UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31,
20172022
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-34835
(Exact name of registrant as specified in its charter)
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Delaware | | 20-1409613 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S Employer Identification No.) |
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| 1000 Chesterbrook Boulevard, Suite 250, Berwyn, Pennsylvania | | 60601 |
35 East Wacker Drive, Suite 2400, Chicago, IL
| | 60601
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(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:(312) 827-2800
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class: each class: | Trading symbol(s) | Name of Each Exchangeeach exchange on Which Registered: which registered: |
Common stock,Stock, par value $0.005 per share | ENV | NYSE
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐☒ No ☒☐
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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(§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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
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Non-accelerated filer | ☐ | | Smaller reporting 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. Yes ☐ No ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on June 30, 20172022 as reported on The New York Stock Exchange on that date: $1,174,950,058.$1.8 billion. For purposes of this calculation, shares of common stock held by (i) persons holding more than 5% of the outstanding shares of stock and (ii) officers and directors of the registrant, as of June 30, 2017,2022, are excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive of affiliate status.
As of February 23, 2018, 44,724,80121, 2023, 54,019,836 shares of the common stock with a par value of $0.005 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:Part III incorporates by reference portions of the registrant’s definitive proxy statement for the annual meeting of stockholders, which will be filed within 120 days after the close of the 2022 fiscal year.
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| PART I
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| Summary
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Forward‑Looking Statements
Unless
otherwise indicated, the
context requires otherwise, the wordsterms “Envestnet,” “the Company,” “we,” “us” and “our”
are referencesrefer to Envestnet, Inc. and its subsidiaries as a whole.
This annual report on Form 10‑K
for the year ended December 31, 2022 ("Annual Report") contains forward‑looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward‑looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”Operations”. These statements are based on our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward‑looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward‑looking statements.
Forward‑lookingThe potential risks, uncertainties and other factors that could cause actual results to differ from those expressed by the forward-looking statements
mayin this Annual Report include,
among others, statements relating to: | ·
| | difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources,
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but are not limited to, | ·
| | the concentration of nearly all of our revenues from the delivery of our solutions and services to clients in the financial services industry,
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•adverse economic or global market conditions, including periods of rising inflation and market interest rates, and governmental responses to such conditions; | ·
| | our reliance on a limited number of clients for a material portion of our revenue,
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•the conflict between Russia and Ukraine including related sanctions, and their impact on the global economy and capital markets; | ·
| | the renegotiation of fee percentages or termination of our services by our clients,
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•the concentration of our revenues from the delivery of our solutions and services to clients in the financial services industry; | ·
| | our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies,
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•our reliance on a limited number of clients for a material portion of our revenue; | ·
| | the impact of market and economic conditions on revenues,
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•the renegotiation of fees by our clients; | ·
| | our inability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner,
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•changes in the estimates of fair value of reporting units or of long-lived assets; | ·
| | our ability to expand our relationships with existing customers, grow the number of customers and derive revenue from new offerings such as our data analytics solutions and market research services and premium financial applications (“FinApps”),
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•the amount of our debt and our ability to service our debt;•limitations on our ability to access information from third parties or charges for accessing such information; | ·
| | adverse judicial or regulatory proceedings against us,
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•the targeting of some of our sales efforts at large financial institutions and large financial technology ("FinTech") companies which prolongs sales cycles, requires substantial upfront sales costs and results in less predictability in completing some of our sales; | ·
| | liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest,
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•changes in investing patterns on the assets on which we derive revenue and the freedom of investors to redeem or withdraw investments generally at any time; | ·
| | changes in laws and regulations, including tax laws and regulations,
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•the impact of fluctuations in market conditions and interest rates on the demand for our products and services and the value of assets under management or administration; | ·
| | general economic conditions, political and regulatory conditions,
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•our ability to keep up with rapid technological change, evolving industry standards or changing requirements of clients; | ·
| | the impact of fluctuations in market condition and interest rates on the demand for our products and services and the value of assets under management or administration,
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•risks associated with our international operations; | ·
| | the impact of market conditions on our ability to issue debt and equity,
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•liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest; •our ability to successfully identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;
•our ability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner;
•the failure to protect our intellectual property rights;
•our ability to introduce new solutions and services and enhancements;
•our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information and potential liabilities for data security breaches;
•the effect of privacy laws and regulations, industry standards and contractual obligations and changes to these laws, regulations, standards and obligations on how we operate our business and the negative effects of failure to comply with these requirements;
•regulatory compliance failures;
•failure by our customers to obtain proper permissions or waivers for our use of disclosure of information;
•adverse judicial or regulatory proceedings against us;
•failure of our solutions, services or systems, or those of third parties on which we rely, to work properly;
•potential liability for use of inaccurate information by third parties provided by us;
•the occurrence of a deemed “change of control”;
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| | the impact of fluctuations in interest rates on our cost of borrowing,
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•the uncertainty of the application and interpretation of certain tax laws; | ·
| | our financial performance,
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•issuances of additional shares of common stock or issuances of shares of preferred stock or convertible securities on our existing stockholders; | ·
| | the results of our investments in research and development, our data center and other infrastructure,
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•general economic, political and regulatory conditions; | ·
| | our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information,
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•global events, natural disasters, environmental disasters, terrorist attacks and pandemics, including their impact on the economy and trading markets; | ·
| | failure of our systems to work properly,
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•a pandemic or health crisis, including the COVID-19 pandemic; and | ·
| | our ability to realize operating efficiencies,
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•management’s response to these factors. | ·
| | the advantages of our solutions as compared to those of others,
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| | the failure to protect our intellectual property rights,
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| | our ability to establish and maintain intellectual property rights,
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| | our ability to retain and hire necessary employees and appropriately staff our operations, and
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| | management’s response to these factors.
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More information on these important factors that could cause actual results to differ materially from the forward‑looking statements we make in this Annual Report are set forth in Part I, Item 1A under “Risk Factors”.In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forward‑looking statements. All forward‑looking statements contained in this annual reportAnnual Report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. Forward‑looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward‑looking statements to reflect events or circumstances after the date of this annual reportAnnual Report or to reflect the occurrence of unanticipated events, except as required by applicable law. If we do update one or more forward‑looking statements, no inference should be made that we will make additional updates with respect to those or other forward‑looking statements.
Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.
These forward‑looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward‑looking statements we make in this annual report are set forth in Part I under “Risk Factors”; accordingly, investors should not place undue reliance upon our forward‑looking statements.
You should read this
annual report on Form 10‑KAnnual Report completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward‑looking statements by these cautionary statements.
The following discussion and analysis should also be read along with our consolidated financial statements and the related notes included elsewhere in this
annual report.Annual Report. Except for the historical information contained herein, this discussion contains forward‑looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.
Except where we have otherwise indicated or the context otherwise requires, dollar amounts presented in this Form 10‑K are in thousands, except for Exhibits and per share amounts.
Envestnet, through its subsidiaries, is transforming the way financial advice and insight are delivered. Our mission is to empower financial advisors and service providers with innovative technology, solutions and intelligence. Envestnet has been a leading provider of intelligent systems forleader in helping transform wealth management, andworking towards its goal of expanding a holistic financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process. Envestnet empowers enterprises and advisorswellness ecosystem so that our clients can deliver an intelligent financial life to more fully understand their clients ("Intelligent Financial Life").
Approximately 106,000 advisors and
deliver better outcomes.More than 2,900approximately 6,900 companies includingincluding: 16 of the 20 largest U.S. banks, 3947 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”("RIAs"), and hundreds of Internet servicesFinTech companies, leverage Envestnet technology and services. Envestnet solutions enhance knowledge of the client, accelerate client on-boarding, improve client digital experiences, andservices that help drive better outcomes for enterprises, advisors and their clients.
Founded in 1999, Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic financial wellness network that supports enterprises, advisors and their clients.
Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting
software, servicestechnology, solutions and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet, a Delaware corporation originally founded in 1999, serves clients from its headquarters based in Chicago, Illinois,Berwyn, Pennsylvania, as well as other locations throughout the United States, India and other international locations.
Envestnet is organized around two primary, complementary business
segments.segments. Financial information about each business segment is contained in “Note 21 – Segment Information” to the notes to consolidated financial statements in Part II, Item 8.8, “Note 19—Segment Information”. Our business segments are as follows: | ·
| | Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.
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| ·
| | Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.
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•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an Intelligent Financial Life to their clients.
•Envestnet Data & Analytics – a leading data aggregation, intelligence, and experiences platform that powers data connectivity and business intelligence across digital financial services to enable them to deliver an Intelligent Financial Life to their clients.
Envestnet Wealth Solutions Segment
Envestnet
Wealth Solutions empowers financial advisors at broker-dealers, banks and RIAs with all the tools they require to deliver holistic wealth management to their end
clients, enabling them to deliver an Intelligent Financial Life to their clients. In addition, the firm provides advisors with practice management support so that they can grow their practices and operate more efficiently. At the end of
2017, Envestnet’s2022, Envestnet Wealth Solutions’ platform assets
grew toare approximately
$1.4$5.1 trillion in
nearly 7more than 18.3 million accounts overseen by
nearly 60 thousandapproximately 106,000 advisors.
Services provided to advisors include: financial planning, risk assessment
and selection oftools, investment strategies and solutions, asset allocation models, research,
and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi‑custodian performance reporting and communication tools, plus data analytics.
Envestnet hasWe have access to a wide range of leading third‑party asset custodians.
We offer these solutions principally through the following product/product and service 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 the creation of a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to nearly 23,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics and digital advice capabilities to customers.
•Envestnet | Tamarac™ provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high‑end RIAs.
•Envestnet | MoneyGuide provides leading goals-based financial planning solutions to the financial 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 18,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.
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industry. The highly adaptable software helps financial advisors add significant value for their clients using best-in-class technology with enhanced integrations to generate financial plans. | ·
| | Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management (“CRM”) software, principally to high‑end RIAs.
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| ·
| | 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.
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•Envestnet | Retirement Solutions (“ERS & 401kplans.com”)offers a comprehensive suite of services for advisor-sold retirement plans. Our retirement solutions address the regulatory, data, and investment needs of retirement plans and delivers the information holistically. 401kplans.com is a digital 401(k) retirement plan marketplace that streamlines retirement plan distribution and due diligence among financial advisors and third-party administrators. With Envestnet's retirement solutions marketplace, advisors can employ Envestnet's outsourced 3(38) or 3(21) fiduciary services for investment selection and monitoring in retirement plan portfolios and can access essential information to make investment recommendations and understand the impact of fund changes to the total cost of their plans. | ·
| | Envestnet | PMC®, or Portfolio Management Consultants (“PMC”)– provides research, due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 4,000 vetted managed account products, multi-manager portfolios, fund strategist portfolios, as well as proprietary products, such as Quantitative Portfolios. PMC also offers an overlay service, which includes patented portfolio overlay and tax optimization services.
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•Envestnet | PMC®, or Portfolio Management Consultants(“PMC”) provides research and consulting services to assist advisors in creating investment solutions for their clients. These solutions include over 5,000 vetted third-party managed account products, multi-manager portfolios and fund strategist portfolios, as well as over 950 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers portfolio overlay and tax optimization services.
•Envestnet | Redi2 (“Redi2”) offers revenue management and hosted fee-billing solutions in the global financial services industry. Redi2's platform enables fee calculation, invoice creation, payouts and accounting, and billing compliance. Redi2 solutions caters to different segments of the market with three different product lines: Revenue Manager which provides client revenue accounting and billing services for asset managers; Wealth Manager which delivers multi-party billing and payouts for broker-dealers and turnkey asset management programs and BillFin™ which offers advisory billing and invoicing for financial advisors.
As the tables below indicate,
Envestnet’s wealth management solutions haveEnvestnet Wealth Solutions has experienced steady and significant growth over the last several years. We believe this growth is attributable to secular trends in the wealth management industry, the uniqueness and comprehensiveness of our products, as well as acquisitions.
Periodically clients choose to change the way they pay for our solution, whereby they switch from an asset-based pricing model to a subscription-based model.
The following charts show growth in
theassets, number of
advisors, accounts and
assetsadvisors supported by
Envestnet:Advisors with Assets Under ManagementEnvestnet Wealth Solutions, distinguishing those metrics between assets under management or Administration & Subscriptionadministration (“AUM/A”) and Licensing
Accounts Under Management or AdministrationAUM/A & Subscription and Licensing
(in thousands)
Assets Under Management or Administration & Subscription and Licensing
($ in billions)
AUM/A & Subscription Accounts
(in thousands)
AUM/A & Subscription Advisors
Envestnet
| YodleeData & Analytics Segment
Envestnet
| YodleeData & Analytics is a leading data aggregation,
and data intelligence,
and experiences platform.
As a “big data” specialist, Envestnet
| Yodlee gathers, refinesData & Analytics enables consumers to aggregate financial accounts within client applications and
aggregates a massive set of end-user permissioned transaction level data, which it then provides to
customers asclients the functionality to gather, refine, and aggregate massive sets of consumer permissioned data
analytics solutions andfor use in financial applications, reports, market research
services.More than a thousandanalysis, and application programming interfaces (“APIs”).
Over 1,800 clients, including financial institutions, financial technology innovators and financial advisory firms, including 13 of the 20 largest U.S. banks, subscribe to the Envestnet
| YodleeData & Analytics platform to underpin personalized financial apps and services for
over 21approximately 37 million paid
subscribers.end-users.
Envestnet | YodleeData & Analytics serves twofour main customerclient groups: financial institutions (“FI”Banking”), financial advisors and institutions (“Wealth”), market intelligence and analytics providers (“Research”) and financial technology innovators (“Tech”).
These groups serve the following customers:
•Banking – Retail Banks, Credit Unions and credit card providers
•Wealth – Wealth management financial advisors and institutions
•Research – Research and analyst firms
•Tech – Personal financial management, small business accounting, e-commerce, payment solutions providers, small business lending and authentication
With the exception of the Tech Group, we provide clients with secure access to open APIs, user facing applications powered by our platform, APIs and reports. We aggregate and cleanse client permission consumer data elements. Envestnet Data & Analytics also enables clients to develop their own applications through its open APIs, which
we refer to as Yodlee Interactive (“YI”) customers. | ·
| | The Financial Institutions group provides customers with secure access to open application programming interfaces (“APIs”), end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Envestnet | Yodlee also enables customers to develop their own applications through its open APIs, which deliver secure data, money movement solutions, and other functionality. FinApps can be subscribed to individually or in combinations that include personal financial management, wealth management, card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, card, lenders, and other financial services sectors. These FinApps help consumers and small businesses simplify and manage their finances, review their financial accounts, track their spending, calculate their net worth, and perform a variety of other activities. For example, Yodlee’s Expense FinApp helps consumers track their spending, and a Payroll FinApp from a third party helps small businesses process their payroll. The suite of reports is designed to supplement traditional credit reports by utilizing consumer permissioned aggregated data from over 16,000 sources, including banking, investment, loan, and credit card information.
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| ·
| | The Yodlee Interactive group enables customers to develop new applications and enhance existing solutions. These customers operate in a number of sub-vertical markets, including wealth management, personal financial management, small business accounting, small business lending and authentication. They use the Envestnet | Yodlee platform to build solutions that leverage our open APIs and access to a large end user base. In addition to aggregated transaction-level account data elements, we provide YI customers with secure access to account verification, money movement and risk assessment tools via our APIs. We play a critical role in transferring innovation from financial technology innovators to financial institutions. For example, YI customers use Yodlee applications to provide working capital to small businesses online; personalized financial management, planning and advisory services; e-commerce payment solutions; and online accounting systems for small businesses. We provide access to our solutions across multiple channels, including web, tablet and mobile.
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Both FI and YI channels benefit customers by improving end-user satisfaction and retention, accelerating speed to market, creating technology savings and enhancing their data analytics solutions, and market research capabilities. End users receive better accessother functionality.
The Tech group enables clients to
theirdevelop new applications and enhance existing solutions through our APIs. These clients operate in a number of sub-vertical markets, including FinTech, wealth management, personal financial
informationmanagement, small business accounting, small business lending and
more control over their finances, leading to more informed and personalized decision making. For customers who are members of the developer community, Yodlee solutions provide access to critical data and payments solutions, faster speed to market and enhanced distribution.authentication.
We believe that our brand
leadership,recognition, innovative technology and intellectual property, large
customerclient base, and unique data gathering and enrichment provide us with competitive advantages that have enabled us to
generate strong growth. | ·
| | Envestnet Analytics provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. These tools empower financial services firms to extract key business insights to run their business better and provide timely and focused support to advisors. Our
|
dashboards deliver segmentation analytics, multi-dimensional benchmarking, and practice pattern analyses that provide mission-critical insights to clients.
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Market Opportunity
The wealth management industry has experienced significant growth in terms of assets invested by retail investors in the past several years. According to the Federal Reserve, U.S. household financial assets
approximated $79totaled approximately $108 trillion as of September 30,
2017,2022, representing a sizeable wealth management opportunity.
A number According to Boston Consulting Group's Global Wealth Report 2022, total net wealth in North America is expected to grow by 4.9% annually between 2021 and 2026 to exceed $200 trillion. Based on data from Cerulli Associates, invested assets comprised an estimated 55% of significantoverall U.S. household financial assets in 2021, advisor-directed assets totaled $30.7 trillion in 2021, and advisors had discretion over 58% of managed account assets as of September 30, 2022.
In the next 5-10 years, we believe the wealth management industry will continue to consolidate with fewer firms and fewer advisors managing more assets, making scale and operational efficiency increasingly important. This will require firms to integrate technology into all areas of their business.
The following trends are impacting
the wealth management industry. Market forces are converging to bring about changes in wealth management, including those described below: | ·
| | More consumers are recognizing the need for advice and are willing to pay for it. Consumers are also becoming more cost conscious and tech savvy. They want advice to be objective and non-conflicted.
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| ·
| | According to various media sources, a massive wealth transfer is in the offing that will amount to $30 trillion as baby boomers transition assets to their offspring (Gen X and Gen Y). These generations tend to favor greater use of technology and want access to advice and their assets anywhere, anytime, and on any device.
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| ·
| | Regulations and digital advice start-ups are putting pressure on advisor and firm fees and profit margins. To survive and thrive, advisors will need to increasingly rely on technology to achieve efficiency and scale to serve a growing client base.
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| ·
| | Federal regulations and investor demand are changing as the fiduciary standard is expected to become more broadly applicable in the investor-advisor relationship. Investment advice will be rooted in financial planning and centered on achieving investor goals.
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| ·
| | Technology is transforming the financial advice industry. Control is shifting from manufacturers and distributors of products to consumers. As consumers become better informed in an increasingly complex market, they not only seek guided advice, but they seek unbiased advisors who put their best interest first. They demand greater transparency in product pricing.
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| ·
| | Digital technology is revolutionizing the way financial advisors can do business as they increasingly employ technology to service clients.
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| ·
| | Financial services firms will need to be able to interact with customers on a digital basis via investor portals and other technology.
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| ·
| | According to Capgemini’s 2017 World Wealth report, global high-net-worth financial wealth is expected to grow by $17 trillion between 2016 and 2020. In the next 5 – 10 years, fewer firms will manage far more assets at a significantly lower cost. Industry margins will be squeezed making scale and operational efficiency far more important. Firms will need to integrate technology in all areas of the business and develop a clear strategy for the future. As low-cost products gain share and larger firms benefit from scale economies, there will likely be further consolidation and new forms of collaboration.
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| ·
| | Based on data from Cerulli Associates and projections by Envestnet, fee-based financial advisory is expected to reach $10 trillion by the end of 2017. Cerulli Associates analysis revealed that advisors had discretion over 53% of managed account assets in 2016, which is expected to climb to 59% by 2020.
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These trends are impacting Envestnet’sour business and creating a significantlarge and growing market opportunity for technology‑enableddata, technology, and investment solutions and services like ours.
A technological shiftours:
•Scale: Scale is also underwaya defining theme across the financial services landscape, including wealth management. For example, in the broaderindependent broker-dealer channel, the ten largest firms are now 3.5 times larger than the next 40 firms, as measured by assets. In the RIA channel, firms with at least $1 billion of assets represented 75% of assets in 2021. We expect consolidation of firms and assets to continue, driven by factors including advisor succession needs, private capital attracted to the space, and the growing expectations of end-investors for modern digital experiences and holistic advice relationships. We are well positioned for this future. More specific, as of December 31, 2022, the company served approximately 106,000 financial services industry. Outdated enterprise hardwareadvisors, including those at 47 of the top 50 wealth management and brokerage firms and over 500 RIAs. Envestnet | MoneyGuide is the leading financial planning software provider, according to a 2022 T3/Inside Information Survey; more than 2.5 million plans were created or updated in 2022. Envestnet Data & Analytics has over 400 million linked accounts and approximately 37 million paid end-users. From an operations standpoint, we handled over 200 million trades in 2022 and over 10 million service requests across more than 30 trading and custody partners.
•Personalization: Consumers are increasingly demanding personalization in both their technology and their investments. On the technology front, Envestnet Data & Analytics is being replaced by cloud-driven solutions thatdelivering over 20 million insights per day to financial advisors, home offices, and financial institutions. By surfacing actionable opportunities, we are easierenabling our customers to create a better client experience and less expensivedrive business efficiency and growth. Also, in 2022, we introduced a new, modern, highly configurable client portal with features such as account aggregation, a spending and budgeting experience, an Envestnet | MoneyGuide goal-planning page, and various widgets and performance reports. On the investment side, direct indexing, tax overlay, and sustainable investing enable advisors to implement, updatetailor portfolios to meet specific client needs. We have invested in each of these capabilities for years and manage. Banks continue to spend heavily on ITenhance our offerings. For instance, in order to compete effectively inlate 2021, our direct indexing solution received GIPS verification and it currently has a 9-year, GIPS-compliant track record. In 2022, our overlay services team introduced an increasingly competitive environment. The addressable market opportunity is large. | ·
| | As financial institutions continue to spend on technology, we believe a growing proportion of that spending will shift to cloud-based solutions.
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after-tax reporting capability. | ·
| | In addition to the opportunity that exists with traditional financial institutions, we believe that we also have a significant opportunity with Internet services companies providing innovative financial solutions.
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| ·
| | Open platforms and application-level developer ecosystems are driving innovation forward. New technology platforms are leveraging big data.
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| | As mentioned in PwC’s Asset and Wealth Management report, investors want solutions for specific needs, not products that fit style boxes. Technology is enabling outcome-based planning. It can quickly identify important life goals and solutions to match. Technology and data analytics are expected to be used to construct multi-asset outcome-based solutions using low-cost building blocks such as ETFs or index trackers. For just a small fee, computer algorithms will be able to create customized solutions.
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| | It is widely believed that technology is set to disrupt all areas of wealth management. Studies have shown that:
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| o
| | 58% of an advisor’s occupation can be digitized using artificial intelligence;
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| o
| | 73% of 18 to 34 year olds would try a tech firm’s credit card, deposit account, investment or mortgage; and
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| o
| | 69% of advisory firms’ websites are optimized for mobile use.
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| ·
| | A report from Roubini Thought Lab indicated that by 2022, the “SMAC” stack (social, mobile, analytics, and cloud) will become table stakes for investment providers, over half of which surveyed•Integrated technology: Financial advisors and enterprises are looking for integrated, seamless WealthTech workflows; as such, spending on technology continues to climb. According to the 2022 InvestmentNews Advisor Technology Study, the median wealth management firm spent 3.7% of revenue on technology in 2021, up from 3.2% in 2016. We are delivering a cloud-based, open architecture, end-to-end technology stack to the marketplace. Our offering is broad and integrated, encompassing portfolio management capabilities from proposal to planning to reporting and billing. We have also invested in and connected its core technology offerings to the Envestnet Insurance Exchange, the Envestnet Credit Exchange, and the Envestnet Trust Exchange, among other offerings, to create a comprehensive digital ecosystem for advisors and their clients. During 2021, we opened up our UMA technology to Envestnet | Tamarac users, which should benefit from and drive growing adoption of managed accounts among RIAs. In 2022, we introduced the next generation proposal tool, which provides enhanced features, streamlined workflows, and seamless access to managed accounts. We plan to use a cloud platform to replace their legacy systems. Digitally advanced firms now spend 16.8% of their revenue on technology and plan to increase that investment to 24% by 2022.
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| ·
| | Clients expect to be able to access their account information from any device at any time. Advisors (and financial services firms in general) must be prepared to interact with clients through a wider range of communication channels. New technologies are being adopted by wealth management firms to better communicate with clients and give them the same type of experience they receive in other aspects of their lives, such as using devices like Amazon’s Alexa and video performance reports.
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As we continue to invest in software, APIs, developer tools, and integration points.
•Leveraging data: Enterprises, advisors, and financial institutions need to leverage in-house and third-party data to make better, more timely decisions. According to NewVantage Partners’ Data and AI Leadership Executive Survey 2022, 92% of senior executives respondents stated their organizations were increasing investments in data and artificial intelligence. As part of our Wealth Data Platform, we gather and ingest advisor client accounts, classifying them using a uniform process across account types and sources. Data comes from our portfolio accounting system, a client-permissioned source via account aggregation, or an account assigned to a firm within an institutional feed from a custodian, recordkeeper, trust accounting system, or data provider. All accounts are fully reconciled and packaged at the enterprise level. These offerings and related tools provide our customers with a single source of truth for wealth data. Further, our ecosystem brings together a diverse group of constituents—consumers, product manufacturers, technology providers, developers and advisors—to create a network where consumer-permissioned data can be leveraged to optimize experiences.
•Independent and fee-based advice: We are a driver and beneficiary of the growth of financial advice, movement to independent channels, fee-based pricing, and managed accounts. Beginning with financial advice industry growth, in an annual survey by MarketCast and Cerulli Associates, 60% of affluent investors stated they are willing to pay for advice in 2022, up from 58% in 2017. Cerulli forecasts independent advice channels to expand our presencefrom 39% of advisor-mediated assets in 2021 to 45% in 2026, driven by growth in the markets outlined above,RIA and hybrid RIA channels. Advice delivered with fee-based pricing—as opposed to commission-based pricing—also continues to take share, growing from 43% of industry assets in 2016 to 54% in 2021, according to Cerulli. Lastly, using data from Cerulli Lodestar, managed account assets have grown organically (excluding market appreciation) at a 10% annualized rate from December 31, 2016 through September 30, 2022. Our managed account annualized organic asset growth rate, as measured by organic AUM growth, has been approximately double that of the number of potential end users who use our solutions increases dramatically. Our potential end user base includes any consumer of financial services onindustry over the Internet—and this end user could be a paid user of Envestnet | Yodlee many times over across multiple customers and products. This multiplier effect greatly increases our addressable end user base.same time period.
Business Model
Envestnet’s
Our business model lends itself to a high degree of recurring and predictable revenues.
Envestnet providesWe provide asset-based,
subscription and licensing,subscription-based and professional services on a business-to-business-to-consumer
(“B2B2C”) basis to financial services clients, whereby customers offer solutions based on our platform to their end users. On a business-to-business
(“B2B”) basis, we deliver an open platform to customers and third-party developers through an open API framework. We believe that a number of characteristics contribute to the success of our business model, including:
| ·
| | Favorable trends with respect to growth in fee-based assets and need for advanced technology;
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| ·
| | Recurring and resilient revenue base; and
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•Favorable trends with respect to growth in fee-based assets and need for advanced technology; | ·
| | Strong customer retention.
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•Recurring and resilient revenue base; andRevenue is
•Strong customer retention.
Our revenues are generated in
three categories:Assets underthe following manners:
Asset-based Recurring Revenues
Asset-based recurring revenues primarily consist of fees for providing customers continuous access to platform services through the Company’s uniquely customized platforms. These platform services include investment manager research, portfolio diagnostics, proposal generation, investment model management,
orrebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration
(“AUM/A”) AUM/A revenueand are made available to customers throughout the contractual term from the date the customized platform is asset‑launched.
The asset-based fees the Company earns are generally based
meaning it is derived from fees charged as a percentageupon variable percentages of
the assets
that are managed or administered on our
technology platformsplatforms. The fee percentage varies based on the level and type of services the Company provides to its customers, as well as the values of existing customer accounts. The values of the customer accounts are affected by
financial advisors. In over 90%inflows or outflows of customer funds and market fluctuations.
For approximately 80% of our asset‑based fee arrangements, customers are billed at the beginning of each quarter based on the market value of customer assets on our wealth management platforms as of the end of the prior quarter, providing for a high degree of revenue visibility in the current quarter. Revenue may fluctuate from
quarter to quarterquarter-to-quarter based on changes in asset values,
or fee rates on those asset
values. values and asset flows. Subscription-based Recurring Revenues Subscription and Licensing
The firm also generates revenue from recurring, contractual subscription and licensing fees for providing customers continuous access to ourthe Company’s technology platforms.
Envestnet’s subscriptionplatforms for wealth management and licensingfinancial wellness. The subscription-based fees are also highly predictable because they are generally established in multi‑year contracts providing longer‑term visibility regarding that portion of total revenues.
Subscriptioninclude fixed fees and licensingor usage-based fees.
Subscription fees vary based on the scope of technology solutions and services being used, and are priced in a variety of constructs based on the size of the business, number of users or number of accounts, and in many cases can increase over time based on the growth of these factors.
Despite this potential variance, we believe that our subscription fees are also highly predictable because they are generally established in multi‑year contracts providing longer‑term visibility regarding that portion of total revenues.
Professional Services and Other
Envestnet
We also
generatesgenerate revenue from professional services for client onboarding, technology development and other project related work.
Growth StrategyEnvestnet intends
We intend to increase revenue and profitability by continuingpursuing the following strategies:
•Capture addressable market:
◦Enterprise clients in wealth management. We provide enterprise clients with customized, private‑labeled technology platforms that enable them to support their affiliated financial advisors with a broad range of investment solutions and services.
◦Financial advisors that are working alone or as part of financial advisory firms. Our principal value proposition aimed at financial advisors working alone or as part of financial advisory firms is that our technology platforms allow them to compete effectively with financial advisors employed by large financial institutions.
◦Financial institutions. We serve global banks through financial applications. Envestnet Data & Analytics Retail Banking solution is a set of innovative FinApps providing consumers with a clear picture and greater insight into their financial lives. It enablescustomers to consolidate all their financial account information in one place which allows customers to manage and meet their financial goals, which in turn leads to increased engagement.
◦Other financial technology providers. We work with a variety of firms who provide technology to the financial services industry. We provide FinApps, personal financial management tools and data aggregation capabilities to companies in online lending, e-commerce and payments, digital advice and wealth management and other web development firms.
•Modernize the digital engagement marketplace:
◦We have made significant investments in platform development in order to enhance and expand our technology platforms and expect these investments to continue in the future.
◦We expect to continue focusing our technology development efforts principally on adding features to increase our market competitiveness, enhancements to improve operating efficiency, address regulatory demands and reduce risk and client‑driven requests for new capabilities.
•Open the platform:
◦As we connect with more firms and developers, our product offerings continue to expand and vitalize our environment, which we believe drives more benefit for our customers.
We also continue to pursue
the following strategies: | ·
| | Add new enterprise clients;
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strategic transactions and other relationships to support our growth strategies. | ·
| | Increase our advisor base;
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| | Extend the account base within a given advisor relationship;
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| | Expand the services utilized by each advisor or enterprise client, including the cross selling of services across Envestnet’s business lines where applicable;
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| | Continue to invest in our technology platforms and data analytics capabilities; and
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| | Continue to pursue strategic transactions and other relationships.
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Technology Platforms
Our
We are composed of technology platforms featurethat are primarily multi-tenant SAAS-based hybrid cloud offerings that afford us the flexibility to offer a three‑tier architecture integratinghighly scalable consolidated workflow via a Web‑basedweb-based user interface that is complemented by an application tierAPI led open strategy that houses the business logicenables us to offer an integrated omnichannel flexibility and collaboration ecosystem.This open ecosystem strategy has enabled us to abstract, integrate and modernize our offerings at a rapid pace while also enabling our customers and partners to add incremental value on top of our platform via a fit for all of the platforms’ functionalitya purpose managed open ecosystem model.
We are committed to our operational and
a SQL Server databases. The application tier resides behind load balancers which distribute the workload demands across our servers.information security capabilities as strategic differentiators. We
believe our technology design allows for significant scalability.Envestnet undergoes anundergo annual SSAE 16 SOC 12 Type II auditaudits to validate the continued operation of our internal controls on three of its main technology platforms;for our flagship offerings within the ecosystem; the Unified Managed Platform, the Unified ManagedEnvestnet Data & Analytics Platform (Institutional) and Envestnet | Tamarac platforms. The SOC reports confirm design and operating effectiveness of internal controls. We maintain multiple redundancies, back up our databases and safeguard technologies and proprietary information consistent with industry best practices. We also maintain a comprehensive business continuity plan and company‑wide risk assessment program that is consistent with industry best practices and that complies with applicable regulatory requirements.
We have historically made significant investments in platform development in order to enhance and expand our technology platforms and expect to continue to make significant investments in the future. In the years ended December 31, 2017, 2016 and 2015, we incurred technology development costs totaling approximately $40,800, $38,100 and $12,600, respectively. Of these costs, we capitalized approximately $12,600, $8,600 and $5,500, respectively, as internally developed software. We expect to continue focusing our technology development efforts principally on adding features to increase our market competitiveness, enhancements to improve operating efficiency, address regulatory demands and reduce risk, and client‑driven requests for new capabilities.
Our proprietary Web‑based platforms provideecosystem provides Enterprise clients in wealth management, financial advisors that are working alone or as part of financial advisory firms, financial institutions, and FinTech firms along with their respective customers, access to investment solutions and services, enriched financial data, analytics, and workflows that address, inenable the foundational orchestration of an Intelligent Financial Life via one unified centrally‑hosted platform, based on our knowledge of the industry,experience, with the widest range of front‑, middle‑ and back‑office needs in our industry.needs. The “open architecture” design of our technologyecosystem and platforms provide financial advisorsour customers and their customers with flexibility in terms of the investment solutions, and services they access, data they leverage, and configurability in the manner in which the financial advisors utilize particular investment solutions and services.to meet their unique needs. The multi‑tenant platform architecture ensures that this level of flexibility and customization is achieved without requiring us to create unique applications for each client, thereby reducing the need for additional technology personnelenabling improved efficacy and associated expenses.efficiency vs other offerings. In addition, though our technology platforms are designed to deliver a breadth of functions, financial advisors are able toour customers can select from the various investment solutions, services, data, and servicesanalytics we offer,offer; without being required to subscribe to or purchase more than what they believe is necessary.
An integral part of our strategy is an open architecture approach to integration via our OpenENV integration platform. This strategy allows for robust integrations with 3rd party technology platforms and service providers and enables client firms to create unique client and advisor experiences powered by the Envestnet ecosystem.
Our data aggregation platform collects a wide variety of end user-permissioned transaction-level data from
over 16,000approximately 17,000 sources, including banking, investment, loan and credit card information, and puts itthis data in a common repository. Envestnet | YodleeData & Analytics has developed robust proprietary technology and processes and established relationships that allowallows us to curate these data sources and expand our access to new data sources. Approximately 70%Over 75% of this data is collected through structured feeds from our FI customers and other FIs.customers. These structured feeds, which consist of either batch files pushed to us or real-time access, provide this critical data efficiently and at scale. Where we do not have direct connections, we capture data using our proprietary information-gathering techniques.
Beyond collecting data, our data aggregation platform performs a data refining process and augments the data with additional information from a variety of other sources. We enrich the data with a proprietary
twelve-step process, adding such elements as categorization and merchant identification for bank or credit card account data and security identification, classification and normalization for investment data. As our
platformecosystem usage grows and is exposed to more users,
and use cases
and related data, the system benefits from machine learning algorithms to better normalize, categorize and process large amounts of data, allowing our network to become more effective, efficient and valuable to our customers. Utilizing this enhanced data, including consolidated data from within our
FI customers,
and account data regarding accounts at other FIs, our data intelligence organizes, analyzes and presents it in a manner that helps our customers offer personalized solutions that enable their consumers to achieve better financial outcomes.
Our analytics platform provides a highly scalable cloud basedcloud-based environment that supports a cost effective and secure way of handling very large data sets, permitting us to develop and test new machine learning algorithms and transform these data sets using the resulting models. The results of the computations can be accessed interactively, as insights, suggestions, or next best actions within our workflow offerings, as files, or via API access throughfor use in third-party or proprietary customer applications and environments to create competitive advantage for our data aggregationcustomers and their customers.
In the years ended December 31, 2022, 2021 and 2020, we incurred technology development costs for all our technology platforms totaling approximately $112 million, $80 million and $72 million, respectively. Of these costs, we capitalized approximately $89 million, $65 million and $55 million, respectively, as internally developed software.
Sales and Marketing
We are putting forth an extensive effort in partnering sales and marketing to deliver a cohesive and holistic message to the wealth management industry. Efforts to increase the use of technology and sales enablement tools allows for more predictive and effective conversations with our advisor client-base as well as prospective customers.
•Our advisor-facing sales teams are both field sales and internal consultants. Depending on the specific business unit, they are organized regionally or by firm segmentation. They help advisors understand and access our investment solutions, create investment proposals, navigate our wealth management platform and facilitate new business. As an example, our Platform Consulting Group and Business Development Directors help advisors utilize our wealth management platform effectively and efficiently. They are subject matter experts on advisor managed programs, unified managed accounts (“UMA”), proposal guidance and site navigation. They provide consulting services to a number of large clients. Our PMC Consulting team of investment professionals provide a variety of portfolio and investment management consulting services to advisors using our wealth management platform.
•Enterprise Consultants are the main point of contact for enterprise clients with respect to day-to-day platform matters as well as contractual and pricing efforts. This includes support for advisors and firm management with regard to the overall relationship. The enterprise consultant is essentially the client’s relationship manager who serves as the liaison between the firm and Envestnet.
•We have a direct sales and pre-sales team servicing the leading global financial institutions. The sales team is divided geographically. Each regional sales and pre-sales team is responsible for acquiring new customers. Within the North America region, direct sales and pre-sales representatives are further divided into teams that focus on specific accounts, on a named-account basis, depending on size, location, product specialization and/or brand. Our money movement solutions facilitate payment flows. Ourcurrent customers can debitwork most closely with our Client Partner teams who specialize in customer account management and credit consumerexpansion. Together, sales, pre-sales and small businessClient Partners are responsible for growing our customer relationships in terms of establishing new customers, deepening our relationships with existing customers (cross-selling additional products and services into the same or additional groups) and expanding use of existing products and services (increasing usage).
•We have a direct sales and technical pre-sales team covering financial technology providers in each region. Each regional sales and technical pre-sales team is responsible for acquiring new customers and channel partners. From time to time, we assign specific accounts based upon sales or domain expertise. These teams are supported by a customer success and developer relations team who specialize in real time orcustomer API integration, and account management and expansion, including services to our channel partners. Together, sales, technical pre-sales, customer success and developer relations representatives are responsible for growing our direct customer and channel partner relationships in batchesterms of account penetration and route payments between accounts (funds transfer), to billers (bill pay), or to other individuals (peer to peer). Designed to be run as a service, our money movement solutions allow us to operate these functionalities in the cloud and quickly adapt to new payment systems. Our payment engine, which is a principal component of our money movement solutions, is a task-based payment processing platform that controls all payment activity across cobrands, originators, processors, and billers.Customers
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| | Financial advisors that are working alone or as part of financial advisory firms. Our principal value proposition aimed at financial advisors working alone or as part of financial advisory firms is that our technology platforms allow them to compete effectively with financial advisors employed by large financial institutions. Envestnet can provide these advisors with access to as many or more of the investment solutions and services that are typically available to financial advisors working at the largest firms.
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| ·
| | Enterprise clients in wealth management. We provide enterprise clients with customized, private‑labeled technology platforms that enable them to support their affiliated financial advisors with a broad range of investment solutions and services. Our contracts with enterprise clients establish the applicable terms and conditions, including pricing terms, service level agreements and basic platform configurations.
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| ·
| | Financial institutions. We serve global banks through financial applications. Envestnet | Yodlee Retail Banking solution is a set of innovative FinApps providing consumers with a clear picture and greater insight into their financial lives. It enablescustomers to consolidate all their financial account information in one place, giving them a better handle on their money. Personalized tools allow them to manage, and meet, their financial goals – which in turn makes them more engaged and more loyal customers.
|
| ·
| | Other financial technology providers. We work with a variety of firms who provide technology to the financial services industry. We provide FinApps, personal financial management tools and data aggregation capabilities to companies in online lending, e-commerce and payments, digital advice and wealth management, and other web development firms.
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Sales and Marketing
Our sales teams are organized based on our customers.
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| | Our advisor-facing sales teams are field sales professionals supported by internal consultants, organized regionally, responsible for supporting firms and investment advisors who are customers of Envestnet. They help advisors create investment proposals, navigate Envestnet’s wealth management platform, and facilitate new business. Our Platform Consulting Group helps advisors utilize Envestnet’s wealth management platform effectively and efficiently. They are subject matter experts on advisor managed programs, unified managed accounts (“UMA”), proposal guidance and site navigation. They provide consulting services to a number of large clients. Envestnet’s PMC Consulting team of investment professionals provide a variety of portfolio and investment management consulting services to RIAs and broker-dealer advisors using Envestnet’s wealth management platform.
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| ·
| | Enterprise Consultants are the main point of contact for enterprise clients with respect to day-to-day platform matters as well as contractual and pricing efforts. This includes support for advisors and firm management with regard to the overall relationship. The enterprise consultant is essentially the client’s relationship manager who serves as the liaison between the firm and Envestnet.
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| ·
| | We have a direct sales and pre-sales team servicing the leading global financial institutions. The FI sales team is divided geographically. Each regional sales and pre-sales team is responsible for acquiring new FI customers. Within the North America region, direct sales and pre-sales representatives are further divided into teams that focus on specific accounts, on a named-account basis, depending on size, location, product specialization and/or brand. These sales teams are supported by customer advocacy teams who specialize in customer account management and expansion. Together, sales, pre-sales and customer advocacy representatives are responsible for growing our customer relationships in terms of account penetration (cross-selling additional products and services into the same or additional groups within a FI) and expanding use of existing products and services (increasing usage).
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| ·
| | We have a direct sales and technical pre-sales team covering financial technology providers in each region. Each regional sales and technical pre-sales team is responsible for acquiring new customers and channel partners. From time to time, we assign specific accounts based upon sales or domain expertise. These teams are supported by a customer success and developer relations team who specialize in customer API integration, and account management and expansion, including services to our channel partners. Together, sales, technical pre-sales, customer success and developer relations representatives are responsible for growing our direct customer and channel partner relationships in terms of account penetration and API usage.
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Our marketing efforts are focused on initiatives to drive global company, brand and solutionsecosystem awareness and significant leaddemand generation and sales acceleration across our whole business. These initiatives include educatingOur marketing strategy uses data driven integrated efforts across paid, earned and owned media in order to reach our targeted clients and prospects with the right message at the right time.
To support and expand our current addressable market,
our goal is to educate the market and our clients about our solutions
achievingand achieve recognition as the industry
leaderleader. We drive ongoing communication through
awards,thought leadership content, media interviews speaking engagements
thought leadership articles, data trends and
metrics, and high profile interviews. We use advertising and public relations to communicate our message to our target markets. To implement our marketing efforts, we generally employ paid print and online advertisements in a variety of industry publications, as well as promotions that include e‑blast campaigns and sponsored webinars for financial advisors.analyst relations. We also partner with independent broker‑dealers on direct mail campaigns targeting such firms’ financial advisors to describe the investment solutions and services that we offer, produce brochures and presentations for financial advisors to use with their clients and we create Internet pages or sites to promote our investment solutions and services. Envestnet | Yodlee employsemploy a variety of integrated sales and marketing initiatives, including hostedhosting demand generationgenerated webinars, sponsorship and partnership of key industry conferences, customeras well as executing our own events.
Additionally, as practice management and developer-focused eventssupport is important to our advisors' business, we partner on direct email campaigns, conduct proprietary research and programs, incubatorproduce collateral for financial advisors to use with their clients.
Our digital marketing efforts are increasing and other high-profile activitiesare designed to demonstrate thought leadershipsupport our clients and to engage new audiences in actionableactual and measurable ways. We employ many tools, including webuse digital media for search optimization, account base marketing and social properties,to drive traffic to our digital solutions and websites. Our integrated creative campaigns consistingconsist of online performance advertising, social media, podcasts and digital content marketing, direct mail,marketing.
During 2022, we further enhanced our use of digital, and
blogs. Envestnet | Yodlee also supports industry analyst relationscontinued virtual events as a response to limitations of in person contacts as a result of the COVID-19 pandemic and
media relations activities. In addition, our marketing efforts develop FI customer best practices tools to drive deeper consumer activity and engagement.Competition
Within wealth management, Envestnet competes on the basis of several factors including:
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| | The breadth and quality of investment solutions and services to which we provide access through our technology platform;
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remote work changes. | ·
| | The number of custodians that are connected through our technology platforms;
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Competition | ·
| | The price of our investment solutions and services;
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| | The ease of use of our technology platforms; and
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| | The nature and scope of investment solutions and services that each wealth management provider believes are necessary to address their needs.
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Our competitors offer a variety of products and services that compete with one or more of the investment solutions and services provided through our ecosystem of technology platforms; although, based on our industry experience, we believe that none offers a more comprehensive set of products and services than we do.
Within Envestnet
does.Within digital financial services,Wealth Solutions, we compete on the basis of several factors, including:
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| | Cloud-based delivery model;
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•The breadth and quality of investment solutions and services to which we provide access through our technology platform; | ·
| | Data aggregation capability;
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•The number of custodians that are connected through our technology platforms; | ·
| | Access to data through direct structured data feeds to FI’s;
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•The price of our investment solutions and services; | ·
| | Scale (size of customer base and level of user adoption);
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•The ease of use of our technology platforms; and•The nature and scope of investment solutions and services that each wealth management provider believes are necessary to address their needs. Our Envestnet Data & Analytics group competes with other financial technology companies, credit bureaus and data, analytics and digital providers. Based on our global and multi-industry experience, we do not believe any other single company in the data aggregation, analytics and digital experiences space offers a diverse, comprehensive set of platforms with features such as ours. | ·
| | Breadth and depth of application functionality user experience;
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Within Envestnet Data & Analytics, we compete on the basis of several factors, including: | ·
| | Access to third-party applications;
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•Reputation; | ·
| | Ease of use, ease of integration, flexibility and configurability; and
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•Global and multi-market and segments reach;•Cloud-based delivery model; •Data aggregation capability;
•Access to data through direct structured data feeds;
•Scale (size of customer base and level of user adoption);
•Security and open banking infrastructure;
•Time to market;
•Unique analytics capability;
•Breadth and depth of application functionality user experience;
•Access and integration to/with third-party applications;
•Ease of use, ease of integration, flexibility and configurability; and
•Competitive pricing.
We believe that
Envestnet competeswe compete favorably with respect to all of these factors.
The financial services industry is among the most extensively regulated industries in the United States. We operate investment advisory broker-dealer and mutual fund advisory businesses, each of which is subject to a specific regulatory scheme, including regulation at the federal and state level, as well as regulation by self-regulatory
organizations and non-U.S. regulatory authorities. In addition, we are subject to numerous laws and regulations of general application.
Our subsidiaries Envestnet Asset Management, Inc. (“EAM”), Envestnet Portfolio Solutions, Inc. (“EPS”)
, FDX Advisors, Inc., QRG Capital Management, Inc. (“QRG”), Envestnet Embedded Advisory, Inc., and
ERSEnvestnet Retirement Solutions, LLC operate investment advisory businesses. These subsidiaries are registered with the U.S. Securities and Exchange Commission (“SEC”) as “investment advisers” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and are regulated thereunder. They may also provide fiduciary services as defined in Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (“ERISA”), including acting as an “investment manager” (as defined in Section 3(38) of ERISA). As described further below, many of our investment advisory programs are conducted pursuant to the non-exclusive safe harbor from the definition of an “investment company” provided for under Rule 3a-4 of the Investment Company Act of 1940, as amended (the “Investment Company Act”).
If Rule 3a-4 were to cease to be available, or if the SEC were to modify the rule or its interpretation of how the rule is applied, it could have a substantial effect on our business. EAM serves as the investment adviser to two mutual funds. Mutual funds are registered as “investment companies” under the Investment Company Act. The Advisers Act, Investment Company Act and ERISA, together with related regulations and interpretations of the SEC
and the Department of Labor (the “DOL”), impose numerous obligations and restrictions on investment advisers and mutual funds, including recordkeeping requirements, limitations on advertising, disclosure and reporting obligations, prohibitions on fraudulent activities and
detailed operating requirements, including restrictions on transactions between an adviserthe requirement that conflicts of interest be monitored, mitigated, and
its clients, and between a mutual fund and its advisers and affiliates.disclosed. The fiduciary obligations of investment advisers to their clients require advisers to, among other things, consider the suitability of the investment products and advice they provide, seek “best execution” for their clients’ securities transactions, conduct due diligence on third-party products offered to clients, consider the appropriateness of the adviser’s fees and provide extensive and ongoing disclosure to clients.
The application of these requirements to wrap fee programs is particularly complex and the SEC has in the past scrutinized firms’ compliance with these requirements. The SEC is authorized to institute proceedings and impose fines and sanctions for violations of the Advisers Act and the Investment Company Act and has the power to restrict or prohibit an investment adviser from carrying on its business in the event that it fails to comply with applicable laws and regulations. Although we believe we are in compliance in all material respects with the requirements of the Advisers Act,
ERISA and the Investment Company Act and the rules and interpretations promulgated
thereunder, our failure to comply with such laws, rules and interpretations could have a material adverse effect on us.Portfolio Brokerage Services, Inc., (“PBS”), our broker-dealer subsidiary, is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934, (the “Exchange Act”), in all 50 states and the District of Columbia. In addition, PBS is a member of the Financial Industry Regulatory Authority (“FINRA”), the securities industry self-regulatory organization that supervises and regulates the conduct and activities of broker-dealers. Broker-dealers are subject to regulations that cover all aspects of their business, including sales practices, market making and trading among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure, record-keeping and the conduct of directors, officers, employees, representatives and associated persons. FINRA and the SEC conduct periodic examinations of the operations of its members, including PBS. Violation of applicable regulations can result in the suspension or revocation of a broker-dealer’s registration, the imposition of censures or fines and the suspension or expulsion of the broker-dealer from FINRA. PBS is subject to minimum net capital requirements under the Exchange Act, SEC and FINRA rules and conducts its business pursuant to the exemption from the SEC’s customer protection rule provided by Rule 15c3-3(k)(2)(i) under the Exchange Act. As of December 31, 2017, PBS was required to maintain a minimum of $100 in net capital and its actual net capital was $1,238.
thereunder.
Envestnet
| YodleeData & Analytics is examined on a periodic basis by various regulatory agencies. For example, Envestnet
| YodleeData & Analytics is a supervised third-party technology service provider subject to multi-agency supervisory examinations in a wide variety of areas based on published guidance by the Federal Financial Institutions Examination Council. These examinations include
examinationsreviews of Envestnet
| Yodlee’sData & Analytics’ management, acquisition and development activities, support and delivery, IT and disaster preparedness and business recovery planning. The Office of the Comptroller of the Currency (the “OCC”) is the agency in charge of these examinations.
Either as a result of direct regulation or obligations under customer agreements, our subsidiaries are required to comply with certain provisions of the Gramm-Leach-Bliley Act, related to the privacy of consumer information and may be subject to other privacy and data security laws because of the solutions we provide. In addition, numerous regulations have beencontinue to be proposed and are still being written to implementpromulgated that necessitate the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the “Dodd-Frank Act”), for enhanced due diligence of the internal systems and processesadditional controls of companies like ours by their financial institutions customers.
Our subsidiaries are subject to various federal and state laws and regulations that grant supervisory agencies, including the SEC and OCC, broad administrative powers. In the event of a failure to comply with these laws and regulations, the possible sanctions that may be imposed include the suspension of individual employees, limitations on the permissibility of our regulated subsidiaries and our other subsidiaries to engage in business for specified periods of time, censures, fines, and the revocation of registration as a broker-dealer or investment adviser, as applicable. Additionally, the securities laws and other regulations applicable to us and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial and non-financial consequences including monetary judgments and the requirement to take action or limit activities that could ultimately affect our business.
ours.
Many of the laws and regulations to which our subsidiaries are subject are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with them is difficult and costly.
We continually develop improvements to our existing products and services as well as new products and services. Many of these improvements or new products and services may implicate regulations to which we may not already be subject or with which we may not have experience. New laws or regulations, or changes in existing laws or regulations or interpretations of existing laws and regulations, including those relating to the activities of our investment adviser, broker-dealer and financial institution clients, may occur that could increase our compliance and other costs of doing business, require significant changes to our systems or solutions or substantially change the way that our clients operate their businesses. Compliance with any new or revised regulatory requirements may divert internal resources, be expensive and time-consuming and may require increased investment in compliance functions or new technologies. Failure to comply with the laws and regulations to which we and our subsidiaries are subject could result in fines, penalties or limitations on our ability to conduct our business, or federal or state actions, any of which could significantly harm our reputation, and could materially and adversely affect our business, operating results and financial condition.Investment Advisory Program Conducted Under Rule 3a-4
Under the Investment Company Act, an issuer that is engaged in the business of investing, reinvesting or trading in securities may be deemed an “investment company,” in which case the issuer may be subject to registration requirements and regulation as an investment company under the Investment Company Act. In order to provide assurance that certain discretionary investment advisory programs would not be considered investment companies, the SEC adopted Rule 3a-4 under the Investment Company Act, which provides a non-exclusive safe harbor from the definition of an investment company for programs that meet the requirements of the rule. We conduct
and support the following programs pursuant to the Rule 3a-4 safe harbor:
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| | Separately managed accounts;
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| | Unified managed account portfolios;
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•Separately managed accounts; | ·
| | Mutual fund portfolios and exchange-traded fund portfolios; and
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•Unified managed account portfolios; | ·
| | Advisor as portfolio manager.
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We believe that, to the extent we exercise discretion over accounts in any of these programs, these programs qualify for the safe-harbor because all of the programs have the following characteristics, which are generally required in order for a program to be eligible for the Rule 3a-4 safe harbor:
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| | Each client account is managed on the basis of the client’s financial situation, investment objectives and reasonable client-imposed investment restrictions;
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•Mutual fund portfolios and exchange-traded fund portfolios; and | ·
| | At the opening of the account, the client’s financial advisor obtains information from the client and provides us with the client’s financial situation, investment objectives and reasonable restrictions;
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| | On no less than an annual basis, the client’s financial advisor contacts the client to determine whether there have been any changes in the client’s financial situation or investment objectives, and whether the client wishes to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions. This information is communicated to us and reflected in our management of client accounts;
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•Advisor as portfolio manager.
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| | On a quarterly basis, we or another designated person (in most cases this will be the client’s financial advisor) notify the client to contact us or another designated person if there have been any changes to the client’s financial position or investment objectives or if the client wishes to impose any reasonable restrictions on the management of the account;
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Human Capital Resources | ·
| | We, the client’s financial advisor and the manager of the client’s account, all of whom are knowledgeable about the account and its management, are reasonably available to the client for consultation;
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Our Values - Envestnet’s five values create the foundation for our organization and influence how we approach talent acquisition, professional development, and retention. Additionally, these key principles inform our performance metrics for leaders. | ·
| | All of the programs allow each client to impose reasonable restrictions on the management of his or her account;
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| | On at least a quarterly basis, the client is provided with a statement containing a description of all activity in the client’s account during the preceding period, including all transactions made on behalf of the account, all contributions and withdrawals made by the client, all fees and expenses charged to the account, and the value of the account at the beginning and end of the period; and
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CLIENT SERVICE is the hallmark of Envestnet’s brand. We build our business by exceeding our clients’ expectations, listening to and anticipating their needs, and earning their trust; and we believe in treating our colleagues with the same level of integrity and respect. | ·
| | For all of the programs, each client retains, with respect to all securities and funds in the client’s account, the right to withdraw securities or cash, vote securities, or delegate the authority to vote securities to another person, receive written confirmation or other notification of each securities transaction by the client’s independent custodian, and proceed directly as a security holder against the issuer of any security in the client’s account without the obligation to include us or any other client of the program in any such action as a condition precedent to initiating such proceeding.
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Employees
As
INNOVATION is what differentiates Envestnet’s products and services from our competitors. It is also the way our employees respond to client needs and industry trends, and drive productivity through continuous process improvement and the maximization of December 31, 2017,resources. Regardless of your position, you have an opportunity to innovate and improve and make Envestnet better.
INCLUSION AND RESPECT is how we treat each other and our clients and by nurturing these values and culture, we embrace differences, and appreciate the strength and value of a diverse workforce. We believe that a respectful, innovative, and collaborative workplace attracts the best talent and ultimately fosters the best financial outcomes for advisors and their investors.
COLLABORATION is critical to Envestnet’s ability to stay ahead of the demands of our ever-changing industry. Together, through a culture of generosity, open communication and sharing, we can uphold our mission and shape our industry.
ACCOUNTABILITY is intrinsic to maintaining our clients’ trust, our colleagues’ confidence and our own integrity. At Envestnet we aim for transparency and responsibility in all that we do. By standing behind our work, we can build a stronger business and more lasting client relationships.
Diversity, Equity & Inclusion (“DEI”)
We recognize that our workforce is made up of people of different backgrounds, cultures, and beliefs. We welcome and encourage this diversity and inclusion. Respecting each person as an individual and welcoming the richness of ideas that come from such diversity help us meet our objective of being a great place to work.
We value the creative ideas and broader perspective that comes with a diverse workforce. We seek the best talent from the widest possible pool, and we continue to offer opportunities for people willing and able to perform in a challenging and competitive environment. We value employee diversity, equity and inclusion, and are committed to providing our employees with the resources and support they need to achieve their full potential.
DEI - Professional Development
In June 2022 we launched mandatory DEI training which provided a safe space for employees to explore their varied experiences and perspectives. The Foundations of Diversity, Equity and Inclusion is an interactive training that addresses a wide spectrum of topics, increasing awareness of how we engage across our differences. Over 1,500 employees completed this training, including our CEO and his direct reports. This mandatory training will continue as a requirement in 2023.
Also in 2022, we also introduced a “Share Your Pronouns” campaign that was accompanied by training that focused on why sharing pronouns at work is important. Additional sessions had 3,516to be added given its popularity. Over 900 employees includingcompleted this training.
Since 2021, we have partnered with the University of Delaware Women’s Leadership program to provide women tools and resources to succeed in their leadership journey. Approximately 40 women have participated to date and graduates of the program have created an alumni group to continue their learning journey and help encourage and develop other women.
DEI - Talent Acquisition
In 2022, all members of our Talent Acquisition team completed their certifications as Diversity and Inclusion Recruiters. The program offers talent acquisition professionals the opportunity to learn strategies to create or improve their diversity and inclusion recruiting practices. Topics include building a strategy to locate under-represented candidates, using online data resources that support inclusive hiring, and analyzing opportunities for improving job descriptions to reach a more inclusive candidate pool.
Also in 2022, we began utilizing a national job board service which provides us with access to target diverse groups through a network of 15,500 community-based organizations and niche diversity sites. This increases our applications and helps us to access to an expansive talent pool of underrepresented groups.
DEI - Employee Resource Groups
The recognition of Juneteenth at Envestnet included the introduction of our third official employee resource group. The resource group, “Enclusion,” was created by African American and Black-American employees to celebrate our differences in operations, researchbackground, ethnicity, and perspectives. This group will champion initiatives that elevate voices, networking, and professional development engineeringfor all employees.
The resource group “Bridges” continues to encourage all employees to participate in conversations regarding diversity and systems, executivedifferences, building greater understanding and corporate functions, salesenhancing our Envestnet community.
Our Women’s Initiative Network (“WIN”) continues to provide women with the tools, training, and marketingnetworking connections to advance in their careers and investment managementbuild a platform for them to succeed. In 2022, WIN hosted a Women in Wealth Forum at the Advisor Summit with over 200 participants.
We continue to be an ambassador for Money Management Institute, an organization with a mission to prepare under-represented talent for the financial tech industry.
In 2022, we were recognized by ThinkAdvisor for our efforts in Diversity, Equity, and research. Of these 3,516 employees, 1,263 were locatedInclusion with a Luminary Award.
Workforce Demographics
In 2022, our employee population primarily remains based in the United States 2,241and India, 57% and 42%, respectively, with less than 1% of employees in Australia and Great Britain. Our global workforce decreased 16% from 4,335 full-time employees to 3,429 full-time employees in 2022. During the fourth quarter of this year, Envestnet entered into a partnership with Tata Consultancy Services, outsourcing 94% of our Yodlee Bangalore workforce, reducing our overall India population by 35%.
In 2021, we launched “People Manager Dashboards” which provide U.S.-based managers with anonymous information regarding the race/ethnicity and gender demographics of their teams, as well as information regarding open positions, promotions, terminations. This data helps managers pinpoint opportunities to increase diversity when hiring, promoting, and developing employees. No employee is represented in a collective bargaining agreement.
Learning & Development
Through our global learning management system, employees have access to over 19,000 learning courses, including management and skills development; and U.S. based employees receive reimbursement for training, certifications, and degrees. In 2022, there were locatedapproximately 80,000 training completions by employees in IndiaCornerstone. Additionally, approximately 3,000 unique courses were completed. Major enhancements were also conducted which included improving our data feed process from Workday, updating our catalog, and 12developing processes to improve our user and client experience.
The Envestnet Scholarship Program has expanded its partnership with the CFP Board to offer scholarships to undergraduate students from groups traditionally underrepresented in the financial planning profession who are pursuing their Certified Financial Planner™ designation. Women and minorities who are undergraduates can apply for these scholarships. As of June 30, 2022, 74 scholarships totaling over $413,000 have been granted.
In 2022, we hosted a diverse group of approximately 60 interns in our Berwyn, Raleigh, Denver, and San Mateo offices, in addition to a small number of interns who participated remotely. Of our interns, 53% self-identified as Black, Asian, Hispanic or Two or More Races, and 39% as female or other. During the 10-week program, interns spent half their time working on team-specific related items, which included projects and assignments coming from their managers and departments, and the other half their time was spent on program-related items. Interns worked on a project presented to leadership at the end of the summer. Eligible 2022 interns were locatedgiven an opportunity to apply for a full-time position post-graduation via our Rotational program.
The Delegates Program is a nine-month professional development program for a diverse pool of high performing employees. Of these program participants, 40% self-identify as Black, Asian, Hispanic, or Two or More Races, and 46% as female. This program allows us to build a strong bench of future leaders by increasing the leadership skills and competencies of its participants. In 2022, 15 employees graduated from the program.
Engagement
We conduct global surveys every other year, and other surveys throughout the year. We also participate in other international locations. None“Best Places to Work in FinTech” which surveys up to 400 employees selected at random. We were rated 41st in 2021, which was our first year of participation. In 2022, we moved up to 29th.
The Best Places to Work survey takes into consideration Envestnet’s policies, practices, philosophy, systems, and demographics; Envestnet improved overall, including two areas of great importance:
•Envestnet leaders are open to input from employees
•Employees feel they can express their honest opinions without fear of negative consequences, and are valued by Envestnet
In our last Global Survey conducted at the end of 2021, we rated 4 points above the standard for employee satisfaction and received positive feedback in the areas of leadership, development, and inclusion from employees:
•84% of employees surveyed responded favorably to “I have confidence in the Leadership team.”
•82% of employees surveyed responded favorably to “I am excited about Envestnet’s future.”
•83% of employees surveyed responded favorably to “Envestnet takes a genuine interest in employees--
We have quarterly live all-hands meetings and survey employees following these meetings, encouraging employee feedback so that we can continually increase and improve our communication between leaders and employees.
In Our Community
The Envestnet Institute on Campus (“EIOC”) is a program for motivated university students designed to bridge the gap between academic knowledge and the application of this knowledge in the Wealth and Asset Management industries. Many of our employees are representedhave graduated from this key Learning and Development program. The curriculum is currently offered at 47 universities and colleges, including Historically Black Colleges and Universities such as Howard University. The program includes mentoring, job placement, and financial literacy initiatives. As of June 30, 2022, over 6,000 students have completed the program averaging an approximate 72% completion rate. More than 2,000 women and over 2,000 students of color have completed the program. EIOC continues to support job and internship placements through its résumé database, which contains 3,000 résumés for employers seeking workforce-ready employees for internships and entry-level positions
The Envestnet Cares program empowers our employees to engage in their local communities with paid time off for volunteer activities, charitable donation matching, and partnerships with several non-profit organizations. U.S. employees receive an annual match of up to $3,000, as well as increased match and limits for special match campaigns. We donated approximately $1.3 million and $1 million worldwide in 2022 and 2021, respectively.
In 2022, our employees received three paid Volunteer Days for use when volunteering for a non-profit organization of their choice during the workweek, or as part of a Company-organized volunteering event. Despite canceling in person volunteer events early in 2022 due to the Pandemic, our employees still volunteered 371 days as employees participated in several virtual events such as writing notes to veterans and the elderly, making toys for dogs in shelters, and assembling skateboards for kids in the community.
Total Rewards
To attract and retain top talent in our highly competitive industry, we offer employees a comprehensive total rewards package. For U.S. based employees, this includes competitive base pay, annual bonus consideration, long-term incentive grants, employer-subsidized health, dental, and vision insurance, employer match for retirement savings, paid time off, group term life and disability insurance, college tuition reimbursement and scholarships, as well as paid parental leave for the birth or adoption of a child, parental stipend for children under age 6 and military leave with pay differential. During 2021, we added adoption and surrogacy to further support our employees in balancing work and life as well as After Tax Retirement contributions, and in 2022, we added a student loan repayment benefit to help our employees improve their financial wellness by paying down their loan balances. All U.S. based, full-time employees also receive ten paid holidays, a labor union.minimum of three weeks paid time off, six sick/personal emergency days, three floating holidays, and three paid volunteer days per year.
India-based employees receive standard health and welfare benefits, as well as additional family medical coverage, an internet stipend, and free transportation home from late shifts. We have never experiencedsupport our employees’ physical and mental health with a work stoppageno-cost Wellness Program; and believe our relationshipprovide legal, financial, and work-life solutions with our Employee Assistance Program.
Pandemic Response
We care about our colleagues and anyone who enters our workplace. Our continuing focus on the health and well-being of our colleagues has enabled us to preserve business continuity without sacrificing our commitment to keeping our employees
is positive.Executive Officersand workplace visitors safe during the COVID-19 pandemic.
Our Pandemic Response Team, which includes our CEO and other senior members of management, meets as needed to assess the risks and status for each office location and to ensure business continuity.
All of our employees began working remotely in March 2020. Our Pandemic Response Team established protocols to ensure the safety of our employees while working remotely and upon return to our office locations. This included mandatory COVID-19 training, advanced cleaning protocols for all offices, modified workspaces, and communication that provides employees with regular updates regarding Envestnet’s response to the impact of the
Registrantpandemic. Beginning in early 2022, employees were welcomed back to the office once their proof of vaccination was received. Later in 2022, we reopened our offices to full staffing, regardless of vaccine status.
During the pandemic, our employees also received additional benefits to support home-office set-up (U.S. and India), parental stipend (U.S.), additional health insurance (India), and utility stipend (India), as well as multiple initiatives and organized activities to support mental wellness, morale and team building.
Information about our Executive Officers
The following table summarizes information about each one of our executive officers.
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Name | | Age | | Position(s) |
Judson Bergman
William Crager | | 6158 | | Chairman, Chief Executive Officer, Director
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Anil Arora
Peter D'Arrigo | | 5755 | | Vice Chairman, Chief Executive of Envestnet | Yodlee
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William Crager
| | 53 | | President
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Peter D’Arrigo
| | 50 | | Chief Financial Officer |
Scott Grinis
| | 56 | | Chief Technology Officer
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Shelly O’Brien | | 5257 | | Chief Legal Officer, General Counsel and Corporate Secretary |
Brandon Thomas
| | 54 | | Chief Investment Officer
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Josh Mayer
| | 44 | | Chief Operating Officer
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Judson Bergman, Age 61. Mr. Bergman is the founder of our company and has served as our Chairman, Chief Executive Officer and a director since 1999. Prior to founding our company, Mr. Bergman was Managing Director at Nuveen Investments, Inc. (“Nuveen”), a diversified investment manager. Mr. Bergman received an MBA in finance and accounting from Columbia University and a BA from Wheaton College.
Anil Arora, Age 57. Mr. Arora has served as Vice Chairman and Chief Executive Officer of Envestnet | Yodlee since November 2015. Prior to then, he was President and Chief Executive Officer and was a member of the board of directors of Yodlee, Inc. since February 2000. Mr. Arora served as the Chairman of the board of directors of Yodlee, Inc. since March 2014. Prior to joining Yodlee, Mr. Arora served in various positions with Gateway, Inc. Mr. Arora holds an M.B.A. from the University of Michigan, Stephen M. Ross School of Business, and a B.S. in business administration from Rockford College.
William Crager Age 53. —Mr. Crager has served as ourDirector, Chief Executive Officer, President and Chief Executive of Envestnet Wealth Solutions. Having served as Envestnet’s President since 2002.2002, Mr. Crager was named Interim Chief Executive Officer in October 2019 and named Director and Chief Executive Officer in March 2020. Prior to joining us, Mr. Crager served as Managing Director of Marketing and Client Services at Rittenhouse Financial Services, Inc., an investment management firm affiliated with Nuveen. Mr. Crager received an MA from Boston University and a BA from Fairfield University with a dual majorwhere he majored in economics and English.
now serves on the Board of Trustees.
Peter D’Arrigo Age 50. —Mr. D’Arrigo has served as our Chief Financial Officer since 2008. Prior to joining us, Mr. D’Arrigo worked at Nuveen where he served as Treasurer since 1999, as well as holding a variety of other titles after joining them in 1990. Mr. D’Arrigo received an MBA from the Northwestern University Kellogg Graduate School of Management and an undergraduate degree in applied mathematics from Yale University.Scott Grinis, Age 56. Mr. Grinis has served as our Chief Technology Officer since 2004. Prior to joining us, Mr. Grinis co‑founded Oberon Financial Technology, Inc., our subsidiary, prior to its acquisition by us. Mr. Grinis received a BS and an MS degree in electrical engineering from Stanford University.
Shelly O’Brien Age 52. —Ms. O’Brien has served as our Chief Legal Officer, General Counsel and Corporate Secretary since 2002. Prior to joining us, Ms. O’Brien was General Counsel and Director of Legal and Compliance for ING (U.S.) Securities, Futures & Options Inc., a broker‑dealer, and futures commission merchant. Ms. O’Brien received a degree in political science from Northwestern University, a JD from Hamline University School of Law, and an LLM in taxation from John Marshall Law School.Brandon Thomas, Age 54. Mr. Thomas
Securities Exchange Act Reports
The Company maintains a website at the following address: http://www.envestnet.com. The information on the Company's website is not incorporated by reference in this Annual Report.
We make available on or through our website reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports of Form 8-K and amendments to these reports. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information available with, or furnish it to, the SEC. The SEC also maintains a
co‑founder of our company and has served as Chief Investment Officer and Managing Director of Portfolio Management Consultants, our internal investment management and portfolio consulting group, since 1999. Prior to joining us, Mr. Thomas was Director of Equity Funds for Nuveen. Mr. Thomas received an MBA fromwebsite at the
University of Chicago, a JD from DePaul University andfollowing address, through which this information is
a graduate of Brown University.Josh Mayer, Age 44. Mr. Mayer was appointed Chief Operating Officer in April 2014. Previously, he served as Envestnet’s Executive Vice President and Director of Operations from January 2011 to April 2014, and as Envestnet’s Senior Vice President, Head of Operations from 2004 to January 2011. From 2000 to 2004, Mr. Mayer served as the Director of Operations for Oberon Financial Technology, which was acquired by Envestnet in 2004. Mr. Mayer holds a Bachelor of Arts and Sciences from Georgetown University.
available: http://www.sec.gov.
An investment in any security involves risk. An investor or potential investor should consider the risks summarized in this section when making investment decisions regarding our
securities offerings.securities. These risks and uncertainties include, but are not limited to, the risk factors set forth below. The risks and uncertainties described in this section are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be materially adversely affected.
Risks Related to Our
BusinessWe have experienced rapid revenue growth, which may be difficult to sustainResults of Operations and which may place significant demands on our administrative, operational and financial resources and any inability to maintain or manage our growth could have a material adverse effect on our results of operations, financial condition or business.
Our revenues during the three years ended December 31, 2017 have grown at a compound annual growth rate of 27%. We expect our growth to continue, which could place additional demands on our resources and increase our expenses. Our future growth will depend on, among other things, our ability to successfully grow our total assets under management and administration and add additional clients. If we are unable to implement our growth strategy, develop new investment solutions and services and gain new clients, our results of operations, financial condition or business may be materially adversely affected.
Financial ConditionSustaining growth will also require us to commit additional management, operational and financial resources and to maintain appropriate operational and financial systems. In addition, continued growth increases the challenges involved in:
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| | recruiting, training and retaining sufficiently skilled technical, marketing, sales and management personnel;
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| | preserving our culture, values and entrepreneurial environment;
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| | successfully expanding the range of investment solutions and services offered to our clients;
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| | developing and improving our internal administrative infrastructure, particularly our financial, operational, compliance, record‑keeping, communications and other internal systems; and
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| | maintaining high levels of satisfaction with our investment solutions and services among clients.
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There can be no assurance that we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our results of operations, financial condition or business.
Our revenue can fluctuate from period to period, which could cause our share price to fluctuate.
Our revenue may fluctuate from period‑to‑period in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following events, as well as other factors described elsewhere in this document:
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| | a decline or slowdown of the growth in the value of financial market assets, which may reduce the value of assets under management and administration and therefore our revenues and cash flows;
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| | negative public perception and reputation of the financial services industry, which would reduce demand for our investment solutions and services;
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| | unanticipated changes to economic terms in contracts with clients, including renegotiations;
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| | downward pressure on fees we charge our clients, which would therefore reduce our revenue;
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| | changes in laws or regulations that could impact our ability to offer investment solutions and services;
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| | failure to obtain new clients;
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| | cancellation or non‑renewal of existing contracts with clients;
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| | failure to protect our proprietary technology and intellectual property rights;
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| | unanticipated delays in connection with the conversion of client assets onto our technology platforms;
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| | changes to or a reduction in the suite of investment solutions and services provided to or used by existing clients;
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| | changes in our pricing policies or the pricing policies of our competitors to which we have to adapt;
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| | fluctuations in currency exchange rates; and
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| | general economic and political conditions, both domestically and internationally, as well as economic
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conditions specifically affecting industries in which our customers operate.
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As a result of these and other factors, the results of operations for any quarterly or annual period may differ materially from the results of operations for any prior or future quarterly or annual period and should not be relied upon as indications of our future performance.
We operate in highly competitive industries, with many firms competing for business from financial advisors and financial institutions on the basis of a number of factors, including the quality and breadth of investment solutions and services, ability to innovate, reputation and the prices of services and this competition could hurt our financial performance.
We compete with many different types of companies that vary in size and scope, including custodians, turnkey asset management platforms, data and analytics providers, and other financial technology companies. Representative examples of competitors include Pershing LLC (a subsidiary of BNY Mellon Corporation), AssetMark, Inc., Advent Software (a subsidiary of SS&C Technologies Holdings, Inc.), Orion Advisor Services, and Quovo, Inc. Competition is discussed in greater detail under “Business—Competition” included in this Form 10‑K. In addition, some of our clients have developed or may develop the in‑house capability to provide the technology and/or investment advisory services they have retained us to perform. These clients may also offer internally developed services to their financial advisors, obviating the need to hire us, and they may offer these services to third‑party financial advisors or financial institutions, thereby competing directly with us for that business.
Many of our competitors have significantly greater resources than we do. These resources may allow our competitors to respond more quickly to changes in demand for investment solutions and services, to devote greater resources to developing and promoting their services and to make more attractive offers to potential clients and strategic partners, which could hurt our financial performance.
We may lose clients as a result of the sale or merger of a client, a change in a client’s senior management, competition from other financial advisors and financial institutions and for other reasons. We also face increased competition due to the current trend of industry consolidation. If large financial institutions that are not our clients are able to attract assets from our clients, our ability to grow revenues and earnings may be adversely affected.
Our Envestnet | PMC group competes with other providers of investment solutions and products. These competitors may offer broader solutions and/or products and their solutions and/or products may have better investment returns during one or more periods. If the investment returns on our investment products are not perceived to be competitive, we could experience outflows of assets from these products and face difficulty attracting new assets to these products.
We compete with many companies that have greater name recognition, substantially greater financial, technical, marketing and other resources, the ability to devote greater resources to the promotion, sale and support of their solutions, more extensive customer bases and broader customer relationships, and longer operating histories than we have.
Our failure to successfully compete in any of the above‑mentioned areas could have a material adverse effect on our results of operations, financial condition or business. Competition could also affect the revenue mix of services we provide, resulting in decreased revenues in lines of business with higher profit margins.
We derive a substantial portion of our revenues from the delivery of investment solutions and services to clients in the financial advisoryservices industry and our revenue could suffer if that industry experiences a downturn.
A substantial portion of our revenues are derived from clients in the financial services industry, particularly in financial advisory industry.services. A decline or lack of growth in demand for financial advisory services would adversely affect our clients and, in turn, our results of operations, financial condition and business. For example, the availability of free or low‑cost investment information and resources, including research and information relating to publicly traded companies and mutual funds available on the Internetinternet or on company websites, could lead to lower demand by investors for the services provided by financial
advisors. In addition, demand for our investment solutions and services among financial advisors could decline for many reasons. Negative public perception and reputation of the financial services industry could reduce demand for our broader services and investment advisory solutions. Consolidation or limited growth in the financial services and advisory industry could reduce the number of our clients and potential clients. Events that adversely affect our clients’ businesses, rates of growth or the numbers of customers they serve, including decreased demand for our clients’ products and services, adverse conditions in our clients’ markets or adverse economic conditions generally, could in turn decrease demand for our investment solutions and services and thereby decrease our revenues. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.
Because some of our sales efforts are targeted at large financial institutions and large Internet services companies, we face prolonged sales cycles, substantial upfront sales costs and less predictability in completing some of our sales. If our sales cycle lengthens, or if our upfront sales investments do not result in sufficient revenue, our operating results may be harmed.
We target a portion of our sales efforts at large financial institutions and large Internet services companies, which presents challenges that are different from those we encounter with smaller customers. Because our large customers are often making an enterprise-wide decision to deploy our solutions, we face longer sales cycles, complex customer requirements, substantial upfront sales costs, significant contract negotiations and less predictability in completing sales with these customers. Our sales cycle can often last one year or more with our largest customers, who often undertake an extended evaluation process, but is variable and difficult to predict. We anticipate that we will experience even longer sales cycles, more complex customer needs, higher upfront sales costs and less predictability in completing sales with customers located outside of the United States. If our sales cycle lengthens or our upfront sales investments do not generate sufficient revenue to justify our investments in our sales efforts, our operating results may be harmed.
Failure of our customers to deploy our solutions in a timely and successful manner could negatively affect our revenue and operating results.
The timing of revenue from our customers depends on a number of factors outside of our control and may vary from period to period. Our customers may request customization of our solutions for their systems or engage in a prolonged, internal decision making process regarding the deployment of our solutions. Among our larger customers, deployment of our solutions can be a complex and prolonged process and requires integration into the existing platform on our customers’ systems. Any delay during the deployment process related to technical difficulties experienced by our customers or us in integrating our solutions into our customers’ systems could further lengthen the deployment period and create additional costs or customer dissatisfaction. During the deployment period, we expend substantial time, effort, and financial resources to assist our customers with the deployment. We generally are not able to recognize the full potential value of our customer contracts until our customers actually deploy our solutions. Cancellation of any deployment after it has begun could result in lost time, effort, and expenses invested in the cancelled deployment process, and would adversely affect our ability to recognize revenue that we anticipated at the time of the execution of the related customer contract. If our customers do not timely and successfully deploy our solutions, our future revenue and operating results could be negatively impacted.
A limited number of clients account for a material portion of our revenue. TerminationRenegotiation or termination of our contracts with any of these clients could have a material adverse effect on our results of operations, financial condition or business.
For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, revenues associated with our relationship with our single largest client, FMR LLC, an affiliate of FMR Corp., or Fidelity, accounted for 17%approximately 16%, 15%17% and 18%15% respectively, of our total revenues and our ten largest clients accounted for 37%approximately 34%, 36%33% and 42%29%, respectively, of our total revenues. Our license agreements with large financial institutions are generally multi-year contracts that may be terminated upon the expiration of the contract term or prior to such time for cause, which may include breach of contract, bankruptcy, insolvency and other reasons. A majority of our agreements with financial advisors generally provide for termination at any time.
A substantial majority of our revenues associated with Fidelity is derived from ongoing asset-based platform service fees paid by firms, advisors or advisors’ clients obtained through the Fidelity relationship based upon asset-based fees. A majority of our agreements with financial advisors generally provide for termination at any time.relationship. The license agreement with Fidelity, which accounted for less than 1% of our revenue in the year ended December 31, 2017,2022, is subject to renewal on an annual basis.
If Fidelity or a significant number of our most important clients were to
renegotiate or terminate their contracts with us,
and we were unable to obtain a significant number of new clients, our results of operations, financial condition or business could be materially adversely affected.
Our investment advisory clients that pay us an asset‑based fee may seek to negotiate a lower fee percentage or may cease using our services, which could limit the growth of, or decrease, our revenues.
A significant portion of our revenues are derived from asset‑based fees. Our investment advisory clients may, for a number of reasons, seek to negotiate a lower asset‑based fee percentage. For example, an increase
Changes in the
useestimates of
index‑linked investment products by the clientsfair value of
our financial advisor clientsreporting units or of long-lived assets, particularly goodwill and intangible assets, may result in
lower fees being paid to our clients, and our clients may in turn seek to negotiate lower asset‑based fee percentages for our services. In addition, as competition among our clients increases, they may be required to lower the fees they charge to their clients, which could cause them to seek to decrease our fees accordingly. Any of these factors could result in fluctuation or a decline in our asset‑based fees, which would have a material adverse effect on our results of operations, financial condition or business.Changes in market and economic conditions could lower the value of assets on which we earn revenues and could decrease the demand for our investment solutions and services.
Asset‑based fees make up a significant portion of our revenues. Asset‑based fees represented 60%, 61% and 79% of our total revenues for the years ended December 31, 2017, 2016 and 2015, respectively. We expect that asset‑based fees will continue to represent a significant percentage of our total revenues in the future. Significant fluctuations in securities prices may materially affect the value of the assets managed by our clients and may also influence financial advisor and investor decisions regarding whether to invest in, or maintain an investment in, a mutual fund or other investment solution. If such market fluctuation led to less investment in the securities markets, our revenues and earnings derived from asset‑based fees could be materially adversely affected.
We provide our investment solutions and services to the financial services industry. The financial markets, and in turn the financial services industry, are affected by many factors, such as U.S. and foreign economic conditions and general trends in business and finance that are beyond our control. In the event that the U.S. or international financial markets suffer a severe or prolonged downturn, investors may choose to withdraw assets from financial advisors, which we refer to as “redemptions”, and transfer them to investments that are perceived to be more secure, such as bank deposits and Treasury securities. For example, in late 2007 and through the first quarter of 2009, the financial markets experienced a broad and prolonged downturn, our redemption rates were higher than our historical average, and our results of operations, financial condition and business were materially adversely affected. Any prolonged downturn in financial markets or increased levels of asset withdrawals could have a material adverse effect on our results of operations, financial condition or business.
Investors’ decisions regarding their investment assets are affected by many factors and investors may redeem or withdraw their investment assets generally at any time. Significant changes in investing patterns or large‑scale withdrawal of investment funds could have a material adverse effect on our results of operations, financial condition or business.
The clients of our financial advisors are generally free to change financial advisors, forgo the advice and other services provided by financial advisors or withdraw the funds they have invested with financial advisors. These clients of financial advisors may elect to change their investment strategies, by moving their assets away from equity securities to fixed income or other investment options, or by withdrawing all or a portion of their assets from their accounts to avoid all securities markets‑related risks. These actions by investors are outside of our control and could materially adversely affect the market value of the investment assets that our clients manage, which could materially adversely affect the asset‑based fees we receive from our clients.
Our hosting, collection, use and storage of customer information and data require the implementation of effective security controls, and a data security breach could disrupt our business, result in the disclosure of confidential information, expose us to liability and protracted and costly litigation, adversely affect our reputation and revenue and cause losses.
We, and our customers through which our solutions are made available to end users, collect, use, transmit and store confidential financial information such as bank account numbers, social security numbers, non-public personally identifiable information, portfolio holdings, credit card data and outstanding debts and bills. The measures we take to provide security for collection, use, storage, processing and transmission of confidential end user information may not be effective to protect against data security breaches by third parties. We use commercially available security technologies, including hardware and software data encryption techniques and multi-layer network security measures, to protect transactions and information. Although we encrypt data fields that typically include sensitive, confidential information, other unencrypted data fields may include similar information that could be accessible in the event of a security breach. We use security and business controls to limit access and use of confidential end user information. Although we require our customers and third-party suppliers to implement controls similar to ours, the technologies and practices of our customers and third-party suppliers may not meet all of the requirements we include in our contracts and we may not have the ability to effectively monitor the implementation of security measures of our customers and third-party suppliers. In a number of cases, our customers build and host their own web applications and access our solutions through our APIs. In these cases, additional risks reside in the customer’s system with respect to security and preventive controls. As a result, inadequacies of our customers’ and third-party suppliers’ security technologies and practices may only be detected after a security breach has occurred. Errors in the collection, use, storage or transmission of confidential end user information may result in a breach of privacy or theft of assets.
The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Criminals are using increasingly sophisticated techniques to engage in illegal activities involving solutions such as ours or involving end user information, such as counterfeiting, fraudulent payment and identity theft. Because the techniques used by hackers change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition to hackers, it is possible that a customer could gain unauthorized access to our database through the use of our solutions. Improper access to our systems or databases by hackers or customers intending to commit criminal activities could result in the theft, publication, deletion or modification of confidential end user information. An actual or perceived breach of our security may require notification under applicable data privacy regulations.
A data security breach of the systems on which sensitive user data and account information are stored could lead to claims, industry fines, or regulatory actions against us. If we are sued in connection with any data security breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our revenue and profitability. Our customer contracts typically include security standards that must be complied with by us and our customers. If a data security breach occurs and we have not been in compliance with the security standards included in our applicable contracts, we could be liable for breach of contract claims brought by our customers.
We could also be required to indemnify our customers for third-party claims, fines, penalties and/or other assessments imposed on our customers as a result of any data security breach and our liability could exceed our insurance coverage or ability to pay. Envestnet’s Registered Investment Advisers and Broker-Dealer may face SEC, FINRA and state enforcement actions, including monetary fines, if it is determined that Envestnet had inadequate data security measures in place to prevent such theft.
Our security procedures and technologies are regularly audited by independent security auditors engaged by us, and many of our prospective and current customers conduct their own audits or review the results of such independent security audits as part of their evaluation of our solutions. We are also periodically audited by regulatory agencies to which our operations or our customers are subject. Adverse findings in these audits or examinations, even if not accompanied by any data security breach, could adversely affect our ability to maintain our existing customer relationships and establish new customer relationships.
Data security breaches, acts of fraud involving our solutions, or adverse findings in security audits or examinations, could result in reputational damage to us, which could reduce the use and acceptance of our solutions, cause our customers to cease doing business with us and/or have a significant adverse impact on our revenue and future growth prospects. Further, any of these events could lead to additional regulation and oversight by federal and state agencies, which could impose new and costly compliance obligations and may lead to the loss of our ability to make our solutions available.
We could incur significant costs protecting the personal information we store on our technology platforms.
Users of our investment solutions and services are located in the United States and around the world. As a result, we collect and store the personal information of individuals who live in many different countries. Privacy regulators in some of those countries have publicly stated that foreign entities (including entities based in the United States) may render themselves subject to those countries’ privacy laws and the jurisdiction of such regulators by collecting or storing the personal data of those countries’ residents, even if such entities have no physical or legal presence there. Consequently, we may be obligated to comply with the privacy and data security laws of such foreign countries, including the European Union's (“EU”) General Data Protection Regulation which comes into effect on May 25, 2018 and requires businesses operating in the EU or foreign business dealing with EU customers to store and process all personal data within the EU borders. Our exposure to foreign countries’ privacy and data security laws impacts our ability to collect and use personal information, increases our legal compliance costs and may expose us to liability.
We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Increased domestic or international regulation of data utilization and distribution practices could require us to modify our operations and incur significant additional expense,impairment charges, which could have a material adverse effect on our results of operations, financial condition, cash flows or business. Furthermore, even
Over time, the fair values of long-lived assets change. At December 31, 2022, we had $998.4 million of goodwill and $380.0 million of intangible assets, net, collectively representing 65% of our total assets.
Goodwill is reviewed for impairment each year using a qualitative or quantitative process that is performed at least annually or whenever events or circumstances indicate that impairment may have occurred. We perform the annual impairment analysis on October 31 in order to provide management time to complete the analysis prior to year-end. Prior to performing the quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, we are not required to complete the quantitative goodwill impairment evaluation. If it is determined that the carrying value may exceed fair value when considering qualitative factors, a quantitative goodwill impairment evaluation is performed. When performing the quantitative evaluation, if
not directed at us specifically, attacks on other financial institutions could disrupt the
overall functioningcarrying value of the
financial system.Privacy concerns could havereporting unit exceeds its fair value, an adverse impact on our revenue and harm our reputation and may require us to modify our operations.
As part of our business, we use, transmit and store end user-permissioned, non-identified transaction data elements. We are subject to laws, rules and regulations relatingimpairment loss equal to the collection, use,difference will be recorded. The identification of reporting units and securityconsideration of end user data. For privacyaggregation criteria requires management’s judgment. Based on the relevant GAAP authoritative guidance, we aggregate components of a single operating segment into a reporting unit, if appropriate. Future goodwill impairment charges may occur if estimates of fair values decrease, which would reduce future earnings.
We test our indefinite lived intangible assetson an annual basis and more often if an event occurs or security reasons, privacy groups, governmental agenciescircumstances change that would more likely than not reduce the fair value of the indefinite lived intangible asset below its carrying amount. We also test property and individuals may seek to restrict or prevent our use of this data. New laws in this area have been passed by several jurisdictions,equipment and other jurisdictions are considering imposing additional restrictions. These new laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction and our current data protection policies and practiceslong lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be consistent with those interpretations and applications. In addition, the ability to execute transactions and the possession and userecoverable. Future asset impairment charges may occur if asset utilization declines, if customer demand decreases, or for a number of personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require notification to customers or employees ofother reasons, which would reduce future earnings. Any such impairment charges could have a security breach, restrict our use of personal information, hinder our ability to acquire new customers or market to existing customers, require us to modify our operations and have anmaterial adverse effect on our business, financial condition, results of operations, and operating results. Wecash flows. Impairment charges would also reduce our consolidated stockholders’ equity and increase our debt-to-total-capitalization ratio, which could negatively impact our access to the debt and equity markets.
During the fourth quarter of 2022, we completed our annual goodwill impairment analysis. The qualitative analysis performed as of October 31, 2022 indicated that it is more likely than not that the fair value of each reporting unit exceeded the carrying value, and accordingly, no impairment existed. There can be no assurance that our estimates and assumptions of the fair value of our reporting units, the current economic environment, or the other inputs used to estimate the fair value of our reporting units will prove to be accurate, and any material error in our estimates and assumptions, could result in us needing to take a material impairment charge, which would have incurred, andthe effects discussed above.
As part of our ongoing monitoring efforts, we will continue to incur, significant expenses to comply withconsider capital markets and other economic factors and its potential impact on our businesses, as well as other factors, in assessing goodwill and other long-lived assets for possible indications of impairment.
privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. As our business continues to expand to new industry segments that may be more highly regulated for privacy and data security, and to countries outside the United States that have more strict data protection laws, our compliance requirements and costs may increase.
We have a significant amount of debt and servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to service our debt.
As of December 31,
2017,2022, we had
$81,168 of borrowings outstanding under our revolving credit facility (the “Second Amended and Restated Credit Agreement”) and $172,500$45.0 million of outstanding 1.75%
convertible notesConvertible Notes due
in 2019 (the2023, $317.5 million of outstanding 0.75% Convertible Notes due 2025, and $575.0 million of outstanding 2.625% Convertible Notes due 2027 (collectively, the “Convertible Notes”). As of December 31,
2017,2022, we had an additional
$268,832$500.0 million available
to us to borrow under our
Amended and Restated Credit Agreement.revolving credit facility (the “Credit Agreement”). This indebtedness could, among other things:
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| | make it difficult for us to pay other obligations;
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| | make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
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•make it difficult for us to pay other obligations; | ·
| | require us to dedicate a substantial portion of our cash flow from operations to service the indebtedness, reducing the amount of cash flow available for other purposes; and
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•make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes; | ·
| | limit our flexibility in planning for and reacting to changes in our business.
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•require us to dedicate a substantial portion of our cash flow from operations to service the indebtedness, reducing the amount of cash flow available for other purposes; and•limit our flexibility in planning for and reacting to changes in our business.
The conditional conversion features of our Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion features of our outstanding Convertible Notes are triggered, holders of the Convertible Notes will be entitled to convert their Convertible Notes at any time during specified periods at their option. We may elect to satisfy our conversion obligation in cash, in shares of our common stock or in a combination of cash and shares of our common stock. If one or more holders elect to convert their Convertible Notes, unless we satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity. Furthermore, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long‑term liability, which would result in a material reduction of our net working capital.
We may not have the ability to raise the funds necessary to settle conversions of our Convertible Notes or purchase the Convertible Notes as required upon a fundamental change, and our existing debt contains, and our future debt may contain, limitations on our ability to pay cash upon conversion or purchase of our Convertible Notes.
Following a fundamental change, Convertible Notes holders will have the right to require us to purchase their Convertible Notes for cash. A fundamental change may also constitute an event of default or prepayment under, and result in the acceleration of the maturity of, our then‑existing indebtedness. In addition, upon conversion of the Convertible Notes, unless we settle our conversion obligation solely in shares of our common stock (other than cash in lieu of any fractional share), we will be required to make cash payments in respect of the Convertible Notes being surrendered for conversion. We may not have sufficient financial resources, or may not be able to arrange financing, to pay the fundamental change purchase price in cash with respect to the Convertible Notes surrendered by holders for purchase upon a fundamental change or make cash payments upon conversions. In addition, restrictions in our Third Credit Agreement (as described herein) or future credit facilities or other indebtedness, if any, may not allow us to purchase the Convertible Notes upon a fundamental change or make cash payments upon conversions of the Convertible Notes. Our failure to purchase the Convertible Notes upon a fundamental change or make cash payments upon conversions thereof when required would result in an event of default with respect to the Convertible Notes which could, in turn, constitute a default under the terms of our other indebtedness, if any. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Convertible Notes or make cash payments upon conversions thereof. For a description of the Company’s Credit Agreement entered into on November 14, 2022 amending and restating the Third Amended and Restated Credit Agreement, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Recent Developments, Credit Agreement Amendment” and Part II, Item 8, “Note 10—Debt”.
The capped call transactions entered into in connection with the issuance of our 2.625% Convertible Notes due 2027 may affect the value of such notes and our common stock.
In connection with the issuance of our 2.625% Convertible Notes due 2027 (the “Convertible Notes due 2027”), we entered into privately negotiated capped call transactions with certain financial institutions (the "Capped Call Counterparties"). The capped call transactions were entered into to reduce the potential dilutive effect on our common stock upon any conversion of the Convertible Notes due 2027 and/or offset any potential cash payments we are required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to cap.
In connection with establishing their initial hedges of the capped call transactions, the Capped Call Counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock and/or purchased shares of our common stock concurrently with or shortly after the pricing of the Convertible Notes due 2027. The Capped Call Counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions from time to time prior to the maturity of the Convertible Notes due 2027 (and are likely to do so following any conversion of the Convertible Notes due 2027 or any retirement by us of the Convertible Notes due 2027, in each case if we exercise the relevant election to terminate the corresponding portion of the capped call transactions). This activity could cause or avoid an increase or decrease in the market price of our common stock or the Convertible Notes due 2027. The potential effect, if any, of these transactions and activities on the market price of our common stock or the Convertible Notes due 2027 will depend, in part, on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.
We are subject to
liability for losses that result from a breach of our fiduciary duties.Our investment advisory services involve fiduciary obligations that require us to act in the best interests of our clients, and we may be sued and face liabilities for actual or claimed breaches of our fiduciary duties. Because we provide investment advisory services, both directly and indirectly,counterparty risk with respect to substantial assetsthe capped call transactions, and the capped call transactions may not operate as planned.
The Capped Call Counterparties are financial institutions or affiliates of financial institutions, and we could face substantial liability if it is determinedwill be subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the Capped Call Counterparties will not be secured by any collateral. Global economic conditions have, from time to time, resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a Capped Call Counterparty becomes subject to insolvency proceedings, we have breachedwill become an unsecured creditor in those proceedings with a claim equal to our fiduciary duties. In certain circumstances, which generallyexposure at that time under our transactions with that Capped Call Counterparty. Our exposure will depend on many factors, but generally an increase in our exposure will be correlated with increase in the typesmarket price of investment solutionsthe volatility of our common stock. In addition, upon a default by a Capped Call Counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any Capped Call Counterparty.
In addition, the capped call transactions are complex, and servicesthey may not operate as planned. For example, the terms of the called call transactions may be subject to adjustment, modification or, in some cases, renegotiation if certain corporate or other transactions occur. Accordingly, these may not operate as we intend if we are providing, we may enter into client agreements jointly with advisors and retain third‑party investment money managers on behalf of clients. Asrequired to adjust their terms as a result weof transactions in the future or upon unanticipated developments that may be included as a defendant in lawsuits against financial advisors and third‑party investment money managers that involve claims of breachesadversely affect the functioning of the duties of such persons, and we may face liabilities for the improper actions and/or omissions of such advisors and third‑party investment money managers. In addition, we may face claims based on the results of our investment advisory recommendations, even in the absence of a breach of our fiduciary duty. Such claims and liabilitiescapped call transactions.
Activist shareholders could therefore have a materialan adverse effect on our business, impact and create volatility in our stock price, divert board and management’s attention and resources, and cause us to incur substantial expense.
In January 2023, Impactive Capital, L.P. ("Impactive Capital "), announced the nomination of four candidates for election to our Board of Directors at our 2023 Annual Meeting of Shareholders. If a proxy contest ensues, the Company’s business, operating results
of operations,or financial condition
could be adversely affected because actions in connection with the proxy contest could result in us incurring substantial costs, including proxy solicitation, public relations, and legal fees. Further, such a proxy contest or
business.We are subject to liability for losses that result from potential, perceived or actual conflictsother actions taken by activist shareholders could (i) divert the attention of interest.
Potential, perceivedour Board of Directors, management, and actual conflicts of interest are inherentemployees, and may disrupt the momentum in our existingbusiness and future business activities and could give rise to client dissatisfaction, litigation or regulatory enforcement actions. In particular, we pay varying fees to third‑party asset managers and custodians andoperations, as well as our financial advisor customers, or their clients, could accuse us of directing them toward those asset managers or custodians that charge us the lowest fees and therefore provide us with a greater financial advantage. In addition, we offer proprietary mutual funds and portfolios of mutual funds through our internal investment management and portfolio consulting group, and financial advisors or their clients could conclude that we favor our proprietary investment products because of their belief that we earn higher fees when our proprietary investment products are used. Adequately addressing conflicts of interest is complex and difficult. If we fail, or appear to fail, to adequately address potential, perceived or actual conflicts of interest, the resulting negative public perception and reputational harm could materially adversely affect our client relations or ability to enter into contracts with new clients and, consequently,execute our results of operations, financial condition and business.
If our reputation is harmed, our results of operations, financial condition or business could be materially adversely affected.
Our reputation, which depends on earning and maintainingstrategic plan, (ii) create perceived uncertainties as to the trust and confidencefuture direction of our clientsbusiness or strategy, which may result in the loss of customers and end users, is critical to our business. Our reputation is vulnerable to many threats that can bepotential business opportunities, make it more difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, data security breaches, lawsuits initiated by our clients or stockholders, employee misconduct, perceptions of conflicts of interest and rumors, among other developments, could substantially damage our reputation, even if they are baseless or satisfactorily addressed. In addition, any perception that the quality of our solutions and services may not be the same or better than that of other providers, can also damage our reputation. Any damage to our reputation could harm our ability to attract and retain clients, which would materiallyqualified personnel, and impact our relationship with investors, vendors, and other third parties, and (iii) impact the market price and the volatility of our common stock. If any of the nominees proposed by Impactive Capital are elected to our Board of Directors, their presence may be disruptive, may lead to further uncertainty among our customers, employees and others, and may adversely affect our results of operations, financial conditionability to effectively implementing the Company’s business strategy and business. Attempts to repaircreate additional value for our reputation, if damagedshareholders. In addition, the proxy fight may be costly and time consuming, and such efforts may not ultimately be successful.
If our investment solutions and services fail to perform properly due to undetected errors or similar problems, our results of operations, financial condition and business could be materially adversely affected.
Investment solutions and services we develop or license may contain undetected errors or defects despite testing. Such errors can exist at any point in the life cycle of our investment solutions or services, but are frequently found after introduction of new investment solutions and services or enhancements to existing investment solutions or services. We continually introduce new investment solutions and services and new versions of our investment solutions and services. Despite internal testing and testing by current and potential clients, our current and future investment solutions and services may contain serious defects or malfunctions. If we detect any errors before release, we might be required to delay the release of the investment solution or service for an extended period of time while we address the problem. We might not discover errors that affect our new or current investment solutions, services or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Errors may occur that could have a material adverse effect on our results of operations, financial condition or business and could result in harm tolitigation by or against the Company or the Board, which could also be a significant distraction for our reputation, lost sales, delays in commercial release, third‑party claims, regulatory actions, contractual disputes, contract terminations or renegotiations, or unexpected expenses and diversion of management and other resources to remedy errors. In addition, negative public perception and reputational damage caused by such claims would adversely affect our client relationships and our ability to enter into new contracts. Any of these problems could have a material adverse effect on our results of operations, financial condition and business.
We could face liability or incur costs to remediate operational errors or to address possible customer dissatisfaction.
Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. The success of our business depends on our ability to mitigate those operational risks and deliver time-sensitive services. We operate in diverse markets and are reliant on the ability of our employees and systems to process large volumes of transactions often within short time frames. Our operations and those of third parties on whom we rely for information and transaction processing services are vulnerable to interruption by technical breakdowns, computer hardware and software malfunctions, software viruses, infrastructure failures, fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures and other events beyond our control. In the event of any such interruptions or improper operation of systems, human error or improper action by employees, we could suffer financial loss, regulatory sanctions or damage to our reputation.
In addition, our contracts with our customers often include stringent requirements for us to maintain certain levels of performance and service availability. Failure by us to meet these contractual requirements could result in a claim for substantial damages against us, regardless of whether we are responsible for that failure. Our customers may also delay or withhold payment to us, elect to terminate or not to renew their contracts with us, or refuse to integrate our solutions into their online offerings, or we could lose future sales to new customers as a result of damage to our reputation due to such service downtime or interruptions. If we suffer a significant database or network facility outage, our business could experience disruption until we fully implement our back-up systems. The occurrence of any such disruptions in our solutions could materially and adversely affect our business.
Furthermore, there may be circumstances when our customers are dissatisfied with our investment solutions and services, even in the absence of an operational error. In such circumstances, we may elect to make payments or otherwise incur increased costs or lower revenues in order to maintain a strong customer relationship. In any of the forgoing circumstances, our results of operations, financial condition or business could be materially adversely affected.
We may become subject to liability based on the use of our investment solutions and services by our clients.
Our investment solutions and services support the investment processes of our clients, which, in the aggregate, manage billions of dollars of assets. Our client agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or third parties based on the use of our investment solutions and services. However, these provisions have certain exceptions and could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. Such claims and lawsuits could therefore have a material adverse effect on our results of operations, financial condition or business.
Furthermore, our clients may use our investment solutions and services together with software, data or products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our investment solutions and services do not cause these problems, the existence of these errors might causerequire us to incur significant costs or otherwise result in an adverse effect on the Company.
Public health crises, pandemics or similar events, such as the COVID-19 pandemic, have and divert the attention of our management and technical personnel, any of which could materiallymay continue to adversely affect our business, including our operations and financial condition.
The effects of public health crises, pandemics and similar events, such as the COVID-19 pandemic, including responses and restrictions related thereto have had, and may continue to have, a significant impact on global economic and market conditions. Although certain economic conditions have improved since their worst levels during the pandemic, the pandemic continues to evolve and the effects of COVID-19, its variants or any other widespread public health crisis could lead to deterioration in then-current economic conditions or result in other adverse consequences to our business, results of operations
and financial condition
or business.Our business relies heavily on computer equipment, electronic delivery systems andin the Internet. Any failures or disruptions in such technologiesfuture.
Such effects could
result in reduced revenues, increased costs and the loss of customers.Our business relies heavilyhave adverse impacts on our computer equipment (including our servers), electronic delivery systems and the Internet, but these technologies are vulnerable to disruptions, failures or slowdowns caused by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures, computer virusesclients, vendors and other events beyondthird-parties with whom we do business. Additionally, our control. We derive our subscription revenue from licenses to a single software platform, and related support and professional services. As such, any factor adversely affecting subscriptions to that single software platform, including those described elsewhere under “Risk Factors” or in otherbusiness operations may be disrupted if significant portions of this Form 10-K, would harm our business and operating results. Furthermore, we rely on agreements with our suppliers, such as our current data hosting and service provider, to provide us with access to certain computer equipment, electric delivery systems and the Internet. Weworkforce are unable to predict whether a future contractual disputework effectively, including because of illness, quarantines, government actions or other restrictions in connection with any ongoing effects of pandemic. Further, remote working and other modified business practices have introduced additional operational risks, including resiliency, cybersecurity, and execution risks. Any failure to manage these additional risks effectively may arise with one of our suppliers that could cause a disruptionresult in service,inefficiencies or whether our agreements with our suppliers can be obtained or renewed on acceptable terms, or at all. An unanticipated disruption, failure or slowdown affecting our key technologies or facilities may have significant ramifications, such as data‑loss, data corruption, damaged software codes or inaccurate processing of transactions. We maintain off‑ site back‑up facilities for our electronic informationdelays, and computer equipment, but these facilities could be subject to the same interruptions that may affect our primary facilities. Any significant disruptions, failures, slowdowns, data‑lossability to, or data corruption could have a material adverse effect onthe manner in which we, conduct our business activities.
The extent to which COVID-19 and any other potential future public health crises, pandemics or similar events may adversely affect our business, results of operations
and financial condition,
will depend on future developments that are highly uncertain and cannot be predicted, including the duration and scope of the COVID-19 or
business and resultany other future pandemic, actions taken in
the loss of customers.Our insurance coverage and contractual liability limitations may fail to provide adequate protections.
We maintain general liability insurance coverage, including coverage for errors or omissions; however, this coverage may not continue to be available on reasonable terms or may be insufficient to cover one or more large claims. An insurer might disclaim coverage asresponse to any future claim. A successful assertionpandemic and the availability and efficacy of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases orvaccines. Further, the impositionimpact on U.S. and global economies and the extent and strength of a large deductible or co-insurance requirement, could harm our operating resultsany economic recovery after the COVID-19 pandemic abates is uncertain and financial condition. Additionally, although we attempt to limit our contractual liability in delivering our solutions, these limitations on liability may be unenforceable in some cases, or may be insufficient to protect us from liability for damages.
If we fail to process transactions effectively or fail to adequately protect against disputed or potential fraudulent activities, our revenuevarious evolving factors and earnings may be harmed.
Envestnet | Yodlee processes a significant volume and dollar value of transactions on a daily basis using its money movement solutions. Effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that funds may be misappropriated due to fraud. If we are unable to effectively manage our systems and processes we may be unable to process money movement transactions in an accurate, reliable and timely manner, which may harm our business. In addition, if we do not detect suspected fraudulent or non-sufficient fund transactions within agreed-upon timelines, we may be required to reimburse our customers for the transactions and such reimbursements may exceed the amount of the reserves we have established to make such payments.
The online payments industry has been experiencing an increasing amount of fraudulent activities by third parties. Although we do not believe that any of this activity is uniquely targeted at our business, this type of fraudulent activity may adversely impact us.conditions. In addition, to the extent COVID-19 or any direct damages and potential fines that may result from such fraud, which may be substantial, a loss of confidence in our controls may seriously harmother pandemic adversely affects our business or the global economic conditions more generally, it may also have the effect of heightening many of the other risks described in this section entitled “Risk Factors” and damage our reputation. We may implement risk control mechanisms that could make it more difficult for legitimate end users to use our solutions, which could result in lost revenue and negatively impact our operating results.
If we are unable to maintain our payment networkany subsequent filings with third-party service providers, or if our disbursement partners encounter business difficulties, our business could be harmed.
Envestnet | Yodlee’s payment network consists of a single Originating Deposit Financial Institution (“ODFI”), and a small number of bill payment processors. Our ODFI clears and processes the funds from the customer. In the instance of funds transfers, the ODFI also processes funds to the end user’s destination institution. For bill payment, funds are sent to the bill pay processors for disbursement to biller sites.
While we have entered into an agreement with our ODFI and each of our bill payment processors, these partners could choose to terminate or not renew their agreements with us. If we are unable to maintain our agreements with our current partners, or our current partners are unable to handle increased transaction volumes, our ability to disburse transactions and our revenue and business may be harmed. If we are unable to sign new payment processors and/or ODFIs under terms consistent with, or better than, those currently in place, our revenue and business may be harmed.
Payment processors and ODFI partners also engage in a variety of activities in addition to providing our services and may encounter business difficulties unrelatedSEC.
Risks Related to our
services. Such activities or difficulties could cause the affected partner to reduce the services provided, cease to do business with us, or cease doing business altogether. This could lead to our inability to move funds on a timely basis as required to settle transactions. In addition, because we offer next day automated clearing house transactions in certain cases, if a disbursement partner experiences insufficient liquidity or ceases to do business, we may not be able to recover funds that are held with that disbursement partner which could harm our financial condition and operating results.We may also be forced to cease doing business with payment processors and/or ODFIs if rules governing electronic funds transfers change or are reinterpreted to make it difficult or impossible for us to operate our money movement solutions.
Operations
If sources from which we obtain information limit our access to such information or charge us fees for accessing such information, our business could be materially and adversely harmed.
Our Envestnet | YodleeData & Analytics data aggregation solutions require certain data that we obtain from thousands of sources, including banks, other financial institutions, retail businesses and other organizations, some of which are not our current customers. As of December 31, 2017,2022, we receive approximately 70%over 75% of this data through structured data feeds that are provided under the terms of our contracts with most of our financial institution, or FI, customers. Although all of the information we currently gather is end user-permissioned, non-identified data and, currently, we generally have free,
unrestricted access to, or ability to use, such information, one or more of our current customers could decide to limit or block our access to the data feeds we currently have in place with these customers due to factors outside of our control, such as more burdensome regulation of our or our customers’ industry, increased compliance requirements or changes in business strategy. If the sources from which we obtain information that is important to our solutions limit or restrict our ability to access or use such information, we may be required to attempt to obtain the information, if at all, through end user-permissioned data scraping or other means that could be more costly and time-consuming, and less effective or efficient. In the past, a limited number of third parties, primarily airline and international sites, have either blocked our access to their websites or requested that we cease employing data scraping of their websites to gather information, and we could receive similar, additional requests in the future. Any such limitation or restriction may also preclude us from providing our solutions on a timely basis, if at all. In addition, if in the future one or more third parties challenge our right to access information from these sources, we may be required to negotiate with these sources for access to their information or to discontinue certain services currently provided by our solutions. The legal environment surrounding data scraping and similar means of obtaining access to information on third-party websites is not completely clear and is evolving, and one or more third parties could assert claims against us seeking damages or to prevent us from accessing information in that manner. In the event sources from which we obtain this information begin to charge us fees for accessing such information, we may be forced to increase the fees that we charge our customers, which could make our solutions less attractive, or our gross margins and other financial results could suffer.
Failure by our customers to obtain proper permissions and waivers might result in claims against us or may limit or prevent our use of data, which could harm our business.
For
Because some of our sales efforts are targeted at large financial institutions and large FinTech companies, we face prolonged sales cycles, substantial upfront sales costs and less predictability in completing some of our sales. If our sales cycle lengthens, or if our upfront sales investments do not result in sufficient revenue, our operating results may be harmed.
We target a portion of our sales efforts at large financial institutions and large FinTech companies, which presents challenges that are different from those we encounter with smaller customers. Because our large customers are often making an enterprise-wide decision to deploy our solutions, we
require our customers to provide necessary noticesface longer sales cycles, complex customer requirements, substantial upfront sales costs, significant contract negotiations and
to obtain necessary permissions and waivers for use and disclosure of information through our solutions.less predictability in completing sales with these customers. Our
contractssales cycle can often last one year or more with our
largest customers,
for these services include assurances from themwho often undertake an extended evaluation process, but is variable and difficult to predict. We anticipate that
they have done sowe will experience even longer sales cycles, more complex customer needs, higher upfront sales costs and
will do so, but weless predictability in completing sales with customers located outside of the United States. If our sales cycle lengthens or our upfront sales investments do not
auditgenerate sufficient revenue to justify our
customers to ensure that they have acted, and continue to act, consistent with such assurances. If, despite these requirements and contractual obligations,investments in our
customers do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf might be limited or prohibited by federal, state or foreign privacy laws or other laws. Such a failure to obtain proper permissions and waivers could impair our functions, processes and databases that reflect, contain, or are based upon such data and might prevent use of such data. In addition, such a failure could interfere with, or prevent creation or use of, rules, analyses, or other data-driven activities that benefit us and our business. Moreover, we might be subject to claims or liability for use or disclosure of information by reason of lack of valid notices, agreements, permissions or waivers. These claims or liabilities could subject us to unexpected costs and adversely affectsales efforts, our operating
results.We could face liability for certain information we provide, including information based on data we obtain from other parties.
Weresults may be subject to claims for securities law violations, negligence, breachharmed.
Investors’ decisions regarding their investment assets are affected by many factors and investors may redeem or withdraw their investment assets generally at any time. Significant changes in investing patterns or large‑scale withdrawal of
fiduciary duties or other claims relating to the information we provide. For example, individuals may take legal action against us if they rely on information we have provided and it contains an error. In addition, we could be subject to claims based upon the content that is accessible from our website through links to other websites. Moreover, we could face liability based on inaccurate information provided to us by others. Defending any such claims could be expensive and time‑consuming, and any such claim could materially adversely affect our results of operations, financial condition or business.We depend on our senior management team and other key personnel and the loss of their servicesinvestment funds could have a material adverse effect on our results of operations, financial condition or business.
We depend on the efforts, relationships and reputations
The clients of our senior management teamfinancial advisors are generally free to change financial advisors, forgo the advice and other key personnel, including Judson Bergman,services provided by financial advisors or withdraw the funds they have invested with financial advisors. These clients of financial advisors may elect to change their investment strategies, by moving their assets away from equity securities to fixed income or other investment options, or by withdrawing all or a portion of their assets from their accounts to avoid all securities markets‑related risks. These actions by investors are outside of our Chief Executive Officer, William Crager,control and could materially adversely affect the market value of the investment assets that our President, Anil Arora, Vice Chairman,clients manage, which could materially adversely affect the asset‑based fees we receive from our clients.
A substantial portion of our revenue is based on fees earned in the value of assets under management or administration. Changes in market and Scott Grinis,economic conditions could lower the value of assets on which we earn revenues and could decrease the demand for our Chief Technology Officer, in order to successfully manageinvestment solutions and services.
Asset‑based fees make up a significant portion of our business.revenues. Asset‑based fees represented 60%, 60% and 54% of our total revenues for the years ended December 31, 2022, 2021 and 2020, respectively. We believeexpect that success in our businessasset‑based fees will continue to be based upon the strengthrepresent a significant percentage of our intellectual capital. The losstotal revenues in the future. Significant fluctuations in securities prices may materially affect the market value of the assets managed by our clients and may also influence financial advisor and investor decisions regarding whether to invest in, or maintain an investment in, a particular investment or strategy. If such market fluctuation led to less investment in the securities markets, our revenues and earnings derived from asset‑based fees could be materially adversely affected. Our asset-based fees are generally calculated quarterly using the value of assets at the end of each calendar quarter. Our methodology may result in lower fees if the financial markets are down when fees are calculated, even if the market had performed well earlier in the quarter.
We provide our investment solutions and services
to the financial services industry. The financial markets, and in turn the financial services industry, are affected by many factors, such as U.S. and foreign economic conditions and general trends in business and finance that are beyond our control. In the event that the U.S. or international financial markets suffer a severe or prolonged downturn, investors may choose to withdraw assets from financial advisors, which we refer to as “redemptions”, and transfer them to investments that are perceived to be more secure, such as bank deposits and Treasury securities, and on which we might not earn fees. For example, in early 2022 continuing through the fourth quarter of
any member2022, the financial markets experienced a broad downturn, our redemption rates were higher than our historical average, and our results of
our senior management teamoperations, financial condition and business were materially adversely affected. A continued downturn in financial markets or
increased levels of
other key personnelasset withdrawals could have a material adverse effect on our results of operations, financial condition or business.
Our operations are subject Historically, redemption rates have typically increased during periods where there has been a significant downturn in financial markets. Any potential decline in assets on which we earn fees would not necessarily be proportional to, extensive government regulation, and compliance failures or regulatory action against us could adversely affect our results of operations, financial condition or business.
The financial services industry is among the most extensively regulated industries in the United States. We operate investment advisory, broker‑dealer, and mutual fund lines of business, each of which is subject to a specific and extensive regulatory scheme. In addition, we are subject to numerous laws and regulations of general application. It is very difficult to predict the future impact of the legislative and regulatory requirements affecting our business and our clients’ businesses.
Certain of our subsidiaries are registered as “investment advisers” with the SEC under the Advisers Act and are regulated thereunder. In addition, many of our investment advisory services are conducted pursuant to the non‑exclusive safe harbor from the definition of an “investment company” provided under Rule 3a‑4 under the Investment Company Act. If Rule 3a‑4 were to cease to be available, or if the SEC were to modify the rule or its interpretation of how the rule is applied, our businesstotal, could be adversely affected. Certain of our registered investment adviser subsidiaries provide advicegreater than the overall market decline.
We must continue to
mutual fund clients. Mutual funds are registered as “investment companies” under the Investment Company Act. Our advisory subsidiaries provide advice on assets subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). The Advisers Act, Investment Company Act and ERISA, together with related regulations and interpretations of the SEC and the Department of Labor, impose numerous obligations and restrictions on investment advisers and mutual funds, including requirements relating to the safekeeping of client funds and securities, limitations on advertising, disclosure and reporting obligations, prohibitions on fraudulent activities, restrictions on transactions between an adviser and its clients, and between a mutual fund and its advisers and affiliates, and other detailed operating requirements, as well as general fiduciary obligations.In addition, PBS, our broker‑dealer subsidiary, is registered as a broker‑dealer with the SEC and with all 50 states and the District of Columbia, and is a member of FINRA, a securities industry self‑regulatory organization that supervises and regulates the conduct and activities of its members. Broker‑dealers are subject to regulations that cover all aspects of their business, including sales practices, market making and trading among broker‑dealers, use and safekeeping of customer funds and securities, capital structure, recordkeeping and the conduct of directors, officers, employees, representatives and associated persons. FINRA conducts periodic examinations of the operations of its members, including PBS. As a broker‑dealer, PBS is also subject to certain minimum net capital requirements under SEC and FINRA rules. Compliance with the net capital rules may limit our ability to withdraw capital from PBS.
Envestnet | Yodlee is examined on a periodic basis by various regulatory agencies. For example, it is a supervised third-party technology service provider subject to multi-agency supervisory examinations in a wide variety of areas based on published guidance by the Federal Financial Institutions Examination Council. These examinations include examinations of our management, acquisition and development activities, support and delivery, IT, and disaster preparedness and business recovery planning. The Office of the Comptroller of the Currency (the “OCC”) is the agency in charge of these examinations. If deficiencies are identified, customers may choose to terminate or reduce their relationships with us.
Either as a result of direct regulation or obligations under customer agreements, many of our subsidiaries are required to comply with certain provisions of the Gramm-Leach-Bliley Act (“GLBA”), related to the privacy of consumer information and may be subject to other privacy and data security laws because of the solutions we provide. In addition, numerous regulations have been proposed and are still being written to implement the Dodd-Frank Act for enhanced due diligence of the internal systems and processes of companies like ours by their regulated customers. If we are required to make changes to our internal processes and solutions as result of this heightened scrutiny, we could be required to invest substantial additional time and funds and divert time and resources from other corporate purposes to remedy any identified deficiency.
All of the foregoing laws and regulations are complex, evolving, unclear and inconsistent across various jurisdictions and we are required to expend significant resources in order to maintain our monitoring of, and compliance with, such laws and regulations. We continually develop improvements to our existing products and services as well asintroduce new products and services. Many of these improvements or new products and services may implicate regulations to which we may not already be subject or with which we may not have experience. Any failure on our part to comply with
these and other applicable laws and regulations could result in decreasing the demand for these products and services, increasing our potential liability or increase or costs, regulatory fines, suspensions of personnel or other sanctions, including revocation of our subsidiaries as an investment adviser or broker‑dealer, as the case may be, which could, among other things, require changes to our business practices and scope of operations or harm our reputation. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.
Changes to the laws or regulations applicable to us or to our clients could adversely affect our results of operations, financial condition or business.
We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC or other U.S. or foreign governmental regulatory authorities or self‑regulatory organizations that supervise the financial markets around the world. In addition, we may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self‑regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any current proposals will become law, and it is difficult to predict how any changes or potential changes could affect our business. Changes to laws or regulations could increase our potential liability in connection with the investment solutions and other services that we provide. The introduction of any new laws orand technological enhancements to address our clients’ changing needs, market changes, regulations, could make our abilityand technological developments and failure to comply with applicable laws and regulations more difficult and expensive. Any of the foregoingdo so could have a material adverse effect on our results of operations, financial condition or business.
A deemed “change of control”
The market for our investment solutions and services is characterized by shifting client demands, evolving market practices, new and evolving regulations, and for some of our
company could require usinvestment solutions and services, rapid technological change. Changing client demands, new market rules and practices, or new technologies can render existing investment solutions and services obsolete and unmarketable. As a result, our future success will continue to
obtaindepend upon our ability to develop new investment solutions and services, and service and technological enhancements that address the
consentfuture needs of our
target markets and respond to technological and market changes. We incurred technology development costs of approximately $112 million, $80 million and $72 million in the years ended December 31, 2022, 2021 and 2020, respectively. We expect that our technology development costs will continue at this level or they may increase in the future. We may not be able to accurately estimate the impact of new investment solutions and services on our business or how their benefits will be perceived by our clients. Further, we may not be successful in developing, introducing, marketing and licensing our new investment solutions or services or investment solution or service enhancements on a timely and cost effective basis, or at all, and our new investment solutions and services and enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. In addition, clients
and a failure to do so properlymay delay purchases in anticipation of new investment solutions or services or enhancements. Any of these factors could
materially adversely affect our results of operations, financial condition or business.
Under
As a global organization, our business is susceptible to risks associated with our international operations.
We currently maintain international operations in India, the AdvisersUnited Kingdom, Canada and Australia, lease space in other jurisdictions outside of the United States for the purpose of gathering data, and have customers located around the globe. Managing a global organization outside of the United States is difficult and time-consuming and introduces risks that we may not face with our operations and sales in the United States. These risks include:
•the burdens of complying with a wide variety of foreign regulations, laws and legal standards, including privacy, data security, tax and employment, some of which may be materially different or more stringent than those of the United States;
•regional data privacy laws that apply to the transmission of data across international borders;
•lack of familiarity with, and unexpected changes in, foreign regulatory requirements;
•customers’ unfamiliarity with and concerns regarding laws and regulations of the United States that may impact our business operations in their jurisdictions;
•negative, local perception of industries and customers that we may pursue;
•laws and business practices favoring local competitors;
•localization of our solutions, including unanticipated costs related to translation into foreign languages and adaptation for local practices and regulatory requirements;
•different pricing environments;
•difficulties in managing and staffing international operations;
•reduced or varied protection for intellectual property rights in some countries;
•compliance with laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our solutions in certain foreign markets, and the risks and costs of compliance;
•fluctuations in currency exchange rates;
•potentially adverse tax consequences, including the complexities of foreign value added tax systems, difficulty in interpreting international tax laws and restrictions on the repatriation of earnings;
•increased financial accounting and reporting burdens and complexities; and
•political, social and economic instability abroad, terrorist attacks and security concerns in general.
Operating in international markets also requires significant management attention and financial resources. A component of our growth strategy involves the further expansion of our operations and the development of new customer relationships internationally. As we seek to expand internationally, we will need to develop relationships with additional partners and add internal capabilities to effectively manage the operational, financial, legal and regulatory requirements and risks associated with our international operations. The investment advisory agreements entered into bywe make and additional resources we use to expand our investment adviser subsidiariesoperations, target new international customers, expand our presence globally within our existing customers and manage operational and sales growth in other countries may not be assigned without the client’s consent. Under the Investment Company Act, advisory agreements with registered funds terminate automatically upon assignmentproduce desired levels of revenue or profitability, which could adversely affect our business and any assignment of an advisory agreement must be approved by the board of directors and the shareholders of the registered fund. Under the Advisers Act and the Investment Company Act, such an assignment may be deemed to occur upon a change of control of the Company. A change of control includes either gaining or losing a “controlling person.” Whether someone is a controlling person for these purposes depends significantly on the specific facts and circumstances. There can be no assurance that if we undergo a change of control, we would be successful in obtaining all necessary consents or that the method by which we obtain such consents could not be challenged at a later time. operating results.
If we are unable to obtain all necessary consentseffectively manage certain risks and challenges related to our India operations, our business could be harmed.
Our India operations are a key factor to our success. We believe that our significant presence in India provides certain important advantages for our business, such as direct access to a large pool of skilled professionals and assistance in growing our business internationally. However, it also creates certain risks that we must effectively manage. As of December 31, 2022, approximately 1,400 of our approximate 3,400 total employees were based in India. Wage costs in India for skilled professionals are currently lower than in the United States for comparably skilled professionals. However, wages in India are increasing at a faster rate than in the United States, which could result in us incurring increased costs for technical professionals and reduced margins. There is intense competition in India for skilled technical professionals, and we expect such competition to increase. As a result, we may be unable to retain our current employee base in India or
hire additional new talent or do so cost-effectively. In addition, India has experienced significant inflation, low growth in gross domestic product and shortages of foreign exchange. India also has experienced civil unrest and terrorism and, in the past, has been involved in conflicts with neighboring countries. The occurrence of any of these circumstances could result in disruptions to our India operations, which, if
such a challenge were to be successful itcontinued for an extended period of time, could have a material adverse effect on our
results of operations, financial condition or business.
We rely on exemptions from certain laws and if for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third‑party claims and our business could be materially and adversely affected.
We regularly rely on exemptions from various requirements of the Exchange Act, the Advisers Act, the Investment Company Act and ERISA in conducting our activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third‑party claims and our business could be materially and adversely affected.
If government regulation of the Internet or other areas of our business changes, or if consumer attitudes toward use of the Internet change, we may need to change the manner in which we conduct our business or incur greater operating expenses.
The adoption, modification or interpretation of laws or regulations relating to the Internet or other areas of our business could adversely affect the manner in which we conduct our business. Such laws and regulations may cover sales practices, taxes, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts, consumer protection, broadband residential Internet access and the characteristics and quality of services. Moreover, it is not clear how existing laws governing these matters apply to the Internet. If we are requiredunable to complyeffectively manage any of the foregoing risks related to our India operations, our development efforts could be impaired, our growth could be slowed, and our operating results could be negatively impacted.
We operate in highly competitive industries, with new regulationsmany firms competing for business from financial advisors and financial institutions on the basis of a number of factors, including the quality and breadth of investment solutions and services, ability to innovate, reputation and the prices of services and this competition could hurt our financial performance.
We compete with many different types of companies that vary in size and scope, including custodians, turnkey asset management platforms, data and analytics providers, and other financial technology companies. Representative competitors include Pershing LLC (a subsidiary of BNY Mellon Corporation), AssetMark, Inc., Advent Software (a subsidiary of SS&C Technologies Holdings, Inc.) and Orion Advisor Services in our Envestnet Wealth Solutions business and Intuit, Inc., Plaid Inc. and Fiserv, Inc in our Envestnet Data & Analytics business. Competition is discussed in greater detail under “Business—Competition” included in this Annual Report. In addition, some of our clients have developed or
may develop the in‑house capability to provide the technology and/or investment advisory services they have retained us to perform. These clients may also offer internally developed services to their financial advisors, obviating the need to hire us, and they may offer these services to third‑party financial advisors or financial institutions, thereby competing directly with us for that business.
legislationMany of our competitors in this business have significantly greater resources than we do. These resources may allow our competitors to respond more quickly to changes in demand for investment solutions and services, to devote greater resources to developing and promoting their services and to make more attractive offers to potential clients and strategic partners, which could hurt our financial performance.
We may lose clients as a result of the sale or new interpretationsmerger of existing regulations or legislation, wea client, a change in a client’s senior management, competition from other financial advisors and financial institutions and for other reasons. We also face increased competition due to the current trend of industry consolidation. If large financial institutions that are not our clients are able to attract assets from our clients, our ability to grow revenues and earnings may be requiredadversely affected.
We compete with many companies that have greater name recognition, substantially greater financial, technical, marketing and other resources, the ability to incurdevote greater resources to the promotion, sale and support of their solutions, more extensive customer bases and broader customer relationships, and longer operating histories than we have.
We expect competition to increase as other companies continue to evolve their offerings and as new companies enter our market. New companies entering our market may choose to offer internally-developed solutions at little or no additional expensescost to their end users by bundling them with their existing applications and solutions. Increased competition is likely to result in pricing pressures, which could negatively impact our gross margins.
Our failure to successfully compete in any of the above‑mentioned areas could result in reduced revenues or
alter our business model, eitherlack of
market share which could have a material adverse effect on our results of operations, financial condition or business.
Competition could also affect the revenue mix of services we provide, resulting in decreased revenues in lines of business with higher profit margins.
We are subject to liability for losses that result from potential, perceived or actual conflicts of interest.
Potential, perceived and actual conflicts of interest are inherent in our existing and future business activities and could give rise to client dissatisfaction, litigation or regulatory enforcement actions. In particular, we pay varying fees to third‑party asset managers and custodians and our financial advisor customers, or their clients, could accuse us of directing them toward those asset managers or custodians that charge us the lowest fees and therefore provide us with a greater financial advantage. In addition, we offer proprietary mutual funds and proprietary investment strategies through our internal investment management and portfolio consulting group, and financial advisors or their clients could conclude that we favor our proprietary investment products because of their belief that we earn higher fees when our proprietary investment products are used. Adequately addressing conflicts of interest is complex and difficult. If we fail, or appear to fail, to adequately address potential, perceived or actual conflicts of interest, the resulting negative public perception and reputational harm could materially adversely affect our client relations or ability to enter into contracts with new clients and, consequently, our results of operations, financial condition and business.
We are substantially dependent on our intellectual property rights, and a failure to protect these rights could adversely affect our results of operations, financial condition or business.
We have made substantial investments in software and other intellectual property on which our business is highly dependent.
We rely on a combination of patent, trade secret, trademark and copyright laws, confidentiality and nondisclosure agreements and other contractual and technical security measures to protect our proprietary technology, all of which provide only limited protection. As of December 31,
2017,2022, notwithstanding expiration of some of our oldest patents, we had
approximately 80over 50 issued patents in the U.S. and foreign jurisdictions as well as additional pending patent applications in the U.S. and foreign jurisdictions.
Some of these patents relate to technology that is included in our data aggregation platform and expire beginning in 2018. Any loss of our intellectual property rights, or any significant claim of infringement or indemnity for violation of the intellectual property rights of others, could have a material adverse effect on our results of operations, financial condition or business.Many of our key technologies, investment solutions or services are not covered by any copyright registration, issued patent or patent application. We are the owner of certain patent rights, registered trademarks in the United States, including “ENVESTNET,” and we claim common law rights in other trademarks that are not registered. We cannot guarantee that:
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| | our intellectual property rights will provide competitive advantages to us;
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| | our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
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| | our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;
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| | any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;
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| | our trademark applications will lead to registered trademarks; or
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| | competitors will not design around our intellectual property rights or develop similar technologies, investment solutions or products; or that we will not lose the ability to assert our intellectual property rights against others.
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We are alsorely on a party to a number of third‑party intellectual property license agreements. Some of these license agreements require us to make one‑time payments or ongoing subscription payments. We cannot guarantee that the third‑party intellectual property we license will not be licensed to our competitors or others in our industry. In the future, we may need to obtain additional licenses or renew existing license agreements. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms, or at all. In addition, we have granted our customers certain rights to use our intellectual property in the ordinary course of our business. Some of our customer agreements restrict our ability to license or develop certain customized technology or services within certain markets or to certain competitors of our customers. For example, our agreement with Fidelity restricts our ability to develop an enterprise‑level integration or combination of productspatent, trade secret, trademark and services substantially similar to the technology platform we have developed for Fidelity. Some of our customercopyright laws, confidentiality and nondisclosure agreements grant our customers ownership rights with respect to the portion of the intellectual property we have developed or customized for our customers. In addition, some of our customer agreements require us to deposit the source code to the customized technology and investment solutions with a source code escrow agent, which source code may be released in the event we enter into bankruptcy or are unable to provide support and maintenance of the technology or investment solutions we have licensed to our customers. These provisions in our agreements may limit our ability to grow our business in the future.
Third parties may sue us for intellectual property infringement or misappropriation which, if successful, could require us to pay significant damages or make changes to the investment solutions or services that we offer.
We cannot be certain that our internally developed or acquired technologies, investment solutions or services do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third partiescontractual and may be subject to claims of infringement if such parties do not possess the necessary intellectual property rights to the products they license to us. The risk of infringement claims against us will increase if more of our competitors are able to obtain patents for investment solutions or services or business processes. In addition, we face additional risk of infringement or misappropriation claims if we hire an employee who possesses third party proprietary information who decides to use such information in connection with our investment solutions, services or business processes without such third‑party’s authorization. We have in the past been and may in the future be subject to legal proceedings and claims that we have infringed or misappropriated the intellectual property rights of a third party. These claims sometimes involve patent holding companies who have no relevant product revenues and against whom our own proprietary technology may therefore provide little or no deterrence. In addition, third parties may in the future assert intellectual property infringement claims against our customers, which, in certain circumstances, we have agreed to indemnify. Any intellectual property related infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and could divert management resources and attention. Moreover, should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages or make changes to the investment solutions and services that we offer. Any of the foregoing could prevent us from competing effectively, result in substantial costs to us, divert management’s attention and our resources away from our operations and otherwise harm our reputation.
If our intellectual property and proprietary technology are not adequately protected to prevent use or appropriation by our competitors, our business and competitive position would suffer.
Our future success and competitive position depend in part on our abilitytechnical security measures to protect our intellectual property rights. The steps we have taken to protectproprietary technology, all of which provide only limited protection. Despite our intellectual property rights may be inadequate to prevent the misappropriation of our proprietary technology. There can be no assurance that others will not develop or patent similar or superior technologies, investment solutions or services. Unauthorizedefforts, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our intellectual property rights without paying us for doing so, which could harm our business. Policing unauthorized use of proprietary technology is difficult and expensive and our monitoring and policing activities may not be sufficient to identify any misappropriation and protect our proprietary technology. In addition, third parties may knowingly or unknowingly infringe our trademarks and other intellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. If litigation is necessary to protect and enforce our intellectual property rights, any such litigation could be very costly and could divert management attention and resources. If we are unable to protect our intellectual property rights or if third parties independently develop or gain access to our or similar technologies, investment solutions or services, our results of operations, financial condition and business could be materially adversely affected.
The use
We cannot guarantee that:
•our intellectual property rights will provide competitive advantages to us;
•our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
•our intellectual property rights will be enforced in investment solutionsjurisdictions where competition may exposebe intense or where legal protection may be weak;
•any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;
•our trademark applications will lead to registered trademarks;
Our reliance on outsourcing arrangements subjects us to risk and may disrupt or adversely affect our operations.
We have entered into an agreement with Tata Consulting Services (“TCS”) pursuant to which we have outsourced certain development, engineering and back office functions of the Envestnet Data & Analytics business located in Bangalore, India to increase operations scale and business agility. Although we have service-level arrangements with TCS and a variety of contractual obligations and options designed to (a) monitor TCS’s performance and (b) incentivize a high level of performance by TCS, because we do not ultimately control its performance, our reliance on a third-party vendor could subject us to additional
risks and harm ourrisk, including the loss of valuable intellectual property,
rights.To a limited extent,data security issues and non-compliance with data protection and privacy laws. If TCS fails to perform as required or terminates our arrangements, we rely on open source code to develop our platform, investmentmight not realize the expected financial and other solutionsoperational benefits of the outsourcing arrangement and support for our internal systems and infrastructure. While we monitor our use of open source code to attempt to avoid subjecting our solutions to conditions we do not intend, such use could inadvertently occur. Additionally, if a third‑party software provider has incorporated certain types of open source code into software we license from such third party for our solutions, we could, under certain circumstances,may be required to disclose the source code forpursue new third-party relationships, which could significantly disrupt Envestnet Data & Analytics’ operations and adversely affect our solutions. This could harm our intellectual property position and have a material adverse effect on our results of operations,business, financial condition, and business.
Confidentiality agreements with employees, consultants and othersoperations. We may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resourcesalso be unable to the development of our proprietary technologies, investment solutions and services. In order to protect our proprietary rights,establish comparable new vendor relationships on as favorable terms or at all. Even if we enter into confidentiality agreements with our employees, consultants and independent contractors. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our technologies, investment solutions or products or obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of such unauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time‑consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failureare able to obtain replacement services in these scenarios, there may be a disruption or maintain trade secret protection could reduce any competitive advantagedelay in our ability to operate our Envestnet Data & Analytics business, and the replacement services might be more expensive than those we have developedcurrently. The process of transitioning services and cause usdata from one provider to lose customers or otherwise harm our business.
Our failureanother can be complicated, time-consuming, expensive and may lead to successfully integrate acquisitionssignificant disruptions in Envestnet Data & Analytics’ business and could strain our resources. In addition, there are significant risks associated with growth through acquisitions, which may materially adversely affect our business, financial condition, and results of operations, financial condition or business.
operations.
Risks Related to our Acquisitions
Our growth strategy includes growing through acquisitions and acquisitions involve a number of risks.
We expect to grow our business by, among other things, making acquisitions. Over the past
fourfive years we have completed
five significanta number of acquisitions. Acquisitions involve a number of risks. They can be time‑consuming and may divert management’s attention from day‑to‑day operations. Financing an acquisition could result in dilution from issuing equity securities or a weaker balance sheet from using cash or incurring debt. Acquisitions might also result in losing key employees. In addition, we may fail to successfully integrate acquisitions. We may also fail to generate enough revenues or profits from an acquisition to earn a return on the associated purchase price.
To the extent we grow our business through acquisitions, any such future acquisitions could present a number of other risks, including:
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| | failure to integrate the operations or management of any acquired operations or assets successfully and on a timely and cost effective basis;
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•incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; | ·
| | insufficient knowledge of the operations and markets of acquired businesses;
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•failure to integrate the operations or management of any acquired operations or assets successfully and on a timely and cost effective basis;•insufficient knowledge of the operations and markets of acquired businesses; | ·
| | failure to obtain necessary customer consents or retain key customers;
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•loss of key personnel; | ·
| | diversion of management’s attention from existing operations or other priorities;
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•failure to obtain necessary customer consents or retain key customers; | ·
| | increased costs or liabilities as a result of historical, undetected or undisclosed legal, regulatory or financial issues related to acquired operations or assets; and
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•diversion of management’s attention from existing operations or other priorities; | ·
| | inability to secure, on terms we find acceptable, sufficient financing that may be required for any such acquisition or investment.
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•increased costs or liabilities as a result of historical, undetected or undisclosed legal, regulatory or financial issues related to acquired operations or assets; and•inability to secure, on terms we find acceptable, sufficient financing that may be required for any such acquisition or investment.
In addition, if we are unsuccessful in completing acquisitions of other businesses, operations or assets or if such opportunities for expansion do not arise, our results of operations, financial condition or business could be materially adversely affected.
Risks Related to our Information Technology and Data
Our failure to successfully execute the conversion of our clients’ assets from their technology platform to our platforms in a timely and accurate manner could have a material adverse effect on our results of operations, financial condition or business.
When we begin working with a new client, or acquire new client assets through an acquisition or other transaction, we are often required to convert all or a significant portion of assets from the clients’ technology platform to our technology platforms. These conversions present significant technological and operational challenges that can be time‑consuming and may divert management’s attention from other operational activities. If we fail to successfully complete our conversions in a timely and accurate manner, we may be required to expend more time and resources than anticipated, which could erode the profitability of the client relationship. In addition, any such failure may harm our reputation and may make it less likely that prospective clients will commit to working with us. Any of these risks could materially adversely affect our results of operations, financial condition or business.
Our hosting, collection, use and storage of customer information and data require the implementation of effective security controls, and a data security breach could disrupt our business, will suffer ifresult in the disclosure of confidential information, expose us to liability and protracted and costly litigation, adversely affect our reputation and revenue and cause losses.
We, and our customers through which our solutions are made available to end users, collect, use, transmit and store confidential financial information, such as bank account numbers, social security numbers, non-public personally identifiable information, portfolio holdings, credit card data and outstanding debts and bills. The measures we take to provide security for collection, use, storage, processing and transmission of confidential end user information may not be effective to protect against data security breaches by third parties. We use commercially available security technologies, including hardware and software data encryption techniques and multi-layer network security measures, to protect transactions and information. Although we encrypt data fields that typically include sensitive, confidential information, other unencrypted data fields may include similar information that could be accessible in the event of a security breach. We use security and business controls to limit access and use of confidential end user information. Although we require our customers and third-party suppliers to implement controls similar to ours, the technologies and practices of our customers and third-party suppliers may not meet all of the requirements we include in our contracts and we may not have the ability to effectively monitor the implementation of security measures of our customers and third-party suppliers. In a number of cases, our customers build and host their own web applications and access our solutions through our APIs. In these cases, additional risks reside in the customer’s system with respect to security and preventive controls. As a result, inadequacies of our customers’ and third-party suppliers’ security technologies and practices may only be detected after a security breach has occurred. Errors in the collection, use, storage or transmission of confidential end user information may result in a breach of privacy or theft of assets.
The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Criminals are using increasingly sophisticated techniques to engage in illegal activities involving solutions such as ours or involving end user information, such as counterfeiting, fraudulent payment and identity theft. Because the techniques used by hackers change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition to hackers, it is possible that a customer could gain unauthorized access to our database through the use of our solutions. Improper access to our systems or databases by hackers or customers intending to commit criminal activities could result in the theft, publication, deletion or modification of confidential end user information. An actual or perceived breach of our security may require notification under applicable data privacy regulations.
A data security breach of the systems on which sensitive user data and account information are stored could lead to private claims or regulatory actions, including fines, against us. Many of our agreements with clients do not
keep up with rapid technologicallimit our potential liability for breaches of confidentiality, and consequential damages. If any person, including any of our employees, contractors, or consultants, penetrates our network security, misappropriates or mishandles sensitive data, inadvertently or otherwise, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change
evolving industry standardsour business practices or
changing requirementspricing structure, any of
clients.We expect technological developments to continue atwhich could have a rapid pace in our industry. Our success will depend, in part,material adverse effect on our ability to:
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revenue and profitability. In addition, our customer contracts typically require us to meet specified minimum system security and privacy standards. If a data security breach occurs and we have not been in compliance with these standards, we could be liable for breach of contract claims brought by our customers. | ·
| | recruit and retain skilled technology professionals;
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| | enhance our current investment solutions and services;
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| | develop new investment solutions and services that meet changing client needs;
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| | implement changes to our investment solutions and services to meet changing regulatory requirements;
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| | advertise and market our investment solutions and services;
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| | protect our proprietary technology and intellectual property rights; and
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| | influence and respond to emerging industry standards and other technological changes.
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We must accomplish these tasks incould also be required to indemnify our customers for third-party claims, fines, penalties and/or other assessments imposed on our customers as a timely and cost‑effective mannerresult of any data security breach and our failureliability could exceed our insurance coverage or ability to do sopay. Our registered investment adviser subsidiaries may face SEC, FINRA and state enforcement actions, including monetary fines, if it is determined that we had inadequate data security measures in place to prevent such theft.
Our security procedures and technologies are regularly audited by independent security auditors engaged by us, and many of our prospective and current customers conduct their own audits or review the results of such independent security audits as part of their evaluation of our solutions. We are also periodically audited by regulatory agencies to which our operations or our customers are subject. Adverse findings in these audits or examinations, even if not accompanied by any data security breach, could materiallyadversely affect our ability to maintain our existing customer relationships and establish new customer relationships.
Data security breaches, acts of fraud involving our solutions, or adverse findings in security audits or examinations, could result in reputational damage to us, which could reduce the use and acceptance of our solutions, cause our customers to cease doing business with us and/or have a significant adverse impact on our revenue and future growth prospects. Further, any of these events could lead to additional regulation and oversight by federal and state agencies, which could impose new and costly compliance obligations and may lead to the loss of our ability to make our solutions available.
Risks Related to Laws and Regulations
Our operations are subject to extensive government regulation, and compliance failures or regulatory action against us could adversely affect our results of operations, financial condition or business.
The financial services industry is among the most extensively regulated industries in the United States. We must continueoperate investment advisory, broker‑dealer, and mutual fund lines of business, each of which is subject to introduce newa specific and extensive regulatory scheme. In addition, we are subject to numerous laws and regulations of general application. It is very difficult to predict the future impact of the legislative and regulatory requirements affecting our business and our clients’ businesses.
Certain of our subsidiaries are registered as “investment advisers” with the SEC under the Advisers Act and are regulated thereunder. In addition, many of our investment advisory services are conducted pursuant to the non‑exclusive safe harbor from the definition of an “investment company” provided under Rule 3a‑4 under the Investment Company Act. If Rule 3a‑4 were to cease to be available, or if the SEC were to modify the rule or its interpretation of how the rule is applied, our business could be adversely affected. Certain of our registered investment adviser subsidiaries provide advice to mutual fund clients. Mutual funds are registered as “investment companies” under the Investment Company Act. Our advisory subsidiaries provide advice on assets subject to the ERISA. The Advisers Act, Investment Company Act and ERISA, together with related regulations and interpretations of the SEC and the Department of Labor, impose numerous obligations and restrictions on investment advisers and mutual funds, including requirements relating to the safekeeping of client funds and securities, limitations on advertising, disclosure and reporting obligations, prohibitions on fraudulent activities, restrictions on transactions between an adviser and its clients, and between a mutual fund and its advisers and affiliates, and other detailed operating requirements, as well as general fiduciary obligations.
Envestnet Data & Analytics is examined on a periodic basis by various regulatory agencies. For example, it is a supervised third-party technology service provider subject to multi-agency supervisory examinations in a wide variety of areas based on published guidance by the Federal Financial Institutions Examination Council. These examinations include examinations of our management, acquisition and development activities, support and delivery, IT, and disaster preparedness and business recovery planning. The Office of the Comptroller of the Currency is the agency in charge of these examinations. If deficiencies are identified, customers may choose to terminate or reduce their relationships with us.
Either as a result of direct regulation or obligations under customer agreements, many of our subsidiaries are required to comply with certain provisions of the Gramm-Leach-Bliley Act, related to the privacy of consumer information and may be subject to other privacy and data security laws because of the solutions we provide. In addition, numerous regulations have been proposed and are still being written to implement the Dodd-Frank Act for enhanced due diligence of the internal systems and processes of companies like ours by their regulated customers. If we are required to make changes to our internal processes and solutions as result of this heightened scrutiny, we could be required to invest substantial additional time and funds and divert time and resources from other corporate purposes to remedy any identified deficiency.
All of the foregoing laws and regulations are complex, evolving, unclear and inconsistent across various jurisdictions and we are required to expend significant resources in order to maintain our monitoring of, and compliance with, such laws and regulations. We continually develop improvements to our existing products and services as well as new products and services.
Many of these improvements or new products and services may implicate regulations to which we may not already be subject or with which we may not have experience. Any failure on our part to comply with these and other applicable laws and regulations could result in decreasing the demand for these products and services, increasing our potential liability or increase or costs, regulatory fines, suspensions of personnel or other sanctions, including revocation of our subsidiaries as an investment
solutionadviser or broker‑dealer, as the case may be, which could, among other things, require changes to our business practices and
service enhancements to addressscope of operations or harm our
clients’ changing needs, market changes, regulations, and technological developments and failure to do soreputation. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.
We regularly rely on exemptions from various requirements of the Exchange Act, the Advisers Act, the Investment Company Act and ERISA in conducting our activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third‑party claims and our business could be materially and adversely affected.
Privacy laws and regulations, industry standards and contractual obligations, and changes in these laws, regulations, standards and obligations, can affect the way in which we do business and cause us to incur significant costs and failure to comply with these requirements could negatively affect our business.
As part of our business, we de-identify and then provide consumer transaction data panels to customers to support data analytics and market research. We collect the underlying transaction data when requested by each applicable consumer. These activities are subject to numerous laws, regulations, industry standards and contractual obligations. We have incurred, and will continue to incur, significant expenses to comply with these requirements. New laws have been passed by several jurisdictions regulating the use of personal data and setting requirements for the de-identification of data. Other jurisdictions are considering imposing additional requirements. As our business continues to expand to new industry segments that may be more highly regulated for privacy and data security, and to countries outside the United States that have more strict data protection laws, we may be subject to increased compliance requirements and costs which could have a material adverse effect on our results of operations, financial condition or business. Industry practices relating to this business activity may change. We are in the process of negotiating new agreements with certain financial institutions governing our access to consumer transaction data when requested by the consumer. These agreements may contain additional requirements relating to our processing and provision of de-identified data. Additionally, our data panel customers might demand that the data that they purchase meet additional data sourcing standards, which we may not satisfy in all cases in the future. Failure to comply with existing or new laws, regulations, standards and obligations could result in loss of rights to use source data for data panels, loss of data panel subscriptions, fines, sanctions or other penalties, which could have a material adverse effect on our results of operations, financial condition or business.
State or federal legislation, regulatory requirements, or regulatory enforcement applicable to this business activity may also change. Privacy groups, governmental agencies and individuals also may seek to restrict or prevent, or may advocate for greater regulation of, our provision of data panels to data panel customers. For example, in January 2020, three members of Congress wrote to the Federal Trade Commission (the “FTC”) to request a review of these business practices. In February 2020, we received a civil investigative demand from the FTC for documents and information relating to our data collection, assembly, evaluation, sharing, correction and deletion practices, with which demand we fully complied. In November, 2020, we were informed by the FTC that it had closed the matter with no further action.
Our use of data panels is subject to the agreement of our business customers from which we obtain the underlying data or for which we source their underlying data. Although our arrangements with these customers generally permit us to use non-identified transaction level data, some customers decline to permit the use of this data. The marketinability to use data may limit the usefulness of our solutions and services which could adversely affect our business. For some of our solutions, we contractually require our customers to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of information through our solutions. A failure by our customers to comply with these contractual requirements could limit our use of the related data and therefore the usefulness of our solutions and services which could adversely affect our business. Furthermore, a failure by our customers to comply with these contractual requirements could subject us to claims or liability for unauthorized use or disclosure of information. These claims or liabilities could subject us to unexpected costs and have a material adverse effect on our results of operations, financial condition or business.
Our investment advisory services may subject us to liability for losses that result from potential, perceived or actual breaches of our fiduciary duties.
Our investment advisory services involve fiduciary obligations that require us to act in the best interests of our clients, and we may be sued and face liabilities for actual or claimed breaches of our fiduciary duties. Because we provide investment advisory services, both directly and indirectly, with respect to substantial assets we could face substantial liability if it is determined that we have breached our fiduciary duties. In certain circumstances, which generally depend on the types of investment solutions and services is characterized by shiftingwe are providing, we may enter into client demands, evolving market practices, newagreements jointly with advisors and evolving regulations,retain third‑party investment money managers on behalf of clients. As a result, we may be included as a defendant in lawsuits against financial advisors and third‑party investment money managers that involve claims of breaches of the duties of such persons, and we may face liabilities for somethe improper actions and/or omissions of such advisors and third‑party investment money managers. In addition, we may face claims based on the results of our investment advisory recommendations, even in the absence of a breach of our fiduciary duty. This risk may be heightened during periods when equity or other financial markets are declining in value or are particularly volatile, or when clients or investors with financial advisory clients are experiencing losses. Such claims and liabilities could have a material adverse effect on our results of operations, financial condition or business.
We may become subject to liability based on the use of our investment solutions and services rapid technological change. Changing client demands, new market rules and practices, or new technologies can render existingby our clients.
Our investment solutions and services obsoletesupport the investment processes of our clients, which, in the aggregate, manage billions of dollars of assets. Our client agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or third parties based on the use of our investment solutions and unmarketable. Asservices. However, these provisions have certain exceptions and could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a result,significant commitment of our future success will continue to depend uponmanagement, personnel, financial and other resources and could have a negative impact on our ability to develop newreputation. Such claims and lawsuits could therefore have a material adverse effect on our results of operations, financial condition or business.
Furthermore, our clients may use our investment solutions and services and investment solution and service enhancements that addresstogether with software, data or products from other companies. As a result, when problems occur, it might be difficult to identify the future needssource of our target markets and respond to technological and market changes. We incurred technology development costs of approximately $40,800, $38,100 and $12,600 in the years ended December, 31, 2017, 2016 and 2015, respectively. We expect thatproblem. Even when our technology development costs will continue at this level or they may increase in the future. We may not be able to accurately estimate the impact of new investment solutions and services on our business or how their benefits will be perceived by our clients. Further, we maydo not be successful in developing, introducing, marketing and licensing our new investment solutions or services or investment solution or service
enhancements on a timely and cost effective basis, or at all, and our new investment solutions and services and enhancements may not adequately meetcause these problems, the requirements of the marketplace or achieve market acceptance. In addition, clients may delay purchases in anticipation of new investment solutions or services or enhancements. Anyexistence of these factorserrors might cause us to incur significant costs and divert the attention of our management and technical personnel, any of which could materially adversely affect our results of operations, financial condition or business.
If our investment solutions and services fail to perform properly due to undetected errors or similar problems, our results of operations, financial condition and business could be materially adversely affected.
Investment solutions and services we develop or license may contain undetected errors or defects despite testing. Such errors can exist at any point in the life cycle of our investment solutions or services, but are frequently found after introduction of new investment solutions and services or enhancements to existing investment solutions or services. We
continually introduce new investment solutions and services and new versions of our investment solutions and services. Despite internal testing and testing by current and potential clients, our current and future investment solutions and services may contain serious defects or malfunctions. If we detect any errors before release, we might be required to delay the release of the investment solution or service for an extended period of time while we address the problem. We might not discover errors that affect our new or current investment solutions, services or enhancements until after they are
a multinational organization faced with increasingly complex tax issues in several jurisdictions,deployed, and we
could be obligatedmay need to
pay additional taxes in various jurisdictions.As a multinational organization, weprovide enhancements to correct such errors. Errors may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, whichoccur that could have a material adverse effect on our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. For example, the taxing authorities of Indiaoperations, financial condition or business and other jurisdictions in which we operate may challenge our methodologies for allocating income and expense under our intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business is not consistent with the manner in which we report our income to the jurisdictions. If such a disagreement were to occur, and our positions were not sustained, we could be required to pay additional taxes, interest and penalties, resulting in higher effective tax rates, reduced cash flows and higher expenses.
Changes in tax law could adversely affect an investment in our shares.
New U.S. federal tax law was recently enacted containing significant changes. The new law is complex and lacks developed administrative guidance; thus, the full impact to us or our stockholders is currently unclear. This new law or future tax law changes, administrative guidance or U.S. court decisions regarding tax law could have an adverse impact on us or our stockholders.
We face exposure to foreign currency exchange rate fluctuations.
We have costs denominated in foreign currencies, primarily the Indian Rupee, and our revenue is primarily denominated in the U.S. dollar. This exposes us to the risk of fluctuations in foreign currency exchange rates. Accordingly, changes in exchange rates, and in particular a weakening of the U.S. dollar, would negatively affect our expenses and other operating results as expressed in U.S. dollars.
If we are unable to effectively manage certain risks and challenges related to our India operations, our business could be harmed.
Our India operations are a key factor to our success. We believe that our significant presence in India provides certain important advantages for our business, such as direct access to a large pool of skilled professionals and assistance in growing our business internationally. However, it also creates certain risks that we must effectively manage. As of December 31, 2017, approximately 2,200 of our total employees were based in India. Wage costs in India for skilled professionals are currently lower than in the United States for comparably skilled professionals. However, wages in India are increasing at a faster rate than in the United States, which could result in us incurring increased costs for technical professionalsharm to our reputation, lost sales, delays in commercial release, third‑party claims, regulatory actions, contractual disputes, contract terminations or renegotiations, or unexpected expenses and reduced margins. There is intense competition in India for skilled technical professionals,diversion of management and we expect such competitionother resources to increase. As a result, we may be unable to cost-effectively retain our current employee base in India or hire additional new talent.remedy errors. In addition, India has experienced significant inflation, low growth in gross domestic productnegative public perception and shortages of foreign exchange. India also has experienced civil unrestreputational damage caused by such claims would adversely affect our client relationships and terrorism and, in the past, has been involved in conflicts with neighboring countries. The occurrence of anyour ability to enter into new contracts. Any of these circumstances could result in disruptions to our India operations, which, if continued for an extended period of time,problems could have a material adverse effect on our results of operations, financial condition and business.
We could face liability for certain information we provide, including information based on data we obtain from other parties.
We may be subject to claims for securities law violations, negligence, breach of fiduciary duties or other claims relating to the information we provide. For example, individuals may take legal action against us if they rely on information we have provided and it contains an error. In addition, we could be subject to claims based upon the content that is accessible from our website through links to other websites. Moreover, we could face liability based on inaccurate information provided to us by others. Defending any such claims could be expensive and time‑consuming, and any such claim could materially adversely affect our results of operations, financial condition or business.
Our charter provides that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between us and our stockholders, which could increase costs to bring a claim, discourage claims or limit the ability of our stockholders to bring a claim in a judicial forum viewed by the stockholders as more favorable for disputes with us or our directors, officers or other employees.
Our charter provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any (i) derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Although we believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, this choice of forum provision may increase costs to bring a claim, discourage claims or limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us or our directors, officers and other employees. The exclusive forum provision in our charter will not preclude or contract the scope of exclusive federal or concurrent jurisdiction for actions brought under the federal securities laws including the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the respective rules and regulations promulgated thereunder.
A deemed “change of control” of our company could require us to obtain the consent of our clients and a failure to do so properly could adversely affect our results of operations, financial condition or business.
Under the Advisers Act, the investment advisory agreements entered into by our investment adviser subsidiaries may not be assigned without the client’s consent. Under the Investment Company Act, advisory agreements with registered funds terminate automatically upon assignment and, any assignment of an advisory agreement must be approved by the board of directors and the shareholders of the registered fund. Under the Advisers Act and the Investment Company Act, such an assignment may be deemed to occur upon a change of control of the Company. A change of control includes either gaining or losing a “controlling person”. Whether someone is a controlling person for these purposes depends significantly on the specific facts and circumstances. There can be no assurance that if we undergo a change of control, we would be successful in obtaining all necessary consents or that the method by which we obtain such consents could not be challenged at a later time. If we are unable to effectively manage anyobtain all necessary consents or if such a challenge were to be successful it could have a material adverse effect on our results of the foregoing risks relatedoperations, financial condition or business.
Risks Related to our India operations,Common Stock
Holders of our development effortscommon stock may be diluted by future issuances of common or preferred stock or convertible securities in connection with our incentive plans, acquisitions or otherwise; and future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.
Our charter authorizes us to issue shares of our common stock and options, rights, warrants and appreciation rights relating to our common stock for the consideration and on the terms and conditions established by our Board of Directors in its sole discretion. We could issue a significant number of shares of common stock, or securities convertible into shares of our common stock, in the future in connection with investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution could be
impaired,significant. Moreover, such dilution could have a material adverse effect on the market price for the shares of our
growth could be slowed, and our operating results could be negatively impacted.
As a global organization, our business is susceptible to risks associatedThe future issuance of shares of preferred stock with our international operations and sales.
We currently maintain international operations in India,voting rights may adversely affect the United Kingdom, Canada and Australia, lease space in other jurisdictions outsidevoting power of the United States for the purposeholders of gathering data, and have customers located around the globe. Managing a global organization and conducting sales outside of the United States is difficult and time-consuming and introduces risks that we may not face with our operations and sales in the United States. These risks include:
| ·
| | the burdens of complying with a wide variety of foreign regulations, laws and legal standards, including privacy, data security, tax and employment, some of which may be materially different or more stringent than those of the United States;
|
| ·
| | regional data privacy laws that apply to the transmission of data across international borders;
|
| ·
| | lack of familiarity with, and unexpected changes in, foreign regulatory requirements;
|
| ·
| | customers’ unfamiliarity with and concerns regarding laws and regulations of the United States that may impact our business operations in their jurisdictions;
|
| ·
| | negative, local perception of industries and customers that we may pursue;
|
| ·
| | laws and business practices favoring local competitors;
|
| ·
| | localization of our solutions, including unanticipated costs related to translation into foreign languages and adaptation for local practices and regulatory requirements;
|
| ·
| | different pricing environments and longer sales cycles;
|
| ·
| | longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
|
| ·
| | difficulties in managing and staffing international operations;
|
| ·
| | reduced or varied protection for intellectual property rights in some countries;
|
| ·
| | compliance with laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our solutions in certain foreign markets, and the risks and costs of compliance;
|
| ·
| | fluctuations in currency exchange rates;
|
| ·
| | potentially adverse tax consequences, including the complexities of foreign value added tax systems, difficulty in interpreting international tax laws and restrictions on the repatriation of earnings;
|
| ·
| | increased financial accounting and reporting burdens and complexities; and
|
| ·
| | political, social and economic instability abroad, terrorist attacks and security concerns in general.
|
Operating in international markets also requires significant management attention and financial resources. A componentshares of our growth strategy involvescommon stock, either by diluting the further expansionvoting power of our operations andcommon stock if the developmentpreferred stock votes together with the common stock as a single class, or by giving the holders of new customer relationships internationally. As we seekany such preferred stock the right to expand internationally, we will needblock an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock. The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to develop relationships with additional partners and add internal capabilities to effectively manage the operational, financial, legal and regulatory requirements and risks associated with our international operations. The investment we make and additional resources we use to expand our operations, target new international customers, expand our presence globally within our existing customers
and manage operational and sales growth in other countries may not produce desired levels of revenue or profitability, whichpreferred stock could adversely affect the market price for our businesscommon stock by making an investment in the common stock less attractive.
We do not currently intend to pay dividends on our common stock for the foreseeable future and
operating results.any share repurchases will be subject to our discretion; consequently, your ability to achieve a return on your investment may depend only on appreciation in the price of our common stock.
We do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any gains on their investment. Investors seeking cash dividends should not purchase our common stock.
Additionally, in 2016, we announced that our Board of Directors authorized a share repurchase program under which we may repurchase up to 2.0 million shares of our outstanding common stock. We retain the ability to repurchase when circumstances warrant and may suspend or discontinue such program at any time. The Inflation Reduction Act of 2022, which was signed into law in August 2022, imposes a 1% excise tax on the fair market value of stock repurchases after December 31, 2022, which may impact our future decisions on how to return value to stockholders in the most tax efficient manner.
Certain provisions in our charter documents and agreements and Delaware law may inhibit potential acquisition bids for our company and prevent changes in our management.
Our certificate of incorporation and bylaws contains provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in management that our stockholders might deem advantageous. As a result of these provisions in our certificate of incorporation, the price investors may be willing to pay for shares of our common stock may be limited.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock.
We do not currently intend to pay dividends on our common stock for the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any gains on their investment. Investors seeking cash dividends should not purchase our common stock.
The conditional conversion feature of our Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of our $172,500 of outstanding Convertible Notes is triggered, holders of the Convertible Notes will be entitled to convert their Convertible Notes at any time during specified periods at their option. We may elect to satisfy our conversion obligation in cash, in shares of our common stock or in a combination of cash and shares of our common stock. If one or more holders elect to convert their Convertible Notes, unless we satisfy our conversion obligation by delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity. Furthermore, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long‑term liability, which would result in a material reduction of our net working capital.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes or purchase the Convertible Notes as required upon a fundamental change, and our existing debt contains, and our future debt may contain, limitations on our ability to pay cash upon conversion or purchase of the Convertible Notes.
Following a fundamental change, holders of Convertible Notes will have the right to require us to purchase their Convertible Notes for cash. A fundamental change may also constitute an event of default or prepayment under, and result in the acceleration of the maturity of, our then‑existing indebtedness. In addition, upon conversion of the Convertible Notes, unless we settle our conversion obligation solely in shares of our common stock (other than cash in lieu of any fractional share), we will be required to make cash payments in respect of the Convertible Notes being surrendered for conversion. We may not have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change purchase price in cash with respect to any Convertible Notes surrendered by holders for purchase upon a fundamental change or make cash payments upon conversions. In addition, restrictions in our Credit Agreement or future credit facilities or other indebtedness, if any, may not allow us to purchase the Convertible Notes upon a fundamental change or make cash payments upon conversions of the Convertible Notes. Our failure to purchase the Convertible Notes upon a fundamental change or make cash payments upon conversions thereof when required would result in an event of default with respect to the Convertible Notes which could, in turn, constitute a default under the terms of our other indebtedness, if any. If the repayment of the related indebtedness were to be accelerated after any
applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Convertible Notes or make cash payments upon conversions thereof.
Due to uncertainty in the application and interpretation of applicable state sales and use tax laws, we may be subject to additional tax liability.
We and our customers are subject to a variety of sales, use and other tax laws in the various states and cities in which we and they do business. These laws and their interpretations change from time to time and often do not address with clarity their applicability to the types of products and services we and our subsidiaries provide. Vendors, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and use taxes, even when owed by the end user. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our products or services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include interest and penalty charges. We are often entitled to seek reimbursement from our customers for any sales and use taxes we pay either under the terms of our customer contracts or under applicable law or legal principles. Nevertheless, our customers might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back taxes and any associated interest and penalties, and if our clients do not reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our products and services to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.
During 2017 and 2016, the Company estimated that a sales and use tax liability of $8,522 and $10,108 was probable related to a number of taxing jurisdictions with respect to revenues in the respective years ended December 31, and prior years. For the year ended December 31, 2017 and 2016, we recognized net sales and use tax expense of $345 and $6,229, including interest of approximately $244 and $914, respectively. In addition, we determined an estimated sales tax receivable of $2,705 and $3,879 as of December 31, 2017 and 2016, respectively, related to estimated recoverability of amounts due from customers. Additional future information obtained from the applicable jurisdictions or audits by one or more taxing authorities may affect our estimate of our sales and use tax liability. There can be no assurance that we will not be subject to sales and use taxes or related penalties for past sales in jurisdictions where we currently believe no such taxes are required.
Item 1B. Unresolved Staff Comments
Our headquarters are located in
Chicago, Illinois. Office space is also leased for theBerwyn, Pennsylvania. We support our Envestnet
Wealth Solutions segment
primarily through offices in Denver, Colorado;
New York, New York; San Jose, California; Boston, Massachusetts; Seattle, Washington; Raleigh, North Carolina;
Plano, Texas; Tucson, Arizona; Berwyn, Pennsylvania;
Richmond, Virginia; Boston, Massachusetts; and Trivandrum, India.
Office space is leased for theWe support our Envestnet
| YodleeData & Analytics segment
primarily through offices in
Redwood City,San Mateo, California;
West Chester, Pennsylvania and
Bangalore, India.Raleigh, North Carolina. The majority of our offices are leased. We believe that our office facilities are adequate for our immediate needs and that additional or substitute space is available if needed to accommodate the foreseeable growth of our operations.
Item 3. Legal Proceedings
The Company is involved in legal proceedings arising in the ordinary course of its business.
See Part II, Item 8, “Note 21—Commitments” for Legal
fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For legal proceedings matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of December 31, 2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.Proceedings details.
Item 4. Mine Safety Disclosures
This section is not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol
(ENV)“ENV”.
(b)Holders
The
following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock, for each of the periods presented below as reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions. | | | | | | | |
| | 2017 | |
| | High | | Low | |
Quarter ended March 31, 2017 | | $ | 39.90 | | $ | 31.45 | |
Quarter ended June 30, 2017 | | $ | 39.85 | | $ | 32.45 | |
Quarter ended September 30, 2017 | | $ | 51.00 | | $ | 37.55 | |
Quarter ended December 31, 2017 | | $ | 54.25 | | $ | 48.40 | |
| | | | | | | |
| | 2016 | |
| | High | | Low | |
Quarter ended March 31, 2016 | | $ | 28.95 | | $ | 19.64 | |
Quarter ended June 30, 2016 | | $ | 37.31 | | $ | 26.88 | |
Quarter ended September 30, 2016 | | $ | 40.87 | | $ | 33.70 | |
Quarter ended December 31, 2016 | | $ | 39.10 | | $ | 32.75 | |
The approximate number of holders of record of our common stock was 518124 as of February 23, 2018.
We have not paid dividends for the most recent two years.
21, 2023.As of December 31,
2017,2022, we had 500,000,000 common shares authorized at a par value of $0.005, of which
44,700,64154,013,826 shares were outstanding.
As of December 31, 2017,2022, we had 50,000,000 preferred shares authorized at a par value of $0.005, of which no shares were outstanding.
| (d)
| | Securities Authorized for Issuance Under Equity Compensation Plan
|
(c)DividendsWe have never declared or paid cash dividends on our common stock, and we intend to retain our future earnings, if any, to fund the growth of our business. We therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as any other factors that the Board, in its sole discretion, may consider relevant.
(d)Securities Authorized for Issuance Under Equity Compensation Plan
For a description of securities authorized under our equity compensation plans, see “Note 15 – Stockholders’ Equity” to the consolidated financial statements in Part II, Item 8.8, “Note 15—Stock-Based Compensation” and Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
| (e)
| | Stock Performance Graph
|
(e)Stock Performance GraphThe following graph compares the cumulative return to stockholders for $100 invested in our common stock relative to the cumulative total returns of the Russell® 2000 Index and The S&P North American Technology Sector Index for each of the last five fiscal years. In calculating total annual stockholder return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purposes only. This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act, of 1933, as amended, or the Exchange Act, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
5 YEAR STOCK PERFORMANCE GRAPH
| | | | | | | | | | | | | | | | | | | |
| | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | |
Envestnet, Inc. | | $ | 100.00 | | $ | 288.89 | | $ | 352.26 | | $ | 213.98 | | $ | 252.69 | | $ | 357.35 | |
Russell® 2000 Index | | | 100.00 | | | 141.70 | | | 149.03 | | | 142.45 | | | 172.81 | | | 198.13 | |
S&P North American Technology Sector Index | | | 100.00 | | | 132.73 | | | 150.99 | | | 163.83 | | | 183.57 | | | 250.10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/30/2017 | | 12/31/2018 | | 12/31/2019 | | 12/30/2020 | | 12/30/2021 | | 12/31/2022 |
| Envestnet, Inc. | | $ | 100.00 | | | $ | 98.68 | | | $ | 139.68 | | | $ | 165.08 | | | $ | 159.16 | | | $ | 123.77 | |
Russell® 2000 Index | | 100.00 | | | 87.82 | | | 108.66 | | | 128.61 | | | 146.23 | | | 114.70 | |
| S&P North American Technology Sector Index | | 100.00 | | | 101.11 | | | 144.78 | | | 207.31 | | | 260.56 | | | 167.17 | |
The stock price performance included in the graph above is not necessarily indicative of future stock price performance.
| (f)
| | Recent Sales of Unregistered Securities
|
None
| (g)
| | Issuer Purchases of Equity Securities
|
| | | | | | | | |
| | | | | | | | Maximum number (or |
| | | | | | Total number of | | approximate dollar |
| | | | | | shares purchased | | value) of shares |
| | Total number | | Average | | as part of publically | | that may yet be |
| | of shares | | price paid | | announced plans | | purchased under the |
| | purchased | | per share | | or programs | | plans or programs |
October 1, 2017 through October 31, 2017 | | 7,512 | $ | 52.92 | | — | | 1,956,390 |
November 1, 2017 through November 30, 2017 | | 27,999 | | 51.32 | | — | | 1,956,390 |
December 1, 2017 through December 31, 2017 | | 9,612 | | 49.86 | | — | | 1,956,390 |
(f)Recent Sales of Unregistered Securities
None
(g)Issuer Purchases of Equity Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total number
of shares
purchased | | Average
price paid
per share | | Total number of
shares purchased
as part of publicly
announced plans
or programs | | Maximum number (or
approximate dollar
value) of shares
that may yet be
purchased under the
plans or programs |
| October 1, 2022 through October 31, 2022 | | — | | | $ | — | | | — | | | 1,748,882 | |
| November 1, 2022 through November 30, 2022 | | — | | | — | | | — | | | 1,748,882 | |
| December 1, 2022 through December 31, 2022 | | 1,417,622 | | | 60.50 | | | 1,417,622 | | | 331,260 | |
In 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2.0 million 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 December 31, 2022, 0.3 million shares could still be purchased under this program.
Item 6. Selected Financial Data
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
| | | (in thousands, except for share and per share information) | |
Total revenues | | $ | 683,679 | | $ | 578,164 | | $ | 420,919 | | $ | 348,748 | | $ | 242,535 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of revenues | | | 219,037 | | | 180,590 | | | 161,309 | | | 150,067 | | | 98,970 | |
Compensation and benefits | | | 264,392 | | | 241,584 | | | 139,756 | | | 104,457 | | | 77,442 | |
General and administration | | | 121,010 | | | 115,435 | | | 72,900 | | | 54,321 | | | 45,282 | |
Depreciation and amortization | | | 62,820 | | | 63,999 | | | 27,962 | | | 18,651 | | | 15,329 | |
Total operating expenses | | | 667,259 | | | 601,608 | | | 401,927 | | | 327,496 | | | 237,023 | |
Income (loss) from operations | | | 16,420 | | | (23,444) | | | 18,992 | | | 21,252 | | | 5,512 | |
Other income (expense), net | | | (18,109) | | | (17,046) | | | (10,004) | | | 1,255 | | | 200 | |
Income (loss) before income tax provision | | | (1,689) | | | (40,490) | | | 8,988 | | | 22,507 | | | 5,712 | |
Income tax provision | | | 1,591 | | | 15,077 | | | 4,552 | | | 8,528 | | | 2,052 | |
Net income (loss) | | | (3,280) | | | (55,567) | | | 4,436 | | | 13,979 | | | 3,660 | |
Add: Net loss attributable to non-controlling interest | | | — | | | — | | | — | | | 195 | | | — | |
Income (loss) attributable to common shareholders | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 | | $ | 14,174 | | $ | 3,660 | |
Net income (loss) per share attributable to common stockholders | | | | | | | | | | | | | | | | |
Basic | | $ | (0.08) | | $ | (1.30) | | $ | 0.12 | | $ | 0.41 | | $ | 0.11 | |
Diluted | | $ | (0.08) | | $ | (1.30) | | $ | 0.12 | | $ | 0.38 | | $ | 0.10 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 43,732,148 | | | 42,814,222 | | | 36,500,843 | | | 34,559,558 | | | 33,191,088 | |
Diluted | | | 43,732,148 | | | 42,814,222 | | | 38,386,873 | | | 36,877,599 | | | 35,666,575 | |
Part II, Item 6 is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301.Consolidated Balance Sheet Data
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | |
| | (in thousands) | |
Cash and cash equivalents | | $ | 60,115 | | $ | 52,592 | | $ | 51,718 | | $ | 209,754 | | $ | 49,942 | |
Working capital | | | (9,248) | | | (42,870) | | | (5,808) | | | 172,661 | | | 23,892 | |
Goodwill and intangible assets | | | 655,686 | | | 697,494 | | | 713,948 | | | 163,630 | | | 110,033 | |
Total assets | | | 862,052 | | | 872,401 | | | 876,249 | | | 439,358 | | | 221,242 | |
Long-term debt | | | 240,158 | | | 252,984 | | | 284,753 | | | 145,203 | | | — | |
Stockholders’ equity | | | 436,272 | | | 412,889 | | | 439,529 | | | 201,435 | | | 147,772 | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except where we have otherwise indicated or
Overview
Envestnet, through its subsidiaries, is transforming the
context otherwise requires, dollar amounts presented in this Form 10‑Kway financial advice and insight are
in thousands, except for Exhibits and per share amounts.Overview
Envestnet, Inc. (“Envestnet”)delivered. Our mission is a leading provider of intelligent systems for wealth management andto empower financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process. Envestnet empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.
More than 2,900 companies, including 16 of the 20 largest U.S. banks, 39 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”), and hundreds of Internet services companies, leverage Envestnet technology and services. Envestnet solutions enhance knowledge of the client, accelerate client on-boarding, improve client digital experiences, and help drive better outcomes for enterprises, advisors and their clients.
Founded in 1999,service providers with innovative technology, solutions and intelligence. Envestnet has been a leader in helping transform wealth management, working towards its goal of buildingexpanding a holistic financial wellness networkecosystem so that supportsour clients can deliver an Intelligent Financial Life to their clients.
Approximately 106,000 advisors and approximately 6,900 companies, including 16 of the 20 largest U.S. banks, 47 of the 50 largest wealth management and brokerage firms, over 500 of the largest RIAs and hundreds of FinTech companies, leverage Envestnet technology and services that help drive better outcomes for enterprises, advisors and their clients.
Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting
software, servicestechnology, solutions and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet, a Delaware corporation originally founded in 1999, serves clients from its headquarters based in Berwyn, Pennsylvania, as well as other locations throughout the United States, India and other international locations.
We also operate six RIAs registered with the SEC. We believe that our business model results in a high degree of recurring and predictable financial results.
Recent Developments
FolioDynamix
Macroeconomic Environment
Our business is directly and indirectly affected by macroeconomic conditions and the state of global financial markets. Recent geopolitical uncertainty resulting, in part, from military conflict between Russia and Ukraine which escalated in February 2022 as well as rising inflation have contributed to significant volatility and decline in global financial markets during 2022 which continues as of the date of this Annual Report. The uncertainty over the extent and duration of the ongoing conflict and this period of inflation continues to cause disruptions to businesses and markets worldwide. The extent of the effect on our financial performance will continue to depend on future developments, including the extent and duration of the conflict and this period of inflation, the Federal Reserve's monetary policy in response to rising inflation, the extent of economic sanctions imposed, changes in market interest rates, further governmental and private sector responses and the timing and extent normal economic conditions resume, all of which are uncertain and difficult to predict. Although we are unable to estimate the overall financial effect of the conflict and this period of inflation at this time, as these conditions continue, they could have a material adverse effect on our business, results of operations, financial condition and cash flows. As of December 31, 2022, the consolidated financial statements do not reflect any adjustments as a result of these macroeconomic conditions.
Credit Agreement
On January 2, 2018, pursuantNovember 14, 2022, we entered into a First Amendment to an agreementthe Third Amended and planRestated Credit Agreement (the “Third Credit Agreement”) with a group of merger (the “Merger Agreement”),banks. The Third Credit Agreement, dated as of September 25, 2017, between Envestnet, Inc., Folio Dynamics Holdings, Inc.,February 4, 2022, amended and restated, in its entirety, our prior credit agreement.
The First Amendment to the Third Credit Agreement amended certain provisions under the Third Credit Agreement to (i) permit us to enter into derivative transactions related to our common stock in connection with the issuance of any convertible indebtedness permitted to be incurred under the Third Credit Agreement and (ii) eliminate the testing of the liquidity covenant on March 31, 2023. The Third Credit Agreement amended certain provisions under the prior credit agreement to, among other things, (i) extend the maturity of loans and the revolving credit commitments, (ii) reduce the interest rate payable on the loans and (iii) increase capacity and flexibility under certain of the negative covenants.
The Third Credit Agreement provides, subject to certain customary conditions, for a Delaware corporationrevolving credit facility (“FolioDynamix”Revolving Credit Facility”), FCD Merger Sub, Inc.,in an aggregate amount of $500.0 million, with a Delaware corporation$20.0 million sub-facility for issuances of letters of credit.
In connection with entering into the Third Credit Agreement, we capitalized $1.9 million of new issuance costs and wrote off $0.6 million of existing deferred financing charges.
In the event that we borrow monies under the Revolving Credit Facility, at Envestnet’s option, we will pay interest on these borrowings at a wholly owned subsidiaryrate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term Secured Overnight Financing Rate ("SOFR") plus an applicable margin ranging from 1.25% to 2.75% per annum, in each case based upon the total net leverage ratio, as calculated pursuant to the Third Credit Agreement. Any borrowings under the Credit Facility mature on February 4, 2027. The undrawn portion of the commitments under the Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum, based upon the total net leverage ratio as calculated pursuant to the Credit Agreement.
Obligations under the Third Credit Agreement are guaranteed by substantially all of Envestnet’s domestic subsidiaries and are secured by a first-priority lien on substantially all of the personal property (other than intellectual property) of Envestnet (“Merger Sub”), and Actua USA Corporation,the guarantors, subject to certain exclusions. Proceeds under the Third Credit Agreement may be used to finance capital expenditures and permitted acquisitions and for working capital and general corporate purposes.
Private Offering of Convertible Notes due 2027
In November 2022, we issued $575.0 million aggregate principal amount of convertible notes due 2027 (“Convertible Notes due 2027”). The Convertible Notes due 2027 will mature on December 1, 2027, unless earlier repurchased, redeemed or converted. Net proceeds from the offering were approximately $558.7 million. The Convertible Notes due 2027 bear interest at a Delaware corporation, solelyrate of 2.625% per annum payable semiannually in its capacity as the representativearrears in cash on June 1 and December 1 of the stockholderseach year, beginning on June 1, 2023.
The Convertible Notes due 2027 are general unsecured obligations, subordinated in right of
FolioDynamix, Envestnet completed the mergerpayment to our obligations under our revolving credit facility. The Convertible Notes due 2027 are convertible into shares of
Merger Sub with and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) andour common stock under certain circumstances prior to maturity at a
wholly owned subsidiaryconversion rate of
Envestnet. The completion13.6304 shares per one thousand principal amount of
the Acquisition on January 2, 2018 followed the receiptnotes, which represents a conversion price of
all necessary regulatory approvals and third party consents.$73.37 per share, subject to adjustment under certain conditions.
In connection with the Acquisition, Envestnet paid $195,000 in cashpricing of the Convertible Notes due 2027, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions for alla total cost of approximately $79.6 million. The Capped Call Transactions initially cover the number of shares of our common stock underlying the Convertible Notes due 2027, subject to customary anti-dilution adjustments. The Capped Call Transactions are net purchased call options on our common stock.
Using proceeds from the issuance of the Convertible Notes due 2027, we repurchased $300.0 million aggregate principal of the outstanding sharesConvertible Notes due 2023 for cash consideration of FolioDynamix,approximately $312.4 million and recognized a loss on extinguishment of approximately $13.4 million recognized in interest expense. As of December 31, 2022, aggregate principal of $45.0 million less unamortized debt issuance costs of $0.1 million remain outstanding after the repurchase. Additionally, we repurchased $200.0 million aggregate principal of the outstanding Convertible Notes due 2025 for cash consideration of approximately $181.8 million and recognized a gain on extinguishment of approximately $15.1 million recognized in interest expense. As of December 31, 2022, aggregate principal of $317.5 million less unamortized debt issuance costs of $4.8 million remain outstanding after the repurchase.
See Part II, Item 8, “Note 10—Debt, Convertible Notes due 2025” for more details regarding the issuance of the Convertible Notes due 2027, repurchases of Convertible Notes due 2023 and Convertible Notes due 2025, and Capped Call Transactions.
Procurement of Technology Solutions
On April 1, 2022, we entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $9.0 million. We have paid a $4.0 million advance during the year ended December 31, 2022. This advance is included in other non-current assets in the consolidated balance sheets.
Office Closures
In April 2022, in response to changing needs and an increase in employees working remotely, we closed three offices in the United States. In December 2022, we closed our office in Bangalore, India as a result of the outsourcing arrangement with Tata Consultancy Services (“TCS”) (as described below). We are currently exploring alternative uses for these properties, including sublease options. In connection with these closures, in the year ended December 31, 2022, we recognized $4.4 million of losses on asset retirements, which are included in general and administration expense in the consolidated statement of operations. Additionally, in the year ended December 31, 2022, we recognized approximately $13.0 million of lease related impairments, primarily right-of-use assets, which are included in general and administration expense in the consolidated statement of operations.
Investment in Privately Held Companies
On May 20, 2022, we acquired a 25.0% interest in a privately held company for cash consideration of $5.0 million. Subject to the occurrence of certain conditions, we agreed to invest up to an additional $10.0 million for additional units in the future. We use the equity method of accounting to record our portion of this privately held company's net income or loss on a one quarter lag from the actual results of operations. We use the equity method of accounting because of our less than 50% ownership interest and lack of control and we do not otherwise exercise control over the significant economic and operating decisions of the privately held company.
On September 2, 2022, we acquired additional membership units in a privately held company in which we already had an approximate 43% ownership interest for $8.4 million which increased our ownership interest to 48%. We use the equity method of accounting to record our portion of this privately held company's net income or loss on a one quarter lag from the actual results of operations. After this unit purchase, our investment in this privately held company exceeded our proportionate share of our net assets by approximately $7.8 million, which represents amortizable intangible assets. We will recognize amortization of this basis difference prospectively over a period of 5 years. This amortization will be included within our proportional share of income (loss) in other expense, net in the consolidated statements of operations.
Dilution gains on equity method investee share issuance
We have an ownership interest in a privately held company that is accounted for under the equity method. During the first quarter of 2022, we funded a $2.5 million convertible loan to this privately held company. During the second quarter of 2022, this privately held company raised additional preferred equity which reduced our ownership to 41.0% and our convertible loan was converted. As a result of this transaction, we recorded a $6.9 million dilution gain during the second quarter of 2022, which is included in other expense, net in the consolidated statements of operations.
During the fourth quarter of 2022, another of our equity method investee's raised additional preferred equity which reduced our ownership to 3.51%. As a result of this transaction, we recorded a $2.6 million dilution gain during the fourth quarter of 2022, which is included in other expense, net in the consolidated statements of operations.
Exercise of Membership Interests
We granted membership interests in certain of our equity investments to two legacy PIEtech executives as part of the 2019 acquisition of PIEtech. These interests, which were fully vested as of May 1, 2020, became exercisable on May 1, 2022. In July 2022, these executives exercised their respective put options and sold these membership interests to us for approximately $10 million.
Acquisition of 401kplans.com
On May 31, 2022, we acquired 401kplans.com LLC (“401kplans.com”). 401kplans.com has been integrated into the Envestnet Wealth Solutions segment.
401kplans.com provides a digital 401(k) retirement plan marketplace that streamlines retirement plan distribution and due diligence among financial advisors and third-party administrators. The acquisition demonstrates our commitment to the retirement plan industry and is expected to create a more seamless experience and enhance productivity for advisors by helping them shop, compare and select the best-fitting 401(k) plan for their client.
In connection with the 401kplans.com acquisition, we paid estimated consideration of $14.5 million, net of cash acquired, subject to certain
closing and post-closing adjustments.
EnvestnetWe funded the
Acquisition priceacquisition with
a combination ofavailable cash
on the Company’s balance sheet and with borrowings under its revolving credit facility.FolioDynamix provides financial institutions, registered investment advisors, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services.
The acquisition of FolioDynamix added complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. The Company expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management business, enabling the Company to further leverage its operating scale and data analytics capabilities.
Acquisition of Truelytics
On July 1, 2022, we acquired Truelytics, Inc. (“Truelytics”). The acquisition of Truelytics aligns with our strategy to further connect our ecosystem by creating transformative progress for our advisors and clients. Truelytics is an Advisor Transition Management platform and the first end-to-end data-driven system to help wealth management and insurance enterprises attract, grow, and retain advisory businesses, while also reducing the costs related to advisor transitions. The Truelytics platform combines our data, analytics, and wealth technology to further support advisors across the ecosystem. Truelytics has been integrated into the Envestnet Data & Analytics segment.
In connection with the acquisition of Truelytics, we paid estimated cash consideration of approximately $20.7 million, net of cash acquired, subject to certain post-closing adjustments. We funded the Truelytics acquisition with available cash resources.
Acquisition of Redi2
On July 1, 2022, we acquired Redi2 Technologies Inc. (“Redi2”). Redi2 provides revenue management and hosted fee-billing solutions. Its platform enables fee calculation, invoice creation, payouts and accounting, and billing compliance. Redi2 has been integrated into the Envestnet Wealth Solutions segment.
In connection with the Redi2 acquisition, we paid estimated consideration of approximately $68.9 million in cash. In addition, certain executives may earn up to $20.0 million in performance bonuses based upon the achievement of certain target financial and non-financial metrics. These performance bonuses are recognized as compensation and benefits expense in the statement of operations. As of December 31, 2022, the amount recorded in the statement of operations related to these performance bonuses was immaterial. We funded the Redi2 acquisition with available cash resources.
Inflation Reduction Act of 2022
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. The provisions of the IRA are effective beginning in 2023. We are currently evaluating the impacts of this act on our consolidated financial statements.
Entry into Outsourcing Arrangement
In October 2022, we entered into an outsourcing arrangement with TCS to increase operational scale and business agility. Under this agreement, we will outsource certain administrative and operational services of the Envestnet Data & Analytics business located in Bangalore, India. The agreement became effective in October 2022 and will continue for a period of ten years. In certain circumstances, we may terminate certain portions of the agreement, and in doing so, the agreement requires us to pay significant termination fees. In connection with the outsourcing arrangement with TCS, we incurred severance expenses, write-off of lease related restructuring costs, and other related expenses of approximately $9.1 million.
Organizational Realignment
In the fourth quarter of 2022, as part of an organizational realignment, we entered into separation agreements with a number of employees. This realignment will allow us to operate more efficiently and prioritize activities and services that will benefit our clients and the future of our business. In connection with the organizational realignment, we incurred approximately $10.1 million of total severance expense during 2022.
Privately Held Company Investment
On January 31, 2023, we entered into a convertible promissory note agreement with a customer of our business, a privately held company, whereby we were issued a convertible promissory note with a principal amount of $20.0 million and a stated interest rate of 8.0% per annum (the “Convertible Promissory Note”). The Convertible Promissory Note has a maturity date of January 31, 2026 and is convertible into common stock or preferred stock of the privately held company upon qualified financing events or corporate transactions.
In connection with the Convertible Promissory Note, we concurrently entered into a call option agreement with the privately held company, which provides us an option to acquire the privately held company at a predetermined price upon satisfaction of certain financial metrics.
Envestnet
Wealth Solutions Segment
The following table provides information regarding the amount of assets utilizing our platform technology,platforms, financial advisors and investor accounts and financial advisors in the periods indicated.indicated:
| | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in millions except accounts and advisors data) |
Platform Assets | | | | | | | | | |
Assets Under Management (AUM) | | $ | 141,518 | | $ | 105,178 | | $ | 92,559 |
Assets Under Administration (AUA) | | | 308,480 | | | 241,682 | | | 197,177 |
Total AUM/A | | | 449,998 | | | 346,860 | | | 289,736 |
Subscription and Licensing | | | 926,880 | | | 748,125 | | | 561,699 |
Total Platform Assets | | $ | 1,376,878 | | $ | 1,094,985 | | $ | 851,435 |
Platform Accounts | | | | | | | | | |
AUM | | | 685,925 | | | 545,130 | | | 490,471 |
AUA | | | 1,217,697 | | | 994,583 | | | 807,708 |
Total AUM/A | | | 1,903,622 | | | 1,539,713 | | | 1,298,179 |
Subscription and Licensing | | | 5,027,900 | | | 4,558,883 | | | 2,176,068 |
Total Platform Accounts | | | 6,931,522 | | | 6,098,596 | | | 3,474,247 |
Advisors | | | | | | | | | |
AUM/A | | | 40,485 | | | 36,483 | | | 33,775 |
Subscription and Licensing | | | 19,445 | | | 17,852 | | | 13,553 |
Total Advisors | | | 59,930 | | | 54,335 | | | 47,328 |
| | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | (in millions, except accounts and advisors data) |
| Platform Assets | | | | | | |
| AUM | | $ | 341,144 | | | $ | 362,038 | | | $ | 263,043 | |
| AUA | | 367,412 | | | 456,316 | | | 405,365 | |
| Total AUM/A | | 708,556 | | | 818,354 | | | 668,408 | |
| Subscription | | 4,382,109 | | | 4,901,662 | | | 3,892,814 | |
| Total Platform Assets | | $ | 5,090,665 | | | $ | 5,720,016 | | | $ | 4,561,222 | |
| Platform Accounts | | | | | | |
| AUM | | 1,547,009 | | | 1,345,274 | | | 1,073,122 | |
| AUA | | 1,135,026 | | | 1,217,076 | | | 1,276,975 | |
| Total AUM/A | | 2,682,035 | | | 2,562,350 | | | 2,350,097 | |
| Subscription | | 15,665,020 | | | 14,986,531 | | | 11,079,048 | |
| Total Platform Accounts | | 18,347,055 | | | 17,548,881 | | | 13,429,145 | |
| Advisors | | | | | | |
| AUM/A | | 38,025 | | | 39,735 | | | 41,206 | |
| Subscription | | 67,520 | | | 68,808 | | | 65,104 | |
| Total Advisors | | 105,545 | | | 108,543 | | | 106,310 | |
The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset Rollforward - 2022 |
| | | As of December 31, 2021 | | Gross Sales | | Redemptions | | Net Flows | | Market Impact | | Reclass to Subscription | | Reclassification(1) | | As of December 31, 2022 |
| | | | | | | | | |
| | | (in millions, except account data) |
| AUM | | $ | 362,038 | | | $ | 100,098 | | | $ | (68,181) | | | $ | 31,917 | | | $ | (60,948) | | | $ | (584) | | | $ | 8,721 | | | $ | 341,144 | |
| AUA | | 456,316 | | | 120,409 | | | (95,016) | | | 25,393 | | | (73,849) | | | (31,727) | | | (8,721) | | | 367,412 | |
| Total AUM/A | | $ | 818,354 | | | $ | 220,507 | | | $ | (163,197) | | | $ | 57,310 | | | $ | (134,797) | | | $ | (32,311) | | | $ | — | | | $ | 708,556 | |
| Fee-Based Accounts | | 2,562,350 | | | | | | | 243,320 | | | | | (123,635) | | | | | 2,682,035 | |
| | | | | | | | | | | | | | | | | | | | | |
| | Asset Rollforward - 2017 |
| | | | | | | | | | | | | Reclass (to) from | | |
| | As of | | Gross | | | | Net | | Market | | Subscription and | | As of |
| | 12/31/2016 | | Sales | | Redemptions | | Flows | | Impact | | Licensing | | 12/31/2017 |
| | (in millions except account data) |
AUM | | $ | 105,178 | | $ | 50,331 | | $ | (28,876) | | $ | 21,455 | | $ | 14,885 | | $ | — | | $ | 141,518 |
AUA | | | 241,682 | | | 121,653 | | | (84,240) | | | 37,413 | | | 34,276 | | | (4,891) | | | 308,480 |
Total AUM/A | | $ | 346,860 | | $ | 171,984 | | $ | (113,116) | | $ | 58,868 | | $ | 49,161 | | $ | (4,891) | | $ | 449,998 |
Fee-Based Accounts | | | 1,539,713 | | | | | | | | | 386,673 | | | | | | (22,764) | | | 1,903,622 |
The above AUM/A gross sales figures include
$49.6$52.9 billion in new client conversions.
The CompanyWe onboarded an additional
$57.1$132.3 billion in subscription
and licensing conversions during
2017,2022, bringing total conversions for the year to
$106.7$185.2 billion.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset Rollforward - 2021 |
| | | As of December 31, 2020 | | Gross Sales | | Redemptions | | Net Flows | | Market Impact | | Reclass to Subscription | | As of December 31, 2021 |
| | | | | | | | |
| | | (in millions, except account data) |
| AUM | | $ | 263,043 | | | $ | 117,066 | | | $ | (52,668) | | | $ | 64,398 | | | $ | 34,597 | | | $ | — | | | $ | 362,038 | |
| AUA | | 405,365 | | | 116,675 | | | (92,299) | | | 24,376 | | | 40,787 | | | (14,212) | | | 456,316 | |
| Total AUM/A | | $ | 668,408 | | | $ | 233,741 | | | $ | (144,967) | | | $ | 88,774 | | | $ | 75,384 | | | $ | (14,212) | | | $ | 818,354 | |
| Fee-Based Accounts | | 2,350,097 | | | | | | | 322,138 | | | | | (109,885) | | | 2,562,350 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Asset Rollforward - 2016 |
| | As of | | Gross | | | | | Net | | Market | | As of |
| | 12/31/2015 | | Sales | | Redemptions | | Flows | | Impact | | 12/31/2016 |
| | (in millions except account data) |
AUM | | $ | 92,559 | | $ | 34,504 | | $ | (26,698) | | $ | 7,806 | | $ | 4,813 | | $ | 105,178 |
AUA | | | 197,177 | | | 84,253 | | | (54,942) | | | 29,311 | | | 15,194 | | | 241,682 |
Total AUM/A | | $ | 289,736 | | $ | 118,757 | | $ | (81,640) | | $ | 37,117 | | $ | 20,007 | | $ | 346,860 |
Fee-Based Accounts | | | 1,298,179 | | | | | | | | | 241,534 | | | | | | 1,539,713 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
The above AUM/A gross sales figures include
$17.1$34.9 billion in new client conversions.
The CompanyWe onboarded an additional
$137.4$312.4 billion in subscription
and licensing conversions during
2016,2021, bringing total conversions for the year to
$154.5$347.3 billion.
Asset and account figures in the “Reclass to Subscription” columns for the years ended December 31, 2022 and 2021 represent enterprise customers whose billing arrangements in future periods are subscription-based, rather than asset-based. Such amounts are included in Subscription metrics at the end of the quarter in which the reclassification occurred, with no impact on total platform assets or accounts.
Envestnet
| YodleeData & Analytics Segment
A paid
userend-user is defined as a user of an application or service provided to our customer using the Envestnet
| YodleeData & Analytics platform whose status corresponds to a billable activity under the associated customer contract. We believe that our ability to increase the number of paid
usersend-users is an indicator of our market penetration, the growth of our business, and our potential future business opportunities.
Paid usersend-users were over approximately 22.437 million, 22.032 million and 21.335 million as of December 31, 2017, 20162022, 2021 and 2015,2020, respectively. The increase was primarily driven by an increase in our number of customers as well as expansion of user base within certain existing customers.
We earn revenues primarily under three pricing models. First, a
majorityportion of our revenues is derived from fees charged as a percentage of the assets that are managed or administered on our technology platforms by financial advisors. These revenues are recorded under
revenues from AUM or AUA, or collectively AUM/A.asset-based revenues. Our asset‑based fees vary based on the types of investment solutions and services that financial advisors utilize. Asset‑based fees accounted for approximately 60%,
61%60% and
79%54% of our total revenues for the years ended December 31,
2017, 20162022, 2021 and
2015,2020, respectively. In future periods, the percentage of our total revenues attributable to asset‑based fees is expected to vary based on fluctuations in securities markets, whether we enter into significant subscription agreements, the mix of AUM or AUA, and other factors.
We
also generate revenues from recurring, contractual subscription fees for providing access to our technology platforms. This subscription revenue includes both contractual minimum payments and usage-based fees and is driven primarily by the number of customers, including new customers as well as customers who renew their existing subscription contracts, and the number of paid
users.end-users. These revenues are recorded under
revenues from subscription and licensing fees.subscription-based revenues. Subscription
and licensing fees vary based on the scope of technology solutions and services being used, and are priced in a variety of constructs based on the size of the business, number of users or number of accounts and in many cases can increase over time based on the growth of these factors. Subscription
and licensing fees accounted for
36%39%,
34%38% and
18%43% of our total revenues for the years ended December 31,
2017, 20162022, 2021 and
2015,2020, respectively.
We also generate
Finally, a portion of our revenues
are generated from fees received in connection with professional services and other
revenue accounted for the remainder of our revenues.sources.
Revenues from assets under management or administration
Asset-based recurring revenues
We generally charge our customers fees based on a higher percentage of the market value of AUM than the fees we charge on the market value of AUA, because we provide fiduciary oversight and/or act as the investment advisor in connection with assets we categorize as AUM. The level of fees varies based on the nature of the investment solutions and services we provide, as well as the specific investment manager, fund and/or custodian chosen by the financial advisor. A portion of our revenues from assets under management or administration
includeincludes costs paid by us to third parties for sub‑advisory, clearing, custody and brokerage services. These expenses are recorded under cost of revenues. We do not have fiduciary responsibility in connection with AUA and, therefore, generally charge lower fees on these assets. Our fees for AUA vary based on the nature of the investment solutions and services we provide.
For over 90%
Approximately 80% of our
asset-based recurring revenues from
assets under management or administration, we billAUM/A are billed to customers at the beginning of each quarter
and are based on the market value of
customertheir assets on our platforms as of the end of the prior quarter. For example,
asset-based recurring revenues
from assets under management or administration recognized during the fourth quarter of
20172022 were primarily based on the market value of assets as of September 30,
2017.2022. Our
asset-based recurring revenues
from assets under management or administration are generally recognized ratably throughout the quarter based on the number of days in the quarter.
Our
asset-based recurring revenues
from assets under management or administration are affected by the amount of new assets that are added to existing and new client accounts, which we refer to as gross sales. Gross sales, from time to time, also include conversions of client assets to our technology platforms. The amounts of assets that are withdrawn from client accounts are referred to as redemptions. We refer to the difference between gross sales and redemptions as net flows. Positive net flows indicate that the market value of assets added to client accounts exceeds the market value of assets that have been withdrawn from client accounts.
Our
asset-based revenues
from assets under management or administration are also affected by changes in the market values of securities held in client accounts due to fluctuations in the securities markets. Certain types of securities have historically experienced greater market price fluctuations, such as equity securities, than other securities, such as fixed income securities, though in any given period the type of securities that experience the greatest fluctuations may vary.
Revenues from subscription and licensing fees
Our
Subscription-based recurring revenues received under license agreements
Subscription-based recurring revenues are
recognized over the contractual term. Subscription revenue isgenerally recognized ratably over the
contracted term of each respective subscription agreement, commencing on the date the service is provisioned to the customer, provided all applicable revenue recognition criteria have been satisfied. As part of the subscription contracts, our customers generally commit to a minimum level of paid
usersend-users from which a minimum level of non-refundable subscription revenue is derived. As paid
usersend-users in excess of the guaranteed minimum level access the
Envestnet | Yodlee platform, the customer is then required to pay additional usage fees calculated based upon a contracted per-paid-user fee. No refunds or credits are given if fewer paid
usersend-users access the
Envestnet | Yodlee platform than the contracted minimum level. Usage-based revenue is recognized as earned, provided all applicable revenue recognition criteria have been satisfied.
Revenues from professional
Professional services and other
To a lesser degree we revenues
We also receive revenues from professional services fees by providing customers with certain technology platform software development and implementation services. These revenues are recognized
with when completed, under a proportional‑performance model utilizing an output‑based approach or on a straight‑line basis over the estimated life of the customer relationship. Our contracts generally have fixed prices and generally specify or quantify interim deliverables.
The following is a description of our principal expense
items.items:
Cost of revenues primarily includes expenses related to our receipt of sub‑advisory and clearing, custody and brokerage services from third parties. The largest component of cost of revenues is paid to third party investment managers. Clearing, custody and brokerage services are performed by third‑party providers. These expenses are typically calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each fiscal quarter and are recognized ratably throughout the quarter based on the number of days in the quarter. Also included in cost of revenues are vendor specific expenses related to the direct support of revenues associated with the Envestnet
| Tamarac products and Envestnet | YodleeData & Analytics products.
Compensation and benefits
Compensation and benefits expenses primarily relate to employee compensation, including salaries, short-term incentive compensation, non‑cash stock‑based compensation, incentive compensation, benefits and employer‑related taxes.
General and administration
General and administration expenses include
occupancy costs and expenses
relatingrelated to
occupancy, communications services, research and data services,
websitesoftware and
system development,maintenance charges, marketing, professional and legal services, travel and entertainment and
acquisition/transaction related expenses.
Depreciation and amortization
Depreciation and amortization expenses include depreciation and amortization related to:
| ·
| | fixed assets, including computer equipment and software, leasehold improvements, office furniture and fixtures and other office equipment;
|
| ·
| | internally developed software; and
|
| ·
| | intangible assets, primarily related to customer lists, backlog, proprietary technology and trade names, the value of which are capitalized in connection with our acquisitions.
|
•fixed assets, including building and building improvements, computer equipment and software, leasehold improvements, office furniture and fixtures and office equipment and other;Furniture
•internally developed software; and
•intangible assets, primarily related to customer lists, proprietary technology and trade names, the values of which are capitalized in connection with our acquisitions.
Building, furniture and equipment are depreciated using the straight‑line method based on the estimated useful lives of the depreciable assets. Leasehold improvements are amortized using the straight‑line method over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs and maintenance costs are recorded as expenses in the period they are incurred. Assets are tested for recoverability whenever events or circumstances indicate that the carrying value of the assets may not be recoverable.
Internally developed software is amortized on a straight‑line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Intangible assets are depreciated using an accelerated or straight‑line basis over their estimated economic useful lives and are reviewed for possible impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Interest income
Interest income primarily includes amounts earned on our bank accounts and money market funds.
Interest expense includes coupon interest
discount amortization, and issuance cost amortization related to
the Convertible Notesour convertible note issuances, as well as
interest and amortization of upfront fees and monthly fees related to
the Second Amended and Restatedour Revolving Credit
Agreement.Facility. The
discount, issuance costs and upfront fees are amortized over the term of the related agreements.
Interest expense may also include gain or loss on extinguishment of debt. See Part II, Item 8, “Note 10—Debt” for additional details regarding our third-party debt.
Other income (expense), netOther expense, net
Other expense,income (expense), net includes gains (losses) on our portion of our equity method investees' results and foreign exchange gains or loss and gain or loss on foreign currency forward contractslosses as well as other miscellaneous revenueincome or expense items as appropriate.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | % Change | | 2020 | | % Change |
| | | (in thousands, except for percentages) |
| Revenues: | | | | | | | | | | |
| Asset-based | | $ | 738,228 | | | $ | 709,376 | | | 4 | % | | $ | 540,947 | | | 31 | % |
| Subscription-based | | 477,844 | | | 453,989 | | | 5 | % | | 426,507 | | | 6 | % |
| Total recurring revenues | | 1,216,072 | | | 1,163,365 | | | 5 | % | | 967,454 | | | 20 | % |
| Professional services and other revenues | | 23,712 | | | 23,152 | | | 2 | % | | 30,776 | | | (25) | % |
| Total revenues | | 1,239,784 | | | 1,186,517 | | | 4 | % | | 998,230 | | | 19 | % |
| Operating expenses: | | | | | | | | | | |
| Cost of revenues | | 468,460 | | | 423,723 | | | 11 | % | | 305,929 | | | 39 | % |
| Compensation and benefits | | 490,725 | | | 432,829 | | | 13 | % | | 398,970 | | | 8 | % |
| General and administration | | 216,075 | | | 171,657 | | | 26 | % | | 160,229 | | | 7 | % |
| Depreciation and amortization | | 130,548 | | | 117,767 | | | 11 | % | | 113,661 | | | 4 | % |
| Total operating expenses | | 1,305,808 | | | 1,145,976 | | | 14 | % | | 978,789 | | | 17 | % |
| Income (loss) from operations | | (66,024) | | | 40,541 | | | * | | 19,441 | | | 109 | % |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 4,184 | | | 827 | | | * | | 1,112 | | | (26) | % |
| Interest expense | | (16,843) | | | (16,931) | | | (1) | % | | (31,504) | | | (46) | % |
| Other income (expense), net | | 264 | | | (4,076) | | | (106) | % | | 2,906 | | | * |
| Total other expense, net | | (12,395) | | | (20,180) | | | (39) | % | | (27,486) | | | (27) | % |
| Income (loss) before income tax provision (benefit) | | (78,419) | | | 20,361 | | | * | | (8,045) | | | * |
| Income tax provision (benefit) | | 7,061 | | | 7,667 | | | (8) | % | | (5,401) | | | * |
| Net income (loss) | | (85,480) | | | 12,694 | | | * | | (2,644) | | | * |
| Add: Net (income) loss attributable to non-controlling interest | | 4,541 | | | 602 | | | * | | (466) | | | * |
| Net income (loss) attributable to Envestnet, Inc. | | $ | (80,939) | | | $ | 13,296 | | | * | | $ | (3,110) | | | * |
*Not meaningful
Year ended December 31, 2022 compared to year ended December 31, 2021
Asset-based recurring revenues
Asset-based recurring revenues increased 4% from $709.4 million in 2021 to $738.2 million in 2022. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles as a result of the upswing in the equity markets in the fourth quarter of 2021, offset by a decline in the equity markets beginning the first quarter of 2022 through the end of 2022. In 2022, revenues were also positively affected by new account growth and positive net flows of AUM/A. The revenue increase was partially offset by existing customers switching from an asset-based pricing model to a subscription-based pricing model.
The number of financial advisors with AUM or AUA on our technology platforms decreased from approximately 40,000 as of December 31, 2021 to approximately 38,000 as of December 31, 2022 and the number of AUM or AUA client accounts increased from approximately 2.6 million as of December 31, 2021 to approximately 2.7 million as of December 31, 2022.
Asset-based recurring revenue remained consistent at 60% of total revenue in 2021 and 2022.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 5% from $454.0 million in 2021 to $477.8 million in 2022. This increase was primarily due to an increase of $27.3 million in the Envestnet Wealth Solutions segment which can be attributed to new and existing customer growth as well as existing customers switching from an asset-based pricing model to a subscription-based pricing model. This increase is partially offset by a $3.4 million decrease in the Envestnet Data & Analytics segment, primarily due to the equity market decline impacting the asset management customers in the research business. Periodically, existing customers switch from an asset-based pricing model to a subscription-based pricing model.
Professional services and other revenues
Professional services and other revenues increased 2% from $23.2 million in 2021 to $23.7 million in 2022. The increase was primarily due to an increase in revenues resulting from the 2022 Advisor Summit, which was held as an in-person event. The 2021 Advisor Summit was virtual due to the COVID-19 pandemic.
Cost of revenues
Cost of revenues increased 11% from $423.7 million in 2021 to $468.5 million in 2022. The increase was primarily due to an increase in asset-based cost of revenues of $36.6 million, which directly correlates with the increase to asset-based recurring revenues during the period. Also contributing to this increase was an increase in professional services and other cost of revenues of $6.9 million, primarily as a result of our 2022 Advisor Summit, which was held in-person in 2022, and an increase in subscription-based cost of revenues of $1.2 million. As a percentage of total revenues, cost of revenues increased from 36% to 38% for the years ended December 31, 2021 and 2022.
Compensation and benefits
Compensation and benefits increased 13% from $432.8 million in 2021 to $490.7 million in 2022. The increase is comprised of increases in salaries, benefits and related payroll taxes of $40.5 million, non-cash compensation expense of $12.3 million, and miscellaneous employee related expenses of $3.6 million. These increases were primarily due to increased headcount as a result of growth and acquisitions in the Envestnet Wealth Solutions segment. Also contributing to this increase was an increase in severance expense of $18.8 million, primarily a result of the outsourcing of the arrangement with TCS as well as an organizational realignment in the fourth quarter. These increases were partially offset by a decrease in incentive compensation expense of $20.5 million primarily due to the result of lower revenue and profitability measures achieved in our incentive compensation program. As a percentage of total revenues, compensation and benefits increased from 36% in 2021 to 40% in 2022 primarily due to lower revenue increase compared to a higher growth in compensation and benefits.
General and administration
General and administration expenses increased 26% from $171.7 million in 2021 to $216.1 million in 2022. The increase was primarily due to increases in lease restructuring and transaction costs of $16.6 million driven by the closure of four offices, software and maintenance charges of $13.9 million, travel and entertainment expenses of $5.6 million, communications, research and data services of $3.5 million, insurance, bank and payroll expenses of $2.0 million and miscellaneous other general and administration expenses of $2.5 million. These increases were partially offset by decreases in total occupancy costs of $4.6 million and professional and legal fees of $4.3 million. As a percentage of total revenues, general and administration expenses increased from 14% in 2021 to 17% and 2022, which is primarily attributed to the increase in lease restructuring and other related costs.
Depreciation and amortization
Depreciation and amortization expense increased 11% from $117.8 million in 2021 to $130.5 million in 2022, primarily due to increases in internally developed software amortization expense of $8.4 million, finance lease amortization expense of $4.7 million and intangible asset amortization of $3.3 million. The increases are partially offset by a decrease in fixed assets depreciation of $3.7 million. As a percentage of total revenues, depreciation and amortization expense increased from 10% in 2021 to 11% in 2022.
Interest income
Interest income increased from $0.8 million in 2021 to $4.2 million in 2022, primarily due to an increase the effective interest rates earned on our cash and money market funds compared to the prior year.
Other income (expense), net
Other income (expense), net decreased from other expense of $4.1 million in 2021 to other income of $0.3 million in 2022, primarily due to dilution gains of $9.5 million recorded in 2022 related to equity method investee share issuances partially offset by an increase in losses recorded for our share of losses on our equity method investees and a loss on foreign exchange.
Income tax provision
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 |
| | (in thousands, except for percentages) |
| Income (loss) before income tax provision | | $ | (78,419) | | $ | 20,361 |
| Income tax provision | | 7,061 | | 7,667 |
| Effective tax rate | | (9.0) | % | | 37.7 | % |
Our 2022 effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance we have placed on a portion of US deferred tax assets, the generation of research and development ("R&D") tax credits, executive compensation deduction limitations, income related to Indian partnerships, a change in our India indefinite reinvestment assertion, and state income taxes.
Our 2021 effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance we have placed on a portion of US deferred tax assets, the generation of R&D tax credits, executive compensation deduction limitations, income related to Indian partnerships, and state income taxes.
Year ended December 31, 2021 compared to year ended December 31, 2020
For a discussion of the 2021 Results of Operations compared to 2020, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 25, 2022.
Business Segments
Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Part II, Item 8, “Note 19—Segment Information”. Our business segments are as follows:
Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an Intelligent Financial Life to their clients.
Envestnet Data & Analytics– a leading data aggregation, intelligence, and experiences platform that powers data connectivity and business intelligence across digital financial services to enable them to deliver an Intelligent Financial Life to their clients.
We also incur expenses not directly attributable to the segments listed above. These nonsegment operating expenses include salary and benefits for certain corporate officers, certain types of professional service expenses and insurance, acquisition related transaction costs, certain restructuring charges and other non-recurring and/or non-operationally related expenses.
The following table reconciles income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Envestnet Wealth Solutions | | $ | 55,972 | | | $ | 124,651 | | | $ | 91,501 | |
| Envestnet Data & Analytics | | (20,870) | | | 2,033 | | | (9,943) | |
| Nonsegment operating expenses | | (101,126) | | | (86,143) | | | (62,117) | |
| Income (loss) from operations | | (66,024) | | | 40,541 | | | 19,441 | |
| Interest income | | 4,184 | | | 827 | | | 1,112 | |
| Interest expense | | (16,843) | | | (16,931) | | | (31,504) | |
| Other income (expense), net | | 264 | | | (4,076) | | | 2,906 | |
| Consolidated income (loss) before income tax provision (benefit) | | (78,419) | | | 20,361 | | | (8,045) | |
| Income tax provision (benefit) | | 7,061 | | | 7,667 | | | (5,401) | |
| Consolidated net income (loss) | | (85,480) | | | 12,694 | | | (2,644) | |
| Add: Net (income) loss attributable to non-controlling interest | | 4,541 | | | 602 | | | (466) | |
| Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | (80,939) | | | $ | 13,296 | | | $ | (3,110) | |
Envestnet Wealth Solutions
The following table presents income from operations for the Envestnet Wealth Solutions segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | % Change | | 2020 | | % Change |
| | | (in thousands, except for percentages) |
| Revenues: | | | | | | | | | | |
| Asset-based | | $ | 738,228 | | | $ | 709,376 | | | 4 | % | | $ | 540,947 | | | 31 | % |
| Subscription-based | | 294,997 | | | 267,720 | | | 10 | % | | 248,810 | | | 8 | % |
| Total recurring revenues | | 1,033,225 | | | 977,096 | | | 6 | % | | 789,757 | | | 24 | % |
| Professional services and other revenues | | 16,568 | | | 14,070 | | | 18 | % | | 16,333 | | | (14) | % |
| Total revenues | | 1,049,793 | | | 991,166 | | | 6 | % | | 806,090 | | | 23 | % |
| Operating expenses: | | | | | | | | | | |
| Cost of revenues | | 443,471 | | | 399,313 | | | 11 | % | | 283,497 | | | 41 | % |
| Compensation and benefits | | 312,910 | | | 269,153 | | | 16 | % | | 257,698 | | | 4 | % |
| General and administration | | 140,782 | | | 107,976 | | | 30 | % | | 92,680 | | | 17 | % |
| Depreciation and amortization | | 96,658 | | | 90,073 | | | 7 | % | | 80,714 | | | 12 | % |
| Total operating expenses | | 993,821 | | | 866,515 | | | 15 | % | | 714,589 | | | 21 | % |
| Income from operations | | $ | 55,972 | | | $ | 124,651 | | | (55) | % | | $ | 91,501 | | | 36 | % |
Year ended December 31, 2022 compared to year ended December 31, 2021 for the Envestnet Wealth Solutions segment
Revenues
Asset-based recurring revenues
Asset-based recurring revenues increased 4% from $709.4 million in 2021 to $738.2 million in 2022. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles as result of the upswing in the equity markets in the fourth quarter of 2021, offset by a decline in the equity markets beginning the first quarter of 2022 through the end of 2022. In 2022, revenues were also positively affected by new account growth and positive net flows of AUM/A. The revenue increase was partially offset by existing customers switching from an asset-based pricing model to a subscription-based pricing model.
The number of financial advisors with AUM or AUA on our technology platforms decreased from approximately 40,000 as of December 31, 2021 to approximately 38,000 as of December 31, 2022 and the number of AUM or AUA accounts increased from approximately 2.6 million as of December 31, 2021 to approximately 2.7 million as of December 31, 2022.
As a percentage of total revenues, asset-based recurring revenue decreased from 72% of total revenue in 2021 to 70% in 2022.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 10% from $267.7 million in 2021 to $295.0 million in 2022, primarily due to new and existing customer growth along with additional revenue from existing customers switching from an asset-based pricing model to a subscription-based pricing model.
Professional services and other revenues
Professional services and other revenues increased 18% from $14.1 million in 2021 to $16.6 million in 2022. The increase was primarily due to an increase in revenues resulting from the 2022 Advisor Summit, which was held as an in-person event. The 2021 Advisor Summit was virtual due to the COVID-19 pandemic.
Cost of revenues
Cost of revenues increased 11% from $399.3 million in 2021 to $443.5 million in 2022. The increase was primarily due to an increase in asset-based cost of revenues of $36.6 million directly correlated with the increase in asset-based recurring revenues for the period. Also contributing to this increase was an increase in professional services and other cost of revenues of $7.0 million, primarily as a result of our 2022 Advisor Summit, which was held in-person. As a percentage of segment revenues, cost of revenues increased from 40% in 2021 to 42% in 2022.
Compensation and benefits
Compensation and benefits increased 16% from $269.2 million in 2021 to $312.9 million in 2022, primarily due to increases in salaries, benefits and related payroll taxes of $34.3 million, non-cash compensation of $10.3 million and an increase in severance expense of $8.9 million. These increases primarily relate to an increase in headcount as a result of growth and acquisitions, along with the increase in severance expense related to a fourth quarter organizational realignment. These increases are partially offset by a decrease in incentive compensation expense of $10.4 million primarily a result of lower revenue and profitability measures achieved in our incentive compensation program. As a percentage of segment revenues, compensation and benefits increased from 27% in 2021 to 30% in 2022, primarily due to lower revenue increase as well as higher growth in compensation and benefits.
General and administration
General and administration expenses increased 30% from $108.0 million in 2021 to $140.8 million in 2022, primarily due to increases in lease restructuring and transaction costs of $9.1 million driven by the closure of three offices, software and maintenance charges of $11.5 million, travel and entertainment expenses of $3.3 million, miscellaneous general and administrative expenses of $3.1 million and insurance, bank and payroll charges of $1.5 million. These increases were partially offset by decreases in occupancy costs of $4.1 million and professional services fees of $3.5 million. As a percentage of segment revenues, general and administration expenses increased from 11% in 2021 to 13% in 2022.
Depreciation and amortization
Depreciation and amortization increased 7% from $90.1 million in 2021 to $96.7 million in 2022, primarily due to an increase in internally developed software amortization expense of $4.5 million and an increase in finance lease amortization expense of $2.8 million. These increases are partially offset by other immaterial decreases within depreciation and amortization As a percentage of segment revenues, depreciation and amortization expense remained consistent at 9% in 2021 and 2022.
Year ended December 31, 2021 compared to year ended December 31, 2020 for the Envestnet Wealth Solutions segment
For a discussion of the 2021 Results of Operations compared to 2020 for the Envestnet Wealth Solutions segment, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 25, 2022.
Envestnet Data & Analytics
The following table presents loss from operations for the Envestnet Data & Analytics segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | % Change | | 2020 | | % Change |
| | | (in thousands, except for percentages) |
| Revenues: | | | | | | | | | | |
| Subscription-based | | $ | 182,847 | | | $ | 186,269 | | | (2) | % | | $ | 177,697 | | | 5 | % |
| Professional services and other revenues | | 7,144 | | | 9,082 | | | (21) | % | | 14,443 | | | (37) | % |
| Total revenues | | 189,991 | | | 195,351 | | | (3) | % | | 192,140 | | | 2 | % |
| Operating expenses: | | | | | | | | | | |
| Cost of revenues | | 24,989 | | | 24,410 | | | 2 | % | | 22,432 | | | 9 | % |
| Compensation and benefits | | 109,667 | | | 105,416 | | | 4 | % | | 110,436 | | | (5) | % |
| General and administration | | 42,315 | | | 35,798 | | | 18 | % | | 36,268 | | | (1) | % |
| Depreciation and amortization | | 33,890 | | | 27,694 | | | 22 | % | | 32,947 | | | (16) | % |
| Total operating expenses | | 210,861 | | | 193,318 | | | 9 | % | | 202,083 | | | (4) | % |
| Income (loss) from operations | | $ | (20,870) | | | $ | 2,033 | | | * | | $ | (9,943) | | | (120) | % |
*Not meaningful
Year ended December 31, 2022 compared to year ended December 31, 2021 for the Envestnet Data & Analytics segment
Revenues
Subscription-based recurring revenues
Subscription-based recurring revenues decreased 2% from $186.3 million in 2021 to $182.8 million in 2022, primarily due to the equity market decline impacting our asset management customers in the research business.
Professional services and other revenues
Professional services and other revenues decreased 21% from $9.1 million in 2021 to $7.1 million in 2022, primarily due to the timing of the completion of customer projects and deployments.
Compensation and benefits
Compensation and benefits increased 4% from $105.4 million in 2021 to $109.7 million in 2022, primarily due to increases in severance expense of $7.6 million, miscellaneous employee expense of $2.2 million and salaries, benefits and related payroll taxes of $2.2 million. The increase in severance expense is primarily a result of the outsourcing arrangement with TCS as well as an organizational realignment in the fourth quarter. The increases were partially offset by decreases in incentive compensation of $7.6 million and stock-based compensation expense of $2.0 million. As a percentage of segment revenues, compensation and benefits increased from 54% in 2021 to 58% in 2022. The increase in compensation and benefits as a percentage of total revenues is primarily due to a decrease in revenue as well as an overall increase in compensation and benefits.
General and administration
General and administration expenses increased 18% from $35.8 million in 2021 to $42.3 million in 2022, primarily due to increases in restructuring and transaction costs of $2.8 million, research and data services expense of $2.4 million, travel and entertainment expense of $1.8 million and software and maintenance charges of $1.7 million. These increases were primarily offset by decreases in immaterial other general and administration expenses. As a percentage of segment revenues general and administration expenses increased from 18% in 2021 to 22% in 2022, which is primarily due to a decrease in revenues as well as an overall increase in general and administration expenses.
Depreciation and amortization
Depreciation and amortization increased 22% from $27.7 million in 2021 to $33.9 million in 2022, primarily due to increases in internally developed software amortization expense of $3.8 million and intangible asset amortization expense of $2.6 million. As a percentage of segment revenues, depreciation and amortization expense increased from 14% in 2021 to 18% in 2022. The increase in depreciation and amortization as a percentage of total revenues is primarily due to a decrease in revenues as well as higher amortization expense incurred in 2022 driven by increased capitalization related to internally developed software costs and the procurement of technology solutions from a privately held company.
Year ended December 31, 2021 compared to year ended December 31, 2020 for the Envestnet Data & Analytics segment
For a discussion of the 2021 Results of Operations compared to 2020 for the Envestnet Data & Analytics segment, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 25, 2022.
Nonsegment
The following table presents nonsegment operating expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | % Change | | 2020 | | % Change |
| | | (in thousands, except for percentages) |
| Operating expenses: | | | | | | | | | | |
| Compensation and benefits | | $ | 68,148 | | | $ | 58,260 | | | 17 | % | | $ | 30,836 | | | 89 | % |
| General and administration | | 32,978 | | | 27,883 | | | 18 | % | | 31,281 | | | (11) | % |
| Total operating expenses | | $ | 101,126 | | | $ | 86,143 | | | 17 | % | | $ | 62,117 | | | 39 | % |
Year ended December 31, 2022 compared to year ended December 31, 2021 for Nonsegment
Compensation and benefits
Compensation and benefits increased 17% from $58.3 million in 2021 to $68.1 million in 2022, primarily due to increases in headcount that resulted in increases in non-cash compensation expense of $4.0 million and salaries, benefits and related payroll taxes of $3.3 million. In addition, severance expense increased by $3.4 million as a result of an organization realignment in the fourth quarter of 2022. The increases are partially offset by a decrease in incentive compensation of $2.5 million.
General and administration
General and administration expenses increased 18% from $27.9 million in 2021 to $33.0 million in 2022, primarily due to an increase in restructuring charges and transaction costs of $4.1 million, primarily driven by acquisition activity and system implementation costs.
Year ended December 31, 2021 compared to year ended December 31, 2020 for Nonsegment
For a discussion of the 2021 Results of Operations compared to 2020 for Nonsegment expenses, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 25, 2022.
Non‑GAAP Financial Measures
In addition to reporting results according to GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues,” “adjusted EBITDA,” “adjusted net income” and “adjusted net income per diluted share”.
“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. On January 1, 2022, the Company adopted ASU 2021-08 whereby it now accounts for contract assets and contract liabilities obtained upon a business combination in accordance with ASC 606. Prior to the adoption of ASU 2021-08, we recorded at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition did not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑alone entities. Adjusted revenues has limitations as a financial measure, should be considered as supplemental in nature and is not meant as a substitute for revenue prepared in accordance with GAAP.
“Adjusted EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration and purchase liability, income tax provision (benefit), depreciation and amortization, non‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment to contingent consideration liability, fair market value adjustment on investment in private company, litigation and regulatory related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, gain on acquisition of equity method investment, gain on sale of interest in private company, dilution gain on equity method investee share issuance, loss allocations from equity method investments and (income) loss attributable to non‑controlling interest.
“Adjusted net income” represents net income before deferred revenue fair value adjustment, accretion on contingent consideration and purchase liability, non‑cash interest expense, cash interest on our Convertible Notes (subsequent to the adoption of ASU 2020-06 on January 1, 2021), non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fair market value adjustment to contingent consideration liability, fair market value adjustment to investment in private company, litigation and regulatory related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, dilution gain on equity method investee share issuance, gain on acquisition of equity method investment, gain on sale of interest in private company, loss allocations from equity method investments and (income) loss attributable to non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income. The normalized tax rate is based solely on the estimated blended statutory income tax rates in the jurisdictions in which we operate. We monitor the normalized tax rate based on events or trends that could materially impact the rate, including tax legislation changes and changes in the geographic mix of our operations.
“Adjusted net income per diluted share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted-average shares outstanding. Beginning January 1, 2021, the dilutive effect of our Convertible Notes are calculated using the if-converted method in accordance with the adoption of ASU 2020-06 (See “Note 2—Summary of Significant Accounting Policies”). As a result, 9.9 million potential shares to be issued in connection with our Convertible Notes are assumed to be dilutive for purposes of the adjusted net income per share calculation beginning January 1, 2021.
Our Board and management use these non-GAAP financial measures:
•As measures of operating performance;
•For planning purposes, including the preparation of annual budgets;
•To allocate resources to enhance the financial performance of our business;
•To evaluate the effectiveness of our business strategies; and
•In communications with our Board concerning our financial performance.
Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.
We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share as supplemental performance measures because we believe that they provide our Board, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provides comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets
affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, income tax provision (benefit), non-income tax expense, restructuring charges and transaction costs, accretion on contingent consideration and purchase liability, severance, fair market value adjustment to contingent consideration liability, income or loss allocations from equity method investments, litigation and regulatory related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, gain on acquisition of equity method investment, fair market value adjustment to investment in private company, dilution gain on equity method investee share issuance, income or loss allocations from equity method investments, pre-tax (income) loss attributable to non‑controlling interest and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non‑cash stock‑based compensation expense from adjusted EBITDA and adjusted net income because non‑cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.
We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investors and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
We understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under GAAP. In particular you should consider:
•Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
•Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect non‑cash components of employee compensation;
•Although depreciation and amortization are non‑cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
•Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards, we paid net cash of $12.1 million, $7.9 million, and $8.3 million in the years ended December 31, 2022, 2021 and 2020, respectively. In the event that we generate taxable income and our existing net operating loss carryforwards for federal and state income taxes have been fully utilized or have expired, income tax payments will be higher; and
•Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share differently than we do, limiting their usefulness as a comparative measure.
Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per diluted share to net income and net income per share, the most directly comparable GAAP measures. Further, our management also reviews GAAP measures and evaluates individual measures that are not included in some or all of our non‑GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | (in thousands) |
| Total revenues | | $ | 1,239,784 | | | $ | 1,186,517 | | | $ | 998,230 | |
| Deferred revenue fair value adjustment | | 216 | | | 284 | | | 692 | |
| Adjusted revenues | | $ | 1,240,000 | | | $ | 1,186,801 | | | $ | 998,922 | |
The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA based on our historical results:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | (in thousands) |
| Net income (loss) | | $ | (85,480) | | | $ | 12,694 | | | $ | (2,644) | |
| Add (deduct): | | | | | | |
| Deferred revenue fair value adjustment | | 216 | | | 284 | | | 692 | |
| Interest income | | (4,184) | | | (827) | | | (1,112) | |
| Interest expense | | 16,843 | | | 16,931 | | | 31,504 | |
| Accretion on contingent consideration and purchase liability | | — | | | 730 | | | 1,688 | |
| Income tax provision (benefit) | | 7,061 | | | 7,667 | | | (5,401) | |
| Depreciation and amortization | | 130,548 | | | 117,767 | | | 113,661 | |
| Non-cash compensation expense | | 80,333 | | | 68,020 | | | 57,113 | |
| Restructuring charges and transaction costs | | 35,141 | | | 18,490 | | | 19,383 | |
| Severance | | 30,117 | | | 11,347 | | | 25,110 | |
| Fair market value adjustment to contingent consideration liability | | — | | | (1,067) | | | (3,105) | |
| Fair market value adjustment on investment in private company | | (400) | | | (758) | | | — | |
| Litigation and regulatory related expenses | | 6,055 | | | 7,591 | | | 7,825 | |
| Foreign currency | | 1,419 | | | (7) | | | 116 | |
| Gain on settlement of liability | | — | | | (1,206) | | | — | |
| Gain on insurance reimbursement | | — | | | (968) | | | — | |
| Non-income tax expense adjustment | | 802 | | | (1,347) | | | 421 | |
| Gain on acquisition of equity method investment | | — | | | — | | | (4,230) | |
| Gain on sale of interest in private company | | — | | | — | | | (1,647) | |
| Dilution gain on equity method investee share issuance | | (9,517) | | | — | | | — | |
| Loss allocations from equity method investments | | 8,874 | | | 7,093 | | | 5,399 | |
| (Income) loss attributable to non-controlling interest | | 2,300 | | | (704) | | | (1,830) | |
| Adjusted EBITDA | | $ | 220,128 | | | $ | 261,730 | | | $ | 242,943 | |
The following table sets forth a reconciliation of net income (loss) to adjusted net income and adjusted net income per diluted share based on our historical results:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | | (in thousands) |
| Net income (loss) | | $ | (85,480) | | | $ | 12,694 | | | $ | (2,644) | |
Income tax provision (benefit) (1) | | 7,061 | | | 7,667 | | | (5,401) | |
| Income (loss) before income tax provision (benefit) | | (78,419) | | | 20,361 | | | (8,045) | |
| Add (deduct): | | | | | | |
| Deferred revenue fair value adjustment | | 216 | | | 284 | | | 692 | |
| Accretion on contingent consideration and purchase liability | | — | | | 730 | | | 1,688 | |
| Non-cash interest expense | | 4,678 | | | 5,745 | | | 17,480 | |
Cash interest - Convertible Notes (2) | | 10,897 | | | 9,919 | | | — | |
| Non-cash compensation expense | | 80,333 | | | 68,020 | | | 57,113 | |
| Restructuring charges and transaction costs | | 35,141 | | | 18,490 | | | 19,383 | |
| Severance | | 30,117 | | | 11,347 | | | 25,110 | |
| Amortization of acquired intangibles | | 71,901 | | | 68,587 | | | 73,559 | |
| Fair market value adjustment to contingent consideration liability | | — | | | (1,067) | | | (3,105) | |
| Fair market value adjustment to investment in private company | | (400) | | | (758) | | | — | |
| Litigation and regulatory related expenses | | 6,055 | | | 7,591 | | | 7,825 | |
| Foreign currency | | 1,419 | | | (7) | | | 116 | |
| Gain on settlement of liability | | — | | | (1,206) | | | — | |
| Gain on insurance reimbursement | | — | | | (968) | | | — | |
| Non-income tax expense adjustment | | 802 | | | (1,347) | | | 421 | |
| Gain on acquisition of equity method investment | | — | | | — | | | (4,230) | |
| Gain on sale of interest in private company | | — | | | — | | | (1,647) | |
| Dilution gain on equity method investee share issuance | | (9,517) | | | — | | | — | |
| Loss allocations from equity method investments | | 8,874 | | | 7,093 | | | 5,399 | |
| (Income) loss attributable to non-controlling interest | | 2,300 | | | (704) | | | (1,830) | |
| Adjusted net income before income tax effect | | 164,397 | | | 212,110 | | | 189,929 | |
Income tax effect (3) | | (41,921) | | | (54,088) | | | (48,432) | |
| Adjusted net income | | $ | 122,476 | | | $ | 158,022 | | | $ | 141,497 | |
| | | | | | |
| Basic number of weighted-average shares outstanding | | 55,199,482 | | | 54,470,975 | | | 53,589,232 | |
| Effect of dilutive shares: | | | | | | |
| Options to purchase common stock | | 111,327 | | | 206,022 | | | 416,593 | |
| Unvested restricted stock units | | 390,270 | | | 633,384 | | | 592,033 | |
| Convertible Notes | | 10,092,369 | | | 9,898,549 | | | 414,398 | |
| Warrants | | — | | | 73,715 | | | 58,459 | |
| Diluted number of weighted-average shares outstanding | | 65,793,448 | | | 65,282,645 | | | 55,070,715 | |
| Adjusted net income per share - diluted | | $ | 1.86 | | | $ | 2.42 | | | $ | 2.57 | |
(1)For the years ended December 31, 2022, 2021 and 2020, the effective tax rate computed in accordance with GAAP equaled (9.0)%, 37.7% and 67.1%, respectively.
(2)Cash interest on the Company's Convertible Notes included only for the for the year ended December 31, 2022 and 2021 due to the adoption of ASU 2020-06 on January 1, 2021 (See Part II, Item 8, "Note 2—Summary of Significant Accounting Policies”).
(3)Estimated normalized effective tax rate of25.5% has been used to compute adjusted net income for all years presented.
Note on Income Taxes: As of December 31, 2022, we had net operating loss carryforwards of approximately $69 million and $221 million for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes we pay for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with GAAP, and from the normalized rate shown above.
The following tables set forth a reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 |
| | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Nonsegment | | Total |
| | | (in thousands) |
| Revenues | | $ | 1,049,793 | | | $ | 189,991 | | | $ | — | | | $ | 1,239,784 | |
| Deferred revenue fair value adjustment | | 216 | | | — | | | — | | | 216 | |
| Adjusted revenues | | $ | 1,050,009 | | | $ | 189,991 | | | $ | — | | | $ | 1,240,000 | |
| | | | | | | | |
| Income (loss) from operations | | $ | 55,972 | | | $ | (20,870) | | | $ | (101,126) | | | $ | (66,024) | |
| Add (deduct): | | | | | | | | |
| Deferred revenue fair value adjustment | | 216 | | | — | | | — | | | 216 | |
| | | | | | | | |
| Depreciation and amortization | | 96,658 | | | 33,890 | | | — | | | 130,548 | |
| Non-cash compensation expense | | 47,043 | | | 10,739 | | | 22,551 | | | 80,333 | |
| Restructuring charges and transaction costs | | 22,868 | | | 3,734 | | | 8,539 | | | 35,141 | |
| Severance | | 12,415 | | | 11,567 | | | 6,135 | | | 30,117 | |
| | | | | | | | |
| Litigation and regulatory related expenses | | — | | | 6,055 | | | — | | | 6,055 | |
| Non-income tax expense adjustment | | 878 | | | (76) | | | — | | | 802 | |
| Loss attributable to non-controlling interest | | 2,300 | | | — | | | — | | | 2,300 | |
| Other | | 635 | | | 5 | | | — | | | 640 | |
| Adjusted EBITDA | | $ | 238,985 | | | $ | 45,044 | | | $ | (63,901) | | | $ | 220,128 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2021 |
| | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Nonsegment | | Total |
| | | (in thousands) |
| Revenues | | $ | 991,166 | | | $ | 195,351 | | | $ | — | | | $ | 1,186,517 | |
| Deferred revenue fair value adjustment | | 284 | | | — | | | — | | | 284 | |
| Adjusted revenues | | $ | 991,450 | | | $ | 195,351 | | | $ | — | | | $ | 1,186,801 | |
| | | | | | | | |
| Income (loss) from operations | | $ | 124,651 | | | $ | 2,033 | | | $ | (86,143) | | | $ | 40,541 | |
| Add (deduct): | | | | | | | | |
| Deferred revenue fair value adjustment | | 284 | | | — | | | — | | | 284 | |
| Accretion on contingent consideration and purchase liability | | 632 | | | 98 | | | — | | | 730 | |
| Depreciation and amortization | | 90,073 | | | 27,694 | | | — | | | 117,767 | |
| Non-cash compensation expense | | 36,787 | | | 12,634 | | | 18,599 | | | 68,020 | |
| Restructuring charges and transaction costs | | 13,795 | | | 242 | | | 4,453 | | | 18,490 | |
| Severance | | 4,614 | | | 4,016 | | | 2,717 | | | 11,347 | |
| Fair market value adjustment to contingent consideration liability | | — | | | (1,067) | | | — | | | (1,067) | |
| Litigation and regulatory related expenses | | — | | | 7,591 | | | — | | | 7,591 | |
| Non-income tax expense adjustment | | (1,507) | | | 160 | | | — | | | (1,347) | |
| Income attributable to non-controlling interest | | (704) | | | — | | | — | | | (704) | |
| Other | | 78 | | | — | | | — | | | 78 | |
| Adjusted EBITDA | | $ | 268,703 | | | $ | 53,401 | | | $ | (60,374) | | | $ | 261,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2020 |
| | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Nonsegment | | Total |
| | | (in thousands) |
| Revenues | | $ | 806,090 | | | $ | 192,140 | | | $ | — | | | $ | 998,230 | |
| Deferred revenue fair value adjustment | | 692 | | | — | | | — | | | 692 | |
| Adjusted revenues | | $ | 806,782 | | | $ | 192,140 | | | $ | — | | | $ | 998,922 | |
| | | | | | | | |
| Income (loss) from operations | | $ | 91,501 | | | $ | (9,943) | | | $ | (62,117) | | | $ | 19,441 | |
| Add (deduct): | | | | | | | | |
| Deferred revenue fair value adjustment | | 692 | | | — | | | — | | | 692 | |
| Accretion on contingent consideration and purchase liability | | 1,430 | | | 258 | | | — | | | 1,688 | |
| Depreciation and amortization | | 80,714 | | | 32,947 | | | — | | | 113,661 | |
| Non-cash compensation expense | | 35,797 | | | 14,932 | | | 8,908 | | | 59,637 | |
| Restructuring charges and transaction costs | | 6,878 | | | 2,304 | | | 10,201 | | | 19,383 | |
| Severance | | 18,617 | | | 4,628 | | | 1,865 | | | 25,110 | |
| Fair market value adjustment to contingent consideration liability | | — | | | (3,105) | | | — | | | (3,105) | |
| Litigation and regulatory related expenses | | — | | | 7,825 | | | — | | | 7,825 | |
| Non-income tax expense adjustment | | 514 | | | (93) | | | — | | | 421 | |
| Income attributable to non-controlling interest | | (1,830) | | | — | | | — | | | (1,830) | |
| Other | | 15 | | | 5 | | | — | | | 20 | |
| Adjusted EBITDA | | $ | 234,328 | | | $ | 49,758 | | | $ | (41,143) | | | $ | 242,943 | |
Liquidity and Capital Resources
As of December 31, 2022, we had total cash and cash equivalents of $162.2 million compared to $429.3 million as of December 31, 2021.
We plan to use existing cash as of December 31, 2022, cash generated in the ongoing operations of our business and amounts under our revolving credit facility to fund our current operations, capital expenditures and possible acquisitions or other strategic activity, and to meet our debt service obligations. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements we may be required to borrow under our revolving credit facility or incur additional debt to fund our ongoing operations or to fund potential acquisitions or other strategic activities.
Credit Agreement
On February 4, 2022, we entered into a First Amendment to the Third Amended and Restated Credit Agreement (the "Third Credit Agreement"), dated as of February 4, 2022. The Third Credit Agreement amended and restated, in its entirety, the prior credit agreement.
The First Amendment to the Third Credit Agreement amended certain provisions under the Third Credit Agreement to (i) permit us to enter into derivative transactions related to our common stock in connection with the issuance of any convertible indebtedness permitted to be incurred under the Third Credit Agreement and (ii) eliminate the testing of the liquidity covenant on March 31, 2023. The Third Credit Agreement amended certain provisions under the prior credit agreement to, among other things, (i) extend the maturity of loans and the revolving credit commitments, (ii) reduce the interest payable on the loans, and (iii) increase capacity and flexibility under certain of the negative covenants.
The Third Credit Agreement provides, subject to certain customary conditions, for the Revolving Credit Facility, in an aggregate amount of $500.0 million, with a $20.0 million sub-facility for letters of credit.
Proceeds under the Third Credit Agreement may be used to finance capital expenditures and permitted acquisitions and for working capital and general corporate purposes.
Outstanding loans under the Revolving Credit Facility accrue interest, at our option, at a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term SOFR plus an applicable margin ranging from 1.25% to 2.75% per annum, in each case based upon our total net leverage ratio, as calculated pursuant to the Third Credit Agreement. The undrawn portion of the commitments under the Revolving Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum based upon our total net leverage ratio, as calculated pursuant to the Third Credit Agreement. Borrowings made under the Third Credit Agreement are scheduled to mature on February 4, 2027.
There are no amounts outstanding under the Revolving Credit Facility and we have $500.0 million available to borrow under the Revolving Credit Facility, subject to covenant compliance.
Convertible Notes
In November 2022, we issued $575.0 million aggregate principal amount of Convertible Notes due 2027. The Convertible Notes due 2027 will mature on December 1, 2027, unless otherwise repurchased, redeemed or converted. Net proceeds from the offering were approximately $558.7 million. The Convertible Notes due 2027 bear interest at a rate of 2.625% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2023.
Using proceeds from the issuance of the Convertible Notes due 2027, we repurchased $300.0 million of the $345.0 million of convertible notes issued in May 2018 that mature on June 1, 2023 (the “Convertible Notes due 2023”) for cash consideration of approximately $312.4 million and recognized a loss on extinguishment of approximately $13.4 million recognized in interest expense. As of December 31, 2022, aggregate principal of $45.0 million less unamortized debt issuance costs of $0.1 million remain outstanding after the repurchase. The Convertible Notes due 2023 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 1 and December 1 of each year.
Using proceeds from the issuance of the Convertible Notes due 2027, we repurchased $200.0 million of the $517.5 million of convertible notes issued in August 2020 that mature on August 15, 2025 (the “Convertible Notes due 2025”) for cash consideration of approximately $181.8 million and recognized a gain on extinguishment of approximately $15.1 million recognized in interest expense. As of December 31, 2022, aggregate principal of $317.5 million less unamortized debt issuance costs of $4.8 million remaining outstanding after the repurchase. The Convertible Notes due 2025 bear interest at a rate of 0.75% per annum payable semiannually in arrears on February 15 and August 15 of each year.
See Part II, Item 8, “Note 10—Debt” for further information regarding the terms of our Convertible Notes.
Capped Call Transactions
In connection with the pricing of the Convertible Notes due 2027, we entered into privately negotiated Capped Call Transactions with certain financial institutions for a total cost of approximately $79.6 million. The Capped Call Transactions initially cover the number of shares of our common stock underlying the Convertible Notes due 2027, subject to customary anti-dilution adjustments. The Capped Call Transactions are net purchased call options on our common stock.
Issuance and sale of Common Shares to BlackRock
On December 20, 2018, we issued and sold to BlackRock, Inc. (“BlackRock”) warrants to purchase approximately 470,000 common shares of our common stock at an exercise price of $65.16 per share, subject to customary anti-dilution adjustments. The warrants were exercisable at BlackRock’s option for four years from the date of issuance. The warrants were unexercised upon expiration on December 20, 2022.
Impact of Tax Cuts and Jobs Act
Beginning in 2022, the Tax Cuts and Jobs Act (“TCJA”) eliminates the option to deduct research and development ("R&D") expenditures currently and requires taxpayers to amortize them pursuant to IRC Section 174. As a result, in 2023, we expect the amount of cash we pay for income taxes to increase compared to 2022.
Cash Flows
The following table presents information regarding our cash flows for the periods indicated:
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 |
| | | (in thousands) |
| Net cash provided by operating activities | | $ | 117,037 | | | $ | 250,577 | |
| Net cash used in investing activities | | (251,126) | | | (176,138) | |
| Net cash used in financing activities | | (127,002) | | | (29,170) | |
| Effect of exchange rate on changes on cash | | (6,164) | | | (555) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | (267,255) | | | $ | 44,714 | |
| | | | |
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2022 was $117.0 million compared to net cash provided by operating activities of $250.6 million for the same period in 2021. The decrease was primarily due to an increase in pre-tax net loss period over period of $98.8 million, a decrease in the change in operating assets and liabilities of $72.3 million, which is primarily timing related, and gains on equity method investee share issuances recorded in 2022 of $9.5 million. These were partially offset by year-over-year increases in lease-related impairment charges and loss on property and equipment disposals driven by office closures of $19.3 million, noncash addbacks for depreciation and amortization expense of $12.8 million, and non-cash compensation expense of $12.3 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was $251.1 million compared to net cash used in investing activities of $176.1 million for the same period in 2021. The increase was primarily due to year-over-year increases of $61.7 million in net disbursements related to acquisitions and investments in privately held companies and an additional $24.0 million of internally developed software costs capitalized in 2022 compared to 2021. These increases were partially offset by decreases in cash disbursements of $10.5 million for acquisitions of proprietary technology, purchases of property and equipment of $7.6 million and issuance of notes receivable to equity method investees of $6.4 million.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2022 was $127.0 million compared to net cash used in financing activities of $29.2 million for the same period in 2021. In November 2022, we received proceeds of approximately $558.7 million from the issuance of the Convertible Notes due 2027. We repurchased $312.4 million of the Convertible Notes due 2023 and $181.8 million of the Convertible Notes due 2025. Additionally, we used approximately $79.6 million from the net proceeds to pay the cost of entering into Capped Call Transactions. We also increased share repurchases of $81.7 million and increased finance lease payments of $18.7 million in 2022 also contributed to the year-over-year increase. These increases in net cash used in financing activities were partially offset by additional capital contributions of $12.8 million in 2022 made by non-controlling shareholders and decreased contingent consideration payments of $8.5 million.
Commitments
We enter into unconditional purchase obligations arrangements for certain of our services that we receive in the normal course of business. As of December 31, 2022, the Company estimated future minimum unconditional purchase obligations of approximately $103 million. This amount increased by $65 million compared to the prior year primarily driven by our entry into the outsourcing agreement with TCS.
As of December 31, 2022, future minimum lease payments under non-cancellable leases were $154.7 million. These leases expire at various dates prior to 2033.
In connection with certain of our acquisitions, we have entered into arrangements whereby we have agreed to pay performance bonuses up to $20 million based upon the achievement of certain performance targets. As of December 31, 2022, the liabilities associated with these performance bonuses were immaterial.
We have also committed $12.5 million in future funding to certain of our equity method investees.
We expect to increase our capital expenditures to approximately $33 million in 2023 compared to approximately $16 million in 2022. Subsequent to 2023, we expect to spend approximately $19 - $30 million per year on capital expenditures.
We have entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $18.0 million, including an advance of $3.0 million. We closed the transaction on February 1, 2022 and paid the remaining $15.0 million on February 2, 2022. This proprietary technology asset has been integrated into the Envestnet Data & Analytics segment and is being amortized over an estimated useful life of five years. In addition, the agreement includes an earn-out payment of $10.0 million based upon the achievement of certain target metrics within five years after the date of our launch of the technology solutions. The parties have agreed to renegotiate the terms of the earn-out payment. On April 1, 2022, we entered into a purchase agreement with this same privately held company to acquire certain technology solutions being developed by this privately held company for an original purchase price of $9.0 million, including an advance of $4.0 million. The purchase agreement was amended subsequent to December 31, 2022 to increase the purchase price to $14 million for additional functionality.
We include various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. We have experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to these indemnification and guarantee provisions. We believe that it is unlikely that we will have to make material payments under these arrangements and therefore we have not recorded a contingent liability in the consolidated balance sheets.
Critical Accounting Policies
and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States or (“U.S. GAAP”). The accounting policies described below require management to apply significant judgment in connection with the preparation of our consolidated financial statements. In particular, judgment is applied to determine the appropriate assumptions to be used in calculating estimates that affect certain reported amounts in our consolidated financial statements. These estimates and assumptions are based on historical experience and on various other factors that we believe to be reasonable under the circumstances. If different estimates or assumptions were used, our results of operations, financial condition and cash flows could have been materially different than those reflected in our consolidated financial statements. For additional information regarding our critical accounting policies, see Part II, Item 8, “Note 2 - 2—Summary of Significant Accounting Policies”.
Revenue Recognition
Revenues are derived from asset-based and subscription-based services and professional services and other sources. Revenues are recognized when control of these services is transferred to
our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the consolidated
financial statements
in Part II, Item 8.Revenue recognition
We recognizeof operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.
Asset-based recurring revenues—Asset-based recurring revenues when all fourprimarily consist of the following criteria have been met: | ·
| | Persuasive evidence of an arrangement exists;
|
| ·
| | The product has been delivered or the service has been performed;
|
| ·
| | The fee is fixed or determinable;fees for providing customers continuous access to platform services through our uniquely customized platforms. These platform services include investment manager research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and
|
| ·
| | Collectability is reasonably assured.
|
Types of revenues
We generate revenues from assets under management or administration and are made available to customers throughout the contractual term from licensing, subscriptions and professional service fees.
Revenues fromthe date the customized platform is launched.
The asset-based fees we earn are generally based upon variable percentages of assets under managementmanaged or administration are generated from feesadministered on our platforms. The fee percentage varies based on a contractual percentage of assets under management or administration valued at each quarter‑end. These fees are generally collected at the beginning of a quarter in advance based upon the previous quarter‑end values. In less than 10% of our assets under management or administration contracts, fees are collected at the end of the quarter based upon the average daily balance. The contractual fee percentages vary based upon the level and type of services we provide to our customers. Pursuantcustomers, as well as the values of existing customer accounts. The values of the customer accounts are affected by inflows or outflows of customer funds and market fluctuations.
The platform services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the contracts withcustomer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our customers, we calculate ourservices and each quarter is separately identified in the contract, and are considered to be a single performance obligation under ASC 606.
The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees
are generally calculated and billed quarterly in advance based on
preceding quarter-end values and the
asset values, without making any judgment or estimates. None of our fees isvariable amounts earned
pursuantfrom the platform services relate specifically to
performance‑based or other incentive‑based arrangements.Subscriptionthe benefits transferred to the customer during that quarter. Accordingly, revenue is primarily derived from customers accessingallocated to the Envestnet | Yodlee platform or the Envestnet | Tamarac platformspecific quarter in which services are performed.
The asset-based contracts generally contain one performance obligation and
include subscription, support, and usage-based fees. Subscription revenue is recognized
ratablyon a ratable basis over the
contracted term of each respective subscription agreement, commencingquarter beginning on the date
that the
service is provisionedplatform services are made available to the customer
providedas the
four revenue recognition criteria have been satisfied. Usage-based revenues are recognized as earned, providedcustomer simultaneously consumes and receives the
four revenue recognition criteria have been satisfied.We generate revenues from licensing fees pursuant to recurring contractual fixed‑fee agreements. Our licensing fees vary based on the type of services we provide.
We also generate revenues from professional service fees by providing customers with customized technology platform software development and implementation services. These revenues are received pursuant to contracts that generally detail the naturebenefits of the services to be provided by us, the estimated number of hours such work will require and the total contract fee amount.
Recognition of revenues
Application of the applicable accounting principles of U.S. GAAP requires us to make judgments and estimates in connection with the measurement and recognition of certain revenues. Revenuesservices. All asset-based fees are recognized in the period in whichEnvestnet Wealth Solutions segment.
For certain services provided by third parties, we evaluate whether we are the related services are provided. In certain cases, management is required to determine whether revenues should be recognized in an amount equal to theprincipal (revenues reported on a gross basis) or agent (revenues reported on a net basis). Generally, we report customer fees we receive or net of payments of expenses to third‑parties, such asincluding charges for third party investment managers and custodians, that perform services for us in connection with certain of our financial advisors’ client accounts. Generally, when fees are collected for investment management, clearing, custody or brokerage services in circumstancesservice providers where we do not have a direct contract with such third party service providers on a gross basis, whereas the third‑party provider, the feesamounts billed to our customers are recorded as revenue on a net basis. Fees we received in advance of the performance of servicesrevenues, and amounts paid to third party service providers are recorded as deferredcost of revenues. We are the principal in the transaction because we control the services before they are transferred to our customers. Control is evidenced by being primarily responsible to our customers and having discretion in establishing pricing.
Subscription-based recurring revenues—Subscription-based recurring revenues onprimarily consist of fees for providing customers continuous access to our consolidated balance sheetplatform for wealth management and financial wellness. The subscription-based fees generally include fixed fees and or usage-based fees.
Generally, the subscription services are substantially the same over each quarter and performed in a similar manner over the contract period, and are
recognizedconsidered stand-ready promises. Quarterly subscription services are considered distinct as
revenues when earned, generally over three months.The Company derives subscription and licensing fees from recurring contractual fixed fee contracts with larger financial institutions or enterprise clients. Licensing contracts allow the customer can benefit from each increment of services on its own and each quarter is separately identified in the contract, and services are considered to providebe a unique configurationsingle performance obligation under the ASC 606.
The usage-based pricing generally resets each quarter and the pricing structure is generally consistent throughout the term of
platform featuresthe contract. The fixed fees are generally calculated and
investment solutions for their advisors.billed quarterly in advance. The
licensingusage-based fees
varyare generally calculated and are billed either monthly or quarterly based on the
type of services providedactual usage and
our revenues received under license agreements are recognized overrelate specifically to the
contractual term. The Company’s license agreements do not generally provide its customers the ability to take possession of the software or host the software on the customers’ own systems or through a hosting arrangement with an unrelated party.When the Company enters into arrangements with multiple deliverables, exclusive of arrangements with software deliverables, it applies the FASB’s guidance for revenue arrangements with multiple deliverables and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (i) whether the delivered item has valuebenefits transferred to the customer on a stand‑alone basis, and (ii) if the contract includes a general right of return relative to the delivered item, deliveryduring that month or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Revenuequarter. Accordingly, revenue is allocated to each unit of accounting or element basedthe specific quarter in which services are performed.
Certain subscription-based contracts contain multiple performance obligations(i.e. platform services performance obligation and professional services performance obligation). Fixed fees are generally recognized on relative selling prices. The Company determines relative selling prices by using either (a) vendor‑specific objective evidence (“VSOE”) if it exists; or (b) third‑party evidence (“TPE”) of selling price. When neither VSOE nor TPE of selling price exists for a deliverable,ratable basis over the Company uses its best estimatequarter beginning when the subscription services are made available to the customer, as the customer simultaneously receives and consumes the benefits of the selling price for that deliverable.After determining which deliverables representsubscription services. Usage-based revenue is recognized on a separate unit of accounting, each unit is then accounted for undermonthly basis as the applicable revenue recognition guidance. In cases where elements cannot be treatedcustomer receives and consumes the benefit as separate units of accounting,we provide the elementsservices. Subscription-based fees are combined into a single unit of accounting for revenue recognition purposes. If one ofrecognized in both the elements that are combined into a single unit of accounting is fees fromEnvestnet Wealth Solutions and Envestnet Data & Analytics segments.
Professional services and other revenues—We earn professional services including implementation relatedfees by providing contractual customized services or customized serviceand platform software development the professional service fees are recognized over the course of the expected customer relationship. We have estimated the life of the customer relationship by considering both the historical retention rate of our customers while not exceeding the number of years over which we can accurately forecast future revenues. We currently estimate this term to be five years.The Company also derives professional service fees from providing contractual customized platform software development andas well as initial implementation fees. Professional services which are recognized under a proportional‑performance model utilizing an output‑based approach. The Company’s contracts generally have fixed prices, and generally specify or quantify deliverables.
Ourthe deliverables in the contract. Certain professional services contracts are billed on a time and materials basis and revenue recognition is also affected by our judgment in determining whether collectability is reasonably assured. With regard to allowances for uncollectible receivables, we consider customer‑specific information related to delinquent accounts and past loss experience,recognized over time as well as current economic conditions in establishing the amount of the allowance.
Purchase accounting
Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions, we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and contingent consideration.
Acquired intangible assets, excluding goodwill, are valued usingperformed. For contracts billed on a discounted cash flow methodology based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projectedfixed price basis, revenue growth rates, margins, and forecasted cash flowsis recognized over time based on the discount rateproportion of services performed. Initial implementation fees are fixed and terminal growth rate. Management projectsare generally recognized ratably over the contract term.
Other revenues primarily include revenue growth rates, margins and cash flows based onrelated to the historical operating resultsAdvisor Summit. Other revenue is recognized when the events are held. Other revenue is not significant.
The majority of the
acquired entity adjusted for synergies anticipated to be achieved through integration, expected futureprofessional services and other contracts contain one performance
operational strategies,obligation. Professional services and
other revenues are recognized in both the
general macroeconomic environment. We review finite‑lived intangible assets for triggering events such as significant changes in operations, customers or future revenue that might indicate the need to impair the assets acquired or change the useful lives of the assets acquired. There was no impairment recognized on intangible assets in 2017, 2016 or 2015.Assumed liabilities are valued based on estimates of anticipated expenditures to be incurred to satisfy the assumed obligations, including contractual liabilities assumed, which require the exercise of professional judgment.
Assumed contracts may have favorable or unfavorable terms that must be valued as of the acquisition date. Such valuation is subject to management judgment regarding the evaluationEnvestnet Wealth Solutions and interpretation of contract terms in relation to other economic circumstances, such as the market rates for office space leases.
If we assume a performance obligation to customers as of the acquisition date, a deferred revenue obligation is recognized. Judgment is required to evaluate whether a future performance obligation exists and to assign a value to the performance obligation.
Assumed acquired tax liabilities for uncertain tax positions are dependent on assessing the past practices of the acquisition target based on our review of actual tax filings and information obtained through due diligence procedures. Evaluation of the validity of tax positions taken by the acquisition target are subject to management judgment.
The Company determines the fair value of contingent acquisition consideration payable on the acquisition date using a discounted cash flow approach utilizing an appropriate discount rate. Each reporting period thereafter, the Company revalues these obligations and records increases or decreases in their fair value as adjustments to fair market value adjustment on contingent consideration in the Company’s consolidated statements of operations. Changes in the fair value of the contingent acquisition consideration payable can result from adjustments to the estimated revenue forecasts included in the contingent payment calculations.
Envestnet Data & Analytics segments.
Reviews for impairment of goodwill and acquired intangible assets
Goodwill is tested for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the relevant
U.S. GAAP authoritative guidance, we aggregate components of a single operating segment into a reporting unit, if appropriate. For purposes of performing the impairment tests, we identify reporting units in accordance with
U.S. GAAP. The identification of reporting units and consideration of aggregation criteria requires management judgment.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a quantitative evaluation must be performed. If the carrying value of a reporting unit’s goodwill exceeds its fair value, then an impairment loss equal to the difference will be recorded. In accordance with applicable accounting guidance, prior to performing the quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the
fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, the Company iswe are not required to complete the quantitative goodwill impairment evaluation. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves management judgment.
Envestnet
We completed
itsour annual goodwill impairment test as of October 31,
20172022 for the fiscal year ended December 31,
2017.2022. At that date,
Envestnetwe determined it was appropriate to aggregate certain components of the same operating segment into a single reporting unit.
The Company hasWe concluded that
it haswe have two reporting units.
EnvestnetWe also determined that it was more likely than not that the fair value of
itsthe reporting units exceeded the carrying value and concluded that goodwill was not impaired. As a result,
the Companywe did not perform the quantitative goodwill impairment evaluation.
As part of the
Company’s ongoing monitoring efforts to assess goodwill for possible indications of impairment, we will continue to consider a wide variety of factors, including but not limited to the global economic environment and its potential impact on
Envestnet’sour business. There can be no assurance that our estimates and assumptions regarding forecasted cash flows of certain reporting units, the current economic environment, or the other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.
Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. No
intangible asset impairment charges have been recorded for the years ended December 31,
2017, 20162022, 2021 and
2015.2020.
We are subject to income taxes in the United States, Australia, Canada, India, and the United Kingdom. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.
We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
the Company’sour income tax provision in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount that we determine is more-likely-than-not to be realized in the future.
In our ordinary course of business, we may enter into transactions for which the ultimate tax determination is uncertain. In such cases, we establish reserves for tax-related uncertainties based on our estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will be reflected in our provision for income taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The amount of income tax we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for the foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitations on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. It is anticipated that the net deferred tax liability position of our January 2018 acquisition of Folio Dynamix will cause the Company to release a portion of its valuation allowance during the first quarter of 2018.
Our effective tax rates differ from the statutory rates primarily due to
state taxes, permanent differences,the change in the valuation allowance the Company has placed on a portion of its US deferred tax assets, the generation of R&D tax credits,
unrecognized tax benefits, prior period true-ups, changes in valuation allowances, changes in ratesthe executive compensation deduction limitation, income related to the India partnerships and
tax reform.state taxes. Our provision for income taxes varies based on, among other things, changes in the valuation of our deferred tax assets and liabilities, the tax effects of non-cash stock-based compensation or changes in applicable tax laws, regulations and accounting principles or interpretations thereof.
We are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our results of operations, financial condition and cash flows.
Our Indian
subsidiary issubsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31,
20052020, 2019, 2018, 2017, 2012, 2011 and
forward.2010. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets.
It is possible that one or more of these audits may be finalized within the next twelve months.Recent Accounting Pronouncements Results of Operations
| | | | | | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2017 | | | 2016 | | Percent Change | | | 2015 | | Percent Change | |
| | | | (in thousands) | | | | | (in thousands) | | | |
Revenues: | | | | | | | | | | | | | | | | | |
Assets under management or administration | | | $ | 410,016 | | | $ | 352,498 | | 16 | % | | $ | 333,684 | | 6 | % |
Subscription and licensing | | | | 245,867 | | | | 198,125 | | 24 | % | | | 75,280 | | 163 | % |
Professional services and other | | | | 27,796 | | | | 27,541 | | 1 | % | | | 11,955 | | 130 | % |
Total revenues | | | | 683,679 | | | | 578,164 | | 18 | % | | | 420,919 | | 37 | % |
Operating expenses: | | | | | | | | | | | | | | | | | |
Cost of revenues | | | | 219,037 | | | | 180,590 | | 21 | % | | | 161,309 | | 12 | % |
Compensation and benefits | | | | 264,392 | | | | 241,584 | | 9 | % | | | 139,756 | | 73 | % |
General and administration | | | | 121,010 | | | | 115,435 | | 5 | % | | | 72,900 | | 58 | % |
Depreciation and amortization | | | | 62,820 | | | | 63,999 | | (2) | % | | | 27,962 | | 129 | % |
Total operating expenses | | | | 667,259 | | | | 601,608 | | 11 | % | | | 401,927 | | 50 | % |
Income (loss) from operations | | | | 16,420 | | | | (23,444) | | (170) | % | | | 18,992 | | * | |
Other income (expense): | | | | | | | | | | | | | | | | | |
Interest income | | | | 201 | | | | 37 | | * | | | | 338 | | (89) | % |
Interest expense | | | | (16,347) | | | | (16,600) | | (2) | % | | | (10,271) | | 62 | % |
Other income (expense), net | | | | (1,963) | | | | (483) | | * | | | | (71) | | * | % |
Total other expense, net | | | | (18,109) | | | | (17,046) | | 6 | % | | | (10,004) | | 70 | % |
Income (loss) before income tax provision (benefit) | | | | (1,689) | | | | (40,490) | | (96) | % | | | 8,988 | | * | |
Income tax provision | | | | 1,591 | | | | 15,077 | | (89) | % | | | 4,552 | | * | |
Net income (loss) | | | | (3,280) | | | | (55,567) | | (94) | % | | | 4,436 | | * | |
Add: Net loss attributable to non-controlling interest | | | | — | | | | — | | * | | | | — | | * | |
Net income (loss) attributable to Envestnet, Inc. | | | $ | (3,280) | | | $ | (55,567) | | (94) | % | | $ | 4,436 | | * | |
Year ended December 31, 2017 compared to year ended December 31, 2016
Revenues
Total revenues increased 18% from $578,164 in 2016 to $683,679 in 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles in 2017, relative to the corresponding period in 2016 and an increase in subscription and licensing revenues of $47,742, of which $26,034 was related to the Envestnet | Yodlee segment primarily attributable to our data analytics and FI and YI channels. Revenues from assets under management or administration comprised 60% and 61% of total revenues in 2017 and 2016, respectively.
Assets under management or administration
Revenues earned from assets under management or administration increased 16% from $352,498 in 2016 to $410,016 in 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles in 2017, relative to the corresponding period in 2016. In 2017, revenues were further positively affected by new account growth, market appreciation and positive net flows of AUM or AUA during 2016 and 2017, partially offset by a lower overall effective fee rate on AUM/A.
The number of financial advisors with AUM or AUA on our technology platforms increased from 36,483 as of December 31, 2016 to 40,485 as of December 31, 2017 and the number of AUM or AUA client accounts increased from approximately 1,540,000 as of December 31, 2016 to approximately 1,900,000 as of December 31, 2017.
Subscription and licensing
Subscription and licensing revenues increased 24% from $198,125 in 2016 to $245,867 in 2017. This increase was primarily due to an increase in Envestnet | Yodlee contributing an additional $26,034, Envestnet | Tamarac related revenue of $12,212 and Envestnet | Enterprise revenue of $9,496. The increase in the Envestnet | Yodlee segments was primarily attributable to our data analytics and FI and YI channels. The Envestnet | Tamarac revenue increase resulted from the continued addition of new clients and selling additional services to existing clients. The Envestnet | Enterprise revenue increase was primarily attributable to a significant client which attributed revenue for an entire year during 2017 as compared to a portion of 2016.
Professional services and other
Professional services and other revenues increased 1% from $27,541 in 2016 to $27,796 in 2017. This was primarily due to relatively consistent year over year implementation fees and data analytics customer deployments.
Cost of revenues
Cost of revenues increased 21% from $180,590 in 2016 to $219,037 in 2017, primarily due to the corresponding increase in revenues from AUM or AUA. As a percentage of total revenues, cost of revenues increased from 31% in 2016 to 32% in 2017. The increase in cost of revenues as a percentage of total revenue is primarily a result of the an increase in third party consulting and professional services for new data analytics customer deployments and hosting and payment processing services.
Compensation and benefits
Compensation and benefits increased 9% from $241,584 in 2016 to $264,392 in 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $21,764 related to an increase in headcount, and increases in incentive compensation of $3,610 and short-term variable compensation of $1,553, partially offset by decreases in severance expense of $2,025 and non-cash compensation expense of $1,944. Headcount increased from an average of 2,900 in 2016 to an average of 3,000 in 2017, primarily as a result of an increase in headcount to support the organic growth of our operations. As a percentage of total revenues, compensation and benefits decreased from 42% in 2016 to 39% in 2017. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.
General and administration
General and administration expenses increased 5% from $115,435 in 2016 to $121,010 in 2017, primarily due to increases in transaction related costs of $7,882, occupancy costs of $3,901, professional and legal fees of $2,016, marketing costs of $1,623 and travel and entertainment expense of $1,264, partially offset by decreases in non-income tax expense of $5,883, litigation expense of $4,558 and fair market value adjustment on continent consideration of $1,588. As a percentage of total revenues, general and administration expenses decreased from 20% in 2016 to 18% in 2017. The decrease in general and administration as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower general and administration increase.
Depreciation and amortization
Depreciation and amortization expense decreased 2% from $63,999 in 2016 to $62,820 in 2017, primarily due to a decrease in intangible asset amortization of $3,388 due to a significant portion of the intangible assets being amortized using an accelerated expense method throughout the assets’ useful livesand the majority of such assets being acquired prior to 2017 (see “Note 3 – Business Acquisitions” to the notes to consolidated financial statements in Part II, Item 8). The decrease in depreciation and amortization was partially offset by an increase in amortization and
depreciation on internally developed software and property and equipment, primarily due to an increase in capital expenditures. As a percentage of total revenues, depreciation and amortization decreased from 11% in 2016 to 9% in 2017, primarily as a result of a decrease in Envestnet | Yodlee intangible asset amortization.
Interest expense
Interest expense remained consistent from $16,600 in 2016 to $16,347 in 2017. Interest expense includes coupon interest, discount amortization, and issuance cost amortization related to the Convertible Notes as well as interest and amortization of upfront fees and monthly fees related to the Second Amended and Restated Credit Agreement. The discount, issuance costs, and upfront fees are amortized over the term of the related agreements.
Other expense, net
Other expense, net increased from $483 in 2016 to $1,963 in 2017, primarily due to a one-time 2016 gain related to a customer settlement of $1,384 as well as comparatively favorable foreign currency impacts of $532, partially offset by a decrease in losses and impairments booked on investments in private companies of $685.
Income tax provision
| | | | | | | |
| | Year Ended | |
| | December 31, | |
| | 2017 | | 2016 | |
Loss before income tax provision | | $ | (1,689) | | $ | (40,490) | |
Income tax provision | | | 1,591 | | | 15,077 | |
Effective tax rate | | | (94.2) | % | | (37.2) | % |
Our 2017 effective tax rate differs from the statutory rate primarily due to the effect of state taxes, AMT Credit conversion to a receivable, foreign tax expense, change in foreign unremitted earnings assertion, indefinite-lived intangibles, changes in valuation allowance on our domestic temporary differences and tax reform.
Our 2016 effective tax rate differs from the statutory rate primarily due to the effect of state taxes, foreign tax expense, unremitted foreign earnings true-up, indefinite-lived intangibles and changes in valuation allowance on our domestic temporary differences.
Year ended December 31, 2016 compared to year ended December 31, 2015
Revenues
Total revenues increased 37% from $420,919 in 2015 to $578,164 in 2016. The increase was primarily due to an increase in subscription and licensing revenues of $122,845 related to the acquisition of Yodlee on November 19, 2015. Revenues from assets under management or administration comprised 61% and 79% of total revenues in 2016 and 2015, respectively.
Assets under management or administration
Revenues earned from assets under management or administration increased 6% from $333,684 in 2015 to $352,498 in 2016. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles in 2016, relative to the corresponding period in 2015. In 2016, revenues were further positively affected by new account growth, market appreciation and positive net flows of AUM or AUA during 2015 and 2016, partially offset by a lower overall effective fee rate on AUM/A, primarily related to the transition of a WMS client to a lower priced solution.
The number of financial advisors with AUM or AUA on our technology platforms increased from 33,775 as of December 31, 2015 to 36,483 as of December 31, 2016 and the number of AUM or AUA client accounts increased from approximately 1,298,000 as of December 31, 2015 to approximately 1,540,000 as of December 31, 2016.
Subscription and licensing
Subscription and licensing revenues increased 163% from $75,280 in 2015 to $198,125 in 2016. This increase was primarily due to an increase in Envestnet | Yodlee contributing an additional $102,224 and Envestnet | Tamarac related revenue of $11,544. Envestnet | Yodlee was acquired November 19, 2015 and therefore its revenues were included for only a small portion of the year in comparison to an entire year during 2016. The Envestnet | Tamarac revenue increase resulted from the continued addition of new clients and selling additional services to existing clients.
Professional services and other
Professional services and other revenues increased 130% from $11,955 in 2015 to $27,541 in 2016. This increase was primarily due to an increase in Envestnet | Yodlee contributing an additional $14,227 and Envestnet | Tamarac related revenue of $1,207. Envestnet | Yodlee was acquired November 19, 2015 and therefore its revenues were included for only a small portion of the year in comparison to an entire year during 2016. The increase in Envestnet and Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from the onboarding of new clients.
Cost of revenues
Cost of revenues increased 12% from $161,309 in 2015 to $180,590 in 2016, primarily due to the corresponding increase in revenues from AUM or AUA. As a percentage of total revenues, cost of revenues decreased from 38% in 2015 to 31% in 2016. The decrease in cost of revenues as a percentage of total revenue is primarily a result of the inclusion of Envestnet | Yodlee segment revenues which have a lower cost of revenue profile.
Compensation and benefits
Compensation and benefits increased 73% from $139,756 in 2015 to $241,584 in 2016, primarily due to an increase in salaries, benefits and related payroll taxes of $67,290 related to an increase in headcount, an increase in incentive compensation of $9,142 and an increase in non‑cash compensation expense of $18,115. Headcount increased from an average of 1,400 in 2015 to an average of 2,900 in 2016, primarily as a result of the Yodlee acquisition as well as an increase in headcount to support the growth of our operations. As a percentage of total revenues, compensation and benefits increased from 33% in 2015 to 42% in 2016. The increase in compensation and benefits as a percentage of total revenues is primarily due to the inclusion of the Envestnet | Yodlee segment which has a higher compensation and benefits profile.
General and administration
General and administration expenses increased 58% from $72,900 in 2015 to $115,435 in 2016, primarily due to general and administration expense increases related to the Envestnet | Yodlee segment of $30,160 as well as an increase in non-income tax expense of $6,229. As a percentage of total revenues, general and administration expenses increased from 17% in 2015 to 20% in 2016. The increase in general and administration expense as a percentage of total revenues is primarily due to the inclusion of the Envestnet | Yodlee segment which has a higher general and administrative expense profile.
Depreciation and amortization
Depreciation and amortization expense increased 129% from $27,962 in 2015 to $63,999 in 2016, primarily due to an increase in intangible asset amortization of $27,879 as a result of intangible assets recorded in purchase accounting related to our 2015 and 2016 acquisitions (see “Note 3 – Business Acquisitions” to the notes to consolidated financial statements in Part II, Item 8). The increase in depreciation and amortization expense was also due to increases in
capitalized computer equipment and software to support the growth of our operations. As a percentage of total revenues, depreciation and amortization increased from 7% in 2015 to 11% in 2016, primarily as a result of Envestnet | Yodlee intangible asset amortization.
Interest expense
Interest expense increased 62% from $10,271 in 2015 to $16,600 in 2016 as a result of the issuance of $160,000 in Term Notes under the Amended and Restated Credit Agreement during the fourth quarter of 2015. Interest expense includes coupon interest, discount amortization, and issuance cost amortization related to the Convertible Notes as well as interest and amortization of upfront fees and monthly fees related to the Amended and Restated Credit Agreement. The discount, issuance costs, and upfront fees are amortized over the term of the related agreements.
Income tax provision
Income tax provision | | | | | | | |
| | Year Ended | |
| | December 31, | |
| | 2016 | | 2015 | |
Income (loss) before income tax provision | | $ | (40,490) | | $ | 8,988 | |
Income tax provision | | | 15,077 | | | 4,552 | |
Effective tax rate | | | (37.2) | % | | 50.6 | % |
Our 2016 effective tax rate differs from the statutory rate primarily due to the effect of state taxes, foreign tax expense, unremitted foreign earnings true-up, indefinite-lived intangibles and changes in valuation allowance on our domestic temporary differences.
Our 2015 effective tax rate differs from the statutory rate primarily due to the effect of state taxes, non-deductible transaction costs, non-deductible meals and entertainment expense, income inclusion under IRC Section 956, unremitted foreign earnings true-up, changes in valuation allowance related to state net operating losses that will expire unused, release of uncertain tax position reserves related to the tax year ended December 31, 2011, and research and development tax credit generation.
Business Segments
The Company has two segments as described below:
Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.
Envestnet | Yodlee– a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.
The following table reconciles income from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Envestnet | $ | 75,449 | | $ | 41,678 | | $ | 43,278 |
Envestnet | Yodlee | | (19,456) | | | (38,547) | | | (2,984) |
Total segment income from operations | | 55,993 | | | 3,131 | | | 40,294 |
Nonsegment operating expenses | | (39,573) | | | (26,575) | | | (21,302) |
Interest expense, net | | (16,146) | | | (16,563) | | | (9,933) |
Other expense, net | | (1,963) | | | (483) | | | (71) |
Consolidated income (loss) before income tax provision | | (1,689) | | | (40,490) | | | 8,988 |
Income tax provision | | 1,591 | | | 15,077 | | | 4,552 |
Consolidated net income (loss) | | (3,280) | | | (55,567) | | | 4,436 |
Add: Net income (loss) attributable to non-controlling interest | | — | | | — | | | — |
Consolidated net income (loss) attributable to Envestnet, Inc. | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
Envestnet
The following table presents income from operations for the Envestnet segment:
| | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2017 | | 2016 | | Percent Change | | 2015 | | Percent Change |
| | (in thousands) | | | | | (in thousands) | | | |
Revenues: | | | | | | | | | | | | | | | |
Assets under management or administration | | $ | 410,016 | | $ | 352,498 | | 16 | % | | $ | 333,684 | | 6 | % |
Subscription and licensing | | | 106,048 | | | 84,340 | | 26 | % | | | 63,719 | | 32 | % |
Professional services and other | | | 11,841 | | | 10,794 | | 10 | % | | | 9,435 | | 14 | % |
Total revenues | | | 527,905 | | | 447,632 | | 18 | % | | | 406,838 | | 10 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Cost of revenues | | | 205,793 | | | 169,732 | | 21 | % | | | 160,489 | | 6 | % |
Compensation and benefits | | | 157,237 | | | 144,388 | | 9 | % | | | 125,585 | | 15 | % |
General and administration | | | 63,203 | | | 67,050 | | (6) | % | | | 54,118 | | 24 | % |
Depreciation and amortization | | | 26,223 | | | 24,784 | | 6 | % | | | 23,368 | | 6 | % |
Total operating expenses | | | 452,456 | | | 405,954 | | 11 | % | | | 363,560 | | 12 | % |
Income from operations | | $ | 75,449 | | $ | 41,678 | | 81 | % | | $ | 43,278 | | (4) | % |
| | | | | | | | | | | | | | | |
Year ended December 31, 2017 compared to year ended December 31, 2016 for the Envestnet segment
Revenues
Assets under management or administration
Revenues earned from assets under management or administration increased 16% from $352,498 in 2016 to $410,016 in 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles in 2017, relative to the corresponding period in 2016. In 2017, revenues were further positively affected by new account growth, market appreciation and positive net flows of AUM or AUA during 2016 and 2017, partially offset by a lower overall effective fee rate on AUM/A.
The number of financial advisors with AUM or AUA on our technology platforms increased from 36,483 as of December 31, 2016 to 40,485 as of December 31, 2017 and the number of AUM or AUA client accounts increased from approximately 1,540,000 as of December 31, 2016 to approximately 1,900,000 as of December 31, 2017.
Subscription and licensing
Subscription and licensing revenues increased 26% from $84,340 in 2016 to $106,048 in 2017. This increase was primarily due to an increase in Envestnet | Tamarac and Envestnet | Enterprise related revenue of $12,212 and $9,496, respectively. The Envestnet | Tamarac and Envestnet | Enterprise revenue increase resulted from the continued addition of new clients and selling additional services to existing clients.
Professional services and other
Professional services and other revenues increased 10% from $10,794 in 2016 to $11,841 in 2017. This increase was primarily due to increases in Envestnet | Tamarac and Envestnet | Enterprise related revenue of $640 and $400, respectively. The increase in Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from the onboarding of new clients. The Envestnet | Enterprise revenue increase was primarily due to an increase in Advisor Summit related revenue.
Cost of revenues
Cost of revenues increased 21% from $169,732 in 2016 to $205,793 in 2017, primarily due to the corresponding increase in revenues from AUM or AUA, and the mix of such revenues. As a percentage of total revenues, cost of revenues increased from 38% in 2016 to 39% in 2017.
Compensation and benefits
Compensation and benefits increased 9% from $144,388 in 2016 to $157,237 in 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $8,765 related to an increase in headcount, an increase in non‑cash compensation expense of $2,472 and an increase in incentive compensation of $1,784. As a percentage of total revenues, compensation and benefits decreased from 32% in 2016 to 30% in 2017. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.
General and administration
General and administration expenses decreased 6% from $67,050 in 2016 to $63,203 in 2017, primarily due to decreases in non-income tax expenses of $5,883 and website and systems development costs of $2,392, partially offset by increases in communication, research and data services costs of $2,330 and occupancy costs of $2,043. As a percentage of total revenues, general and administration expenses decreased from 15% in 2016 to 12% in 2017. The decrease in general as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower general and administration increase.
Depreciation and amortization
Depreciation and amortization expense increased 6% from $24,784 in 2016 to $26,223 in 2017, primarily due to increases in internally developed software amortization expense of $1,664 and property and equipment depreciation expense of $1,510, partially offset by a decrease in intangible asset amortization expense of $1,735. As a percentage of total revenues, depreciation and amortization decreased from 6% in 2016 to 5% in 2017.
Year ended December 31, 2016 compared to year ended December 31, 2015 for the Envestnet segment
Revenues
Assets under management or administration
Revenues earned from assets under management or administration increased 6% from $333,684 in 2015 to $352,498 in 2016. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles in 2016, relative to the corresponding period in 2015. In 2016, revenues were further positively affected by new account growth, market appreciation and positive net flows of AUM or AUA during 2015 and 2016, partially offset by a lower overall effective fee rate on AUM/A, primarily related to the transition of a WMS client to a lower priced solution.
The number of financial advisors with AUM or AUA on our technology platforms increased from 33,775 as of December 31, 2015 to 36,483 as of December 31, 2016 and the number of AUM or AUA client accounts increased from approximately 1,298,000 as of December 31, 2015 to approximately 1,540,000 as of December 31, 2016.
Subscription and licensing
Subscription and licensing revenues increased 32% from $63,719 in 2015 to $84,340 in 2016. This increase was primarily due to an increase in Envestnet | Tamarac related revenue of $11,544. The Envestnet | Tamarac revenue increase resulted from the continued addition of new clients and selling additional services to existing clients. The remainder of the increase was primarily due to the addition of several large contracts by Envestnet.
Professional services and other
Professional services and other revenues increased 14% from $9,435 in 2015 to $10,794 in 2016. This increase was primarily due to an increase in Envestnet | Tamarac related revenue of $1,207. The increase in Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from the onboarding of new clients.
Cost of revenues
Cost of revenues increased 6% from $160,489 in 2015 to $169,732 in 2016, primarily due to the corresponding increase in revenues from AUM or AUA. As a percentage of total revenues, cost of revenues decreased from 39% in 2015 to 38% in 2016.
Compensation and benefits
Compensation and benefits increased 15% from $125,585 in 2015 to $144,388 in 2016, primarily due to an increase in salaries, benefits and related payroll taxes of $14,057 related to an increase in headcount, an increase in incentive compensation of $2,449 and an increase in non‑cash compensation expense of $578. As a percentage of total revenues, compensation and benefits increased from 31% in 2015 to 32% in 2016.
General and administration
General and administration expenses increased 24% from $54,118 in 2015 to $67,050 in 2016, primarily due to increases in non-income tax expenses of $6,229, occupancy costs of $2,276, travel and entertainment expenses of $1,296, marketing expenses of $841 and bad debt expense of $769. As a percentage of total revenues, general and administration expenses increased from 13% in 2015 to 15% in 2016.
Depreciation and amortization
Depreciation and amortization expense increased 6% from $23,368 in 2015 to $24,784 in 2016, primarily due to an increase in internally developed software amortization expense of $988. As a percentage of total revenues, depreciation and amortization remained consistent at 6% in both 2015 and 2016.
Envestnet | Yodlee
The following table presents loss from operations for the Envestnet | Yodlee segment:
| | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2017 | | 2016 | | Percent Change | | 2015 | | Percent Change |
| | (in thousands) | | | | | (in thousands) | | | |
Revenues: | | | | | | | | | | | | | | | |
Subscription and licensing | | $ | 139,819 | | $ | 113,785 | | 23 | % | | $ | 11,561 | | * | |
Professional services and other | | | 15,955 | | | 16,747 | | (5) | % | | | 2,520 | | * | |
Total revenues | | | 155,774 | | | 130,532 | | 19 | % | | | 14,081 | | * | |
Operating expenses: | | | | | | | | | | | | | | | |
Cost of revenues | | | 13,244 | | | 10,858 | | 22 | % | | | 820 | | * | |
Compensation and benefits | | | 93,316 | | | 85,972 | | 9 | % | | | 8,777 | | * | |
General and administration | | | 32,073 | | | 33,034 | | (3) | % | | | 2,874 | | * | |
Depreciation and amortization | | | 36,597 | | | 39,215 | | (7) | % | | | 4,594 | | * | |
Total operating expenses | | | 175,230 | | | 169,079 | | 4 | % | | | 17,065 | | * | |
Loss from operations | | $ | (19,456) | | $ | (38,547) | | 50 | % | | $ | (2,984) | | * | |
| | | | | | | | | | | | | | | |
Year ended December 31, 2017 compared to year ended December 31, 2016 for the Envestnet | Yodlee segment
Revenues
Subscription and licensing
Subscription and licensing revenues increased 23% from $113,785 in 2016 to $139,819 in 2017. This increase was primarily due to an increase of $18.9 million in revenue attributed to our data analytics channel with the remainder primarily derived from our FI and YI channels.
Professional services and other
Professional services and other revenues decreased 5% from $16,747 in 2016 to $15,955 in 2017. This decrease was primarily due to timing of new data analytics customer deployments.
Cost of revenues
Cost of revenues increased 22% from $10,858 in 2016 to $13,244 in 2017, primarily due toan increase in third party consulting and professional services of $900 for new data analytics customer deployments and hosting and payment processing services of $1,577 to support our overall revenue growth. As a percentage of total revenues, cost of revenues increased from 8% in 2016 to 9% in 2017.
Compensation and benefits
Compensation and benefits increased 9% from $85,972 in 2016 to $93,316 in 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $10,192, as a result of increased headcount to support organic growth and an increase related to the Wheelhouse acquisition, and an increase in incentive compensation of $1,809, offset by a decrease in non-cash compensation expense of $4,153. As a percentage of total revenues, compensation and benefits decreased from 66% in 2016 to 60% in 2017. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to lower growth in compensation and benefit expenses.
General and administration
General and administration expenses decreased 3% from $33,034 in 2016 to $32,073 in 2017, primarily due to decreases in litigation related expense of $4,317 and realized losses on designated hedges of $486, offset by increases in software purchase and maintenance of $2,120 and occupancy cost of $1,856. As a percentage of total revenues, general and administration expenses decreased from 25% in 2016 to 21% in 2017. The decrease in general and administration as a percentage of total revenues is primarily due to a higher revenue increase compared to lower growth in general and administration expenses.
Depreciation and amortization
Depreciation and amortization expense decreased 7% from $39,215 in 2016 to $36,597 in 2017, primarily due to a decrease in intangible asset amortization of $1,653primarily due to a significant portion of the intangible assets being amortized using an accelerated expense method throughout the assets’ useful lives and the majority of such assets being acquired prior to 2017, as well as a decrease in depreciation of property and equipment of $965. As a percentage of total revenues, depreciation and amortization expense decreased from 30% in 2016 to 23% in 2017. The decrease in depreciation and amortization as a percentage of total revenues is primarily due to a higher revenue increase and a decrease in depreciation and amortization expenses.
Year ended December 31, 2016 compared to year ended December 31, 2015 for the Envestnet | Yodlee segment
The 2015 period for Envestnet | Yodlee consists of financial activity from November 19, 2015 through December 31, 2015. Due to this time period deviating significantly from 2016 where twelve months of financial activity is consolidated, a year-over-year review would not be meaningful. For additional information pertaining to our business segments, see “Note 21 – Segment Information” to the notes to consolidated financial statements inSee Part II, Item 8, as well as Item 1 in Part I.
Nonsegment
The following table presents nonsegment loss from operations:
| | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2017 | | 2016 | | Percent Change | | 2015 | | Percent Change |
| | (in thousands) | | | | | (in thousands) | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Compensation and benefits | | $ | 13,839 | | $ | 11,224 | | 23 | % | | $ | 5,394 | | 108 | % |
General and administration | | | 25,734 | | | 15,351 | | 68 | % | | | 15,908 | | (4) | % |
Total operating expenses | | | 39,573 | | | 26,575 | | 49 | % | | | 21,302 | | 25 | % |
Loss from operations | | $ | (39,573) | | $ | (26,575) | | 49 | % | | $ | (21,302) | | 25 | % |
Year ended December 31, 2017 compared to year ended December 31, 2016Significant Accounting Policies” for nonsegment
Compensation and benefits
Compensation and benefits increased 23% from $11,224 in 2016 to $13,839 in 2017, primarily due to increases in salaries, benefits and related payroll taxesa detailed description of $2,807.
General and administration
General and administration expenses increased 68% from $15,351 in 2016 to $25,734 in 2017, primarily due to increases in transaction related expenses of $8,484, professional and legal fees of $2,582 and marketing expense of $524, partially offset by a decrease in fair market value adjustments to contingent consideration liabilities of $1,588.
Year ended December 31, 2016 compared to year ended December 31, 2015 for nonsegment
Nonsegment expenses increased 25% from $21,302 in 2015 to $26,575 in 2016, primarily due to increases in fair market value adjustments to contingent consideration liabilities of $5,740, non-cash compensation expense of $4,073, professional and legal fees of $1,786, incentive compensation of $694, salary and benefits expense of $634, offset by a decrease in transaction related costs of $8,679.
Non‑GAAP Financial Measures
In addition to reporting results according to U.S. GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues”, “adjusted EBITDA”, “adjusted net income” and “adjusted net income per share”.
“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under U.S. GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑alone entities.
“Adjusted EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration, income tax provision (benefit), depreciation and amortization, non‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, other
(income) expense, non-income tax expense adjustment, impairment of equity method investment, loss allocation from equity method investment and loss attributable to non‑controlling interest.
“Adjusted net income” represents net income (loss) before deferred revenue fair value adjustment, accretion on contingent consideration, non‑cash interest expense, non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fair‑market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, other (income) expense, non-income tax expense adjustment, impairment of equity method investment, loss allocation from equity method investment and loss attributable to non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income. The reconciling items, and resulting adjusted net income, are presented on a different basis than historically shown to eliminate the impact of quarterly volatility of the GAAP tax provision on the Company’s adjusted earnings figures.
“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted‑average shares outstanding.
Our Board of Directors and our management use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share:
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| | As measures of operating performance;
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| | For planning purposes, including the preparation of annual budgets;
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| | To allocate resources to enhance the financial performance of our business;
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| | To evaluate the effectiveness of our business strategies; and
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| | In communications with our Board of Directors concerning our financial performance.
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Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.
We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measures because we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provide comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, litigation‑related expense, foreign currency and related hedging activity, income tax provision, restructuring charges and transaction costs, accretion on contingent consideration and purchase liability, fair market value adjustments on contingent consideration, non-income tax expense, other (income) expense, severance, impairment of equity method investment, loss allocation from equity method investment, loss attributable to non‑controlling interest, and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non‑cash stock‑based compensation expense from adjusted EBITDA and adjusted net income because non‑cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.
We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
We understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider:
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| | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
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| | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect changes in, or cash requirements for, our working capital needs;
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| | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect non‑cash components of employee compensation;
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| | Although depreciation and amortization are non‑cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
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| | Due to either net losses before income tax expenses or the use of federal and state net operating loss carryforwards in 2017, 2016 and 2015, we had cash income tax payments, net of refunds, of $3,261, $1,114, and $1,700 in the years ended December 31, 2017, 2016 and 2015, respectively. Income tax payments will be higher if we continue to generate taxable income and our existing net operating loss carryforwards for federal and state income taxes have been fully utilized or have expired; and
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| | Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share differently than we do, limiting their usefulness as a comparative measure.
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Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted operating income, adjusted net income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable U.S. GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per share to net income and net income per share, the most directly comparable U.S. GAAP measure. Further, our management also reviews U.S. GAAP measures and evaluates individual measures that are not included in some or all of our non‑U.S. GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
Total revenues | | $ | 683,679 | | $ | 578,164 | | $ | 420,919 |
Deferred revenue fair value adjustment | | | 130 | | | 1,270 | | | 322 |
Adjusted revenues | | $ | 683,809 | | $ | 579,434 | | $ | 421,241 |
The following table sets forth the reconciliation of net income (loss) to adjusted EBITDA based on our historical results:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
Net income (loss) | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
Add (deduct): | | | | | | | | | |
Deferred revenue fair value adjustment | | | 130 | | | 1,270 | | | 322 |
Interest income | | | (201) | | | (37) | | | (338) |
Interest expense | | | 16,347 | | | 16,600 | | | 10,271 |
Accretion on contingent consideration and purchase liability | | | 512 | | | 150 | | | 888 |
Income tax provision | | | 1,591 | | | 15,077 | | | 4,552 |
Depreciation and amortization | | | 62,820 | | | 63,999 | | | 27,962 |
Non-cash compensation expense | | | 31,331 | | | 33,276 | | | 15,160 |
Restructuring charges and transaction costs | | | 13,666 | | | 5,784 | | | 13,495 |
Severance | | | 2,316 | | | 4,342 | | | 1,695 |
Fair market value adjustment to contingent consideration | | | — | | | 1,588 | | | (4,153) |
Litigation related expense | | | 1,033 | | | 5,591 | | | 65 |
Foreign currency and related hedging activity | | | 494 | | | (716) | | | — |
Other (income) expense | | | — | | | (1,384) | | | 72 |
Non-income tax expense adjustment | | | 346 | | | 6,229 | | | — |
Impairment of equity method investment | | | — | | | 734 | | | — |
Loss allocation from equity method investment | | | 1,469 | | | 1,420 | | | — |
Loss attributable to non-controlling interest | | | 316 | | | 1,081 | | | 1,643 |
Adjusted EBITDA | | $ | 128,890 | | $ | 99,437 | | $ | 76,070 |
The following table sets forth the reconciliation of net income (loss) to adjusted net income and adjusted net income per diluted share based on our historical results:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
Net income (loss) | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
Income tax provision (1) | | | 1,591 | | | 15,077 | | | 4,552 |
Income (loss) before income tax provision | | | (1,689) | | | (40,490) | | | 8,988 |
Add (deduct): | | | | | | | | | |
Deferred revenue fair value adjustment | | | 130 | | | 1,270 | | | 322 |
Accretion on contingent consideration and purchase liability | | | 512 | | | 150 | | | 888 |
Non-cash interest expense | | | 8,994 | | | 8,244 | | | 6,393 |
Non-cash compensation expense | | | 31,331 | | | 33,276 | | | 15,160 |
Restructuring charges and transaction costs | | | 13,666 | | | 5,784 | | | 13,495 |
Severance | | | 2,316 | | | 4,342 | | | 1,695 |
Amortization of acquired intangibles | | | 42,127 | | | 45,515 | | | 17,636 |
Fair market value adjustment on contingent consideration | | | — | | | 1,588 | | | (4,153) |
Litigation related expense | | | 1,033 | | | 5,591 | | | 65 |
Foreign currency and related hedging activity | | | 494 | | | (716) | | | — |
Other (income) expense | | | — | | | (1,384) | | | 72 |
Non-income tax expense adjustment | | | 346 | | | 6,229 | | | — |
Impairment of equity method investment | | | — | | | 734 | | | — |
Loss allocation from equity method investment | | | 1,469 | | | 1,420 | | | — |
Loss attributable to non-controlling interest | | | 316 | | | 1,081 | | | 1,643 |
Adjusted net income before income tax effect | | | 101,045 | | | 72,634 | | | 62,204 |
Income tax effect (2) | | | (40,418) | | | (29,054) | | | (24,509) |
Adjusted net income | | $ | 60,627 | | $ | 43,580 | | $ | 37,695 |
| | | | | | | | | |
Basic number of weighted-average shares outstanding | | | 43,732,148 | | | 42,814,222 | | | 36,500,843 |
Effect of dilutive shares: | | | | | | | | | |
Options to purchase common stock | | | 1,649,225 | | | 1,278,827 | | | 1,700,248 |
Unvested restricted stock units | | | 770,428 | | | 486,823 | | | 185,782 |
Diluted number of weighted-average shares outstanding | | | 46,151,801 | | | 44,579,872 | | | 38,386,873 |
Adjusted net income per share - diluted | | $ | 1.31 | | $ | 0.98 | | $ | 0.98 |
(1) For the years ended December 31, 2017, 2016 and 2015, the effective tax rate computed in accordance with U.S. GAAP equaled (94.2%), (37.2)% and 50.6%, respectively.
(2) For the years ended December 31, 2017, 2016 and 2015, an estimated normalized effective tax rate of 40% has been used to compute adjusted net income.
Note on Income Taxes: As of December 31, 2017, the Company had NOL carryforwards of $249,653 and $143,775 for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes the Company pays for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with U.S. GAAP, and from the normalized rate shown above.
The following tables set forth the reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the years ended December 31, 2017, 2016 and 2015:
| | | | | | | | | | | |
| Year Ended December 31, 2017 |
| | Envestnet | | | Envestnet | Yodlee | | | Non-Segment | | | Total |
| (in thousands) |
Total revenues | $ | 527,905 | | $ | 155,774 | | $ | — | | $ | 683,679 |
Deferred revenue fair value adjustment | | 38 | | | 92 | | | — | | | 130 |
Adjusted revenues | $ | 527,943 | | $ | 155,866 | | $ | — | | $ | 683,809 |
| | | | | | | | | | | |
Income (loss) from operations | $ | 75,449 | | $ | (19,456) | | $ | (39,573) | | $ | 16,420 |
Add (deduct): | | | | | | | | | | | |
Deferred revenue fair value adjustment | | 38 | | | 92 | | | — | | | 130 |
Accretion on contingent consideration | | 512 | | | — | | | — | | | 512 |
Depreciation and amortization | | 26,223 | | | 36,597 | | | — | | | 62,820 |
Non-cash compensation expense | | 15,191 | | | 10,880 | | | 5,260 | | | 31,331 |
Restructuring charges and transaction costs | | 366 | | | — | | | 13,300 | | | 13,666 |
Non-income tax expense adjustment | | 346 | | | — | | | — | | | 346 |
Severance | | 1,954 | | | 346 | | | 16 | | | 2,316 |
Litigation related expense | | — | | | 1,033 | | | — | | | 1,033 |
Loss attributable to non-controlling interest | | 316 | | | — | | | — | | | 316 |
Adjusted EBITDA | $ | 120,395 | | $ | 29,492 | | $ | (20,997) | | $ | 128,890 |
| | | | | | | | | | | |
| Year Ended December 31, 2016 |
| | Envestnet | | | Envestnet | Yodlee | | | Non-Segment | | | Total |
| (in thousands) |
Total revenues | $ | 447,632 | | $ | 130,532 | | $ | — | | $ | 578,164 |
Deferred revenue fair value adjustment | | 329 | | | 941 | | | — | | | 1,270 |
Adjusted revenues | $ | 447,961 | | $ | 131,473 | | $ | — | | $ | 579,434 |
| | | | | | | | | | | |
Income (loss) from operations | $ | 41,678 | | $ | (38,547) | | $ | (26,575) | | $ | (23,444) |
Add (deduct): | | | | | | | | | | | |
Deferred revenue fair value adjustment | | 329 | | | 941 | | | — | | | 1,270 |
Accretion on contingent consideration | | 150 | | | — | | | — | | | 150 |
Depreciation and amortization | | 24,784 | | | 39,215 | | | — | | | 63,999 |
Non-cash compensation expense | | 12,719 | | | 15,033 | | | 5,524 | | | 33,276 |
Restructuring charges and transaction costs | | 904 | | | 64 | | | 4,816 | | | 5,784 |
Non-income tax expense adjustment | | 6,229 | | | — | | | — | | | 6,229 |
Severance | | 3,334 | | | 670 | | | 338 | | | 4,342 |
Fair market value adjustment to contingent consideration | | — | | | — | | | 1,588 | | | 1,588 |
Litigation related expense | | — | | | 5,350 | | | 241 | | | 5,591 |
Foreign currency and related hedging activity | | — | | | (462) | | | — | | | (462) |
Other loss | | — | | | — | | | 33 | | | 33 |
Loss attributable to non-controlling interest | | 1,081 | | | — | | | — | | | 1,081 |
Adjusted EBITDA | $ | 91,208 | | $ | 22,264 | | $ | (14,035) | | $ | 99,437 |
| | | | | | | | | | | |
| Year Ended December 31, 2015 |
| | Envestnet | | | Envestnet | Yodlee | | | Non-Segment | | | Total |
| (in thousands) |
Total revenues | $ | 406,838 | | $ | 14,081 | | $ | — | | $ | 420,919 |
Deferred revenue fair value adjustment | | 117 | | | 205 | | | — | | | 322 |
Adjusted revenues | $ | 406,955 | | $ | 14,286 | | $ | — | | $ | 421,241 |
| | | | | | | | | | | |
Income (loss) from operations | $ | 43,255 | | $ | (2,963) | | $ | (21,300) | | $ | 18,992 |
Add (deduct): | | | | | | | | | | | |
Deferred revenue fair value adjustment | | 117 | | | 205 | | | — | | | 322 |
Accretion on contingent consideration | | 888 | | | — | | | — | | | 888 |
Depreciation and amortization | | 23,369 | | | 4,592 | | | — | | | 27,961 |
Non-cash compensation expense | | 12,141 | | | 1,569 | | | 1,451 | | | 15,161 |
Restructuring charges and transaction costs | | — | | | — | | | 13,495 | | | 13,495 |
Severance | | 1,681 | | | 14 | | | — | | | 1,695 |
Fair market value adjustment to contingent consideration | | — | | | — | | | (4,152) | | | (4,152) |
Litigation related expense | | — | | | — | | | 65 | | | 65 |
Loss attributable to non-controlling interest | | 1,643 | | | — | | | — | | | 1,643 |
Adjusted EBITDA | $ | 83,094 | | $ | 3,417 | | $ | (10,441) | | $ | 76,070 |
Liquidity and Capital Resources
As of December 31, 2017, we had total cash and cash equivalents of $60,115, compared to $52,592 as of December 31, 2016. We plan to use existing cash as of December 31, 2017 and cash generated in the ongoing operations of our business to fund our current operations, capital expenditures and possible acquisitions or other strategic activity, and to meet our debt service obligations. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements we may be required to borrow under our bank credit agreement to fund our ongoing operations or to fund potential acquisitions or other strategic activities. The Company funded the FolioDynamix acquisition subsequent to year-end with a combination of cash on the Company’s balance sheet and borrowings under its revolving credit facility.
Credit Agreement
On July 18, 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Second Amended and Restated Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated as of November 19, 2015, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Facility”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments (the “Revolving Credit Facility”) in the aggregate amount of up to $350,000 which amount may be increased by $50,000. The Second Amended and Restated Credit Agreement also includes a $5,000 subfacility for the issuance of letters of credit.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Amended and Restated Security Agreement, dated July 18, 2017 (the “Security Agreement”), among the Company, the Debtors party thereto and the Administrative Agent, obligations under the Second Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Proceeds under the Second Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
The Company will pay interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
The Second Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum liquidity requirement, and provisions that limit the ability of the Company and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities.
The July 18, 2017 amendment to the Prior Credit Facility replaced the Term Notes and related excess cash flow payment obligations with a revolving line of credit. The Company’s consolidated balance sheets reflect these changes with no resulting portion of debt related to the revolving credit facility being classified as short-term, in accordance with the term of the Second Amended and Restated Credit Agreement.
As of December 31, 2017, an amount of $81,168 was outstanding on the Revolving Credit Facility. Subsequent to December 31, 2017, the Company borrowed $195,000 to fund the acquisition of FolioDynamix.
Cash Flows
The following table presents information regarding our cash flows and cash and cash equivalents for the periods indicated:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 108,607 | | $ | 81,270 | | $ | 42,035 |
Net cash used in investing activities | | | (29,019) | | | (57,927) | | | (344,621) |
Net cash provided by (used in) financing activities | | | (72,440) | | | (22,469) | | | 144,550 |
Effect of exchange rate on changes on cash | | | 375 | | | — | | | — |
Net increase (decrease) in cash and cash equivalents | | | 7,523 | | | 874 | | | (158,036) |
Cash and cash equivalents, end of period | | | 60,115 | | | 52,592 | | | 51,718 |
Operating activities
Net cash provided by operating activities in 2017 increased by $27,337 compared to 2016, primarily due to a decrease in net loss of $52,287, partially offset by decreases in the change in deferred income tax liabilities of $10,181 andchanges in operating assets and liabilities of $11,372.
Net cash provided by operating activities in 2016 increased by $39,235 compared to 2015, primarily due to the Yodlee acquisition contributing an entire year of operating cash flow, an increase in the change in operating assets and liabilities totaling $24,777, an increase in non‑cash adjustments totaling $74,461, offset by a decrease in net income of $60,003 in 2016 compared to the prior year period.
Investing activities
Net cash used in investing activities in 2017 decreased by $28,908 compared to 2016, primarily due to a decrease in cash used for acquisition of business of $31,613, partially offset by an increase in capital expenditures for internally develop software of $4,015.
Net cash used in investing activities in 2016 decreased by $286,694 compared to 2015, primarily due to the Yodlee and other acquisitions during 2015 totaling $328,305 offset by cash used in acquisitions of $31,613 during 2016.
In 2016, the Company acquired FinaConnect and Wheelhouse for net cash totaling $6,693, and $13,219, respectively, as well as a payment of $11,701 related to the Yodlee dissenting shareholders (see “Note 3 – Business Acquisitions” to the notes to consolidated financial statements in Part II, Item 8).
Financing activities
Net cash used in financing activities in 2017 increased by $49,971 compared to 2016, primarily due to increases in Term Note payments of $27,862, payments on the revolving credit facility of $22,500, purchase of treasury stock for stock-based minimum tax withholdings of $3,008, and an increase in proceeds from borrowings on the revolving credit facility of $5,000. These impacts were partially offset by an increase in proceeds from the exercise of stock options of $3,027 and a decrease in payments of purchase consideration liabilities of $3,021.
Net cash used in financing activities in 2016 was $22,469 compared to net cash provided by financing activities in 2015 of $144,550. The fluctuation of $167,019 was primarily the result of 2015 including $160,000 of proceeds from the issuance of Term Notes.
Backlog
We sell subscriptions to our solutions through contracts that are generally one to three years in length, although terms can extend to as long as five years. Our subscription agreements with our customers generally contain scheduled minimum subscription fees, and usage-based fees which depend on the extent their customers or end users use our platform. We consider the unpaid contractual minimum payments under our subscription agreements to be our backlog. Due to the inherent volatility of backlog measured using contractual minimums, and the fact that contractual minimums are becoming increasingly less important to our business, we do not utilize backlog as a key management metric internally and we do not believe that it is a meaningful measurement of our future revenues.
We expect that the amount of backlog relative to the total value of our subscription agreements will change from year to year for several reasons, including the timing of contract renewals, the proportion of total subscription revenue represented by contractual minimum payments and the average non-cancellable terms of our subscription agreements. The change in backlog that results from these events may not be an indicator of the likelihood of renewal or expected future revenues.
We also expect that as our customer base continues to mature and customer deployments scale usage, renewals over time will increasingly have fewer contractual minimum fees because such fees are intended to decrease the timing risk associated with initial deployment commitments.
In addition, because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of the period, as well as contracts that are renewed and new customer contracts that are entered into during the period, backlog at the beginning of any period is not necessarily indicative of future performance.
Commitments
The following table sets forth information regarding our contractual obligations as of December 31, 2017:
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| | (in thousands) |
Operating leases (1) | | $ | 111,138 | | $ | 14,104 | | $ | 29,293 | | $ | 24,335 | | $ | 43,406 |
Convertible Notes | | | 172,500 | | | — | | | 172,500 | | | — | | | — |
Convertible Notes coupon interest payments | | | 4,529 | | | 3,019 | | | 1,510 | | | — | | | — |
Revolving credit facility (2) | | | 81,168 | | | — | | | — | | | 81,168 | | | — |
Undrawn credit facility fees | | | 1,319 | | | 290 | | | 580 | | | 449 | | | — |
Estimated undiscounted contingent consideration | | | 4,000 | | | 4,000 | | | — | | | — | | | — |
Definite consideration payments | | | 1,250 | | | 1,250 | | | — | | | — | | | — |
Purchase obligations | | | 27,425 | | | 14,884 | | | 12,287 | | | 254 | | | — |
Total | | $ | 403,329 | | $ | 37,547 | | $ | 216,170 | | $ | 106,206 | | $ | 43,406 |
| (1)
| | We lease facilities under non‑cancelable operating leases expiring at various dates through 2030.
|
| (2)
| | No scheduled payments exist for the revolving credit facility, and prepayments can be made without penalty.
|
The table above does not reflect the following:
| ·
| | Amounts estimated for uncertain tax positions as the timing and likelihood of such payments cannot be reasonably estimated.
|
| ·
| | Voluntary employer matching contributions to our defined contribution benefit plans since the amount cannot be reasonably estimated. For the years ended December 31, 2017, 2016 and 2015, we made voluntary employer matching contributions of $4,038, $2,270 and $1,521, respectively.
|
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the consolidated balance sheets.
Off‑Balance Sheet Arrangements
Other than operating leases as indicated above, we do not have any other off‑balance sheet arrangements.
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.
Pronouncements. In August 2015, the FASB issued ASU 2015-14 to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in its first quarter of 2018.
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 initial adoption. The standard also allows entities to apply certain practical expedients at their discretion. The Company will adopt the standard using the modified retrospective approach with a cumulative catch-up adjustment and will provide additional disclosures comparing results to previous GAAP in our 2018 consolidated financial statements. We plan to apply the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. The Company has substantially completed the implementation of key systems changes and changes to internal controls over financial reporting to allow the Company to timely compile the information needed to account for transactions under this new guidance.
In adopting ASU 2014-09, the Company expects the following significant changes:
| i)
| | Timing of revenue recognition for initial implementation services. Under ASU 2014-09, the Company will recognize professional services revenue from the initial implementation services over the remaining contractual term of the arrangement. Previously, this revenue was recognized on a straight line basis over the estimated life of the customer relationship; and
|
| ii)
| | Deferral of incremental direct costs to obtaining a contract with a customer. Under ASU 2014-09, the Company will capitalize certain variable compensation (i.e., shot term incentive compensation) payable to its sales force and subsequently amortize the capitalized costs over a period of time that is consistent with the transfer of the related good or service to the customer, which the Company has determined to be five years. Capitalized costs, net of accumulated amortization, will be included in other non-current assets on the Company’s consolidated balance sheets. Previously, the Company elected to expense these incremental direct costs as incurred.
|
The Company currently estimates the adoption of ASU 2014-09 will decrease its 2018 beginning accumulated deficit balance by approximately $9,000, offset by an approximate $4,000 decrease in deferred revenues and an approximate $5,000 increase in other non-current assets.
Additionally, while we are still in the process of assessing the statement of operations classification impact, under ASU 2014-09, for a subset of third party manager agreements, the existing presentation of gross versus net revenue may change.
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 statements 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 will be classified as a financing activity in the statements of cash flows. Lastly, the update allows forfeitures to be estimated or recognized when they occur. The requirements for the excess tax effects related to share-based payments at settlement must be applied on a prospective basis, and the other requirements under this standard are to be applied on a retrospective basis. This standard will be effective for financial statements
issued by public companies for annual and interim periods beginning after December 15, 2016.These changes became effective for the Company’s fiscal year beginning January 1, 2017 and have been reflected in these consolidated financial statements. As a result of the retrospective adoption of ASU 2016-09, for the year ended December 31, 2016 and 2015, net cash provided by operating activities increased by $4,455 and $17,607, respectively, with a corresponding offset to net cash used in financing activities. The Company did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.
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 statements of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. Upon adoption, the ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. We will adopt the standard effective January 1, 2018. Upon adoption, the Company does not anticipate significant changes to the Company's existing accounting policies or presentation of the consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),” which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company has adopted this standard as of April 1, 2017, however it did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will be effective for public companies for annual and interim periods beginning after December 15, 2017. Early adoption is permitted effective for transactions not yet reported in financial statements issued or made available for issuance. We will adopt the standard effective January 1, 2018. Upon adoption, the Company will assess all future purchases within the context of this updated guidance. We do not anticipate significant changes to the Company's existing accounting policies or presentation of the consolidated statements of cash flows.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. The ASU is effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2017. Early adoption of the standard is permitted. The standard will be applied prospectively to awards modified on or after the adoption date. We will adopt the standard effective January 1, 2018. Upon adoption, the Company will assess all future awards within the context of this updated guidance. We do not anticipate significant changes to the Company's existing accounting policies or presentation of the consolidated statements of cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is directly related to asset-based recurring revenues from asset management or administration earned based upon a contractual percentage of AUM or AUA. In the years ended December 31, 2017, 20162022, 2021 and 2015,2020, 60%, 61%60% and 79%54% of our revenues, respectively, were derived from revenues based on the market value of AUM or AUA.
This We expect this percentage willto vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue and income to decline. We do not use derivativedecline which in turn could lead to a decrease in our earnings. If there are financial instrumentsmarket declines for speculative, hedgingCOVID-19 or trading purposes.
any other matter, our asset-based revenues may negatively be impacted in future periods.
A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly revenues into U.S. dollars. For the year ended December 31, 2022, we estimate that a hypothetical 10% change in the value of various foreign currencies to the U.S. dollar would not have a material effect on our consolidated financial position, results of operations or cash flow.
The expenses of our
India subsidiary,Indian subsidiaries, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars.
As ofFor the year ended December 31,
2017,2022, we estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of approximately
$4,350$7.4 million to pre-tax earnings and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of approximately
$3,560$6.0 million to pre-tax earnings.
Interest rate risk
On February 4, 2022, we entered into the Third Credit Agreement which amends and restates, in its entirety, the Prior Credit Agreement. The
Company transacts business with entities which provide paymentThird Credit Agreement provides for
services in foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translationa Credit Facility of
these revenues into U.S. dollars. As of December 31, 2017, we estimate that a hypothetical 10% increase in the value of these currencies to the U.S. dollar would result in a decrease of approximately $2,920 to pre-tax earnings$500.0 million and a
hypothetical 10% decrease in$20.0 million sub-facility for the
valueissuance of
these currencies to the U.S. dollar would result in an increaseletters of
approximately $2,840 to pre-tax earnings.Interest rate risk
credit. We are subject to market risk from changes in interest rates. The Company has a revolving credit facility that bearsrates only if we have borrowings outstanding on our Credit Facility. At our option, outstanding loans under the Credit Facility accrue interest at LIBORa rate equal to either (i) a base rate plus an applicable margin between 1.50 percent and 3.25 percent.ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term SOFR rate plus an applicable margin ranging from 1.25% to 2.75% per annum, based upon our total net leverage ratio, as calculated pursuant to the Third Credit Agreement. As the LIBORthese rates fluctuate, so too will theour interest expense on amounts borrowed under the Second Amended and RestatedThird Credit Agreement. Interest charged on the revolving credit facility during 2017 was approximately 3.6%. As of December 31, 2017, there were $81,168 of revolving creditWe currently have no borrowings or amounts outstanding under the Second Amended and RestatedThird Credit Agreement. The Company incurred interest expense of $4,153 for the year ended December 31, 2017 related to2022.
As of December 31, 2022, we have $45.0 million of outstanding 1.75% Convertible Notes due 2023, $317.5 million of outstanding 0.75% Convertible Notes due 2025, and $575.0 million of outstanding 2.625% Convertible Notes due 2027 (collectively "Convertible Notes"). The total estimated fair value of our Convertible Notes was approximately $946.0 million as of December 31, 2022. The fair value was determined based on quoted market prices in less active markets and is categorized accordingly as Level 2 in the
Second Amended and Restated Credit Agreement. A hypothetical 0.25% increase or decrease in our interest rate would increase or decrease interest expense on an annual basis by approximately $270.fair value hierarchy.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Envestnet, Inc. and subsidiaries (the Company) as of December 31,
20172022 and
2016,2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2017,2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31,
2017,2022, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
20172022 and
2016,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2017,2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017,2022 based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible notes as of January 1, 2021 due to the adoption of Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible instruments and Contracts in an Entity’s own Equity.
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’sManagement's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over the IT elements of revenue recognition
As discussed in Notes 2 and 14 to the consolidated financial statements, the Company has recorded $1.2 billion of revenues for the year ended December 31, 2022. Revenues are derived from asset-based services, subscription or licensing-based services, and professional services and other sources, and sold with varying price structures. The Company recognizes revenues when control of the services is transferred to customers.
We identified the evaluation of the sufficiency of audit evidence over the information technology (“IT”) elements of revenue recognition as a critical audit matter. Subjective and complex auditor judgment was required to assess the sufficiency of audit procedures performed and the nature and extent of audit evidence obtained due to the complexity and number of IT systems and the specialized skills needed to test the IT elements of the revenue recognition process.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the IT elements of revenue recognition, including the determination of IT systems for which those procedures were to be performed based on the nature of the information processed by the systems. We evaluated the design and tested the operating effectiveness of certain internal controls within the Company’s revenue recognition process, including the automated elements of the flow of transactions and certain manual controls over the underlying transaction data processed by the IT systems. We involved IT professionals with specialized skills and knowledge, who assisted in testing certain general IT controls and certain application controls interacting within the Company’s revenue recognition process. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed.
We have served as the Company’s auditor since 2013.
Chicago, Illinois
Feburary
Denver, Colorado
Consolidated Balance Sheets
(in thousands, except share information)
| | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 60,115 | | $ | 52,592 | |
Fees and other receivables, net | | | 51,522 | | | 44,268 | |
Prepaid expenses and other current assets | | | 19,470 | | | 16,224 | |
Total current assets | | | 131,107 | | | 113,084 | |
| | | | | | | |
Property and equipment, net | | | 35,909 | | | 33,000 | |
Internally developed software, net | | | 22,174 | | | 14,860 | |
Intangible assets, net | | | 222,731 | | | 265,558 | |
Goodwill | | | 432,955 | | | 431,936 | |
Other non-current assets | | | 17,176 | | | 13,963 | |
Total assets | | $ | 862,052 | | $ | 872,401 | |
| | | | | | | |
Liabilities and Equity | | | | | | | |
Current liabilities: | | | | | | | |
Accrued expenses and other liabilities | | $ | 105,897 | | $ | 87,763 | |
Accounts payable | | | 11,097 | | | 11,480 | |
Current portion of debt | | | — | | | 37,926 | |
Contingent consideration | | | 2,115 | | | 2,286 | |
Deferred revenue | | | 21,246 | | | 16,499 | |
Total current liabilities | | | 140,355 | | | 155,954 | |
| | | | | | | |
Convertible Notes | | | 158,990 | | | 152,575 | |
Revolving credit facility | | | 81,168 | | | — | |
Term Notes | | | — | | | 100,409 | |
Contingent consideration | | | 666 | | | 2,582 | |
Deferred revenue | | | 12,047 | | | 15,643 | |
Deferred rent and lease incentive | | | 15,185 | | | 12,060 | |
Deferred tax liabilities, net | | | 969 | | | 5,555 | |
Other non-current liabilities | | | 15,102 | | | 13,436 | |
Total liabilities | | | 424,482 | | | 458,214 | |
| | | | | | | |
Commitments and contingencies | | | | | | | |
| | | | | | | |
Redeemable units in ERS | | | 900 | | | 900 | |
Equity: | | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock, par value $0.005, 50,000,000 shares authorized | | | — | | | — | |
Common stock, par value $0.005, 500,000,000 shares authorized; 57,450,056 and 55,642,686 shares issued as of December 31, 2017 and December 31, 2016, respectively; 44,700,641 and 43,240,567 shares outstanding as of December 31, 2017 and December 31, 2016, respectively | | | 287 | | | 278 | |
Additional paid-in capital | | | 556,257 | | | 516,675 | |
Accumulated deficit | | | (73,854) | | | (70,574) | |
Treasury stock at cost, 12,749,415 and 12,402,119 shares as of December 31, 2017 and December 31, 2016, respectively | | | (47,042) | | | (33,068) | |
Accumulated other comprehensive income (loss) | | | 624 | | | (422) | |
Total stockholders’ equity | | | 436,272 | | | 412,889 | |
Non-controlling interest | | | 398 | | | 398 | |
Total equity | | | 436,670 | | | 413,287 | |
Total liabilities and equity | | $ | 862,052 | | $ | 872,401 | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share information)
| | | | | | | | | | |
| | December 31, | |
| | 2017 | | 2016 | | 2015 | |
Revenues: | | | | | | | | | | |
Assets under management or administration | | $ | 410,016 | | $ | 352,498 | | $ | 333,684 | |
Subscription and licensing | | | 245,867 | | | 198,125 | | | 75,280 | |
Professional services and other | | | 27,796 | | | 27,541 | | | 11,955 | |
Total revenues | | | 683,679 | | | 578,164 | | | 420,919 | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Cost of revenues | | | 219,037 | | | 180,590 | | | 161,309 | |
Compensation and benefits | | | 264,392 | | | 241,584 | | | 139,756 | |
General and administration | | | 121,010 | | | 115,435 | | | 72,900 | |
Depreciation and amortization | | | 62,820 | | | 63,999 | | | 27,962 | |
Total operating expenses | | | 667,259 | | | 601,608 | | | 401,927 | |
| | | | | | | | | | |
Income (loss) from operations | | | 16,420 | | | (23,444) | | | 18,992 | |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | |
Interest income | | | 201 | | | 37 | | | 338 | |
Interest expense | | | (16,347) | | | (16,600) | | | (10,271) | |
Other expense, net | | | (1,963) | | | (483) | | | (71) | |
Total other expense, net | | | (18,109) | | | (17,046) | | | (10,004) | |
| | | | | | | | | | |
Income (loss) before income tax provision | | | (1,689) | | | (40,490) | | | 8,988 | |
| | | | | | | | | | |
Income tax provision | | | 1,591 | | | 15,077 | | | 4,552 | |
| | | | | | | | | | |
Net income (loss) | | | (3,280) | | | (55,567) | | | 4,436 | |
Add: Net income (loss) attributable to non-controlling interest | | | — | | | — | | | — | |
Net income (loss) attributable to Envestnet, Inc. | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 | |
| | | | | | | | | | |
Net income (loss) per share attributable to Envestnet, Inc.: | | | | | | | | | | |
Basic | | $ | (0.08) | | $ | (1.30) | | $ | 0.12 | |
| | | | | | | | | | |
Diluted | | $ | (0.08) | | $ | (1.30) | | $ | 0.12 | |
| | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | |
Basic | | | 43,732,148 | | | 42,814,222 | | | 36,500,843 | |
| | | | | | | | | | |
Diluted | | | 43,732,148 | | | 42,814,222 | | | 38,386,873 | |
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 162,173 | | | $ | 429,279 | |
| Fees receivable, net | | 101,696 | | | 95,291 | |
| Prepaid expenses and other current assets | | 41,363 | | | 42,706 | |
| Total current assets | | 305,232 | | | 567,276 | |
| | | | |
| Property and equipment, net | | 62,443 | | | 50,215 | |
| Internally developed software, net | | 184,558 | | | 133,659 | |
| Intangible assets, net | | 379,995 | | | 400,396 | |
| Goodwill | | 998,414 | | | 925,154 | |
| Operating lease right-of-use assets, net | | 81,596 | | | 90,714 | |
| Other non-current assets | | 99,927 | | | 73,768 | |
| Total assets | | $ | 2,112,165 | | | $ | 2,241,182 | |
| | | | |
| Liabilities and Equity | | | | |
| Current liabilities: | | | | |
| Accrued expenses and other liabilities | | $ | 216,532 | | | $ | 225,159 | |
| Accounts payable | | 17,334 | | | 19,092 | |
| Operating lease liabilities | | 11,949 | | | 10,999 | |
| | | | |
| Deferred revenue | | 36,363 | | | 33,473 | |
| Current portion of long-term debt | | 44,886 | | | — | |
| Total current liabilities | | 327,064 | | | 288,723 | |
| | | | |
| Long-term debt | | 871,769 | | | 848,862 | |
| | | | |
| | | | |
| | | | |
| Non-current operating lease liabilities | | 110,652 | | | 105,920 | |
| Deferred tax liabilities, net | | 16,196 | | | 21,021 | |
| Other non-current liabilities | | 18,880 | | | 17,114 | |
| Total liabilities | | 1,344,561 | | | 1,281,640 | |
| | | | |
| Commitments and contingencies | | | | |
| | | | |
| Equity: | | | | |
| Stockholders’ equity: | | | | |
| Preferred stock, par value $0.005, 50,000,000 shares authorized; no shares issued and outstanding as of December 31, 2022 and December 31, 2021 | | — | | | — | |
| Common stock, par value $0.005, 500,000,000 shares authorized; 70,025,733 and 68,879,152 shares issued as of December 31, 2022 and December 31, 2021, respectively; 54,013,826 and 54,793,088 shares outstanding as of December 31, 2022 and December 31, 2021, respectively | | 350 | | | 344 | |
| Additional paid-in capital | | 1,135,284 | | | 1,131,628 | |
| Accumulated deficit | | (118,927) | | | (37,988) | |
| Treasury stock at cost, 16,011,907 and 14,086,064 shares as of December 31, 2022 and December 31, 2021, respectively | | (253,551) | | | (134,996) | |
| Accumulated other comprehensive loss | | (8,589) | | | (1,899) | |
| Total stockholders’ equity | | 754,567 | | | 957,089 | |
| Non-controlling interest | | 13,037 | | | 2,453 | |
| Total equity | | 767,604 | | | 959,542 | |
| Total liabilities and equity | | $ | 2,112,165 | | | $ | 2,241,182 | |
See accompanying notes to Consolidated Financial Statements.
Consolidated Statements of
Comprehensive Income (Loss)(in thousands)
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Net income (loss) attributable to Envestnet, Inc. | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 | |
Other comprehensive income (loss), net of taxes: | | | | | | | | | | |
Foreign currency translation gain (loss) | | | 1,046 | | | (412) | | | (2) | |
Gain (loss) on foreign currency contracts designated as cash flow hedges reclassified to earnings | | | — | | | (204) | | | 196 | |
Total other comprehensive income (loss), net of taxes | | | 1,046 | | | (616) | | | 194 | |
Comprehensive income (loss), net of taxes | | $ | (2,234) | | $ | (56,183) | | $ | 4,630 | |
See accompanying notes to Consolidated Financial Statements.
OperationsEnvestnet, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share information)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 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, 2014 | | 46,345,376 | | $ | 232 | | (11,800,723) | | $ | (13,242) | | $ | 233,888 | | $ | — | | $ | (19,443) | | $ | 556 | | $ | 201,991 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | 1,047,911 | | | 5 | | — | | | — | | | 8,274 | | | — | | | — | | | — | | | 8,279 |
Issuance of common stock - vesting of restricted stock units | | 434,292 | | | 2 | | — | | | — | | | — | | | — | | | — | | | — | | | 2 |
Acquisition of businesses | | 6,097,836 | | | 31 | | — | | | — | | | 195,420 | | | — | | | — | | | — | | | 195,451 |
Acquisition of business - attribution of the fair market value of replacement awards | | — | | | — | | — | | | — | | | 4,318 | | | — | | | — | | | — | | | 4,318 |
Stock-based compensation expense | | — | | | — | | — | | | — | | | 15,161 | | | — | | | — | | | — | | | 15,161 |
Excess tax benefits from stock-based compensation expense | | — | | | — | | — | | | — | | | 17,607 | | | — | | | — | | | — | | | 17,607 |
Purchase of treasury stock for stock-based minimum tax withholdings | | — | | | — | | (145,566) | | | (7,412) | | | — | | | — | | | — | | | — | | | (7,412) |
Purchase of ERS units | | — | | | — | | — | | | — | | | 58 | | | — | | | — | | | (158) | | | (100) |
Foreign currency translation loss | | — | | | — | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) |
Unrealized gain on foreign currency contracts designated as accounting hedges | | — | | | — | | — | | | — | | | — | | | 196 | | | — | | | — | | | 196 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 4,436 | | | — | | | 4,436 |
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 | | 598,382 | | | 2 | | — | | | — | | | 4,922 | | | — | | | — | | | — | | | 4,924 |
Issuance of common stock - vesting of restricted stock units | | 1,118,889 | | | 6 | | — | | | — | | | — | | | — | | | — | | | — | | | 6 |
Stock-based compensation expense | | — | | | — | | — | | | — | | | 32,572 | | | — | | | — | | | — | | | 32,572 |
Excess tax benefits from stock-based compensation expense | | — | | | — | | — | | | — | | | 4,455 | | | — | | | — | | | — | | | 4,455 |
Purchase of treasury stock for stock-based minimum tax withholdings | | — | | | — | | (412,220) | | | (10,966) | | | — | | | — | | | — | | | — | | | (10,966) |
Common stock shares repurchased | | — | | | — | | (43,610) | | | (1,448) | | | — | | | — | | | — | | | — | | | (1,448) |
Foreign currency translation loss | | — | | | — | | — | | | — | | | — | | | (412) | | | — | | | — | | | (412) |
Loss on foreign currency contracts designated as cash flow hedges reclassified to earnings | | — | | | — | | — | | | — | | | — | | | (204) | | | — | | | — | | | (204) |
Net loss | | — | | | — | | — | | | — | | | — | | | — | | | (55,567) | | | — | | | (55,567) |
Balance, December 31, 2016 | | 55,642,686 | | $ | 278 | | (12,402,119) | | $ | (33,068) | | $ | 516,675 | | $ | (422) | | $ | (70,574) | | $ | 398 | | $ | 413,287 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | 837,857 | | | 4 | | — | | | — | | | 7,947 | | | — | | | — | | | — | | | 7,951 |
Issuance of common stock - vesting of restricted stock units | | 969,513 | | | 5 | | — | | | — | | | — | | | — | | | — | | | — | | | 5 |
Stock-based compensation expense | | — | | | — | | — | | | — | | | 31,635 | | | — | | | — | | | — | | | 31,635 |
Purchase of treasury stock for stock-based tax withholdings | | — | | | — | | (347,296) | | | (13,974) | | | — | | | — | | | — | | | — | | | (13,974) |
Foreign currency translation gain | | — | | | — | | — | | | — | | | — | | | 1,046 | | | — | | | — | | | 1,046 |
Net loss | | — | | | — | | — | | | — | | | — | | | — | | | (3,280) | | | — | | | (3,280) |
Balance, December 31, 2017 | | 57,450,056 | | $ | 287 | | (12,749,415) | | $ | (47,042) | | $ | 556,257 | | $ | 624 | | $ | (73,854) | | $ | 398 | | $ | 436,670 |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
OPERATING ACTIVITIES: | | | | | | | | | |
Net income (loss) | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 62,820 | | | 63,999 | | | 27,962 |
Deferred rent and lease incentive amortization | | | 1,027 | | | (438) | | | 1819 |
Provision for doubtful accounts | | | 867 | | | 1,122 | | | 176 |
Deferred income taxes | | | (4,597) | | | 5,584 | | | (10,508) |
Stock-based compensation expense | | | 31,331 | | | 33,276 | | | 15,161 |
Non-cash interest expense | | | 8,994 | | | 8,244 | | | 10,271 |
Accretion on contingent consideration and purchase liability | | | 512 | | | 150 | | | 888 |
Fair market value adjustment to contingent consideration | | | — | | | 1,588 | | | (4,153) |
Loss allocation from equity method investment | | | 1,469 | | | 1,420 | | | — |
Impairment of equity method investment | | | — | | | 734 | | | — |
Loss on disposal of fixed assets | | | 76 | | | 398 | | | — |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | |
Fees and other receivables | | | (8,121) | | | 1,646 | | | (9,297) |
Prepaid expenses and other current assets | | | (787) | | | (3,290) | | | 14,716 |
Other non-current assets | | | (1,690) | | | (98) | | | (6,025) |
Accrued expenses and other liabilities | | | 16,810 | | | 17,174 | | | (13,653) |
Accounts payable | | | (442) | | | (462) | | | 3,128 |
Deferred revenue | | | 1,191 | | | 2,014 | | | 10,906 |
Other non-current liabilities | | | 2,427 | | | 3,776 | | | (3,792) |
Net cash provided by operating activities | | | 108,607 | | | 81,270 | | | 42,035 |
| | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | |
Purchase of property and equipment | | | (14,945) | | | (13,967) | | | (9,184) |
Capitalization of internally developed software | | | (12,624) | | | (8,609) | | | (5,532) |
Investment in private companies | | | (1,450) | | | (2,238) | | | (1,500) |
Purchase of ERS units | | | — | | | (1,500) | | | (100) |
Acquisition of businesses, net of cash acquired | | | — | | | (31,613) | | | (328,305) |
Net cash used in investing activities | | | (29,019) | | | (57,927) | | | (344,621) |
| | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | |
Proceeds from issuance of Term Notes | | | — | | | — | | | 160,000 |
Payment of Term Notes | | | (35,862) | | | (8,000) | | | (10,000) |
Proceeds from borrowings on revolving credit facility | | | 35,000 | | | 40,000 | | | 10,000 |
Payments on revolving credit facility | | | (62,500) | | | (40,000) | | | (10,000) |
Debt issuance costs | | | (94) | | | — | | | — |
Payments of contingent consideration | | | (2,286) | | | (3,729) | | | (7,219) |
Payments of definite consideration | | | (445) | | | — | | | — |
Payments of purchase consideration liabilities | | | (235) | | | (3,256) | | | — |
Issuance of redeemable units in ERS | | | — | | | — | | | 900 |
Proceeds from exercise of stock options | | | 7,951 | | | 4,924 | | | 8,279 |
Purchase of treasury stock for stock-based tax withholdings | | | (13,974) | | | (10,966) | | | (7,412) |
Common stock acquired under the share repurchase program | | | — | | | (1,448) | | | — |
Issuance of restricted stock units | | | 5 | | | 6 | | | 2 |
Net cash provided by (used in) financing activities | | | (72,440) | | | (22,469) | | | 144,550 |
| | | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | 375 | | | — | | | — |
| | | | | | | | | |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 7,523 | | | 874 | | | (158,036) |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 52,592 | | | 51,718 | | | 209,754 |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 60,115 | | $ | 52,592 | | $ | 51,718 |
| | | . | | | | | | |
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes | | $ | 3,261 | | $ | 1,114 | | $ | 1,700 |
Supplemental disclosure of cash flow information - cash paid during the period for interest | | | 7,353 | | | 8,356 | | | 3,877 |
Supplemental disclosure of non-cash operating, investing and financing activities: | | | | | | | | | |
Non-cash debt issuance costs | | | 2,230 | | | — | | | — |
Leasehold improvements funded by lease incentive | | | 2,098 | | | 1,522 | | | 330 |
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities | | | 1,286 | | | 1,136 | | | — |
Purchase liabilities included in accrued expenses and other liabilities | | | 856 | | | 996 | | | 13,676 |
Contingent consideration issued in business acquisitions | | | — | | | 4,868 | | | 1,500 |
Common stock issued in business acquisitions | | | — | | | — | | | 195,451 |
Attribution of the fair market value of replacement awards | | | — | | | — | | | 4,318 |
See accompanying notes to Consolidated Financial Statements.
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
information) | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Revenues: | | | | | | |
| Asset-based | | $ | 738,228 | | | $ | 709,376 | | | $ | 540,947 | |
| Subscription-based | | 477,844 | | | 453,989 | | | 426,507 | |
| Total recurring revenues | | 1,216,072 | | | 1,163,365 | | | 967,454 | |
| Professional services and other revenues | | 23,712 | | | 23,152 | | | 30,776 | |
| Total revenues | | 1,239,784 | | | 1,186,517 | | | 998,230 | |
| | | | | | |
| Operating expenses: | | | | | | |
| Cost of revenues | | 468,460 | | | 423,723 | | | 305,929 | |
| Compensation and benefits | | 490,725 | | | 432,829 | | | 398,970 | |
| General and administration | | 216,075 | | | 171,657 | | | 160,229 | |
| Depreciation and amortization | | 130,548 | | | 117,767 | | | 113,661 | |
| Total operating expenses | | 1,305,808 | | | 1,145,976 | | | 978,789 | |
| | | | | | |
| Income (loss) from operations | | (66,024) | | | 40,541 | | | 19,441 | |
| | | | | | |
| Other income (expense): | | | | | | |
| Interest income | | 4,184 | | | 827 | | | 1,112 | |
| Interest expense | | (16,843) | | | (16,931) | | | (31,504) | |
| Other income (expense), net | | 264 | | | (4,076) | | | 2,906 | |
| Total other expense, net | | (12,395) | | | (20,180) | | | (27,486) | |
| | | | | | |
| Income (loss) before income tax provision (benefit) | | (78,419) | | | 20,361 | | | (8,045) | |
| | | | | | |
| Income tax provision (benefit) | | 7,061 | | | 7,667 | | | (5,401) | |
| | | | | | |
| Net income (loss) | | (85,480) | | | 12,694 | | | (2,644) | |
| Add: Net (income) loss attributable to non-controlling interest | | 4,541 | | | 602 | | | (466) | |
| Net income (loss) attributable to Envestnet, Inc. | | $ | (80,939) | | | $ | 13,296 | | | $ | (3,110) | |
| | | | | | |
| Net income (loss) per share attributable to Envestnet, Inc.: | | | | | | |
| Basic | | $ | (1.47) | | | $ | 0.24 | | | $ | (0.06) | |
| | | | | | |
| Diluted | | $ | (1.59) | | | $ | 0.24 | | | $ | (0.06) | |
| | | | | | |
| Weighted average common shares outstanding: | | | | | | |
| Basic | | 55,199,482 | | | 54,470,975 | | | 53,589,232 | |
| | | | | | |
| Diluted | | 56,842,125 | | | 55,384,096 | | | 53,589,232 | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Net income (loss) attributable to Envestnet, Inc. | | $ | (80,939) | | | $ | 13,296 | | | $ | (3,110) | |
| Other comprehensive income (loss), net of taxes: | | | | | | |
| Foreign currency translation gains (losses), net | | (6,690) | | | (1,501) | | | 1,351 | |
| Comprehensive income (loss) attributable to Envestnet, Inc. | | $ | (87,629) | | | $ | 11,795 | | | $ | (1,759) | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share information)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | |
| | | Common Stock | | Treasury Stock | | Additional | | Other | | | | Non- | | |
| | | | | | | Common | | | | Paid-in | | Comprehensive | | Accumulated | | controlling | | Total |
| | | Shares | | Amount | | Shares | | Amount | | Capital | | Loss | | Deficit | | Interest | | Equity |
| Balance, December 31, 2019 | | 66,320,706 | | | $ | 331 | | | (13,479,000) | | | $ | (90,965) | | | $ | 1,037,141 | | | $ | (1,749) | | | $ | (75,664) | | | $ | (1,518) | | | $ | 867,576 | |
| Adoption of ASC 326 | | — | | | — | | | — | | | — | | | — | | | — | | | (1,138) | | | — | | | (1,138) | |
| Exercise of stock options | | 705,333 | | | 4 | | | — | | | — | | | 10,756 | | | — | | | — | | | — | | | 10,760 | |
| Issuance of common stock - vesting of restricted stock units | | 804,982 | | | 4 | | | — | | | — | | | — | | | — | | | — | | | — | | | 4 | |
| Issuance of common stock | | 1,685 | | | — | | | — | | | — | | | 126 | | | — | | | — | | | — | | | 126 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | 56,292 | | | — | | | — | | | — | | | 56,292 | |
| Shares withheld to satisfy tax withholdings | | — | | | — | | | (260,171) | | | (19,501) | | | — | | | — | | | — | | | — | | | (19,501) | |
| Transfer of non-controlling units, net of tax | | — | | | — | | | — | | | — | | | 666 | | | — | | | — | | | (139) | | | 527 | |
| Capital contribution - non-controlling interest | | — | | | — | | | — | | | — | | | (66) | | | — | | | — | | | 672 | | | 606 | |
| Issuance of Convertible Notes due 2025, net of offering costs and taxes of $8,694 | | — | | | — | | | — | | | — | | | 61,859 | | | — | | | — | | | — | | | 61,859 | |
| Foreign currency translation gain, net of taxes | | — | | | — | | | — | | | — | | | — | | | 1,351 | | | — | | | — | | | 1,351 | |
| Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (3,110) | | | 466 | | | (2,644) | |
| Balance, December 31, 2020 | | 67,832,706 | | | $ | 339 | | | (13,739,171) | | | $ | (110,466) | | | $ | 1,166,774 | | | $ | (398) | | | $ | (79,912) | | | $ | (519) | | | $ | 975,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adoption of ASU 2020-06, net of taxes of $7,641 (See Note 2) | | — | | | — | | | — | | | — | | | (108,470) | | | — | | | 28,628 | | | — | | | (79,842) | |
| Exercise of stock options | | 76,303 | | | — | | | — | | | — | | | 2,090 | | | — | | | — | | | — | | | 2,090 | |
| Issuance of common stock - vesting of restricted stock units | | 891,466 | | | 5 | | | — | | | — | | | — | | | — | | | — | | | — | | | 5 | |
| Issuance of common stock | | 78,677 | | | — | | | — | | | — | | | 4,068 | | | — | | | — | | | — | | | 4,068 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | 67,525 | | | — | | | — | | | — | | | 67,525 | |
| Shares withheld to satisfy tax withholdings | | — | | | — | | | (291,405) | | | (20,529) | | | — | | | — | | | — | | | — | | | (20,529) | |
| Share repurchases | | — | | | — | | | (55,488) | | | (4,001) | | | — | | | — | | | — | | | — | | | (4,001) | |
| Capital contribution - non-controlling interest | | — | | | — | | | — | | | — | | | (127) | | | — | | | — | | | 3,328 | | | 3,201 | |
| Foreign currency translation loss, net of taxes | | — | | | — | | | — | | | — | | | — | | | (1,501) | | | — | | | — | | | (1,501) | |
| Other | | — | | | — | | | — | | | — | | | (232) | | | — | | | — | | | 246 | | | 14 | |
| Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 13,296 | | | (602) | | | 12,694 | |
| Balance, December 31, 2021 | | 68,879,152 | | | $ | 344 | | | (14,086,064) | | | $ | (134,996) | | | $ | 1,131,628 | | | $ | (1,899) | | | $ | (37,988) | | | $ | 2,453 | | | $ | 959,542 | |
-continued-
Envestnet, Inc.
Consolidated Statements of Stockholders’ Equity (continued)
(in thousands, except share information)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | | |
| | Common Stock | | Treasury Stock | | Additional | | Other | | | | Non- | | |
| | | | | | Common | | | | Paid-in | | Comprehensive | | Accumulated | | controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Loss | | Deficit | | Interest | | Equity |
| Balance, December 31, 2021 | | 68,879,152 | | | 344 | | | (14,086,064) | | | (134,996) | | | 1,131,628 | | | (1,899) | | | (37,988) | | | 2,453 | | | 959,542 | |
| Exercise of stock options | | 82,802 | | | — | | | — | | | — | | | 2,620 | | | — | | | — | | | — | | | 2,620 | |
| Issuance of common stock - vesting of restricted stock units | | 1,063,779 | | | 6 | | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | 79,581 | | | — | | | — | | | — | | | 79,581 | |
| Shares withheld to satisfy tax withholdings | | — | | | — | | | (356,201) | | | (23,516) | | | — | | | — | | | — | | | — | | | (23,516) | |
| Share repurchases | | — | | | — | | | (1,569,642) | | | (95,039) | | | — | | | — | | | — | | | — | | | (95,039) | |
| Capital contribution - non-controlling interest | | — | | | — | | | — | | | — | | | 1,288 | | | — | | | — | | | 14,749 | | | 16,037 | |
| Foreign currency translation loss, net of taxes | | — | | | — | | | — | | | — | | | — | | | (6,690) | | | — | | | — | | | (6,690) | |
| | | | | | | | | | | | | | | | | | |
| Capped call transactions | | — | | | — | | | — | | | — | | | (79,585) | | | — | | | — | | | — | | | (79,585) | |
| Other | | — | | | — | | | — | | | — | | | (248) | | | — | | | — | | | 376 | | | 128 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | (80,939) | | | (4,541) | | | (85,480) | |
| Balance, December 31, 2022 | | 70,025,733 | | | $ | 350 | | | (16,011,907) | | | $ | (253,551) | | | $ | 1,135,284 | | | $ | (8,589) | | | $ | (118,927) | | | $ | 13,037 | | | $ | 767,604 | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) | | $ | (85,480) | | | $ | 12,694 | | | $ | (2,644) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 130,548 | | | 117,767 | | | 113,661 | |
| Provision for doubtful accounts | | 511 | | | 1,598 | | | 2,817 | |
| Deferred income taxes | | (3,490) | | | (320) | | | (1,884) | |
| Release of uncertain tax positions | | — | | | — | | | (7,101) | |
| Non-cash compensation expense | | 80,333 | | | 68,020 | | | 59,637 | |
| Non-cash interest expense | | 7,445 | | | 5,799 | | | 18,515 | |
| Loss on extinguishment of Convertible Notes due 2023 | | 13,421 | | | — | | | — | |
| | | | | | |
| Gain on extinguishment of Convertible Notes due 2025 | | (15,089) | | | — | | | — | |
| | | | | | |
| Accretion on contingent consideration and purchase liability | | — | | | 730 | | | 1,688 | |
| Payments of contingent consideration | | — | | | (2,360) | | | — | |
| Fair market value adjustment to contingent consideration liability | | — | | | (1,067) | | | (3,105) | |
| | | | | | |
| Gain on settlement of liability | | — | | | (1,206) | | | — | |
| | | | | | |
| Loss allocations from equity method investments | | 8,874 | | | 7,093 | | | 5,399 | |
| Gain on equity method investments | | (9,517) | | | — | | | (4,230) | |
| Loss on property and equipment disposals | | 5,097 | | | — | | | — | |
| Lease related impairments, including right-of-use assets | | 15,750 | | | 1,537 | | | 2,661 | |
| Other | | 355 | | | (293) | | | (729) | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
| Fees receivable, net | | (5,031) | | | (16,731) | | | (15,055) | |
| Prepaid expenses and other current assets | | 2,864 | | | 399 | | | (9,666) | |
| Other non-current assets | | (4,992) | | | 2,741 | | | (1,963) | |
| Accrued expenses and other liabilities | | (24,711) | | | 53,265 | | | 22,109 | |
| Accounts payable | | (3,724) | | | 1,290 | | | (187) | |
| Deferred revenue | | (305) | | | (2,080) | | | (4,125) | |
| Other non-current liabilities | | 4,178 | | | 1,701 | | | (5,962) | |
| Net cash provided by operating activities | | 117,037 | | | 250,577 | | | 169,836 | |
| | | | | | |
| INVESTING ACTIVITIES: | | | | | | |
| Purchases of property and equipment | | (16,172) | | | (23,731) | | | (12,088) | |
| Capitalization of internally developed software | | (89,153) | | | (65,170) | | | (54,908) | |
| Investments in private companies | | (16,351) | | | (25,926) | | | (15,640) | |
| Acquisitions of businesses, net of cash acquired | | (104,100) | | | (32,794) | | | (20,257) | |
| Acquisition of proprietary technology | | (15,000) | | | (25,517) | | | — | |
| | | | | | |
| Advance for technology solutions | | (4,000) | | | (3,000) | | | — | |
| Issuance of notes receivable to equity method investees | | (6,350) | | | — | | | — | |
| Other | | — | | | — | | | 2,897 | |
| Net cash used in investing activities | | (251,126) | | | (176,138) | | | (99,996) | |
-continued-
Envestnet, Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| FINANCING ACTIVITIES: | | | | | | |
| Proceeds from issuance of Convertible Notes due 2027 | | 575,000 | | | — | | | — | |
| Convertible Notes due 2027 issuance costs | | (16,323) | | | — | | | — | |
| Repurchase of Convertible Notes due 2023 | | (312,422) | | | — | | | — | |
| | | | | | |
| Repurchase of Convertible Notes due 2025 | | (181,772) | | | — | | | — | |
| Proceeds from issuance of Convertible Notes due 2025 | | — | | | — | | | 517,500 | |
| | | | | | |
| Convertible Notes due 2025 issuance costs | | — | | | — | | | (14,540) | |
| Proceeds from borrowings on revolving credit facility | | — | | | — | | | 45,000 | |
| Payments on revolving credit facility | | — | | | — | | | (305,000) | |
| | | | | | |
| Capital contributions - non-controlling shareholders | | 16,037 | | | 3,201 | | | 606 | |
| Payments of deferred consideration on prior acquisitions | | — | | | — | | | (1,879) | |
| Payments of contingent consideration | | (743) | | | (9,276) | | | — | |
| Purchase of capped calls | | (79,585) | | | — | | | — | |
| Proceeds from exercise of stock options | | 2,620 | | | 2,090 | | | 10,760 | |
| Taxes paid in lieu of shares issued for stock-based compensation | | (23,516) | | | (20,529) | | | (19,501) | |
| Share repurchases | | (85,750) | | | (4,001) | | | — | |
| Finance lease payments | | (18,682) | | | — | | | — | |
| Other | | (1,866) | | | (655) | | | 4 | |
| Net cash provided by (used in) financing activities | | (127,002) | | | (29,170) | | | 232,950 | |
| | | | | | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | | (6,164) | | | (555) | | | (831) | |
| | | | | | |
| INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | (267,255) | | | 44,714 | | | 301,959 | |
| | | | | | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (See Note 2) | | 429,428 | | | 384,714 | | | 82,755 | |
| | | | | | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) | | $ | 162,173 | | | $ | 429,428 | | | $ | 384,714 | |
| | | | | | | |
| Supplemental disclosure of cash flow information - net cash paid during the period for income taxes | | $ | 12,120 | | | $ | 7,920 | | | $ | 8,304 | |
| Supplemental disclosure of cash flow information - cash paid during the period for interest | | 11,046 | | | 11,132 | | | 12,990 | |
| Supplemental disclosure of non-cash operating, investing and financing activities: | | | | | | |
| | | | | | |
| Common stock issued to settle purchase liability | | — | | | 4,068 | | | 126 | |
| Contingent consideration issued in acquisition of businesses | | — | | | — | | | 5,239 | |
| Internally developed software costs included in accrued expenses and other liabilities | | — | | | 591 | | | — | |
| Leasehold improvements funded by lease incentive | | — | | | 164 | | | 1,806 | |
| Membership interest liabilities included in other non-current liabilities | | 752 | | | 496 | | | 3,345 | |
| Purchase liabilities included in accrued expenses and other liabilities | | — | | | 2,951 | | | 632 | |
| | | | | | |
| Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities | | 4,206 | | | 1,328 | | | 1,841 | |
| Property and equipment acquired through financing leases | | 18,682 | | | — | | | — | |
| Transfer of non-controlling units | | — | | | — | | | 771 | |
| | | | | | |
| Treasury stock purchases included in accrued expenses and other liabilities | | 9,289 | | | — | | | — | |
| Right-of-use assets obtained in exchange for lease liabilities, net | | 13,211 | | | 4,596 | | | 39,370 | |
| Conversion of equity method investee loan to shares | | 2,623 | | | — | | | — | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Notes to Consolidated Financial Statements
1.Organization and Description of Business Envestnet, Inc. (“Envestnet”("Envestnet") and, through its subsidiaries (collectively, the “Company”"Company") provide intelligent systems for, is transforming the way financial advice and insight are delivered. Its mission is to empower financial advisors and service providers with innovative technology, solutions and intelligence. Envestnet has been a leader in helping transform wealth management, andworking towards its goal of expanding a holistic financial wellness. Envestnet’swellness ecosystem so that our clients can deliver an intelligent financial life to their clients.
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 19—Segment Information”. The business segments are as follows:
•Envestnet Wealth Solutions – a leading provider of unified technology enhances advisor productivity and strengthens the wealth management process. Through a combination of platform enhancements, partnershipssoftware and acquisitions, services to empower financial advisors and institutions to enable them to deliver an Intelligent Financial Life to their clients.
Envestnet
empowers enterprises and advisors to more fully understand theirWealth Solutions serves its clients
and deliver better outcomes.The Company offers these solutions principally through the following product and service 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 the creation of a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to nearly 23,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics and digital advice capabilities to customers.
•Envestnet | Tamarac™ provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high‑end RIAs.
•Envestnet | MoneyGuide provides leading goals-based financial planning solutions to the financial services suites: | ·
| | Envestnet | Enterpriseprovides 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 18,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.
|
industry. The highly adaptable software helps financial advisors add significant value for their clients using best-in-class technology with enhanced integrations to generate financial plans. | ·
| | Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and CRM software, principally to high‑end registered investment advisers (“RIAs”).
|
•Envestnet | Retirement Solutions (“ERS & 401kplans.com”) offers a comprehensive suite of services for advisor-sold retirement plans. Our retirement solutions address the regulatory, data, and investment needs of retirement plans and delivers the information holistically. 401kplans.com is a digital 401(k) retirement plan marketplace that streamlines retirement plan distribution and due diligence among financial advisors and third-party administrators. With Envestnet's retirement solutions marketplace, advisors can employ Envestnet's outsourced fiduciary services for investment selection and monitoring in retirement plan portfolios and can access essential information to make investment recommendations and understand the impact of fund changes to the total cost of their plans. | ·
| | 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 and consulting services to assist advisors in creating investment solutions for their clients. These solutions include over 5,000 vetted third-party managed account products, multi-manager portfolios, and fund strategist portfolios, as well as over 950 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers portfolio overlay and tax optimization services. | ·
| | Envestnet | PMC®, or Portfolio Management Consultants (“PMC”)provides research, due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 4,000 vetted managed account products, multi-manager portfolios, fund strategist portfolios, as well as proprietary products, such as quantitative portfolios. PMC also offers an overlay service, which includes patented portfolio overlay and tax optimization services.
|
•Envestnet | Redi2(“Redi2”) offers revenue management and hosted fee-billing solutions in the global financial services industry. Redi2's platform enables fee calculation, invoice creation, payouts and accounting, and billing compliance. Redi2 solutions caters to different segments of the market with three different product lines: Revenue Manager which provides client revenue accounting and billing services for asset managers; Wealth Manager which delivers multi-party billing and payouts for broker-dealers and turnkey asset management programs and BillFin™ which offers advisory billing and invoicing for financial advisors. | ·
| | Envestnet | Yodlee™is a leading data aggregation and data analytics platform powering dynamic,cloud-based innovation for digital financial services.
|
•Envestnet Data & Analytics – a leading data aggregation, data intelligence, and experiences platform. Envestnet Data & Analytics enables consumers to aggregate financial accounts within client applications and provides to clients the functionality to gather, refine, and aggregate massive sets of consumer permissioned data for use in financial applications, reports, market research analysis, and application programming interfaces (“APIs”).
Envestnet, Inc.
Notes to Consolidated Financial Statements
Envestnet operates
threesix RIAs
and a registered broker-dealer. The RIAs are registered with the U.S. Securities and Exchange Commission
(“SEC”("SEC").
The broker-dealer is registered with the SEC, all 50 states and the District of Columbia and is a member of the Financial Industry Regulatory Authority (“FINRA”).
2.Summary of Significant Accounting Policies The Company follows accounting standards established by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting of financial condition, results of operations and cash flows. References to Generally Accepted Accounting Principlesaccounting principles generally accepted in the United States (“GAAP”) in these footnotesnotes are to the FASB Accounting Standards CodificationTM, sometimes referred to as the codification or ASC.™ (“ASC”) and related updates (“ASU”). Principles of Consolidation—The consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Foreign Currency—Accounts for the Envestnet Wealth Solutions segment that are denominated in a non-U.S. currency have been remeasured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet Data & Analytics segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a functional currency other than the U.S. dollar 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 consolidated balance sheets as accumulated other comprehensive income (loss) within stockholders' equity. The Company is also subject to gains and losses from foreign currency denominated transactions and the remeasurement of foreign currency denominated balance sheet accounts, both of which are included in other income (expense), net in the consolidated statements of operations.
Management Estimates—Management of the Company has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
relate to estimating uncollectible receivables, revenue recognition, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of restricted stock and stock optionsright-of-use assets, performance shares issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, operating lease liabilities, fair value of the liability portion of the convertible debt, commitments and contingencies and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.
Revenue Recognition—Recognition
The Company recognizesaccounts for its revenue arrangements in accordance with FASB Topic 606 - Revenue from services related to asset managementContracts with Customers ("ASC 606"). The Company derives revenues from asset-based and administration, licensingsubscription-based services and professional services fees.and other sources. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues. The Company recognizes revenue when allmajority of the following conditionsCompany's revenues are satisfied: (i) there is persuasive evidence of an arrangement, (ii) the service or product has been provided to the customer and no uncertainties exist surrounding product acceptances (iii) the amountrecognized when services are provided.
Asset-Based Recurring Revenues—Asset-based recurring revenues primarily consist of fees for providing customers continuous access to be paid byplatform services through the customer is fixed or determinable;Company’s uniquely customized platforms. These platform services include investment manager research, portfolio diagnostics, proposal generation, investment model management, rebalancing and (iv)trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration and are made available to customers throughout the collection of fees is reasonably assured. | ·
| | Asset management and administration fees — The Company derives revenuescontractual term from fees charged as a percentage of the assets that are managed or administered on its technology platform by financial advisors, financial institutions, and their clients (collectively “customers”) and for services the Company provides to its customers. Such services include investment manager due diligence and research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing, and back office and middle-office operations and administration. Investment decisions for assets under management or administration are made by our customers. The asset management and administration fees the Company earns are generally based upon a contractual percentage of assets managed or administered on our platform based on preceding quarter-end values. The contractual fee percentages vary based on the level and type of services the Company provides to its customers. Fees related to assets under management or administration increase or decrease based on values of existing customer accounts. The values are affected by inflows or outflows of customer funds and market fluctuations.
|
| ·
| | Subscription and licensing —
|
Subscription— Subscription revenue is primarily derived from customers accessing the SaaS technology platform and includes subscription, support, and usage-based fees. Subscription revenue is recognized ratably over the contracted term of each respective subscription agreement, commencing on the date the servicecustomized platform is provisioned tolaunched.
The asset-based fees the
customer, provided the four revenue recognition criteria have been satisfied. Usage-based revenue is recognized as earned, provided the four revenue recognition criteria have been satisfied.Licensing— Company earns are generally based upon variable percentages of assets managed or administered on our platforms. The Company derives licensing fees from recurring contractual fixed fee contracts with larger financial institutions or enterprise clients. Licensing contracts allow the customer to provide a unique configuration of platform features and investment solutions for their advisors. The licensing fees varypercentage varies based on the level and type of services provided and our revenues received under license agreements are recognized over the contractual term. The Company’s license agreements do not generally provideCompany provides to its customers, the ability to take possession of the software or host the software on the customers’ own systems or through a hosting arrangement with an unrelated party.
| ·
| | Professional services and other —
|
The Company derives professional services fees from providing contractual customized service platform software development as well as implementation fees, which are recognized under a proportional performance model utilizing an output-based approach or are deferred and amortized over the estimated lifevalues of existing customer accounts. The values of the customer relationship. The Company’s contracts generally have fixed prices,accounts are affected by inflows or outflows of customer funds and generally specify or quantify deliverables.
market fluctuations.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Cash receivedThe platform services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the customer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our services and each quarter is separately identified in the contract, and are considered to be a single performance obligation.
The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the variable amounts earned from the platform services relate specifically to the benefits transferred to the customer during that month or quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
The asset-based contracts generally contain one performance obligation and revenue is recognized on a ratable basis over the quarter beginning on the date that the platform services are made available to the customer as the customer simultaneously consumes and receives the benefits of the services. All asset-based fees are recognized in the Envestnet Wealth Solutions segment.
For certain services provided by
third parties, the Company
in advance ofevaluates whether it is the
performance of services is deferred and recognized as revenue when earned. Certain portions of the Company’s revenues require management’s consideration of the nature of the client relationship in determining whether to recognize as revenue the gross amount billed or net amount retained after payments are made to providers for certain services related to the product or service offering.The Company uses the following factors to determine whether to record revenueprincipal (revenues reported on a gross basis) or agent (revenues reported on a net basis:
| ·
| | the Company has a direct contract with the third party service provider;
|
| ·
| | the Company has discretion in establishing fees paid by the customer and fees due to the third party service provider; and
|
| ·
| | the Company has credit risk.
|
Whenbasis). Generally, the Company reports customer fees includeincluding charges for third party service providers where the Company has a direct contract with such third party service providers on a gross revenue recognizedbasis, whereas the amounts billed to its customers are recorded as revenues, and amounts paid to third party service providers are recorded as cost of revenues. The Company is the principal in the transaction because it controls the services before they are transferred to its customers. Control is evidenced by the Company equals the fee paid by the customer. The cost of revenues recognized by the Company is the amount duebeing primarily responsible to the third party service provider.
In instances where the Company does not have a direct contract with the third party service provider, the Company cannot exerciseits customers and having discretion in establishing pricing.
Subscription-Based Recurring Revenues—Subscription-based recurring revenues primarily consist of fees paid byfor providing customers continuous access to the Company’s platform for wealth management and financial wellness. The subscription-based fees generally include fixed fees and or usage-based fees.
Generally, the subscription services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. Quarterly subscription services are considered distinct as the customer can benefit from each increment of services on its own and fees dueeach quarter is separately identified in the contract, and services are considered to be a single performance obligation.
Certain subscription-based contracts include fixed and variable consideration. The amount of variable consideration that is included in the transaction price may be subject to constraint and included in the subscription-based recurring revenues only to the third party service provider,extent that is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company utilizes the expected value method to estimate variable consideration based on available historical, current, and forecasted information.
The usage-based pricing generally resets each quarter and the
Company does not have credit risk,pricing structure is generally consistent throughout the
Company recordsterm of the
revenue on a net basis.Multiple Element Arrangements—When the Company enters into arrangements with multiple deliverables, exclusive of arrangements with software deliverables, it applies the FASB’s guidance for revenue arrangements with multiple deliverablescontract. The fixed fees are generally calculated and evaluates each deliverable to determine whether it represents a separate unit of accountingbilled quarterly in advance. The usage-based fees are generally calculated and are billed either monthly or quarterly based on the following criteria: (i) whetheractual usage and relate specifically to the delivered item has valuebenefits transferred to the customer on a stand-alone basis, and (ii) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Revenueduring that quarter. Accordingly, revenue is allocated to each unitthe specific quarter in which services are performed.
Fixed fees are generally recognized on a ratable basis over the quarter beginning when the subscription services are made available to the customer, as the customer simultaneously receives and consumes the benefits of accounting or element basedthe subscription services. Usage-based revenue is recognized on relative selling prices. a monthly basis as the customer receives and consumes the benefit as the Company provides the services. Subscription-based fees are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Professional Services and Other Revenues—The Company determines relative selling prices by using either (a) vendor-specific objective evidence (“VSOE”) if it exists; or (b) third-party evidence (“TPE”) of selling price. When neither VSOE nor TPE of selling price exists for a deliverable, the Company uses its best estimate of the selling price for that deliverable.After determining which deliverables represent a separate unit of accounting, each unit is then accounted for under the applicable revenue recognition guidance. In cases where elements cannot be treated as separate units of accounting, the elements are combined into a single unit of accounting for revenue recognition purposes. If one of the elements that are combined into a single unit of accounting is fees fromearns professional services including implementation relatedfees by providing contractual customized services or customized serviceand platform software development as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverables in the contract. Certain professional serviceservices contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Initial implementation fees are fixed and are generally recognized ratably over the coursecontract term.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Other revenues primarily include revenue related to the Advisor Summit. Other revenues are recognized when the events are held. Other revenues are not significant.
The majority of the expected customer relationship. We have estimatedCompany's professional services and other contracts contain one performance obligation. Professional services and other revenues are recognized in both the lifeEnvestnet Wealth Solutions and Envestnet Data & Analytics segments.
Arrangements with Multiple Performance Obligations—Certain of the customer relationship by considering both the historical retention rate of ourCompany’s contracts with customers while not exceeding the number of years over which we can accurately forecast future revenues. We currently estimate this term to be five years.contain
multiple performance obligations, such as platform services performance obligation and professional services performance obligation. For revenues that are subject to sales and use tax and that were billed to customers,such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Standalone selling prices of services are estimated based on observable transactions when these services are sold on a standalone basis or based on expected cost plus margin.
Remaining Performance Obligations—Remaining performance obligations represent the transaction price allocated to unsatisfied or partially satisfied performance obligations. The disclosure includes estimates of variable consideration. The Company applies the practical expedients and exemption not to disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed; and (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.
Contract Balances—The Company records contract liabilities (deferred revenue) when cash payments are received in advance of its performance. The term between invoicing date and when payment is due is generally not significant. For the tax net withinmajority of its arrangements, the corresponding revenue category inCompany requires advance quarterly payments before the consolidated statements of operations. services are delivered to the customer.
Deferred Revenue—Revenue—Deferred revenue primarily consists of implementation and set up fees, professional services and licensesubscription fee payments received in advance from customers. For subscription agreements, the Company typically invoices its customers in monthly or annual fixed installments. Accordingly, the deferred revenue balance does
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
not represent the total contract value of these multi-year subscription agreements. Deferred revenue also includes certain deferred professional services fees, which are recognized in accordance withSales Incentive Compensation—Sales incentive compensation earned by the Company’s revenue recognition policy.
sales force is considered an incremental and recoverable cost to acquire a contract with a customer. Sales incentive compensation for initial contracts is deferred and amortized on a straight-line basis over the period of benefit. The Company determined the period of benefit by taking into consideration its customer contracts, life of the technology and other factors. Sales incentive compensation for renewal contracts are deferred and amortized on a straight-line basis over the related contractual renewal period. Deferred sales incentive compensation is included in other non-current assets in the consolidated balance sheets and amortization expense is included in compensation and benefits expenses in the consolidated statements of operations.
The Company has applied the practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in compensation and benefits expenses in the consolidated statements of operations.
Cost of Revenues—Revenues—Cost of revenues primarily includes expenses related to third party investment management and clearing, custody and brokerage services. Generally, these expenses are calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each quarter and are recognized ratably throughout the quarter based on the number of days in the quarter.
Allowance for Doubtful Accounts—Accounts—The Company evaluates the need for an allowance for doubtful accounts for potentially uncollectible fees receivable. In establishing the amount of the allowance, if any, customer-specific information is considered related to delinquent accounts, including historical loss experience and current economic conditions. As of December 31, 2017, 20162022 and 2015,2021, the Company’s allowance for doubtful accounts was $407, $242$2.6 million and $221,$3.9 million, respectively. Cash and Cash Equivalents—Equivalents—The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. Investments—
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Restricted Cash—The following table reconciles cash, cash equivalents and restricted cash from the consolidated balance sheets to amounts reported in the consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Cash and cash equivalents | | $ | 162,173 | | | $ | 429,279 | | | $ | 384,565 | |
| Restricted cash included in prepaid expenses and other current assets | | — | | | 149 | | | — | |
| Restricted cash included in other non-current assets | | — | | | — | | | 149 | |
| Total cash, cash equivalents and restricted cash | | $ | 162,173 | | | $ | 429,428 | | | $ | 384,714 | |
Investments—The Company has an investmentinvestments in private companies for which it has significant influence that isare recorded at costusing the equity method of accounting. The Company uses the equity method of accounting because of its less than 50% ownership and reviewed for impairment. Investmentslack of control in these companies. These investments are included in “Otherother non-current assets”assets on the consolidated balance sheets and consistsheets. The Company records the portion of non-marketable investmentsits earnings or losses in these privately held companies. companies’ net income or loss on a one quarter lag from the actual results of operations as a component of other income (expense), net on the consolidated statements of operations.
The Company reviews
theseall investments on a regular basis to evaluate the carrying amount and economic
viability ofviability. This evaluation process is based on information that the Company requests directly from these
investments. This policyinvestees and includes, but is not limited to,
reviewing eachthe review of the investee’s cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition.
The evaluation process is based on information that the Company requests from these investees. ThisAs this information is not subject to the same disclosure regulations as U.S. publicly traded companies,
and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these investees.
The Company has investments in which it uses the equity method of accounting to record its portion of investments in these privately held companies’ net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50 percent ownership and lack of control. The Company’s interest in the earnings or losses of the privately held companies will be reflected in other expense, net on the consolidated statements of operations.
The Company’s investments are assessed for impairment when
When a review of
thean investee’s operations indicates that there is a decline in
its value
of the investment and
theit has been determined that this decline is other than
temporary. Such indicators include, but are not limited to, limited capital resources, limited prospects of receiving additional financing, and prospectstemporary, the Company assesses the investment for
liquidity of the related securities.impairment. Impaired investments are written down to estimated fair value.
The Company estimates fairFair value
is estimated using a variety of valuation methodologies, including comparing the investee with publicly traded companies in similar lines of business, applying valuation multiples to estimated future operating results and
analyzing estimated discounted future cash flows. There were
$0, $734 and $0 inno impairments
toof investments
duringfor the years ended December 31,
2017, 20162022, 2021 and
2015, respectively. See “Note 9 Other Non-Current Assets.”2020.
For investments where the Company owns equity interests in privately held companies though does not have significant influence and there is no readily determinable fair value, it accounts for the investment under the measurement alternative at cost minus impairment, if any, plus or minus fair value changes when there are observable price changes.
Property and Equipment—Equipment—Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is computed using the straight-line method based on estimated useful lives of the depreciable assets. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs and maintenance costs are charged to operations as incurred. Assets are reviewed for recoverability whenever events or circumstances indicate the carrying value may not be recoverable. There were $5.1 million of impairments of property and equipment for the year ended December 31, 2022. There were immaterial impairments of property and equipment for the years ended December 31, 2021 and 2020. Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Internally Developed Software for Internal Use—Use—Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Internally developed software is amortized on a straight-line basis over its estimated useful life. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were noimmaterial impairments of internally developed software for internal use duringfor the years ended December 31, 2017, 20162022, 2021 and 2015.
2020.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Goodwill and Intangible Assets—Assets—Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is reviewed for impairment each year using a qualitative or quantitative process that is performed at least annually or whenever events or circumstances indicate a likely reduction in the fair value of a reporting unit below its carrying amount. The Company has concluded that impairment may have occurred. it has two reporting units.
The Company performs the annual impairment analysis on October 31 in order to provide management time to complete the analysis prior to year-end.
The Company has concluded that it has two reporting units.Prior to performing the quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, the Company is not required to complete the quantitative goodwill impairment evaluation. If it is determined that the carrying value may exceed fair value when considering qualitative factors, a quantitative goodwill impairment evaluation is performed.
When performing the quantitative evaluation, if the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the difference will be recorded.
No goodwill impairment charges have been recorded for the years ended December 31, 2017, 20162022, 2021 and 2015.
2020.
Intangible assets are recorded at cost less accumulated amortization. Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. No intangible asset impairment charges have been recorded for the years ended December 31,
2017, 20162022, 2021 and
2015. Operating Leases—In certain circumstances,2020.
Leases—The Company accounts for its leases in accordance with FASB Topic 842 - Leases (“ASC 842”) and has elected the available package of practical expedients as well as elected to apply the short-term lease exemption to all of its classes of underlying assets.
At inception, the Company enters intodetermines if an arrangement is a lease. Operating leases with free rent periods, rent escalations orare included in operating right-of-use ("ROU") assets, current operating lease incentives overliabilities and non-current operating lease liabilities in the Company's consolidated balance sheets. Finance leases are included in property and equipment, net in the Company's consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term ofand lease liabilities represent the Company's obligation to make lease payments arising from the lease. In such cases,Operating lease ROU assets and liabilities are recognized at commencement date based on the Company calculates the totalpresent value of lease payments over the termremaining lease term. The operating lease ROU asset also includes prepaid payments and excludes lease incentives. As none of the Company's leases provide an implicit rate, the Company uses an estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for non-lease components as part of the lease component for all asset classes. The majority of the Company's lease agreements are real estate leases.
Fair Value Measurements—The Company accounts for its fair value measurements in accordance with FASB Topic 825 - Financial Instruments (“ASC 825”), which provides companies the option to report selected financial assets and records them ratably as rent expense overliabilities at fair value and also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheets. The Company has not elected the ASC 825-10 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
term.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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Financial assets and liabilities recorded at fair value in the consolidated balance sheets 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. |
Income Taxes—Taxes—The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce deferred tax assets to an amount that is more likely than not to be realized. The Company follows authoritative guidance related to how uncertain tax positions should be recognized, measured, disclosed and presented in the consolidated financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
are “more-likely-than-not” of being sustained “when challenged” or “when examined”examined��� by the applicable tax authority. The tax benefits recognized in the consolidated financial statements from tax positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Non-income Tax Liabilities—Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. During 2017 and 2016, the Company estimated that a sales and use tax liability of $8,522 and $10,108, respectively, was probable related to multiple taxing jurisdictions with respect to revenues in the years ended December 31, 2017 and December 31, 2016, and prior years. This amount is included in accrued expenses and other liabilities on the consolidated balance sheets. For the same periods, the Company also estimated a sales and use tax receivable of $2,704 and $3,879, respectively, related to estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the consolidated balance sheets.
For the year ended December 31, 2017 and 2016, we recognized net sales and use tax expense of $345 and $6,229, including interest of approximately $244 and $914, respectively. The sales and use tax adjustment was recorded in general and administration on the consolidated statements of operations. Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability.
Business Combinations—Combinations—The Company accounts for business combinations under the acquisition method. The cost of an acquired company is assigned to the tangible and intangible assets acquired and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires management to make estimates and use valuation techniques when market values are not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred. The Company determines the fair value of contingent acquisition consideration payable on the acquisition date using a discounted cash flow approach utilizing an appropriate discount rate. Each reporting period thereafter, the Company revalues these obligations and records increases or decreases in their fair value as adjustments to fair market value adjustment onto contingent consideration in the Company’s consolidated statements of operations. Changes in the fair value of the contingent acquisition consideration payable can result from adjustments to the estimated revenue forecasts included in the contingent paymentconsideration calculations. Stock-Based Compensation—Compensation—Compensation cost relating to stock-based awards made to employees and directors is recognized in the consolidated financial statements using the Black-Scholes option-pricing model in the case of non-qualified stock option awards, and intrinsic value in the case of restricted stock awards. The Company measures the cost of such awards based on the estimated fair value of the award measured at the grant date and recognizes the expense on a straight-line basis over the requisite service period, which is the vesting period. Determining the fair value of stock options requires the Company to make several estimates, including the volatility of its stock price, the expected life of the option, forfeiture rate, dividend yield and interest rates. The Company estimates the expected life of its options using historical internal forfeiture data. The Company estimates stock-price volatility using historical third-party quotes of Envestnet’s common stock. The Company utilizes a risk-free interest rate, which is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the options. The Company has not and does not expect to pay dividends on its common shares.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The Company is required to estimate expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for those awards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions may impact the total amount of expense ultimately recognized over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Convertible Notes—On December 15, 2014,In May 2018, the Company issued $172,500$345.0 million of 1.75% convertible notesConvertible Notes due December 2019 (theJune 2023. In August 2020, the Company issued $517.5 million of 0.75% Convertible Notes due August 2025. In November 2022, the Company issued $575.0 million of 2.625% Convertible Notes due November 2027. The Company used a portion of the proceeds from the Convertible Notes due 2027 and available cash to repurchase $300.0 million aggregate principal amount of the outstanding Convertible Notes due 2023 and $200.0 million aggregate principal amount of the outstanding Convertible Notes due 2025 in November 2022. Collectively the “Convertible Notes”). The Convertible Notes are accounted for in accordance with FASB Topic 470 - Debt ("ASC 470-20.470"). The Company has determined that the embedded conversion options in the Convertible Notes are not required to be separately accounted for as a derivative under GAAP. TheUpon adoption of ASU 2020-06, the Company separately accounts for the liability and equity components of Convertible Notes as a single liability measured at amortized cost.
Capped Call Transactions—In November 2022, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions (the “Capped Call Counterparties”). The Capped Call Transactions initially cover the number of shares of Envestnet’s common stock underlying the Convertible Notes due 2027, subject to customary anti-dilution adjustments. The Capped Call Transactions are net purchased call options on Envestnet’s common stock.
The Capped Call Transactions are separate transactions entered into by the Company with each of the Capped Call Counterparties, are not part of the terms of the Convertible Notes due 2027, and do not affect any holder’s rights under the Convertible Notes due 2027. Holders of the Convertible Notes due 2027 do not have any rights with respect to the Capped Call Transactions.
As the Capped Call Transactions are legally detachable and separately exercisable from the Convertible Notes due 2027, they were evaluated as freestanding instruments under FASB Topic 480 - Distinguishing Liabilities from Equity. The Company concluded that can be settledthe Capped Call Transactions meet the scope exceptions for derivative instruments under FASB Topic 815 - Derivatives and Hedging. As such, the Capped Call Transactions meet the criteria for classification in equity and are included as a reduction to additional paid-in capital.
Non-controlling Interest—In March 2018, the Company initially acquired a 43% fully diluted interest in a private company for cash consideration of $1.3 million. In connection with the acquisition, the Company was granted the ability to appoint two members to the private company's board of directors. The appointment of two board members gives the Company the majority of the board's voting rights. As a result, the Company uses the consolidation method of accounting for this investment. The private company was formed to enable financial advisors to provide insurance and income protection products to their clients.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements—In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.” This update simplifies the accounting for certain convertible instruments by allocatingreducing the proceeds from issuance between the liability component and the embedded conversion option, or equity component, in accordance withnumber of accounting models available for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate ofand revises Topic 815-40, which provides guidance on how an entity must determine whether a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. The Company recognizes the accretion of the resulting discount using the effective interest method as part of interest expense in its consolidated statements of operations.Non-controlling Interest—Effective February 1, 2014, the Company formed ERS with various third parties. ERS offers advisory and technology enabled services to financial advisors and retirement plans. In exchangecontract qualifies for a 64.5% ownership interest in ERS, the Company contributed certain assets and has agreed to fund a certain amount of the operating expenses of ERS. As described in “Note 3 – Business Acquisitions,” primarily due to the issuance of units related to the contributions of FinaConnect, Inc. (“FinaConnect”) and Castle Rock Innovations, Inc. (“Castle Rock”) and the purchase of additional ERS units acquiredscope exception from the former owners of Klein Decisions, Inc. (“Klein”), the Company’s ownership in ERS increased to 80.8% as of December 31, 2016. During the year ended December 31, 2017, the Company purchased an additional 15 units, which increased the Company’s ownership percentage to 81.5% as of December 31, 2017.
The allocation of gains and losses to the members of ERS is based on a hypothetical liquidation book value method in accordance with the ERS operating agreement. There were no losses for the years ended December 31, 2017, 2016 and 2015, reflected as non-controlling interest in the consolidated statements of operations.
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.
In August 2015, the FASB issued ASU 2015-14 to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in its first quarter of 2018.
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 initial adoption. The standard also allows entities to apply certain practical expedients at their discretion. The Company will adopt the standard using the modified retrospective approach with a cumulative catch up adjustment and will provide additional disclosures comparing results to previous GAAP in our 2018 consolidated financial statements. We plan to apply the new revenue standard only to contracts not completed as of the date of initial application, referred to as open contracts. The Company has substantially completed the implementation of key systems changes and changes to internal controls over financial reporting to allow the Company to timely compile the information needed to account for transactions under this new guidance.
In adopting ASU 2014-09, the Company expects the following significant changes:
| i)
| | Timing of revenue recognition for initial implementation services. Under ASU 2014-09, the Company will recognize professional services revenue from the initial implementation services over the
|
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
remaining contractual term of the arrangement. Previously, this revenue was recognized on a straight line basis over the estimated life of the customer relationship; and
|
| ii)
| | Deferral of incremental direct costs to obtaining a contract with a customer. Under ASU 2014-09, the Company will capitalize certain variable compensation (i.e., short term incentive compensation) payable to its sales force and subsequently amortize the capitalized costs over a period of time that is consistent with the transfer of the related good or service to the customer, which the Company has determined to be five years. Capitalized costs, net of accumulated amortization, will be included in other non-current assets on the Company’s consolidated balance sheets. Previously, the Company elected to expense these incremental direct costs as incurred.
|
The Company currently estimates the adoption of ASU 2014-09 will decrease its 2018 beginning accumulated deficit balance by approximately $9,000, offset by an approximate $4,000 decrease in deferred revenues and an approximate $5,000 increase in other non-current assets.
Additionally, while we are still in the process of assessing the statement of operations classification impact, under ASU 2014-09, for a subset of third party manager agreements, the existing presentation of gross versus net revenue may change.
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.derivative accounting. Under the new guidance, all excess tax benefits and deficienciesthe embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. The convertible debt instruments will be recordedaccounted for as an income tax benefit or expense ina single liability measured at amortized cost. In addition, the income statement and excess tax benefits will be recorded as an operating activity in the statements of cash flows. The new guidance also allows withholding up torequires the maximum individual statutory tax rate without classifying the awards as a liability. The cash paid to satisfy the statutory income tax withholding obligation will be classified as a financing activity in the statements of cash flows. Lastly, the update allows forfeitures to be estimated or recognized when they occur. The requirements for the excess tax effects related to share-based payments at settlement must be applied on a prospective basis, and the other requirements under this standard areif-converted method to be applied on a retrospective basis.for all convertible instruments. This standard will beis effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. These changes became effective for the Company’s fiscal year beginning January 1, 2017 and have been reflected in these consolidated financial statements. As a result2021. Early adoption of the retrospective adoptionstandard is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption of ASU 2016-09, for the year ended December 31, 2016 and 2015, net cash provided by operating activities increased by $4,455 and $17,607, respectively, with a corresponding offset to net cash used in financing activities. The Company did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.
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 statements of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. Upon adoption, the ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. We will adopt the standard effective January 1, 2018. Upon adoption, the Company does not anticipate
requires using either a modified retrospective or a full retrospective approach.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
significant changesThe Company adopted this standard as of January 1, 2021 using the modified retrospective approach. Adoption of this standard resulted in a decrease to accumulated deficit of $28.6 million (net of $0.9 million in taxes), a decrease to paid-in capital of $108.5 million (net of $6.7 million in taxes) and an increase to Convertible Notes of $87.5 million. Interest expense recognized in future periods is expected to be reduced as a result of accounting for the Company's existing accounting policies or presentationconvertible debt instrument as a single liability measured at its amortized cost, with an expected decrease of approximately $22.1 million in 2021 as a result of the consolidated statements of cash flows.
adoption.
In
January 2017,October 2021, the FASB issued ASU
2017-04, “Intangibles—Goodwill2021-08, “Business Combinations ("ASC 805").” This update amends ASC 805 to add contract assets and
Other (Topic 350),” which removes step two fromcontract liabilities to the
goodwill impairment test. As a result,list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity
should perform its annual goodwill impairment test by comparing the fair value of a reporting unit(acquirer) recognize and measure contract assets and contract liabilities in accordance with
its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value.ASC 606. This standard
will beis effective for financial statements issued by public companies for annual and interim periods beginning after December 15,
2019.2022. Early adoption
of the standard is permitted. The
amendment is to be applied prospectively to business combinations occurring on or after the effective date of the amendment. The Company has
early adopted this standard as of
AprilJanuary 1,
2017, however it2022. Adoption of ASU 2021-08 did not have a material impact on the
Company’sCompany's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition
3.Acquisitions
2020 Acquisitions
Acquisition of a Business (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will be effective for public companies for annual and interim periods beginning after December 15, 2017. Early adoption is permitted effective for transactions not yet reported in financial statements issued or made available for issuance. We will adopt the standard effective January 1, 2018. Upon adoption,Private Technology Company
On February 18, 2020, the Company, will assess all future purchases withinthrough its wholly owned subsidiary Yodlee, Inc. (“Yodlee”), acquired a private technology company (the “Private Technology Company Acquisition”). The private technology company enables the contextconsent generation and data flow between financial information providers, such as banks and financial institutions, and financial information users, such as financial technology lenders and other financial services agencies, through a network of this updated guidance. We do not anticipate significant changes tocloud-based interoperable interfaces or application programming interfaces. The technology and operations of the private technology company have been integrated into the Company's existing accounting policies or presentation ofEnvestnet Data & Analytics segment.
In connection with the
consolidated statements of cash flows. In May 2017,Private Technology Company Acquisition, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. The ASU is effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2017. Early adoption of the standard is permitted. The standard will be applied prospectively to awards modified on or after the adoption date. We will adopt the standard effective January 1, 2018. Upon adoption, the Company will assess all future awards within the context of this updated guidance. We do not anticipate significant changes to the Company's existing accounting policies or presentation of the consolidated statements of cash flows.
3. Business Acquisitions
The following acquisitions are included within the Envestnet segment, except for Yodlee and Wheelhouse, which comprise the Envestnet | Yodlee segment.
Upside Holdings, Inc.
On February 24, 2015, Envestnet, Inc. (the “Company”) acquired all of the stockoutstanding shares of Upside Holdings, Inc. (including its subsidiaries “Upside”) for consideration totaling $2,641.
Upside is athe private technology company that was previously registeredand paid cash consideration of $2.3 million, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6.8 million in contingent consideration, based upon achieving certain performance targets. The Company recorded a liability as an Internet Investment Adviser under Rule 203A-2(f) of the Investment Advisers Actdate of 1940 (“Advisers Act”). Upside helps financial advisors compete against other digital advisors, or “robo advisors,”acquisition of $5.2 million, which represented the estimated fair value of contingent consideration on the date of acquisition.
In 2021 and 2020, we determined that certain performance targets for this acquisition would not be met. As a result, we reduced the contingent consideration liability plus accrued interest associated with this acquisition by
leveraging technology$0.7 million and
algorithms$3.1 million, respectively, and recorded this as a reduction to
advise, manage,general and
serve clients who want personalized investment services. administration expenses. Future changes to the estimated fair value of the contingent consideration, if any, will be recognized in our earnings. Contingent consideration of $1.1 million was paid during the year ended December 31, 2021.
The Company acquired Upside to integrate its technology within the Company’s unified wealth management platform,recorded estimated goodwill of $7.0 million, which will allow advisors to compete more aggressively to engage their clients online and reach a new class of investors. The goodwill arising from the acquisition represents the advantage of this integrated technology, the expected
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
purposes, and estimated identifiable intangible assets for proprietary technologies of $1.0 million. The tangible assets acquired and liabilities assumed were not material.
The results of the private technology company's operations are included in the consolidated statements of operations beginning February 18, 2020 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2022, 2021 and 2020, acquisition related costs for the Private Technology Company Acquisition were not material and are included in general and administration expenses.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Acquisition of Private Cloud Technology Company
On March 2, 2020, the Company acquired certain assets of a private cloud technology company (the “Private Cloud Technology Company Acquisition”). The private cloud technology company enables enterprises to design and implement the digital transition from legacy systems and applications to a modern cloud computing platform. The technology and operations of the private cloud technology company have been integrated into the Company's Envestnet Wealth Solutions segment.
In connection with the Private Cloud Technology Company Acquisition, the Company paid estimated consideration transferredof $12.0 million, net of cash acquired. In connection with the acquisition, the Company recorded estimated goodwill of $10.9 million, which is deductible for income tax purposes. The tangible assets acquired and liabilities assumed were not material.
The results of the private cloud technology company's operations are included in the consolidated statements of operations beginning March 2, 2020 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2022, 2021 and 2020, acquisition related costs for the Private Cloud Technology Company Acquisition were not material and are included in general and administration expenses.
Acquisition of Private Financial Technology Design Company
On March 3, 2020, the Company acquired the outstanding units of a private financial technology design company that were not owned by the Company and merged the acquired company into a wholly owned subsidiary of the Company (the “Private Financial Technology Design Company Acquisition”). The private financial technology design company designs integrated, intuitive digital technology applications for institutional financial services firms, bank wealth management organizations, independent advisor networks, and broker-dealers. The technology and operations of the private financial technology design company have been integrated into the Envestnet Wealth Solutions segment.
The Company previously owned approximately 45% of the outstanding units in this private financial technology design company and accounted for it as an equity method investment. Based upon the estimated value of the private financial technology design company of $11.0 million, the Company paid estimated consideration of $5.9 million, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, the Company recognized a gain of $4.2 million in the first quarter of 2020 on the re-measurement to fair value of its previously held interest, which is included in other income (expense), net in the consolidated statements of operations.
In connection with the Private Financial Technology Design Company Acquisition, the Company recorded estimated total goodwill of $9.2 million, of which approximately $6.2 million is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2.0 million. The tangible assets acquired and liabilities assumed were not material.
The results of the private financial technology design company's operations are included in the consolidated statements of operations beginning March 3, 2020 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2022, 2021 and 2020, acquisition related costs for the Private Financial Technology Design Company Acquisition were not material and are included in general and administration expenses.
The goodwill arising from these 2020 acquisitions represents the expected synergistic benefits of these transactions, primarily related to an increase in future revenues as a result of potential new business and cross selling opportunities, as well as enhancements to our technologies.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
2021 Acquisitions
Acquisition of Proprietary Technology
The Company previously owned approximately 29% of the outstanding units in a privately held company and accounted for it as an equity method investment. On March 11, 2021, the Company entered into an intellectual property purchase agreement with this privately held company to acquire all of the proprietary technology developed by the privately held company for approximately $35.5 million. Concurrent with the intellectual property purchase agreement, the Company also entered into a redemption agreement with the same privately held company to redeem the Company's previously held equity interest for approximately $10.0 million. The Company accounted for these two arrangements as a single unit of account. As of the acquisition date, the net cost of the proprietary technology acquired, including capitalized transaction costs, was approximately $24.5 million, which will be amortized over a five-year period on a straight-line basis. The proprietary technology has been integrated into the Envestnet Wealth Solutions.
Acquisition of Harvest
On April 7, 2021, pursuant to an agreement and plan of merger (the “Merger Agreement”), dated as
follows:of March 31, 2021, between, among others, Harvest Savings & Wealth Technologies (“Harvest”), a Delaware corporation, and Bounty Merger Sub, Inc, a wholly-owned subsidiary of the Company (“Merger Sub”), the Company completed the merger of Harvest with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Harvest Acquisition”) and operating as a wholly-owned subsidiary of Envestnet. Harvest has been integrated into the Envestnet Wealth Solutions segment. | | | | | | | | | |
Cash consideration | | | | | | | | $ | 2,040 |
Purchase consideration liability | | | | | | | | | 615 |
Cash acquired | | | | | | | | | (14) |
Total | | | | | | | | $ | 2,641 |
Harvest provides automated goals-based saving and wealth solutions tools to customers of banks, credit unions, trust companies, and other financial institutions. The acquisition optimizes the Company's API-based financial wellness ecosystem, and also helps strengthen the Company's foothold to enable embedded finance, which the Company sees as a key driver of the future of financial services.
In connection with the Harvest Acquisition, the Company paid estimated consideration of $32.8 million (of which approximately $3.0 million was held in escrow for 18 months after the closing date), net of cash acquired, subject to certain post-closing adjustments. The Company funded the acquisition with cash on hand.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate | | Measurement Period Adjustments | | Revised Estimate |
| | (in thousands) |
Tangible assets acquired, net of cash(1) | | $ | 2,032 | | | $ | 3,278 | | | $ | 5,310 | |
| Total liabilities assumed | | (596) | | | 54 | | | (542) | |
| Identifiable intangible assets | | 9,500 | | | — | | | 9,500 | |
| Goodwill | | 21,858 | | | (3,332) | | | 18,526 | |
| Total net assets acquired | | $ | 32,794 | | | $ | — | | | $ | 32,794 | |
| | | | | | | | | |
Total tangible assets acquired | | | | | | | | $ | 88 |
Total liabilities assumed | | | | | | | | | (404) |
Identifiable intangible assets | | | | | | | | | 1,450 |
Goodwill | | | | | | | | | 1,507 |
Total net assets acquired | | | | | | | | $ | 2,641 |
(1)The estimated useful life and amortization methodCompany recorded measurement period adjustments of the intangible asset acquired is as follows:
| | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated | | Amortization | |
| | | | | | | | Amount | | Useful Life in Years | | Method | |
Proprietary technology | | | | | | | | $ | 1,450 | | 4 | | Straight-line | |
The results of Upside’s operations are included in the consolidated statements of operations beginning February 24, 2015, and are not material$3.3 million primarily due to the Company’s resultsestablishment of operations.
Oltis Software LLC
On May 6, 2015,deferred tax assets during the Company acquired all of the issued and outstanding membership interests of Oltis Software LLC (d/b/a Finance Logix®), an Arizona limited liability company (“Finance Logix”). Finance Logix provides financial planning and wealth management software solutions to banks, broker-dealers and RIAs.
The Company paid upfront consideration of $20,595 in cash, purchase consideration liability of $3,000, 123,410 in shares of Envestnet common stock with a fair value of $6,388 and 123,410 stock options to acquire Envestnet common stock at $52.67 per share with an estimated fair value of $2,542.
The Company acquired Finance Logix to integrate its technology within the Company’s unified wealth management platform, which will allow advisors to offer financial planning that flows seamlessly into portfolio construction and ongoing management on a single platform. Finance Logix allows the Company to deliver that capability and increase the breadth of our platform and the functionality gap between our platform and competing platforms. The goodwill arising from the acquisition represents cross-selling opportunities, the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill is deductible for income tax purposes.
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The estimated consideration transferred in the acquisition as of the acquisition date was as follows:
| | | | | | | | | |
Cash consideration | | | | | | | | $ | 20,595 |
Stock and stock option consideration | | | | | | | | | 8,930 |
Purchase consideration liability | | | | | | | | | 3,000 |
Cash acquired | | | | | | | | | (909) |
Total | | | | | | | | $ | 31,616 |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | |
Total tangible assets acquired | | | | | | | | $ | 952 |
Total liabilities assumed | | | | | | | | | (2,628) |
Identifiable intangible assets | | | | | | | | | 9,800 |
Goodwill | | | | | | | | | 23,492 |
Total net assets acquired | | | | | | | | $ | 31,616 |
A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated | | Amortization | |
| | | | | | | | Amount | | Useful Life in Years | | Method | |
Customer list | | | | | | | | $ | 8,300 | | 12 | | Accelerated | |
Proprietary technology | | | | | | | | | 1,000 | | 4 | | Straight-line | |
Trade names and domains | | | | | | | | | 500 | | 5 | | Straight-line | |
Total | | | | | | | | $ | 9,800 | | | | | |
The results of Finance Logix’s operations are included in the consolidated statements of operations beginning May 6, 2015. Finance Logix’s revenues for the periodyear ended December 31, 2015 totaled $1,892. Finance Logix’s net loss for the period ended December 31, 2015 totaled $999. The net loss for the period ended December 31, 2015 includes acquired intangible asset amortization of $974.
For the periods ended December 31, 2017, 2016 and 2015, acquisition related costs for Finance Logix totaled $145, $548 and $465, respectively, and are included in general and administration expenses.
Castle Rock Innovations, Inc.
On August 30, 2015, the Company acquired all of the outstanding shares of stock of Castle Rock Innovations, Inc., a Delaware corporation (“Castle Rock”). Castle Rock provides data aggregation and plan benchmark solutions to retirement plan record-keepers, broker-dealers, and advisors.
The Company combined the acquired Castle Rock assets with ERS on December 1, 2016. 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.
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The estimated consideration transferred in the acquisition as of the acquisition date 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.
On December 1, 2016, the Company and Castle Rock amended the stock purchase agreement to fix the remaining post-closing period payments. The first post-closing payment was made during October 2016 in the amount of $805. The second post-closing period payment of $445 was paid in January 2017 and the third post-closing payment of $1,250 was paid in January 2018.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | |
Total tangible assets acquired | | | | | | | | $ | 255 |
Total liabilities assumed | | | | | | | | | (1,366) |
Identifiable intangible assets | | | | | | | | | 3,900 |
Goodwill | | | | | | | | | 4,581 |
Total net assets acquired | | | | | | | | $ | 7,370 |
A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated | | Amortization | |
| | | | | | | | Amount | | Useful Life in Years | | Method | |
Customer list | | | | | | | | $ | 3,000 | | 12 | | Accelerated | |
Proprietary technology | | | | | | | | | 800 | | 5 | | Straight-line | |
Trade names and domains | | | | | | | | | 100 | | 4 | | Straight-line | |
Total | | | | | | | | $ | 3,900 | | | | | |
The results of Castle Rock’s operations are included in the consolidated statements of operations beginning September 1, 2015. Castle Rock’s revenues and net income for the period ended December 31, 2015 totaled $1,011 and $109, respectively. The net income includes acquired intangible asset amortization of $178.
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 consolidated balance sheets.
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
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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. 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.
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 have exercised their statutory appraisal rights under Delaware law. As of December 31, 2015, the Company recognized a liability in the amount of $10,061, which represented $17.49 in cash for each share of Yodlee common stock held by them. Although the Company believed the fair value of these shares did not exceed the consideration paid in the Acquisition, nevertheless, during the first quarter of 2016, the Company settled the appraisal claim in order to avoid the costs, uncertainties, disruptions and distraction of potential litigation. The difference between the liability as of December 31, 2015 and the settlement amount resulted in an increase to goodwill and total consideration paid.
The 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 relatedenhancements to the knowledge and experience of the workforce in place.Company's existing technologies. The goodwill is not deductible for income tax purposes.
The 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) |
Total | | | | | | | | $ | 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. See “Note 16 – Stock-Based Compensation” for additional information related to the replacement awards.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:
| | | | | | | | | |
Accounts receivable | | | | | | | | $ | 16,882 |
Prepaid expenses and other current assets | | | | | | | | | 3,507 |
Property and equipment, net | | | | | | | | | 13,800 |
Other non-current assets | | | | | | | | | 1,959 |
Identifiable intangible assets | | | | | | | | | 244,000 |
Goodwill | | | | | | | | | 282,429 |
Total assets acquired | | | | | | | | | 562,577 |
Accounts payable | | | | | | | | | (2,424) |
Accrued expenses | | | | | | | | | (28,173) |
Capital lease obligations | | | | | | | | | (1,527) |
FIN 48 liability | | | | | | | | | (5,450) |
Deferred tax liability | | | | | | | | | (16,693) |
Deferred revenue | | | | | | | | | (4,100) |
Other long term liabilities | | | | | | | | | (946) |
Total liabilities assumed | | | | | | | | | (59,313) |
Total net assets acquired | | | | | | | | $ | 503,264 |
As part of the final acquisition accounting, management assigned $24,613 of the total acquired goodwill of $282,429 to the Envestnet segment given the expected benefit to that segment related to the synergies resulting from the combination.
A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated | | Amortization | |
| | | | | | | | Amount | | Useful Life in Years | | Method | |
Customer list | | | | | | | | $ | 177,000 | | 15 | | Accelerated | |
Backlog | | | | | | | | | 11,000 | | 4 | | Accelerated | |
Proprietary technology | | | | | | | | | 35,000 | | 5 | | Straight-line | |
Trade names | | | | | | | | | 21,000 | | 7 | | Straight-line | |
Total | | | | | | | | $ | 244,000 | | | | | |
The results of Envestnet | Yodlee’s operations are included in the consolidated statements of operations beginning November 20, 2015. Envestnet | Yodlee’s revenues and net loss for the period ended December 31, 2015 totaled $14,081 and $5,963, respectively. The net loss includes acquired intangible asset amortization of $3,953.
For the periods ended December 31, 2017, 2016 and 2015, acquisition related costs for Yodlee totaled $1,289, $2,186 and $6,624, respectively, and are included in general and administration expenses.
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 service (SaaS) platform that provides reporting and practice management capabilities to financial professionals servicing the retirement plan market and is the technology platform supporting the ERS service offering. FinaConnect is included in the Envestnet segment.
On May 1, 2016, the Company combined the assets of FinaConnect 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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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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.
As of December 31, 2016, the estimated fair market value of contingent consideration liability for FinaConnect increased from $1,929 to $2,286. As a result, the Company recorded a fair market value adjustment of $357 which is recognized in general and administration in the consolidated statements of operations. During 2017, the Company paid contingent consideration in the amount of $2,286 for the first year earnout and estimated the second year earnout to be $0 as of December 31, 2017.
The estimated consideration transferred in the acquisition as of the acquisition date was as follows:
| | | | | | | | | |
Cash consideration | | | | | | | | $ | 6,425 |
Contingent consideration liability | | | | | | | | | 1,929 |
Working capital adjustment | | | | | | | | | 269 |
Cash acquired | | | | | | | | | (1) |
Total | | | | | | | | $ | 8,622 |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | |
Total tangible assets acquired | | | | | | | | $ | 430 |
Total liabilities assumed | | | | | | | | | (400) |
Identifiable intangible assets | | | | | | | | | 3,800 |
Goodwill | | | | | | | | | 4,792 |
Total net assets acquired | | | | | | | | $ | 8,622 |
A summary of intangible assets acquired, estimated useful lives and amortization methods are as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | Estimated | | Amortization |
| | | | | | | | Amount | | Useful Life in Years | | Method |
Customer list | | | | | | | | $ | 2,800 | | 12 | | Accelerated |
Proprietary technology | | | | | | | | | 900 | | 5 | | Straight-line |
Trade names and domains | | | | | | | | | 100 | | 2 | | Straight-line |
Total | | | | | | | | $ | 3,800 | | | | |
The results of FinaConnect’s operations are included in the consolidated statements of operations beginning February 1, 2016, and are not considered material to the Company’s results of operations.
For the periods ended December 31, 2017 and 2016, acquisition related costs for FinaConnect totaled $135 and $116, respectively, and are included in general and administration in the consolidated statements of operations.
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Wheelhouse Analytics LLC
On October 3, 2016, the Company acquired all of the issued and outstanding membership interests of Wheelhouse Analytics LLC (“Wheelhouse”). Wheelhouse is a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. Wheelhouse is included in the Envestnet | Yodlee segment.
The Company acquired Wheelhouse to be integrated with Yodlee’s industry-leading data and analytics solutions to strengthen Envestnet’s data-driven insights to financial advisors, asset managers and enterprises enabling them to better manage their businesses and client relationships and deliver better outcomes to their clients. Envestnet expects to deeply integrate Wheelhouse’s tools, delivering robust online dashboards and reporting that provides actionable intelligence.
In connection with the acquisition of Wheelhouse, the Company paid cash consideration of $13,299 and is required to pay contingent consideration with the aggregate amount not to exceed $4,000 and certain holdbacks upon release. Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.
The consideration transferred in the acquisition was as follows:
| | | | | | | | | |
Cash consideration | | | | | | | | $ | 13,299 |
Contingent consideration liability | | | | | | | | | 2,364 |
Purchase consideration liability | | | | | | | | | 887 |
Working capital adjustment | | | | | | | | | 110 |
Cash acquired | | | | | | | | | (80) |
Total | | | | | | | | $ | 16,580 |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | |
Total tangible assets acquired | | | | | | | | $ | 385 |
Total liabilities assumed | | | | | | | | | (1,420) |
Identifiable intangible assets | | | | | | | | | 6,600 |
Goodwill | | | | | | | | | 11,015 |
Total net assets acquired | | | | | | | | $ | 16,580 |
A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | Estimated | | Amortization |
| | | | | | | | Amount | | Useful Life in Years | | Method |
Customer list | | | | | | | | $ | 4,000 | | 15 | | Accelerated |
Proprietary technology | | | | | | | | | 2,500 | | 6 | | Straight-line |
Trade names and domains | | | | | | | | | 100 | | 2 | | Straight-line |
Total | | | | | | | | $ | 6,600 | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate
(in thousands) | | Estimated Useful Life in Years | | Amortization Method |
| Proprietary technology | | $ | 6,900 | | | 6 | | Straight-line |
| Customer list | | 2,600 | | | 14 | | Accelerated |
| Total intangible assets acquired | | $ | 9,500 | | | | | |
The results of Wheelhouse’sHarvest’s operations are included in the consolidated statements of operations beginning October 3, 2016,April 7, 2021 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2022 and 2021, the Company’s acquisition related costs were not material and are included in general and administration expenses.
2022 Acquisitions
Acquisition of 401kplans.com
On May 31, 2022, Envestnet Retirement Solutions, LLC, a wholly-owned subsidiary of the Company, acquired all of the issued and outstanding membership interests of 401kplans.com LLC (“401kplans.com”). 401kplans.com has been integrated into the Envestnet Wealth Solutions segment.
401kplans.com provides a digital 401(k) retirement plan marketplace that streamlines retirement plan distribution and due diligence among financial advisors and third-party administrators. The acquisition demonstrates Envestnet's commitment to the retirement plan industry and is expected to create a more seamless experience and enhance productivity for advisors by helping them shop, compare and select the best-fitting 401(k) plan for their clients.
In connection with the 401kplans.com acquisition, the Company paid estimated consideration of $14.5 million, net of cash acquired, subject to certain post-closing adjustments. The Company funded the acquisition with available cash resources.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate | | Measurement Period Adjustments | | Revised Estimate |
| | (in thousands) |
| Tangible assets acquired, net of acquired cash | | $ | 94 | | | $ | 10 | | | $ | 104 | |
| Identifiable intangible assets | | 3,000 | | | — | | | 3,000 | |
| Goodwill | | 11,378 | | | 18 | | | 11,396 | |
| Total net assets acquired | | $ | 14,472 | | | $ | 28 | | | $ | 14,500 | |
The goodwill arising from the acquisition represents the expected benefits of the transaction, primarily related to the enhancement of the Company's existing technologies and increase in future revenues as a result of potential cross selling opportunities. The estimated goodwill is deductible for income tax purposes.
A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate
(in thousands) | | Estimated Useful Life in Years | | Amortization Method |
| Proprietary technology | | $ | 3,000 | | | 5 | | Straight-line |
The results of 401kplans.com's operations are included in the consolidated statements of operations beginning May 31, 2022 and are not considered material to the Company’s results of operations.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
For the periodsyear ended December 31, 2017 and 2016,2022, the Company’s acquisition related costs for Wheelhouse totaled $874 and $383, respectively,were not material and are included in general and administration expenses.
Acquisition of Truelytics
On July 1, 2022, pursuant to an agreement and plan of merger (the “Merger Agreement”), dated as of May 10, 2022, between, among others, Truelytics, Inc., (“Truelytics”), Yodlee, Inc. and Quadrant Merger Sub Inc., a wholly-owned subsidiary of Envestnet (“Merger Sub”), the Company completed the merger of Truelytics with and into Merger Sub, with Truelytics continuing as the surviving corporation (the “Truelytics Merger”) and a wholly owned subsidiary of Envestnet. Truelytics has been integrated into the Envestnet Data & Analytics segment.
The acquisition of Truelytics aligns with the Company's strategy to further connect its ecosystem by creating transformative progress for its advisors and clients. Truelytics is an advisor transition management platform and the first end-to-end data-driven system to help wealth management and insurance enterprises attract, grow, and retain advisory businesses, while also reducing the costs related to advisor transitions. The Truelytics platform combines Envestnet data, analytics, and wealth technology to further support advisors across the ecosystem.
The Company paid estimated cash consideration of $20.7 million, net of cash acquired, subject to certain post-closing adjustments. The Company funded the Truelytics acquisition with available cash resources.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate | | Measurement Period Adjustments | | Revised Estimate | | | | |
| | (in thousands) |
| Tangible net assets acquired, net of acquired cash | | $ | 532 | | | $ | (22) | | | $ | 510 | | | | | |
| Identifiable intangible assets | | 4,000 | | | — | | | 4,000 | | | | | |
| Goodwill | | 16,195 | | | 22 | | | 16,217 | | | | | |
| Total net assets acquired | | $ | 20,727 | | | $ | — | | | $ | 20,727 | | | | | |
The goodwill arising from the acquisition represents the expected benefits of the transaction, primarily related to the enhancement of the Company's existing technologies and increase in future revenues as a result of potential cross selling opportunities. The estimated goodwill is not deductible for income tax purposes.
A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate
(in thousands) | | Estimated Useful Life in Years | | Amortization Method |
| Proprietary technology | | $ | 4,000 | | | 5 | | Straight-line |
The results of Truelytics' operations are included in the consolidated statements of
operations. Unaudited pro forma results for Envestnet, Inc. giving effect to recent acquisitions
The results of the FinaConnectoperations beginning July 1, 2022 and Wheelhouse acquisitions wereare not considered material to the Company’s results of operations and as such no unaudited pro forma financial information is presented foroperations.
For the
yearsyear ended December 31,
20172022, the Company’s acquisition related costs were not material and
December 31, 2016.4. Costare included in general and administration expenses.
Acquisition of
RevenuesRedi2
On July 1, 2022, pursuant to a stock purchase agreement, dated as of June 24, 2022, between Envestnet and Redi2 Technologies Inc., (“Redi2”), Envestnet completed the acquisition of all of the issued and outstanding shares of Redi2. Redi2 provides revenue management and hosted fee-billing solutions. Its platform enables fee calculation, invoice creation, payouts and accounting, and billing compliance. Redi2 has been integrated into the Envestnet Wealth Solutions segment.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
In connection with the Redi2 acquisition, the Company paid estimated consideration as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate | | Measurement Period Adjustments | | Revised Estimate | | | | | | | | |
| | (in thousands) | | | | |
| Cash consideration, net | | $ | 69,406 | | | $ | — | | | $ | 69,406 | | | | | | | | | |
| Estimated working capital adjustment | | (1,465) | | | 932 | | | (533) | | | | | | | | | |
| Total | | $ | 67,941 | | | $ | 932 | | | $ | 68,873 | | | | | | | | | |
| | | | | | | | | | | | | | |
The following summarizes costCompany funded the Redi2 acquisition with available cash resources. In addition, certain executives may earn up to $20.0 million in performance bonuses based upon the achievement of revenues by revenue category forcertain target financial and non-financial metrics. These performance bonuses will be recognized as compensation and benefits expense in the yearsconsolidated statement of operations. The performance bonuses recognized during the year ended December 31, 2017, 20162022 were immaterial.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate | | Measurement Period Adjustments | | Revised Estimate | | | | |
| | (in thousands) |
| Total current assets | | $ | 1,985 | | | $ | — | | | $ | 1,985 | | | | | |
| Other non-current assets | | 3,349 | | | (28) | | | 3,321 | | | | | |
| Identifiable intangible assets | | 26,500 | | | — | | | 26,500 | | | | | |
| Goodwill | | 44,236 | | | 2,231 | | | 46,467 | | | | | |
| Total assets acquired | | 76,070 | | | 2,203 | | | 78,273 | | | | | |
| Accounts payable and accrued expenses | | (1,157) | | | (1,271) | | | (2,428) | | | | | |
| Operating lease liabilities | | (2,201) | | | — | | | (2,201) | | | | | |
| Deferred revenue | | (4,771) | | | — | | | (4,771) | | | | | |
| Total liabilities assumed | | (8,129) | | | (1,271) | | | (9,400) | | | | | |
| Total net assets acquired, net of cash received | | $ | 67,941 | | | $ | 932 | | | $ | 68,873 | | | | | |
The goodwill arising from the acquisition represents the expected benefits of the transaction, primarily related to the enhancement of the Company's existing technologies and 2015:increase in future revenues as a result of potential cross selling opportunities. Estimated goodwill of $40.7 million is deductible for income tax purposes.
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Assets under management or administration | | $ | 194,894 | | $ | 160,842 | | $ | 152,573 |
Subscription and licensing | | | 19,818 | | | 16,113 | | | 7,785 |
Professional services and other | | | 4,325 | | | 3,635 | | | 951 |
Total | | $ | 219,037 | | $ | 180,590 | | $ | 161,309 |
5.
A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate
(in thousands) | | Estimated Useful Life | | Amortization Method |
| Customer lists | | $ | 14,000 | | | 14-16 years | | Accelerated |
| Proprietary technologies | | 9,500 | | | 6 years | | Straight-line |
| Trade names | | 3,000 | | | 6-7 years | | Straight-line |
| Total intangible assets acquired | | $ | 26,500 | | | | | |
The estimated fair values of certain of the assets acquired and liabilities assumed are provisional and based on information that was available to the Company as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation procedures that 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, though is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected herein are subject to change and such changes could be significant. The Company expects to finalize the valuation of tangible assets acquired, liabilities assumed, identifiable intangible assets and goodwill balances and complete the acquisition accounting as soon as reasonably practicable though no later than July 1, 2023.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The results of operations of Redi2 are included in the consolidated statements of operations beginning July 1, 2022 and are not considered material to the Company’s results of operations.
For the year ended December 31, 2022, the Company’s acquisition related costs totaled $1.5 million and are included in general and administration expenses.
Pro Forma Financial Information
The results of the Company's acquisitions since January 1, 2020 were not considered material to the Company's results of operations, therefore, pro forma information is not presented.
4.Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets
consistconsisted of the following:
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
Non-income tax receivable | | $ | 2,704 | | $ | 3,879 |
FinaConnect escrow | | | 2,000 | | | 429 |
Prepaid technology | | | 1,843 | | | 1,318 |
Income tax receivable | | | 1,684 | | | 1,864 |
Prepaid rent | | | 959 | | | 882 |
Prepaid insurance | | | 575 | | | 552 |
Other | | | 9,705 | | | 7,300 |
| | $ | 19,470 | | $ | 16,224 |
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | (in thousands) |
| Prepaid technology | | $ | 16,649 | | | $ | 15,415 | |
| Non-income tax receivables | | 5,488 | | | 7,013 | |
| Prepaid insurance | | 2,881 | | | 2,234 | |
| | | | |
| Income tax prepayments and receivables | | 2,515 | | | 1,310 | |
| Escrow for acquisition | | 545 | | | 2,951 | |
| Other | | 13,285 | | | 13,783 | |
| Total prepaid expenses and other current assets | | $ | 41,363 | | | $ | 42,706 | |
5.Property and Equipment, Net
Property and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| | | Estimated Useful Life | | 2022 | | 2021 |
| | | | (in thousands) |
| Cost: | | | | |
| Computer equipment and software | | 3 years | | $ | 66,639 | | | $ | 72,289 | |
| Leasehold improvements | | Shorter of the lease term or useful life of the asset | | 36,158 | | | 43,544 | |
| Leased data servers | | 3 years | | 19,273 | | | 590 | |
| Office furniture and fixtures | | 3-7 years | | 10,796 | | | 12,214 | |
| Office equipment and other | | 3-5 years | | 11,563 | | | 7,973 | |
| Building and building improvements | | 7-39 years | | 2,729 | | | 2,729 | |
| Land | | Not applicable | | 940 | | | 940 | |
| | | | 148,098 | | | 140,279 | |
| Less: accumulated depreciation and amortization | | (85,655) | | | (90,064) | |
| Total property and equipment, net | | $ | 62,443 | | | $ | 50,215 | |
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
6. Property and Equipment
PropertyDuring the year ended December 31, 2022, the Company entered into an arrangement with a third party cloud service provider for the use of dedicated servers to migrate its infrastructure to the cloud. As the terms of the arrangement convey a finance lease under ASC 842, the Company accounts for those dedicated servers as leased assets when the lease term commences. The leased dedicated servers are presented as a component of property and equipment, consistsnet in the consolidated balance sheets as of December 31, 2022. To take advantage of the following:
favorable savings programs offered by the cloud service provider, the Company prepaid the lease payments and therefore does not have a lease liability recorded for the leased assets. Amortization of the right-of-use assets totaled $4.9 million for the year ended December 31, 2022. Finance lease activity as of and for the year ended December 31, 2021 was not material. | | | | | | | | | |
| | | | At December 31, | |
| | Estimated Useful Life | | 2017 | | 2016 | |
Cost: | | | | | | | | | |
Computer equipment and software | | 3 years | | $ | 56,192 | | $ | 52,921 | |
Leasehold improvements | | Shorter of the lease term or useful life of the asset | | | 23,192 | | | 17,286 | |
Office furniture and fixtures | | 3-7 years | | | 8,110 | | | 6,911 | |
Other office equipment | | 3-5 years | | | 2,052 | | | 1,367 | |
| | | | | 89,546 | | | 78,485 | |
Less: accumulated depreciation and amortization | | | | | (53,637) | | | (45,485) | |
Property and equipment, net | | | | $ | 35,909 | | $ | 33,000 | |
During 2017the year ended December 31, 2022 and 2016,2021, the Company retired property and equipment that werewas no longer in service in the amount of $7,712 and $8,123, respectively. Substantially all assets retired originated infor the Envestnet segment. Wealth Solutions segment with an historical cost of $20.0 million and $12.7 million, respectively. During the year ended December 31, 2022 and 2021, the Company retired property and equipment that was no longer in service for the Envestnet Data & Analytics segment with an historical cost of $10.4 million and $2.4 million, respectively.
The following table presents the cost amounts and related accumulated depreciation written off by category:
| | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | | | | Accumulated | | | | | Accumulated |
| | Cost | | Depreciation | | Cost | | Depreciation |
Computer equipment and software | | $ | 7,528 | | $ | (7,523) | | $ | 6,593 | | $ | (6,498) |
Office furniture and fixtures | | | 184 | | | (113) | | | 225 | | | (206) |
Other office equipment | | | — | | | — | | | 1,175 | | | (916) |
Leasehold improvements | | | — | | | — | | | 130 | | | (105) |
Total property and equipment retirements | | $ | 7,712 | | $ | (7,636) | | $ | 8,123 | | $ | (7,725) |
During 2016, the Company recorded an increase in the cost of acquired Yodlee property and equipment related to a purchase accounting fair market value adjustment in the amount of $3,922.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | | | | Accumulated | | | | Accumulated |
| | | Cost | | Depreciation | | Cost | | Depreciation |
| | (in thousands) |
| Computer equipment and software | | $ | 15,887 | | | $ | (14,947) | | | $ | 10,936 | | | $ | (10,838) | |
| Leasehold improvements | | 2,442 | | | (1,209) | | | 197 | | | (178) | |
| Office furniture and fixtures | | 660 | | | (418) | | | 1,702 | | | (1,646) | |
| Office equipment and other | | 11,467 | | | (8,785) | | | 2,227 | | | (1,915) | |
| | | | | | | | |
| Total property and equipment retirements | | $ | 30,456 | | | $ | (25,359) | | | $ | 15,062 | | | $ | (14,577) | |
Depreciation and amortization expense was as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Depreciation and amortization expense | | $ | 15,383 | | $ | 14,838 | | $ | 7,668 |
7.
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Depreciation and amortization expense | | $ | 21,688 | | | $ | 20,577 | | | $ | 21,432 | |
6.Internally Developed Software, Net
Internally developed software,
consistsnet consisted of the following:
| | | | | | | | |
| | | | At December 31, |
| | Estimated Useful Life | | 2017 | | 2016 |
Internally developed software | | 5 years | | $ | 46,342 | | $ | 33,718 |
Less: accumulated amortization | | | | | (24,168) | | | (18,858) |
Internally developed software, net | | | | $ | 22,174 | | $ | 14,860 |
102
| | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| | | Estimated Useful Life | | 2022 | | 2021 |
| | | | (in thousands) |
| Internally developed software | | 5 years | | $ | 313,200 | | | $ | 225,380 | |
| Less: accumulated amortization | | | | (128,642) | | | (91,721) | |
| Internally developed software, net | | | | $ | 184,558 | | | $ | 133,659 | |
Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Amortization expense | | $ | 36,959 | | | $ | 28,603 | | | $ | 18,670 | |
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Amortization expense was as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Amortization expense | | $ | 5,310 | | $ | 3,646 | | $ | 2,658 |
8. 7.Goodwill and Intangible Assets,
Net
Changes in the carrying amount of goodwill were as follows:
| | | | | | | | | |
| | Envestnet | | Envestnet | Yodlee | | Total |
Balance at December 31, 2015 | | $ | 135,224 | | $ | 286,049 | | $ | 421,273 |
FinaConnect acquisition | | | 4,792 | | | — | | | 4,792 |
Wheelhouse acquisition | | | — | | | 10,558 | | | 10,558 |
Purchase accounting adjustments - Yodlee | | | 24,613 | | | (28,233) | | | (3,620) |
Purchase accounting adjustments - Castle Rock | | | (388) | | | — | | | (388) |
Other | | | (490) | | | (189) | | | (679) |
Balance at December 31, 2016 | | | 163,751 | | | 268,185 | | | 431,936 |
Purchase accounting adjustments - Wheelhouse | | | — | | | 457 | | | 457 |
Foreign currency translation | | | — | | | 562 | | | 562 |
Balance at December 31, 2017 | | $ | 163,751 | | $ | 269,204 | | $ | 432,955 |
| | | | | | | | | | | | | | | | | | | | |
| | | Envestnet
Wealth Solutions | | Envestnet
Data & Analytics | | Total |
| | (in thousands) |
| Balance at December 31, 2020 | | $ | 603,350 | | | $ | 303,423 | | | $ | 906,773 | |
| Harvest acquisition | | 18,526 | | | — | | | 18,526 | |
| Foreign currency translation | | — | | | (145) | | | (145) | |
| Balance at December 31, 2021 | | 621,876 | | | 303,278 | | | 925,154 | |
| 401kplans.com acquisition | | 11,396 | | | — | | | 11,396 | |
| Truelytics acquisition | | — | | | 16,217 | | | 16,217 | |
| Redi2 acquisition | | 46,467 | | | — | | | 46,467 | |
| Foreign currency translation | | — | | | (820) | | | (820) | |
| Balance at December 31, 2022 | | $ | 679,739 | | | $ | 318,675 | | | $ | 998,414 | |
Procurement of Technology Solutions
On June 21, 2021, the Company entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $18.0 million, including an advance of $3.0 million. The Company closed the transaction and paid the remaining $15.0 million in February 2022. This proprietary technology asset has been integrated into the Envestnet Data & Analytics segment and is being amortized over an estimated useful life of five years. In addition, the agreement included an earn-out payment of $10.0 million based upon the achievement of certain target metrics within five years after the date of the Company’s launch of the technology solutions. The parties have agreed to renegotiate the terms of the earn-out payment.
Intangible assets,
consistnet consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, 2017 | | December 31, 2016 |
| | | | | | | Gross | | | | | Net | | Gross | | | | | Net |
| | Estimated | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Useful Life | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
Customer lists | | 7 | - | 15 | years | | $ | 259,350 | | $ | (78,482) | | $ | 180,868 | | $ | 259,490 | | $ | (54,861) | | $ | 204,629 |
Proprietary technologies | | 4 | - | 8 | years | | | 57,377 | | | (31,067) | | | 26,310 | | | 57,770 | | | (20,214) | | | 37,556 |
Trade names | | 1 | - | 7 | years | | | 24,840 | | | (9,701) | | | 15,139 | | | 25,007 | | | (6,178) | | | 18,829 |
Backlog | | | | 4 | years | | | 11,000 | | | (10,586) | | | 414 | | | 11,000 | | | (6,456) | | | 4,544 |
Total intangible assets | | | | | | | $ | 352,567 | | $ | (129,836) | | $ | 222,731 | | $ | 353,267 | | $ | (87,709) | | $ | 265,558 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | December 31, 2021 |
| | | | Gross | | | | Net | | Gross | | | | Net |
| | | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| | | (in thousands) |
| Customer lists | | | $ | 604,080 | | | $ | (285,288) | | | $ | 318,792 | | | $ | 590,080 | | | $ | (241,189) | | | $ | 348,891 | |
| Proprietary technologies | | | 113,224 | | | (59,401) | | | 53,823 | | | 85,324 | | | (43,004) | | | 42,320 | |
| Trade names | | | 15,700 | | | (8,320) | | | 7,380 | | | 33,700 | | | (24,515) | | | 9,185 | |
| Total intangible assets | | $ | 733,004 | | | $ | (353,009) | | | $ | 379,995 | | | $ | 709,104 | | | $ | (308,708) | | | $ | 400,396 | |
During
2016,2022, the Company
wrote offhad no retirements of intangible assets for the Envestnet Wealth Solutions segment. During 2021, the Company retired fully amortized intangible assets
specificallyfor the Envestnet Wealth Solutions segment with an historical cost of $5.0 million, including proprietary technologies and customer
lists, inlists. During 2022, the
amountCompany had $27.6 million retirements of
$4,159. The Company did not write off anyfully amortized intangible assets,
in 2017.Amortization expense was as follows:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Amortization expense | | $ | 42,127 | | $ | 45,515 | | $ | 17,636 |
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Amortization expense | | $ | 71,901 | | | $ | 68,587 | | | $ | 73,559 | |
Future amortization expense of the
Company's intangible assets as of December 31,
2017,2022, is expected to be as follows:
| | |
Years ending December 31: | | |
2018 | $ | 35,807 |
2019 | | 31,288 |
2020 | | 28,344 |
2021 | | 20,638 |
2022 | | 19,015 |
Thereafter | | 87,639 |
| $ | 222,731 |
9. Other Non-Current Assets
Other non-current assets consist of the following:
| | | | | | |
| At December 31, | |
| 2017 | | 2016 | |
Assets to fund deferred compensation liability | $ | 5,185 | | $ | 2,738 | |
Deposits: | | | | | | |
Lease | | 4,291 | | | 4,262 | |
Other | | 615 | | | 2,083 | |
Unamortized issuance costs on revolving credit facility | | 3,106 | | | — | |
Investments in private companies | | 2,731 | | | 2,750 | |
Other | | 1,248 | | | 2,130 | |
| $ | 17,176 | | $ | 13,963 | |
| | | | | |
| Amortization Expense |
| (in thousands) |
| Years ending December 31: | |
| 2023 | $ | 60,087 | |
| 2024 | 53,240 | |
| 2025 | 49,900 | |
| 2026 | 41,997 | |
| 2027 | 33,432 | |
| Thereafter | 141,339 | |
| Total | $ | 379,995 | |
8.Investments
Equity Method Investments
The Company owns 756,347 Class B Unitsequity interests in avarious privately held companycompanies for which it has significant influence and, therefore, recognizes its investment under the equity method. Equity method investments are initially recorded at a historical purchase price of $1,250. The Company uses the cost method of accounting for this investment.In April 2015, the Company purchased 150,000 Class B units representing 10.3% of the outstanding membership interests of a privately held company for cash consideration of $1,500. In July 2016, the Company purchased an additional 738,463 Class B units of the outstanding membership interests of a privately held company for cash consideration of $738 bringing its total of the outstanding membership interests to 16.2%. The Company usescost. Under the equity method of accounting, the investment is adjusted for the
Company’s proportionate share of earnings or losses, dividends, capital contributions and changes in ownership interests.
As of December 31, 2022, the Company’s ownership interests in these companies ranged from approximately 3% to record its portion48%. As of December 31, 2021, the Company’s ownership interests in these companies ranged from approximately 4% to 47%. As of December 31, 2022 and December 31, 2021, the carrying value of the privately held company’sCompany’s equity method investments was $37.4 million and $18.6 million, respectively, which are included in other non-current assets in the consolidated balance sheets.As of December 31, 2022, the Company has committed $12.5 million in future funding to certain of these equity method investees.
Summarized combined financial information for these investments is as follows (amounts represent 100% of investee financial information, except Envestnet’s proportional share of losses):
| | | | | | | | | | | | | | | | |
| | December 31, |
| Balance Sheets | | 2022 | | 2021 | | |
| | (in thousands) | | |
| Current assets | | $ | 42,059 | | | $ | 40,333 | | | |
| Non-current assets | | 50,703 | | | 33,529 | | | |
| Current liabilities | | 17,647 | | | 20,018 | | | |
| Non-current liabilities | | 9,437 | | | 1,583 | | | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Statements of Operations | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Revenues | | $ | 79,062 | | | $ | 65,085 | | | $ | 35,603 | |
| Loss from operations | | (8,896) | | | (149) | | | (4,758) | |
| Net loss | | (7,124) | | | (134) | | | (5,062) | |
Envestnet’s proportional share of gains (losses) (1) | | 643 | | | (7,093) | | | (5,399) | |
(1) The year ended December 31, 2022 includes a $9.5 million dilution gain on equity method investee share issuance.
Envestnet's proportional share of gains (losses) from the Company’s equity method investments are included in other income (expense), net income or loss on a one quarter lag from its actual resultsin the consolidated statements of operations.
Equity Method Investments
The Company
useshas an approximate 3.51% membership interest in a private services company that it accounts for using the equity method of accounting
because of its less than 50 percent ownership and
lack of control. The Company’s shareis considered to be a related party. Revenues from the private services company totaled $16.0 million, $16.4 million and $11.5 million in
the loss of the privately held company was $1,420 and $84 during the years ended December 31,
20162022, 2021 and
2015,2020, respectively.
In As of December 2016,31, 2022 and 2021, the Company determinedhad recorded a net receivable of $2.0 million and $3.0 million, respectively, from the private services company. During the fourth quarter of 2022, the Company recognized a $2.6 million dilution gain on this investment.
During the first quarter of 2022, the Company funded a $2.5 million convertible loan to a privately held company that
its investment inis accounted for under the equity method. During the second quarter of 2022, this privately held company
raised additional preferred equity which reduced the Company's ownership to 41.0% and the Company's convertible loan was
other than temporarily impaired. Therefore,converted. As a result of this transaction, the Company
reducedrecorded a $6.9 million dilution gain during the
carrying valuesecond quarter of
its investment to zero and recorded an impairment loss of $734,2022, which
was recordedis included in other
expense,income (expense), net
onin the consolidated statements of
operations foroperations. During the
year ended December 31, 2016.In November 2016,third quarter of 2022, the Company purchased 1,500,000 Class A units representing 21.4% of the outstandingacquired additional membership interests of a privately held company for cash consideration of $1,500 which is included in investments in private companies. In September 2017, the Company purchased an additional 1,450,000 Class A units in this privately held company for cash consideration of $1,450. The additional investment$8.4 million which increased the Company’sits ownership interest to 34.5%48.0%.
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The Company uses the equity method of accounting to record its portion of this privately held company’scompany's net income or loss on a one quarter lag from the actual results of operations. After this unit purchase, the Company's investment in this privately held company exceeded its proportionate share of its net assets by approximately $7.8 million, which represents amortizable intangible assets. The Company will recognize amortization of this basis difference prospectively over a period of 5 years. This amortization will be included within Envestnet's proportional share of income (loss) in other income (expense), net in the consolidated statements of operations.
During the second quarter of 2022, the Company acquired an approximate 25.0% interest in a privately held company for cash consideration of $5.0 million. Subject to the occurrence of certain conditions, the Company agreed to invest up to an additional $10.0 million for additional units in the future. The Company uses the equity method of accounting to record its portion of this privately held company's net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50 percent50% ownership interest and lack of control. The Company’s share incontrol and does not otherwise exercise control over the losssignificant economic and operating decisions of the privately held companycompany.
Other Equity Investments
The Company owns equity interests in various privately held companies for which it does not have significant influence, there is no readily determinable fair value, and its investment qualifies for recognition under the measurement alternative at cost minus impairment, if any, plus or minus fair value changes when there are observable price changes.
As of December 31, 2022 and December 31, 2021, the carrying value of these other equity investments was $1,469$22.1 million and $18.7 million, respectively, which are included in other non-current assets in the consolidated balance sheets. There have been no impairments or downward adjustments due to observable transactions recognized for these investments as of December 31, 2022 and 2021. Fair value adjustments, resulting from observable price changes, of $0.4 million and $0.8 million were recognized during the years ended December 31, 2022 and 2021, respectively.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
9.Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | (in thousands) |
| Accrued investment manager fees | | $ | 93,788 | | | $ | 95,858 | |
| Accrued compensation and related taxes | | 77,939 | | | 97,523 | |
| Accrued professional services | | 10,762 | | | 7,746 | |
| Accrued treasury stock purchases | | 9,289 | | | — | |
| Accrued technology | | 6,393 | | | 8,951 | |
| Non-income tax payables | | 2,548 | | | 4,907 | |
| Other accrued expenses | | 15,813 | | | 10,174 | |
| Total accrued expenses and other liabilities | | $ | 216,532 | | | $ | 225,159 | |
Entry into Outsourcing Arrangement and Organizational Realignment
In the fourth quarter of 2022, the Company entered into an outsourcing arrangement with Tata Consultancy Services (“TCS”) to increase operational scale and business agility. Under this agreement, the Company will outsource certain administrative and operational services of the Envestnet Data & Analytics segment located in Bangalore, India. In connection with this agreement, the Company closed its Bangalore office. The agreement became effective in October 2022 and will continue for a period of ten years. In certain circumstances, the Company may terminate certain portions of the agreement, and in doing so, the agreement requires the Company to pay significant termination fees. Additionally, as part of an organizational realignment in the fourth quarter of 2022, the Company entered into separation agreements with a number of employees. This realignment will allow Envestnet to operate more efficiently and prioritize activities and services that will benefit its clients and the future of its business.
In connection with the outsourcing arrangement with TCS and the 2022 organizational realignment, the Company recognized approximately $18.7 million of severance expense in the fourth quarter of 2022. As of December 31, 2022 the Company has accrued approximately $9.0 million in accrued compensation and related taxes. Additionally, as a result of the outsourcing arrangement and related office closure, the Company recognized office closure and other related expenses totaling $0.9 million during the year ended December 31,
2017 and is included in other expense, net on the consolidated statements of operations.10. Fair Value Measurements
The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
Financial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established by U.S. 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.
|
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Fair Value on a Recurring Basis:
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 December 31, 2017 and 2016, based on the three-tier fair value hierarchy.
| | | | | | | | | | | |
| December 31, 2017 |
| Fair Value | | Level I | | Level II | | Level III |
Assets | | | | | | | | |
Money market funds(1) | $ | 39,400 | | $ | 39,400 | | $ | — | | $ | — |
Assets to fund deferred compensation liability(2) | | 5,185 | | | — | | | — | | | 5,185 |
Total assets | $ | 44,585 | | $ | 39,400 | | $ | — | | $ | 5,185 |
Liabilities | | | | | | | | | | | |
Contingent consideration | $ | 2,781 | | $ | — | | $ | — | | $ | 2,781 |
Deferred compensation liability(3) | | 4,364 | | | 4,364 | | | — | | | — |
Total liabilities | $ | 7,145 | | $ | 4,364 | | $ | — | | $ | 2,781 |
| | | | | | | | | | | |
| December 31, 2016 |
| Fair Value | | Level I | | Level II | | Level III |
Assets | | | | | | | | |
Money market funds(1) | $ | 31,644 | | $ | 31,644 | | $ | — | | $ | — |
Assets to fund deferred compensation liability(2) | | 2,738 | | | — | | | — | | | 2,738 |
Total assets | $ | 34,382 | | $ | 31,644 | | $ | — | | $ | 2,738 |
Liabilities | | | | | | | | | | | |
Contingent consideration | $ | 4,868 | | $ | — | | $ | — | | $ | 4,868 |
Deferred compensation liability(3) | | 2,885 | | | 2,885 | | | — | | | — |
Total liabilities | $ | 7,753 | | $ | 2,885 | | $ | — | | $ | 4,868 |
| (1)
| | 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.
|
| (2)
| | The deferred compensation asset fair value is based upon the cash surrender value of the life insurance premiums. The Company recognized immaterial gains related to this asset within the statements of operations for the year ended December 31, 2017.
|
| (3)
| | The deferred compensation liability is included in other non-current liabilities in the consolidated balance sheets and its fair market value is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected.
|
Level I assets and liabilities include money-market funds not insured by the FDIC, deferred compensation liability and the revolving credit facility. 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 1 and are included in cash and cash equivalents in the consolidated balance sheets. The fair value of the deferred compensation liability is based upon the daily quoted market prices for net asset value on the various funds selected by participants. The outstanding balance on the revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believe our credit risk quality was consistent with when the debt originated.
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Level II liabilities consist of Convertible Notes and Term Notes in which the Company uses observable market prices to determine the fair value. The outstanding value of our Term Notes approximated fair value as the Term Notes bore interest at variable rates and we believe our credit risk quality was consistent with when the debt originated through July 18, 2017, at which time the Second Amended and Restated Credit Facility replaced the Term Notes with the revolving credit facility.
Level III liabilities consist of the estimated fair value of contingent consideration as well as the deferred compensation asset. The fair market value of the deferred compensation asset is based upon the cash surrender value of the life insurance premiums.
The fair value of the contingent consideration liabilities related to the FinaConnect and Wheelhouse 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 FinaConnect and Wheelhouse during the subsequent periods 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 FinaConnect and Wheelhouse, 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 administration on the consolidated statements of operations.
The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to December 31, 2017:
| | | |
| | Fair Value of |
| | Contingent |
| | Consideration |
| | Liabilities |
Balance at December 31, 2016 | | $ | 4,868 |
Settlement of contingent consideration liability | | | (2,286) |
Contingent consideration adjustment | | | (218) |
Accretion on contingent consideration | | | 417 |
Balance at December 31, 2017 | | $ | 2,781 |
The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to December 31, 2017:
| | | |
| | Fair Value of |
| | Assets to Fund |
| | Deferred |
| | Compensation |
| | Liability |
Balance at December 31, 2016 | | $ | 2,738 |
Contributions and fair value adjustments | | | 2,447 |
Balance at December 31, 2017 | | $ | 5,185 |
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The asset value was increased due to funding of the plan as well as immaterial gains on the underlying investment vehicles, which resulted in an asset value of $5,185 as of December 31, 2017, which was included in other non-current assets on the condensed consolidated balance sheets.
The Company assesses categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the year.
On December 15, 2014, the Company issued $172,500 of Convertible Notes. As of December 31, 2017 and 2016, the carrying value of the 2019 Convertible Notes equaled $158,990 and $152,575, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of December 31, 2017 and 2016, the fair value of the Convertible Notes was $180,180 and $164,824, respectively. The Company considers the Convertible Notes to be a Level II liability as of December 31, 2017 and 2016, and uses a market approach to calculate the fair value of the Convertible Notes. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on or near December 31, 2017 (see “Note 12 – Debt”).
As of December 31, 2017 and 2016, there was $0 and $142,000, respectively, of Term Notes outstanding. The July 18, 2017 amendment to the Prior Credit Facility replaced the Term Notes and related excess cash flow payment obligations with a revolving line of credit. As of December 31, 2016, the outstanding value of our Term Notes approximated fair value as the Term Notes bore interest at variable rates and we believed our credit risk quality was consistent with when the debt originated. As of December 31, 2016, the carrying value of the Term Notes equaled $138,335, and represents the aggregate principal amount outstanding less the unamortized debt issuance costs. The Company considered the Term Notes to be a Level II liability as of December 31, 2016 (see “Note 12 – Debt”).
As of December 31, 2017 and 2016, there was $81,168 and $0, respectively, outstanding on the revolving credit facility under the Second Amended and Restated Credit Agreement. As of December 31, 2017 and 2016, the outstanding balance on our revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believed our credit risk quality was consistent with when the debt originated. The Company considered the revolving credit facility to be a Level I liability as of December 31, 2017 and 2016 (see “Note 12 – Debt”).
We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2017 based upon the short-term nature of the assets and liabilities.
11. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
Accrued compensation and related taxes | | $ | 43,724 | | $ | 35,287 |
Accrued investment manager fees | | | 39,324 | | | 31,278 |
Sales and use tax payable | | | 9,037 | | | 10,108 |
Accrued professional services | | | 4,985 | | | 3,213 |
Definite consideration | | | 1,250 | | | 445 |
Other accrued expenses | | | 7,577 | | | 7,432 |
| | $ | 105,897 | | $ | 87,763 |
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
12. Debt
The Company’s outstanding debt obligations as of December 31, 20172022 and 20162021 were as follows:
| | | | | |
| At December 31, |
| 2017 | | 2016 |
Convertible Notes | $ | 172,500 | | $ | 172,500 |
Unaccreted discount on Convertible Notes | | (11,677) | | | (17,149) |
Unamortized issuance costs on Convertible Notes | | (1,833) | | | (2,776) |
Convertible Notes carrying value | $ | 158,990 | | $ | 152,575 |
| | | | | |
Term Notes | $ | — | | $ | 142,000 |
Unamortized issuance costs on Term Notes | | — | | | (3,665) |
Term Notes carrying value | $ | — | | $ | 138,335 |
| | | | | |
Revolving credit facility balance | $ | 81,168 | | $ | — |
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | (in thousands) |
| Revolving credit facility balance | | $ | — | | | $ | — | |
| | | | |
| Convertible Notes due 2023 | | $ | 45,000 | | | $ | 345,000 | |
| Unamortized issuance costs on Convertible Notes due 2023 | | (114) | | | (2,979) | |
| Convertible Notes due 2023 carrying value | | $ | 44,886 | | | $ | 342,021 | |
| | | | |
| Convertible Notes due 2025 | | $ | 317,500 | | | $ | 517,500 | |
| Unamortized issuance costs on Convertible Notes due 2025 | | (4,765) | | | (10,659) | |
| Convertible Notes due 2025 carrying value | | $ | 312,735 | | | $ | 506,841 | |
| | | | |
| Convertible Notes due 2027 | | $ | 575,000 | | | $ | — | |
| Unamortized issuance costs on Convertible Notes due 2027 | | (15,966) | | | — | |
| Convertible Notes due 2027 carrying value | | $ | 559,034 | | | $ | — | |
On
June 19, 2014, Envestnet and certain of its subsidiariesFebruary 4, 2022, the the Company entered into a
credit agreementThird Amended and Restated Credit Agreement (the "Third Credit Agreement") with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative
agent, pursuant to which the Banks agreed to provide an unsecured revolving credit facility of $70,000 with a sublimit for the issuance of letters of credit of $5,000. Since then the agreement has been amended several times and was lastagent. The Third Credit Agreement amended and restated,
on July 18, 2017.On July 18, 2017,in its entirety, the Company's prior credit agreement. In connection with entering into the Third Credit Agreement, the Company capitalized an additional $1.9 million of deferred financing charges to Other non-current assets on the consolidated balance sheets and certainwrote off $0.6 million of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a grouppre-existing finance charges to other expense, net on the consolidated statements of banks (the “Banks”), for which Bank of Montreal acted as administrative agent (the “Administrative Agent”). The Second Amended and Restated Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated as of November 19, 2015, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Facility”). operations.
Pursuant to the Second Amended and RestatedThird Credit Agreement, the Banks have agreed to provide to the Company with a revolving credit commitments
facility of $500.0 million (the “Revolving Credit Facility”)
in the aggregate amount of up to $350,000 which amount may be increased by $50,000.. The
Second Amended and RestatedThird Credit Agreement also includes a
$5,000 subfacility$20.0 million sub-facility for the
issuanceissuances of letters of credit.
As of December 31, 2022 and December 31, 2021, there were no amounts outstanding under the Revolving Credit Facility.
Obligations under the
Second Amended and RestatedThird Credit Agreement are guaranteed by substantially all of Envestnet’s U.S. subsidiaries
including Yodlee. In accordance with the terms of the Security Agreement, dated November 19, 2015 (the “Security Agreement”), among the Company, the Debtors party thereto, the Banks and
the Administrative Agent, obligations under the Second Amended and Restated Credit Agreement are secured by
a first-priority lien on substantially all of the
Company’s domestic assetspersonal property (other than intellectual property) of Envestnet and the
Company’s pledge of 66% of the voting equity and 100% of the non-voting equity ofguarantors, subject to certain
of its first-tier foreign subsidiaries. In addition to funding a portion of the cash consideration paid by the Company in connection with the acquisition of Yodlee, proceedsexclusions. Proceeds under the
Second Amended and RestatedThird Credit Agreement may be used to finance capital expenditures
working capital,and permitted acquisitions and for
working capital and general corporate purposes.
Envestnet
In the event the Company has borrowings under the Third Credit Agreement, at the Company's option, it will pay interest on these borrowings madeat a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin ranging from 1.25% to 2.75% per annum, in each case based upon the total net leverage ratio, as calculated pursuant to the Third Credit Agreement. Any borrowings under the Second Amended and RestatedThird Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled towill mature on July 18, 2022.February 4, 2027. There is also a commitment fee equalat a rate ranging from 0.25% to 0.25 percent0.30% per annum onbased upon the daily unused portiontotal net leverage ratio.
As of
December 31, 2022, debt issuance costs related to the
facility.Third Credit Agreement of $0.7 million and $2.2 million are presented in prepaid expenses and other non-current assets in the consolidated balance sheets, respectively.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The Second Amended and RestatedThird Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring Envestnetthe Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and a minimum adjusted EBITDA, and provisions that limit the ability of Envestnet and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities.
As of December 31, 2017, there were $0 of Term Notes and $81,168 of revolving credit amounts outstanding under the Second Amended and Restated Credit Agreement. The July 18, 2017 amendment replaced the Term Notes and related excess cash flow payment obligations, which were issued in relation to a previous amendment, with a revolving line of credit. The Company’s consolidated balance sheets reflect these changes as of December 31, 2017 with no portion of debt related to the revolving credit facility being classified as short-term. As of December 31, 2017, the debt issuance costs related to the Second Amended and Restated Credit Agreement and the Prior Credit Facility are presented in prepaid expenses and other non-current assets which have outstanding amounts of $855 and $3,106, respectively.
liquidity covenant. The Company was in compliance with allthese financial covenants of the Second Amended and Restated Credit Agreement as of December 31, 2017.
2022. On November 14, 2022, the Company entered into a First Amendment to the Third Credit Agreement, which amended certain provisions under the Third Credit Agreement, including elimination of required testing of the liquidity covenant beginning March 31, 2023. The borrowing base and rate were not amended by this First Amendment to the Third Credit Agreement.
As of December 31, 2022, the Company had all $500.0 million available to borrow under the Revolving Credit Facility, subject to covenant compliance.
Convertible Notes
On December 15, 2014, due 2023
In May 2018, the Company issued
$172,500$345.0 million of
Convertible Notes.convertible notes maturing June 1, 2023 (the “Convertible Notes due 2023”). Net proceeds from the offering were
$166,967.$335.0 million. The Convertible Notes
due 2023 bear interest at a rate of
1.75 percent1.75% per annum payable semiannually in arrears on June
151 and December
151 of each
year, beginning on June 15, 2015.In connection with the issuance of the Convertible Notes, the Company incurred $4,651 of issuance costs in 2014, which are presented net in non-current debt on the consolidated balance sheets. These costs are being amortized and are recorded as additional interest expense over the life of the Convertible Notes.
year.
The Convertible Notes
due 2023 are general unsecured
senior obligations, subordinated in right of payment to
ourthe Company’s obligations under
ourits Credit Agreement. The Convertible Notes
due 2023 rank equally in right of payment with all of the Company’s
other existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated
indebtedness.obligations. The Convertible Notes
due 2023 will be structurally subordinated to the indebtedness and other liabilities of any of
ourthe Company’s subsidiaries,
other than its wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis, and other than to the extent the Convertible Notes
due 2023 are guaranteed in the future by
any of our
other subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Certain of our subsidiaries guarantee our obligations under our Credit Agreement.
Upon the occurrence of a “fundamental change”, as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes
due 2023 for cash at 100% of the principal amount of the Convertible Notes
due 2023 being purchased, plus any accrued and unpaid interest.
The Company may redeem for cash all or any portion of the notes, at the Company's option, on or after June 5, 2021 if the last reported sale price of Envestnet’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, consecutive or non-consecutive, within a 30 consecutive trading day period ending on, and including, any of the five trading days immediately preceding the date on which the Company provides notice of redemption.
The Convertible Notes due 2023 are convertible into shares of Envestnet’s common stock under certain circumstances prior to maturity at an initial conversion rate of 14.6381 shares per one thousand principal amount of the Convertible Notes due 2023, which represents a conversion price of $68.31 per share, subject to adjustment under certain conditions. The initial conversion rate is subject to adjustment upon a "fundamental change", as defined in the indenture, if the Company calls all or any portion of the notes for optional redemption, or subject to anti-dilution provisions provided in the indenture. On or after December 15, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
Upon conversion, the Company may pay cash, shares of Envestnet’s common stock or a combination of cash and stock, as determined by the Company in its discretion.
Upon issuance, the Company separately accounted for the liability and equity components of the Convertible Notes due 2023 by allocating the proceeds from issuance of the Convertible Notes due 2023 between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include an embedded conversion option. The Company allocated $46.6 million to the equity component, presented within additional paid-in capital, net of offering costs of $1.4 million. The Company recorded a discount on the Convertible Notes due 2023 of $48.0 million which was accreted and recorded as additional interest expense.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Upon the adoption of ASU 2020-06 on January 1, 2021, the equity component is no longer separated from the host contract and is now accounted for as a single liability measured at amortized cost within long-term debt in the consolidated balance sheets. Accordingly, no future accretion of the original issue discount necessary. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $0.0 million, $0.0 million and $9.4 million, respectively, in accretion related to the discount.
In connection with the issuance of the Convertible Notes due 2023, the Company incurred $10.0 million of issuance costs in 2018, of which $8.6 million was originally allocated to the debt component and presented net in long-term debt and $1.4 million was originally allocated to the equity component and presented within additional paid-in capital in the consolidated balance sheets. Upon the adoption of ASU 2020-06, the costs originally allocated to the equity component are reflected within long-term debt and are being amortized and recorded as additional interest expense over the life of the Convertible Notes due 2023.
In November 2022, the Company repurchased $300.0 million aggregate principal of the outstanding Convertible Notes due 2023 for cash consideration of approximately $312.4 million and recognized a loss on extinguishment of approximately $13.4 million recognized in interest expense on the consolidated statements of operations. As of December 31, 2022, aggregate principal of $45.0 million less unamortized debt issuance costs of $0.1 million remain outstanding after this repurchase which may result in approximately 0.7 million shares issuable upon conversion, subject to adjustment under certain conditions.
Convertible Notes due 2025
In August 2020, the Company issued $517.5 million of convertible notes that mature on August 15, 2025 (the “Convertible Notes due 2025”). Net proceeds from the offering were $503.0 million. The Convertible Notes due 2025 bear interest at a rate of 0.75% per annum payable semiannually in arrears in cash on February 15 and August 15 of each year.
The Convertible Notes due 2025 are general unsecured senior obligations, subordinated in right of payment to the Company’s obligations under its Credit Agreement. The Convertible Notes due 2025 rank equally in right of payment with all of the Company’s other existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated obligations. The Convertible Notes due 2025 will be structurally subordinated to the indebtedness and other liabilities of any of the Company’s subsidiaries, other than its wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis, and other than to the extent the Convertible Notes due 2025 are guaranteed in the future by any of our other subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes due 2025 for cash at 100% of the principal amount of the Convertible Notes due 2025 being purchased, plus any accrued and unpaid interest.
The Company may redeem for cash all or any portion of the notes, at the Company's option, on or after August 15, 2023 if the last reported sale price of Envestnet’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, consecutive or non-consecutive, within a 30 consecutive trading day period ending on, and including, any of the five trading days immediately preceding the date on which the Company provides notice of redemption.
The Convertible Notes due 2025 are convertible into shares of Envestnet’s common stock under certain circumstances prior to maturity at a an initial conversion rate of 15.90229.3682 shares per $1,000one thousand principal amount of the Convertible Notes due 2025, which represents a conversion price of $62.88$106.74 per share, subject to adjustment under certain conditions. The initial conversion rate is subject to adjustment upon a "fundamental change", as defined in the indenture, if the Company calls all or any portion of the notes for optional redemption, or subject to anti-dilution provisions provided in the indenture. Holders may convert their Convertible Notes due 2025 at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019,February 15, 2025, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015September 30, 2020 (and only during such calendar quarter), if the last reported sale price of ourEnvestnet’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price per $1,000 principal amount offor the Convertible Notesnotes for each such trading day wasis less than 98% of the last reported sale price of ourEnvestnet’s common stock on such date
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
multiplied by the then-current conversion rate;
(c) if the Company calls any or
(c)all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (d) upon the occurrence of specified corporate events
as defineddescribed in the
indenture.Indenture. On or after February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
Upon conversion, the Company may pay cash, shares of the Company’sEnvestnet’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle
Upon issuance, the
debt component of the Convertible Notes at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.The Company has separately accounted for the liability and equity components of the Convertible Notes due 2025 by allocating the proceeds from issuance of the Convertible Notes due 2025 between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618$61.9 million to the equity component presented within additional paid-in capital, net of offering costs of $882.$1.9 million and taxes of $6.7 million. The Company recorded a discount on the Convertible Notes due 2025 of $27,500$70.6 million which will bewas accreted and recorded as additional interest expense.
Upon the adoption of ASU 2020-06 on January 1, 2021, the equity component is no longer separated from the host contract and is now accounted for as a single liability measured at amortized cost within long-term debt in the consolidated balance sheets. Accordingly, no future accretion of the original issue discount necessary. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $0.0 million, $0.0 million and $4.7 million, respectively in accretion related to the discount.
In connection with the issuance of the Convertible Notes due 2025, the Company incurred $14.5 million of issuance costs in 2020, of which $12.6 million was originally allocated to the debt component and presented net in long-term debt and $1.9 million was originally allocated to the equity component and presented within additional paid-in capital in the consolidated balance sheets. Upon the adoption of ASU 2020-06, the costs originally allocated to the equity component are reflected within long-term debt and are being amortized and recorded as additional interest expense over the life of the Convertible Notes. During 2017, 2016 and 2015,Notes due 2025.
In November 2022, the Company repurchased $200.0 million aggregate principal of the outstanding Convertible Notes due 2025 for cash consideration of approximately $181.8 million and recognized $5,472, $5,237a gain on extinguishment of approximately $15.1 million recognized in interest expense on the consolidated statements of operations. As of December 31, 2022, aggregate principal of $317.5 million less unamortized debt issuance costs of $4.8 million remain outstanding after this repurchase which may result in approximately 3.0 million shares issuable upon conversion, subject to adjustment under certain conditions.
Convertible Notes due 2027
In November 2022, the Company issued $575.0 million of Convertible Notes due 2027. Net proceeds from the offering were $558.7 million. The Convertible Notes due 2027 bear interest at a rate of 2.625% per annum payable semiannually in arrears in cash on June 1 and $4,932, respectively,December 1 of each year.
The Convertible Notes due 2027 are general unsecured senior obligations, subordinated in accretion relatedright of payment to the discount.Company’s obligations under its Credit Agreement. The effective interest rateConvertible Notes due 2027 rank equally in right of payment with all of the liability componentCompany’s other existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated obligations. The Convertible Notes due 2027 will be structurally subordinated to the indebtedness and other liabilities of any of the Company’s subsidiaries, other than its wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis, and other than to the extent the Convertible Notes due 2027 are guaranteed in the future by any of our other subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes is equal todue 2027 for cash at 100% of the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability componentprincipal amount of the Convertible Notes due 2027 being purchased, plus any accrued and unpaid interest.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The Company may redeem for cash all or any portion of the years endednotes, at the Company's option, on or after December 31, 2017, 20165, 2025 if the last reported sale price of Envestnet’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, consecutive or non-consecutive, within a 30 consecutive trading day period ending on, and 2015 was approximately 6%.Interest expenseincluding, any of the five trading days immediately preceding the date on which the Company provides notice of redemption.
The Convertible Notes due 2027 are convertible into shares of Envestnet’s common stock under certain circumstances prior to maturity at a an initial conversion rate of 13.6304 shares per one thousand principal amount of the Convertible Notes due 2027, which represents a conversion price of $73.37 per share and approximately 7.8 million shares issuable upon conversion, subject to adjustment under certain conditions. The initial conversion rate is subject to adjustment upon a "fundamental change", as defined in the Second Amended and Restated Credit agreement was comprisedindenture, if the Company calls all or any portion of the following:notes for optional redemption, or subject to anti-dilution provisions provided in the indenture. Holders may convert their Convertible Notes due 2027 at their option at any time prior to the close of business on the business day immediately preceding June 1, 2027, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on December 31, 2022 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day is less than 98% of the last reported sale price of Envestnet’s common stock on such date multiplied by the then-current conversion rate; (c) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (d) upon the occurrence of specified corporate events described in the Indenture. On or after June 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances. | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Coupon interest | | $ | 3,019 | | $ | 3,019 | | $ | 3,019 |
Amortization of issuance costs | | | 3,279 | | | 2,875 | | | 1,462 |
Accretion of debt discount | | | 5,472 | | | 5,237 | | | 4,932 |
Interest on credit agreement | | | 4,153 | | | 5,128 | | | 606 |
Undrawn and other fees | | | 424 | | | 341 | | | 252 |
| | $ | 16,347 | | $ | 16,600 | | $ | 10,271 |
Upon conversion, the Company may pay cash, shares of Envestnet’s common stock or a combination of cash and stock, as determined by the Company in its discretion.
As of December 31, 2022, the Convertible Notes due 2027 are presented at their gross proceeds of $575.0 million less unamortized debt issuance costs of $16.0 million.
In connection with the issuance of the Convertible Notes due 2027, the Company incurred a total of $16.3 million of issuance costs in 2022, which are being amortized and recorded as additional interest expense over the life of the Convertible Notes due 2027.
See “Note
17 – 18—Net Income (Loss) Per Share” for further discussion of the effect of conversion on net income per common share.
13. Other Non-Current Liabilities
Other non-current liabilities consist
In connection with the pricing of the
following: | | | | | | |
| | December 31, | | December 31, |
| | 2017 | | 2016 |
Uncertain tax positions | | $ | 10,640 | | $ | 7,762 |
Accrued deferred compensation | | | 4,364 | | | 2,885 |
Other | | | 98 | | | 1,539 |
Accrued purchase liability | | | — | | | 1,250 |
| | $ | 15,102 | | $ | 13,436 |
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
14. Income Taxes
Income (loss) beforeInterest Expense
Interest expense was comprised of the following and is included in other income
tax provision was generated(expense), net in the
following jurisdictions: | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Domestic | | $ | (9,387) | | $ | (47,059) | | $ | 7,059 | |
Foreign | | | 7,698 | | | 6,569 | | | 1,929 | |
Total | | $ | (1,689) | | $ | (40,490) | | $ | 8,988 | |
The componentsconsolidated statements of the income tax provision charged to operations are summarized as follows:
operations: | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Current: | | | | | | | | | | |
Federal | | $ | (1,201) | | $ | 3,812 | | $ | 12,731 | |
State | | | 951 | | | 1,172 | | | 1,644 | |
Foreign | | | 6,438 | | | 4,509 | | | 685 | |
| | | 6,188 | | | 9,493 | | | 15,060 | |
| | | | | | | | | | |
Deferred: | | | | | | | | | | |
Federal | | | (4,439) | | | 5,992 | | | (9,384) | |
State | | | 146 | | | 117 | | | (1,288) | |
Foreign | | | (304) | | | (525) | | | 164 | |
| | | (4,597) | | | 5,584 | | | (10,508) | |
| | | | | | | | | | |
Total | | $ | 1,591 | | $ | 15,077 | | $ | 4,552 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Coupon interest | | $ | 10,897 | | | $ | 9,919 | | | $ | 7,442 | |
Amortization of issuance costs (1) | | 4,678 | | | 5,745 | | | 3,396 | |
| Undrawn and other fees | | 1,268 | | | 1,267 | | | 796 | |
| Accretion of debt discount | | — | | | — | | | 14,084 | |
| Interest on revolving credit facility | | — | | | — | | | 5,786 | |
| Total interest expense | | $ | 16,843 | | | $ | 16,931 | | | $ | 31,504 | |
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Net deferred tax assets (liabilities) consist of(1) For the following:
| | | | | | | |
| | At December 31, | |
| | 2017 | | 2016 | |
Deferred revenue | | $ | 5,723 | | $ | 6,309 | |
Prepaid expenses and accruals | | | 1,459 | | | 1,363 | |
Deferred rent and lease incentives | | | 3,419 | | | 3,940 | |
Net operating loss and tax credit carryforwards | | | 66,896 | | | 100,471 | |
Property and equipment and intangible assets | | | (51,182) | | | (90,222) | |
Stock-based compensation expense | | | 6,894 | | | 10,641 | |
Convertible Notes | | | (2,886) | | | (6,346) | |
Other | | | 1,221 | | | (2,101) | |
Total deferred tax assets | | | 31,544 | | | 24,055 | |
Less: valuation allowance | | | (32,513) | | | (29,610) | |
Net deferred tax liabilities | | $ | (969) | | $ | (5,555) | |
Onyear ended December 22, 2017 the Tax Cuts and Jobs Act (“the Act”) was signed into law. The Act significantly changes U.S. income tax law and is the first major overhaul of the federal income tax code in more than 30 years. Key provisions of the Act that may impact the Company include: (i) reduction of the U.S. federal corporate income tax rate from 35% to 21%, (ii) repeal of the Corporate Alternative Minimum Tax (“AMT”) system (iii) replacement of the worldwide taxation system with31, 2022, amount includes a territorial tax system which exempts certain foreign operations from U.S. taxation, (iv) further limitationnet gain on the deductibilityextinguishment of certain executive compensation, (v) modificationdebt of earnings calculations for certain foreign subsidiaries that were previously tax deferred to a one-time tax, (vi) creation of a new minimum tax on certain foreign earnings and a new base erosion anti-abuse tax, (vii) allowance for immediate capital expensing of certain qualified property, (viii) limitation on the deduction for net interest expense incurred by a U.S. corporation, and (ix) modification and/or repeal of a number of other international provisions.
The Company recognized the income tax effects of the Act in its 2017 financial statements in accordance with Staff Accounting Bulletin 118 which provides SEC staff guidance for the application of ASC Topic 740.
The Company has completed its assessment for the income tax effects of the Act for the following items:
| ·
| | Repeal of the corporate AMT system: Existing AMT credits as of December 31, 2017 will be refunded over the next five years. The Company has determined that it will receive a refund of existing AMT credits equal to $1,330. The valuation allowance previously recorded against these credits has been released for this amount and a tax benefit of $1,330 was recorded as a component of income tax expense from continuing operations.
|
The Company has not completed its assessment for the income tax effects of the Act but has recorded a reasonable estimate of the effects for the items below. The Company anticipates completing the analyses for these estimates by the fourth quarter of 2018, within the one year measurement period for the following items:
| ·
| | One-time tax on deferred foreign earnings: The Company does not believe that the one-time tax on deferred foreign earnings will have a material impact on their tax provision due to the ability to fully offset any tax with foreign tax credits and net operating losses (“NOL”). However, the calculation of earnings and profits through 2017 has been estimated and will be finalized when the tax returns are filed; and
|
| ·
| | Re-measurement of deferred tax assets and liabilities: Deferred tax assets and liabilities attributable to the U.S. were re-measured from 35% to the reduced tax rate of 21%. The Company recorded a
|
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Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
provisional amount of $13,792 for the re-measurement; however, the majority of the change was offset by a change in valuation allowance leaving a benefit of $810 recorded as a component of income tax expense from continuing operations; and
|
| ·
| | Elimination of executive compensation exemptions: The Act made major changes to the $1,000 limit on deductible compensation paid to certain executive employees. The Act eliminated exemptions for qualified performance based compensation and compensation paid after termination and expanded the number of employees to which the limit applies. The Company does not believe that the elimination of executive compensation exemptions will have a material impact on its deferred tax assets. The Act contains transitional rules, the implementation of which is not entirely clear at this time. The Company is still analyzing related aspects of the Act including the impact of the transitional rules. The provisional assessment above may change when further guidance is released that addresses these rules.
|
The Company has not completed its assessment for the income tax effects of the Act and is unable to calculate a reasonable estimate of such effect for the items below. The Company anticipates completing the analysis for these items by the fourth quarter of 2018, within the one year measurement period:
| ·
| | Changes to international taxation: The Act modifies various aspects of international taxation and the application of these changes to the current foreign tax credit system is unclear. These rules are complex and require further clarity through the issuance of regulations and final technical interpretation. The Company has a deferred tax asset of $2,459 relating to foreign tax credits that carry a full valuation allowance. Depending upon the final interpretation of the new Act, it may be more likely than not that realization of a portion of the credits may occur. The Company has determined that a reasonable estimate cannot be made at this time. Information needed to complete the accounting is as follows: (i) final technical analysis of the new tax law, and (ii) finalization of necessary calculations, including an assessment on how these new provisions will impact the utilization of these credits in the future; and
|
| ·
| | Sequestration charge on AMT credits: As stated above, the Company expects to receive a refund of existing AMT credits as of December 31, 2017 of $1,330. The refund may or may not be subject to a 6-7% sequestration charge. The application of this charge is unclear at this time. Clarification on the application of this charge is needed to complete the accounting for this item.
|
The valuation allowance for net deferred tax assets as of December 31, 2017 and 2016 was $32,513 and $29,610, respectively. The change in the valuation allowance from 2016 to 2017 was primarily$1.7 million related to the amortizationpartial repurchase of book intangible assets, which increased the valuation allowance,Convertible Notes due 2023 and the change in the federal tax rateConvertible Notes due to the Act, which reduced the value of the ending valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2017, a valuation allowance of $32,513 was recorded to offset the portion of deferred tax assets for which the Company is not at more likely than not that they will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of
2025.Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
Prior to December 31, 2017, the Company did not claim permanent reinvestment of our accumulated foreign earnings, and recorded taxes on these earnings. The amount of this estimated liability at December 31, 2016 was approximately $4,500. As of December 31, 2017, the Company changed our position on this matter and has now claimed permanent reinvestment on accumulated earnings of approximately $20,600. The reinvested foreign earnings of the Company will be used to fund future foreign acquisitions, capital expenditures, headcount expansion and other operating expenses. As these earnings will be permanently reinvested in the foreign jurisdictions, deferred taxes will not be recorded.
The expected tax provision calculated at the statutory federal rate differs from the actual provision as follows:
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Tax provision (benefit), at U.S. federal statutory tax rate | | $ | (573) | | $ | (13,767) | | $ | 3,056 | |
| | | | | | | | | | |
State income tax provision (benefit), net of federal benefit | | | (1,251) | | | (2,053) | | | 247 | |
Effect of stock-based compensation excess tax benefit | | | (11,522) | | | — | | | — | |
Effect of permanent items | | | 1,145 | | | 1,773 | | | 1,899 | |
Change in valuation allowance | | | 2,151 | | | 26,269 | | | 841 | |
Effect of change in federal income tax rate | | | 13,792 | | | — | | | — | |
Effect of change in state income tax rate | | | 537 | | | 279 | | | 283 | |
Uncertain tax positions | | | 3,668 | | | 2,024 | | | (859) | |
Research and development credits | | | (2,815) | | | (2,758) | | | (1,914) | |
Change in permanent reinvestment assertion | | | (4,494) | | | — | | | — | |
State net operating loss adjustment, net of valuation allowance impact | | | 836 | | | — | | | — | |
Other | | | 117 | | | 3,310 | | | 999 | |
Income tax provision | | $ | 1,591 | | $ | 15,077 | | $ | 4,552 | |
At December 31, 2017, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of $249,653 which are available to offset future federal taxable income, if any, and expire through 2035. In addition, as of December 31, 2017, the Company had NOL carryforwards for state income tax purposes of $143,775 available to reduce future income subject to income taxes. The state NOL carryforwards expire through 2037.
In addition, at December 31, 2017, the Company had AMT credit carryforwards of approximately $1,330 for Federal purposes. As a result of tax reform, AMT credits are refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the minimum tax credit was reclassified from a deferred tax asset to an income tax receivable. The Company also had AMT credits of $21 for California, which are available to reduce future California income taxes, if any, over an indefinite period. In addition, the Company had research and development credit carryforwards of approximately $10,430 for federal and $8,103 for California and Illinois, as well as foreign tax credits of $2,459 available to offset federal income tax.
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Unrecognized tax benefits balance at beginning of year | | $ | 16,476 | | $ | 14,129 | | $ | 2,092 | |
Additions based on tax positions related to the current year | | | 1,691 | | | 1,153 | | | 576 | |
Additions based on tax positions related to prior years | | | 145 | | | 1,257 | | | — | |
Additions based on tax positions related to acquired entities | | | — | | | — | | | 12,780 | |
Reductions for settlements with taxing authorities related to prior years | | | — | | | — | | | (1,120) | |
Reductions for lapses of statute of limitations | | | — | | | (63) | | | (199) | |
Unrecognized tax benefits balance at end of year | | $ | 18,312 | | $ | 16,476 | | $ | 14,129 | |
At December 31, 2017, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $18,312.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 20172022, 2021 and 2016, income tax2020, total interest expense included $1,690 and $880, respectively, of potential interest and penalties related to unrecognized tax benefits. the Convertible Notes due 2023 was $20.7 million, $8.0 million, and $17.1 million, respectively, with coupon interest expense of $5.4 million, $6.0 million, and $6.0 million, and amortization of debt discount, issuance costs of $1.9 million, $2.0 million, and $11.1 million, respectively. For the year ended December 31, 2022, recognized in total interest expense of $20.7 million includes a loss on extinguishment of debt of $13.4 million in connection with the repurchase of $300.0 million in Convertible Notes due 2023. Excluding the impact of the repurchase, the effective interest rate of the Convertible Notes due 2023 was approximately 2.4%, 2.4%, and 6.0% for the years ended December 31, 2022, 2021, and 2020, respectively. The effective interest rate of the Convertible Notes due 2023 is equal to the stated interest rate plus the amortization of the debt issuance costs subsequent to adoption of ASU 2020-06.
For the years ended December 31, 2022, 2021 and 2020, total interest expense related to the Convertible Notes due 2025 was $(8.6) million, $6.8 million, and $6.9 million, respectively, with coupon interest expense of $3.7 million, $3.9 million, and $1.4 million, and amortization of debt discount and issuance costs of $2.8 million, $2.9 million, and $5.5 million, respectively. For the year ended December 31, 2022, recognized in total interest expense of $8.6 million includes a gain on extinguishment of debt of $15.1 million in connection with the repurchase of $200.0 million in Convertible Notes due 2025, Excluding the impact of the repurchase, the effective interest rate of the Convertible Notes due 2025 was approximately 1.3%, 1.3%, and 4.0% for the years ended December 31, 2022, 2021, and 2020, respectively. The effective interest rate of the Convertible Notes due 2025 was equal to the stated interest rate plus the amortization of the debt issuance costs subsequent to adoption of ASU 2020-06.
For the year ended December 31, 2022, total interest expense related to the Convertible Notes due 2027 was $2.2 million with coupon interest expense of $1.8 million and issuance costs of $0.4 million. The effective interest rate of the Convertible Notes due 2027 for the year ended December 31, 2022 was approximately 3.2%. The effective interest rate of the Convertible Notes due 2027 was equal to the stated interest rate plus the amortization of the debt issuance costs.
11.Leases
The Company had accrued interesthas operating leases for corporate offices and penaltiescertain equipment, some of $6,018which may include options to extend the leases for up to 7 years, and $4,328some of which may include options to terminate the leases within 90 days. Terms of the Company's operating leases may change from time to time. The Company's leases have remaining lease terms of 3 months to 11 years. See "Note 5 - Property and Equipment, net" for further discussion of finance leases.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The following table illustrates information for the Company's operating leases as of and for the year ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | (in thousands) |
| Total operating lease cost | | $ | 15,157 | | $ | 18,600 |
| Short-term lease cost | | 12,445 | | 4,940 |
| Weighted average remaining lease term (in years) | | 9.2 | | 9.8 |
| Weighted average discount rate | | 5.0 | % | | 5.1 | % |
| Cash paid for amounts included in the measurement of the operating lease liability | | 15,748 | | 18,052 |
The Company did not have significant sublease income or variable lease cost for the years ended December 31, 2022 and 2021.
Future minimum lease payments under non-cancellable leases, as of December 31, 20172022, were as follows:
| | | | | | | | |
| | Operating Leases |
| | (in thousands) |
| Years Ending December 31, | | |
| 2023 | | $ | 16,058 | |
| 2024 | | 17,925 | |
| 2025 | | 15,372 | |
| 2026 | | 15,242 | |
| 2027 | | 15,370 | |
| Thereafter | | 74,709 | |
| Total future minimum lease payments | | 154,676 | |
| Less imputed interest | | (32,075) | |
| Total operating lease liabilities | | $ | 122,601 | |
As a result of office closures in 2022, 2021 and
2016, respectively.The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of2020, the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Servicewrote down operating lease right-of-use assets totaling $13.0 million, $1.5 million and $2.7 million, respectively, as of December 18, 2017 that the calendar year 2015general and 2016 federal income tax returns have been have been selected for audit by the Internal Revenue Service. As of the date of this report, no additional taxes had been assessed, as the audit has not yet begun. The Company’s tax returns for the calendar years ended December 31, 2016, 2015, and 2014 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2012 and forward remain open to examination by various state revenue services.
Our Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2005 and forward. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recordedadministrative expense in the consolidated balance sheets.
15. Stockholders’ Equity
On May 6, 2015, in connection with the acquisitionstatements of Finance Logix,operations.
As of December 31, 2022, the Company
issued 123,410 in shareshas several operating lease commitments, primarily for our corporate offices, that have not yet commenced. These operating leases are expected to commence before January 2024 with lease terms of Envestnet common stock with a fair value of $6,388 and 123,410 stock optionsup to acquire Envestnet common stock at $52.67 per share with an estimated fair value of $2,542.On November 19, 2015 in connection with the merger of Yodlee, Envestnet issued approximately 5,974,000 shares of Envestnet common stock with a fair value of $186,522 to Yodlee stockholders in the Merger.
On February 25,10 years.
12.Stockholders’ Equity
In 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
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(including (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. For the years ended December 31, 2017 and 2016, the Company purchased 0 and 43,610Throughout 2022, we repurchased 1,569,642 shares of the Company’sCompany's common stock respectively.for $95.0 million. Throughout 2021, we repurchased 55,488 shares of the Company's common stock for $4.0 million. As of both December 31, 2017 and 2016,2022, a maximum of 1,956,390331,260 shares may yet be purchased under this program.
16. Stock-Based Compensation
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
On December 31, 2004,20, 2018, the Company adopted a stock incentive plan (the “2004 Plan”). The 2004 Plan provided for the grant of optionsissued and sold to employees, consultants, and non-employee directorsBlackRock, Inc. (“BlackRock”) warrants to purchase approximately 470,000 common stock, which vest over time and have a ten -year contractual term. To satisfy options granted under the 2004 Plan, the Company made common stock available from authorized but unissued shares or shares held in treasury, if any, by the Company. Stock options granted under the 2004 Plan were non-stock options, as defined in the 2004 Plan agreement. Stock options were granted withat an exercise price no less than the fair-market-value price of the common stock$65.16 per share, subject to customary anti-dilution adjustments. The warrants were exercisable at BlackRock’s option for four years from the date of issuance. The warrants were unexercised upon expiration on December 20, 2022.
In December 2021, the
grant.Company issued 78,677 shares of the Company’s common stock for the settlement of liabilities connected with a prior acquisition.
13.Fair Value Measurements
The 2004 Plan hasfollowing tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a changerecurring basis in control provision whereby ifthe consolidated balance sheets as of December 31, 2022 and December 31, 2021, based on the three-tier
fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | Fair Value | | Level I | | Level II | | Level III |
| | (in thousands) |
| Assets: | | | | | | | | |
| Money market funds | | $ | 2,628 | | | $ | 2,628 | | | $ | — | | | $ | — | |
| Assets to fund deferred compensation liability | | 10,074 | | | — | | | — | | | 10,074 | |
| Total assets | | $ | 12,702 | | | $ | 2,628 | | | $ | — | | | $ | 10,074 | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Deferred compensation liability | | $ | 8,088 | | | $ | 8,088 | | | $ | — | | | $ | — | |
| Total liabilities | | $ | 8,088 | | | $ | 8,088 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | Fair Value | | Level I | | Level II | | Level III |
| | (in thousands) |
| Assets: | | | | | | | | |
| Money market funds | | $ | 2,684 | | | $ | 2,684 | | | $ | — | | | $ | — | |
| Assets to fund deferred compensation liability | | 11,140 | | | — | | | — | | | 11,140 | |
| Total assets | | $ | 13,824 | | | $ | 2,684 | | | $ | — | | | $ | 11,140 | |
| Liabilities: | | | | | | | | |
| Contingent consideration | | $ | 743 | | | $ | — | | | $ | — | | | $ | 743 | |
| Deferred compensation liability | | 10,418 | | | 10,418 | | | — | | | — | |
| Total liabilities | | $ | 11,161 | | | $ | 10,418 | | | $ | — | | | $ | 743 | |
Level I assets and liabilities include money-market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”) and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the consolidated balance sheets. 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 fair market value of the deferred compensation liability is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected, and is included in other non-current liabilities in the consolidated balance sheets.
Level III assets and liabilities consist of the estimated fair values of contingent consideration as well as the assets to fund the Company's deferred compensation liability. The fair market value of the assets used to fund the Company's deferred compensation liability approximates the cash surrender value of the Company's life insurance premiums and is included in other non-current assets in the consolidated balance sheets.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Fair Value of Contingent Consideration Liabilities
The fair value of the contingent consideration liabilities related to certain of the Company's acquisitions were estimated using a change in control occurs and the participant’s awardsdiscounted cash flow method with significant inputs that are not equitably adjusted, such awards shall become fully vestedobservable in the market and exercisablethus represents a Level III fair value measurement. The significant inputs in the Company's Level III fair value measurement not supported by market activity included its assessments of expected future cash flows related to these acquisitions and all forfeiture restrictions on such awards shall lapse. Based ontheir ability to meet the target performance objectives during the subsequent periods from the date of acquisition, which management believes are appropriately discounted considering the uncertainties associated with these obligations, and are calculated in accordance with the terms of their respective agreements.
The Company will continue to reassess the 2004 Plan,fair values of the contingent consideration liabilities at each reporting date until settlement. Changes to these estimated fair values will be recognized in the Company's earnings and included in general and administration expenses in the consolidated statements of operations.
The table below presents a reconciliation of the Company's contingent consideration liabilities, which were measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2021 to December 31, 2022:
| | | | | | | | |
| | Fair Value of Contingent Consideration Liabilities |
| | (in thousands) |
| Balance at December 31, 2021 | | $ | 743 | |
| Payments of contingent consideration liability | | (743) | |
| | |
| | |
| Balance at December 31, 2022 | | $ | — | |
The table below presents a reconciliation of assets used to fund deferred compensation liability, which was measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2021 to December 31, 2022:
| | | | | | | | |
| | Fair Value of Assets Used to Fund Deferred Compensation Liability |
| | (in thousands) |
| Balance at December 31, 2021 | | $ | 11,140 | |
| Contributions | | 649 | |
| Fair value adjustments and fees | | (1,715) | |
| Balance at December 31, 2022 | | $ | 10,074 | |
The fair market value of the assets used to fund the Company's deferred compensation liability is based upon the cash surrender value of the Company's life insurance premiums. The value of the assets used to fund the Company's deferred compensation liability, which are included in other non-current assets in the consolidated balance sheets, decreased due to losses on the underlying investment vehicles. These losses are recognized in the Company's earnings and included in general and administration expenses in the consolidated statements of operations.
The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or when changes in circumstances cause the transfer, in accordance with the Company’s initial public offeringaccounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the year ended December 31, 2022.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Fair Value of Debt Agreements and Other Financial Assets and Liabilities
The Company considered its Convertible Notes due 2023, Convertible Notes due 2025 and Convertible Notes due 2027 to be Level II liabilities as of December 31, 2022 and 2021, and used a market approach to calculate their respective fair values. The estimated fair value for each convertible note was determined based on the estimated or actual bids and offers in 2010 didan over-the-counter market on December 31, 2022 and 2021 (See “Note 10—Debt”).
In May 2018, the Company issued $345.0 million of Convertible Notes due 2023. As of December 31, 2022 and 2021, the carrying value of the Convertible Notes due 2023 equaled $44.9 million and $342.0 million, respectively, and represented the aggregate principal amount outstanding less the debt issuance costs. As of December 31, 2022 and 2021, the estimated fair value of the Convertible Notes due 2023 was $46.1 million and $439.9 million, respectively.
In August 2020, the Company issued $517.5 million of Convertible Notes due 2025. As of December 31, 2022 and 2021, the carrying value of the Convertible Notes due 2025 equaled $312.7 million and $506.8 million, and represented the aggregate principal amount outstanding less the debt issuance costs. As of December 31, 2022 and 2021, the estimated fair value of the Convertible Notes due 2025 was $293.7 million and $526.1 million, respectively.
In November 2022, the Company issued $575.0 million of Convertible Notes due 2027. As of December 31, 2022, the carrying value of the Convertible Notes due 2027 equaled $559.0 million and represented the aggregate principal amount outstanding less the debt issuance costs. As of December 31, 2022, the estimated fair value of the Convertible Notes due 2027 was $606.1 million.
As of December 31, 2022 and 2021, no advances were outstanding on the revolving credit facility under the Credit Agreement. The Company considered the revolving credit facility to be a Level I liability as of December 31, 2022 and 2021 (See “Note 10—Debt”).
The Company considered the recorded value of its other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2022 based upon the short-term nature of these assets and liabilities.
14.Revenues and Cost of Revenues
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by major source:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2022 |
| | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
| | (in thousands) |
| Revenues: | | | | | | |
| Asset-based | | $ | 738,228 | | | $ | — | | | $ | 738,228 | |
| Subscription-based | | 294,997 | | | 182,847 | | | 477,844 | |
| Total recurring revenues | | 1,033,225 | | | 182,847 | | | 1,216,072 | |
| Professional services and other revenues | | 16,568 | | | 7,144 | | | 23,712 | |
| Total revenues | | $ | 1,049,793 | | | $ | 189,991 | | | $ | 1,239,784 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2021 |
| | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
| | (in thousands) |
| Revenues: | | | | | | |
| Asset-based | | $ | 709,376 | | | $ | — | | | $ | 709,376 | |
| Subscription-based | | 267,720 | | | 186,269 | | | 453,989 | |
| Total recurring revenues | | 977,096 | | | 186,269 | | | 1,163,365 | |
| Professional services and other revenues | | 14,070 | | | 9,082 | | | 23,152 | |
| Total revenues | | $ | 991,166 | | | $ | 195,351 | | | $ | 1,186,517 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
| | (in thousands) |
| Revenues: | | | | | | |
| Asset-based | | $ | 540,947 | | | $ | — | | | $ | 540,947 | |
| Subscription-based | | 248,810 | | | 177,697 | | | 426,507 | |
| Total recurring revenues | | 789,757 | | | 177,697 | | | 967,454 | |
| Professional services and other revenues | | 16,333 | | | 14,443 | | | 30,776 | |
| Total revenues | | $ | 806,090 | | | $ | 192,140 | | | $ | 998,230 | |
One customer accounted for more than 10% of the Company’s total revenues, substantially all of which are included within the Envestnet Wealth Solutions segment:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Fidelity | | 16 | % | | 17 | % | | 15 | % |
The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| United States | | $ | 1,218,254 | | | $ | 1,166,251 | | | $ | 977,047 | |
International (1) | | 21,530 | | | 20,266 | | | 21,183 | |
| Total revenues | | $ | 1,239,784 | | | $ | 1,186,517 | | | $ | 998,230 | |
(1)No foreign country accounted for more than 10% of total revenues.
Remaining Performance Obligations
As of December 31, 2022, the Company's estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $544.6 million. We expect to recognize approximately 43% of this revenue in 2023, approximately 42% throughout 2024 and 2025, with the balance recognized thereafter. These remaining performance obligations are not triggerindicative of revenue for future periods.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Contract Balances
Total deferred revenue increased $4.9 million for the
change in control provisionyear ended December 31, 2022 and
did not result in any modificationsdecreased $2.0 million for the year ended December 31, 2021. These fluctuations are primarily due to timing differences related to the
satisfaction of outstanding
equity awards underperformance obligations and the
2004 Plan.Company's billing cycles during the years then ended. The majority of the Company's deferred revenue as of December 31, 2022 will be recognized over the course of the next twelve months.
The amount of revenue recognized that was included in the opening deferred revenue balance was $33.1 million and $33.8 million for the years ended December 31, 2022 and 2021, respectively. The majority of this revenue consists of subscription-based services and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Deferred Sales Incentive Compensation
Deferred sales incentive compensation was $11.0 million and $11.8 million as of December 31, 2022 and 2021, respectively. Amortization expense for the deferred sales incentive compensation was $4.3 million and $4.4 million for the years ended December 31, 2022 and 2021, respectively. Deferred sales incentive compensation is included in other non-current assets on the consolidated balance sheets and amortization expense is included in compensation and benefits expenses on the consolidated statements of operations. No significant impairment loss for capitalized costs was recorded during the periods.
Cost of Revenues
The following table summarizes cost of revenues by revenue category:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Asset-based | | $ | 430,345 | | | $ | 393,717 | | | $ | 278,569 | |
| Subscription-based | | 30,613 | | | 29,445 | | | 26,934 | |
| Professional services and other | | 7,502 | | | 561 | | | 426 | |
| Total cost of revenues | | $ | 468,460 | | | $ | 423,723 | | | $ | 305,929 | |
15.Stock-Based Compensation
On June 22, 2010, the Board of Directors approved the 2010 Long-Term Incentive Plan (“2010 Plan”), effective upon the closing of the Company’s initial public offering. The 2010 Plan provides for the grant of options, stock appreciation rights, Full Value Awards (as defined in the 2010
Plan)Plan agreement) and cash incentive awards to employees, consultants and non-employee directors to purchase common stock, which vest over time and have a ten-year contractual term.
TheAs approved by the Company’s shareholders, the 2010 Plan has since been amended whereby the maximum number of shares of common stock that may be delivered under the 2010 Plan is
equal to the sum of 2,700,000 plus the number of shares of common stock that are subject to outstanding awards under the 2004 Plan which are forfeited, expire or are cancelled after the effective date of the Company’s initial public offering.12,375,000. Stock options and stock appreciation rights are granted with an exercise price no less than the fair-market-value price of the common stock at the date of the grant.
On May 13, 2015 and July 13, 2017,As of December 31, 2022, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendments increased themaximum number of common shares of the Company reservedoptions and restricted stock available for deliveryfuture issuance under the 2010 Plan by 2,700,000 shares and 3,525,000 shares, respectively.Company’s plans is 2,579,021.
As a result of the merger between Envestnet and Tamarac,PIEtech acquisition in 2019, the Company adopted the Envestnet, Inc. Management Incentive2019 Equity Plan forin order to make inducement grants to certain PIEtech employees who will join Envestnet | Tamarac Management Employees (the “2012 Plan”). The 2012 Plan provides forMoneyGuide. Envestnet agreed to grant at future dates, not earlier than the grantsixty day anniversary of restrictedthe PIEtech Acquisition, up to 301,469 shares of Envestnet common stock stock optionsin the form of RSUs and PSUs pursuant to the 2019 Equity Plan. The RSUs vest over time and the purchasePSUs vest upon the achievement of common stock for certain Envestnet | Tamarac employees. The maximum number of shares of stock which may be issued with respect to awards under the 2012 Plan is 1,023,851.The 2012 Plan provides for the grant of up to 559,551 shares of common stock (“Target Incentive Awards”). The Target Incentive Awards vest based upon Tamarac meeting certain performance conditions and thenas well as a subsequent two-year service condition. The
Company measured the cost of these awards based on the estimated fair value of the award as of the market closing price on the day before the acquisition closed. The Company is recognizing the estimated expense on a graded-vesting method over a requisite service period of three to five years, which is the estimated vesting period. The Company estimates the expected vesting amount and recognizes compensation expense only for those awards expected to vest. This estimate is reassessed by management each reporting period and may change based upon new facts and circumstances. Changes in the assumptions impact the total amount of expense and are recognized over the vesting period. As of December 31, 2017, all 559,551 shares of restricted stock have vested.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
As a result of the merger between Envestnet and Yodlee, the Company adopted the Envestnet, Inc. 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the assumption of all unvested equity awards previously granted pursuant to the Yodlee employees and the conversion of such awards into equity awards of the Company pursuant to the 2015 Plan. No new awards are being madeStock-based compensation expense under the 2015 Plan. Company's plans was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Stock-based compensation expense | | $ | 79,581 | | | $ | 67,525 | | | $ | 56,292 | |
| Tax effect on stock-based compensation expense | | (20,293) | | | (17,219) | | | (14,354) | |
| Net effect on income | | $ | 59,288 | | | $ | 50,306 | | | $ | 41,938 | |
The
maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,058,807.As of December 31, 2017, the maximum number of options and restricted stock available for future issuance under the Company’s plans is 3,960,729.
Employeetax effect on stock-based compensation expense above was as follows:
calculated using a blended statutory rate of 25.5% for each of the years ended December 31, 2022, 2021 and 2020 respectively. | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Stock-based compensation expense | | $ | 31,331 | | $ | 33,276 | | $ | 15,161 |
Tax effect on stock-based compensation expense | | | (11,906) | | | (13,001) | | | (7,678) |
Net effect on income | | $ | 19,425 | | $ | 20,275 | | $ | 7,483 |
The following weighted average assumptions were used to value options granted during the periods indicated:
| | | | | | | | | | |
| | At December 31, | |
| | 2017 | | 2016 | | 2015 | |
Grant date fair value of options | | $ | 14.51 | | $ | 9.56 | | $ | 19.06 | |
Volatility | | | 43.8 | % | | 42.2 | % | | 37.8 | % |
Risk-free interest rate | | | 2.1 | % | | 1.4 | % | | 1.8 | % |
Dividend yield | | | — | % | | — | % | | — | % |
Expected term (in years) | | | 6.3 | | | 6.3 | | | 6.0 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Grant date fair value of options | | $ | — | | | $ | 31.23 | | | $ | — | |
| Volatility | | — | % | | 42.1 | % | | — | % |
| Risk-free interest rate | | — | % | | 0.4 | % | | — | % |
| Dividend yield | | — | % | | — | % | | — | % |
| Expected term (in years) | | 0.0 | | 6.5 | | 0.0 |
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes option activity under the Company’s plans:
| | | | | | | | | | |
| | | | | | | Weighted-Average | | | |
| | | | Weighted- | | Remaining | | | |
| | | | Average | | Contractual Life | | Aggregate |
| | Options | | Exercise Price | | (Years) | | Intrinsic Value |
Outstanding as of December 31, 2014 | | 4,265,337 | | $ | 10.73 | | 4.7 | | $ | 163,830 |
Granted | | 358,087 | | | 48.38 | | | | | |
Exercised | | (1,047,911) | | | 7.90 | | | | | |
Forfeited | | (41,722) | | | 41.10 | | | | | |
Outstanding as of December 31, 2015 | | 3,533,791 | | | 15.03 | | 4.7 | | | 61,199 |
Granted | | 163,864 | | | 22.38 | | | | | |
Exercised | | (598,382) | | | 8.23 | | | | | |
Forfeited | | (66,079) | | | 35.08 | | | | | |
Outstanding as of December 31, 2016 | | 3,033,194 | | | 16.33 | | 4.3 | | | 63,264 |
Granted | | 75,238 | | | 31.70 | | | | | |
Exercised | | (837,857) | | | 9.49 | | | | | |
Forfeited | | (16,010) | | | 37.42 | | | | | |
Outstanding as of December 31, 2017 | | 2,254,565 | | | 19.23 | | 4.3 | | | 69,939 |
Options exercisable | | 2,041,660 | | | 17.74 | | 3.8 | | | 66,291 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | | | | | (Years) | | (in thousands) |
| Outstanding as of December 31, 2019 | | 1,150,586 | | | $ | 25.66 | | | 3.4 | | $ | 50,590 | |
| | | | | | | | |
| Exercised | | (705,333) | | | 18.83 | | | | | |
| Forfeited | | (7,213) | | | 48.70 | | | | | |
| Outstanding as of December 31, 2020 | | 438,040 | | | 36.28 | | | 4.1 | | 20,156 | |
| Granted | | 4,781 | | | 74.83 | | | | | |
| Exercised | | (76,303) | | | 27.37 | | | | | |
| Forfeited | | (1,277) | | | 49.02 | | | | | |
| Outstanding as of December 31, 2021 | | 365,241 | | | 38.61 | | | 3.3 | | 14,878 | |
| | | | | | | | |
| Exercised | | (82,802) | | | 31.67 | | | | | |
| Forfeited | | (4,904) | | | 72.96 | | | | | |
| Outstanding as of December 31, 2022 | | 277,535 | | | 40.07 | | | 2.2 | | 6,005 | |
| Options exercisable | | 277,303 | | | 39.69 | | | 2.2 | | 6,005 | |
| | | | | | | | |
The aggregate intrinsic values in the table below represent the total pre-tax intrinsic value (the aggregate difference between the fair value of the Company’s common stock on December 31, 2017, 20162022, 2021 and 20152020 of $49.85, $35.25$61.70, $79.34 and $29.85,$82.29, respectively, and the exercise price of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of that date.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Other information is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Total intrinsic value of options exercised | | $ | 2,650 | | | $ | 3,815 | | | $ | 35,687 | |
| Cash received from exercises of stock options | | 2,620 | | | 2,090 | | | 10,760 | |
Exercise prices of stock options outstanding as of December 31,
20172022 range from
$7.15$15.34 to
$55.29.Other information is as follows:
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Total intrinsic value of options exercised | | $ | 29,562 | | $ | 14,165 | | $ | 37,879 | |
Cash received from exercises of stock options | | | 7,951 | | | 4,924 | | | 8,279 | |
$74.83. At December 31, 2017,2022, there was $1,891an immaterial amount of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.7 years.
options.
Restricted Stock Units and
RestrictedPerformance Stock
AwardsUnits
Periodically, the Company grants restricted stock unit awardsunits and performance-based stock units to employees. Beginning with grants issued in February 2016, restrictedRestricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. For grants issued prior to February 2016,Performance-based restricted units vest upon the achievement of certain pre-established business and financial metrics as well as a subsequent service condition. The business and financial metrics governing the vesting of these performance-based restricted stock units awardsprovide thresholds that dictate the number of shares to vest upon each evaluation date, which range from 0% to 150% of the original grant number. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest ratably in three annual
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
tranchesyears from the date of grant. grant date.
The following is a summary of the activity for unvested restricted stock units and awards granted under the Company’s plans:
| | | | | |
| | | | Weighted- |
| | | | Average Grant |
| | Number of | | Date Fair Value |
| | Shares | | per Share |
Outstanding as of December 31, 2014 | | 1,098,674 | | $ | 33.72 |
Granted | | 1,508,796 | | | 34.55 |
Vested | | (434,292) | | | 29.26 |
Forfeited | | (19,967) | | | 38.58 |
Outstanding as of December 31, 2015 | | 2,153,211 | | | 35.63 |
Granted | | 1,009,661 | | | 28.82 |
Vested | | (1,082,206) | | | 29.12 |
Forfeited | | (185,907) | | | 30.96 |
Outstanding as of December 31, 2016 | | 1,894,759 | | | 30.40 |
Granted | | 959,591 | | | 32.38 |
Vested | | (969,513) | | | 31.51 |
Forfeited | | (118,198) | | | 30.11 |
Outstanding as of December 31, 2017 | | 1,766,639 | | | 32.48 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | PSUs |
| | | Number of Shares | | Weighted-Average Grant Date Fair Value per Share | | Number of Shares | | Weighted-Average Grant Date Fair Value per Share |
| Outstanding as of December 31, 2019 | | 1,318,870 | | | $ | 58.88 | | | 254,118 | | | $ | 67.96 | |
| Granted | | 970,390 | | | 74.61 | | | 81,689 | | | 83.47 | |
| Vested | | (804,982) | | | 57.77 | | | — | | | — | |
| Forfeited | | (138,931) | | | 62.14 | | | (33,010) | | | 64.70 | |
| Outstanding as of December 31, 2020 | | 1,345,347 | | | 70.56 | | | 302,797 | | | 72.50 | |
| Granted | | 1,195,313 | | | 71.03 | | | 129,865 | | | 70.92 | |
| Vested | | (828,942) | | | 69.50 | | | (62,524) | | | 61.53 | |
| Forfeited | | (204,294) | | | 70.71 | | | (10,954) | | | 78.97 | |
| Outstanding as of December 31, 2021 | | 1,507,424 | | | 71.50 | | | 359,184 | | | 73.64 | |
| Granted | | 1,401,742 | | | 73.13 | | | 113,269 | | | 68.47 | |
| Vested | | (908,362) | | | 71.22 | | | (155,417) | | | 66.22 | |
| Forfeited | | (318,828) | | | 73.16 | | | (57,987) | | | 78.17 | |
| Outstanding as of December 31, 2022 | | 1,681,976 | | | 72.69 | | | 259,049 | | | 74.83 | |
At December 31,
2017,2022, there was
$42,250$88.2 million of unrecognized compensation expense related to unvested restricted stock
unit awards,units, which the Company expects to recognize over a weighted-average period of 1.8 years.
The Company entered into employment agreements with certain executive officers, three At December 31, 2022, there was $4.8 million of whom received a total of 205,000unrecognized compensation expense related to unvested performance-based restricted stock unit awards in May 2016units, which vest upon the achievementCompany expects to recognize over a weighted-average period of certain “Target Performance Measures” as defined in the employment agreements, for the periods ending December 31, 2016, December 31, 2017 and December 31, 2018 and four of whom also received a total of 125,000 restricted stock units awards in August 2016 which vest quarterly thereafter. The Target Performance Measures for the First and Second Performance Periods, as defined in the employment agreements, were achieved as of December 31, 2017.
1.5 years.
In connection with the Yodlee merger, on November 19, 2015,unexpected death of our former CEO in 2019, the Company issued 1,052,000 sharesmodified certain of Envestnet restricted stock unit awards (“replacement awards”) issued in connection with unvested Yodlee employeehis outstanding equity awards. The Yodlee unvestedmodifications included the extension of exercise periods for his outstanding stock options and the immediate vesting of his outstanding RSUs. All unvested restricted stock unitsPSUs were canceled and exchanged forforfeited. In 2020, the replacement awards. In accordance with ASC 805, these awards are considered to be replacement awards. ExchangesCompany recognized a gain of share options or$2.5 million in other share-based payment awards in conjunction with a business combination are modifications of share-based payment awards in accordance with ASC Topic 718. Asincome (expense), net as a result of a portionfair value adjustment upon settlement of the fair-value-based measure of the replacement awards, are included in measuring the consideration transferred in the Yodlee 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 rollover consideration was estimated to be $32,836 of which $4,318 was attributable to pre-acquisition services. The remaining fair value of $28,518 is amortizing over the 43 month vesting period subsequent to the acquisition date. As of December 31, 2017, the remaining amount of unrecognized expense totaled $4,719.former CEO’s stock options.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
In connection with the PIEtech acquisition the Company also granted membership interests in certain of the Company's equity investments to two legacy PIEtech executives with an estimated grant date fair market value of $8.9 million. These membership interests vested on May 1, 2020 and became exercisable on May 1, 2022, with the option to put the membership interests to the Company. For the years ended December 31, 2022, 2021 and 2020 the Company recorded approximately $0.8 million, $0.5 million and $3.3 million, respectively, as a component of compensation and benefits in the consolidated statements of operations. As of December 31, 2021, the corresponding liability was recorded in accrued expenses and other current liabilities. In July 2022, these executives exercised their respective put options and sold these membership interests to the Company for approximately $10 million.
16.Benefit Plan
The Company sponsors a profit sharing and savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all domestic employees. The Company made voluntary employer matching contributions as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Voluntary employer matching contributions | | $ | 8,087 | | | $ | 6,873 | | | $ | 6,247 | |
17.Income Taxes
Income (loss) before income tax expense (benefit) was generated in the following jurisdictions:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Domestic | | $ | (89,000) | | | $ | 9,730 | | | $ | (17,234) | |
| Foreign | | 10,581 | | | 10,631 | | | 9,189 | |
| Total | | $ | (78,419) | | | $ | 20,361 | | | $ | (8,045) | |
The components of the income tax expense (benefit) charged to operations are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Current: | | | | | | |
| Federal | | $ | 1,185 | | | $ | — | | | $ | (1,086) | |
| State | | 6,964 | | | 3,488 | | | 2,111 | |
| Foreign | | 2,402 | | | 4,499 | | | (4,542) | |
| | 10,551 | | | 7,987 | | | (3,517) | |
| | | | | | |
| Deferred: | | | | | | |
| Federal | | (2,453) | | | 4,021 | | | (2,659) | |
| State | | (1,439) | | | (3,548) | | | 1,158 | |
| Foreign | | 402 | | | (793) | | | (383) | |
| | (3,490) | | | (320) | | | (1,884) | |
| | | | | | |
| Total | | $ | 7,061 | | | $ | 7,667 | | | $ | (5,401) | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Net deferred tax assets (liabilities) consisted of the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | (in thousands) |
| Deferred revenue | | $ | 8,945 | | | $ | 6,436 | |
| Prepaid expenses and accrued expenses | | 8,847 | | | 8,099 | |
| | | | |
| Right-of-use assets | | (20,388) | | | (22,190) | |
| Lease liabilities | | 31,328 | | | 28,994 | |
| Net operating loss and tax credit carryforwards | | 64,590 | | | 85,698 | |
| Property and equipment and intangible assets | | (94,061) | | | (100,314) | |
| Stock-based compensation expense | | 10,559 | | | 9,652 | |
| Investment in partnerships | | 2,836 | | | 2,941 | |
| Convertible Notes | | 20,440 | | | — | |
| R&D expenditures | | 43,956 | | | — | |
| Withholding taxes | | (4,841) | | | — | |
| Other | | 196 | | | (173) | |
| Total deferred tax assets, net | | 72,407 | | | 19,143 | |
| Less: valuation allowance | | (88,603) | | | (40,164) | |
| Net deferred tax liabilities | | $ | (16,196) | | | $ | (21,021) | |
Beginning in 2022, the Tax Cuts and Jobs Act ("TCJA") eliminates the option to deduct research and development ("R&D") expenditures currently and requires taxpayers to amortize them pursuant to IRC Section 174. As a result, in 2023, the Company expects the amount of cash paid for income taxes to increase compared to 2022.
The deferred tax liability that is not being recorded because of the Company's assertion to permanently reinvest the earnings of its India subsidiaries is $2.0 million related to the withholding tax in India, net of an assumed foreign tax deduction for this amount in the U.S.
The valuation allowance for deferred tax assets as of December 31, 2022 and 2021 was$88.6 million and $40.2 million, respectively. The change in the valuation allowance from 2021 to 2022 was primarily related to the 401kplans.com, Truelytics, and Redi2 acquisitions, the increased deferred tax assets for R&D expenditures, original issue discount on convertible debt, and additional valuation allowance on state NOLs. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative pre-tax loss incurred over the three years ended December 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth. On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $88.6 million has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence, such as the Company's projections for growth.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The expected income tax provision (benefit) calculated at the statutory federal rate differs from the actual provision as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Tax provision (benefit), at U.S. federal statutory tax rate | | $ | (15,515) | | | $ | 4,402 | | | $ | (1,787) | |
| State income tax provision (benefit), net of federal benefit | | (3,463) | | | 856 | | | (2,461) | |
| Effect of stock-based compensation excess tax benefit | | 717 | | | (364) | | | (9,349) | |
| Effect of limitation on executive compensation | | 2,511 | | | 1,678 | | | 961 | |
| Effect of permanent items | | 869 | | | 661 | | | (703) | |
| Effect of India partnerships | | 1,644 | | | 1,422 | | | 2,977 | |
| Change in valuation allowance | | 26,974 | | | 5,660 | | | 16,210 | |
| Effect of change in state and foreign income tax rates | | (254) | | | (1,184) | | | 1,323 | |
| Uncertain tax positions | | (617) | | | 158 | | | (6,093) | |
| Research and development credits | | (10,993) | | | (5,695) | | | (5,939) | |
| | | | | | |
| Change in India indefinite reinvestment assertion | | 4,372 | | | — | | | — | |
| Other | | 816 | | | 73 | | | (540) | |
| Income tax provision (benefit) | | $ | 7,061 | | | $ | 7,667 | | | $ | (5,401) | |
At December 31, 2022, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $69 million available to offset future federal taxable income, if any, of which $32 million expire through 2036 and $37 million are carried forward indefinitely. In addition, as of December 31, 2022, the Company had NOL carryforwards for state income tax purposes of approximately $221 million available to reduce future income subject to income taxes. The state NOL carryforwards that are subject to expiration expire through 2041. In addition, the Company had R&D credit carryforwards of approximately $38 million for federal and $14 million for California and Illinois, as well as foreign tax credits of $0.9 million available to offset federal income tax. Federal R&D credits began to expire in 2022 will expire through 2041. California R&D credits carryover indefinitely.
A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Balance at beginning of year | | $ | 14,517 | | | $ | 15,132 | | | $ | 18,939 | |
| Additions based on tax positions related to the current year | | 2,522 | | | 1,631 | | | 1,420 | |
| Reductions based on tax positions related to prior years | | (296) | | | (550) | | | (2,793) | |
| | | | | | |
| Reductions for settlements with taxing authorities related to prior years | | — | | | (394) | | | (2,434) | |
| Reductions for lapses of statute of limitations | | (3,131) | | | (1,302) | | | — | |
| Balance at end of year | | $ | 13,612 | | | $ | 14,517 | | | $ | 15,132 | |
At December 31, 2022, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $13.6 million. At this time, the Company estimates that the liability for unrecognized tax benefits will decrease by an estimated $0.3 million in the next twelve months as statutes of limitations expire.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2022 and 2021, income tax expense (benefit) included $0.3 million and $0.6 million, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $2.0 million and $1.9 million as of December 31, 2022 and 2021, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Service (“IRS”) in August 2021 that the calendar year 2018 federal income tax return had been selected for audit by the IRS. The Company’s tax returns for the 2018-2021 calendar years remain open to examination by the IRS in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for the 2017-2021 calendar years remain open to examination by various state revenue services.
The Company's Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2020, 2019, 2018, 2017, 2012, 2011 and 2010. Based on the outcome of examinations of the Company's subsidiaries or the result of the expiration of statutes of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months.
Inflation Reduction Act of 2022
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 ("IRA"), which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. The provisions of the IRA are effective beginning in 2023. The Company is currently evaluating the impacts of this act on the consolidated financial statements.
18.Net Income (Loss) Per Share Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earningsnet income (loss) per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock awards, restricted stock units and Convertible Notes, usingif dilutive.
Prior to January 1, 2021, the
treasury stock method.The Company accountsaccounted for the effect of the Convertible Notes on diluted net income per shareits convertible notes using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’sCompany's option. As a result, the Convertible Notes havedue 2023 and Convertible Notes due 2025 had no effect on diluted net lossincome per share until the Company’s stock price exceedsexceeded the conversion price of $62.88$68.31 per share and $106.74 per share, respectively, and certain other criteria were met, or if the trading price of the Convertible Notes meetsconvertible notes met certain criteria as described in “Note 12 – Debt.” Incriteria. Pursuant to the periodadoption of conversion,ASU 2020-06 on January 1, 2021, the Convertible Notes will have no impactCompany now accounts for the effect of its convertible notes on diluted net income if the Convertible Notes are settled in cash and will have an impact on basic and diluted net income per share ifusing the Convertible if-converted method (See “Note 2—Summary of Significant Accounting Policies” and “Note 10—Debt”).
Envestnet, Inc.
Notes
are settled in shares upon conversion.to Consolidated Financial Statements (continued)
The following table provides
a reconciliation of the numerators and denominators used in computing basic and diluted net income
(loss) per share attributable to
common stockholders:Envestnet, Inc.: | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Basic income (loss) per share calculation: | | | | | | | | | |
Net income (loss) attributable to Envestnet, Inc. | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
| | | | | | | | | |
Basic number of weighted-average shares outstanding | | | 43,732,148 | | | 42,814,222 | | | 36,500,843 |
Basic | | $ | (0.08) | | $ | (1.30) | | $ | 0.12 |
| | | | | | | | | |
Diluted income (loss) per share calculation: | | | | | | | | | |
Net income (loss) attributable to Envestnet, Inc. | | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
| | | | | | | | | |
Basic number of weighted-average shares outstanding | | | 43,732,148 | | | 42,814,222 | | | 36,500,843 |
Effect of dilutive shares: | | | | | | | | | |
Options to purchase common stock | | | — | | | — | | | 1,700,248 |
Unvested restricted stock units | | | — | | | — | | | 185,782 |
Diluted number of weighted-average shares outstanding | | | 43,732,148 | | | 42,814,222 | | | 38,386,873 |
Diluted | | $ | (0.08) | | $ | (1.30) | | $ | 0.12 |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands, except share and per share amounts) |
Net income (loss) attributable to Envestnet, Inc. (a) | | $ | (80,939) | | | $ | 13,296 | | | $ | (3,110) | |
| Interest and gain on settlement of Convertible Notes due 2025, net of interest and tax | | (9,524) | | | — | | | — | |
Net income (loss) attributable to Envestnet, Inc. - Diluted (b) | | $ | (90,463) | | | $ | 13,296 | | | $ | (3,110) | |
| | | | | | |
| Weighted-average common shares outstanding: | | | | | | |
Basic (c) | | 55,199,482 | | | 54,470,975 | | | 53,589,232 | |
| Effect of dilutive shares: | | | | | | |
| Options to purchase common stock | | — | | | 206,022 | | | — | |
| Unvested restricted stock units | | — | | | 633,384 | | | — | |
| Convertible Notes | | 1,642,643 | | | — | | | — | |
| Warrants | | — | | | 73,715 | | | — | |
Diluted (d) | | 56,842,125 | | | 55,384,096 | | | 53,589,232 | |
| | | | | | |
| Net income (loss) per share attributable to Envestnet, Inc common stock: | | | | | | |
Basic (a/c) | | $ | (1.47) | | | $ | 0.24 | | | $ | (0.06) | |
Diluted (b/d) | | $ | (1.59) | | | $ | 0.24 | | | $ | (0.06) | |
Securities that were anti-dilutive and therefore excluded from the computation of diluted
earningsnet income (loss) per share
arewere as follows:
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 | | 2015 |
Options to purchase common stock | | 2,254,565 | | 3,033,194 | | 297,343 |
Unvested restricted stock awards and units | | 1,766,639 | | 1,894,759 | | 210,233 |
Ungranted unvested restricted stock units related to Upside | | — | | — | | 132,384 |
Convertible Notes | | 2,743,321 | | 2,743,321 | | 2,743,321 |
Total | | 6,764,525 | | 7,671,274 | | 3,383,281 |
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 | | 2020 |
| Options to purchase common stock | | 277,535 | | | — | | | 438,040 | |
| Unvested RSU's and PSU's | | 1,941,025 | | | — | | | 1,648,144 | |
Convertible Notes (1) | | 11,470,646 | | | 9,898,549 | | | 9,898,549 | |
| Warrants | | — | | | — | | | 470,000 | |
| Total anti-dilutive securities | | 13,689,206 | | | 9,898,549 | | | 12,454,733 | |
19.Segment Information
Business segments are generally organized around the Company's business services. The Company's business segments are:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an intelligent financial life to their clients.
•Envestnet Data & Analytics – a leading data aggregation, intelligence, and experiences platform that powers data connectivity and business intelligence across digital financial services to enable them to deliver an Intelligent Financial Life to their clients.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
18. Major Customers
One customer accountedThe information in the following tables is derived from the Company’s internal financial reporting used for 10% corporate management purposes. Nonsegment operating expenses may include salary and benefits for certain corporate officers, certain types of professional service expenses and insurance, acquisition related transaction costs, certain restructuring charges and other non-recurring and/or morenon-operationally related expenses. Intersegment revenues were not material for the year ended December 31, 2022 and 2021.
See “Note 14—Revenues and Cost of Revenues” for detail of revenues by segment.
The following table presents a reconciliation from income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| | (in thousands) |
| Envestnet Wealth Solutions | | $ | 55,972 | | | $ | 124,651 | | | $ | 91,501 | |
| Envestnet Data & Analytics | | (20,870) | | | 2,033 | | | (9,943) | |
| Nonsegment operating expenses | | (101,126) | | | (86,143) | | | (62,117) | |
| Income (loss) from operations | | (66,024) | | | 40,541 | | | 19,441 | |
| Interest expense, net of interest income | | (12,659) | | | (16,104) | | | (30,392) | |
| Other income (expense), net | | 264 | | | (4,076) | | | 2,906 | |
| Consolidated income (loss) before income tax benefit | | (78,419) | | | 20,361 | | | (8,045) | |
| Income tax provision (benefit) | | 7,061 | | | 7,667 | | | (5,401) | |
| Consolidated net income (loss) | | (85,480) | | | 12,694 | | | (2,644) | |
| Add: Net (income) loss attributable to non-controlling interest | | 4,541 | | | 602 | | | (466) | |
| Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | (80,939) | | | $ | 13,296 | | | $ | (3,110) | |
A summary of consolidated
revenues:total assets, consolidated depreciation and amortization and consolidated capital expenditures by segment follows: | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Fidelity | | 17 | % | 15 | % | 18 | % |
19.
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Segment assets: | | (in thousands) |
| Envestnet Wealth Solutions | | $ | 1,503,646 | | | $ | 1,720,779 | |
| Envestnet Data & Analytics | | 608,519 | | | 520,403 | |
| Consolidated total assets | | $ | 2,112,165 | | | $ | 2,241,182 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Segment depreciation and amortization: | | (in thousands) |
| Envestnet Wealth Solutions | | $ | 96,658 | | | $ | 90,073 | | | $ | 80,714 | |
| Envestnet Data & Analytics | | 33,890 | | | 27,694 | | | 32,947 | |
| Consolidated depreciation and amortization | | $ | 130,548 | | | $ | 117,767 | | | $ | 113,661 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Segment capital expenditures: | | (in thousands) |
| Envestnet Wealth Solutions | | $ | 79,993 | | | $ | 65,264 | | | $ | 46,891 | |
| Envestnet Data & Analytics | | 25,332 | | | 23,637 | | | 20,105 | |
| Consolidated capital expenditures | | $ | 105,325 | | | $ | 88,901 | | | $ | 66,996 | |
20.Geographical Information
The following table sets forth certain long-lived assets including property and equipment, net and internally developed software, net by geographic area:
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| | (in thousands) |
| United States | | $ | 245,817 | | | $ | 180,680 | |
| India | | 1,093 | | | 2,923 | |
| Other | | 91 | | | 271 | |
| Total long-lived assets, net | | $ | 247,001 | | | $ | 183,874 | |
See “Note 14—Revenues and Cost of Revenues” for detail of revenues by geographic area.
21.Commitments and ContingenciesLeases
The Company rents office space under leases that expire at various dates through 2030.
Future annual minimum lease commitments under operating leases were as follows:
| | | |
Years ending December 31: | | | |
2018 | | $ | 14,104 |
2019 | | | 14,721 |
2020 | | | 14,572 |
2021 | | | 13,986 |
2022 | | | 10,349 |
Thereafter | | | 43,406 |
Total | | $ | 111,138 |
Rent expense for all operating leases totaled:
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Rent expense | $ | 18,084 | | $ | 14,984 | | $ | 8,893 |
Purchase Obligations and Indemnifications
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business. As of December 31,
2017,2022, the Company estimated future minimum unconditional purchase obligations
are $27,425.of approximately $103 million. This amount increased by $65 million compared to the prior year primarily driven by the Company's entry into the outsourcing agreement with TCS.
In connection with certain of our acquisitions, we have entered into arrangements whereby we have agreed to pay performance bonuses up to $20 million based upon the achievement of certain performance targets. As of December 31, 2022, the liabilities associated with these performance bonuses were immaterial.
We have also committed $12.5 million in future funding to certain of our equity method investees.
On April 1, 2022, the Company entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $9.0 million. The Company has paid a $4.0 million advance during the year ended December 31, 2022. This advance is included in other non-current assets in the consolidated balance sheets.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The Company and its subsidiary, Yodlee, Inc. (“Yodlee”), have been named as defendants in a lawsuit filed on July 17, 2019, by FinancialApps, LLC (“FinancialApps”) in the United States District Court for the District of Delaware. The case caption is FinancialApps, LLC v. Envestnet Inc., et al., No. 19-cv-1337 (D. Del.). FinancialApps alleges that, after entering into a 2017 services agreement with Yodlee, Envestnet and Yodlee breached the agreement and misappropriated proprietary information to develop competing credit risk assessment software. The complaint includes claims for, among other things, misappropriation of trade secrets, fraud, tortious interference with prospective business opportunities, unfair competition, copyright infringement and breach of contract. FinancialApps is seeking significant monetary damages and various equitable and injunctive relief.
On September 17, 2019, the Company and Yodlee filed a motion to dismiss certain of the claims in the complaint filed by FinancialApps, including the copyright infringement, unfair competition and fraud claims. On August 25, 2020, the District Court granted in part and denied in part the Company and Yodlee’s motion. Specifically, the Company and Yodlee prevailed on FinancialApps’ counts alleging copyright infringement and violations of the Illinois Deceptive Trade Practices Act. And while the Court was receptive to Envestnet and Yodlee’s argument that several of FinancialApps’ other counts are based on allegations that amount to copyright infringement—and therefore should fail due to copyright preemption—the Court found that FinancialApps had alleged enough conduct distinct from copyright infringement to survive dismissal at this early stage.
On October 30, 2019, the Company and Yodlee filed counterclaims against FinancialApps. Yodlee alleges that FinancialApps fraudulently induced it to enter into contracts with FinancialApps, then breached those contracts. FinancialApps has filed a motion to dismiss Yodlee’s counterclaims. On September 15, 2020, the District Court denied FinancialApps’ motion on all counts except for the breach-of-contract claim which was dismissed on a pleading technicality without prejudice. On that count, the Court granted Yodlee leave to amend its counterclaim, cure the technical deficiency, and reassert its claim. Yodlee and Envestnet filed amended counterclaims on September 30, 2020. The amended counterclaims (1) cure that technical deficiency and reassert Yodlee’s contract counterclaim; and (2) broaden the defamation counterclaims arising out of various defamatory statements FinancialApps disseminated in the trade press after filing the lawsuit. On January 14, 2021, the Court ordered that (i) FinancialApps’s claims against Yodlee—as well as Yodlee’s counterclaims against FinancialApps—must be tried before the judge instead of a jury pursuant to a jury waiver provision in the parties’ agreement; and (ii) FinancialApps’s claims against Envestnet (and Envestnet’s counterclaim) must be heard by a jury. The Court has scheduled the Envestnet jury trial to take place before the Yodlee bench trial. Fact discovery closed on April 23, 2021, other than a few outstanding matters, and expert discovery concluded on September 30, 2022. The parties are currently briefing summary judgment and Daubert motions.
The Company believes FinancialApps’s allegations are without merit and will continue to defend the claims against it and litigate the counterclaims vigorously.
The Company and Yodlee were also named as defendants in a putative class action lawsuit filed on August 25, 2020, by Plaintiff Deborah Wesch in the United States District Court for the Northern District of California. On October 21, 2020, an amended class action complaint was filed by Plaintiff Wesch and nine additional named plaintiffs. The case caption is Deborah Wesch, et al., v. Yodlee, Inc., et al., Case No. 3:20-cv-05991-SK. Plaintiffs allege that Yodlee unlawfully collected their financial transaction data when plaintiffs linked their bank accounts to a mobile application that uses Yodlee’s API, and plaintiffs further allege that Yodlee unlawfully sold the transaction data to third parties. The complaint alleges violations of certain California statutes and common law, including the Unfair Competition Law, and federal statutes, including the Stored Communications Act. Plaintiffs are seeking monetary damages and equitable and injunctive relief on behalf of themselves and a putative nationwide class and California subclass of persons who provided their log-in credentials to a Yodlee-powered app in an allegedly similar manner from 2014 to the present. The Company believes that it is not properly named as a defendant in the lawsuit and it further believes, along with Yodlee, that plaintiffs’ claims are without merit. On November 4, 2020, the Company and Yodlee filed separate motions to dismiss all of the claims in the complaint. On February 16, 2021, the district court granted in part and denied in part Yodlee’s motion to dismiss the amended complaint and granted the plaintiffs leave to further amend. The Court reserved ruling on the Company’s motion to dismiss and granted limited jurisdictional discovery to the plaintiffs. On March 15, 2021, Plaintiffs filed a second amended class action complaint re-alleging, among others, the claims the district court had dismissed. The second amended complaint did not allege any claims against the Company or Yodlee that were not previously alleged in first amended complaint. On May 5, 2021, the Company filed a motion to dismiss all claims asserted against it in the second amended complaint, and Yodlee filed a motion to dismiss most claims asserted against it in the second amended complaint. On July 19, 2021, the Court granted in part Yodlee’s motion, resulting in the dismissal of all federal law
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
claims and two of the state-law claims. On August 5, 2021, the Court granted the Company's motion to dismiss, and dismissed the Company from the lawsuit. On October 8, 2021, Yodlee filed an early motion for summary judgment. On August 12, 2022, Plaintiffs moved for leave to file a third amended complaint, which Yodlee opposed. On September 29, 2022, the Court denied Plaintiffs’ motion to amend the complaint. On December 13, 2022, the Court granted in part and denied in part Yodlee’s early motion for summary judgment, narrowing the scope of issues that remain to be resolved. On January 30, 2023, the Court granted Yodlee’s motion for reconsideration and dismissed one additional claim. Yodlee will continue to vigorously defend the remaining claims against it.
In addition, the Company is involved in legal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case.
Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For
legal proceedingslitigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of December 31,
2017.2022. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on
Envestnet’sthe Company’s results of operations or cash flow in a particular quarter or year.
Contingencies
Certain
22.Subsequent Events
Privately Held Company
On January 31, 2023, the Company entered into a convertible promissory note agreement with a customer of the
Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conductsCompany's business,
in the United States. During 2017 and 2016,a privately held company, whereby the Company
estimated thatwas issued a
salesconvertible promissory note with a principal amount of $20.0 million and
use tax liabilitya stated interest rate of
$8,5228.0% per annum (the “Convertible Promissory Note”). The Convertible Promissory Note has a maturity date of January 31, 2026 and
$10,108, respectively, was probable related to multiple taxing jurisdictions with respect to revenues in the years ended December 31, 2017 and December 31, 2016, and prior years. This amount is
included in accrued expenses and other liabilities on the consolidated balance sheets.For the years ended December 31, 2017 and 2016, the Company also estimated a sales and use tax receivable of $2,704 and $3,879, respectively, related to the estimated recoverability of a portionconvertible into common stock or preferred stock of the liability from customers. This amount is included in prepaid expenses and other current assets on the consolidated balance sheets.
Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.
20. Benefit Plan
The Company sponsors a profit sharing and savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all domestic employees. The Company made voluntary employer matching contributions as follows:
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
Voluntary employer matching contributions | | $ | 4,038 | | $ | 2,270 | | $ | 1,521 | |
21. Segment Information
Business segments are generally organized around our business services. Our business segments are:
| ·
| | Envestnet – provides leading unified wealth management software and services to empower financial advisors and institutions.
|
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
| ·
| | Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.
|
The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes. Nonsegment expenses include salary and benefits for certain corporate officers, certain types of professional service expenses and insurance, acquisition related transaction costs, restructuring charges, and other non-recurring and/or non-operationally related expenses. There are no inter-segment revenues for the year ended December 31, 2017. The accounting policies of the reportable business segments are the same as those described in “Note 2 – Summary of Significant Accounting Policies.”
The following table presents revenue by segment:
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Revenue: | | | | | | | | | |
Envestnet | | | | | | | | | |
Assets under management or administration | | $ | 410,016 | | $ | 352,498 | | $ | 333,684 |
Subscription and licensing | | | 106,048 | | | 84,340 | | | 63,719 |
Professional services and other | | | 11,841 | | | 10,794 | | | 9,435 |
Total Envestnet segment revenues | | | 527,905 | | | 447,632 | | | 406,838 |
Envestnet | Yodlee | | | | | | | | | |
Subscription and licensing | | | 139,819 | | | 113,785 | | | 11,561 |
Professional services and other | | | 15,955 | | | 16,747 | | | 2,520 |
Total Envestnet | Yodlee segment revenues | | | 155,774 | | | 130,532 | | | 14,081 |
Consolidated revenue | | $ | 683,679 | | $ | 578,164 | | $ | 420,919 |
| | | | | | | | | |
Fidelity revenue as a percentage of Envestnet segment revenue: | | | 22% | | | 19% | | | 18% |
No single customer revenue amounts for Envestnet | Yodlee exceeded 10% of the segment revenue total.
The following table presents a reconciliation from income from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Envestnet | $ | 75,449 | | $ | 41,678 | | $ | 43,278 |
Envestnet | Yodlee | | (19,456) | | | (38,547) | | | (2,984) |
Total segment income from operations | | 55,993 | | | 3,131 | | | 40,294 |
Nonsegment operating expenses | | (39,573) | | | (26,575) | | | (21,302) |
Interest expense, net | | (16,146) | | | (16,563) | | | (9,933) |
Other expense, net | | (1,963) | | | (483) | | | (71) |
Consolidated income (loss) before income tax provision | | (1,689) | | | (40,490) | | | 8,988 |
Income tax provision | | 1,591 | | | 15,077 | | | 4,552 |
Consolidated net income (loss) | | (3,280) | | | (55,567) | | | 4,436 |
Add: Net income (loss) attributable to non-controlling interest | | — | | | — | | | — |
Consolidated net income (loss) attributable to Envestnet, Inc. | $ | (3,280) | | $ | (55,567) | | $ | 4,436 |
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Segment assets primarily consist of cash, accounts receivable, prepaid expenses and other current assets, property and equipment, net, internally developed software, goodwill, intangible assets, net, deferred tax assets and other non-current assets.
A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures by segment follows:
| | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
Segment assets: | | | | | | |
Envestnet | | $ | 353,048 | | $ | 341,602 |
Envestnet | Yodlee | | | 509,004 | | | 530,799 |
Consolidated total assets | | $ | 862,052 | | $ | 872,401 |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Segment depreciation and amortization: | | | | | | | | | |
Envestnet | | $ | 26,223 | | $ | 24,784 | | $ | 23,369 |
Envestnet | Yodlee | | | 36,597 | | | 39,215 | | | 4,593 |
Consolidated depreciation and amortization | | $ | 62,820 | | $ | 63,999 | | $ | 27,962 |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Segment capital expenditures: | | | | | | | | | |
Envestnet | | $ | 22,434 | | $ | 17,120 | | $ | 13,682 |
Envestnet | Yodlee | | | 5,135 | | | 5,456 | | | 1,034 |
Consolidated capital expenditures | | $ | 27,569 | | $ | 22,576 | | $ | 14,716 |
22. Geographical Information
Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area:
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 617,835 | | $ | 519,998 | | $ | 388,098 |
International (1) | | 65,844 | | | 58,166 | | | 32,821 |
Total | $ | 683,679 | | $ | 578,164 | | $ | 420,919 |
| (1)
| | No foreign country accounted for more than 10% of total revenue.
|
The following table sets forth property, plant, and equipment, net by geographic area:
| | | | | |
| At December 31, |
| 2017 | | 2016 |
United States | $ | 30,647 | | $ | 28,713 |
India | | 4,907 | | | 3,596 |
Other | | 355 | | | 691 |
Total | $ | 35,909 | | $ | 33,000 |
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
23. Net Capital Requirements
Portfolio Brokerage Services, Inc. (“PBS”) is a broker-dealer subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital (“net capital ratio”), both as defined, shall not exceed 15 to 1. SEC Rule 15c3-1 also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At December 31, 2017, the Company had net capital of $1,238, which was $1,138 in excess of its required net capital of $100. At December 31, 2017, the Company’s net capital ratio was .05 to 1.
Additionally, PBS is subject to net capital requirements of certain self-regulatory organizations and at December 31, 2017, PBS was in compliance with such requirements.
24. Subsequent Events
FolioDynamix
On January 2, 2018, pursuant to an agreement and plan of merger (the “Merger Agreement”), dated as of September 25, 2017, between the Company, Folio Dynamics Holdings, Inc., a Delaware corporation (“FolioDynamix”), FCD Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Actua USA Corporation, a Delaware corporation, solely in its capacity as the representative of the stockholders of FolioDynamix, the Company completed the merger of Merger Sub with and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) and a wholly owned subsidiary of the Company. The completion of the Acquisition on January 2, 2018 followed the receipt of all necessary regulatory approvals and third party consents.
In connection with the Acquisition,Convertible Promissory Note, the Company paid $195,000 in cash for allconcurrently entered into a call option agreement with the outstanding shares of FolioDynamix, subject to certain closing and post-closing adjustments. The Company funded the Acquisition price with a combination of cash on the Company’s balance sheet and with borrowings under its revolving credit facility.
FolioDynamixprivately held company, which provides financial institutions, registered investment advisors, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services.
The acquisition of FolioDynamix added complementary trading tools as well as commission and brokerage support to the Company’s existing suite of offerings. The acquisition also added one RIA. The Company expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management business, enabling the Company an option to further leverage its operating scale and data analytics capabilities.
Due toacquire the lackprivately held company at a predetermined price upon satisfaction of availability of sufficient information, the disclosures in relation to ASC 805 are currently not able to be included.
certain financial metrics.
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
25. Quarterly Financial Data (Unaudited)
Quarterly results for the years ended December 31, 2017 and 2016 were as follows:
| | | | | | | | | | | | | |
| | 2017 | |
| | First | | Second | | Third | | Fourth | |
Total revenues | | $ | 157,786 | | $ | 167,417 | | $ | 175,614 | | $ | 182,862 | |
Income (loss) from operations | | | (3,354) | | | 2,743 | | | 4,348 | | | 12,683 | |
Net income (loss) attributable to Envestnet, Inc. | | | (13,135) | | | (6,470) | | | (1,320) | | | 17,645 | |
Net income (loss) per share | | | | | | | | | | | | | |
Basic (1) | | | (0.30) | | | (0.15) | | | (0.03) | | | 0.40 | |
Diluted (1) (2) | | | (0.30) | | | (0.15) | | | (0.03) | | | 0.38 | |
| | | | | | | | | | | | | |
| | 2016 | |
| | First | | Second | | Third | | Fourth | |
Total revenues | | $ | 131,821 | | $ | 141,708 | | $ | 149,155 | | $ | 155,480 | |
Loss from operations | | | (12,760) | | | (6,330) | | | (1,291) | | | (3,063) | |
Net loss attributable to Envestnet, Inc. | | | (10,993) | | | (7,943) | | | (4,057) | | | (32,574) | |
Net loss per share | | | | | | | | | | | | | |
Basic (1) | | | (0.26) | | | (0.19) | | | (0.09) | | | (0.75) | |
Diluted (1) | | | (0.26) | | | (0.19) | | | (0.09) | | | (0.75) | |
| (1)
| | Quarterly values may not sum to annual values due to rounding.
|
| (2)
| | Quarterly values may not sum to annual values due to differences in quarterly dilution compared to year to date dilution.
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2017.2022. The term “disclosure controls and procedures,” as defined in Rules
13a 15(e)13a-15(e) and
15d 15(e)15d-15(e) under the Exchange Act,
meansare defined as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Based on this evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31,
2017,2022, our disclosure controls and procedures were effective.
b. Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with
U.S.accounting principles generally accepted
accounting principlesin the United States and include policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with
U.S.accounting principles generally accepted
accounting principles,in the United States, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31,
20172022 using the criteria established in the updated Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31,
2017.2022.
Our independent registered public accounting firm, KPMG LLP, has issued a report concerning the effectiveness of our internal control over financial reporting as of December 31,
2017.2022. See
Part II, Item 8, “Report of Independent Registered Public Accounting Firm”
in Item 9A in this Form 10-K..
c. Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2017, improvements to the processes of financial reporting were implemented which include enhanced disclosure preparation and review controls, a condensed financial close process providing an increased time frame to prepare and review financial reporting documents, as well as streamlined financial data aggregation which increases reliance on system generated reports, thereby decreasing the likelihood of human error. In addition, management has reorganized the accounting department as well as increased its overall staffing levels.
During the three months ended December 31, 2017, the material weakness related to ineffective design and operation of internal controls over the accounting for non-routine transactions and the relevance and reliability of data used to prepare financial statement
Table of Contents
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
disclosures and the material weakness related to ineffective design and operation of internal controls related to our state and local tax compliance process were remediated and the impacted controls were effective at December 31, 2017.
The remedial actions that management undertook in the three months ended December 31, 2017 to address these material weaknesses included the following:
| ·
| | Implemented enhanced accounting processes and added internal control procedures over the preparation and review of quarterly and annual financial reporting disclosures; and
|
| ·
| | Added internal control procedures over the identification of the necessary data to comply with all required non-income tax obligations.
|
Except for the remediation of the material weaknesses noted above, thereThere were no changes to our internal control over financial reporting during the three months ended December 31, 20172022, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
129
Item 9B. Other InformationNone.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this
item relating to our directors and nominees, regarding compliance with Section 16(a) of the Securities Act of 1934, and regarding our Audit Committee isItem will be included
under the captions “Board of Directors,” “Board Meetings and Committees—Audit Committee” (including information with respect to audit committee financial experts), “Stock Ownership of Management,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement,
related towhich will be filed within 120 days after the
Annual Meetingclose of
Stockholders to be held May 10, 2018,the 2022 fiscal year, and is
hereby incorporated
herein by reference.
The information
Information required by this
itemItem relating to our executive officers and other corporate officers is included under the caption
“Executive Officers of the Registrant”“Information about our Executive Officers” in Part I, Item 1 of this report.
We have adopted a code of ethics that applies to all of our employees, including our principal executive officer,
and our principal financial officer and our principal accounting officer. This code of ethics is posted on our
Website. The Internet address for our Website is www.envestnet.com, andwebsite within the
code of ethics may be found from our main Web page by clicking first on “Investor Relations”
and then “Corporate Governance,” and then on “Code of Conduct.”section. We intend to disclose any amendment to, or waiver from, a provision of this code of ethics by posting such information to our Website, atwebsite. Information found on our website is not part of this Annual Report or any other report filed with the address and location specified above.
SEC.
Item 11. Executive Compensation
Information regarding executive compensation is under the captions “Board Meetings and Committees—Director Compensation,” “Board Meetings and Committees—Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report on Compensation Discussion and Analysis,” and “Executive Compensation”
The information required by this Item will be included in our Proxy Statement,
forwhich will be filed within 120 days after the
Annual Meetingclose of
Stockholders to be held May 10, 2018,the 2022 fiscal year, and is
hereby incorporated
herein by
reference, except the section captioned “Compensation Committee Report on Compensation Discussion and Analysis” is hereby “furnished” and not “filed” with this annual report on Form 10‑K.reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and related stockholder matters is under the tables captioned “Stock Ownership of Management,” “Persons Owning More Than Five Percent of Envestnet, Inc. Stock,” and
The information required by this Item will be included in our Proxy Statement,
forwhich will be filed within 120 days after the
Annual Meetingclose of
Stockholders to be held May 10, 2018,the 2022 fiscal year, and is
hereby incorporated
herein by reference. For a description of securities authorized under our equity compensation plans,
see “Note 15 – Stockholders’ Equity”please refer to
the consolidated financial statements in Part II, Item 8.our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information
set forth under “Board Meetings and Committees—Related Person Transaction Policies and Procedures,” “Board of Directors” and “Audit Committee Report to Stockholders”required by this Item will be included in our Proxy Statement,
forwhich will be filed within 120 days after the
Annual Meetingclose of the
Stockholders to be held May 10, 2018, is incorporated herein by reference except the section captioned “Audit Committee Report”2022 fiscal year, and is hereby
“furnished” and not “filed” with this annual report on Form 10‑K.incorporated by reference.
Item 14. Principal
AccountantAccounting Fees and Services
Information regarding principal accountant fees and services is under the captions “Audit Committee Report to Stockholders—Audit Committee’s Policy on Pre‑Approval of Services Provided
The information required by
Independent Registered Public Accounting Firm” and “Audit Committee Report to Stockholders—Fees Paid to Independent Registered Public Accounting Firm”this Item will be included in our Proxy Statement,
forwhich will be filed within 120 days after the
Annual Meetingclose of
Stockholders to be held May 10, 2018,the 2022 fiscal year, and is
hereby incorporated
herein by reference.
Item 15. Exhibits, and Financial Statement Schedules
| | | | | | | | | | | |
| | | | Page Number in
10‑K 10-K |
(a)(1) | | Consolidated Financial Statements | | |
| | | (KPMG LLP, Denver, CO, Auditor Firm ID: 185) | 78 |
| | | 2021 | 80 |
| | | 2020 | 81 |
| | | 2020 | 82 |
| | | 2020 | 83 |
| | | 2020 | 84 |
| | | | 85 |
(a)(2) | | Evaluation and Qualifying Accounts | | |
| | Financial statements and schedules are omitted for the reason that they are not applicable, are not required, or the information is included in the financial statements or the related footnotes. notes. | | |
(b) | | Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to the Exhibits on pages 133122 to 136125 of this report, which is incorporated herein by reference. | | |
Item 16. Form 10-K Summary
| | | | | | | | |
Exhibit No. | | Description |
| 3.1 | | |
| 3.2 | | |
4.1 | | Registration Rights AgreementIndenture, dated as of March 22, 2004August 20, 2020, by and among Envestnet, Inc., Envestnet Asset Management, Inc., and U.S. Bank National Association, as trustee (filed as Exhibit 4.24.1 to the Company’s Registration Statement on Form S‑1, as amended (File No. 333‑165717),8-K filed with the SEC on March 26, 2010August 20, 2020 and incorporated by reference herein). |
| 4.2 | First Amendment to Registration Rights Agreement dated as of August 30, 2004 (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S‑1, as amended (File No. 333‑165717), filed with the SEC on March 26, 2010 and incorporated by reference herein).
|
4.3 | Second Amendment to Registration Rights Agreement effective as of March 24, 2005 (filed as Exhibit 4.4 to the Company’s Registration Statement on Form S‑1, as amended (File No. 333‑165717), filed with the SEC on March 26, 2010 and incorporated by reference herein).
|
4.4 | Joinder Agreements to Registration Rights Agreement (filed as Exhibit 4.5 to the Company’s Registration Statement on Form S‑1, as amended (File No. 333‑165717), filed with the SEC on March 26, 2010 and incorporated by reference herein).
|
4.5 | Indenture, dated as of December 15, 2014,May 25, 2018, by and betweenamong the Company, Envestnet Asset Management, Inc. and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to the Company’s Form 8‑K filed with the SEC on December 15, 2014May 25, 2018 and incorporated by reference herein). |
4.64.3 | | First Supplemental Indenture, dated as of December 15, 2014,November 17, 2022, by and betweenamong the Company, Envestnet, Inc., Envestnet Asset Management, Inc., and U.S. Bank National Association, as trustee (filed as Exhibit 4.24.1 to the Company’s Form 8‑K filed with the SEC on November 17, 2022 and incorporated by reference herein). |
| 4.4 | | |
10.14.5 | | |
| 4.6 | | |
| 10.1 | | |
| 10.2 | | |
| 10.3 | | |
| 10.4 | | |
| 10.5 | | |
| 10.6 | | |
| 10.7 | | |
10.1010.8 | | |
| | | | | | | | |
| Exhibit No. | | Description |
| 10.11 | | |
| 10.12 | | |
| 10.13 | | |
| 10.14 | | |
10.1410.15 | | |
10.1510.16 | | |
10.1610.17 | Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S‑8 (filed with the SEC on May 1, 2012 and incorporated by reference herein).*
|
10.17 | First Amendment to Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (filed as Exhibit 10.1 to the Company’s Form 8‑K filed with the SEC on April 17, 2013 and incorporated by reference herein).*
|
10.18 | Second Amendment to Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (filed as Exhibit 10.1 to the Company’s Form 8‑K filed with the SEC on May 13, 2013 and incorporated by reference herein).*
|
10.19 | Envestnet, Inc. Executive Deferred Compensation Plan (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on February 10, 2015 and incorporated by reference herein).* |
10.2010.18 | | |
10.2110.19 | 2010 Long-Term Incentive Plan, as amended (filed as Exhibit A to the Company’s 2015 Annual Meeting Proxy Statement (File No. 1-34835), filed with the SEC on April 13, 2015 and incorporated by reference herein).*
|
10.22 | Envestnet, Inc. 2015 Acquisition Equity Award Plan (filed as Exhibit 4.3 to the Company’s Form S-8 filed with the SEC on November 19, 2015 and incorporated by reference herein).*
|
10.23 | Employment Agreement, dated as of January 27, 2016 between the Company and Anil Arora (filed as Exhibit 10.8 to the Company’s Form 10-Q filed with the SEC on August 13, 2016 and incorporated by reference herein.) *
|
10.24 | Executive Agreement, dated as of May 12, 2016 between Judson Bergman, the Company and Envestnet Asset Management, Inc. (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on May 13, 2016 and incorporated by reference herein.) *
|
10.25 | Executive Agreement, dated as of May 12, 2016 between William Crager, the Company and Envestnet Asset Management, Inc. (filed as Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on May13,May 13, 2016 and incorporated by reference herein.)herein).* |
10.2610.20 | | |
10.2710.21 | | |
| 10.22 | | |
10.2810.23 | | |
| |
Exhibit No.
10.24 | Description
|
10.29 | Full Value Award Grant CertificateSeverance Agreement and TermsGeneral Release, dated as of October 29, 2020 between Scott Grinis and Conditions for Anil Arora, dated December 12, 2015Envestnet Financial Technologies, Inc. (filed as Exhibit 10.10 to the Company’s Form 10-Q filed with the SEC on August 13, 2016 and incorporated by reference herein.) *
|
10.30 | Nonqualified Stock Option Grant Certificate and Terms and Conditions for Judson Bergman, dated May 12, 2016 (filed as Exhibit 10.710.1 to the Company’s Form 8-K filed with the SEC on May 13, 2016October 30, 2020 and incorporated by reference herein.)herein).*
|
10.3110.25 | | |
10.3210.26 | | |
10.3310.27 | | |
10.3410.28 | | |
| | | | | | | | |
10.35Exhibit No. | | Description |
| 10.29 | | |
| 10.30 | | |
10.3610.31 | | |
10.3710.32 | | ConsentFirst Amendment to Second Amended and Restated Credit Agreement, dated as of Cerulli Associates,May 24, 2018, among Envestnet, Inc., the Guarantors from time to time party thereto, the Lenders from time to time party thereto, and Bank of Montreal, as Administrative Agent (filed as Exhibit 10.1 to the Company’s Form 8-K filed herewith.with the SEC on May 31, 2018 and incorporated by reference herein). |
12.110.33 | | ComputationSecond Amendment to Second Amended and Restated Credit Agreement, dated as of RatioSeptember 27, 2019, among Envestnet, Inc., the Guarantors from time to time party thereto, the Lenders from time to time party thereto, and Bank of EarningsMontreal as Administrative Agent (filed as Exhibit 10.1 to Fixed Charges,the Company's Form 10-Q for the period ended September 30, 2019 filed herewith.with the SEC on November 8, 2019 and incorporated by reference herein).*** |
21.110.34 | | | |
| 10.35 | | | |
| 10.36 | | | |
| 10.37 | | | |
| 10.38 | | | |
| 10.39 | | | |
| 10.40 | | |
| 10.41 | | | |
| 10.42 | | | |
| 10.43 | | | |
| 21.1 | | | |
| 23.1 | | | |
| 31.1 | | | |
| 31.2 | | | |
| | | | | | | | |
32.1(1)
Exhibit No. | | Description |
32.1(1) | | |
32.2(1)
32.2(1) | | |
101.INS | | XBRL Instance Document***Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH 101.CAL
101.LAB
101.PRE
101.DEF
| | Inline XBRL Taxonomy Extension Schema Document*** * |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document*** * |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document*** * |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document*** * |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document**** |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
__________________________________________________________ | | | | | |
(1) | | The material contained in Exhibit 32.1 and 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference. |
* | Management contract or compensation plan. |
