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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended March 31, 2016

 

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

 

Commission file number 001-34835

 


 

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

20-1409613

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S Employer
Identification No.)

 

 

35 East Wacker Drive, Suite 2400, Chicago, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(312) 827-2800

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 April 30, 2016, 42,693,455 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 March 31, 2016 and December 31, 2015 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 

Condensed Consolidated Statements of Other Comprehensive Income for the three months ended March 31, 2016 and 2015 

Condensed Consolidated Statement of Equity for the three months ended March 31, 2016 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 

Notes to Condensed Consolidated Financial Statements 

 

 

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

27 

Forward-Looking Statements 

28 

Overview 

29 

Results of Operations 

33 

Liquidity and Capital Resources 

41 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

43 

 

 

Item 4. Controls and Procedures 

43 

 

 

PART II - OTHER INFORMATION 

44 

 

 

Item 1. Legal Proceedings 

44 

 

 

Item 1A. Risk Factors 

45 

 

 

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

46 

 

 

Item 3. Defaults Upon Senior Securities 

46 

 

 

Item 4. Mine Safety Disclosures 

46 

 

 

Item 5. Other Information 

46 

 

 

Item 6. Exhibits 

46 

 

 

2


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2016

    

2015

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,550

 

$

51,718

Fees and other receivables, net

 

 

35,455

 

 

46,756

Prepaid expenses and other current assets

 

 

22,880

 

 

13,239

Total current assets

 

 

94,885

 

 

111,713

 

 

 

 

 

 

 

Property and equipment, net

 

 

27,122

 

 

28,681

Internally developed software, net

 

 

10,490

 

 

9,897

Intangible assets, net

 

 

286,174

 

 

292,675

Goodwill

 

 

426,695

 

 

421,273

Deferred tax assets, net

 

 

 —

 

 

2,688

Other non-current assets

 

 

10,878

 

 

9,322

Total assets

 

$

856,244

 

$

876,249

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

61,360

 

$

83,411

Accounts payable

 

 

10,441

 

 

10,420

Current portion of debt

 

 

8,064

 

 

6,064

Contingent consideration

 

 

5,190

 

 

2,537

Deferred revenue

 

 

17,576

 

 

15,089

Total current liabilities

 

 

102,631

 

 

117,521

 

 

 

 

 

 

 

Convertible notes

 

 

147,939

 

 

146,418

Term notes

 

 

136,819

 

 

138,335

Contingent consideration

 

 

894

 

 

1,506

Deferred revenue

 

 

14,628

 

 

14,378

Deferred rent and lease incentive

 

 

10,805

 

 

10,976

Deferred tax liabilities, net

 

 

911

 

 

 —

Other non-current liabilities

 

 

6,706

 

 

6,288

Total liabilities

 

 

421,333

 

 

435,422

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units in ERS

 

 

900

 

 

900

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, par value $0.005, 500,000,000 shares authorized; 54,904,938 and 53,925,415 shares issued as of March 31, 2016 and December 31, 2015, respectively; 42,663,127 and 41,979,126 shares outstanding as of March 31, 2016 and December 31, 2015, respectively

 

 

275

 

 

270

Additional paid-in capital

 

 

486,707

 

 

474,726

Accumulated deficit

 

 

(26,000)

 

 

(15,007)

Treasury stock at cost, 12,241,811 and 11,946,289 shares as of March 31, 2016 and December 31, 2015, respectively

 

 

(27,725)

 

 

(20,654)

Accumulated other comprehensive income

 

 

356

 

 

194

Total stockholders’ equity

 

 

433,613

 

 

439,529

Non-controlling interest

 

 

398

 

 

398

Total equity

 

 

434,011

 

 

439,927

Total liabilities and equity

 

$

856,244

 

$

876,249

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Revenues:

 

 

 

 

 

 

Assets under management or administration

 

$

82,871

 

$

81,077

Subscription and licensing

 

 

43,620

 

 

14,082

Professional services and other

 

 

5,330

 

 

1,295

Total revenues

 

 

131,821

 

 

96,454

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Cost of revenues

 

 

40,158

 

 

38,695

Compensation and benefits

 

 

62,616

 

 

31,535

General and administration

 

 

25,727

 

 

14,209

Depreciation and amortization

 

 

16,080

 

 

5,333

Total operating expenses

 

 

144,581

 

 

89,772

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(12,760)

 

 

6,682

Other expense, net

 

 

(3,949)

 

 

(2,203)

Income (loss) before income tax provision

 

 

(16,709)

 

 

4,479

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

(5,716)

 

 

1,968

 

 

 

 

 

 

 

Net income (loss)

 

 

(10,993)

 

 

2,511

Add: Net income (loss) attributable to non-controlling interest

 

 

 —

 

 

 —

Net income (loss) attributable to Envestnet, Inc.

 

$

(10,993)

 

$

2,511

 

 

 

 

 

 

 

Net income (loss) per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

Basic

 

$

(0.26)

 

$

0.07

 

 

 

 

 

 

 

Diluted

 

$

(0.26)

 

$

0.07

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

 

42,506,557

 

 

35,147,043

 

 

 

 

 

 

 

Diluted

 

 

42,506,557

 

 

37,316,934

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2016

    

2015

Net income (loss) attributable to Envestnet, Inc.

 

$

(10,993)

 

$

2,511

Other comprehensive income, net of taxes

 

 

 

 

 

 

Foreign currency translation loss

 

 

(15)

 

 

 —

Unrealized gain on foreign currency contracts designated as cash flow hedges

 

 

177

 

 

 —

Total other comprehensive income, net of taxes

 

 

162

 

 

 —

Comprehensive income (loss), net of taxes

 

$

(10,831)

 

$

2,511

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

 

 

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Table of Contents

Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Other

 

 

 

 

Non-

 

Total

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Stockholders’

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Interest

    

Equity

Balance, December 31, 2015

 

53,925,415

 

$

270

 

(11,946,289)

 

$

(20,654)

 

$

474,726

 

$

194

 

$

(15,007)

 

$

398

 

$

439,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

152,220

 

 

1

 

 —

 

 

 —

 

 

1,206

 

 

 —

 

 

 —

 

 

 —

 

 

1,207

Issuance of common stock - vesting of restricted stock units

 

827,303

 

 

4

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

11,050

 

 

 —

 

 

 —

 

 

 —

 

 

11,050

Tax shortfall from stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(275)

 

 

 —

 

 

 —

 

 

 —

 

 

(275)

Purchase of treasury stock for stock-based minimum tax withholdings

 

 —

 

 

 —

 

(295,522)

 

 

(7,071)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,071)

Foreign currency translation loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(15)

 

 

 —

 

 

 —

 

 

(15)

Unrealized gain on foreign currency contracts designated as accounting hedges

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

177

 

 

 —

 

 

 —

 

 

177

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,993)

 

 

 —

 

 

(10,993)

Balance, March 31, 2016

 

54,904,938

 

$

275

 

(12,241,811)

 

$

(27,725)

 

$

486,707

 

$

356

 

$

(26,000)

 

$

398

 

$

434,011

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

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Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

March 31,

 

    

2016

    

2015

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

(10,993)

 

$

2,511

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

16,080

 

 

5,333

Deferred rent and lease incentive

 

 

(171)

 

 

168

Provision for doubtful accounts

 

 

23

 

 

 —

Deferred income taxes

 

 

3,599

 

 

1,888

Stock-based compensation expense

 

 

11,615

 

 

3,419

  Tax shortfall (excess tax benefit) from stock-based compensation expense

 

 

275

 

 

(11,468)

Non-cash interest expense

 

 

2,013

 

 

2,356

Accretion on contingent consideration

 

 

62

 

 

342

Fair market value adjustment on contingent consideration

 

 

50

 

 

(1,446)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees and other receivables

 

 

11,278

 

 

(5,853)

Prepaid expenses and other current assets

 

 

(9,780)

 

 

(1,175)

Other non-current assets

 

 

(1,556)

 

 

(214)

Accrued expenses and other liabilities

 

 

(11,335)

 

 

(2,827)

Accounts payable

 

 

32

 

 

188

Deferred revenue

 

 

2,181

 

 

4,088

Other non-current liabilities

 

 

418

 

 

(58)

Net cash provided by (used in) operating activities

 

 

13,791

 

 

(2,748)

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,811)

 

 

(2,058)

Capitalization of internally developed software

 

 

(1,388)

 

 

(1,132)

Purchase of ERS units

 

 

(1,500)

 

 

 —

Acquisition of businesses, net of cash acquired

 

 

(18,125)

 

 

(2,641)

Net cash used in investing activities

 

 

(22,824)

 

 

(5,831)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings on revolving credit facility

 

 

15,000

 

 

 —

Payment on revolving credit facility

 

 

(13,000)

 

 

 —

Payment of term notes

 

 

(2,000)

 

 

 —

Proceeds from exercise of stock options

 

 

1,207

 

 

3,710

Excess tax benefit (shortfall) from stock-based compensation expense

 

 

(275)

 

 

11,468

Purchase of treasury stock for stock-based minimum tax withholdings

 

 

(7,071)

 

 

(6,441)

Issuance of restricted stock units

 

 

4

 

 

2

Net cash provided by (used in) financing activities

 

 

(6,135)

 

 

8,739

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(15,168)

 

 

160

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

51,718

 

 

209,754

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

36,550

 

$

209,914

 

 

 

 

 

 

 

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

 

$

(1,513)

 

$

475

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

 

 

2,079

 

 

65

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

 

 

 

 

 

 

Purchase consideration liabilities included in accrued expenses and other liabilities

 

 

269

 

 

 —

Contingent consideration issued in a business acquisition

 

 

1,929

 

 

 —

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

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Table of Contents

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 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™.

 

We offer these solutions principally through the following product and services suites:

 

·

Envestnet | Advisor Suite™ empowers advisors to better manage client outcomes and strengthen their practice. Our software unifies the applications and services advisors use to manage their practice and advise their clients, including data aggregation; financial planning; capital markets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, trading and rebalancing; multicustodial, aggregated performance reporting; and billing calculation and administration.

 

·

Envestnet | PMC®, our Portfolio Management Consultants group, primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs, as well as the creation of investment solutions and products. Envestnet | PMC’s investment solutions and products include managed account and multimanager portfolios, mutual fund portfolios and Exchange Traded Funds (“ETF”) portfolios.  Envestnet | PMC offers Prima Premium Research, comprising institutionalquality research and due diligence on investment managers, mutual funds, ETFs and liquid alternatives funds.  Envestnet | PMC also offers Placemark Overlay Services which includes patented portfolio overlay and tax optimization services.

 

·

Envestnet | Vantage™ software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an indepth view of clients’ various investments, empowering advisors to give holistic, personalized advice and consulting.

 

·

Envestnet | Advisor Now™ offers a private-labeled investor engagement technology enabling advisors to deliver a compelling digital wealth management experience to their clients.

 

·

Envestnet | Finance Logix™ provides financial planning and wealth management software solutions to banks, broker-dealers and RIAs.

 

·

Envestnet | Tamarac™ provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management (“CRM”) software, principally to highend RIAs.

 

·

Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services designed specifically for retirement plan professionals. With our integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically.

 

·

Envestnet | Yodlee™ is a leading data aggregation and data analytics platform powering dynamic, cloud-based innovation for digital financial services.

 

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 five 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”).

 

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Table of Contents

2.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 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, 2015 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2016 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2015 was derived from the Company’s audited financial statements for the year ended December 31, 2015 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. The results of operations for the three months ended March 31, 2016 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, filed with the SEC on February 29, 2016.

 

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.

 

ERS Update - During the three months ended March 31, 2016, the Company acquired additional units in ERS related to the exercise of a put option on units held by the former owners of Klein Decisions, Inc. As of March 31, 2016, the Company’s ownership interest in ERS is 65.4%.

 

Share repurchase program - 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 March 31, 2016, 2,000,000 of shares could still be purchased 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. 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 impact of the adoption of the new revenue standard on its consolidated financial statements.

 

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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 that 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 asset. The Company adopted the guidance for the Company’s fiscal year beginning January 1, 2016 and resulted in decreases 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. The guidance is to be applied prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted for financial statements that have not been issued. The adoption of this standard did not have a material impact on its condensed consolidated financial statements.

 

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

 

In March 2016, The FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This update is intended to reduce the cost and complexity of accounting for share-based payments; however, some changes may also increase volatility in reported earnings. Under the new guidance, all excess tax benefits and deficiencies will be recorded as an income tax benefit or expense in the income statement and excess tax benefits will be recorded as an operating activity in the statement of cash flows. The new guidance also allows withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. The cash paid to satisfy the statutory income tax withholding obligation is classified as a financing activity in the statement 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. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

3.Business Acquisitions

 

FinaConnect, Inc.

On February 1, 2016 Envestnet acquired all of the outstanding shares of capital stock of FinaConnect, Inc. (“FinaConnect”).  FinaConnect is a software as a services (SaaS) platform that provides reporting and practice management capabilities to financial professional servicing the retirement plan market and is the technology platform supporting the ERS service offering.  FinaConnect is included in the Envestnet 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

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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.

 

In connection with the acquisition of FinaConnect, the Company paid upfront cash consideration of $6,425 and Company is required to pay contingent consideration of four times the incremental revenue on a certain book of business for the next two years, not to exceed a total amount of $3,500.

 

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

 

 

 

 

 

Cash consideration

    

$

6,425

Contingent consideration liability

 

 

1,929

Working capital adjustment

 

 

269

Cash acquired

 

 

(1)

Total

 

$

8,622

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:

 

 

 

 

 

Total tangible assets acquired

    

$

136

Total liabilities assumed

 

 

(556)

Identifiable intangible assets

 

 

5,425

Goodwill

 

 

3,617

Total net assets acquired

 

$

8,622

 

A summary of preliminary intangible assets acquired, estimated useful lives and amortization methods are as follows:

 

 

 

 

 

 

 

 

 

    

    

 

    

Weighted Average

    

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 material to the Company’s results of operations.

 

For the three months ended March 31, 2016, acquisition related costs for FinaConnect totaled $7 and are included in general and administration expenses. The Company may incur additional acquisition related costs during 2016.

 

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.

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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 preliminary estimated consideration transferred in the acquisition was as follows:

 

 

 

 

 

Cash consideration

    

$

6,190

Contingent consideration liability

 

 

1,500

Cash acquired

 

 

(320)

Total

 

$

7,370

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 8.

The preliminary estimated fair value of contingent consideration as of March 31, 2016 was $1,500. This amount is the present value of an undiscounted liability of $1,600, applying a discount rate of 2.7%, 3.0%, and 3.3% to the first, second, and third post-closing periods, respectively.  The first, second and third undiscounted payments are anticipated to be $714 on September 30, 2016, $603 on September 30, 2017, and $275 on September 30, 2018. During the three months ended March 31, 2016, the Company made a fair market value upward adjustment on the contingent consideration of $200 and that adjustment is included in general and administration expense in the condensed consolidated statement of operations.

The estimated fair values of certain working capital balances, contingent consideration, deferred revenue, deferred income taxes, unrecognized tax benefits, 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 contingent consideration, deferred revenue, deferred income taxes and intangible assets, and complete the acquisition accounting as soon as practicable but no later than August 30, 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

    

$

255

Total liabilities assumed

 

 

(1,305)

Identifiable intangible assets

 

 

3,400

Goodwill

 

 

5,020

Total net assets acquired

 

$

7,370

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Weighted Average

    

Amortization

 

 

 

Amount

 

Useful Life in Years

 

Method

 

Customer list

 

$

2,500

 

12

 

Accelerated

 

Proprietary technology

 

 

800

 

5

 

Straight-line

 

Trade names and domains

 

 

100

 

4

 

Straight-line

 

Total

 

$

3,400

 

 

 

 

 

 

For the three months ended March 31, 2016, acquisition related costs for Castle Rock totaled $44, 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.  Subsequent to the subscription of the Castle Rock Parties, the Company’s ownership interest in ERS was 54.8%.

 

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 21 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 14,500 data sources and been awarded 76 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 three months ended March 31, 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.

 

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

 

 

 

 

Cash consideration

    

$

375,658

Stock consideration

 

 

186,522

Attribution of the fair market value of replacement awards

 

 

4,318

Cash acquired

 

 

(63,234)

 

 

$

503,264

In connection with the Yodlee merger, the Company issued 1,052,000 shares of Envestnet restricted stock awards (“replacement awards”) issued 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.

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, identifiable intangible assets and goodwill and complete the acquisition accounting as soon as practicable but no later than September 30, 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

 

$

33,815

Total liabilities assumed

 

 

(55,240)

Identifiable intangible assets

 

 

237,000

Goodwill

 

 

287,689

Total net assets acquired

 

$

503,264

 

A preliminary 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

 

$

178,000

 

12

 

Accelerated

 

Backlog

 

 

11,000

 

4

 

Accelerated

 

Proprietary technology

 

 

35,000

 

5

 

Straight-line

 

Trade names

 

 

13,000

 

6

 

Straight-line

 

Total

 

$

237,000

 

 

 

 

 

The results of Envestnet | Yodlee’s operations are included in the condensed consolidated statement of operations beginning November 20, 2015. Envestnet | Yodlee’s revenues and net loss for the period ended March 31, 2016 totaled $28,631 and $14,189, respectively. The net loss includes estimated acquired intangible asset amortization of $8,571.

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For the period ended March 31, 2016, acquisition related costs for Yodlee totaled $1,265, and are included in general and administration expenses. The Company may 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 following pro forma financial information presents the combined results of operations of Envestnet, Finance Logix, Castle Rock and Yodlee for the three month period ended March 31, 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.

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 2015.

 

 

 

 

Three Months Ended

 

March 31, 2015

Revenues

$

122,338

Net loss

 

(7,801)

Net loss per share:

 

 

Basic

 

(0.19)

Diluted

 

(0.19)

 

 

4.      Property and Equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

    

Estimated Useful Life

    

2016

    

2015

Cost:

 

 

 

 

 

 

 

 

 

Computer equipment and software

 

3

years

 

$

44,177

 

$

44,470

Office furniture and fixtures

 

7

years

 

 

5,795

 

 

5,785

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

15,523

 

 

15,123

Other office equipment

 

5

years

 

 

743

 

 

683

 

 

 

 

 

 

66,238

 

 

66,061

Less accumulated depreciation and amortization

 

 

 

 

 

(39,116)

 

 

(37,380)

Property and equipment, net

 

 

 

 

$

27,122

 

$

28,681

 

During the three months ended March 31, 2016, the Company retired fully depreciated property and equipment that were no longer in service in the amount of $1,623.

 

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

March 31,

 

    

2016

    

2015

Depreciation and amortization expense

 

$

3,359

 

$

1,600

 

 

 

 

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5.       Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

Estimated Useful Life

    

2016

    

2015

Internally developed software

 

5

years

 

$

26,497

 

$

25,109

Less accumulated amortization

 

 

 

 

 

(16,007)

 

 

(15,212)

Internally developed software, net

 

 

 

 

$

10,490

 

$

9,897

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Amortization expense

 

$

795

 

$

600

 

 

 

6.Goodwill and Intangible Assets

 

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 adjustment - Yodlee

 

 

 —

 

 

1,754

 

 

1,754

Purchase accounting adjustment - Castle Rock

 

 

51

 

 

 —

 

 

51

Balance at March 31, 2016

 

$

138,892

 

$

287,803

 

$

426,695

 

Intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

    

 

 

 

    

    

Gross

    

    

 

    

Net

    

Gross

    

    

 

    

Net

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Customer lists

 

4

-

12

years

 

$

261,710

 

$

(40,787)

 

$

220,923

 

$

257,410

 

$

(33,668)

 

$

223,742

Backlog

 

 

 

4

years

 

 

11,000

 

 

(2,142)

 

 

8,858

 

 

11,000

 

 

(703)

 

 

10,297

Proprietary technologies

 

2.5

-

8

years

 

 

54,728

 

 

(12,387)

 

 

42,341

 

 

53,928

 

 

(9,833)

 

 

44,095

Trade names

 

2

-

6

years

 

 

17,015

 

 

(2,963)

 

 

14,052

 

 

16,690

 

 

(2,149)

 

 

14,541

Total intangible assets

 

 

 

 

 

 

$

344,453

 

$

(58,279)

 

$

286,174

 

$

339,028

 

$

(46,353)

 

$

292,675

 

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Amortization expense

 

$

11,926

 

$

3,133

 

Future amortization expense of the intangible assets as of March 31, 2016, is expected to be as follows:

 

 

 

 

Years ending December 31:

 

    

Remainder of 2016

$

35,769

2017

 

43,059

2018

 

36,936

2019

 

33,201

2020

 

29,239

Thereafter

 

107,970

 

$

286,174

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7.Other Non-Current Assets

 

Other non-current assets consist of the following:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2016

    

2015

Investment in private companies

 

$

2,623

 

$

2,666

Deposits:

 

 

 

 

 

 

Lease

 

 

3,560

 

 

3,198

Other

 

 

518

 

 

515

Other

 

 

4,177

 

 

2,943

 

 

$

10,878

 

$

9,322

 

 

8.Fair Value Measurements

 

The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.

 

Financial assets and liabilities at fair value are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:

 

Level I:

 

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

 

 

 

Level II:

 

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data.

 

 

 

Level III:

 

Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

 

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, based on the three-tier fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

 

   

As of March 31, 2016

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds

$

20,371

   

$

20,371

   

$

 

$

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

6,084

 

$

 

$

 

$

6,084

Foreign currency forward contracts(1)

 

7

 

 

 

 

7

 

 

Total liabilities

$

6,091

 

$

 

$

7

 

$

6,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

Table of Contents

 

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

 

(1)

Included in prepaid and other current assets in the condensed consolidated balance sheet.

 

Level I assets and liabilities included in the table above include money-market funds not insured by the FDIC.  The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds. 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 table above include unrealized gain or loss 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.  For further details on the Company’s derivative financial instruments, refer to Note 18.

 

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 WMS, Castle Rock and FinaConnect from their value at March 31, 2016 would result in a fair value increase of $2,700 in the Company’s contingent consideration balance.  A hypothetical 10% decrease in applicable revenue for WMS, Castle Rock and FinaConnect from their value at March 31, 2016 would result in a fair value decrease of $2,800 in the Company’s contingent consideration balance.

 

The fair value of the contingent consideration liabilities related to the WMS, Castle Rock and FinaConnect acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level III fair value measurement as defined in ASC 820, Fair Value Measurements and 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 WMS, Castle Rock and FinaConnect during the subsequent three years 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 WMS, Castle Rock and FinaConnect 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 for each acquisition at each reporting date until settlement.  Changes to the estimated fair values of the contingent consideration will be recognized in earnings of the Company and included in general and administrative expense on the condensed consolidated statement of operations.

 

The table below presents a reconciliation of all assets and liabilities of the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2015 to March 31, 2016: