env_current folio_10Q

3

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


 

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

 

For the quarterly period ended June 30, 2018

 

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

 

Commission file number 001-34835


Envestnet, Inc.

(Exact name of registrant as specified in its charter)


 

Delaware

 

20-1409613

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S Employer
Identification No.)

 

 

35 East Wacker Drive, Suite 2400, Chicago, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(312) 827-2800


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐  No ☒

 

As of August 1, 2018,  45,384,004 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 

3

 

 

Item 1. Financial Statements (Unaudited) 

3

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 

4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017 

5

Condensed Consolidated Statement of Equity for the six months ended June 30, 2018 

6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 

7

Notes to Unaudited Condensed Consolidated Financial Statements 

8

 

 

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

35

Forward-Looking Statements 

35

Overview 

36

Results of Operations 

42

Liquidity and Capital Resources 

57

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

59

 

 

Item 4. Controls and Procedures 

60

 

 

PART II - OTHER INFORMATION 

60

 

 

Item 1. Legal Proceedings 

60

 

 

Item 1A. Risk Factors 

61

 

 

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

61

 

 

Item 3. Defaults Upon Senior Securities 

61

 

 

Item 4. Mine Safety Disclosures 

61

 

 

Item 5. Other Information 

61

 

 

Item 6. Exhibits 

61

 

 

2


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,032

 

$

60,115

 

Fees receivable, net

 

 

64,164

 

 

51,522

 

Prepaid expenses and other current assets

 

 

22,721

 

 

19,470

 

Total current assets

 

 

220,917

 

 

131,107

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

40,397

 

 

35,909

 

Internally developed software, net

 

 

29,257

 

 

22,174

 

Intangible assets, net

 

 

313,743

 

 

222,731

 

Goodwill

 

 

526,955

 

 

432,955

 

Other non-current assets

 

 

23,907

 

 

17,176

 

Total assets

 

$

1,155,176

 

$

862,052

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

109,537

 

$

105,897

 

Accounts payable

 

 

21,133

 

 

11,097

 

Contingent consideration

 

 

707

 

 

2,115

 

Deferred revenue

 

 

25,739

 

 

21,246

 

Total current liabilities

 

 

157,116

 

 

140,355

 

 

 

 

 

 

 

 

 

Convertible Notes due 2019

 

 

162,299

 

 

158,990

 

Convertible Notes due 2023

 

 

289,562

 

 

 —

 

Revolving credit facility

 

 

 —

 

 

81,168

 

Contingent consideration

 

 

 —

 

 

666

 

Deferred revenue

 

 

7,929

 

 

12,047

 

Deferred rent and lease incentive

 

 

17,334

 

 

15,185

 

Deferred tax liabilities, net

 

 

2,154

 

 

969

 

Other non-current liabilities

 

 

16,744

 

 

15,102

 

Total liabilities

 

 

653,138

 

 

424,482

 

 

 

 

 

 

 

 

 

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; 58,382,026 and 57,450,056 shares issued as of June 30, 2018 and December 31, 2017, respectively; 45,375,594 and 44,700,641 shares outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

291

 

 

287

 

Additional paid-in capital

 

 

624,378

 

 

556,257

 

Accumulated deficit

 

 

(62,059)

 

 

(73,854)

 

Treasury stock at cost, 13,006,432 and 12,749,415 shares as of June 30, 2018 and December 31, 2017, respectively

 

 

(61,437)

 

 

(47,042)

 

Accumulated other comprehensive income (loss)

 

 

(739)

 

 

624

 

Total stockholders’ equity

 

 

500,434

 

 

436,272

 

Non-controlling interest

 

 

704

 

 

398

 

Total equity

 

 

501,138

 

 

436,670

 

Total liabilities and equity

 

$

1,155,176

 

$

862,052

 

 

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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

 

$

118,111

 

$

98,959

 

$

239,264

 

$

193,121

Subscription-based

 

 

71,779

 

 

59,802

 

 

141,474

 

 

117,712

Total recurring revenues

 

 

189,890

 

 

158,761

 

 

380,738

 

 

310,833

Professional services and other revenues

 

 

11,226

 

 

8,656

 

 

18,389

 

 

14,370

Total revenues

 

 

201,116

 

 

167,417

 

 

399,127

 

 

325,203

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

67,627

 

 

55,735

 

 

130,561

 

 

104,961

Compensation and benefits

 

 

80,210

 

 

64,996

 

 

163,750

 

 

130,528

General and administration

 

 

34,089

 

 

28,478

 

 

66,818

 

 

59,025

Depreciation and amortization

 

 

19,185

 

 

15,465

 

 

38,731

 

 

31,300

Total operating expenses

 

 

201,111

 

 

164,674

 

 

399,860

 

 

325,814

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 5

 

 

2,743

 

 

(733)

 

 

(611)

Other expense, net

 

 

(5,430)

 

 

(4,369)

 

 

(10,684)

 

 

(9,852)

Loss before income tax provision (benefit)

 

 

(5,425)

 

 

(1,626)

 

 

(11,417)

 

 

(10,463)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

566

 

 

4,844

 

 

(13,428)

 

 

9,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(5,991)

 

 

(6,470)

 

 

2,011

 

 

(19,605)

Add: Net loss attributable to non-controlling interest

 

 

465

 

 

 —

 

 

567

 

 

 —

Net income (loss) attributable to Envestnet, Inc.

 

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12)

 

$

(0.15)

 

$

0.06

 

$

(0.45)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.12)

 

$

(0.15)

 

$

0.05

 

$

(0.45)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,247,331

 

 

43,855,479

 

 

44,963,735

 

 

43,513,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

45,247,331

 

 

43,855,479

 

 

47,156,205

 

 

43,513,074

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4


 

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

    

2017

 

2018

    

2017

Net income (loss) attributable to Envestnet, Inc.

 

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(1,036)

 

 

76

 

 

(1,363)

 

 

809

Comprehensive income (loss) attributable to Envestnet, Inc.

 

$

(6,562)

 

$

(6,394)

 

$

1,215

 

$

(18,796)

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

5


 

Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Other

 

 

 

 

Non-

 

 

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Total

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Interest

    

Equity

Balance, December 31, 2017

 

57,450,056

 

$

287

 

(12,749,415)

 

$

(47,042)

 

$

556,257

 

$

624

 

$

(73,854)

 

$

398

 

$

436,670

Adoption of ASC 606 (See Note 4)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,217

 

 

 —

 

 

9,217

Exercise of stock options

 

175,023

 

 

 1

 

 —

 

 

 —

 

 

2,539

 

 

 —

 

 

 —

 

 

 —

 

 

2,540

Issuance of common stock - vesting of restricted stock units

 

756,947

 

 

 3

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

18,971

 

 

 —

 

 

 —

 

 

 —

 

 

18,971

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(257,017)

 

 

(14,395)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(14,395)

Issuance of non-controlling units in private company

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

873

 

 

873

Issuance of Convertible Notes due 2023, net of offering costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

46,611

 

 

 —

 

 

 —

 

 

 —

 

 

46,611

Foreign currency translation loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,363)

 

 

 —

 

 

 —

 

 

(1,363)

Net income (loss)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,578

 

 

(567)

 

 

2,011

Balance, June 30, 2018

 

58,382,026

 

$

291

 

(13,006,432)

 

$

(61,437)

 

$

624,378

 

$

(739)

 

$

(62,059)

 

$

704

 

$

501,138

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

6


 

Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2018

    

2017

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

2,011

 

$

(19,605)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

38,731

 

 

31,300

Deferred rent and lease incentive amortization

 

 

1,069

 

 

583

Provision for doubtful accounts

 

 

924

 

 

341

Deferred income taxes

 

 

(17,093)

 

 

6,524

Stock-based compensation expense

 

 

18,971

 

 

15,403

Non-cash interest expense

 

 

5,630

 

 

4,853

Accretion on contingent consideration and purchase liability

 

 

196

 

 

304

Payments of contingent consideration

 

 

 —

 

 

(357)

Loss allocation from equity method investment

 

 

811

 

 

702

Loss on disposal of fixed assets

 

 

10

 

 

69

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees receivable, net

 

 

(8,204)

 

 

(5,639)

Prepaid expenses and other current assets

 

 

(3,426)

 

 

(2,681)

Other non-current assets

 

 

(2,450)

 

 

(514)

Accrued expenses and other liabilities

 

 

(5,448)

 

 

(752)

Accounts payable

 

 

4,166

 

 

(184)

Deferred revenue

 

 

3,478

 

 

1,818

Other non-current liabilities

 

 

1,578

 

 

3,022

Net cash provided by operating activities

 

 

40,954

 

 

35,187

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,569)

 

 

(9,181)

Capitalization of internally developed software

 

 

(10,622)

 

 

(5,651)

Acquisition of businesses

 

 

(188,345)

 

 

 —

Net cash used in investing activities

 

 

(208,536)

 

 

(14,832)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from issuance of Convertible Notes due 2023

 

 

345,000

 

 

 —

Convertible Notes due 2023 issuance costs

 

 

(9,488)

 

 

 —

Proceeds from borrowings on revolving credit facility

 

 

195,000

 

 

25,000

Payments on revolving credit facility

 

 

(276,168)

 

 

(25,000)

Payments of contingent consideration

 

 

(2,193)

 

 

(1,929)

Payments of definite consideration

 

 

 —

 

 

(445)

Payments of purchase consideration liabilities

 

 

 —

 

 

(235)

Payment of Term Notes

 

 

 —

 

 

(35,862)

Proceeds from exercise of stock options

 

 

2,540

 

 

2,617

Purchase of treasury stock for stock-based tax withholdings

 

 

(14,395)

 

 

(9,650)

Issuance of restricted stock units

 

 

 3

 

 

 4

Net cash provided by (used in) financing activities

 

 

240,299

 

 

(45,500)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(572)

 

 

283

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH,  CASH EQUIVALENTS AND RESTRICTED CASH

 

 

72,145

 

 

(24,862)

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

62,115

 

 

54,592

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2)

 

$

134,260

 

$

29,730

 

 

 

 

 

 

 

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

 

$

2,225

 

$

275

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

 

 

4,271

 

 

3,960

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

 

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

 

1,080

 

 

281

Purchase liabilities included in accrued expenses and other liabilities

 

 

1,422

 

 

818

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

 

 

1,188

 

 

260

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

 

7


 

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 intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.

 

The Company offers these solutions principally through the following product and services suites:

·

Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting.  Advisors have access to over 18,400 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.

 

·

Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to highend registered investment advisers (“RIAs”).

 

·

Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services for advisor-sold retirement plans. Leveraging integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically.

 

·

Envestnet | PMC® or Portfolio Management Consultants (“PMC”) provides research, due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include nearly 4,900 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as over 1,700 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers an overlay service, which includes patented portfolio overlay and tax optimization services.

 

·

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

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

 

2.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 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, 2017 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of June 30, 2018 and the results of operations, equity, comprehensive income (loss) and cash flows for the periods presented herein. The unaudited condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet segment that are denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet | Yodlee segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a foreign currency functional currency are translated at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates. Differences arising from these foreign currency translations are recorded in the unaudited condensed consolidated balance sheets as accumulated other comprehensive income (loss) within stockholders’ equity. The results of operations for the three and six months ended June 30, 2018 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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Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

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, 2017, filed with the SEC on February 28, 2018.

 

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, the determination of the period of benefit for deferred sales incentive commissions, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of restricted stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, fair value of the liability portion of the convertible debt and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.

 

The following table reconciles cash, cash equivalents and restricted cash from the condensed consolidated balance sheets to amounts reported within the condensed consolidated statements of cash flows:

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

2018

    

2017

Cash and cash equivalents

 

$

134,032

 

$

27,730

Restricted cash included in prepaid expenses and other current assets

 

 

228

 

 

2,000

Total cash, cash equivalents and restricted cash

 

$

134,260

 

$

29,730

 

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for revenue recognition. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and have been reflected in these condensed consolidated financial statements (See “Note 4 – Revenue”).

 

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 and will be applied using a modified retrospective approach with optional practical expedients. Early adoption of the standard is permitted. The Company will adopt the new standard on its effective date of January 1, 2019 and expects to elect certain available transitional practical expedients. Based on current analysis, the adoption of the standard may have a material impact on our consolidated balance sheets and related disclosures while not significantly impacting financial results. We continue to evaluate the accounting, transition, and disclosure requirements of this standard.  

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and have been reflected in these condensed consolidated financial statements. Retrospective adoption of ASU 2016-15 did not have a material impact on the Company’s presentation of the condensed consolidated statements of cash flows.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” which amends ASC 230 to provide clarifying guidance on the classification and presentation of restricted cash in the statement of cash flows. Additional disclosure is required to reconcile between the statement of financial position and the statement of cash flows when the

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Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and included $228 and $2,000 of restricted cash in the total of cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017, respectively. A reconciliation of restricted cash for each period is included within this footnote.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business (Topic 805),” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and did not have a material impact to these condensed consolidated financial statements. This standard will be applied to all future business acquisition and disposal transactions.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018. This standard will be applied to all future modifications of share-based payment awards.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This update clarifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees. Specifically, the update aligns the accounting for payments to nonemployees to match the accounting for payments to employees, no longer accounting for these transactions differently. This standard is effective for financial statements issued by public companies for 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. 

 

 

3.Business Acquisitions

 

FolioDynamix

 

On January 2, 2018, the Company acquired (the “Acquisition”) all of the issued and outstanding membership interests of FolioDynamics Holdings, Inc. (“FolioDynamix”) through a merger of FolioDynamix with and into a wholly owned subsidiary of Envestnet.

 

FolioDynamix provides financial institutions, RIAs, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services. FolioDynamix is included in the Envestnet segment.

 

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

 

The Company funded the transaction with a combination of cash on the Company’s balance sheet, purchase consideration liabilities and borrowings under its revolving credit facility.

 

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Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

The estimated consideration transferred in the acquisition was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary

 

Period

 

Revised

 

 

Estimate

 

Adjustments

 

Estimate

Cash consideration

 

$

187,580

 

$

12,297

 

$

199,877

Purchase consideration liability

 

 

12,297

 

 

(12,297)

 

 

 —

Working capital and other adjustments

 

 

(3,893)

 

 

(2,500)

 

 

(6,393)

Total

 

$

195,984

 

$

(2,500)

 

$

193,484

The estimated fair values of working capital balances, property and equipment, 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 tangible assets and liabilities, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than January 2, 2019.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary

 

Period

 

Revised

 

 

Estimate

 

Adjustments

 

Estimate

Cash and cash equivalents

 

$

4,876

 

$

 —

 

$

4,876

Accounts receivable

 

 

4,962

 

 

 —

 

 

4,962

Prepaid expenses and other current assets

 

 

1,600

 

 

 —

 

 

1,600

Property and equipment, net

 

 

927

 

 

 —

 

 

927

Other non-current assets

 

 

441

 

 

 —

 

 

441

Identifiable intangible assets

 

 

117,700

 

 

 —

 

 

117,700

Goodwill

 

 

97,248

 

 

(2,624)

 

 

94,624

Total assets acquired

 

 

227,754

 

 

(2,624)

 

 

225,130

Accounts payable

 

 

(5,358)

 

 

 —

 

 

(5,358)

Accrued expenses

 

 

(7,173)

 

 

 —

 

 

(7,173)

Deferred tax liability

 

 

(18,245)

 

 

 —

 

 

(18,245)

Deferred revenue

 

 

(930)

 

 

124

 

 

(806)

Other non-current liabilities

 

 

(64)

 

 

 —

 

 

(64)

Total liabilities assumed

 

 

(31,770)

 

 

124

 

 

(31,646)

Total net assets acquired

 

$

195,984

 

$

(2,500)

 

$

193,484

 

The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction,  primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.

 

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Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

 

 

 

 

Preliminary

 

Period

 

Revised

 

 

 

Amortization

 

    

Estimate

    

Adjustments

    

Estimate

    

Useful Life in Years

    

Method

Customer list

 

$

95,000

 

$

500

 

$

95,500

 

12

 

Accelerated

Proprietary technology

 

 

18,000

 

 

(500)

 

 

17,500

 

 5

 

Straight-line

Trade names and domains

 

 

4,700

 

 

 —

 

 

4,700

 

 6

 

Straight-line

Total

 

$

117,700

 

$

 —

 

$

117,700

 

 

 

 

The results of FolioDynamix’s operations are included in the condensed consolidated statements of operations beginning January 2, 2018. FolioDynamix’s revenues for the three and six month periods ended June  30, 2018 totaled $17,346 and $34,800, respectively. FolioDynamix’s pre-tax loss for the three and six month periods ended June 30, 2018 totaled $3,255 and $7,981, respectively. The pre-tax loss includes estimated acquired intangible asset amortization of $4,390 and $8,701 for the three and six month periods ended June 30, 2018.

For the three and six month periods ended June 30, 2018, acquisition related costs for FolioDynamix totaled $167 and $594, respectively, and are included in general and administration expenses. The Company will incur additional acquisition related costs during 2018.

Pro forma results for Envestnet, Inc. giving effect to the FolioDynamix acquisition

The following pro forma financial information presents the combined results of operations of Envestnet and FolioDynamix for the three and six month periods ended June 30, 2017. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017.

The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.

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 2017.

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2017

 

June 30, 2017

Revenues

$

177,297

 

$

344,514

Net loss

 

(12,624)

 

 

(31,873)

Net loss per share:

 

 

 

 

 

Basic

 

(0.29)

 

 

(0.73)

Diluted

 

(0.29)

 

 

(0.73)

 

 

4.Revenue

On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent ASUs that modified Topic 606 (“ASC 606” or “new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The Company recognized the cumulative effect of the initial application of the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and will continue to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to the results of operations on an ongoing basis.

The majority of our revenues continue to be recognized when services are provided. The adoption of the new revenue standard primarily impacts timing of revenue recognition for initial implementation services, deferral of incremental direct costs in obtaining contracts with customers and gross versus net presentation related to certain third party manager agreements.

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Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

The cumulative effect of the changes made to the Company’s condensed consolidated balance sheets as of January 1, 2018 for the adoption of the new revenue standard was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Cumulative Catch-up

 

Balance at

 

 

December 31, 2017

 

Adjustments

 

January 1, 2018

Balance Sheets

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Other non-current assets

    

$

17,176

    

$

5,315

    

$

22,491

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred revenue, current

 

 

21,246

 

 

(1,122)

 

 

20,124

Deferred revenue, non-current

 

 

12,047

 

 

(2,780)

 

 

9,267

Equity:

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(73,854)

 

 

9,217

 

 

(64,637)

 

In accordance with the new revenue standard requirements, the impact of adoption on the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

 

Without Adoption of

 

Effect of Change

 

 

As Reported

 

ASC 606

 

Higher/(Lower)

Statements of Operations

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Asset-based

    

$

118,111

    

$

121,646

    

$

(3,535)

Subscription-based

 

 

71,779

 

 

71,779

 

 

 —

Total recurring revenues