env_current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended September 30, 2015

 

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

 

Commission file number 001-34835

 


 

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

20-1409613

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S Employer
Identification No.)

 

 

35 East Wacker Drive, Suite 2400, Chicago, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrants 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. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

 

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,  2015, 35,880,687 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

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

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 

Condensed Consolidated Statement of Equity for the nine months ended September 30, 2015 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 

Notes to Condensed Consolidated Financial Statements 

 

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 

 

Forward-Looking Statements 

24 

Overview 

25 

Results of Operations 

31 

Liquidity and Capital Resources 

37 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

39 

 

 

Item 4. Controls and Procedures 

39 

 

 

PART II - OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

41 

 

 

Item 1A. Risk Factors 

41 

 

 

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

43 

 

 

Item 3. Defaults Upon Senior Securities 

43 

 

 

Item 4. Mine Safety Disclosures 

43 

 

 

Item 5. Other Information 

43 

 

 

Item 6. Exhibits 

43 

 

 

2


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2015

    

2014

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

208,348

 

$

209,754

 

Fees and other receivables, net

 

 

25,467

 

 

20,345

 

Deferred tax assets, net

 

 

4,635

 

 

4,654

 

Prepaid expenses and other current assets

 

 

20,714

 

 

7,242

 

Total current assets

 

 

259,164

 

 

241,995

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

18,461

 

 

16,629

 

Internally developed software, net

 

 

8,891

 

 

7,023

 

Intangible assets, net

 

 

65,199

 

 

58,654

 

Goodwill

 

 

134,814

 

 

104,976

 

Deferred tax assets, net

 

 

 —

 

 

565

 

Other non-current assets

 

 

11,128

 

 

9,516

 

Total assets

 

$

497,657

 

$

439,358

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accrued expenses

 

$

53,224

 

$

48,247

 

Accounts payable

 

 

5,236

 

 

4,869

 

Contingent consideration

 

 

3,057

 

 

6,405

 

Deferred revenue

 

 

8,320

 

 

5,159

 

Total current liabilities

 

 

69,837

 

 

64,680

 

 

 

 

 

 

 

 

 

Convertible notes

 

 

148,877

 

 

145,203

 

Contingent consideration

 

 

2,957

 

 

7,462

 

Deferred revenue

 

 

13,107

 

 

6,954

 

Deferred rent

 

 

4,405

 

 

3,588

 

Lease incentive

 

 

5,379

 

 

5,550

 

Deferred tax liabilities, net

 

 

718

 

 

 —

 

Other non-current liabilities

 

 

2,002

 

 

2,430

 

Total liabilities

 

 

247,282

 

 

235,867

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units in ERS, LLC

 

 

2,400

 

 

1,500

 

Equity:

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Common stock, par value $0.005,  500,000,000 shares authorized; 47,780,564 and 46,345,376 shares issued as of September 30, 2015 and December 31, 2014, respectively; 35,854,291 and 34,544,653 shares outstanding as of September 30, 2015 and December 31, 2014, respectively

 

 

239

 

 

232

 

Additional paid-in capital

 

 

278,486

 

 

233,888

 

Accumulated deficit

 

 

(11,094)

 

 

(19,443)

 

Treasury stock at cost, 11,926,273 and 11,800,723 shares as of September 30, 2015 and December 31, 2014, respectively

 

 

(20,054)

 

 

(13,242)

 

Total stockholders’ equity

 

 

247,577

 

 

201,435

 

Non-controlling interest

 

 

398

 

 

556

 

Total equity

 

 

247,975

 

 

201,991

 

Total liabilities and equity

 

$

497,657

 

$

439,358

 

 

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See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

85,576

 

$

74,899

 

$

250,472

 

$

212,707

 

Licensing and professional services

 

 

17,791

 

 

13,678

 

 

52,012

 

 

39,238

 

Total revenues

 

 

103,367

 

 

88,577

 

 

302,484

 

 

251,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

41,027

 

 

39,111

 

 

122,208

 

 

111,503

 

Compensation and benefits

 

 

32,671

 

 

25,833

 

 

96,162

 

 

74,449

 

General and administration

 

 

15,184

 

 

13,428

 

 

44,905

 

 

38,514

 

Depreciation and amortization

 

 

6,157

 

 

4,253

 

 

17,215

 

 

13,290

 

Restructuring charges

 

 

 —

 

 

 —

 

 

518

 

 

 —

 

Total operating expenses

 

 

95,039

 

 

82,625

 

 

281,008

 

 

237,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

8,328

 

 

5,952

 

 

21,476

 

 

14,189

 

Other income (expense)

 

 

(2,347)

 

 

(11)

 

 

(6,801)

 

 

1,909

 

Income before income tax provision

 

 

5,981

 

 

5,941

 

 

14,675

 

 

16,098

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

2,679

 

 

2,173

 

 

6,326

 

 

5,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

3,302

 

 

3,768

 

 

8,349

 

 

10,286

 

Add: Net loss attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

195

 

Net income attributable to Envestnet, Inc.

 

$

3,302

 

$

3,768

 

$

8,349

 

$

10,481

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.11

 

$

0.23

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.09

 

$

0.10

 

$

0.22

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,021,784

 

 

34,674,245

 

 

35,651,508

 

 

34,447,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

37,614,701

 

 

37,006,796

 

 

37,563,815

 

 

36,832,154

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

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Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

 

 

 

Non-

 

Total

 

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Accumulated

    

controlling

 

Stockholders’

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Interest

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

46,345,376

 

$

232

 

(11,800,723)

 

$

(13,242)

 

$

233,888

 

$

(19,443)

 

$

556

 

$

201,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

936,486

 

 

4

 

 —

 

 

 —

 

 

7,444

 

 

 —

 

 

 —

 

 

7,448

 

Issuance of common stock - vesting of restricted stock units

 

375,292

 

 

2

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2

 

Acquisition of business

 

123,410

 

 

1

 

 —

 

 

 —

 

 

8,929

 

 

 

 

 

 —

 

 

8,930

 

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

10,157

 

 

 —

 

 

 —

 

 

10,157

 

Excess tax benefits from stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

18,010

 

 

 —

 

 

 —

 

 

18,010

 

Purchase of treasury stock for stock-based minimum tax withholdings

 

 —

 

 

 —

 

(125,550)

 

 

(6,812)

 

 

 —

 

 

 —

 

 

 —

 

 

(6,812)

 

Purchase of ERS units

 

 —

 

 

 —

 

 —

 

 

 —

 

 

58

 

 

 —

 

 

(158)

 

 

(100)

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

8,349

 

 

 —

 

 

8,349

 

Balance, September 30, 2015

 

47,780,564

 

$

239

 

(11,926,273)

 

$

(20,054)

 

$

278,486

 

$

(11,094)

 

$

398

 

$

247,975

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

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Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2015

    

2014

 

 

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

8,349

 

$

10,286

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,215

 

 

13,290

 

Deferred rent and lease incentive

 

 

628

 

 

173

 

Provision for doubtful accounts

 

 

31

 

 

 —

 

Deferred income taxes

 

 

(264)

 

 

 —

 

Stock-based compensation expense

 

 

10,157

 

 

8,443

 

Excess tax benefits from stock-based compensation

 

 

(18,010)

 

 

(5,086)

 

Interest expense

 

 

7,081

 

 

 —

 

Accretion on contingent consideration

 

 

794

 

 

1,108

 

Fair market value adjustment on contingent consideration

 

 

(3,791)

 

 

(342)

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Fees and other receivables

 

 

(4,817)

 

 

(4,613)

 

Prepaid expenses and other current assets

 

 

4,534

 

 

3,966

 

Other non-current assets

 

 

(1,024)

 

 

(736)

 

Accrued expenses

 

 

(2,068)

 

 

3,212

 

Accounts payable

 

 

113

 

 

2,009

 

Deferred revenue

 

 

7,331

 

 

2,835

 

Other non-current liabilities

 

 

(428)

 

 

278

 

Net cash provided by operating activities

 

 

25,831

 

 

34,823

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(6,852)

 

 

(5,249)

 

Capitalization of internally developed software

 

 

(3,782)

 

 

(2,562)

 

Investment in private company

 

 

(1,500)

 

 

 —

 

Purchase of ERS, LLC units

 

 

(100)

 

 

 —

 

Acquisition of businesses, net of cash acquired

 

 

(27,332)

 

 

(1,288)

 

Net cash used in investing activities

 

 

(39,566)

 

 

(9,099)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from bank indebtedness

 

 

 —

 

 

30,000

 

Payments of contingent consideration

 

 

(7,219)

 

 

(6,000)

 

Payment of promissory note

 

 

 —

 

 

(1,500)

 

Issuance of redeemable units in ERS, LLC

 

 

900

 

 

1,500

 

Proceeds from exercise of stock options

 

 

7,448

 

 

3,146

 

Excess tax benefits from stock-based compensation expense

 

 

18,010

 

 

5,086

 

Purchase of treasury stock for stock-based minimum tax withholdings

 

 

(6,812)

 

 

(1,999)

 

Issuance of restricted stock units

 

 

2

 

 

 —

 

Net cash provided by financing activities

 

 

12,329

 

 

30,233

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(1,406)

 

 

55,957

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

209,754

 

 

49,942

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

208,348

 

$

105,899

 

 

 

 

 

 

 

 

 

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

 

$

937

 

$

154

 

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

 

 

2,454

 

 

 —

 

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

 

 

 

 

 

 

 

Non-cash consideration issued in a business acquisition

 

 

8,930

 

 

 —

 

Purchase liabilities included in accrued expenses

 

 

3,520

 

 

 —

 

Contingent consideration issued in a business acquisition

 

 

2,363

 

 

3,285

 

Leasehold improvements funded by lease incentive

 

 

330

 

 

2,865

 

Purchase of fixed assets included in accounts payable

 

 

209

 

 

 —

 

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

 

 

 —

 

 

158

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

 

1.Organization and Description of Business

 

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

 

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

 

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

 

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

 

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

 

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

 

Envestnet | Placemark develops unified managed account (UMA) programs and other portfolio management outsourcing solutions, including patented portfolio overlay and tax optimization services, for banks, full service broker-dealers and RIA firms.

 

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

 

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

 

2.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2014 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Companys financial position as of September 30, 2015 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2014 was derived from the Companys audited financial statements for the year ended December 31, 2014 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (GAAP). The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.

 

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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 Companys Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015.

 

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

 

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

 

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

 

3.Business Acquisitions

 

Upside Holdings, Inc.

 

On February 24, 2015, Envestnet, Inc. (the “Company”) acquired all of the stock of Upside Holdings, Inc. (including its subsidiaries “Upside”) for consideration totaling $2,641.  

 

Upside is a technology company that is registered as an Internet Investment Adviser under Rule 203A-2(f) of the Investment Advisers Act of 1940 (“Advisers Act”).  Upside helps financial advisors compete against other digital advisors, or “robo advisors,” by leveraging technology and algorithms to advise, manage, and serve clients who want personalized investment services. 

 

The Company acquired Upside to integrate its technology within the Companys unified wealth management platform, which will allow advisors to compete more aggressively to engage their clients online and reach a new class of investors. The goodwill arising from the acquisition represents the advantage of this integrated technology, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

 

As a result of the acquisition of Upside, the Company provided for the future grant of unvested restricted stock unit awards to Upside employees at the end of each year in 2015, 2016 and 2017 upon Upside meeting certain performance conditions and then a subsequent two-year service condition (Note 12).  If 100 percent of the awards are earned for 2015, 2016 and 2017, the maximum number of units that could be granted for 2015, 2016 and 2017 equals 22,064,  44,128 and 66,192 units, respectively. Each unit represents the right to receive one share of common stock of the Company, subject to the terms and conditions of the award. The Company has determined the payments to be categorized as compensation expense.  As of September 30, 2015, no amounts have been recognized as it is currently estimated that the performance targets will not be attained in 2015.

 

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The consideration transferred in the acquisition was as follows:

 

 

 

 

 

 

Cash consideration

    

$

2,040

 

Purchase liabilities

 

 

615

 

Cash acquired

 

 

(14)

 

Total

 

$

2,641

 

 

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

 

 

 

 

 

 

Total tangible assets acquired

    

$

6

 

Total liabilities assumed

 

 

(404)

 

Identifiable intangible assets

 

 

1,450

 

Goodwill

 

 

1,589

 

Total net assets acquired

 

$

2,641

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Weighted Average

    

Amortization

 

 

 

Amount

 

Useful Life in Years

 

Method

 

Proprietary technology

 

$

1,450

 

4

 

Straight-line

 

 

The results of Upsides operations are included in the condensed consolidated statement of operations beginning February 24, 2015, and are not material to the Companys results of operations.

 

For the three and nine months ended September 30, 2015, acquisition related costs for Upside totaled $3 and $221 and are included in general and administration expenses.

 

Oltis Software LLC

 

On May 6, 2015, the Company acquired all of the issued and outstanding membership interests of Oltis Software LLC (d/b/a Finance Logix®), an Arizona limited liability company (“Finance Logix”). Finance Logix provides financial planning and wealth management software solutions to banks, broker-dealers and RIAs.

 

The Company paid upfront consideration of $20,595 in cash, purchase liabilities of $2,905, 123,410 in shares of Envestnet common stock with a fair value of $6,388 and 123,410 stock options to acquire Envestnet common stock at $52.67 per share with an estimated fair value of $2,542.

 

The Company acquired Finance Logix to integrate its technology within the Companys unified wealth management platform, which will allow advisors to offer financial planning that flows seamlessly into portfolio construction and ongoing management on a single platform. Finance Logix allows the Company to deliver that capability and increase the breadth of our platform and the functionality gap between our platform and competing platforms.  The goodwill arising from the acquisition represents cross-selling opportunities, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is deductible for income tax purposes.

 

In connection with the acquisition of Finance Logix, the Company is required to pay the former owner of Finance Logix future payments in a mix of cash, stock and stock options, based on Finance Logix meeting annual net revenue targets of $5,000,  $10,000 and $16,000 for calendar years 2015, 2016 and 2017, respectively, with lower payments for performance below the three yearly targets and a higher payment in 2017 for performance above the target. The Company has preliminarily determined the first payment related to the 2015 target to be categorized as compensation expense and the payments, if any, related to 2016 and 2017 targets, to be categorized as contingent consideration. The Company did not record compensation expense as of September 30, 2015 and has not recorded a contingent consideration liability as payment is not expected to occur at this time.

 

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Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

 

As of September 30, 2015, the Company has not finalized the opening balance sheet (including taxes), contingent consideration, nor has the Company finalized its valuation of Finance Logixs intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. The Company expects to finalize the valuation of the intangible assets and deferred revenue, and complete the acquisition accounting as soon as practicable but no later than March 31, 2016.

 

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

 

 

 

 

 

 

Cash consideration

    

$

20,595

 

Stock and stock option consideration

 

 

8,930

 

Purchase liabilities

 

 

2,905

 

Cash acquired

 

 

(909)

 

Total

 

$

31,521

 

 

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

 

 

 

 

 

 

Total tangible assets acquired

    

$

99

 

Total liabilities assumed

 

 

(2,339)

 

Identifiable intangible assets

 

 

10,500

 

Goodwill

 

 

23,261

 

Total net assets acquired

 

$

31,521

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Weighted Average

    

Amortization

 

 

 

Amount

 

Useful Life in Years

 

Method

 

Customer list

 

$

8,500

 

12

 

Accelerated

 

Proprietary technology

 

 

2,000

 

4

 

Straight-line

 

Total

 

$

10,500

 

 

 

 

 

 

The results of Finance Logixs operations are included in the condensed consolidated statement of operations beginning May 6, 2015. Finance Logixs revenues for the three and nine month periods ended September 30, 2015 totaled $584 and $1,057, respectively. Finance Logixs net loss for the three and nine month periods ended September 30, 2015 totaled $479 and $808, respectively. The net loss for the three and nine month period ended September 30, 2015 includes estimated acquired intangible asset amortization of $376 and $626, respectively.

 

For the three and nine months ended September 30, 2015, acquisition related costs for Finance Logix totaled $40 and $415, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the fourth quarter of 2015.

 

Castle Rock Innovations, Inc.

 

On August 30, 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.

 

The Company acquired Castle Rock with plans to combine the Castle Rock offering into Envestnet Retirement Solutions, LLC (“ERS”).  Castle Rocks 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

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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 preliminary estimated consideration transferred in the acquisition was as follows:

 

 

 

 

 

Cash consideration

    

$

5,940

Contingent consideration liability

 

 

2,363

Cash acquired

 

 

(320)

Total

 

$

7,983

In connection with the acquisition of Castle Rock, the Company is required to pay contingent consideration of 45% 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 $2,363, which represented the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8.

The preliminary estimated fair value of contingent consideration as of September 30, 2015 was $2,363. This amount is the present value of an undiscounted liability of $2,850, applying a discount rate of 10%.  The first, second and third undiscounted payments are anticipated to be $941 on September 30, 2016, $981 on September 30, 2017 and $928 on September 30, 2018.  Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

 

As of September 30, 2015, the Company has not finalized the opening balance sheet (including taxes), contingent consideration, nor has the Company finalized its valuation of Castle Rocks intangible assets and/or goodwill associated with the transaction as well as the fair value of acquired deferred revenue. The Company expects to finalize the valuation of the intangible assets and deferred revenue, and complete the acquisition accounting as soon as practicable but no later than March 31, 2016.

 

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

 

 

 

 

 

Total tangible assets acquired

    

$

605

Total liabilities assumed

 

 

(2,400)

Identifiable intangible assets

 

 

4,790

Goodwill

 

 

4,988

Total net assets acquired

 

$

7,983

 

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

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Weighted Average

    

Amortization

 

 

 

Amount

 

Useful Life in Years

 

Method

 

Customer list

 

$

3,830

 

12

 

Accelerated

 

Proprietary technology

 

 

720

 

5

 

Straight-line

 

Trade names and domains

 

 

240

 

2

 

Straight-line

 

Total

 

$

4,790

 

 

 

 

 

 

The results of Castle Rocks operations are included in the condensed consolidated statement of operations beginning September 1, 2015. Castle Rocks revenues and net loss for the three and nine month periods ended September 30, 2015 totaled $223 and $59, respectively. The net loss includes estimated acquired intangible asset amortization of $67.

 

For the three and nine months ended September 30, 2015, acquisition related costs for Castle Rock totaled $47 and $161, respectively, and are included in general and administration expenses. The Company may incur additional acquisition related costs during the fourth quarter of 2015.

 

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 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, LLC 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.  Subsequent to the subscription of the Castle Rock Parties, the Companys ownership interest in ERS is 52.8%. 

 

Yodlee, Inc.

 

On August 10, 2015, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Yodlee, Inc., a Delaware corporation (“Yodlee”) and Yale Merger Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into Yodlee, with Yodlee continuing as the surviving corporation (the “Merger”) and a wholly owned indirect subsidiary of the Company.

 

Yodlee is a leading cloud-based platform driving digital financial innovation. Yodlee powers digital financial solutions for over 20 million paid subscribers and over 850 financial institutions and financial technology innovators. Founded in 1999, the company has built a network of over 14,000 data sources and been awarded 72 patents.

 

The merger consideration per share of Yodlee common stock consists of (i) $10.78 per share in cash (the “per share cash consideration”) and (i) a number of shares of Company common stock determined by dividing $8.10 by the volume weighted average (the “Company stock value”) price per share of Company common stock for the 10 consecutive trading days ending on (and including) the second trading day immediately prior to completion of the Merger, subject to a collar of $39.006 to $47.674 per share (the “per share stock consideration”).  In the event that the aggregate number of shares of Company common stock issuable pursuant to the Merger Agreement (the "total stock amount"), would be equal to or greater than 19.9% of the shares of Company common stock outstanding as of immediately prior to the effective time of the Merger (such amount, the "stock threshold"), the per share stock consideration will be decreased to the minimum extent necessary, such that the total stock amount will not exceed the stock threshold. In that event, the per share cash consideration will be increased by an amount equal to the product of (A) the amount of such reduction in the per share stock consideration pursuant to the preceding sentence multiplied by (B) the Company stock value; provided that (i) the aggregate per share cash consideration will in no event be increased by greater than $32,000 and (ii) the total stock amount will in no event exceed the stock threshold.  The Company expects to fund the cash portion of the merger consideration with available balance sheet cash and up to $200,000 in committed debt financing.

 

The Merger Agreement contains certain termination rights, including, among others, the right of either party to terminate the Merger Agreement if the Merger does not occur by February 15, 2016 and the right of the Company to terminate the Merger Agreement due to the withdrawal or adverse change of the recommendation by the Yodlee Board of Directors. If the Merger Agreement is terminated by the Company, in certain circumstances described in the Merger Agreement, a termination fee equal to approximately $18,000 will be payable by Yodlee to the Company.

 

In connection with the definitive agreement, funds affiliated with Warburg Pincus, which collectively own approximately 26.5 percent of Yodlees common stock, have entered into a voting agreement pursuant to which it has committed to support the transaction.

 

The transaction is expected to close in the fourth quarter of 2015, subject to approval by Yodlee stockholders at a special meeting on November 19, 2015, and customary closing conditions.  The Company and Yodlee will continue to operate separately until the transaction closes.

 

See “Part II – Item 1A – Legal Proceedings.

 

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

 

The following pro forma financial information presents the combined results of operations of Envestnet and Castle Rock for the three month period ended September 30, 2015, Envestnet, Finance Logix and Castle Rock for the nine month period ended September 30, 2015 and Envestnet, Placemark, Finance Logix, and Castle Rock for the three

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and nine months ended September 30, 2014. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2014. The results of Upside are not included in the pro forma financial information presented below as the Upside acquisition was not considered material to the Companys 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.

 

Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

    

2015

    

2014

 

Revenues

$

103,782

 

$

95,532

 

$

305,403

 

$

271,540

 

Net income

 

3,256

 

 

2,191

 

 

7,225

 

 

6,671

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

0.09

 

 

0.06

 

 

0.20

 

 

0.19

 

Diluted

 

0.09

 

 

0.06

 

 

0.19

 

 

0.18

 

 

 

 

4. Property and Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

Estimated Useful Life

    

2015

    

2014

 

Cost:

 

 

 

 

 

 

 

 

 

 

 

 

Office furniture and fixtures

 

 

 

7

years

 

$

5,307

 

$

4,993

 

Computer equipment and software

 

 

 

3

years

 

 

23,292

 

 

18,540

 

Other office equipment

 

 

 

5

years

 

 

194

 

 

144

 

Leasehold improvements

 

 

 

 

Shorter of the lease term or useful life of the asset

 

 

12,183

 

 

10,805

 

 

 

 

 

 

 

 

 

40,976

 

 

34,482

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

 

(22,515)

 

 

(17,853)

 

Property and equipment, net

 

 

 

 

 

 

$

18,461

 

$

16,629

 

 

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

 

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Depreciation and amortization expense

 

$

1,967

 

$

1,400

 

$

5,100

 

$

4,442

 

 

 

 

5.Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

Estimated Useful Life

    

2015

    

2014

 

Internally developed software

 

5

years

 

$

23,359

 

$

19,577

 

Less accumulated amortization

 

 

 

 

 

(14,468)

 

 

(12,554)

 

Internally developed software, net

 

 

 

 

$

8,891

 

$

7,023

 

 

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Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Amortization expense

 

$

682

 

$

565

 

$

1,914

 

$

1,562

 

 

 

 

6.Goodwill and Intangible Assets

 

Changes in the carrying amount of goodwill were as follows:

 

 

 

 

 

 

Balance at December 31, 2014

    

$

104,976

 

Upside acquisition

 

 

1,589

 

Finance Logix acquisition

 

 

23,261

 

Castle Rock acquisition

 

 

4,988

 

Balance at September 30, 2015

 

$

134,814

 

 

Intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

    

 

 

 

    

    

Gross

    

    

 

    

Net

    

Gross

    

    

 

    

Net

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Customer lists

 

4

-

12

years

 

$

80,939

 

$

(29,030)

 

$

51,909

 

$

68,603

 

$

(21,699)

 

$

46,904

 

Proprietary technologies

 

2.5

-

8

years

 

 

19,848

 

 

(8,165)

 

 

11,683

 

 

15,678

 

 

(5,808)

 

 

9,870

 

Trade names

 

2

-

5

years

 

 

3,330

 

 

(1,723)

 

 

1,607

 

 

3,090

 

 

(1,210)

 

 

1,880

 

Total intangible assets

 

 

 

 

 

 

$

104,117

 

$

(38,918)

 

$

65,199

 

$

87,371

 

$

(28,717)

 

$

58,654

 

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014