the FinaConnect and Castle Rock acquisitions and headcount to support organic growth. SeveranceAn increase in non-cash compensation expense of $1,143$2,306 also contributed to the increase in compensation and benefits. As a percentage of total revenues, compensation and benefits increaseddecreased from 33% in the six months ended June 30, 2016 to 31% in the ninesix months ended SeptemberJune 30, 2015 to 32% in the nine months ended September 30, 2016.2017.
General and administration
General and administration expenses increased 20%3% from $38,282$30,994 in the ninesix months ended SeptemberJune 30, 20152016 to $45,757$31,893 in the ninesix months ended SeptemberJune 30, 20162017, primarily due to increases in external data and research services expenses of $878, sales tax expense of $1,163, occupancy costs of $2,328, travel$702, marketing expenses of $471, and entertainmentmiscellaneous general and administrative expense of $1,114 and$430, offset by a decrease in website and system developmentsystems costs of $650.$2,739. As a percentage of total revenues, general and administration expenses increaseddecreased from 14% in the six months ended June 30, 2016 to 13% in the ninesix months ended SeptemberJune 30, 2015 to 14% in the nine months ended September 30, 2016.2017.
Depreciation and amortization
Depreciation and amortization expense increased 9%3% from $17,215$12,424 in the ninesix months ended SeptemberJune 30, 20152016 to $18,786$12,782 in the ninesix months ended SeptemberJune 30, 2016,2017, primarily due to increasesan increase in depreciation on fixed assets and internally developed software of $1,328 from fixed asset purchases.$1,661 offset by a decrease in amortization of intangibles of $1,303. As a percentage of total revenues, depreciation and amortization expense remained consistent year over year atdecreased from 6% in the ninesix months ended SeptemberJune 30, 20152016 to 5% in the six months ended June 30, 2017.
39
Envestnet | Yodlee
The following table presents loss from operations for the Envestnet | Yodlee segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Six Months Ended |
|
|
| ||||||||
|
| June 30, |
|
|
|
| June 30, |
|
|
| ||||||||
|
| 2017 |
| 2016 |
| Percent Change |
| 2017 |
| 2016 |
| Percent Change | ||||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and licensing |
| $ | 34,331 |
| $ | 27,197 |
| 26 | % |
| $ | 67,004 |
| $ | 52,241 |
| 28 | % |
Professional services and other |
|
| 3,714 |
|
| 3,795 |
| (2) | % |
|
| 7,509 |
|
| 7,382 |
| 2 | % |
Total revenues |
|
| 38,045 |
|
| 30,992 |
| 23 | % |
|
| 74,513 |
|
| 59,623 |
| 25 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
| 3,333 |
|
| 2,412 |
| 38 | % |
|
| 6,488 |
|
| 4,217 |
| 54 | % |
Compensation and benefits |
|
| 23,342 |
|
| 20,806 |
| 12 | % |
|
| 46,592 |
|
| 44,450 |
| 5 | % |
General and administration |
|
| 7,901 |
|
| 8,305 |
| (5) | % |
|
| 16,258 |
|
| 15,512 |
| 5 | % |
Depreciation and amortization |
|
| 9,104 |
|
| 10,740 |
| (15) | % |
|
| 18,518 |
|
| 20,756 |
| (11) | % |
Total operating expenses |
|
| 43,680 |
|
| 42,263 |
| 3 | % |
|
| 87,856 |
|
| 84,935 |
| 3 | % |
Loss from operations |
| $ | (5,635) |
| $ | (11,271) |
| (50) | % |
| $ | (13,343) |
| $ | (25,312) |
| (47) | % |
Three months ended June 30, 2017 compared to three months ended June 30, 2016 for the Envestnet | Yodlee segment
Revenues
Total revenues increased 23% from $30,992 in the three months ended June 30, 2016 to $38,045 in the three months ended June 30, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $7,134. Revenues from professional services and other were 12% and 10% of total revenues in the three months ended June 30, 2016 and 2017, respectively.
Subscription and licensing
Subscription and licensing revenues increased 26% from $27,197 in the three months ended June 30, 2016 to $34,331 in the three months ended June 30, 2017, primarily due to an increase in revenue from existing and other customers of $3,685, new customers of $2,508 and Wheelhouse related revenue of $941.
Professional services and other
Professional services and other revenues decreased 2% from $3,795 in the three months ended June 30, 2016 to $3,714 in the three months ended June 30, 2017.
Cost of revenues
Cost of revenues increased 38% from $2,412 in the three months ended June 30, 2016 to $3,333 in the three months ended June 30, 2017, primarily due to an increase in hosting and payment processing services of $547 to support our overall revenue growth and third party consulting and professional services of $407.As a percentage of total revenues, cost of revenues increased from 8% in the three months ended June 30, 2016 to 9% in the three months ended June 30, 2017.
Compensation and benefits
Compensation and benefits increased 12% from $20,806 in the three months ended June 30, 2016 to $23,342 in the three months ended June 30, 2017, primarily due to an increase in salaries, incentive compensation, benefits and related payroll taxes of $3,013, as a result of increased headcount to support organic growth and an increase related to the Wheelhouse acquisition, offset by a decrease in non-cash compensation expense of $504 and severance of $355. As a percentage of total revenues, compensation and benefits
40
decreased from 67% in the three months ended June 30, 2016 to 61% in the three months ended June 30, 2017. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.
General and administration
General and administration expenses decreased 5% from $8,305 in the three months ended June 30, 2016 to $7,901 in the three months ended June 30, 2017, primarily due to a decrease in legal expense of $1,187, partially offset by increases in software purchase and maintenance of $561 and occupancy cost of $515. As a percentage of total revenues, general and administration expenses decreased from 27% in the three months ended June 30, 2016 to 21% in the three months ended June 30, 2017.
Depreciation and amortization
Depreciation and amortization expense decreased 15% from $10,740 in the three months ended June 30, 2016 to $9,104 in the three months ended June 30, 2017, primarily due to a decrease in intangible asset amortization of $1,122 related to purchase accounting adjustments recorded in the prior year to the fair values of certain intangible assets from the Yodlee acquisition and a decrease in depreciation of $585 related to the Yodlee acquisition recorded in the same period last year. The decrease was partially offset by an increase of $90 in intangible asset amortization as a result of the Wheelhouse acquisition. As a percentage of total revenues, depreciation and amortization expense decreased from 35% in the three months ended June 30, 2016 to 24% in the three months ended June 30, 2017.
Six months ended June 30, 2017 compared to six months ended June 30, 2016 for the Envestnet | Yodlee segment
Revenues
Total revenues increased 25% from $59,623 in the six months ended June 30, 2016 to $74,513 in the six months ended June 30, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $14,763. Revenues from professional services and other were 12% and 10% of total revenues in the six months ended June 30, 2016 and 2017, respectively.
Subscription and licensing
Subscription and licensing revenues increased 28% from $52,241 in the six months ended June 30, 2016 to $67,004 in the six months ended June 30, 2017, primarily due to an increase in revenue from existing and other customers of $8,459, new customers of $4,615 and Wheelhouse related revenue of $1,689.
Professional services and other
Professional services and other revenues increased 2% from $7,382 in the six months ended June 30, 2016 to $7,509 in the six months ended June 30, 2017.
Cost of revenues
Cost of revenues increased 54% from $4,217 in the six months ended June 30, 2016 to $6,488 in the six months ended June 30, 2017, primarily due to an increase in third party consulting and professional services of $1,272 and hosting and payment processing services of $1,032 to support our overall revenue growth. As a percentage of total revenues, cost of revenues increased from 7% in the six months ended June 30, 2016 to 9% in the six months ended June 30, 2017.
Compensation and benefits
Compensation and benefits increased 5% from $44,450 in the six months ended June 30, 2016 to $46,592 in the six months ended June 30, 2017, primarily due to an increase in salaries, incentive compensation, benefits and related payroll taxes of $6,286, as a result of increased headcount to support organicgrowth and an increase related to the Wheelhouse acquisition, partially offset by a decrease in non-cash compensation expense of $3,788 and severance of $455. As a percentage of total revenues, compensation and benefits decreased from 75% in the six months ended June 30, 2016 to 63% in the six months ended June 30, 2017. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.
41
RestructuringGeneral and administration
InGeneral and administration expenses increased 5% from $15,512 in the ninesix months ended SeptemberJune 30, 2016 to $16,258 in the six months ended June 30, 2017, primarily due to increases in software purchase and 2015,maintenance of $1,086, employee travel expenses of $560, and occupancy cost of $912, partially offset by decreases in communication and research costs of $1,123 and legal expense of $709. As a percentage of total revenues, general and administration expenses decreased from 26% in the Company incurred restructuring chargessix months ended June 30, 2016 to 22% in the six months ended June 30, 2017.
Depreciation and amortization
Depreciation and amortization expense decreased 11% from $20,756 in the six months ended June 30, 2016 to $18,518 in the six months ended June 30, 2017, primarily due to a decrease in intangible asset amortization of $152 and $518, respectively, primarily$2,244 related to lease abandonment charges forpurchase accounting adjustments recorded in the former Placemark office locatedprior year to the fair values of certain intangible assets from the Yodlee acquisition and a decrease in Wellesley, Massachusetts.depreciation of $585 related to the Yodlee acquisition recorded in the same period last year. The decrease was partially offset by an increase of $361 in intangible asset amortization as a result of the Wheelhouse acquisition. As a percentage of total revenues, depreciation and amortization expense decreased from 35% in the six months ended June 30, 2016 to 25% in the six months ended June 30, 2017.
Envestnet | YodleeNonsegment
The following table presents incomenonsegment loss from operations for the Envestnet | Yodlee segment:operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
| ||||||||
|
| September 30, |
|
|
|
| September 30, |
|
| ||||||||
|
| 2016 |
| 2015 |
| Percent Change |
|
| 2016 |
| 2015 |
| Percent Change | ||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription and licensing |
| $ | 29,761 |
| $ | — |
| * |
|
| $ | 82,002 |
| $ | — |
| * |
Professional services and other |
|
| 4,883 |
|
| — |
| * |
|
|
| 12,265 |
|
| — |
| * |
Total revenues |
|
| 34,644 |
|
| — |
| * |
|
|
| 94,267 |
|
| — |
| * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
| 3,453 |
|
| — |
| * |
|
|
| 7,670 |
|
| — |
| * |
Compensation and benefits |
|
| 20,936 |
|
| — |
| * |
|
|
| 65,386 |
|
| — |
| * |
General and administration |
|
| 8,341 |
|
| — |
| * |
|
|
| 23,853 |
|
| — |
| * |
Depreciation and amortization |
|
| 10,330 |
|
| — |
| * |
|
|
| 31,086 |
|
| — |
| * |
Total operating expenses |
|
| 43,060 |
|
| — |
| * |
|
|
| 127,995 |
|
| — |
| * |
Loss from operations |
| $ | (8,416) |
| $ | — |
| * |
|
| $ | (33,728) |
| $ | — |
| * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Six Months Ended |
|
|
| ||||||||
|
| June 30, |
|
|
|
| June 30, |
|
|
| ||||||||
|
| 2017 |
| 2016 |
| Percent Change |
| 2017 |
| 2016 |
| Percent Change | ||||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
| $ | 2,912 |
| $ | 2,392 |
| 22 | % |
| $ | 5,716 |
| $ | 6,249 |
| (9) | % |
General and administration |
|
| 4,521 |
|
| 3,157 |
| 43 | % |
|
| 10,874 |
|
| 7,593 |
| 43 | % |
Total operating expenses |
|
| 7,433 |
|
| 5,549 |
| 34 | % |
|
| 16,590 |
|
| 13,842 |
| 20 | % |
Loss from operations |
| $ | (7,433) |
| $ | (5,549) |
| 34 | % |
| $ | (16,590) |
| $ | (13,842) |
| 20 | % |
* Not meaningful
Three and nine months ended SeptemberJune 30, 20162017 compared to three and nine months Septemberended June 30, 20152016 for the Envestnet |Yodlee segmentnonsegment
There are no amounts in the threeCompensation and nine months ended September 30, 2015, as Yodlee was acquired on November 19, 2015. For additional information pertaining to our business segments, see Note 17 to the notes to the condensed consolidated financial statements.benefits
Nonsegment
Nonsegment expensesCompensation and benefits increased 47%22% from $3,569$2,392 in the three months ended SeptemberJune 30, 20152016 to $5,236$2,912 in the three months ended SeptemberJune 30, 2016,2017, primarily due to an increase in compensationsalaries, benefits and benefits expenserelated payroll taxes of $984$572.
General and an increase in generaladministration
General and administration expenses of $683.
Nonsegment expenses increased 82%43% from $10,469$3,157 in the ninethree months ended SeptemberJune 30, 20152016 to $19,078$4,521 in the ninethree months ended SeptemberJune 30, 2016,2017, primarily due to an increase in compensationrestructuring charges and transaction costs of $759 and professional and legal fees of $628.
Six months ended June 30, 2017 compared to six months ended June 30, 2016 for nonsegment
Compensation and benefits
Compensation and benefits expense of $4,745 and an increase general and administration expenses of $3,864. The increasedecreased 9% from $6,249 in general and administration wasthe six months ended June 30, 2016 to $5,716 in the six months ended June 30, 2017, primarily due to the prior period containing a decrease in non-cash compensation expense of the fair market value adjustment on contingent consideration.$1,310 and severance expense of $323, offset by an increase in salaries, benefits and related payroll taxes of $1,060.
Non-GAAP Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
|
| (in thousands) |
|
|
|
|
|
| ||||
Adjusted revenues |
| $ | 149,486 |
| $ | 103,501 |
| $ | 423,465 |
| $ | 302,618 |
Adjusted EBITDA |
|
| 27,505 |
|
| 19,215 |
|
| 69,126 |
|
| 53,640 |
Adjusted net income |
|
| 12,463 |
|
| 9,271 |
|
| 29,498 |
|
| 26,372 |
Adjusted net income per share |
|
| 0.28 |
|
| 0.25 |
|
| 0.67 |
|
| 0.70 |
42
General and administration
General and administration expenses increased 43% from $7,593 in the six months ended June 30, 2016 to $10,874 in the six months ended June 30, 2017, primarily due to increases in restructuring charges and transaction costs of $1,804, professional and legal fees of $1,103 and marketing expense of $505.
Non-GAAP Financial Measures
In addition to reporting results according to U.S. GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues”, “adjusted EBITDA”, “adjusted net income”, and “adjusted net income per share”.
“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under U.S. GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand-alonestand‑alone entities.
“Adjusted EBITDA” represents net incomeloss before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration and purchase liability, income tax provision (benefit), depreciation and amortization, non-cashnon‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non-controllingnon‑controlling interest.
“Adjusted net income” represents net incomeloss before deferred revenue fair value adjustment, accretion on contingent consideration non-cashand purchase liability, non‑cash interest expense, non-cashnon‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fair‑market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non-controllingnon‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income. The reconciling items, and resulting adjusted net income, are presented on a different basis than historically shown to eliminate the impact of quarterly volatility of the GAAP tax provision (benefit) on the Company’s adjusted earnings figures.
“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted-averageweighted‑average shares outstanding.
Our Board of Directors and our management use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share:
· | As measures of operating performance; |
· | For planning purposes, including the preparation of annual budgets; |
· | To allocate resources to enhance the financial performance of our business; |
· | To evaluate the effectiveness of our business strategies; and |
· | In communications with our Board of Directors concerning our financial performance. |
Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.
We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measures because we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provide comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, income tax provision, non-
43
income tax expense, restructuring charges and transaction costs, imputed interestaccretion on contingent consideration, fair market value adjustments on contingent consideration, severance, litigation related expense, pre-tax loss attributable to non-controlling interest, and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense from adjusted EBITDA and adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.
We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to revenues, net income, operating income or
43
any other performance measures derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
We understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider:
· | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
· | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect changes in, or cash requirements for, our working capital needs; |
· | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect non-cash components of employee compensation; |
· | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; |
· | Due to either net losses before income tax |
· | Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share differently than we do, limiting their usefulness as a comparative measure. |
Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted operating income, adjusted net income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable U.S. GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per share to net income and net income per share, the most directly comparable U.S. GAAP measure. Further, our management also reviews U.S. GAAP measures and evaluates individual measures that are not included in some or all of our non-U.S. GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
|
| (in thousands) |
| (in thousands) |
| (in thousands) | ||||||||||||||||||
Total revenues |
| $ | 149,155 |
| $ | 103,367 |
| $ | 422,684 |
| $ | 302,484 |
| $ | 167,417 |
| $ | 141,708 |
| $ | 325,203 |
| $ | 273,529 |
Deferred revenue fair value adjustment |
|
| 331 |
|
| 134 |
|
| 781 |
|
| 134 |
|
| 52 |
|
| 240 |
|
| 105 |
|
| 450 |
Adjusted revenues |
| $ | 149,486 |
| $ | 103,501 |
| $ | 423,465 |
| $ | 302,618 |
| $ | 167,469 |
| $ | 141,948 |
| $ | 325,308 |
| $ | 273,979 |
44
The following table sets forth a reconciliation of net income (loss)loss to adjusted EBITDA based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||
|
| (in thousands) |
| (in thousands) |
| (in thousands) |
| ||||||||||||||||||
Net income (loss) |
| $ | (4,057) |
| $ | 3,302 |
| $ | (22,993) |
| $ | 8,349 | |||||||||||||
Net loss |
| $ | (6,470) |
| $ | (7,943) |
| $ | (19,605) |
| $ | (18,936) |
| ||||||||||||
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment |
|
| 331 |
|
| 134 |
|
| 781 |
|
| 134 |
|
| 52 |
|
| 240 |
|
| 105 |
|
| 450 |
|
Interest income |
|
| (6) |
|
| (77) |
|
| (28) |
|
| (288) |
|
| (29) |
|
| (9) |
|
| (50) |
|
| (22) |
|
Interest expense |
|
| 4,122 |
|
| 2,384 |
|
| 12,345 |
|
| 7,081 |
|
| 3,877 |
|
| 4,131 |
|
| 8,813 |
|
| 8,223 |
|
Accretion on contingent consideration |
|
| 23 |
|
| 143 |
|
| 143 |
|
| 794 | |||||||||||||
Accretion on contingent consideration and purchase liability |
|
| 148 |
|
| 58 |
|
| 304 |
|
| 120 |
| ||||||||||||
Income tax provision (benefit) |
|
| (1,668) |
|
| 2,679 |
|
| (10,602) |
|
| 6,326 |
|
| 4,844 |
|
| (3,218) |
|
| 9,142 |
|
| (8,934) |
|
Depreciation and amortization |
|
| 16,692 |
|
| 6,157 |
|
| 49,872 |
|
| 17,215 |
|
| 15,465 |
|
| 17,100 |
|
| 31,300 |
|
| 33,180 |
|
Non-cash compensation expense |
|
| 7,554 |
|
| 3,409 |
|
| 25,872 |
|
| 10,157 |
|
| 7,945 |
|
| 6,703 |
|
| 15,403 |
|
| 18,194 |
|
Restructuring charges and transaction costs |
|
| 998 |
|
| 2,473 |
|
| 4,484 |
|
| 5,441 |
|
| 2,249 |
|
| 1,157 |
|
| 5,627 |
|
| 3,486 |
|
Severance |
|
| 1,058 |
|
| 22 |
|
| 3,104 |
|
| 877 |
|
| 338 |
|
| 1,419 |
|
| 663 |
|
| 2,046 |
|
Fair market value adjustment on contingent consideration |
|
| 349 |
|
| (1,889) |
|
| 838 |
|
| (3,791) |
|
| — |
|
| 439 |
|
| — |
|
| 489 |
|
Litigation related expense |
|
| 2,097 |
|
| — |
|
| 4,065 |
|
| — |
|
| 52 |
|
| 1,469 |
|
| 1,033 |
|
| 1,968 |
|
Foreign currency and related hedging activity |
|
| (383) |
|
| — |
|
| (672) |
|
| — |
|
| 122 |
|
| (127) |
|
| 412 |
|
| (289) |
|
Non-income tax expense adjustment |
|
| 414 |
|
| — |
|
| 1,163 |
|
| — |
| ||||||||||||
Loss allocation from equity method investment |
|
| 250 |
|
| 40 |
|
| 1,130 |
|
| 40 |
|
| 417 |
|
| 837 |
|
| 702 |
|
| 880 |
|
Loss attributable to non-controlling interest |
|
| 145 |
|
| 438 |
|
| 787 |
|
| 1,305 |
|
| 101 |
|
| 48 |
|
| 351 |
|
| 642 |
|
Adjusted EBITDA |
| $ | 27,505 |
| $ | 19,215 |
| $ | 69,126 |
| $ | 53,640 |
| $ | 29,525 |
| $ | 22,304 |
| $ | 55,363 |
| $ | 41,497 |
|
45
The following table sets forth the reconciliation of net income (loss)loss to adjusted net income and adjusted net income per diluted share based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||
|
| (in thousands) |
| (in thousands) |
| (in thousands) |
| ||||||||||||||||||
Net income (loss) |
| $ | (4,057) |
| $ | 3,302 |
| $ | (22,993) |
| $ | 8,349 | |||||||||||||
Net loss |
| $ | (6,470) |
| $ | (7,943) |
| $ | (19,605) |
| $ | (18,936) |
| ||||||||||||
Income tax provision (benefit) (1) |
|
| (1,668) |
|
| 2,679 |
|
| (10,602) |
|
| 6,326 |
|
| 4,844 |
|
| (3,218) |
|
| 9,142 |
|
| (8,934) |
|
Income (loss) before income tax provision (benefit) |
|
| (5,725) |
|
| 5,981 |
|
| (33,595) |
|
| 14,675 | |||||||||||||
Loss before income tax provision (benefit) |
|
| (1,626) |
|
| (11,161) |
|
| (10,463) |
|
| (27,870) |
| ||||||||||||
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment |
|
| 331 |
|
| 134 |
|
| 781 |
|
| — |
|
| 52 |
|
| 240 |
|
| 105 |
|
| 450 |
|
Accretion on contingent consideration |
|
| 23 |
|
| 143 |
|
| 143 |
|
| 794 | |||||||||||||
Accretion on contingent consideration and purchase liability |
|
| 148 |
|
| 58 |
|
| 304 |
|
| 120 |
| ||||||||||||
Non-cash interest expense |
|
| 2,039 |
|
| 1,564 |
|
| 6,070 |
|
| 4,627 |
|
| 1,331 |
|
| 2,018 |
|
| 4,853 |
|
| 4,031 |
|
Non-cash compensation expense |
|
| 7,554 |
|
| 3,409 |
|
| 25,872 |
|
| 10,157 |
|
| 7,945 |
|
| 6,703 |
|
| 15,403 |
|
| 18,194 |
|
Restructuring charges and transaction costs |
|
| 998 |
|
| 2,473 |
|
| 4,484 |
|
| 5,441 |
|
| 2,249 |
|
| 1,157 |
|
| 5,627 |
|
| 3,486 |
|
Severance |
|
| 1,058 |
|
| 22 |
|
| 3,104 |
|
| 877 |
|
| 338 |
|
| 1,419 |
|
| 663 |
|
| 2,046 |
|
Amortization of acquired intangibles |
|
| 12,035 |
|
| 3,508 |
|
| 36,156 |
|
| 10,201 |
|
| 10,371 |
|
| 12,195 |
|
| 20,956 |
|
| 24,121 |
|
Fair market value adjustment on contingent consideration |
|
| 349 |
|
| (1,889) |
|
| 838 |
|
| (3,791) |
|
| — |
|
| 439 |
|
| — |
|
| 489 |
|
Litigation related expense |
|
| 2,097 |
|
| — |
|
| 4,065 |
|
| — |
|
| 52 |
|
| 1,469 |
|
| 1,033 |
|
| 1,968 |
|
Foreign currency and related hedging activity |
|
| (383) |
|
| — |
|
| (672) |
|
| — |
|
| 122 |
|
| (127) |
|
| 412 |
|
| (289) |
|
Non-income tax expense adjustment |
|
| 414 |
|
| — |
|
| 1,163 |
|
| — |
| ||||||||||||
Loss allocation from equity method investment |
|
| 250 |
|
| — |
|
| 1,130 |
|
| 40 |
|
| 417 |
|
| 837 |
|
| 702 |
|
| 880 |
|
Loss attributable to non-controlling interest |
|
| 145 |
|
| 438 |
|
| 787 |
|
| 1,305 |
|
| 101 |
|
| 48 |
|
| 351 |
|
| 642 |
|
Adjusted net income before income tax effect |
|
| 20,771 |
|
| 15,783 |
|
| 49,163 |
|
| 44,326 |
|
| 21,914 |
|
| 15,295 |
|
| 41,109 |
|
| 28,268 |
|
Income tax effect (2) |
|
| (8,308) |
|
| (6,512) |
|
| (19,665) |
|
| (17,954) |
|
| (8,766) |
|
| (6,118) |
|
| (16,444) |
|
| (11,307) |
|
Adjusted net income |
| $ | 12,463 |
| $ | 9,271 |
| $ | 29,498 |
| $ | 26,372 |
| $ | 13,148 |
| $ | 9,177 |
| $ | 24,665 |
| $ | 16,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 42,843,103 |
|
| 36,021,784 |
|
| 42,704,383 |
|
| 35,651,508 |
|
| 43,855,479 |
|
| 42,752,465 |
|
| 43,513,074 |
|
| 42,632,964 |
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
| 1,331,256 |
|
| 1,554,564 |
|
| 1,286,968 |
|
| 1,784,442 |
|
| 1,597,746 |
|
| 1,307,547 |
|
| 1,670,493 |
|
| 1,269,085 |
|
Unvested restricted stock units |
|
| 350,169 |
|
| 38,353 |
|
| 272,205 |
|
| 127,865 |
|
| 473,892 |
|
| 169,824 |
|
| 551,227 |
|
| 104,637 |
|
Diluted number of weighted-average shares outstanding |
|
| 44,524,528 |
|
| 37,614,701 |
|
| 44,263,556 |
|
| 37,563,815 |
|
| 45,927,117 |
|
| 44,229,836 |
|
| 45,734,794 |
|
| 44,006,686 |
|
Adjusted net income per share - diluted |
| $ | 0.28 |
| $ | 0.25 |
| $ | 0.67 |
| $ | 0.70 |
| $ | 0.29 |
| $ | 0.21 |
| $ | 0.54 |
| $ | 0.39 |
|
(1) | For the three months ended |
(2) | For both periods shown, an estimated normalized effective tax rate of 40% has been used to compute adjusted net income. |
Note on Income Taxes: As of December 31, 2015,June 30, 2017 the Company had NOLnet operating loss carryforwards of $272,804$261,475 and $149,893$164,397 for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes the Company pays for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with USU.S. GAAP, and from the normalized rate shown above.
46
The following tables set forth the reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| For the Three Months Ended September 30, 2016 | Three Months Ended June 30, 2017 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Non-Segment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 114,511 |
| $ | 34,644 |
| $ | — |
| $ | 149,155 | $ | 129,372 |
| $ | 38,045 |
| $ | — |
| $ | 167,417 |
Deferred revenue fair value adjustment |
| 109 |
|
| 222 |
|
| — |
|
| 331 |
| 7 |
|
| 45 |
|
| — |
|
| 52 |
Adjusted revenues | $ | 114,620 |
| $ | 34,866 |
| $ | — |
| $ | 149,486 | $ | 129,379 |
| $ | 38,090 |
| $ | — |
| $ | 167,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations | $ | 12,361 |
| $ | (8,416) |
| $ | (5,236) |
| $ | (1,291) | $ | 15,811 |
| $ | (5,635) |
| $ | (7,433) |
| $ | 2,743 |
Add (deduct): |
|
|
|
|
|
|
|
| ||||||||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| 109 |
| 222 |
| — |
| 331 |
| 7 |
| 45 |
| — |
| 52 | ||||||
Accretion on contingent consideration |
| 23 |
| — |
| — |
| 23 | ||||||||||||||
Accretion on contingent consideration and purchase liability |
| 148 |
| — |
| — |
| 148 | ||||||||||||||
Depreciation and amortization |
| 6,362 |
| 10,330 |
| — |
| 16,692 |
| 6,361 |
| 9,104 |
| — |
| 15,465 | ||||||
Non-cash compensation expense |
| 3,565 |
| 2,937 |
| 1,052 |
| 7,554 |
| 4,218 |
| 2,721 |
| 1,006 |
| 7,945 | ||||||
Restructuring charges and transaction costs |
| 34 |
| 3 |
| 961 |
| 998 |
| 600 |
| — |
| 1,649 |
| 2,249 | ||||||
Non-income tax expense adjustment |
| 414 |
| — |
| — |
| 414 | ||||||||||||||
Severance |
| 990 |
| 68 |
| — |
| 1,058 |
| 307 |
| 15 |
| 16 |
| 338 | ||||||
Fair market value adjustment on contingent consideration |
| — |
| — |
| 349 |
| 349 | ||||||||||||||
Litigation related expense |
| — |
| 2,086 |
| 11 |
| 2,097 |
| — |
| 52 |
| — |
| 52 | ||||||
Foreign currency and related hedging activity |
| — |
| (462) |
| — |
| (462) | ||||||||||||||
Other loss |
| — |
| — |
| 11 |
| 11 |
| — |
| — |
| 18 |
| 18 | ||||||
Loss attributable to non-controlling interest |
| 145 |
|
| — |
|
| — |
|
| 145 |
| 101 |
|
| — |
|
| — |
|
| 101 |
Adjusted EBITDA | $ | 23,589 |
| $ | 6,768 |
| $ | (2,852) |
| $ | 27,505 | $ | 27,967 |
| $ | 6,302 |
| $ | (4,744) |
| $ | 29,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| For the Three Months Ended September 30, 2015 | Three Months Ended June 30, 2016 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Non-Segment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 103,367 |
| $ | — |
| $ | — |
| $ | 103,367 | $ | 110,716 |
| $ | 30,992 |
| $ | — |
| $ | 141,708 |
Deferred revenue fair value adjustment |
| 134 |
|
| — |
|
| — |
|
| 134 |
| 17 |
|
| 223 |
|
| — |
|
| 240 |
Adjusted revenues | $ | 103,501 |
| $ | — |
| $ | — |
| $ | 103,501 | $ | 110,733 |
| $ | 31,215 |
| $ | — |
| $ | 141,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from operations | $ | 11,897 |
| $ | — |
| $ | (3,569) |
| $ | 8,328 | $ | 10,490 |
| $ | (11,271) |
| $ | (5,549) |
| $ | (6,330) |
Add (deduct): |
|
|
|
|
|
|
|
|
| |||||||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| 134 |
| — |
| — |
|
| 134 |
| 17 |
| 223 |
| — |
| 240 | |||||
Accretion on contingent consideration |
| 143 |
| — |
| — |
|
| 143 | |||||||||||||
Accretion on contingent consideration and purchase liability |
| 58 |
| — |
| — |
| 58 | ||||||||||||||
Depreciation and amortization |
| 6,157 |
| — |
| — |
|
| 6,157 |
| 6,360 |
| 10,740 |
| — |
| 17,100 | |||||
Non-cash compensation expense |
| 3,024 |
| — |
| 385 |
|
| 3,409 |
| 2,371 |
| 3,225 |
| 1,107 |
| 6,703 | |||||
Restructuring charges and transaction costs |
| — |
| — |
| 2,473 |
|
| 2,473 |
| 240 |
| 27 |
| 890 |
| 1,157 | |||||
Severance |
| 22 |
| — |
| — |
|
| 22 |
| 1,029 |
| 370 |
| 20 |
| 1,419 | |||||
Fair market value adjustment on contingent consideration |
| — |
| — |
| (1,889) |
|
| (1,889) |
| — |
| — |
| 439 |
| 439 | |||||
Litigation related expense |
| — |
| 1,239 |
| 230 |
| 1,469 | ||||||||||||||
Other loss |
| — |
| — |
| 1 |
| 1 | ||||||||||||||
Loss attributable to non-controlling interest |
| 438 |
|
| — |
|
| — |
|
| 438 |
| 48 |
|
| — |
|
| — |
|
| 48 |
Adjusted EBITDA | $ | 21,815 |
| $ | — |
| $ | (2,600) |
| $ | 19,215 | $ | 20,613 |
| $ | 4,553 |
| $ | (2,862) |
| $ | 22,304 |
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| For the Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2017 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Non-Segment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 328,417 |
| $ | 94,267 |
| $ | — |
| $ | 422,684 | $ | 250,690 |
| $ | 74,513 |
| $ | — |
| $ | 325,203 |
Deferred revenue fair value adjustment |
| 114 |
|
| 667 |
|
| — |
|
| 781 |
| 36 |
|
| 69 |
|
| — |
|
| 105 |
Adjusted revenues | $ | 328,531 |
| $ | 94,934 |
| $ | — |
| $ | 423,465 | $ | 250,726 |
| $ | 74,582 |
| $ | — |
| $ | 325,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations | $ | 32,425 |
| $ | (33,728) |
| $ | (19,078) |
| $ | (20,381) | $ | 29,322 |
| $ | (13,343) |
| $ | (16,590) |
| $ | (611) |
Add (deduct): |
|
|
|
|
|
|
|
| ||||||||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| 114 |
| 667 |
| — |
| 781 |
| 36 |
| 69 |
| — |
| 105 | ||||||
Accretion on contingent consideration |
| 143 |
| — |
| — |
| 143 | ||||||||||||||
Accretion on contingent consideration and purchase liability |
| 304 |
| — |
| — |
| 304 | ||||||||||||||
Depreciation and amortization |
| 18,786 |
| 31,086 |
| — |
| 49,872 |
| 12,782 |
| 18,518 |
| — |
| 31,300 | ||||||
Non-cash compensation expense |
| 9,151 |
| 12,186 |
| 4,535 |
| 25,872 |
| 7,892 |
| 5,462 |
| 2,049 |
| 15,403 | ||||||
Restructuring charges and transaction costs |
| 361 |
| 34 |
| 4,089 |
| 4,484 |
| 695 |
| — |
| 4,932 |
| 5,627 | ||||||
Non-income tax expense adjustment |
| 1,163 |
| — |
| — |
| 1,163 | ||||||||||||||
Severance |
| 2,019 |
| 747 |
| 338 |
| 3,104 |
| 423 |
| 224 |
| 16 |
| 663 | ||||||
Fair market value adjustment on contingent consideration |
| — |
| — |
| 838 |
| 838 | ||||||||||||||
Litigation related expense |
| — |
| 3,824 |
| 241 |
| 4,065 |
| — |
| 1,033 |
| — |
| 1,033 | ||||||
Foreign currency and related hedging activity |
| — |
| (462) |
| — |
| (462) | ||||||||||||||
Other loss |
| — |
| — |
| 23 |
| 23 |
| — |
| — |
| 25 |
| 25 | ||||||
Loss attributable to non-controlling interest |
| 787 |
|
| — |
|
| — |
|
| 787 |
| 351 |
|
| — |
|
| — |
|
| 351 |
Adjusted EBITDA | $ | 63,786 |
| $ | 14,354 |
| $ | (9,014) |
| $ | 69,126 | $ | 52,968 |
| $ | 11,963 |
| $ | (9,568) |
| $ | 55,363 |
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2016 | ||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | ||||||||||
Revenues | $ | 213,906 |
| $ | 59,623 |
| $ | — |
| $ | 273,529 |
Deferred revenue fair value adjustment |
| 6 |
|
| 444 |
|
| — |
|
| 450 |
Adjusted revenues | $ | 213,912 |
| $ | 60,067 |
| $ | — |
| $ | 273,979 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations | $ | 20,064 |
| $ | (25,312) |
| $ | (13,842) |
| $ | (19,090) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment |
| 6 |
|
| 444 |
|
| — |
|
| 450 |
Accretion on contingent consideration and purchase liability |
| 120 |
|
| — |
|
| — |
|
| 120 |
Depreciation and amortization |
| 12,424 |
|
| 20,756 |
|
| — |
|
| 33,180 |
Non-cash compensation expense |
| 5,586 |
|
| 9,250 |
|
| 3,358 |
|
| 18,194 |
Restructuring charges and transaction costs |
| 327 |
|
| 31 |
|
| 3,128 |
|
| 3,486 |
Severance |
| 1,029 |
|
| 679 |
|
| 338 |
|
| 2,046 |
Fair market value adjustment on contingent consideration |
| — |
|
| — |
|
| 489 |
|
| 489 |
Litigation related expense |
| — |
|
| 1,738 |
|
| 230 |
|
| 1,968 |
Other loss |
| — |
|
| — |
|
| 12 |
|
| 12 |
Loss attributable to non-controlling interest |
| 642 |
|
| — |
|
| — |
|
| 642 |
Adjusted EBITDA | $ | 40,198 |
| $ | 7,586 |
| $ | (6,287) |
| $ | 41,497 |
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2015 | ||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Non-Segment |
|
| Total |
| (in thousands) | ||||||||||
Revenues | $ | 302,484 |
| $ | — |
| $ | — |
| $ | 302,484 |
Deferred revenue fair value adjustment |
| 134 |
|
| — |
|
| — |
|
| 134 |
Adjusted revenues | $ | 302,618 |
| $ | — |
| $ | — |
| $ | 302,618 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations | $ | 31,945 |
| $ | — |
| $ | (10,469) |
| $ | 21,476 |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment |
| 134 |
|
| — |
|
| — |
|
| 134 |
Accretion on contingent consideration |
| 794 |
|
| — |
|
| — |
|
| 794 |
Depreciation and amortization |
| 17,215 |
|
| — |
|
| — |
|
| 17,215 |
Non-cash compensation expense |
| 9,095 |
|
| — |
|
| 1,062 |
|
| 10,157 |
Restructuring charges and transaction costs |
| — |
|
| — |
|
| 5,441 |
|
| 5,441 |
Severance |
| 877 |
|
| — |
|
| — |
|
| 877 |
Fair market value adjustment on contingent consideration |
| — |
|
| — |
|
| (3,791) |
|
| (3,791) |
Other loss |
| — |
|
| — |
|
| 32 |
|
| 32 |
Loss attributable to non-controlling interest |
| 1,305 |
|
| — |
|
| — |
|
| 1,305 |
Adjusted EBITDA | $ | 61,365 |
| $ | — |
| $ | (7,725) |
| $ | 53,640 |
Liquidity and Capital Resources
As of SeptemberJune 30, 2016,2017, we had total cash and cash equivalents of $50,662$27,730 compared to $51,718$52,592 as of December 31, 2015.2016. We plan to use existing cash as of SeptemberJune 30, 20162017 and cash generated in the ongoing operations of our business to fund our current operations, capital expenditures, repay debt and for possible acquisitions or other strategic activity. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements, we may be required to borrow under our bank credit agreement to fund our ongoing operations or to fund potential acquisitions or other strategic activities.
48
Credit Agreement
On July 18, 2017, Envestnet and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Second Amended and Restated Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated as of November 19, 2015, as amended, among Envestnet, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Facility”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to Envestnet revolving credit commitments in the aggregate amount of up to $350,000 which amount may be increased by $50,000. The Second Amended and Restated Credit Agreement also includes a $5,000 subfacility for the issuance of letters of credit.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of Envestnet’s U.S. subsidiaries. In accordance with the terms of the Amended and Restated Security Agreement, dated July 18, 2017 (the “Security Agreement”), among Envestnet, the Debtors party thereto and the Administrative Agent, obligations under the Second Amended and Restated Credit Agreement are secured by substantially all of Envestnet’s domestic assets and Envestnet’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Proceeds under the Second Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
Envestnet will pay interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on Envestnet’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
The Second Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring Envestnet to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum liquidity requirement, and provisions that limit the ability of Envestnet and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities.
Cash Flows
The following table presents information regarding our cash flows and cash and cash equivalents for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Nine Months Ended |
| Six Months Ended | ||||||||||
|
| September 30, |
| June 30, | ||||||||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||||
|
| (in thousands) |
| (in thousands) | ||||||||||
Net cash provided by operating activities |
| $ | 51,880 |
| $ | 25,831 |
| $ | 35,544 |
| $ | 26,125 | ||
Net cash used in investing activities |
|
| (37,688) |
|
| (39,566) |
|
| (14,832) |
|
| (27,771) | ||
Net cash provided by (used in) financing activities |
|
| (15,248) |
|
| 12,329 | ||||||||
Net cash used in financing activities |
|
| (45,857) |
|
| (11,550) | ||||||||
Effect of exchange rate on changes on cash |
|
|
| 283 |
|
| — | |||||||
Net decrease in cash and cash equivalents |
|
| (1,056) |
|
| (1,406) |
|
| (24,862) |
|
| (13,196) | ||
Cash and cash equivalents, end of period |
|
| 50,662 |
|
| 208,348 |
|
| 27,730 |
|
| 38,522 |
Operating Activities
Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20162017 increased by $26,049$9,419 compared to the same period in 2015,2016, primarily due to an increase in non-cash adjustments of $59,491 as a result of increases in depreciation and amortization, stock-based compensation and excess tax benefits from stock-based compensation offset by a decrease in net income of $31,342 and changes in operating assets and liabilities netcompared to the corresponding 2016 period of acquisition of $2,100.$9,652.
Investing Activities
Net cash used in investing activities for the ninesix months ended SeptemberJune 30, 20162017 decreased by $1,878$12,939 compared to the same period in 2015.2016. The decrease is primarily a result of a decrease in cash disbursements for acquisitions of $8,938$18,394, offset by increases in purchase of property and equipment purchases of $3,987$4,549 and capitalization of internally developed software of $2,435.$2,406.
49
Financing Activities
Net cash used in financing activities for the ninesix months ended SeptemberJune 30, 2016 was $15,2482017 increased $34,307 compared to $12,329 of net cash provided by financing activities in the same period in 2015.2016. The change was primarily athe result of a decrease in excess tax benefits from stock-based compensation expense of $16,540 a decrease in proceeds from exercise of stock options of $4,282 and a decreaseincreases in payments on Term Notes of $31,862 and payments of contingent consideration of $4,295 offset by an increase in payments of term notes of $6,000 and an increase in purchases of treasury stock for stock-based minimum tax withholdings of $2,705.$2,286.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K include the discussion of estimates used for recognition of revenues, purchase accounting, internally developed software, non-cash stock-based compensation expense, and income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from the amounts reported.
Commitments and Off-Balance Sheet Arrangements
Purchase Obligations and Indemnifications
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.
49
Leases
The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of September 30, 2016, were as follows:
|
|
|
|
Years ending December 31: |
|
|
|
Remainder of 2016 |
| $ | 2,954 |
2017 |
|
| 10,873 |
2018 |
|
| 10,768 |
2019 |
|
| 11,263 |
2020 |
|
| 11,562 |
Thereafter |
|
| 56,116 |
Total |
| $ | 103,536 |
Litigation
In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had and was continuing to infringe on seven of Yodlee’s U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer to Yodlee’s complaint as well as counterclaims seeking declaratory judgment that Yodlee’s patents were not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims also alleged, among other things, violation of federal antitrust and false advertising laws and unfair competition under California state law and common law. The counterclaims sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. During the course of the litigation, Plaid also filed petitions for review before the Patent Office’s Board of Patent Trials and Appeals against the seven Yodlee patents that were the subject of the lawsuit as well as a petition for reexamination against one of the patents.
On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office. Plaid also agreed not to participate further in the reexamination proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.
The Company is involved in litigation arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it isboth probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of September
50
June 30, 2016.2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.
Leases
The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of June 30, 2017, were as follows:
|
|
|
|
Years ending December 31: |
|
|
|
Remainder of 2017 |
| $ | 7,003 |
2018 |
|
| 13,982 |
2019 |
|
| 14,851 |
2020 |
|
| 14,721 |
2021 |
|
| 13,933 |
Thereafter |
|
| 55,198 |
Total |
| $ | 119,688 |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk
Our exposure to market risk is directly related to revenues from asset management or administration services earned based upon a contractual percentage of AUM or AUA. In the three and ninesix months ended SeptemberJune 30, 2016, 60% and 61%, respectively,2017, 59% of our revenues were derived from revenues based on the market value of AUM or AUA. We expect this percentage to vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue to decline and our net loss to increase.
Foreign currency risk
The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. For the three and ninesix months ended SeptemberJune 30, 2016,2017, we estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of $384$991 and $1,164,$2,101, respectively, to pre‑tax earnings and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of $314$811 and $952,$1,719, respectively, to pre‑tax earnings.
A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly revenues into U.S. dollars. For the three and six months ended June 30, 2017, we estimate that a hypothetical 10% increase in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $712 and $1,400, respectively, to pre‑tax earnings. For the three and six months ended June 30, 2017, we estimate that a hypothetical 10% decrease in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $692 and $1,362, respectively, to pre‑tax earnings.
Interest rate risk
We are subject to market risk from changes in interest rates. The Company has Term Notes and a revolving credit facility that bears interest at LIBOR plus an applicable margin between 1.50 percent and 3.25 percent. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the Amended and Restated Credit Agreement. As of SeptemberJune 30, 2016,2017, there was $144,000$75,495 of Term Notes and no$0 revolving credit amounts outstanding under the Amended and Restated Credit Agreement. The Company incurred interest expense of $1,794 and $5,481$2,455 for the three and ninesix months ended SeptemberJune 30, 20162017 related to the Amended and Restated Credit Agreement. A sensitivity analysis performed on the interest expense indicated that a hypothetical 0.25% increase or decrease in our interest rate would increase or decrease interest expense on an annual basis by approximately $360.$249.
5051
Item 4.Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2016.2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Management concluded there was awere material weaknessweaknesses as identified below in the design and operating effectivenessinternal control over financial reporting as of controls over non-routine transactions and financial statement disclosures. This material weakness was causedJune 30, 2017. The control deficiencies identified below were previously identified by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over non-routine transactions and financial statement disclosures.management as of December 31, 2016.
TheseThe following control deficiencies resulted in immaterial errors that were corrected prior to the issuance of our financial statementsidentified as of and for the nine months ended September 30, 2016. material weaknesses:
· | Ineffective design and operation of internal controls over the accounting for non-routine transactions and the relevance and reliability of data used to prepare financial statement disclosures. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over non-routine transactions and financial statement disclosures. |
· | Ineffective design and operation of management review controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over the acquisitions. |
· | Ineffective design and operation of internal controls related to our state and local tax compliance process. Specifically, it was determined that we did not have adequate procedures and controls to appropriately determine compliance with, and accounting for, certain state and local non-income tax regulations. |
These control deficiencies create a reasonable possibility that a material misstatement to the condensed consolidated financial statements will not be prevented or detected on a timely basis, and therefore we concluded that these deficiencies, in aggregate, represent a material weakness in our internal control over financial reporting as of September 30, 2016.
basis. Due to the material weaknessweaknesses described below,above, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective related to the areas described above as of SeptemberJune 30, 2016.2017.
Remediation Plans
Management, under the supervision of our Audit Committee, is committed to remediating thethese material weaknessweaknesses in a timely fashion. We have begun the process of executing remediation plans that address the material weaknessweaknesses in internal control over financial reporting. Specifically, we arehave hired and continue to actively recruitingrecruit additional resources including personnel dedicated to provide additional management oversight over the reportingdocumentation of non-routine accounting matters and accounting for acquisitions and to enhance our expertise in determining the appropriate accounting and reporting for non-routine accounting matters and financial statement disclosures. in these areas.
In addition, management’s planned actions to further address the material weaknessweaknesses include:
· | Review of the quarterly and annual financial reporting processes to identify and implement enhanced accounting processes and related internal control procedures; |
•Timely review of the quarterly and annual financial reporting processes to ensure the appropriateness of the Company’s financial reporting related to non-routine matters and financial statement disclosures;
· | Enhancement of our process and internal controls related to the preparation of accounting position papers documenting our analysis and conclusions for all non-routine accounting matters including purchase accounting over acquisitions; |
•Enhancement
52
· | Establishment of training and education programs for financial personnel responsible for the drafting of our consolidated financial statements and disclosures and accounting for newly acquired businesses and non-routine accounting matters; and |
| · | Update of our systems in order to collect the necessary data to comply with all required tax obligations. |
The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of the Company’sour internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.
51
Management believes the measures described above and others that may be implemented will remediate the control deficiencies identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of the Company’sour internal control processes and will continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above. WeSubject to the foregoing, we expect these remedial actions and or other remedial actions related to this maternal weakness tothese material weaknesses will be effectively remediated by March 31,completed in 2017.
If the remedial measures described above are insufficient to address the identified material weaknessweaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual consolidated financial statements may occur in the future. Among other things, any unremediated material weakness could result in material post-closing adjustments in future financial statements. Furthermore, any such unremediated material weakness could have the effects described in “Item 1A, Risk Factors – In preparing our September 30, 2016 financial statements, we identified a material weakness in our internal control over financial reporting, and our failure to remedy this or other material weaknesses that we may identify in the future could result in material misstatements in our financial statements”“Risk Factors” in Part I, Item 1A of thisour 2016 Form 10-Q.10-K that was filed with the Securities and Exchange Commission on March 24, 2017.
Changes in Internal Control Over Financial Reporting
During the threesix months ended SeptemberJune 30, 2016, there were no changes2017, improvements to our internal control overthe processes of financial reporting that materially affected, or were reasonably likelyhave been implemented which include enhanced disclosure preparation and review controls, enhanced documentation and review controls surrounding acquisitions, a condensed financial close-process providing an increased time frame to materially affect, our internal control overprepare and review financial reporting.reporting documents, as well as streamlined financial data aggregation which increases reliance on system driven reports, thereby decreasing the likelihood of human error. In addition, management has reorganized the accounting department as well as increased its overall staffing levels.
Until these controls are tested and determined to be operating effectively, such material weaknesses remain unremediated as of June 30, 2017. During the remainder of the year, the Company will test the design and operating effectiveness of controls designed to remediate certain material weaknesses as discussed above in an effort to remediate the material weaknesses prior to the filing of the 2017 Form 10-K.
From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we are currently involved in the following matters:
Plaid Litigation
On December 2, 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) hashad and iswas continuing to infringe on seven of itsYodlee’s U.S. patents. The complaint seekssought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. On January 23, 2015, in lieu of filing an answer to the complaint, Plaid filed a motion to dismiss, alleging that Yodlee’s patents do not claim patent eligible subject matter. Yodlee filed its answering brief to the motion to dismiss on February 20, 2015. Plaid filed its reply brief on March 6, 2015. At the outset of the litigation, the judge presiding over the litigation referred certain matters to be handled by the assigned magistrate judge, including case scheduling, and any motions to dismiss. OnIn May 23, 2016, the magistrate judge issued a report and recommendation that the district judge deny Plaid’s motion to dismiss with respect to four of the asserted patents in its entirety, deny Plaid’s motion to dismiss with respect to two of the asserted patents in part, and grant Plaid’s motion to dismiss with respect to the final asserted patent in its entirety. On June 9, 2016, both parties filed limited objections to the magistrate judge’s report and recommendation. On June 27, 2016, both parties filed responses to each other’s objections. These objections are pending before the district judge.
While Plaid’s motion to dismiss was pending, the magistrate judge entered a trial date of March 13, 2017 and discovery has proceeded. On January 15, 2016, the Court issued a ruling on claim construction in which the Court specified the interpretation of certain words and phrases in the patents claims which were disputed between both parties. On May 9, 2016, the Court ordered that Plaid answer Yodlee’s complaint on May 31, 2016. On May 31, 2016, Plaid filed its answer and counterclaims to Yodlee’s complaint. Plaid’scomplaint as well as counterclaims seekseeking declaratory judgment that Yodlee’s patents arewere not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims allege analso alleged, among other things, violation of federal antitrust violation under section 2 of the Sherman Act, 15 U.S.C. § 2,and false advertising laws and unfair competition under California State Lawstate law and common law, and violation of the Lanham Act, 15 U.S.C. § 1125(a).law. The counterclaims seeksought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. Yodlee believes Plaid’s allegations are without merit and intends to vigorously defend against these allegations. On June 24, 2016, Yodlee filed its answer to Plaid’s counterclaims in which it denied Plaid’s allegations and denied thatDuring the course of the litigation, Plaid is entitled to any relief. Both parties have filed various motions for summary judgment and objections to the anticipated testimony of expert witnesses. A hearing on those motions is scheduled for November 10, 2016.
On December 2, 2015 and December 3, 2015, Plaidalso filed petitions for Inter-Partes Review (“IPR”)review before the Patent Office’s Board of Patent Trials and Appeals (“PTAB”) against two of the seven Yodlee patents that arewere the subject of the lawsuit describedas well as a petition for reexamination against one of the patents.
On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office. Plaid also agreed not to participate further in the reexamination proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.
5253
the immediately preceding paragraph. In these petitions, Plaid seeks to have the PTAB find the two patents invalid
The Company is involved in light of specific prior art raised by Plaidlitigation arising in the petition. On June 8, 2016,ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the PTAB issued a decision granting institution of IPR proceedings against U.S. Patent No. 6,317,783. The Oral argument with respect to this petition is scheduled for March 7, 2017 and a final decision is due on June 8, 2017. Either party may appeal the resultamount of the PTAB final decisionloss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the United States Courtimpacts of Appealsnegotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of June 30, 2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Federal Circuit. Once all appeals are exhausted, a final judgmentCompany does not believe that the outcome of invalidity becomes binding on the District Court hearing the Plaid litigation. A judgment confirming validity by the PTAB is not binding on the District Court but it has significant estoppel consequences that will preclude Plaid from relying on certain kindsany of prior artthese proceedings, individually or in the District Court proceedings. On June 9, 2016, the PTAB issuedaggregate, would, if determined adversely to it, have a decision denying institutionmaterial adverse effect on its financial condition or business, although an adverse resolution of IPR proceedings challenging the validitylitigation could have a material adverse effect on Envestnet’s results of U.S. Patent No. 6,199,077. On July 11, 2016, Plaid filed a petition for rehearing requesting that the PTAB reverse its June 9 decision regarding IPR proceedings for U.S. Patent No. 6,199,077.The rehearing request was denied.
On February 7, 2016, Plaid filed a Covered Business Method Review against one (U.S. Patent No. 6,199,077) of the two patents already at issue in the IPR Petitions. On March 18, 2016, Plaid filed a Covered Business Method Review petition against the other patent (U.S. Patent 6,317,783) already at issue in the IPR Petitions. On April 15, 2016, Plaid filed a third Covered Business Method Review petition against another one of the Yodlee patents (U.S. Patent No. 6,510,451) which is the subject of the litigation described above. On May 31, 2016, Plaid filed four Covered Business Method Review petitions against the remaining Yodlee patents at issue in the litigation (U.S. Patent Nos. 7,263,548, 7,424,520, 7,752,535, and 8,266,515). To date, the PTAB has denied institution of the CBM requests for U.S. Patent Nos. 6,199,077, 6,317,783, 7,263,548, and 7,424,520). A rehearing request for U.S. Patent No. 6,199,077 was also denied. On October 3, 2016, a CBM review for U.S. Patent No. 6,510,451 was instituted with a hearing set for June 7, 2017. An institution decision has not yet been made for U.S. Patent Nos. 7,752,535 and 8,266,515. As with the IPR Petitions, either party may appeal the result of the PTAB final decisionoperations or cash flow in a Covered Business Method proceeding to the United States Court of Appeals for the Federal Circuit. Once all appeals are exhausted, a final judgment of invalidity becomes binding on the District Court hearing the Plaid litigation. In a Covered Business Method proceeding, a judgment confirming validity by the PTAB is not binding on the District Court but it has significant estoppel consequences that will preclude Plaid from relying on certain kinds of prior art in the District Court proceedings.particular quarter or year.
Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our 20152016 Form 10-K, when making investment decisions regarding our securities. The following new risk factor supplements our risk factors that could have a material impact on our results of operations or financial condition as described under “Risk Factors” in Item 1A of Part I of our Form 10-K for the year ended December 31, 2015.
In preparing our quarterly financial statements for 2016, we identified a material weakness in our internal control over financial reporting, and our failure to remedy this or other material weaknesses that we may identify in the future could result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management identified a material weakness in our internal control over financial reporting as of September 30, 2016. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management concluded there was a material weakness in the design and operating effectiveness of controls over non-routine transactions and financial statement disclosures. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over non-routine transactions and financial statement disclosures.
If the remedial measures we have begun implementing that are designed to address this material weakness are insufficient to address this material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
The other risk factors that were disclosed in our 20152016 Form 10-K have not materially changed since the date our 20152016 Form 10-K was filed.
53
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
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| Maximum number (or |
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| Total number of |
| approximate dollar |
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| shares purchased |
| value) of shares |
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| Total number |
| Average |
| as part of publically |
| that may yet be |
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| of shares |
| price paid |
| announced plans |
| purchased under the |
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| purchased |
| per share |
| or programs |
| plans or programs |
July 1, 2016 through July 31, 2016 |
| 9,326 |
| $ 36.03 |
| — |
| 1,956,390 |
August 1, 2016 through August 31, 2016 |
| 9,142 |
| 39.09 |
| — |
| 1,956,390 |
September 1, 2016 through September 30, 2016 |
| 12,400 |
| 36.82 |
| — |
| 1,956,390 |
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| Maximum number (or |
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| Total number of |
| approximate dollar |
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| shares purchased |
| value) of shares |
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| Total number |
| Average |
| as part of publically |
| that may yet be |
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| of shares |
| price paid |
| announced plans |
| purchased under the |
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| purchased |
| per share |
| or programs |
| plans or programs |
April 1, 2017 through April 30, 2017 |
| 4,265 | $ | 34.49 |
| — |
| 1,956,390 |
May 1, 2017 through May 31, 2017 |
| 40,437 |
| 35.46 |
| — |
| 1,956,390 |
June 1, 2017 through June 30, 2017 |
| 39,757 |
| 37.37 |
| — |
| 1,956,390 |
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 forward transactions or otherwise, all in compliance with applicable laws and other restrictions. As of SeptemberJune 30, 2016,2017, 1,956,390 of shares could still be purchased under this program.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
None.
(a) Exhibits
54
See the exhibit index, which is incorporated herein by reference.
5455
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on NovemberAugust 9, 2016.2017.
| ENVESTNET, INC. | |
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| By: | /s/ Judson Bergman |
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| Judson Bergman |
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| Chairman and Chief Executive Officer |
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| Principal Executive Officer |
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| By: | /s/ Peter H. D’Arrigo |
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| Peter H. D’Arrigo |
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| Chief Financial Officer |
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| Principal Financial Officer |
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|
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| By: | /s/ Matthew J. Majoros |
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| Matthew J. Majoros |
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| Senior Vice President, Financial Reporting |
|
| Principal Accounting Officer |
5556
Exhibit |
| Description |
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1(1) |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2(1) |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
| XBRL Instance Document * |
101.SCH |
| XBRL Taxonomy Extension Schema Document * |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document * |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document * |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document * |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document * |
(1) | The material contained in Exhibit 32.1 and 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference. |
*Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20162017 and December 31, 2015;2016; (ii) the Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015;2016; (iii) the Condensed Consolidated Statement of Comprehensive IncomeLoss for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015;2016; (iv) the Condensed Consolidated Statement of Equity for the ninesix months ended SeptemberJune 30, 2016;2017; (v) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20162017 and 2015;2016; (vi) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.
5657