3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



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

For the quarterly period ended September 30, 2017

March 31, 2020

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

For the transition period from __________ to __________
Commission file number 001-34835


Envestnet, Inc.

(Exact name of registrant as specified in its charter)


Delaware

20-1409613

Delaware20-1409613
(State or other jurisdiction of
incorporation or organization)

(I.R.S Employer
Identification No.)

35 East Wacker Drive, Suite 2400 Chicago, IL

Chicago,

Illinois

60601

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(312)

(312) 827-2800



Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of exchange on which registered
Common Stock, par value $0.005 per shareENVNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 

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

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

Large accelerated filer ☒

ý

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

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

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

As of November 5, 2017, 44,305,791May 1, 2020, Envestnet, Inc. had 53,513,623 shares of the common stock with a par value of $0.005 per share were outstanding.






TABLE OF CONTENTS


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2






Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,704

 

$

52,592

Fees and other receivables, net

 

 

49,726

 

 

44,268

Prepaid expenses and other current assets

 

 

23,999

 

 

16,224

Total current assets

 

 

122,429

 

 

113,084

 

 

 

 

 

 

 

Property and equipment, net

 

 

35,274

 

 

33,000

Internally developed software, net

 

 

20,279

 

 

14,860

Intangible assets, net

 

 

233,525

 

 

265,558

Goodwill

 

 

432,746

 

 

431,936

Other non-current assets

 

 

17,969

 

 

13,963

Total assets

 

$

862,222

 

$

872,401

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

102,877

 

$

87,763

Accounts payable

 

 

13,215

 

 

11,480

Current portion of debt

 

 

 —

 

 

37,926

Contingent consideration

 

 

2,055

 

 

2,286

Deferred revenue

 

 

18,388

 

 

16,499

Total current liabilities

 

 

136,535

 

 

155,954

 

 

 

 

 

 

 

Convertible Notes

 

 

157,353

 

 

152,575

Revolving credit facility

 

 

101,168

 

 

 —

Term Notes

 

 

 —

 

 

100,409

Contingent consideration

 

 

641

 

 

2,582

Deferred revenue

 

 

14,454

 

 

15,643

Deferred rent and lease incentive

 

 

14,867

 

 

12,060

Deferred tax liabilities, net

 

 

12,216

 

 

5,555

Other non-current liabilities

 

 

14,527

 

 

13,436

Total liabilities

 

 

451,761

 

 

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; 56,918,043 and 55,642,686 shares issued as of September 30, 2017 and December 31, 2016, respectively; 44,213,751 and 43,240,567 shares outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

284

 

 

278

Additional paid-in capital

 

 

544,895

 

 

516,675

Accumulated deficit

 

 

(91,499)

 

 

(70,574)

Treasury stock at cost, 12,704,292 and 12,402,119 shares as of September 30, 2017 and December 31, 2016, respectively

 

 

(44,687)

 

 

(33,068)

Accumulated other comprehensive income (loss)

 

 

170

 

 

(422)

Total stockholders’ equity

 

 

409,163

 

 

412,889

Non-controlling interest

 

 

398

 

 

398

Total equity

 

 

409,561

 

 

413,287

Total liabilities and equity

 

$

862,222

 

$

872,401

  March 31, December 31,
  2020 2019
Assets    
Current assets:    
Cash and cash equivalents $68,601
 $82,505
Fees receivable, net 81,133
 67,815
Prepaid expenses and other current assets 37,699
 32,183
Total current assets 187,433

182,503
     
Property and equipment, net 53,190
 53,756
Internally developed software, net 68,227
 60,263
Intangible assets, net 489,840
 505,589
Goodwill 906,501
 879,850
Operating lease right-of-use assets, net 78,860
 82,796
Other non-current assets 46,407
 37,127
Total assets $1,830,458

$1,801,884
     
Liabilities and Equity    
Current liabilities:    
Accrued expenses and other liabilities $132,142
 $137,944
Accounts payable 14,294
 17,277
Operating lease liabilities 13,736
 13,816
Contingent consideration 2,569
 
Deferred revenue 40,177
 34,753
Total current liabilities 202,918

203,790
     
Convertible Notes due 2023 308,262
 305,513
Revolving credit facility 290,000
 260,000
Contingent consideration 12,222
 9,045
Deferred revenue 6,277
 5,754
Non-current operating lease liabilities 84,935
 88,365
Deferred tax liabilities, net 26,680
 29,481
Other non-current liabilities 34,967
 32,360
Total liabilities 966,261
 934,308
     
Commitments and contingencies 


 


     
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; 67,077,561 and 66,320,706 shares issued as of March 31, 2020 and December 31, 2019, respectively; 53,468,397 and 52,841,706 shares outstanding as of March 31, 2020 and December 31, 2019, respectively 335
 331
Additional paid-in capital 1,054,312
 1,037,141
Accumulated deficit (84,141) (75,664)
Treasury stock at cost, 13,609,164 and 13,479,000 shares as of March 31, 2020 and December 31, 2019, respectively (100,164) (90,965)
Accumulated other comprehensive loss (4,773) (1,749)
Total stockholders’ equity 865,569
 869,094
Non-controlling interest (1,372) (1,518)
Total equity 864,197
 867,576
Total liabilities and equity $1,830,458

$1,801,884
See accompanying notes to unaudited Condensed Consolidated Financial Statements.

3




Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

106,147

 

$

90,042

 

$

299,268

 

$

258,969

Subscription and licensing

 

 

62,963

 

 

51,959

 

 

180,675

 

 

142,303

Professional services and other

 

 

6,504

 

 

7,154

 

 

20,874

 

 

21,412

Total revenues

 

 

175,614

 

 

149,155

 

 

500,817

 

 

422,684

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

56,070

 

 

47,259

 

 

161,031

 

 

132,319

Compensation and benefits

 

 

68,551

 

 

60,345

 

 

199,079

 

 

180,625

General and administration

 

 

31,153

 

 

26,150

 

 

90,178

 

 

80,249

Depreciation and amortization

 

 

15,492

 

 

16,692

 

 

46,792

 

 

49,872

Total operating expenses

 

 

171,266

 

 

150,446

 

 

497,080

 

 

443,065

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

4,348

 

 

(1,291)

 

 

3,737

 

 

(20,381)

Other expense, net

 

 

(3,986)

 

 

(4,434)

 

 

(13,838)

 

 

(13,214)

Income (loss) before income tax provision (benefit)

 

 

362

 

 

(5,725)

 

 

(10,101)

 

 

(33,595)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

1,682

 

 

(1,668)

 

 

10,824

 

 

(10,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,320)

 

 

(4,057)

 

 

(20,925)

 

 

(22,993)

Add: Net loss attributable to non-controlling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to Envestnet, Inc.

 

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

(0.09)

 

$

(0.48)

 

$

(0.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.03)

 

$

(0.09)

 

$

(0.48)

 

$

(0.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383


  Three Months Ended
  March 31,
  2020 2019
Revenues:    
Asset-based $134,811
 $108,934
Subscription-based 104,551
 83,087
Total recurring revenues
239,362

192,021
Professional services and other revenues 7,177
 7,645
Total revenues 246,539

199,666
     
Operating expenses:    
Cost of revenues 74,933
 61,645
Compensation and benefits 110,430
 86,717
General and administration 41,110
 40,524
Depreciation and amortization 27,683
 19,517
Total operating expenses
254,156

208,403
     
Loss from operations (7,617) (8,737)
Other expense, net (1,537)
(5,763)
Loss before income tax provision (benefit)
(9,154)
(14,500)
     
Income tax provision (benefit) (1,964) 3,768
     
Net loss (7,190)
(18,268)
Add: Net (income) loss attributable to non-controlling interest (146) 83
Net loss attributable to Envestnet, Inc.
$(7,336)
$(18,185)
     
Net loss per share attributable to Envestnet, Inc.:    
Basic $(0.14) $(0.38)
Diluted $(0.14) $(0.38)
     
Weighted average common shares outstanding:    
Basic 53,016,511
 48,237,265
Diluted 53,016,511
 48,237,265

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4




Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

    

2016

 

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(217)

 

 

192

 

 

592

 

 

(122)

Gains on foreign currency contracts designated as cash flow hedges reclassified to earnings

 

 

 —

 

 

(556)

 

 

 —

 

 

(204)

Total other comprehensive income (loss), net of taxes

 

 

(217)

 

 

(364)

 

 

592

 

 

(326)

Comprehensive loss, net of taxes

 

$

(1,537)

 

$

(4,421)

 

$

(20,333)

 

$

(23,319)

  Three Months Ended
  March 31,
  2020 2019
Net loss attributable to Envestnet, Inc. $(7,336) $(18,185)
Other comprehensive loss, net of taxes:    
Foreign currency translation gains (losses), net
 (3,024) 222
Comprehensive loss attributable to Envestnet, Inc.
$(10,360)
$(17,963)

See accompanying notes to unaudited Condensed Consolidated Financial Statements.


5




Envestnet, Inc.

Condensed Consolidated StatementStatements of Stockholders' Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Other

 

 

 

 

Non-

 

 

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Total

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Interest

    

Equity

Balance, December 31, 2016

 

55,642,686

 

$

278

 

(12,402,119)

 

$

(33,068)

 

$

516,675

 

$

(422)

 

$

(70,574)

 

$

398

 

$

413,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

428,173

 

 

 2

 

 —

 

 

 —

 

 

4,466

 

 

 —

 

 

 —

 

 

 —

 

 

4,468

Issuance of common stock - vesting of restricted stock units

 

847,184

 

 

 4

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 4

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

23,754

 

 

 —

 

 

 —

 

 

 —

 

 

23,754

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(302,173)

 

 

(11,619)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,619)

Foreign currency translation gain

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

592

 

 

 —

 

 

 —

 

 

592

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,925)

 

 

 —

 

 

(20,925)

Balance, September 30, 2017

 

56,918,043

 

$

284

 

(12,704,292)

 

$

(44,687)

 

$

544,895

 

$

170

 

$

(91,499)

 

$

398

 

$

409,561

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

(unaudited)

6


            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, 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 
 
 
 
 
 
 (1,141) 
 $(1,141)
Exercise of stock options 357,974
 2
 
 
 3,406
 
 
 
 3,408
Issuance of common stock - vesting of restricted stock units 398,881
 2
 
 
 
 
 
 
 2
Stock-based compensation expense 
 
 
 
 13,765
 
 
 
 13,765
Purchase of treasury stock for stock-based tax withholdings 
 
 (130,164) (9,199) 
 
 
 
 (9,199)
Foreign currency translation loss 
 
 
 
 
 (3,024) 
 
 (3,024)
Net income (loss) 
 
 
 
 
 
 (7,336) 146
 (7,190)
Balance, March 31, 2020 67,077,561
 $335
 (13,609,164) $(100,164) $1,054,312
 $(4,773) $(84,141) $(1,372) $864,197

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

    

2017

    

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(20,925)

 

$

(22,993)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

46,792

 

 

49,872

Deferred rent and lease incentive amortization

 

 

709

 

 

(324)

Provision for doubtful accounts

 

 

828

 

 

369

Deferred income taxes

 

 

6,646

 

 

(10,273)

Stock-based compensation expense

 

 

23,451

 

 

25,872

Non-cash interest expense

 

 

8,711

 

 

6,955

Accretion on contingent consideration and purchase liability

 

 

408

 

 

143

Fair market value adjustment on contingent consideration

 

 

 —

 

 

838

Loss on disposal of fixed assets

 

 

69

 

 

220

Loss allocation from equity method investment

 

 

984

 

 

1,130

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees and other receivables

 

 

(6,286)

 

 

4,077

Prepaid expenses and other current assets

 

 

(5,316)

 

 

(4,960)

Other non-current assets

 

 

(1,784)

 

 

(4,271)

Accrued expenses and other liabilities

 

 

13,289

 

 

275

Accounts payable

 

 

1,435

 

 

124

Deferred revenue

 

 

740

 

 

1,959

Other non-current liabilities

 

 

1,852

 

 

4,337

Net cash provided by operating activities

 

 

71,603

 

 

53,350

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(11,432)

 

 

(10,839)

Capitalization of internally developed software

 

 

(9,210)

 

 

(6,217)

Investment in private company

 

 

(1,450)

 

 

(738)

Purchase of ERS units

 

 

 —

 

 

(1,500)

Acquisition of businesses, net of cash acquired

 

 

 —

 

 

(18,394)

Net cash used in investing activities

 

 

(22,092)

 

 

(37,688)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Payment of Term Notes

 

 

(35,862)

 

 

(6,000)

Proceeds from borrowings on revolving credit facility

 

 

35,000

 

 

25,000

Payments on revolving credit facility

 

 

(42,500)

 

 

(25,000)

Debt issuance costs

 

 

(94)

 

 

 —

Payments of contingent consideration

 

 

(2,286)

 

 

(2,924)

Payments of definite consideration

 

 

(445)

 

 

 —

Payments of purchase consideration liabilities

 

 

(235)

 

 

 —

Proceeds from exercise of stock options

 

 

4,468

 

 

3,166

Purchase of treasury stock for stock-based tax withholdings

 

 

(11,619)

 

 

(9,517)

Common stock acquired under the share repurchase program

 

 

 —

 

 

(1,448)

Issuance of restricted stock units

 

 

 4

 

 

 5

Net cash used in financing activities

 

 

(53,569)

 

 

(16,718)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

170

 

 

 —

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(3,888)

 

 

(1,056)

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

52,592

 

 

51,718

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

48,704

 

$

50,662

 

 

 

 

 

 

 

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

 

$

1,449

 

$

(175)

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

 

 

4,887

 

 

5,390

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

 

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

 

2,098

 

 

1,522

Non-cash debt issuance costs

 

 

2,230

 

 

 —

Purchase liabilities included in accrued expenses and other liabilities

 

 

837

 

 

 —

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

 

 

505

 

 

 —

Contingent consideration issued in a business acquisition

 

 

 —

 

 

1,929

Balance, December 31, 2018 61,238,898
 $306
 (13,117,098) $(67,858) $761,128
 $(994) $(58,882) $(1,098) $632,602
Exercise of stock options 200,326
 1
 
 
 3,162
 
 
 
 3,163
Issuance of common stock - vesting of restricted stock units 479,479
 2
 
 
 
 
 
 
 2
Acquisition of business 15,755
 
 
 
 772
 
 
 
 772
Stock-based compensation expense 
 
 
 
 12,864
 
 
 
 12,864
Purchase of treasury stock for stock-based tax withholdings 
 
 (160,456) (9,819) 
 
 
 
 (9,819)
Foreign currency translation gain 
 
 
 
 
 222
 
 
 222
Net loss 
 
 
 
 
 
 (18,185) (83) (18,268)
Balance, March 31, 2019 61,934,458
 $309
 (13,277,554) $(77,677) $777,926
 $(772) $(77,067) $(1,181) $621,538

7



See accompanying notes to unaudited Condensed Consolidated Financial Statements.



Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
  Three Months Ended
  March 31,
  2020 2019
OPERATING ACTIVITIES:    
Net loss $(7,190) $(18,268)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 27,683
 19,517
Provision for doubtful accounts 1,026
 451
Deferred income taxes (1,587) 169
Non-cash compensation expense 15,985
 12,864
Non-cash interest expense 4,463
 6,880
Accretion on contingent consideration and purchase liability 599
 240
Gain on acquisition of equity method investment (4,230) 
Loss allocation from equity method investments 2,030
 203
Changes in operating assets and liabilities, net of acquisitions:    
Fees receivable, net (14,333) 1,198
Prepaid expenses and other current assets (6,793) (13,346)
Other non-current assets 641
 (1,060)
Accrued expenses and other liabilities (11,554) (34,495)
Accounts payable (3,205) 5,179
Deferred revenue 5,598
 7,039
Other non-current liabilities (145) 854
Net cash provided by (used in) operating activities 8,988
 (12,575)
     
INVESTING ACTIVITIES:    
Purchases of property and equipment (2,160) (5,247)
Capitalization of internally developed software (11,572) (7,185)
Investments in private companies (11,700) (1,000)
Acquisitions of businesses, net of cash acquired (20,257) (11,061)
Net cash used in investing activities (45,689) (24,493)
     
FINANCING ACTIVITIES:    
Proceeds from borrowings on revolving credit facility 45,000
 
Payments on revolving credit facility (15,000) 
Proceeds from exercise of stock options 3,408
 3,163
Purchase of treasury stock for stock-based tax withholdings (9,199) (9,819)
Issuance of restricted stock units 2
 2
Net cash provided by (used in) financing activities 24,211
 (6,654)
     
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,496) 112
     
DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (13,986)
(43,610)
     
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 82,755
 289,671
     
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) $68,769
 $246,061
     
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes $814
 $4,998
Supplemental disclosure of cash flow information - cash paid during the period for interest 2,740
 216
Supplemental disclosure of non-cash operating, investing and financing activities:    
Contingent consideration issued in acquisition of businesses 5,239
 7,580
Purchase liabilities included in accrued expenses and other liabilities 375
 
Purchase liabilities included in other non-current liabilities 257
 5,468
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities 1,752
 359
Membership interest liabilities included in other non-current liabilities 2,220
 
Common stock issued to settle purchase liability 
 772
Leasehold improvements funded by lease incentive 894
 489

See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

1.Organization and Description of Business



1.Organization and Description of Business

Envestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provide intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients.process. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides aempowers enterprises and advisors to more fully understand their clients and deliver better outcomes.

Envestnet is organized around 2 primary, complementary business segments. Financial information about each business segment is contained in “Note 16—Segment Information” to the condensed consolidated financial network connecting software, services and data, delivering better intelligence and enabling its customers to drive better outcomes.

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

statements.

·

2.

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 17,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics, and digital advice capabilities to customers.

Basis of Presentation

·

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

·

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

·

Envestnet | PMC® or Portfolio Management Consultants (“PMC”) provides research due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include 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 | Yodlee is a leading data aggregation and data intelligence platform.  As a “big data” specialist, Yodlee gathers, refines and aggregates a massive set of end-user permissioned transaction level data, which it then provides to customers as data analytics solutions and market research services.

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

2.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company as of September 30, 2017March 31, 2020 and for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 20162019 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of September 30, 2017March 31, 2020 and the results of operations, equity, comprehensive loss and cash flows for the periods presented herein. The unaudited condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries.the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet Wealth Solutions segment that are denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet | YodleeData & Analytics segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a foreignfunctional currency functional currencyother than the U.S. dollar are translated at

8


Table of Contents

exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates. Differences arising from these foreign currency translations are recorded in the unaudited condensed consolidated balance sheets as accumulated other comprehensive income (loss) within stockholders’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 expense, net in the condensed consolidated statements of operations.


The results of operations for the three and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.


The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC.U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAPaccounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. References to GAAP in these notes are to the Financial Accounting Standards Board (“FASB”)Accounting Standards Codification, sometimes referred to as the codification or “ASC.” These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, filed with the SEC on March 24, 2017.

February 28, 2020.

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

Share repurchase program – estimates.

The following table reconciles cash, cash equivalents and restricted cash from the condensed consolidated balance sheets to amounts reported within the condensed consolidated statements of cash flows:
  March 31, March 31,
  2020 2019
Cash and cash equivalents $68,601
 $245,735
Restricted cash included in prepaid expenses and other current assets 
 158
Restricted cash included in other non-current assets 168
 168
Total cash, cash equivalents and restricted cash $68,769
 $246,061

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Financial Impacts Related To COVID-19

On February 25, 2016,March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict. Although the Company announced that its Boardis unable to estimate the overall financial effect of Directors had authorizedthe pandemic at this time, if the pandemic continues, it could have 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 bymaterial adverse effect on the Company’s management based on its ongoing assessmentsbusiness, results of the capital needs of the business, the market price of its common stockoperations, financial condition and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other transactions or otherwise, all in compliance with applicable laws and other restrictions.cash flows. As of September 30, 2017, 1,956,390 shares could still be purchased under this program. For the nine month period ended September 30, 2017, the Company purchased no shares under this program. 

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.

The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. However, in July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in its first quarter of 2018.

In 2016, the Company began evaluating the impact of the adoption of the new revenue standard on itsMarch 31, 2020, these condensed consolidated financial statements including enhanced disclosures,do not reflect any adjustments as well as assessing the impact on systems, processes and controls. The Company expects the new revenue standard to have an impact on the estimation of variable transaction considerations, the allocation of variable considerations across distinct services, and the tracking and amortization of contract costs. The new revenue standard may have an impact on the Company’s principal versus agent considerations.  We expect to begin capitalizing certain costs to obtain a contract upon adoptionresult of the new standard and are currently in the process of evaluating the period over which to amortize these capitalized costs. The Company has made progress on its contract and business process reviews but has not yet quantified these amounts.

The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company plans to adopt the standard using the modified retrospective approach with the cumulative effect recognized as of the date of adoption.

pandemic.


Recent Accounting Pronouncements

Recently Adopted Accounting PronouncementsIn FebruaryJune 2016, the FASB issued ASU 2016-02, “Leases.2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326).” This update amendssignificantly changes the requirements for assets and liabilities recognized for all leases longer than twelve months. Lesseesway that entities will be required to recognize a lease liability measured on a discounted basis,measure credit losses. This standard requires that entities estimate credit losses based upon an “expected credit loss” approach rather than the “incurred loss” approach, which is the lessee’s obligationcurrently used. The new approach will require entities to make lease payments arising from the lease, and a right-of-use asset, which is an asset that

9


Table of Contents

represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard will be effectivemeasure all expected credit losses for financial statements issued by public companies forassets based on historical experience, current conditions and reasonable forecasts of collectability. The change in approach is anticipated to impact the annual and interim periods beginning after December 15, 2018. Early adoptiontiming of the standard is permitted. The Company is currently evaluating the potential impactrecognition 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.   Upon adoption, we determined that we did not have previously unrecognized excess tax benefits to be recognized on a modified retrospective transition method as an adjustment to retained earnings.  The new guidance also allows withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. We did not elect an accounting policy change to withhold at the maximum individual statutory tax rate.  The cash paid to satisfy the statutory income tax withholding obligation will continue to be classified as a financing activity in the 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. We did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.credit losses. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. 2019. These changes became effective for the Company’sCompany's fiscal year beginning January 1, 2017 and have been reflected in these condensed consolidated financial statements. As a result2020. The Company recognized the cumulative effect of the retrospectiveinitial application of ASU 2016-13 as an adjustment of $1,141 to the opening balance of accumulated deficit. The Company does not expect the adoption of ASU 2016-09, for2016-13 to have a material impact to the nine months ended September 30, 2016, net cash provided by operating activities increased by $1,470 with a corresponding offset to net cash used for financing activities.

results of its operations on an ongoing basis.

Not Yet Adopted Accounting PronouncementsIn August 2016,December 2019, the FASB issued ASU 2016-15, “Statement of Cash Flows2019-12, “Income Taxes (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,740): Simplifying the Accounting for Income Taxes.which clarifies eight specific cash flow issues in an effortThis update aims to reduce diversity in practice in how certain transactions are classifiedcomplexity within the statement of cash flows. This ASU is effectiveaccounting for the Company January 1, 2018 with early adoption permitted. 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. Upon adoption, the Company does not anticipate significant changes to the Company’s existing accounting policies or presentationincome taxes as part 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.simplification initiative. This standard will beis effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019.2020. Early adoption of the standard is permitted. The Company has adopted this standard as of April 1, 2017, however it did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805), which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will be effective for public companies for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted effective for transactions not yet reported in financial statements issued or made available for issuance. The Company is currently evaluating the potential impact of this guidance on ourits condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.  This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. The ASU is effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2017. Early adoption of the standard is permitted. The standard will be applied prospectively to awards modified on or after the adoption date. The


3.Acquisitions and Other Investments

Investment in Private Services Company is currently evaluating the potential impact of our adoption of this guidance on our consolidated financial statements.  

3.Business Acquisitions

FolioDynamix


On September 25, 2017, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Folio Dynamics Holdings, Inc., a Delaware corporation (“FolioDynamix”), FCD Merger Sub, Inc., a Delaware corporation and a wholly

10


Table of Contents

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.  Pursuant to the Merger Agreement, Merger Sub will merge with and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) and a wholly owned subsidiary of the Company. FolioDynamix will be included in the Envestnet segment.

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 Company plans to acquire FolioDynamix to add 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 channel, enabling the Company to further leverage its operating scale and data analytics capabilities.

Subject to the terms and conditions of the Merger Agreement, the Company will pay $195,000 in cash for all the outstanding shares of FolioDynamix, subject to certain post-closing adjustments.  The Company will fund the Acquisition price with a combination of cash on the Company’s balance sheet and borrowings under its revolving credit facility. Either the Company or FolioDynamix may terminate the Agreement if the closing does not occur by March 31, 2018.

The applicable antitrust pre-clearance filings were made by the parties on October 10, 2017 and October 11, 2017.  The Company is withdrawing its filing and plans to refile it immediately thereafter to allow the Department of Justice additional time to review the filing without having to issue a second request. The Company continues to expect the transaction to close in the first quarter of 2018, subject to satisfaction of the closing conditions.  The Company and FolioDynamix will continue to operate separately until the transaction closes.

Wheelhouse Analytics LLC

On October 3, 2016,January 8, 2020, the Company acquired all of the issued and outstandinga 4.25% 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 are recognized in earnings of the Company.

The estimated consideration transferred in the acquisition was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary

 

Period

 

As of

 

 

Estimate

 

Adjustments

 

September 30, 2017

Cash consideration

 

$

13,299

 

$

 —

 

$

13,299

Contingent consideration liability

 

 

2,582

 

 

(218)

 

 

2,364

Purchase consideration liability

 

 

887

 

 

 —

 

 

887

Working capital adjustment

 

 

110

 

 

 —

 

 

110

Cash acquired

 

 

(80)

 

 

 —

 

 

(80)

Total

 

$

16,798

 

$

(218)

 

$

16,580

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

Preliminary

 

Period

 

As of

 

 

Estimate

 

Adjustments

 

September 30, 2017

Total tangible assets acquired

 

$

399

 

$

(14)

 

$

385

Total liabilities assumed

 

 

(1,459)

 

 

39

 

 

(1,420)

Identifiable intangible assets

 

 

7,300

 

 

(700)

 

 

6,600

Goodwill

 

 

10,558

 

 

457

 

 

11,015

Total net assets acquired

 

$

16,798

 

$

(218)

 

$

16,580

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

AS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

 

 

 

 

Preliminary

 

Period

    

As of

    

Estimated

    

Amortization

 

 

Estimate

 

Adjustments

 

September 30, 2017

    

Useful Life in Years

 

Method

Customer list

 

$

4,100

 

$

(100)

 

$

4,000

    

15

 

Accelerated

Proprietary technology

 

 

3,000

 

 

(500)

 

 

2,500

 

 6

 

Straight-line

Trade names and domains

 

 

200

 

 

(100)

 

 

100

 

 2

 

Straight-line

Total

 

$

7,300

 

$

(700)

 

$

6,600

 

 

 

 

The results of Wheelhouse’s operations are included in the condensed consolidated statements of operations beginning October 3, 2016, and are not considered material to the Company’s results of operations. As such, no pro forma information is presented for the three and nine months ended September 30, 2016.

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4.      Cost of Revenues

The following table summarizes cost of revenues by revenue category for the periods presented herein:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Assets under management or administration

    

$

50,597

 

$

41,960

 

$

142,097

 

$

117,369

Subscription and licensing

 

 

5,076

 

 

5,110

 

 

14,832

 

 

11,934

Professional services and other

 

 

397

 

 

189

 

 

4,102

 

 

3,016

Total

 

$

56,070

 

$

47,259

 

$

161,031

 

$

132,319

5.     Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Cost:

 

 

 

 

 

 

 

 

Computer equipment and software

 

3 years

 

$

60,073

 

$

52,921

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

22,580

 

 

17,286

Office furniture and fixtures

 

3-7 years

 

 

8,048

 

 

6,911

Other office equipment

 

3-5 years

 

 

1,883

 

 

1,367

 

 

 

 

 

92,584

 

 

78,485

Less: accumulated depreciation and amortization

 

 

 

 

(57,310)

 

 

(45,485)

Property and equipment, net

 

 

 

$

35,274

 

$

33,000

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Depreciation and amortization expense

 

$

3,724

 

$

3,740

 

$

11,668

 

$

11,147

6. Internally Developed Software, Net

Internally developed software, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

Estimated Useful Life

    

2017

    

2016

Internally developed software

 

 5 years

 

$

42,928

 

$

33,718

Less: accumulated amortization

 

 

 

 

(22,649)

 

 

(18,858)

Internally developed software, net

 

 

 

$

20,279

 

$

14,860

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Amortization expense

 

$

1,391

 

$

917

 

$

3,791

 

$

2,569

13


Table of Contents

7.Goodwill & Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Envestnet

 

Envestnet | Yodlee

 

Total

Balance at December 31, 2016

    

$

163,751

 

$

268,185

 

$

431,936

Purchase accounting adjustments - Wheelhouse

 

 

 —

 

 

457

 

 

457

Foreign currency translation

 

 

 —

 

 

353

 

 

353

Balance at September 30, 2017

 

$

163,751

 

$

268,995

 

$

432,746

Intangible assets, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

 

4

-

15

years

 

$

259,350

 

$

(72,743)

 

$

186,607

 

$

259,490

 

$

(54,861)

 

$

204,629

Proprietary technologies

 

2

-

8

years

 

 

57,328

 

 

(27,979)

 

 

29,349

 

 

57,770

 

 

(20,214)

 

 

37,556

Trade names

 

2

-

7

years

 

 

24,889

 

 

(8,766)

 

 

16,123

 

 

25,007

 

 

(6,178)

 

 

18,829

Backlog

 

 

 

4

years

 

 

11,000

 

 

(9,554)

 

 

1,446

 

 

11,000

 

 

(6,456)

 

 

4,544

Total intangible assets

 

 

 

 

 

 

$

352,567

 

$

(119,042)

 

$

233,525

 

$

353,267

 

$

(87,709)

 

$

265,558

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Amortization expense

 

$

10,377

 

$

12,035

 

$

31,333

 

$

36,156

Future amortization expense of the intangible assets as of September 30, 2017, is expected to be as follows:

 

 

 

Years ending December 31:

 

 

Remainder of 2017

$

10,232

2018

 

35,657

2019

 

32,038

2020

 

28,344

2021

 

20,638

Thereafter

 

106,616

 

$

233,525

8.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Non-income tax receivable

 

$

4,952

 

$

3,879

FinaConnect escrow

 

 

2,000

 

 

429

Income tax receivable

 

 

2,267

 

 

1,864

Prepaid technology

 

 

1,827

 

 

1,318

Prepaid insurance

 

 

1,055

 

 

552

Other

 

 

11,898

 

 

8,182

 

 

$

23,999

 

$

16,224

14


Table of Contents

9.Other Non-Current Assets

Other non-current assets consist of the following:

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2017

    

2016

Assets to fund deferred compensation liability

$

5,122

 

$

2,738

Deposits:

 

 

 

 

 

Lease

 

4,548

 

 

4,262

Other

 

614

 

 

2,083

Unamortized issuance costs on revolving credit facility

 

3,320

 

 

 —

Investments in private companies

 

3,216

 

 

2,750

Other

 

1,149

 

 

2,130

 

$

17,969

 

$

13,963

The Company owns 756,347 Class B Unitsinterest in a privately held company at a historical purchase price of $1,250. The Company uses the cost method of accounting for this investment.

The Company previously owned 1,500,000 Class A units representing 21.4% of the outstanding membership interests of a privately heldprivate services company for cash consideration of $1,500. During the third quarter of 2017, the Company purchased an additional 1,450,000 Class A units in this privately held$11,000. The private services company for cash consideration of $1,450. The additional investment increased the Company’s ownership interestpartners with independent network advisory firms to 34.5%.

help them grow, become more profitable and run more efficiently. The Company useswill use the equity method of accounting to record its portion of this privately heldthe private services company’s net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50 percent ownership. 50% ownership and lack of control and does not otherwise exercise control over the significant economic decisions of the private services company.


The Company’s interestprivate services company is and remains a client of the Company and has thus been determined to be a related party. Revenues from the private services company totaled $2,689 in the earningsthree months ended March 31, 2020. As of March 31, 2020, the Company had recorded a net receivable of $1,963 from the private services company.

Acquisition of Private Technology Company

On February 18, 2020, the Company, through it's wholly owned subsidiary Yodlee, Inc. (“Yodlee”), acquired a private technology company (the “Private Technology Company Acquisition”). The private technology company enables the consent 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 cloud-based interoperable interfaces or lossesapplication programming interfaces. The technology and operations of the privately heldprivate technology company have been integrated into our Envestnet Data & Analytics segment.

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

In connection with the Private Technology Company Acquisition, the Company acquired all of the outstanding shares and paid cash consideration of $2,343, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6,750 in contingent consideration, based upon achieving certain performance targets. The Company recorded a liability as of the date of acquisition of $5,239, which represented the estimated fair value of contingent consideration on the date of acquisition. Future changes to the estimated fair value of the contingent consideration, if any, are recognized in earnings of the Company.

The Company recorded estimated goodwill of $7,017, which is reflectednot deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $1,000. The tangible assets acquired and liabilities assumed were not material.

The results of the private technology company's operations are included in other expense, net on the condensed consolidated statements of operations beginning February 18, 2020 and were not considered material to the Company’s results of operations.

10.Fair Value Measurements


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 our Envestnet Wealth Solutions segment.

In connection with the Private Cloud Technology Company Acquisition, the Company paid estimated consideration of $11,968, net of cash acquired. In connection with the acquisition, the Company recorded estimated goodwill of $10,932, 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 condensed consolidated statements of operations beginning March 2, 2020 and were not considered material to the Company’s results of operations.

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 our Envestnet Wealth Solutions segment.

The Company follows ASC 825-10,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 $11,026, the Company paid estimated consideration of $5,946, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, the Company recognized a gain of $4,230 on the re-measurement to fair value of its previously held interest, which is included in other expense, net in the condensed consolidated statements of operations
In connection with the Private Financial Instruments,Technology Design Company Acquisition, the Company recorded estimated total goodwill of $9,241, of which provides companiesapproximately $1,800 is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2,000. The tangible assets acquired and liabilities assumed were not material.

The results of the optionprivate financial technology design company's operations are included in the condensed consolidated statements of operations beginning March 3, 2020 and were not considered material to report selected financialthe Company’s results of operations.

For the three months ended March 31, 2020, acquisition related costs for all of the Company's first quarter 2020 acquisitions were not material, and are included in general and administration expenses. The Company may incur additional acquisition related costs over the remainder of 2020.

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The goodwill arising from these 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 existing technologies.

Pro Forma Financial Information

On April 1, 2019, the Company acquired certain of the assets, primarily consisting of intangible assets, and the assumption of certain liabilities of the PortfolioCenter business (“PortfolioCenter”) from Performance Technologies, Inc., a wholly-owned subsidiary of The Charles Schwab Corporation. On May 1, 2019, the Company acquired all of the outstanding shares of capital stock of PIEtech, Inc. (“PIEtech”). The following pro forma financial information presents the combined results of operations of Envestnet, PortfolioCenter and PIEtech for the three months ended March 31, 2019 and assumes the acquisitions of PortfolioCenter and PIEtech had occurred as of the beginning of 2018. The results of the Company's other acquisitions since January 1, 2019 are not included in the pro forma financial information presented below as they were not considered material to the Company's results of operations.

The unaudited pro forma results presented below include amortization charges for acquired intangible assets, interest expense, stock-based compensation expense and income tax. The Company's pro forma information below includes the reversal of a valuation allowance on its deferred tax assets as of January 1, 2018 and the reversal of transaction costs that were incurred in 2019 as a result of these acquisitions and reverses these amounts from the appropriate periods in 2019. All intercompany revenues have been eliminated within this pro forma information.

Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2018.
  Three Months Ended
March 31,
  2019
Revenues $214,753
Net loss attributable to Envestnet, Inc. (11,245)
Net loss per share attributable to Envestnet, Inc.:  
Basic $(0.22)
Diluted $(0.22)


4.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
  March 31, December 31,
  2020 2019
Prepaid technology $10,653
 $8,178
Non-income tax receivables 6,357
 5,555
Advance payroll taxes and benefits 5,329
 5,446
Prepaid insurance 2,509
 1,919
Prepaid outside information services 2,131
 2,209
Other 10,720
 8,876
Total prepaid expenses and other current assets $37,699
 $32,183

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

5.Property and Equipment, Net
Property and equipment, net consists of the following:
    March 31, December 31,
  Estimated Useful Life 2020 2019
Cost:    
  
Computer equipment and software 3 years $72,700
 $72,190
Leasehold improvements Shorter of the lease term or useful life of the asset 36,180
 34,645
Office furniture and fixtures 3-7 years 10,846
 10,832
Office equipment and other 3-5 years 6,898
 6,850
Building and building improvements 7-39 years 2,647
 2,647
Land Not applicable 940
 940
    130,211
 128,104
Less: accumulated depreciation and amortization (77,021) (74,348)
Total property and equipment, net $53,190
 $53,756

During the three months ended March 31, 2020, the Company retired an immaterial amount of property and equipment that was no longer in service. Gains and losses on asset retirements during the three months ended March 31, 2020 and 2019 were not material.
Depreciation and amortization expense was as follows:
  Three Months Ended
  March 31,
  2020 2019
Depreciation and amortization expense $5,317
 $4,366

6.Internally Developed Software
Internally developed software consists of the following:
    March 31, December 31,
  Estimated Useful Life 2020 2019
Internally developed software 5 years $116,275
 $104,703
Less: accumulated amortization   (48,048) (44,440)
Internally developed software, net   $68,227
 $60,263

Amortization expense was as follows:
  Three Months Ended
  March 31,
  2020 2019
Amortization expense $3,608
 $2,623

7.Goodwill and Intangible Assets, Net
Changes in the carrying amount of goodwill were as follows:
  Envestnet Wealth Solutions Envestnet Data & Analytics Total
Balance at December 31, 2019 $583,247
 $296,603
 $879,850
Acquisitions 20,173
 7,017
 27,190
Foreign currency and other (70) (469) (539)
Balance at March 31, 2020 $603,350
 $303,151
 $906,501

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Intangible assets, net consist of the following:
    March 31, 2020 December 31, 2019
    Gross   Net Gross   Net
  Estimated Carrying Accumulated Carrying Carrying Accumulated Carrying
  Useful Life Amount Amortization Amount Amount Amortization Amount
Customer lists 7-16 years $591,520
 $(161,339) $430,181
 $591,520
 $(148,517) $443,003
Proprietary technologies 4-8 years 90,719
 (48,865) 41,854
 87,714
 (44,165) 43,549
Trade names 2-7 years 33,700
 (15,895) 17,805
 33,700
 (14,663) 19,037
Total intangible assets $715,939
 $(226,099) $489,840
 $712,934
 $(207,345) $505,589


There were no retirements of intangible assets during the three months ended March 31, 2020.

Amortization expense was as follows:
  Three Months Ended
  March 31,
  2020 2019
Amortization expense $18,758
 $12,528

8.
Accrued Expensesand Other Liabilities
Accrued expenses and other liabilities consisted of the following:
  March 31, December 31,
  2020 2019
Accrued compensation and related taxes $54,336
 $53,627
Accrued investment manager fees 40,221
 48,720
Non-income tax payables 11,249
 11,040
Accrued professional services 4,271
 3,833
Accrued technology 3,967
 3,042
Accrued transaction costs 2,456
 2,482
Accrued charitable contribution 
 5,020
Other accrued expenses 15,642
 10,180
Total accrued expenses and other liabilities $132,142
 $137,944


In the fourth quarter of 2019, the Company offered a voluntary early retirement program (the “Early Retirement Program”) to employees over a certain age, who have a combined age and years of experience with the Company of at fair value. ASC 825-10 also establishes presentationleast 65 years. Employees had until January 31, 2020 to voluntarily accept the program with separation of service no later than March 31, 2020. In connection with this program, the Company recorded $11,966 of severance expense during the three months ended March 31, 2020. As of March 31, 2020, the Company has accrued approximately $10,670 in accrued compensation and disclosure requirements designedrelated taxes and $2,336 recorded in other non-current liabilities. As of December 31, 2019, the Company had accrued approximately $1,733 in accrued compensation and related taxes and $599 recorded in other non-current liabilities. The Company anticipates approximately $12,000 of payments in 2020 with the remainder paid through 2030.
Envestnet, Inc.
Notes to facilitate comparisons between companies that choose different measurement attributesUnaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

9.Debt
The Company’s outstanding debt obligations as of March 31, 2020 and December 31, 2019 were as follows: 
  March 31, December 31,
  2020 2019
Revolving credit facility balance $290,000
 $260,000
     
Convertible Notes due 2023 $345,000
 $345,000
Unaccreted discount on Convertible Notes due 2023 (31,160) (33,491)
Unamortized issuance costs on Convertible Notes due 2023 (5,578) (5,996)
Convertible Notes due 2023 carrying value(1)
 $308,262
 $305,513


(1) The effective interest rate on the liability component of the Convertible Notes due 2023 was 6% for similar typesthe three months ended March 31, 2020 and 2019.

Interest expense was comprised of assetsthe following and liabilitiesis included in other expense, net in the condensed consolidated statement of operations:
  Three Months Ended
  March 31,
  2020 2019
Interest on revolving credit facility $2,518
 $
Accretion of debt discount 2,331
 3,758
Coupon interest 1,501
 2,264
Amortization of issuance costs 631
 858
Undrawn and other fees 153
 216
 Total interest expense
$7,134
 $7,096

The credit agreement under which the above revolving credit facility was issued (the “Amended Credit Agreement”) includes certain financial covenants and, to more easily understandas of March 31, 2020, the Company was in compliance with these requirements.

See “Note 15—Net Loss Per Share” for further discussion of the effect of the company’s choice to use fair valueconversion on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.

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

net income (loss) per common share.

Level I:

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

10.

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.

Fair Value Measurements

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2017March 31, 2020 and December 31, 2016,2019, based on the three-tier fair value hierarchy.

hierarchy: 

  March 31, 2020
  Fair Value Level I Level II Level III
Assets:        
Money market funds $29,076
 $29,076
 $
 $
Assets to fund deferred compensation liability 7,173
 
 
 7,173
Total assets $36,249
 $29,076
 $
 $7,173
Liabilities:  
  
  
  
Contingent consideration $14,791
 $
 $
 $14,791
Deferred compensation liability 6,911
 6,911
 
 
Total liabilities $21,702
 $6,911
 $
 $14,791

15


Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)


Table of Contents

  December 31, 2019
  Fair Value Level I Level II Level III
Assets:        
Money market funds $37,730
 $37,730
 $
 $
Assets to fund deferred compensation liability 8,390
 
 
 8,390
Total assets $46,120

$37,730
 $
 $8,390
Liabilities:  
  
  
  
Contingent consideration $9,045
 $
 $
 $9,045
Deferred compensation liability 8,208
 8,208
 
 
Total liabilities $17,253

$8,208
 $
 $9,045

 

 

 

 

 

 

 

 

 

 

 

 

   

September 30, 2017

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds(1)

$

28,179

   

$

28,179

   

$

 

$

Assets to fund deferred compensation liability(2)

 

5,122

 

 

 

 

 

 

5,122

Total assets

$

33,301

   

$

28,179

   

$

 

$

5,122

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

2,696

 

$

 

$

 

$

2,696

Deferred compensation liability(3)

 

4,006

 

 

4,006

 

 

 

 

Total liabilities

$

6,702

 

$

4,006

 

$

 

$

2,696

 

 

 

 

 

 

 

 

 

 

 

 

 

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 fair value of assets to fund deferred compensation liability approximates the cash surrender value of the life insurance premiums and is included in other non-current assets in the condensed consolidated balance sheets.

(3)

The deferred compensation liability is included in other non-current liabilities in the condensed consolidated balance sheets and its fair market value is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected.

Level I assets and liabilities include money-market funds not insured by the FDIC and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the condensed consolidated balance sheets. 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.

Level III assets and liabilities consist of the estimated fair value of contingent consideration as well as the assets to fund deferred compensation liability. The fair market value of the assets to fund deferred compensation liability is based upon the cash surrender value of the life insurance premiums.

The fair value of the contingent consideration liabilities related to certain of the FinaConnect and WheelhouseCompany's acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus representrepresents a Level III fair value measurement as defined in ASC 820, Fair“Fair Value Measurements and Disclosures.Disclosures.” The significant inputs in the Company's Level III fair value measurement not supported by market activity included ourits assessments of expected future cash flows related to ourthese acquisitions of FinaConnect and Wheelhousetheir 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 the obligation,these obligations, and are 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. agreements.


The Company will continue to reassess the fair valuevalues of the contingent consideration made subsequent to the measurement period for each acquisitionliabilities at each reporting date until settlement. Changes to thethese estimated fair values

16


Table of Contents

of the contingent consideration will be recognized in earnings of the CompanyCompany's earnings and included in general and administration onadministrative expenses in the condensed consolidated statements of operations.


The table below presents a reconciliation of the Company's contingent consideration liabilities, of which the Companywere measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 20162019 to September 30, 2017:

March 31, 2020: 

 

 

 

 

 

    

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

 

 

332

Balance at September 30, 2017

 

$

2,696

  Fair Value of Contingent Consideration Liabilities
Balance at December 31, 2019 $9,045
Private technology company acquisition 5,239
Accretion on contingent consideration 507
Balance at March 31, 2020 $14,791



The table below presents a reconciliation of the assets used to fund deferred the Company's deferred compensation liability, of which the Companyis measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 20162019 to September 30, 2017:

March 31, 2020:

 

 

 

 

 

 

Fair Value of

 

    

Assets to Fund

 

 

Deferred

 

 

Compensation

 

 

Liability

Balance at December 31, 2016

 

$

2,738

Contributions and fair value adjustments

 

 

2,384

Balance at September 30, 2017

 

$

5,122

 

 

 

 

  Fair Value of Assets to Fund Deferred Compensation Liability
Balance at December 31, 2019 $8,390
Fair value adjustments (1,217)
Balance at March 31, 2020 $7,173


The assetfair market value was increased due to funding of the plan as well as a gain onassets used to fund the underlying investment vehiclesCompany's deferred compensation liability is based upon the cash surrender value of $350,the Company's life insurance premiums. The value of the assets used to fund the Company's deferred compensation liability, which resulted in an asset value as of September 30, 2017 of $5,122, which wasare included in other non-current assets onin the condensed consolidated balance sheets.

sheets, decreased due to losses on the underlying investment vehicles. These losses are recognized in the Company's earnings and included in general and administrative expenses in the condensed 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 changewhen changes in circumstances that caused the transfer, in
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

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 ninethree months ended September 30, 2017.

On December 15, 2014, the Company issued $172,500 of Convertible Notes. March 31, 2020.

As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the carrying value of the 2019 Convertible Notes due 2023 equaled $157,353$308,262 and $152,575,$305,513, respectively, and representsrepresented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the estimated fair value of the Convertible Notes due 2023 was $181,142$369,074 and $164,824,$414,852, respectively. The Company considersconsidered the Convertible Notes due 2023 to be a Level II liabilitiesliability at March 31, 2020 and usesused a market approach to calculate the fair value of the Convertible Notes.value. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes due 2023 in an over-the-counter market on September 30, 2017 (see Note 14)March 31, 2020 (See “Note 9—Debt”).


As of September 30, 2017March 31, 2020 and December 31, 2016,2019, there was $0$290,000 and $142,000, respectively, of Term Notes outstanding. 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 September 30, 2017 and December 31, 2016, the carrying value of the Term Notes equaled $0 and $138,335, respectively, and represents the aggregate principal amount outstanding less the unamortized debt issuance costs. The Company considered the Term Notes as of December 31, 2016 to be Level II liability (See Note 14).

As of September 30, 2017 and December 31, 2016, there was $101,168 and $0,$260,000, respectively, outstanding on the revolving credit facility under the Amended and Restated Credit Agreement. As of September 30, 2017 and DecemberMarch 31, 20162020, the outstanding balance on ourthe revolving credit facility approximated fair value as borrowings under the revolving credit facility bore interest at variable rates and we believed ourthe Company believes its credit risk quality was consistent with when the debt originated. The Company considered the revolving credit facility as of December 31, 2016 and as of September 30, 2017 to be a Level I liability as of March 31, 2020 and December 31, 2019 (See Note 14)“Note 9—Debt”).

17



Table of Contents

We considerThe Company considered 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 September 30, 2017March 31, 2020 based upon the short-term nature of thethese assets and liabilities.

11.Accrued Expensesand Other Liabilities

Accrued expenses and other liabilities consist

11.Revenue

Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by major source:
  Three Months Ended March 31,
  2020 2019
  Envestnet Wealth Solutions Envestnet Data & Analytics Consolidated Envestnet Wealth Solutions Envestnet Data & Analytics Consolidated
Revenues:            
Asset-based $134,811
 $
 $134,811
 $108,934
 $
 $108,934
Subscription-based 60,323
 44,228
 104,551
 41,026
 42,061
 83,087
Total recurring revenues 195,134
 44,228
 239,362
 149,960
 42,061
 192,021
Professional services and other revenues 3,286
 3,891
 7,177
 2,745
 4,900
 7,645
Total revenues $198,420
 $48,119
 $246,539
 $152,705
 $46,961
 $199,666


One customer accounted for more than 10% of the following:

Company’s total revenues:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Accrued investment manager fees

 

$

37,344

 

$

31,278

Accrued compensation and related taxes

 

 

37,882

 

 

35,287

Sales and use tax payable

 

 

12,914

 

 

10,108

Accrued professional services

 

 

4,646

 

 

3,213

Definite consideration

 

 

1,250

 

 

445

Other accrued expenses

 

 

8,841

 

 

7,432

 

 

$

102,877

 

$

87,763

  Three Months Ended
  March 31,
  2020 2019
Fidelity 15% 16%

12.    Other Non-Current Liabilities

Other non-current liabilities consist

Fidelity accounted for 19% and 20% of the following:

Envestnet Wealth Solutions segment's revenues for the three months ended March 31, 2020 and 2019, respectively. No single customer accounted for over 10% of the Envestnet Data & Analytics segment's revenue for any period presented.

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Uncertain tax positions

 

$

10,379

 

$

7,762

Accrued deferred compensation

 

 

4,006

 

 

2,885

Accrued purchase liability

 

 

 —

 

 

1,250

Other

 

 

142

 

 

1,539

 

 

$

14,527

 

$

13,436


13.Income Taxes

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
  Three Months Ended
  March 31,
  2020 2019
United States $240,452
 $192,119
International (1)
 6,087
 7,547
Total revenues $246,539
 $199,666

(1)
No foreign country accounted for more than 10% of the Company's total revenues.

Remaining Performance Obligations
The following table includes the Company’s loss before income tax provision (benefit), income tax provision (benefit) and effective tax rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

    

2017

 

2016

 

 

2017

 

2016

 

Income (loss) before income tax provision (benefit)

 

$

362

 

$

(5,725)

 

 

$

(10,101)

 

$

(33,595)

 

Income tax provision (benefit)

 

 

1,682

 

 

(1,668)

 

 

 

10,824

 

 

(10,602)

 

Effective tax rate

 

 

464.6

%

 

29.1

%

 

 

(107.2)

%

 

31.6

%

The Company's effective tax rateestimated revenue expected to be recognized in the threefuture related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2020: 

Years ending December 31,  
Remainder of 2020 $169,680
2021 166,469
2022 121,386
2023 57,523
2024 32,908
Thereafter 27,043
Total $575,009


Only fixed consideration from significant contracts with customers is included in the amounts presented above.
The Company has applied the practical expedients and nineexemption and therefore does not 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 obligations or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.

Contract Balances

Total deferred revenue as of March 31, 2020 increased by $5,947 during the three months ended September 30, 2017 differed fromMarch 31, 2020, primarily the effective tax rateresult of revenue growth, timing of cash receipts and revenue recognition. The majority of the Company's deferred revenue will be recognized over the course of the next twelve months.

The amount of revenue recognized that was included in the threeopening deferred revenue balance was $15,479 and nine$9,723 for the three months ended September 30, 2016, primarily due to the valuation allowance the Company has put on all U.S. deferreds with the exceptionMarch 31, 2020 and 2019, respectively. The majority of indefinite-lived intangiblesthis revenue consists of subscription-based services and unrepatriated foreign earningsprofessional 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 $9,218 and profits, resulting in no benefit being recognized for the tax loss in the U.S.

Gross unrecognized tax benefits were $17,853 and $16,476 at September 30, 2017$9,387 as of March 31, 2020 and December 31, 2016,2019, respectively. At September 30, 2017,Amortization expense for the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized,deferred sales incentive compensation was $17,853.

The Company recognizes potential interest$1,029 and penalties related to unrecognized tax benefits in income tax expense. The Company recorded interest and penalties of $371 and $1,261$651 for the three and nine months period ended September 30, 2017,

18


Table of Contents

respectively. The Company recorded interest and penalties of $334 and $723 for the three and nine months period ended September 30, 2016, respectively.

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company’s tax returns for the calendar years ended December 31, 2016, 2015, 2014, and 2013 remain open to examination by the Internal Revenue Service in their entirety.  With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2011 through 2016 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, 20062020, and forward. Based on the outcome of examinations of our subsidiaries or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months however, at this time, we have not been notified by the India Tax Authority of any audit scheduled for finalization within the next twelve months.

14.    Debt

The Company’s outstanding debt obligations as of September 30, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

Convertible Notes

 

$

172,500

 

$

172,500

Unaccreted discount on Convertible Notes

 

 

(13,075)

 

 

(17,149)

Unamortized issuance costs on Convertible Notes

 

 

(2,072)

 

 

(2,776)

Convertible Notes carrying value

 

$

157,353

 

$

152,575

 

 

 

 

 

 

 

Term Notes

 

$

 —

 

$

142,000

Unamortized issuance costs on Term Notes

 

 

 —

 

 

(3,665)

Term Notes carrying value

 

$

 —

 

$

138,335

 

 

 

 

 

 

 

Revolving credit facility balance

 

$

101,168

 

$

 —

Interest expense was comprised of the following and2019, respectively. Deferred sales incentive compensation is included in other non-current assets on the condensed consolidated balance sheets and amortization expense netis included in compensation and benefits expenses on the condensed consolidated statements of operations. No significant impairment loss for capitalized costs was recorded during the periods.


Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

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 condensed consolidated statementstatements of operations:

operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

 

2016

 

2017

 

2016

Coupon interest

 

$

755

 

$

754

 

$

2,264

 

$

2,264

Amortization of issuance costs

 

 

483

 

 

737

 

 

2,529

 

 

2,169

Accretion of debt discount

 

 

1,393

 

 

1,323

 

 

4,074

 

 

3,901

Interest on credit agreement

 

 

1,088

 

 

1,255

 

 

3,543

 

 

3,792

Undrawn and other fees

 

 

139

 

 

53

 

 

261

 

 

219

 

 

$

3,858

 

$

4,122

 

$

12,671

 

$

12,345


Credit Agreement

On July 18, 2017, the Company and certain

12.Cost of Revenues
The following table summarizes cost 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 increasedrevenues by $50,000.  The Second Amended and Restated Credit Agreement also includes a $5,000 subfacility for the issuance of letters of credit.

19


revenue category:

Table of Contents

  Three Months Ended
  March 31,
  2020 2019
Asset-based $68,592
 $53,842
Subscription-based 6,277
 7,677
Professional services and other 64
 126
Total cost of revenues
$74,933
 $61,645

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.

As of September 30, 2017, an amount of $101,168 was outstanding on the Revolving Credit Facility.

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 condensed consolidated balance sheets reflect these changes as of September 30, 2017 with no portion of debt related to the revolving credit facility being classified as short-term. As of September 30, 2017, the debt issuance costs related to the Second Amended and Restated Credit Agreement and the Prior Credit Facility are presented in other non-current assets and prepaid expenses and other current assets which have outstanding amounts of $3,320 and $855, respectively.

Convertible Notes

On December 15, 2014, the Company issued $172,500 of Convertible Notes. Net proceeds from the offering were $166,967. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015.

The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes rank equally in right of payment with all of the Company’s existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated indebtedness. The Convertible Notes will be structurally subordinated to the indebtedness and other liabilities of any of our subsidiaries, other than to the extent the Convertible Notes are guaranteed in the future by our subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness. Certain of our subsidiaries guarantee our obligations under our Credit Agreement.

Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at 100% of the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest.

The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible


13.Stock-Based Compensation

20


Table of Contents

Notes for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; or (c) upon the occurrence of specified corporate events as defined in the indenture. 

Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle the debt component of the Convertible Notes at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.

The Company has separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds from issuance of the Convertible Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618 to the equity component, net of offering costs of $882. The Company recorded a discount on the Convertible Notes of $27,500 which is being accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three and nine month periods ended September 30, 2017, the Company recognized $1,393 and $4,074, respectively, in accretion related to the discount. During the three and nine month periods ended September 30, 2016, the Company recognized $1,323 and $3,901, respectively, in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes for the three and nine month periods ended September 30, 2017 was 5.4%. The effective interest rate on the liability component of the Convertible Notes for the three and nine month periods ended September 30, 2016 was 6.0%.

See Note 16 for further discussion of the effect of conversion on net loss per common share.

15.Stock-Based Compensation

The Company has stock options, and restricted stock units (“RSUs”) and performance stock units (“PSUs”) outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management2019 Acquisition Equity Incentive Plan for Envestnet | Tamarac Management Employees (the “2012“2019 Equity Plan”). On July 13, 2017, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 3,525,000 shares.

In connection with the Yodlee merger, the Company adopted the 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the grant of restricted common stock units for certain Envestnet | Yodlee employees. The maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,052,000. These awards vest over a period of 43 months subsequent to the acquisition date of November 19, 2015.


As of September 30, 2017, the remaining amount of unrecognized expense totaled $6,070.

As of September 30, 2017,March 31, 2020, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 3,945,537.  

1,355,235.  

Stock-based compensation expense under the Company’s plans was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 Three Months Ended

 

September 30,

 

September 30,

 March 31,

    

2017

    

2016

 

2017

    

2016

 2020 2019

Stock-based compensation expense

 

$

8,048

 

$

7,554

 

$

23,451

 

$

25,872

 $13,765
 $12,864

Tax effect on stock-based compensation expense

 

 

(3,018)

 

 

(3,022)

 

 

(8,794)

 

 

(10,349)

 (3,510) (3,256)

Net effect on income

 

$

5,030

 

$

4,532

 

$

14,657

 

$

15,523


$10,255
 $9,608


The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 37.5%25.5% and 25.3% for the three and nine months ended September 30, 2017. The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 40.0% for the threeMarch 31, 2020 and nine months ended September 30, 2016.  However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the three and nine months ended September 30, 2017.

2019, respectively.


Stock Options

21


Table of Contents

The following weighted average assumptions were used to value options granted during the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 Three Months Ended

 

September 30,

 

 

September 30,

 

 March 31,

    

2017

    

2016

    

 

2017

    

2016

    

 2020 2019

Grant date fair value of options

 

$

 —

 

$

14.46

 

 

$

14.51

 

$

9.56

 

 $
 $21.55

Volatility

 

 

 —

%  

 

42.2

%  

 

 

43.8

%  

 

42.2

%  

 % 40.0%

Risk-free interest rate

 

 

 —

%  

 

1.1

%  

 

 

2.1

%  

 

1.4

%  

 % 2.5%

Dividend yield

 

 

 —

%  

 

 —

%  

 

 

 —

%  

 

 —

%  

 % %

Expected term (in years)

 

 

 —

 

 

5.0

 

 

 

6.3

 

 

6.3

 

 0
 6.5


Envestnet, Inc.
Notes to Unaudited Condensed 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

 

 

 

     Weighted-Average  

 

 

 

Average

 

Contractual Life

 

Aggregate

   Weighted- Remaining  

 

Options

 

Exercise Price

 

(Years)

 

Intrinsic Value

   Average Contractual Life Aggregate

Outstanding as of December 31, 2016

 

3,033,194

 

$

16.33

 

4.3

 

$

63,264

 Options Exercise Price (Years) Intrinsic Value
Outstanding as of December 31, 2019 1,150,586
 $25.66
 3.4 $50,590

Granted

 

75,238

 

 

31.70

 

 

 

 

 

 
 
  

Exercised

 

(208,334)

 

 

9.12

 

 

 

 

 

 (357,974) 16.57
    

Forfeited

 

(9,062)

 

 

45.81

 

 

 

 

 

 (7,213) 48.70
    

Outstanding as of March 31, 2017

 

2,891,036

 

 

17.15

 

4.5

 

 

50,792

Granted

 

 —

 

 

 —

 

 

 

 

 

Exercised

 

(84,949)

 

 

8.46

 

 

 

 

 

Forfeited

 

(1,667)

 

 

32.46

 

 

 

 

 

Outstanding as of June 30, 2017

 

2,804,420

 

 

17.41

 

4.3

 

 

66,206

Granted

 

 —

 

 

 —

 

 

 

 

 

Exercised

 

(134,890)

 

 

13.71

 

 

 

 

 

Forfeited

 

(2,201)

 

 

30.33

 

 

 

 

 

Outstanding as of September 30, 2017

 

2,667,329

 

 

17.58

 

4.1

 

 

89,739

Outstanding as of March 31, 2020 785,399
 29.60
 3.6 19,010

Options exercisable

 

2,435,815

 

 

16.11

 

3.7

 

 

85,448

 745,220
 $28.55
 3.4 $18,819


Exercise prices of stock options outstanding as of September 30, 2017March 31, 2020 range from $0.11$9.00 to $55.29. At September 30, 2017,March 31, 2020, there was $2,414$539 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.8 years.

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Restricted Stock Units and Restricted Stock Awards

Periodically, the Company grants restricted stock unitunits and awards and performance-based stock units and awards to employees. Beginning with grants issued in February 2016, restrictedPerformance-based stock units and awards vest one-third onupon the first anniversaryachievement 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 stock units and awards provide thresholds that dictate the number of shares to vest upon each evaluation date, which range from 50% to 150%. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest three years from the grant date and quarterly thereafter. For grants issued prior to February 2016, restricted stock units awards would vest ratably in three annual tranches from the date of grant. date.

The following is a summary of the activity for unvested restricted stock units and awardsperformance stock units granted under the Company’s plans:

 

 

 

 

 

    

    

    

Weighted-

 

 

 

Average Grant

 RSUs PSUs

 

Number of

 

Date Fair Value

 
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
per Share
 Number of
Shares
 Weighted-
Average Grant
Date Fair Value
per Share

 

Shares

 

per Share

Outstanding as of December 31, 2016

 

1,894,759

 

$

30.40
Outstanding as of December 31, 2019 1,318,870
 $58.88
 254,118
 $67.96

Granted

 

872,941

 

 

31.89
 907,042
 75.53
 67,793
 81.42

Vested

 

(526,572)

 

 

31.68
 (398,881) 55.93
 
 

Forfeited

 

(20,084)

 

 

27.52
 (41,175) 59.74
 (33,010) 64.70

Outstanding as of March 31, 2017

 

2,221,044

 

 

31.98

Granted

 

47,700

 

 

35.05

Vested

 

(199,163)

 

 

30.59

Forfeited

 

(45,683)

 

 

30.11

Outstanding as of June 30, 2017

 

2,023,898

 

 

32.17

Granted

 

29,000

 

 

39.10

Vested

 

(121,449)

 

 

32.26

Forfeited

 

(30,369)

 

 

31.61

Outstanding as of September 30, 2017

 

1,901,080

 

 

32.28
Outstanding as of March 31, 2020 1,785,856
 67.98
 288,901
 71.49



At September 30, 2017,March 31, 2020, there was $49,527$112,196 of unrecognized stock-based compensation expense related to unvested restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 2.02.4 years.

16.Net Loss Per Share

At March 31, 2020, there was $14,656 of unrecognized stock-based compensation expense related to unvested performance-based restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 2.3 years.

14.
Income Taxes
The following table includes the Company’s loss before income tax benefit, income tax benefit and effective tax rate:
  Three Months Ended
  March 31,
  2020 2019
Loss before income tax provision (benefit)
 $(9,154) $(14,500)
Income tax provision (benefit) (1,964) 3,768
Effective tax rate 21.5% (26.0)%

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

For the three months ended March 31, 2020, the Company's effective tax rate differed from the statutory rate primarily due to increases in the valuation allowance the Company had placed on a portion of its US deferred tax assets, the windfall from stock-based compensation and the CARES Act net operating loss (“NOL”) carryback. For the three months ended March 31, 2019, the Company's effective tax rate differed from the statutory rate primarily due to the impact of the Base Erosion and Anti-Abuse Tax (“BEAT”) and increases in the valuation allowance the Company had placed on all US deferred tax assets with the exception of indefinite-lived intangibles.

The Company's total gross liability for unrecognized tax benefits, exclusive of interest and penalties, was $19,370 and $18,939 at March 31, 2020 and December 31, 2019, respectively. Of this amount, a portion of the unrecognized tax benefits was recorded as a reduction of deferred tax assets instead of a non-current liability. The portion of the unrecognized tax benefits, exclusive of interest and penalties, recorded as a non-current liability was $6,433 and $6,504 at March 31, 2020 and December 31, 2019, respectively.
At March 31, 2020, the amount of unrecognized tax benefits, including interest and penalties, that would benefit the Company's effective tax rate, if recognized, was $13,355. At this time, the Company estimates that the liability for unrecognized tax benefits could decrease in the next twelve months as it is anticipated that reviews by tax authorities will be completed.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. These amounts were not material for the three months ended March 31, 2020 and 2019. The Company had accrued interest and penalties of $7,274 and $7,336 as of March 31, 2020 and December 31, 2019, respectively.

15.Net Loss Per Share
Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted net lossper 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 Notesconvertible notes using the treasury stock method, if dilutive.No items were included in the computation of diluted loss per share in the three and nine months ended September 30, 2016 and 2017 because the Company incurred a net loss attributable to Envestnet, Inc. in each of these periods and therefore these items were considered anti-dilutive.

The Company accounts for the effect of the Convertible Notesits convertible notes (See “Note 9—Debt”) on diluted earningsnet loss per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes due 2023 will have no effect on diluted earningsnet loss per share until the Company’s stock price exceeds the conversion price of $62.88$68.31 per share and certain other criteria are met, or if the trading price of the Convertible Notesconvertible notes meets certain criteria as described in Note 14 at which point, the effect of the conversion feature would be included in the Company’s calculation of diluted earnings per share.criteria. In the period of conversion, the Convertible Notesconvertible notes will have no impact on diluted earningsnet loss per share if the Convertible Notesthey are settled in cash and will have an impact on dilutive earningsnet loss per share if the Convertible Notesthey are settled in shares upon conversion.

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The following table provides the numerators and denominators used in computing basic and diluted net loss per share attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

Net loss attributable to Envestnet, Inc.

 

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted number of weighted-average shares outstanding

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to Envestnet, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

(0.09)

 

$

(0.48)

 

$

(0.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.03)

 

$

(0.09)

 

$

(0.48)

 

$

(0.54)
  Three Months Ended
  March 31,
  2020 2019
Basic and diluted net loss per share calculation:    
Net loss attributable to Envestnet, Inc. $(7,336) $(18,185)
     
Basic and diluted number of weighted-average shares outstanding 53,016,511
 48,237,265
Basic and diluted net loss per share $(0.14) $(0.38)


Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

 As the Company was in a loss position for all periods presented, all potentially dilutive securities were anti-dilutive. Securities that were anti-dilutive and therefore excluded from the computation of diluted net lossper share were as follows:
  Three Months Ended
  March 31,
  2020 2019
Options to purchase common stock 785,399
 1,768,350
Unvested restricted stock awards and units 2,074,757
 2,022,057
Warrants 470,000
 470,000
Convertible Notes 5,050,505
 7,793,826
Total anti-dilutive securities
8,380,661
 12,054,233

16.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.

Envestnet Data & Analytics a leading data aggregation and data analytics 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 operating 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. Intersegment revenues were not material for the three and nine months ended September 30, 2017March 31, 2020 and 2016 were as2019.
See “Note 11—Revenue” for detail of revenues by segment.

The following table presents a reconciliation from loss from operations by segment to consolidated net loss attributable to Envestnet, Inc.:
  Three Months Ended
  March 31,
  2020 2019
Envestnet Wealth Solutions $11,340
 $16,844
Envestnet Data & Analytics (4,585) (7,928)
Nonsegment operating expenses (14,372) (17,653)
Loss from operations (7,617) (8,737)
Other expense, net (1,537) (5,763)
Consolidated loss before income tax provision (benefit)
(9,154)
(14,500)
Income tax provision (benefit) (1,964) 3,768
Consolidated net loss (7,190)
(18,268)
Add: Net (income) loss attributable to non-controlling interest (146) 83
Consolidated net loss attributable to Envestnet, Inc.
$(7,336)
$(18,185)

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures follows:

 

 

 

 

 

 

 

As of

 

 

September 30,

 

 

2017

    

2016

Options to purchase common stock

 

2,667,329

 

3,283,331

Unvested restricted stock awards and units

 

1,901,080

 

1,981,775

Convertible Notes

 

2,743,321

 

2,743,321

Total

 

7,311,730

 

8,008,427

17.Major Customers

One customer accounted

  March 31, December 31,
  2020 2019
Segment assets:    
Envestnet Wealth Solutions $1,323,471
 $1,297,891
Envestnet Data & Analytics 506,987
 503,993
Consolidated total assets $1,830,458
 $1,801,884

  Three Months Ended
  March 31,
  2020 2019
Segment depreciation and amortization:    
Envestnet Wealth Solutions $19,420
 $11,267
Envestnet Data & Analytics 8,263
 8,250
Consolidated depreciation and amortization
$27,683
 $19,517
  Three Months Ended
  March 31,
  2020 2019
Segment capital expenditures:    
Envestnet Wealth Solutions $10,190
 $10,838
Envestnet Data & Analytics 3,542
 1,594
Consolidated capital expenditures
$13,732
 $12,432

17.Geographical Information
The following table sets forth certain long-lived assets including property and equipment, net and internally developed software, net by geographic area:
  March 31, December 31,
  2020 2019
United States $116,182
 $108,992
India 4,385
 3,988
Other 850
 1,039
Total long-lived assets, net $121,417
 $114,019


See “Note 11—Revenue” for more than 10%detail of the Company’s total revenues:

revenues by geographic area.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

    

2017

    

2016

 

 

2017

    

2016

 

Fidelity

 

17

%  

15

%  

 

17

%  

15

%  


18.Commitments and Contingencies

18.Commitments and Contingencies
Purchase Obligations and Indemnifications

The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no0 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 associated with these arrangements in the condensed consolidated balance sheets.

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.

Litigation

Legal Proceedings
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. The motion to dismiss is fully briefed, and the parties are awaiting a decision from the Court. 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. The Company believes FinancialApps’s allegations are without merit and intends to defend the action and litigate the counterclaims vigorously.

In addition, the Company is involved in litigationlegal 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

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Table of Contents

reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of September 30, 2017.March 31, 2020. 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 litigationlegal 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 of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. As of September 30, 2017,March 31, 2020 and December 31, 2019, the Company estimated a sales and use tax liability of $12,914.$10,709 and $10,220, respectively, related to revenues in multiple jurisdictions. This amount is included in accrued expenses and other liabilities onin the condensed consolidated balance sheet. Thesheets.

As of March 31, 2020 and December 31, 2019, the Company also estimated a sales and use tax receivable of $4,952$3,689 and $3,346, respectively, related to the estimated recoverability of amounts duea portion of the liability from customers. This amount is included in prepaid expenses and other current assets onin the condensed consolidated balance sheet. As a result, a net sales and use tax liability of $7,962 related to multiple jurisdictions with respect to revenues in the nine month period ended September 30, 2017 and prior years was probable. sheets.

Additional future information obtained from the applicable jurisdictions may affect the Company’sCompany's estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.

Leases

The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of September 30, 2017, were as follows:

 

 

 

 

Years ending December 31:

    

 

 

Remainder of 2017

 

$

3,309

2018

 

 

13,640

2019

 

 

14,492

2020

 

 

14,343

2021

 

 

13,751

Thereafter

 

 

53,538

Total

 

$

113,073

19.Segment Information

Business segments are generally organized around our business services. Our business segments are:

·

Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.

·

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

The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes.  Nonsegment expenses include salary and benefits for certain corporate employees and officers, certain types of professional service expenses, insurance, acquisition related transaction costs, restructuring charges, and other non-recurring and/or non-operationally related expenses.

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Table of Contents

The following table presents revenue by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

    

2016

 

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Envestnet

 

$

135,948

 

$

114,511

 

$

386,638

 

$

328,417

 

Envestnet | Yodlee

 

 

39,666

 

 

34,644

 

 

114,179

 

 

94,267

 

Consolidated revenue

 

$

175,614

 

$

149,155

 

$

500,817

 

$

422,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity revenue as a percentage of Envestnet segment revenue:

 

 

22%

 

 

19%

 

 

22%

 

 

19%

 

No single customer amounts for Envestnet | Yodlee exceeded 10% of the segment total.

The following table presents a reconciliation from income (loss) from operations by segment to consolidated net loss attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

    

2016

 

2017

    

2016

Envestnet

$

18,955

 

$

12,361

 

$

48,277

 

$

32,425

Envestnet | Yodlee

 

(3,364)

 

 

(8,416)

 

 

(16,707)

 

 

(33,728)

  Total segment income (loss) from operations

 

15,591

 

 

3,945

 

 

31,570

 

 

(1,303)

Nonsegment operating expenses

 

(11,243)

 

 

(5,236)

 

 

(27,833)

 

 

(19,078)

Other expense, net

 

(3,986)

 

 

(4,434)

 

 

(13,838)

 

 

(13,214)

Consolidated income (loss) before income taxes (benefit)

 

362

 

 

(5,725)

 

 

(10,101)

 

 

(33,595)

Income tax provision (benefit)

 

1,682

 

 

(1,668)

 

 

10,824

 

 

(10,602)

Consolidated net loss

 

(1,320)

 

 

(4,057)

 

 

(20,925)

 

 

(22,993)

  Add: Net loss attributable to non-controlling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

Consolidated net loss attributable to Envestnet, Inc.

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

Segment assets consist of cash, accounts receivable, prepaid expenses and other current assets, property, plant and equipment, net, internally developed software, net, goodwill, and other intangibles, net, and other non-current assets.  Segment capital expenditures consist of property and equipment and internally developed software expenditures.

A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures follows:

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2017

    

2016

Segment assets:

 

 

 

 

 

Envestnet

$

344,269

 

$

341,602

Envestnet | Yodlee

 

517,953

 

 

530,799

Consolidated total assets

$

862,222

 

$

872,401

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

    

2016

 

2017

    

2016

Segment depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

Envestnet

$

6,414

 

$

6,362

 

$

19,196

 

$

18,786

Envestnet | Yodlee

 

9,078

 

 

10,330

 

 

27,596

 

 

31,086

Consolidated depreciation and amortization

$

15,492

 

$

16,692

 

$

46,792

 

$

49,872

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

    

2016

 

2017

    

2016

Segment capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

Envestnet

$

4,406

 

$

7,967

 

$

17,337

 

$

13,130

Envestnet | Yodlee

 

1,404

 

 

1,212

 

 

3,305

 

 

3,926

Consolidated capital expenditures

$

5,810

 

$

9,179

 

$

20,642

 

$

17,056

20.    Geographical Information 

Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

    

2016

 

2017

    

2016

United States

$

158,750

 

$

135,160

 

$

452,333

 

$

381,628

International (1)

 

16,864

 

 

13,995

 

 

48,484

 

 

41,056

Total

$

175,614

 

$

149,155

 

$

500,817

 

$

422,684

(1)

No foreign country accounted for more than 10% of total revenues.

The following table sets forth property, plant, and equipment, net by geographic area:

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2017

    

2016

United States

$

29,927

 

$

28,713

India

 

4,886

 

 

3,596

Other

 

461

 

 

691

Total

$

35,274

 

$

33,000

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Table of Contents

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

Forward-Looking Statements
Unless otherwise indicated, the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries.

subsidiaries as a whole.

Unless otherwise indicated, all amounts are in thousands, except share and per share information, numbers of financial advisors and client accounts.

Forward-Looking Statements


This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”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 in this quarterly report include, but are not limited to,
a pandemic or health crisis, including the Coronavirus Disease 2019 (“COVID-19”) pandemic, and its impact on the global economy and capital markets, as well as our products, clients, vendors and employees, and our results of operations, the full extent of which may include, among others, statements relating to:

be unknown;
difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources;
our ability to successfully identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;
the possibility that the anticipated benefits of acquisitions will not be realized to the extent or when expected;
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 amount of our debt and our ability to service our debt;
the variability of our revenue from period to period;
the targeting of some of our sales efforts at large financial institutions and large internet services companies which prolongs sales cycles, requires substantial upfront sales costs and results in less predictability in completing some of our sales;
the deployment of our solutions by customers and potential delays and risks inherent in the process;
the competitiveness of our solutions and services as compared to those of others;
the concentration of our revenues from the delivery of our solutions and services to clients in the financial services industry;
our reliance on a limited number of clients for a material portion of our revenue;
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;
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;
the renegotiation of fees by our clients;
our ability to keep up with rapid technological change, evolving industry standards or changing requirements of clients;
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 and the negative effects of failure to comply with these requirements on how we operate our business;
liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest;
failure of our solutions, services or systems, or those of third parties on which we rely, to work properly;
harm to our reputation;


our failure to process transactions effectively or fail to adequately protect against disputed or potential fraudulent activities;
our inability to maintain our payment network with third-party service providers, or difficulties encountered by our disbursement partners;
limitations on our ability to access information from third parties or charges for accessing such information;
potential liability for use of inaccurate information by third parties provided by us;
the failure of our insurance to adequately protect us;
our dependence on our senior management team;
our ability to recruit and retain qualified employees;
regulatory compliance failures;
changes in laws and regulations, including tax laws and regulations, or the inability to continue to rely on exemptions from the applicability of certain laws or regulations;
the occurrence of a deemed “change of control”;
adverse judicial or regulatory proceedings against us;
the failure to protect our intellectual property rights;
potential claims by third parties for infringement of their intellectual property rights;
our use of open source coding;
protection of trade secrets and other proprietary information;
risks associated with our international operations;
the impact of fluctuations in foreign currency exchange rates;
the uncertainty of the application and interpretation of certain tax laws;
changes in accounting principles and standards;
changes in the estimates of fair value of reporting units or of long-lived assets;
issuances of additional shares of common stock or issuances of shares of preferred stock or convertible securities;
general economic conditions, political and regulatory conditions;
global events, natural disasters, environmental disasters, terrorist attacks and pandemics, including their impact on the economy and trading markets; and

·

difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources,

·

the concentration of nearly all of our revenues from the delivery of our solutions and services to clients in the financial services industry,

·

our reliance on a limited number of clients for a material portion of our revenue,

·

the renegotiation of fee percentages or termination of our services by our clients,

·

our ability to identify potential acquisition candidates, complete acquisitions, including our acquisition of FolioDynamix, successfully integrate acquired companies and realize the expected benefits of acquisitions,

·

the impact of market and economic conditions on revenues,

·

our inability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner,

·

our ability to expand our relationships with existing customers, grow the number of customers and derive revenue from new offerings such as our data analytic solutions and market research services and premium financial applications (“FinApps”),

·

compliance failures,

·

adverse judicial or regulatory proceedings against us,

·

liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest,

·

changes in laws and regulations,

·

general economic conditions, political and regulatory conditions,

·

the impact of fluctuations in market condition and interest rates on the demand for our products and services and the value of assets under management or administration,

·

the impact of market conditions on our ability to issue debt and equity,

·

the impact of fluctuations in interest rates on our cost of borrowing,

·

our financial performance,

·

the results of our investments in research and development, our data center and other infrastructure,

28


Table of Contents

·

our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information,

·

failure of our systems to work properly,

·

our ability to realize operating efficiencies,

·

the advantages of our solutions as compared to those of others,

·

the failure to protect our intellectual property rights,

·

our ability to establish and maintain intellectual property rights,

·

our ability to retain and hire necessary employees and appropriately staff our operations, and

·

management’s response to these factors.


In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forwardforward‑looking statements. All forwardforward‑looking statements contained in this quarterly report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. ForwardForward‑looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forwardforward‑looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events, except as required by applicable law. If we do update one or more forwardforward‑looking statements, no inference should be made that we will make additional updates with respect to those or other forwardforward‑looking statements.

Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I, under “RiskItem 1A.“Risk Factors”; in our annual report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), as updated in Part II, Item 1A.“Risk Factors” of this Form 10-Q; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

You should read this quarterly report on Form 10-Q and our annual report onthe 2019 Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.

The following discussion and analysis should also be read along with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 20162019 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

Overview




Overview
Envestnet is a leading provider of intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value.process. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.

More than 2,9004,900 companies, including 16of the 20 largest U.S. banks, 3946 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”RIAs”), and hundreds of Internetinternet 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, Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic end-to-end wealth management platformfinancial wellness network that supports advisors and their clients.  

29



Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting software, services and data, delivering better intelligence and enabling its customers to drive better outcomes.


Envestnet serves clients from its headquarters based in Chicago, Illinois, as well as other locations throughout the United States, India and internationally,other international locations.

Envestnet also operates five registered investment advisers (“RIAs”) registered with the U.S. Securities and Exchange Commission (“SEC”). We believe that our business model results in a high degree of recurring and predictable financial results.
Recent Developments

Uncertainties Related to COVID-19

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease. We are closely monitoring developments with the COVID-19 pandemic and are taking proactive measures to ensure business continuity. Our priority is to protect the well-being of our employees, while we continue to provide uninterrupted service and support to our clients. As part of our existing business continuity protocol, we created a pandemic steering committee that meets regularly and communicates information or guidance to our employees and customers.

We have instituted travel bans and are following mandatory stay-at-home orders where applicable. A majority of our employees are working from home as a result of these mandatory stay-at-home orders. Where permissible, we have also implemented in-office work rotations. For employees working at our offices, preventative measures have been taken, including the adapting of work spaces to allow for appropriate social distancing and enhanced cleaning regimens. We have also canceled our 2020 annual Advisor Summit Conference, which was set to take place in May 2020. We continue to monitor developments related to COVID-19 and, as the situation evolves, will continue to coordinate our operations response based on existing business continuity plans and on guidance from global health organizations, relevant governments and general response pandemic best practices.

The COVID-19 pandemic has resulted in significant declines within the equity markets. This is significant to us as we provide asset-based, subscription-based and professional services on a business-to-business-to-consumer basis to financial services clients, whereby customers offer solutions based on our platform to their end users. For the three months ended March 31, 2020, approximately 55% of our revenues result from asset-based fee billing arrangements. Asset-based recurring revenues primarily India.

Recent Events

consist of fees for providing customers access to our platforms. These fees are generally based upon variable percentages of assets managed or administered under our platforms. Our fee percentages vary based on the level and type of services that we provide to our customers, as well as the values of existing customer accounts. The values of our customer accounts are affected by inflows or outflows of customer funds and market fluctuations. Approximately 90% of our asset-based fee arrangements are billed at the beginning of each quarter based on the market value of customer assets on our platforms as of the end of the prior quarter.


For the three months ended March 31, 2020, approximately 42% of revenues are subscription-based. These revenues primarily consist of fees for providing customers continuous access to our platforms. These subscription-based fees generally include fixed fees or usage-based fees. These fees vary based on the services being offered. Our subscription-based fee arrangements are typically established through multi-year contracts.



Our customers are primarily banks, financial institutions, financial advisors at broker-dealers and RIAs. As a result of the structure of our revenue arrangements and our customer-types, our revenues during the three months ended March 31, 2020 were not materially impacted by COVID-19. During the three months ended March 31, 2020, we experienced no business interruptions, nor did we lose any significant customers. In March 2020, our wealth management platform saw its highest use in our history.

Our revenues are expected to be negatively impacted by COVID-19 over the remainder of fiscal 2020, primarily due to market impacts and lower than expected customer growth. Based on forecasts and other qualitative factors, we have determined that we currently have no impairments to our assets as of March 31, 2020. We have also not modified our debt agreement in connection with the COVID-19 pandemic.

On September 25,March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law.  One provision of the CARES Act provides a five-year carryback of Net Operating Losses (“NOLs”) generated in tax years beginning after December 31, 2017 and before January 1, 2021. We estimate a refund of approximately $1,200 from the carryback of NOLs. The CARES Act also provides for a payment delay of employer payroll taxes, which we plan on utilizing.

Investment in Private Services Company

On January 8, 2020, we acquired a 4.25% membership interest in a private services company for cash consideration of $11,000. The private services company partners with independent network advisory firms to help them grow, become more profitable and run more efficiently. We will account for this investment under the equity method basis of accounting.

Acquisition of Private Technology Company

On February 18, 2020, through our wholly owned subsidiary Yodlee, Inc. (“Yodlee”), we acquired a private technology company (the “Private Technology Company Acquisition”). The private technology company enables the consent 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 cloud-based interoperable interfaces or application programming interfaces. The technology and operations of the private technology company have been integrated into our Envestnet Data & Analytics segment.

In connection with the Private Technology Company Acquisition, we acquired all of the outstanding shares and paid cash consideration of $2,343, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6,750 in contingent consideration, based upon achieving certain performance targets. We recorded a liability as of the date of acquisition of approximately $5,239, which represented the estimated fair value of contingent consideration on the date of acquisition. Future changes to the estimated fair value of the contingent consideration, if any, are recognized in earnings of the Company.

We recorded estimated goodwill of $7,017, which is not deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $1,000. The tangible assets acquired and liabilities assumed were not material.

Acquisition of Private Cloud Technology Company

On March 2, 2020, we 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 our Envestnet Wealth Solutions segment.

In connection with the Private Cloud Technology Company Acquisition, we paid estimated consideration of $11,968, net of cash acquired. In connection with the acquisition, we recorded estimated goodwill of $10,932, which is deductible for income tax purposes. The tangible assets acquired and liabilities assumed were not material.

Acquisition of Private Financial Technology Design Company

On March 3, 2020, we acquired the outstanding units of a private financial technology design company that were not owned by the Company enteredand merged the acquired company into an agreement and plan of merger (the “Merger Agreement”) with Folio Dynamics Holdings, Inc., a Delaware corporation (“FolioDynamix”), FCD Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of theours (the “Private Financial Technology Design Company (“Merger Sub”Acquisition”), and Actua USA Corporation, a Delaware corporation, solely in its capacity as the representative of the stockholders of FolioDynamix.  Pursuant to the Merger Agreement, Merger Sub will merge with and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) and a wholly owned subsidiary of the Company. FolioDynamix will be included in the Envestnet segment.

FolioDynamix provides. The private financial institutions, registered investment advisors, and othertechnology design company designs integrated, intuitive digital technology applications for institutional financial services firms, bank wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research,organizations, independent



advisor networks, and overlay management services.

broker-dealers. The Company plans to acquire FolioDynamix to add 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 FolioDynamixthe private financial technology design company have been integrated into our Envestnet Wealth Solutions segment.


We previously owned approximately 45% of the Company’s wealth management business, enablingoutstanding 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 $11,026, we paid estimated consideration of $5,946, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, we recognized a gain of $4,230 on the re-measurement to fair value of its previously held interest, which is included in other expense, net in the condensed consolidated statements of operations
In connection with the Private Financial Technology Design Company Acquisition, we recorded estimated total goodwill of $9,241, of which approximately $1,800 is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2,000. The tangible assets acquired and liabilities assumed were not material.

Executive Leadership Appointments

On October 3, 2019, Jud Bergman, our Chairman and Chief Executive Officer, died in an automobile accident. At that time, Bill Crager, President of Envestnet and Chief Executive of Envestnet Wealth Solutions, was named our interim Chief Executive Officer, and Ross Chapin, our lead independent director, was named interim non-executive Chairman of our Board of Directors (the “Board”). On March 30, 2020, Mr. Crager was named Chief Executive Officer of Envestnet and a member of the Board and Stuart DePina, whom has served as Chief Executive of Envestnet Data & Analytics since January 2019, was named President of Envestnet. James Fox, a current member of the Board, was named Chairman and Charles Roame, a current member of the Board, was named Vice Chairman of the Board.

Early Retirement Program

In the fourth quarter of 2019, we offered a voluntary early retirement program (the “Early Retirement Program”) to employees over a certain age, who have a combined age and years of experience with the Company of at least 65 years. Employees had until January 31, 2020 to further leverage its operating scale and data analytics capabilities.

Subject tovoluntarily accept the terms and conditionsprogram with separation of the Merger Agreement, the Company will pay $195,000 in cash for all the outstanding shares of FolioDynamix, subject to certain post-closing adjustments.  The Company will fund the Acquisition price with a combination of cash on the Company’s balance sheet and borrowings under its revolving credit facility. Either the Company or FolioDynamix may terminate the Agreement if the closing does not occur byservice no later than March 31, 2018.

The applicable antitrust pre-clearance filings were made by2020. In connection with this program, we recorded $11,966 of severance expense during the parties on October 10, 2017three months ended March 31, 2020. As of March 31, 2020, we have accrued approximately $10,670 in accrued compensation and October 11, 2017.  The Company is withdrawing its filingrelated taxes and plans to refile it immediately thereafter to allow$2,336 recorded in other non-current liabilities. As of December 31, 2019, we had accrued approximately $1,733 in accrued compensation and related taxes and $599 recorded in other non-current liabilities. We anticipate approximately $12,000 of payments in 2020 with the Department of Justice additional time to review the filing without having to issue a second request. The Company continues to expect the transaction to close in the first quarter of 2018, subject to satisfaction of the closing conditions.  The Company and FolioDynamix will continue to operate separately until the transaction closes.

remainder paid through 2030.


Segments

Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in Note 19Part I, Item 1, “Note 16—Segment Information” to the notes to condensed consolidated financial statements.statements included in Item 1 of this Quarterly Report on Form 10-Q. 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.


·

Envestnet | YodleeData & Analytics – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.


Envestnet Wealth Solutions Segment

Envestnet empowers financial advisors at broker-dealers, banks, and RIAs with all the tools they require to deliver holistic wealth management to their end clients. In addition, the firm provides advisors with practice management support so that they can grow their practices and operate more efficiently. By September 30, 2017,March 31, 2020, Envestnet’s platform assets grew to approximately $1.3$3 trillion in 6.712.3 million accounts overseen by more than 59,000103 thousand 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,

30


tax management and socially responsible investing, aggregated multimulti‑custodian performance reporting and communication tools, plus data analytics. Envestnet hasWe have access to a wide range of leading thirdthird‑party asset custodians.



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

·

Envestnet | Enterprise provides an end-to-end open architecture wealth management platform through which advisors can construct portfolios for clients. It begins with aggregated household data, which then leads to the creation of a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to over 17,00020,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics and digital advice capabilities to customers.


·

Envestnet | TamaracTMprovides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management (“CRM”) software, principally to highhigh‑end RIAs.


·

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


·

Envestnet | PMC®, or Portfolio Management Consultants (“PMC”) provides research due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 4,000nearly 4,500 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as approximately 1,000 proprietary products, such as Quantitative Portfolios.quantitative portfolios and fund strategist portfolios. PMC also offers an Overlay Service, which includes patented portfolio overlay and tax optimization services.


Key Metrics

The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

    

2016

    

2016

    

2017

    

2017

    

2017

 

 

(in millions except accounts and advisors data)

Platform Assets

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Assets Under Management (AUM)

 

$

101,924

 

$

105,178

 

$

113,544

 

$

122,543

 

$

131,809

Assets Under Administration (AUA)

 

 

231,831

 

 

241,682

 

 

248,445

 

 

271,450

 

 

293,963

Subtotal AUM/A

 

 

333,755

 

 

346,860

 

 

361,989

 

 

393,993

 

 

425,772

Licensing

 

 

721,690

 

 

748,125

 

 

763,372

 

 

825,829

 

 

867,967

Total Platform Assets

 

$

1,055,445

 

$

1,094,985

 

$

1,125,361

 

$

1,219,822

 

$

1,293,739

Platform Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

 

519,717

 

 

545,130

 

 

574,132

 

 

614,973

 

 

652,060

AUA

 

 

961,590

 

 

994,583

 

 

986,554

 

 

1,083,417

 

 

1,145,050

Subtotal AUM/A

 

 

1,481,307

 

 

1,539,713

 

 

1,560,686

 

 

1,698,390

 

 

1,797,110

Licensing

 

 

4,394,670

 

 

4,558,883

 

 

4,263,002

 

 

4,811,390

 

 

4,925,146

Total Platform Accounts

 

 

5,875,977

 

 

6,098,596

 

 

5,823,688

 

 

6,509,780

 

 

6,722,256

Advisors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM/A

 

 

35,861

 

 

36,483

 

 

36,985

 

 

38,498

 

 

40,379

Licensing

 

 

16,191

 

 

17,852

 

 

18,159

 

 

19,007

 

 

19,104

Total Advisors

 

 

52,052

 

 

54,335

 

 

55,144

 

 

57,505

 

 

59,483

indicated: 

31


  As of
  March 31, June 30, September 30, December 31, March 31,
  2019 2019 2019 2019 2020
  (in millions, except accounts and advisors data)
Platform Assets          
Assets under Management (“AUM”) $176,144
 $182,143
 $188,739
 $207,083
 $185,065
Assets under Administration (“AUA”) 319,129
 330,226
 316,742
 343,505
 312,472
Total AUM/A 495,273
 512,369
 505,481
 550,588
 497,537
Subscription 2,546,483
 2,835,780
 2,947,582
 3,205,281
 2,875,394
Total Platform Assets $3,041,756
 $3,348,149
 $3,453,063
 $3,755,869
 $3,372,931
Platform Accounts          
AUM 874,574
 907,034
 934,811
 935,039
 970,896
AUA 1,187,589
 1,196,114
 1,136,430
 1,193,882
 1,254,856
Total AUM/A 2,062,163
 2,103,148
 2,071,241
 2,128,921
 2,225,752
Subscription 8,909,581
 9,492,653
 9,692,714
 9,793,175
 10,090,172
Total Platform Accounts 10,971,744
 11,595,801
 11,763,955
 11,922,096
 12,315,924
Advisors          
AUM/A 39,035
 39,727
 39,735
 40,563
 40,971
Subscription 57,594
 59,292
 60,319
 61,180
 62,077
Total Advisors 96,629
 99,019
 100,054
 101,743
 103,048



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 - Three Months Ended September 30, 2017

 

 

As of

 

Gross

 

 

 

 

Net

 

Market

 

As of

 

 

6/30/2017

 

Sales

 

Redemptions

 

Flows

 

Impact

 

9/30/2017

 

 

(in millions except account data)

Assets under Management (AUM)

    

$

122,543

    

$

10,585

    

$

(5,178)

    

$

5,407

    

$

3,859

    

$

131,809

Assets under Administration (AUA)

 

 

271,450

 

 

24,279

 

 

(10,873)

 

 

13,406

 

 

9,107

 

 

293,963

Total AUM/A

 

$

393,993

 

$

34,864

 

$

(16,051)

 

$

18,813

 

$

12,966

 

$

425,772

Fee-Based Accounts

 

 

1,698,390

 

 

 

 

 

 

 

 

98,720

 

 

 

 

 

1,797,110

  Asset Rollforward - Three Months Ended March 31, 2020
  As of Gross   Net Market Reclass to As of
  12/31/2019 Sales Redemptions Flows Impact Subscription 3/31/2020
  (in millions, except account data)
AUM $207,083
 $20,986
 $(11,099) $9,887
 $(31,905) $
 $185,065
AUA 343,505
 39,934
 (18,878) 21,056
 (50,144) (1,945) 312,472
Total AUM/A $550,588
 $60,920
 $(29,977) $30,943
 $(82,049) $(1,945) $497,537
Fee-Based Accounts 2,128,921
     117,673
   (20,842) 2,225,752

The above AUM/A gross sales figures include $9.7$20.1 billion in new client conversions. The CompanyWe onboarded an additional $12.4$25.0 billion in licensingsubscription conversions during the three months ended September 30, 2017, bringing total conversions for the quarter to $22.1 billion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Rollforward - Nine Months Ended September 30, 2017

 

 

As of

 

Gross

 

 

 

 

Net

 

Market

 

Reclass to

 

As of

 

 

12/31/2016

 

Sales

 

Redemptions

 

Flows

 

Impact

 

Licensing

 

9/30/2017

 

 

(in millions except account data)

Assets under Management (AUM)

    

$

105,178

    

$

36,113

    

$

(19,889)

    

$

16,224

    

$

10,407

    

$

 —

    

$

131,809

Assets under Administration (AUA)

 

 

241,682

 

 

74,044

 

 

(40,258)

 

 

33,786

 

 

23,386

 

 

(4,891)

 

 

293,963

Total AUM/A

 

$

346,860

 

$

110,157

 

$

(60,147)

 

$

50,010

 

$

33,793

 

$

(4,891)

 

$

425,772

Fee-Based Accounts

 

 

1,539,713

 

 

 

 

 

 

 

 

280,161

 

 

 

 

 

(22,764)

 

 

1,797,110

The above AUM/A gross sales figures include $20.9 billion in new client conversions. The Company onboarded an additional $34.7 billion in licensing conversions during the nine months ended September 30, 2017,March 31, 2020 bringing total conversions for the three quartersmonths ended March 31, 2020 to $55.6$45.1 billion.

The mix of AUM


Asset and AUA was as followsaccount figures in the “Reclass to Subscription” columns for the three months ended March 31, 2020 represent enterprise customers whose billing arrangements in future periods indicated:

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. Periodically clients have chosen to change the way they pay for our solution, whereby they switch from an asset-based pricing model to a subscription-based model, which has increased our subscription-based metrics.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

March 31,

 

 

June 30,

 

 

September 30,

 

 

2016

    

 

2016

    

 

2017

    

 

2017

    

 

2017

 

Assets under management (AUM)

31

%  

 

30

%  

 

31

%  

 

31

%  

 

31

%  

Assets under administration (AUA)

69

%  

 

70

%  

 

69

%  

 

69

%  

 

69

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%  

Envestnet | YodleeData & Analytics Segment

Envestnet | YodleeData & Analytics is a leading data aggregation and data intelligence platform. As a “big data”an artificial intelligence (“AI”) and data specialist, YodleeEnvestnet Data & Analytics gathers, refines and aggregates a massive set of end-user permissioned transaction level data which it then provides to customers as data analytics solutions and combines them with financial applications, reports, market research services.

More than 1,000analysis and application programming interfaces (“APIs”) for its customers.

Over 1,300 financial institutions, financial technology innovators and financial advisory firms, including 1316 of the 20 largest U.S. banks, subscribe to the Envestnet | YodleeData & Analytics platform to underpin personalized financial apps and services for over 2126 million paid subscribers.

Yodlee

Envestnet Data & Analytics serves two main customer groups: financial institutions (“FI”) and financial technology innovators, which we refer to as Yodlee Interactive (“YI”) customers.

·

The Financial Institutions group provides customers with secure access to open application programming interfaces (“APIs”), end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Yodlee also enables customers to develop their own applications through its open APIs, which deliver secure data, money movement solutions, and other functionality. FinApps can be subscribed to individually or in combinations that include personal financial management, wealth management, card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, card, lenders, and other financial services sectors. These FinApps help consumers and small businesses simplify and manage their finances, review their financial accounts, track their spending, calculate their net worth,

32

The Financial Institutions group provides customers with secure access to open APIs, end-user facing applications powered by our platform and APIs (“FinApps”), and reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Envestnet Data & Analytics 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, credit card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, credit 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 Expense and Income Analysis 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 22,000 sources, including banking, investment, loan and credit card information.


sub-vertical markets, including wealth management, personal financial management, small business accounting, small business lending and authentication. They use the Envestnet Data & Analytics platform to build solutions that leverage our open APIs and provide 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

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.


·

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.


Both FI and YI groupschannels benefit customers by improving end-user satisfaction and retention, accelerating speed to market, creating technology savings and enhancing their data analytics solutions and market research capabilities. End users receive better access to their financial information and have more control over their finances, leading to more informed and personalized decision making. For customers who are members of the developer community, YodleeEnvestnet Data & Analytics solutions provide access to critical data and payments solutions, faster speed to market and enhanced distribution.

·

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.

Envestnet Analytics provides data analytics, mobile sales solutions, and online educational 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 critical insights to clients.

We believe that our brand leadership, innovative technology and intellectual property, large customer base, and unique data gathering and enrichment provide us with competitive advantages that have enabled us to generate strong growth.

We believe that our business model results in a high degree of

Operational Highlights
Asset-based recurring and predictable financial results.

Operational Highlights

Revenuesrevenues increased 24% from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 18% from $90,042$108,934 in the three months ended September 30, 2016March 31, 2019 to $106,147$134,811 in the three months ended September 30, 2017. Subscription and licensingMarch 31, 2020. Subscription-based recurring revenues increased 21%26% from $51,959$83,087 in the three months ended September 30, 2016March 31, 2019 to $62,963$104,551 in the three months ended September 30, 2017.March 31, 2020. Total revenues, which include professional serviceservices and other fees,revenues, increased 18%23% from $149,155$199,666 in the three months ended September 30, 2016March 31, 2019 to $175,614$246,539 in the three months ended September 30, 2017.March 31, 2020. The increaseacquisitions of PortfolioCenter and PIEtech, both of which occurred during the second quarter of 2019 (the “2019 Acquisitions”), contributed additional revenues of $16,526 in the three months ended March 31, 2020. The Envestnet Wealth Solutions segment's total revenues wasexcluding the revenue contributed from the 2019 acquisitions, increased by $29,189 primarily a result of the positive effects of new account growth and positive net flows of AUM/A as well asdue an increase in subscriptionasset-based revenues of $25,877 and licensing revenues related to Envestnet | Yodlee and Envestnet | Enterprise segments of $6,190 and $4,814, respectively.

Revenues from assets AUM/A increased 16% from $258,969 in the nine months ended September 30, 2016 to $299,268 in the nine months ended September 30, 2017. Subscription and licensing revenues increased 27% from $142,303 in the nine months ended September 30, 2016 to $180,675 in the nine months ended September 30, 2017. Total revenues, which include professional service and other fees, increased 18% from $422,684 in the nine months ended September 30, 2016 to $500,817 in the nine months ended September 30, 2017. The increase in total revenues was primarily a result of the positive effects of new account growth and positive net flows of AUM/A as well as an increase in subscriptionsubscription-based revenues of $3,778. The Envestnet Data & Analytics segment's total revenues increased by $1,158 primarily due to an increase in subscription-based revenues of $2,167, partially offset by a decrease in professional services and licensingother revenues related to Envestnet | Yodlee and Envestnet | Enterprise segments of $20,953 and $17,419, respectively.

The net$1,009.

Net loss attributable to Envestnet, Inc. for the three months ended September 30, 2017March 31, 2020 was $1,320,$7,336, or $0.03$0.14 per diluted share, compared to net loss attributable to Envestnet, Inc. of $4,057$18,185, or $0.09$0.38 per diluted share, for the three months ended September 30, 2016. The net loss attributable to Envestnet, Inc. for the nine months ended September 30, 2017 was $20,925, or $0.48 per diluted share, compared to net loss attributable to Envestnet, Inc. of $22,993 or $0.54 per diluted share for the nine months ended September 30, 2016.

March 31, 2019.


Adjusted revenues for the three months ended September 30, 2017 was $175,629, an increaseMarch 31, 2020 were $246,978, compared to adjusted revenues of 17% from $149,486$199,672 in the prior year period. Adjusted net revenues were $178,386 for the three months ended March 31, 2020, compared to adjusted net revenues of $145,830 in the prior year period. Adjusted EBITDA for the three months ended September 30, 2017March 31, 2020 was $34,789, an increase$54,578, compared to adjusted EBITDA of 26% from $27,505$34,002 in the

33


prior year period. Adjusted net income for the three months ended September 30, 2017March 31, 2020 was $17,283,$31,202, or $0.37$0.57 per diluted share, compared to adjusted net income of $12,463,$19,411, or $0.28$0.39 per diluted share in the prior year period.

Adjusted revenues, for the nine months ended September 30, 2017 was $500,937, an increase of 18% from $423,465 in the prior year period. Adjusted EBITDA for the nine months ended September 30, 2017 was $90,152, an increase of 30% from $69,126 in the prior year period. Adjusted net income for the nine months ended September 30, 2017 was $41,948, or $0.91 per diluted share, compared to adjusted net income of $29,498, or $0.67 per diluted share in the prior year period.

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a discussion of non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.




Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

 

2017

    

2016

    

Percent Change

 

2017

    

2016

    

Percent Change

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Revenues:

 

 

    

    

 

 

 

 

 

 

 

    

    

 

 

 

 

Assets under management or administration

$

106,147

 

$

90,042

 

18

%  

 

$

299,268

 

$

258,969

 

16

%  

Subscription and licensing

 

62,963

 

 

51,959

 

21

%  

 

 

180,675

 

 

142,303

 

27

%  

Professional services and other

 

6,504

 

 

7,154

 

(9)

%  

 

 

20,874

 

 

21,412

 

(3)

%  

Total revenues

 

175,614

 

 

149,155

 

18

%  

 

 

500,817

 

 

422,684

 

18

%  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

56,070

 

 

47,259

 

19

%  

 

 

161,031

 

 

132,319

 

22

%  

Compensation and benefits

 

68,551

 

 

60,345

 

14

%  

 

 

199,079

 

 

180,625

 

10

%  

General and administration

 

31,153

 

 

26,150

 

19

%  

 

 

90,178

 

 

80,249

 

12

%  

Depreciation and amortization

 

15,492

 

 

16,692

 

(7)

%  

 

 

46,792

 

 

49,872

 

(6)

%  

Total operating expenses

 

171,266

 

 

150,446

 

14

%  

 

 

497,080

 

 

443,065

 

12

%  

Income (loss) from operations

 

4,348

 

 

(1,291)

 

*

%  

 

 

3,737

 

 

(20,381)

 

(118)

%  

Other expense, net

 

(3,986)

 

 

(4,434)

 

(10)

%  

 

 

(13,838)

 

 

(13,214)

 

 5

%  

Loss before income tax provision (benefit)

 

362

 

 

(5,725)

 

(106)

%  

 

 

(10,101)

 

 

(33,595)

 

(70)

%  

Income tax provision (benefit)

 

1,682

 

 

(1,668)

 

(201)

 

 

 

10,824

 

 

(10,602)

 

(202)

%  

Net loss

 

(1,320)

 

 

(4,057)

 

(67)

%  

 

 

(20,925)

 

 

(22,993)

 

(9)

%  

Add: Net loss attributable to non-controlling interest

 

 —

 

 

 —

 

 —

%  

 

 

 —

 

 

 —

 

 —

%  

Net loss attributable to Envestnet, Inc.

$

(1,320)

 

$

(4,057)

 

(67)

%  

 

$

(20,925)

 

$

(22,993)

 

(9)

%  


  Three Months Ended  
  March 31, 
 Percent
  2020 2019 Change
  (in thousands)  
Revenues:      
Asset-based $134,811
 $108,934
 24 %
Subscription-based 104,551
 83,087
 26 %
Total recurring revenues 239,362
 192,021
 25 %
Professional services and other revenues 7,177
 7,645
 (6)%
Total revenues 246,539
 199,666
 23 %
Operating expenses:      
Cost of revenues 74,933
 61,645
 22 %
Compensation and benefits 110,430
 86,717
 27 %
General and administration 41,110
 40,524
 1 %
Depreciation and amortization 27,683
 19,517
 42 %
Total operating expenses 254,156
 208,403
 22 %
Loss from operations (7,617) (8,737) (13)%
Other expense, net (1,537) (5,763) (73)%
Loss before income tax provision (benefit) (9,154) (14,500) (37)%
Income tax provision (benefit) (1,964) 3,768
 (152)%
Net Loss (7,190) (18,268) (61)%
Add: Net (income) loss attributable to non-controlling interest (146) 83
 *
Net Loss attributable to Envestnet, Inc. $(7,336) $(18,185) (60)%
*Not meaningful.

Three months ended September 30, 2017March 31, 2020 compared to three months September 30, 2016

Revenues

Totalended March 31, 2019

Asset-based recurring revenues
Asset-based recurring revenues increased 18%24% from $149,155$108,934 in the three months ended September 30, 2016March 31, 2019 to $175,614$134,811 in the three months ended September 30, 2017. The increase was primarily due to an increase in revenues from AUM/A and subscription and licensing of $16,105 and $11,004, respectively. Revenues from AUM/A remained consistent as a percentage of total revenues at 60% in the three months ended September 30, 2016 and 2017.

Assets under management or administration

Revenues earned from AUM/A increased 18% from $90,042 in the three months ended September 30, 2016 to $106,147 in the three months ended September 30, 2017.March 31, 2020. The increase was primarily due to an increase in asset values applicable to our quarterly billing cyclecycles in 2017, relativethe three months ended March 31, 2020 compared to the corresponding periodthree months ended March 31, 2019, due to an upturn in 2016. In the thirdequity markets during the fourth quarter of 2017, revenues were2019 as compared to the prior year period. The increase also positively affected byincludes the impact of new account growth and positive net flows of AUM/A duringin the first and second quartersquarter of 2017.

2020.

34



Excluding $16,526 of total revenue from the 2019 Acquisitions, asset-based recurring revenues increased from 55% of total revenue in the three months ended March 31, 2019 to 59% of total revenue in the three months ended March 31, 2020.

The number of financial advisors with AUM/Aasset-based recurring revenue on our technology platforms increased from 35,86139,035 as of September 30, 2016March 31, 2019 to 40,37940,971 as of September 30, 2017March 31, 2020 and the number of AUM/A client accounts increased from approximately 1,500,0002,100,000 as of September 30, 2016March 31, 2019 to approximately 1,800,0002,200,000 as of September 30, 2017.

Subscription and licensing

Subscription and licensingMarch 31, 2020.

Subscription-based recurring revenues
Subscription-based recurring revenue increased 21%26% from $51,959$83,087 in the three months ended September 30, 2016March 31, 2019 to $62,963$104,551 in the three months ended September 30, 2017.March 31, 2020. This increase was primarily due to an increase of$19,297 in theEnvestnet related revenue of $2,051,Wealth Solutionssegment and an increase of $2,167 in the Envestnet | Tamarac related revenue of $2,763 and Envestnet | Yodlee contributing an additional $6,190. Data & Analytics segment.

The increase in the Envestnet andWealth Solutions segment was primarily due to the 2019 Acquisitions, which contributed revenues of $15,519 to subscription-based recurring revenues in the three months ended March 31, 2020. The remaining increase of $3,778 within the Envestnet | Tamarac revenueWealth Solutions segment is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.
The increase in Envestnet | YodleeData & Analytics revenue is primarily due to broad increases in revenue from new and existing customers.


Professional services and other revenues
Professional services and other revenues decreased 6% from $7,645 in the three months ended March 31, 2019 to $7,177 in the three months ended March 31, 2020. The decrease was primarily due to a decrease in revenues from existing customers.

Cost of revenues
Cost of revenues increased 22% from $61,645 in the three months ended March 31, 2019 to $74,933 in the three months ended March 31, 2020. The increase was primarily due to an increase in revenue from new and existing customersasset-based cost of $6,190.Approximately $4.8 million or 77%revenues of this increase was attributed$14,750, partially offset by a decrease in subscription-based cost of revenues of $1,400. The 2019 Acquisitions had an immaterial impact to our data analytics channel while the reminder was mainly driven by increases in our FI and YI groups.

Professional services and other

Professional services and othercost of revenues decreased 9% from $7,154 in the three months ended September 30, 2016 to $6,504 in the three months ended September 30, 2017, primarily due to Envestnet | Yodlee recognizing one-time onboarding of data analytic customers in the three months ended September 30, 2016 that did not repeat in the three months ended September 30, 2017, offset by an overall increase in existing customer revenue attributable to Envestnet | Tamarac.

Cost of revenues

Cost of revenues increased 19% from $47,259 in the three months ended September 30, 2016 to $56,070 in the three months ended September 30, 2017, primarily due to a corresponding increase in revenues from AUM/A, the mix of such revenues from AUM/A, and an increase in cost of revenues associated with subscription and licensing revenues.March 31, 2020. As a percentage of total revenues, cost of revenues remained consistent at 32%decreased from 31% in the three months ended September 30, 2016 and 2017.

March 31, 2019 to 30% in three months ended March 31, 2020.

Compensation and benefits

Compensation and benefits increased 14%27% from $60,345$86,717 in the three months ended September 30, 2016March 31, 2019 to $68,551$110,430 in the three months ended September 30, 2017,March 31, 2020. The increase was primarily due to an increaseincreases in severance expense of $11,502, salaries, benefits and related payroll taxes of $4,678, primarily a result of an increase in headcount to support organic growth. Also contributing to the growth were increases in$4,792, incentive compensation of $2,624,$3,575 and non-cash compensation expense of $3,167. The increase in severance expense is primarily related to the Early Retirement Program in the three months ended March 31, 2020. The 2019 Acquisitions contributed compensation and benefit expenses of $539$8,630 to total compensation and stock-based compensation of $494.benefits expense in the three months ended March 31, 2020. As a percentage of total revenues, compensation and benefits decreasedincreased from 40%43% in the three months ended September 30, 2016March 31, 2019 to 39%45% in the three months ended September 30, 2017.

March 31, 2020.


General and administration

General and administration expenses increased 19%1% from $26,150$40,524 in the three months ended September 30, 2016March 31, 2019 to $31,153$41,110 in the three months ended September 30, 2017, primarily due to increases in acquisition costs of $2,360, audit and related fees of $520,  website and systems costs of $868, non-income tax expense adjustments of $571, professional and legal fees of $508, occupancy costs of $493, external data and research services of $483 and marketing expenses of $380, offset by decreases in litigation related expense of $2,097 and fair market value adjustments on contingent consideration  of $349. As a percentage of total revenues, general and administration expenses remained consistent at 18% in the three months ended September 30, 2016 and 2017.

Depreciation and amortization

Depreciation and amortization expense decreased 7% from $16,692 in the three months ended September 30, 2016 to $15,492 in the three months ended September 30, 2017, primarily due to a decrease in intangible asset amortization of $1,658, offset by an increase in amortization of internally developed software of $474. As a percentage of total revenues, depreciation and amortization expense decreased from 11% in the three months ended September 30, 2016 to 9% in the three months ended September 30, 2017.

Other expense, net

Other expense, net decreased 10% from $4,434 in the three months ended September 30, 2016 to $3,986 in the three months ended September 30, 2017, primarily due to a decrease in interest expense of $264 and foreign exchange impact of $283. Other income primarily consists of interest expense as well as impacts related to investments in private companies and foreign currency exchange.

35


Income tax provision (benefit)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

    

2017

 

2016

 

Income (loss) before income tax provision (benefit)

 

$

362

 

$

(5,725)

 

Income tax provision (benefit)

 

 

1,682

 

 

(1,668)

 

Effective tax rate

 

 

464.6

%

 

29.1

%

For the three months ended September 30, 2017, our effective tax rate differs from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a result of the valuation allowance on all domestic deferreds, compared to the book loss in 2016 with the absence of a valuation allowance.

For the three months ended September 30, 2016, our effective tax rate differs from the statutory rate primarily due to various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.

Nine months ended September 30, 2017 compared to nine months September 30, 2016

Revenues

Total revenues increased 18% from $422,684 in the nine months ended September 30, 2016 to $500,817 in the nine months ended September 30, 2017.March 31, 2020. The increase was primarily due to an increase in revenues from AUM/A and subscription and licensing of $40,299 and $38,372, respectively. Revenues from AUM/A decreased as a percentage of total revenues from 61% to 60% in the nine months ended September 30, 2016 and 2017, respectively, primarily because the growth in subscription and licensing revenue exceeded the growth in AUM/A.

Assets under management or administration

Revenues earned from AUM/AUA increased 16% from $258,969 in the nine months ended September 30, 2016 to $299,268 in the nine months ended September 30, 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2017, relative to the corresponding period in 2016. In the first three quarters of 2017, revenues were also positively affected by new account growth and positive net flows of AUM/A during 2016 and the first and second quarters of 2017.

The number of financial advisors with AUM/A on our technology platforms increased from 35,861 as of September 30, 2016 to 40,379 as of September 30, 2017 and the number of AUM/A client accounts increased from approximately 1,500,000 as of September 30, 2016 to approximately 1,800,000 as of September 30, 2017.

Subscription and licensing

Subscription and licensing revenues increased 27% from $142,303 in the nine months ended September 30, 2016 to $180,675 in the nine months ended September 30, 2017.This increase was primarily due to an increase in Envestnet related revenue of $8,632, an increase in Envestnet | Tamarac related revenue of $8,787 and Envestnet | Yodlee contributing an additional $20,953. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee revenue is primarily due to an increase in revenue from new and existing customers of $20,953.Approximately $16.1 million or 77% of this increase was attributed to our data analytics channel while the reminder was mainly driven by increases in our FI and YI groups.

Professional services and other

Professional services and other revenues decreased 3% from $21,412 in the nine months ended September 30, 2016 to $20,874 in the nine months ended September 30, 2017,  primarily due to Envestnet | Yodlee recognizing one-time onboardingtrade errors expense of data analytic customers in the nine months ended September 30, 2016 that did not repeat in the nine months ended September 30, 2017, offset by an overall increase in existing customer revenue attributable to Envestnet | Tamarac.

36


Cost of revenues

Cost of revenues increased 22% from $132,319 in the nine months ended September 30, 2016 to $161,031 in the nine months ended September 30, 2017, primarily due to a corresponding increase in revenues from AUM or AUA, the mix of such revenues from AUM or AUA, and an increase in cost of revenues associated with subscription and licensing revenues. As a percentage of total revenues, cost of revenues increased from 31% in the nine months ended September 30, 2016 to 32% in the nine months ended September 30, 2017.

Compensation and benefits

Compensation and benefits increased 10% from $180,625 in the nine months ended September 30, 2016 to $199,079 in the nine months ended September 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $16,859, primarily a result of an increase in headcount to support organic growth. Also contributing to the growth were increases in incentive compensation of $3,320 and short-term variable compensation of $1,799, offset by decreases in stock-based compensation of $2,421 and severance of $844. As a percentage of total revenues, compensation and benefits decreased from 43% in the nine months ended September 30, 2016 to 40% in the nine months ended September 30, 2017. The decrease in the compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.

General and administration

General and administration expenses increased 12% from $80,249 in the nine months ended September 30, 2016 to $90,178 in the nine months ended September 30, 2017, primarily due to increases in audit and related$1,585, permits, licenses & fees of $3,308,  acquisition related costs of $2,127, occupancy costs of $2,110, marketing of $1,788, non-income tax expense adjustments of $1,734,$650, professional and legal fees of $1,583$627, systems development costs of $582, bad debt expense of $575 and travel and entertainmentother increases primarily related to the cancellation of $828,our 2020 Advisor Summit, partially offset by decreasesa decrease in litigationtransaction related expenses of $4,760. The 2019 Acquisitions contributed general and administration expenses of $1,660 to general and administrative expense of $3,032 and fair market value adjustments on contingent consideration of $838.in the three months ended March 31, 2020. As a percentage of total revenues, general and administration expenses decreased from 19%20% in the ninethree months ended September 30, 2016March 31, 2019 to 18%17% in the ninethree months ended September 30, 2017. 

March 31, 2020. This decrease is primarily a result of the decrease in transaction related expenses partially offset by the increase in trade errors expense.


Depreciation and amortization

Depreciation and amortization expense decreased 6%increased 42% from $49,872$19,517 in the ninethree months ended September 30, 2016March 31, 2019 to $46,792$27,683 in the ninethree months ended September 30, 2017,March 31, 2020. The increase was primarily due to a decreasean increase in intangible asset amortization expense of $4,823, offset by$6,230, the direct result of amortizing additional intangible assets related to our 2019 Acquisitions, an increase in amortization of internally developed software amortization expense of $1,222$985 and an increase in property and equipment depreciation expense of fixed assets of $521.$951. As a percentage of total revenues, depreciation and amortization expense decreasedincreased from 12%10% in the ninethree months ended September 30, 2016March 31, 2019 to 9%11% in the ninethree months ended September 30, 2017.

March 31, 2020.


Other expense, net


Other expense, net increased 5%decreased 73% from $13,214$5,763 in the ninethree months ended September 30, 2016March 31, 2019 to $13,838$1,537 in the ninethree months ended September 30, 2017,March 31, 2020. The decrease was primarily due to an increasea gain of $4,230 recognized in the three months ended March 31, 2020 on the remeasurement of our previously held interest expensein the private financial technology design company combined with a gain of $326 primarily$2,524 recorded in the three months ended March 31, 2020 as a result of an increasea fair value adjustment upon settlement of our former Chief Executive Officer's stock options, partially offset by increased losses recorded for our equity method investees in debt issuance cost amortization and debt discount accretionthe three months ended March 31, 2020 as well as foreign currency exchange impact of $284.  Other income primarily consists of interest expense as well as impacts relatedcompared to investments in private companies and foreign currency exchange.

the comparable prior year period.




Income tax provision (benefit)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2017

 

2016

 

Loss before income tax provision (benefit)

 

$

(10,101)

 

$

(33,595)

 

Income tax provision (benefit)

 

 

10,824

 

 

(10,602)

 

Effective tax rate

 

 

(107.2)

%

 

31.6

%

37


  Three Months Ended
  March 31,
  2020 2019
Loss before income tax benefit $(9,154) $(14,500)
Income tax benefit (1,964) 3,768
Effective tax rate 21.5% (26.0)%

For the ninethree months ended September 30, 2017,March 31, 2020, our effective tax rate differsdiffered from the statutory rate primarily due to increases in the valuation allowance we had placed on a portion of US deferred tax assets, the windfall from shared based compensation and the CARES Act net operating loss (“NOL”) carryback.


For the three months ended March 31, 2019, our effective tax rate differed from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a resultimpact of the Base Erosion Anti-Abuse Tax (“BEAT”) and increases in the valuation allowance we had placed on all domestic deferreds, compared to the book loss in 2016US deferred tax assets with the absenceexception of a valuation allowance.

For the nine months ended September 30, 2016, our effective tax rate differs from the statutory rate primarily due to various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.

Segments

indefinite-lived intangibles.


Segment Results
Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Note 19 to the notes“Note 16—Segment Information” to the condensed consolidated financial statements. Our business segments are as follows:

·

Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions.

·

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

38



The following table presentsreconciles income (loss) from operations by segment:

segment to consolidated net loss attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2017

    

2016

 

2017

    

2016

Envestnet

$

18,955

 

$

12,361

 

$

48,277

 

$

32,425

Envestnet | Yodlee

 

(3,364)

 

 

(8,416)

 

 

(16,707)

 

 

(33,728)

  Total segment income (loss) from operations

 

15,591

 

 

3,945

 

 

31,570

 

 

(1,303)

Nonsegment operating expenses

 

(11,243)

 

 

(5,236)

 

 

(27,833)

 

 

(19,078)

Other expense, net

 

(3,986)

 

 

(4,434)

 

 

(13,838)

 

 

(13,214)

Consolidated income (loss) before income taxes (benefit)

 

362

 

 

(5,725)

 

 

(10,101)

 

 

(33,595)

Income tax provision (benefit)

 

1,682

 

 

(1,668)

 

 

10,824

 

 

(10,602)

Consolidated net loss

 

(1,320)

 

 

(4,057)

 

 

(20,925)

 

 

(22,993)

  Add: Net loss attributable to non-controlling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

Consolidated net loss attributable to Envestnet, Inc.

$

(1,320)

 

$

(4,057)

 

$

(20,925)

 

$

(22,993)

  Three Months Ended
  March 31,
  2020 2019
Envestnet Wealth Solutions $11,340
 $16,844
Envestnet Data & Analytics (4,585) (7,928)
Nonsegment operating expenses (14,372) (17,653)
Loss from operations (7,617) (8,737)
Other expense, net (1,537) (5,763)
Consolidated loss before income tax provision (benefit) (9,154) (14,500)
Income tax provision (benefit) (1,964) 3,768
Consolidated net loss (7,190) (18,268)
Add: Net (income) loss attributable to non-controlling interest (146) 83
Consolidated net loss attributable to Envestnet, Inc. $(7,336) $(18,185)


Envestnet

Wealth Solutions

The following table presents income from operations for the Envestnet Wealth Solutions segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

 

     

2017

     

2016

     

Percent
Change

 

2017

     

2016

     

Percent
Change

 

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

106,147

 

$

90,042

 

18

%

 

$

299,268

 

$

258,969

 

16

%

Subscription and licensing

 

 

27,012

 

 

22,198

 

22

%

 

 

77,720

 

 

60,301

 

29

%

Professional services and other

 

 

2,789

 

 

2,271

 

23

%

 

 

9,650

 

 

9,147

 

 5

%

Total revenues

 

 

135,948

 

 

114,511

 

19

%

 

 

386,638

 

 

328,417

 

18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

52,957

 

 

43,806

 

21

%

 

 

151,430

 

 

124,649

 

21

%

Compensation and benefits

 

 

41,158

 

 

37,067

 

11

%

 

 

119,378

 

 

106,648

 

12

%

General and administration

 

 

16,464

 

 

14,915

 

10

%

 

 

48,357

 

 

45,909

 

 5

%

Depreciation and amortization

 

 

6,414

 

 

6,362

 

 —

%

 

 

19,196

 

 

18,786

 

 2

%

Total operating expenses

 

 

116,993

 

 

102,150

 

15

%

 

 

338,361

 

 

295,992

 

14

%

Income from operations

 

$

18,955

 

$

12,361

 

53

%

 

$

48,277

 

$

32,425

 

49

%

  Three Months Ended  
  March 31, Percent
  2020 2019 Change
  (in thousands)  
Revenues:      
Asset-based $134,811
 $108,934
 24 %
Subscription-based 60,323
 41,026
 47 %
Total recurring revenues 195,134
 149,960
 30 %
Professional services and other revenues 3,286
 2,745
 20 %
Total revenues 198,420
 152,705
 30 %
Operating expenses:      
Cost of revenues 69,792
 55,855
 25 %
Compensation and benefits 72,588
 48,555
 49 %
General and administration 25,280
 20,184
 25 %
Depreciation and amortization 19,420
 11,267
 72 %
Total operating expenses 187,080
 135,861
 38 %
Income from operations
 $11,340
 $16,844
 (33)%

Three months ended September 30, 2017March 31, 2020 compared to three months September 30, 2016ended March 31, 2019 for the Envestnet Wealth Solutions segment

Revenues

Total

Asset-based recurring revenues
Asset-based recurring revenues increased 19%24% from $114,511$108,934 in the three months ended September 30, 2016March 31, 2019 to $135,948$134,811 in the three months ended September 30, 2017. The increase was primarily due to an increase in revenues from AUM/A of $16,105 and an increase in revenues from subscription and licensing of $4,814. Revenues from AUM/A were 79% and 78% of total revenues in the three months ended September 30, 2016 and 2017, respectively.

Assets under management or administration

Revenues earned from AUM/AUA increased 18% from $90,042 in the three months ended September 30, 2016 to $106,147 in the three months ended September 30, 2017.March 31, 2020. The increase was primarily due to an increase in asset values applicable to our quarterly billing cyclecycles in 2017, relativethe three months ended March 31, 2020 compared to the corresponding periodthree months ended March 31, 2019, resulting from an upturn in 2016. In the thirdequity markets during the fourth quarter of 2017, revenues were also positively affected by new account growth and positive net flows2019 as compared to the prior year period.


Excluding $16,526 of AUM or AUA duringtotal revenue from the first and second quarters2019 Acquisitions, asset-based recurring revenue increased from 71% of 2017.

total revenue in the three months ended March 31, 2019 to 74% of total revenue in the three months ended March 31, 2020.

39


The number of financial advisors with AUM or AUAasset-based recurring revenue on our technology platforms increased from 35,86139,035 as of September 30, 2016March 31, 2019 to 40,37940,971 as of September 30, 2017March 31, 2020 and the number of AUM or AUAAUM/A client accounts increased from approximately 1,500,0002,100,000 as of September 30, 2016March 31, 2019 to approximately 1,800,0002,200,000 as of September 30, 2017.

Subscription and licensing

Subscription and licensingMarch 31, 2020.

Subscription-based recurring revenues
Subscription-based recurring revenues increased 22%47% from $22,198$41,026 in the three months ended September 30, 2016March 31, 2019 to $27,012$60,323 in the three months ended September 30, 2017, primarily dueMarch 31, 2020.

The 2019 Acquisitions contributed revenues of $15,519 to ansubscription-based recurring revenues in the three months ended March 31, 2020. The remaining increase in Envestnet | Enterprise related revenue of $2,051 and an increase in Envestnet | Tamarac related revenue of $2,763.The increase in Envestnet | Enterprise and Envestnet | Tamarac revenue$3,778 is a result of Envestnet | Enterprise and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.

Professional services and other

revenues

Professional services and other revenues increased 23%20% from $2,271$2,745 in the three months ended September 30, 2016March 31, 2019 to $2,789$3,286 in the three months ended September 30, 2017,March 31, 2020. The increase was primarily due to an overall increase of $1,007 contributed from the 2019 Acquisitions offset by a decrease in revenues from existing customer revenue attributable to Envestnet | Tamarac.

customers. 



Cost of revenues

Cost of revenues increased 21%25% from $43,806$55,855 in the three months ended September 30, 2016March 31, 2019 to $52,957$69,792 in the three months ended September 30, 2017,March 31, 2020, primarily due to the correspondingas a result of an increase in asset-based cost of revenues. The 2019 Acquisitions had an immaterial impact to cost of revenues from AUM or AUA, andin the mix of such revenues.three months ended March 31, 2020. As a percentage of total revenues, cost of revenues increaseddecreased from 38%37% in the three months ended September 30, 2016March 31, 2019 to 39%35% in the three months ended September 30, 2017.

March 31, 2020.

Compensation and benefits

Compensation and benefits increased 11%49% from $37,067$48,555 in the three months ended September 30, 2016March 31, 2019 to $41,158$72,588 in the three months ended September 30, 2017,March 31, 2020. The increase is primarily due to an increaseincreases in severance expense of $10,652, salaries, benefits and related payroll taxes of $1,663,$6,226, non-cash compensation expense of $4,036 and incentive compensation of $2,641. The increase in severance expense is primarily related to the Early Retirement Program in the three months ended March 31, 2020. The 2019 Acquisitions contributed compensation and benefit expenses of $8,630 to total compensation and benefits expense in the three months ended March 31, 2020. As a resultpercentage of total revenues, compensation and benefits increased from 32% in the three months ended March 31, 2019 to 37% in the three months ended March 31, 2020, primarily related to the increase in severance expense related to the Early Retirement Program.

General and administration
General and administration expenses increased 25% from $20,184 in the three months ended March 31, 2019 to $25,280 in the three months ended March 31, 2020. The increase was primarily due to increases in trade errors expense of $1,540, systems development costs of $793, occupancy costs of $494, insurance and bank charges of $453, bad debt expense of $368 and other miscellaneous increases, partially offset by a decrease in marketing expense of $281. The 2019 Acquisitions contributed general and administration expenses of $1,660 to general and administrative expense in the three months ended March 31, 2020. As a percentage of total revenues, general and administration expenses remained consistent at 13% in the three months ended March 31, 2019 and 2020.
Depreciation and amortization
Depreciation and amortization expense increased 72% from $11,267 in the three months ended March 31, 2019 to $19,420 in the three months ended March 31, 2020. The increase was primarily due to an increase in headcountintangible asset amortization expense of $6,428, the direct result of amortizing additional intangible assets related to support organic growth. Anour 2019 Acquisitions, an increase in internally developed software amortization expense of $908 and an increase in property and equipment depreciation expense of $816. As a percentage of revenues, depreciation and amortization expense increased from 7% in the three months ended March 31, 2019 to 10% in the three months ended March 31, 2020. The increase in depreciation and amortization as a percentage of total revenues is primarily due to amortization related to finite-lived intangibles acquired from the 2019 Acquisitions.
Envestnet Data & Analytics

The following table presents loss from operations for the Envestnet Data & Analytics segment:
  Three Months Ended  
  March 31, Percent
  2020 2019 Change
  (in thousands)  
Revenues:      
Subscription-based $44,228
 $42,061
 5 %
Professional services and other revenues 3,891
 4,900
 (21)%
Total revenues 48,119
 46,961
 2 %
Operating expenses:      
Cost of revenues 5,141
 5,790
 (11)%
Compensation and benefits 30,113
 31,364
 (4)%
General and administration 9,187
 9,485
 (3)%
Depreciation and amortization 8,263
 8,250
  %
Total operating expenses 52,704
 54,889
 (4)%
Loss from operations $(4,585) $(7,928) (42)%


Three months ended March 31, 2020 compared to three months ended March 31, 2019 for the Envestnet Data & Analytics segment
Subscription-based recurring revenues
Subscription-based recurring revenues increased 5% from $42,061 in the three months ended March 31, 2019 to $44,228 in the three months ended March 31, 2020, primarily due to broad increases in revenue from new and existing customers. 
Professional services and other revenues
Professional services and other revenues decreased21% from $4,900 in the three months ended March 31, 2019 to $3,891 in the three months ended March 31, 2020 due to timing of the completion of customer projects and deployments.

Cost of revenues
Cost of revenues decreased 11% from $5,790 in the three months ended March 31, 2019 to $5,141 in the three months ended March 31, 2020, primarily due to a decrease in third party vendor expense. As a percentage of total revenues, cost of revenues decreased from 12% in the three months ended March 31, 2019 to 11% in the three months ended March 31, 2020.
Compensation and benefits
Compensation and benefits decreased 4% from $31,364 in the three months ended March 31, 2019 to $30,113 in the three months ended March 31, 2020, primarily due to decreases in salaries, benefits, incentive compensation and related payroll taxes of $2,570 and severance expense of $387, partially offset by an increase in incentive compensation of $1,796 and$1,382. The decrease in severance expense is primarily due to severance paid to a former executive of $529 also contributed to the increasecompany in compensation and benefits.the three months ended March 31, 2019, partially offset by severance associated with the Early Retirement Program in the three months ended March 31, 2020. As a percentage of total revenues, compensation and benefits decreased from 32%67% in the three months ended September 30, 2016March 31, 2019 to 30%63% in the three months ended September 30, 2017.

General and administration

General and administration expenses increased 10% from $14,915 in the three months ended September 30, 2016 to $16,464 in the three months ended September 30, 2017, primarily due to increases in external data and research services expenses of $913, non-income tax expense adjustments of $571 and marketing of $309. As a percentage of total revenues, general and administration expenses decreased from 13% in the three months ended September 30, 2016 to 12% in the three months ended September 30, 2017.

Depreciation and amortization

Depreciation and amortization expense increased from $6,362 in the three months ended September 30, 2016 to $6,414 in the three months ended September 30, 2017. As a percentage of total revenues, depreciation and amortization expense decreased from 6% in the three months ended September 30, 2016 to 5% in the three months ended September 30, 2017.

Nine months ended September 30, 2017 compared to nine months September 30, 2016 for the Envestnet segment

Revenues

Total revenues increased 18% from $328,417 in the nine months ended September 30, 2016 to $386,638 in the nine months ended September 30, 2017. The increase was primarily due to an increase in revenues from AUM/A of $40,299 and an increase in revenues from subscription and licensing of $17,419. Revenues from AUM/A were 79% and 77% of total revenues in the nine months ended September 30, 2016 and 2017, respectively.

40


Assets under management or administration

Revenues earned from AUM/AUA increased 16% from $258,969 in the nine months ended September 30, 2016 to $299,268 in the nine months ended September 30, 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2017, relative to the corresponding period in 2016. In the first three quarters of 2017, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during 2016 and the first and second quarters of 2017.

The number of financial advisors with AUM or AUA on our technology platforms increased from 35,861 as of September 30, 2016 to 40,379 as of September 30, 2017 and the number of AUM or AUA client accounts increased from approximately 1,500,000 as of September 30, 2016 to approximately 1,800,000 as of September 30, 2017.

Subscription and licensing

Subscription and licensing revenues increased 29% from $60,301 in the nine months ended September 30, 2016 to $77,720 in the nine months ended September 30, 2017, primarily due to an increase in Envestnet | Enterprise related revenue of $8,632 and an increase in Envestnet | Tamarac related revenue of $8,787.The increase in Envestnet | Enterprise and Envestnet | Tamarac revenue is a result of Envestnet | Enterprise and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.

Professional services and other

Professional services and other revenues increased 5% from $9,147 in the nine months ended September 30, 2016 to $9,650 in the nine months ended September 30, 2017, primarily due to an overall increase in existing customer revenue attributable to Envestnet | Tamarac.

Cost of revenues

Cost of revenues increased 21% from $124,649 in the nine months ended September 30, 2016 to $151,430 in the nine months ended September 30, 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 the nine months ended September 30, 2016 to 39% in the nine months ended September 30, 2017.

Compensation and benefits

Compensation and benefits increased 12% from $106,648 in the nine months ended September 30, 2016 to $119,378 in the nine months ended September 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $7,066, primarily a result of an increase in headcount to support organic growth. Increases in non-cash compensation expense of $2,420, incentive compensation of $1,996 and short-term variable compensation of $1,224 also contributed to the growth. As a percentage of total revenues, compensation and benefits decreased from 32% in the nine months ended September 30, 2016 to 31% in the nine months ended September 30, 2017.

General and administration

General and administration expenses increased 5% from $45,909 in the nine months ended September 30, 2016 to $48,357 in the nine months ended September 30, 2017, primarily due to increases in external data and research services expenses of $1,791,  non-income tax expense adjustments of $1,734,  marketing expenses of $779, occupancy costs of $695, miscellaneous general and administrative expense of $364 and accretion of $265, offset by decreases in website and systems costs of $2,543 and legal fees of $226. As a percentage of total revenues, general and administration expenses decreased from 14% in the nine months ended September 30, 2016 to 13% in the nine months ended September 30, 2017.

Depreciation and amortization

Depreciation and amortization expense increased 2% from $18,786 in the nine months ended September 30, 2016 to $19,196 in the nine months ended September 30, 2017, primarily due to an increase in depreciation on fixed assets and internally developed software of $2,461, offset by a decrease in amortization of intangibles of $2,051. As a percentage of total revenues, depreciation and amortization expense decreased from 6% in the nine months ended September 30, 2016 to 5% in the nine months ended September 30, 2017.

41


Envestnet | Yodlee

The following table presents loss from operations for the Envestnet | Yodlee segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

 

    

2017

    

2016

 

Percent
Change

 

2017

    

2016

 

Percent
Change

 

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and licensing

 

$

35,951

 

$

29,761

 

21

%

 

$

102,955

 

$

82,002

 

26

%

Professional services and other

 

 

3,715

 

 

4,883

 

(24)

%

 

 

11,224

 

 

12,265

 

(8)

%

Total revenues

 

 

39,666

 

 

34,644

 

14

%

 

 

114,179

 

 

94,267

 

21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

3,113

 

 

3,453

 

(10)

%

 

 

9,601

 

 

7,670

 

25

%

Compensation and benefits

 

 

23,463

 

 

20,936

 

12

%

 

 

70,055

 

 

65,386

 

 7

%

General and administration

 

 

7,376

 

 

8,341

 

(12)

%

 

 

23,634

 

 

23,853

 

(1)

%

Depreciation and amortization

 

 

9,078

 

 

10,330

 

(12)

%

 

 

27,596

 

 

31,086

 

(11)

%

Total operating expenses

 

 

43,030

 

 

43,060

 

 —

%

 

 

130,886

 

 

127,995

 

 2

%

Loss from operations

 

$

(3,364)

 

$

(8,416)

 

(60)

%

 

$

(16,707)

 

$

(33,728)

 

(50)

%

Three months ended September 30, 2017 compared to three months ended September 30, 2016 for the Envestnet | Yodlee segment

Revenues

Total revenues increased 14% from $34,644 in the three months ended September 30, 2016 to $39,666 in the three months ended September 30, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $6,190, offset by a decrease in professional services and other revenue of $1,168. Revenues from professional services and other were 14% and 9% of total revenues in the three months ended September 30, 2016 and 2017, respectively.

Subscription and licensing

Subscription and licensing revenues increased 21% from $29,761 in the three months ended September 30, 2016 to $35,951 in the three months ended September 30, 2017, primarily due to an increase in revenue from new and existing customers of $6,190.Of this increase, approximately $4.8 million or 77% was attributed to our data analytics channel while the reminder primarily derived from our FI and YI groups.

Professional services and other

Professional services and other revenues decreased 24% from $4,883 in the three months ended September 30, 2016 to $3,715 in the three months ended September 30, 2017, primarily due to timing of new data analytics customer deployments.

Cost of revenues

Cost of revenues decreased 10% from $3,453 in the three months ended September 30, 2016 to $3,113 in the three months ended September 30, 2017, primarily due to decrease in third party consulting and professional services of $469 that was primarily associated with new data analytic customer deployments, offset by an increase in hosting and payment processing services of $181 to support our overall revenue growth.As a percentage of total revenues, cost of revenues decreased from 10% in the three months ended September 30, 2016 to 8% in the three months ended September 30, 2017.

42


Compensation and benefits

Compensation and benefits increased 12% from $20,936 in the three months ended September 30, 2016 to $23,463 in the three months ended September 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $2,258, 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 $724, offset by a decrease in non-cash compensation expense of $262. As a percentage of total revenues, compensation and benefits decreased from 60% in the three months ended September 30, 2016 to 59% in the three months ended September 30, 2017.March 31, 2020. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increasedriven by lower headcount as of March 31, 2020 compared to lower growth in compensation and benefit expenses.

March 31, 2019.


General and administration

General and administration expenses decreased 12%3% from $8,341$9,485 in the three months ended September 30, 2016March 31, 2019 to $7,376$9,187 in the three months ended September 30, 2017,March 31, 2020, primarily due to a decreasedecreases in legaltravel and entertainment expense of $2,093, partially$337, transaction related expenses of $149, occupancy expenses of $154 and marketing expense of $149, offset by increases in software purchaseexpenses incurred for legal and maintenanceregulatory matters of $647$703 (see “Part I, Note 18—Commitments and occupancy cost of $505.Contingencies”). As a percentage of total revenues, general and administration expenses decreased from 24%20% to 19% for the three months ended March 31, 2019 and 2020.
Depreciation and amortization
Depreciation and amortization expense increased from $8,250 in the three months ended September 30, 2016March 31, 2019 to 19%$8,263 in the three months ended September 30, 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 12% from $10,330 in the three months ended September 30, 2016 to $9,078 in the three months ended September 30, 2017, primarily due to a decrease in intangible asset amortization of $1,122 related to purchase accounting adjustments recorded in the prior year to the fair values of certain intangible assets from the Yodlee acquisition and a decrease in depreciation of $50 related to the Yodlee acquisition recorded in the same period last year. The decrease was partially offset by an increase of $210 in intangible asset amortization as a result of the Wheelhouse acquisition.March 31, 2020. As a percentage of total revenues, depreciation and amortization expense decreased from 30%18% in the three months ended September 30, 2016March 31, 2019 to 23%17% in the three months ended September 30, 2017. March 31, 2020.

Nonsegment
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.

Ninefollowing table presents nonsegment operating expenses:

  Three Months Ended  
  March 31, Percent
  2020 2019 Change
  (in thousands)  
Operating expenses:      
Compensation and benefits $7,729
 $6,798
 14 %
General and administration 6,643
 10,855
 (39)%
Nonsegment operating expenses $14,372
 $17,653
 (19)%


Three months ended September 30, 2017March 31, 2020 compared to ninethree months ended September 30, 2016March 31, 2019 for the Envestnet | Yodlee segment

Revenues

Total revenues increased 21% from $94,267 in the nine months ended September 30, 2016 to $114,179 in the nine months ended September 30, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $20,953. Revenues from professional services and other were 13% and 10% of total revenues in the nine months ended September 30, 2016 and 2017, respectively.

Subscription and licensing

Subscription and licensing revenues increased 26% from $82,002 in the nine months ended September 30, 2016 to $102,955 in the nine months ended September 30, 2017, primarily due to an increase in revenue from new and existing customers of $20,953. Of this increase, approximately $16.1 million or 77% was attributed to our data analytics channel while the reminder primarily derived from our FI and YI groups.

Professional services and other

Professional services and other revenues decreased 8% from $12,265 in the nine months ended September 30, 2016 to $11,224 in the nine months ended September 30, 2017, primarily due to timing of new data analytics customer deployments.

Cost of revenues

Cost of revenues increased 25% from $7,670 in the nine months ended September 30, 2016 to $9,601 in the nine months ended September 30, 2017, primarily due to an increase in third party consulting and professional services of $802 and hosting and payment processing services of $1,213 to support our overall revenue growth. As a percentage of total revenues, cost of revenues remained consistent at 8% in the nine months ended September 30, 2016 and 2017.

Nonsegment

43


Compensation and benefits

Compensation and benefits increased 7%14% from $65,386$6,798 in the ninethree months ended September 30, 2016March 31, 2019 to $70,055$7,729 in the ninethree months ended September 30, 2017,March 31, 2020, primarily due to an increaseincreases in severance expense of $1,237 and salaries, benefits and related payroll taxes of $7,976, as a result of increased headcount to support organicgrowth and an increase related to the Wheelhouse acquisition.  Also contributing to the growth was an increase in incentive compensation of $1,292, offset by a decrease in non-cash compensation expense of $4,049 and severance of $444. As a percentage of total revenues, compensation and benefits decreased from 69% in the nine months ended September 30, 2016 to 61% in the nine months ended September 30, 2017.

General and administration

General and administration expenses decreased 1% from $23,853 in the nine months ended September 30, 2016 to $23,634 in the nine months ended September 30, 2017, primarily due to decreases in legal expense of $2,802 and realized losses on designated hedges of $486, offset by increases in software purchase and maintenance of $1,733 and occupancy cost of $1,416. As a percentage of total revenues, general and administration expenses decreased from 25% in the nine months ended September 30, 2016 to 21% in the nine months ended September 30, 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 11% from $31,086 in the nine months ended September 30, 2016 to $27,596 in the nine months ended September 30, 2017, primarily due to a decrease in intangible asset amortization of $3,365 related to purchase accounting adjustments recorded in the prior year to the fair values of certain intangible assets from the Yodlee acquisition and a decrease in depreciation of $635 related to the Yodlee acquisition recorded in the same period last year. The decrease was offset by an increase of $592 in intangible asset amortization as a result of the Wheelhouse acquisition. As a percentage of total revenues, depreciation and amortization expense decreased from 33% in the nine months ended September 30, 2016 to 24% in the nine months ended September 30, 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.

Nonsegment

The following table presents nonsegment loss from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

 

 

2017

    

2016

 

Percent Change

 

2017

    

2016

 

Percent Change

 

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

3,930

 

$

2,342

 

68

%

 

$

9,646

 

$

8,591

 

12

%

General and administration

 

 

7,313

 

 

2,894

 

153

%

 

 

18,187

 

 

10,487

 

73

%

Total operating expenses

 

 

11,243

 

 

5,236

 

115

%

 

 

27,833

 

 

19,078

 

46

%

Loss from operations

 

$

(11,243)

 

$

(5,236)

 

115

%

 

$

(27,833)

 

$

(19,078)

 

46

%

Three months ended September 30, 2017 compared to three months ended September 30, 2016 for nonsegment

Compensation and benefits

Compensation and benefits increased 68% from $2,342 in the three months ended September 30, 2016 to $3,930 in the three months ended September 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $756 and non-cash compensation expense of $642.

44


General and administration

General and administration expenses increased 153% from $2,894 in the three months ended September 30, 2016 to $7,313 in the three months ended September 30, 2017, primarily due to an increase in acquisition costs of $1,992, audit and related fees of $520 and professional and legal fees of $680, offset by a decrease in fair market value adjustments on contingent consideration of $349.

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016 for nonsegment

Compensation and benefits

Compensation and benefits increased 12% from $8,591 in the nine months ended September 30, 2016 to $9,646 in the nine months ended September 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $1,816,$1,136, partially offset by decreases in non-cash compensation expense of $792$919 and incentive compensation of $447. The increase in severance of $322.

expense is primarily related to the Early Retirement Program in the three months ended March 31, 2020.

General and administration

General and administration expenses increased 73%decreased 39% from $10,487$10,855 in the ninethree months ended September 30, 2016March 31, 2019 to $18,187$6,643 in the ninethree months ended September 30, 2017,March 31, 2020, primarily due to a decrease in transaction related expenses of $4,692, partially offset by increases in auditpermits, licenses and related fees of $2,837, acquisition costs of $1,435,$548 and professional and legal fees of $1,782 and marketing expense of $509, offset by a decrease in fair market value adjustments on contingent consideration of $838.

$482.

Non-GAAP Financial Measures


In addition to reporting results according to U.S. GAAP,generally accepted accounting principles (“GAAP”), we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues”, “adjusted EBITDA”,revenues,” “adjusted net revenues,” “adjusted EBITDA,” “adjusted net income”, and “adjusted net income per share”.

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 net revenues” represents adjusted revenues less asset-based costs of revenues. Under GAAP, we are required to recognize as revenue certain fees paid to investment managers and other third parties needed for implementation of investment solutions included in our assets under management. Those fees also are required to be recorded as cost of revenues. This non-GAAP metric presents adjusted revenues without such fees included, as they have no impact on our profitability. Adjusted revenues and Adjusted net revenues have limitations as financial measures, should be considered as supplemental in nature and are not meant as a substitute for revenue prepared in accordance with GAAP.
“Adjusted EBITDA” represents net 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, nonnon‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration, litigation and regulatory related expense,expenses, foreign currency, and related hedging activity, non-income tax expense adjustment, gain on acquisition of equity method investment, loss allocation from equity method investmentinvestments and (income) loss attributable to nonnon‑controlling interest.

“Adjusted net income” represents net loss before deferred revenue fair value adjustment, accretion on contingent consideration and purchase liability, nonnon‑cash interest expense, nonnon‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fairmarket value adjustment on contingent consideration, litigation and regulatory related expense,expenses, foreign currency, and related hedging activity, non-income tax expense adjustment, gain on acquisition of equity method investment, loss allocation from equity method investmentinvestments and (income) loss attributable to nonnon‑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 share” represents adjusted net income attributable to common stockholders divided by the diluted number of weightedweighted‑average shares outstanding.



Our Board of Directors and our management use adjusted revenues, adjusted EBITDA, adjusted net incomethese 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 adjusted net income per share:

·

As measures of operating performance;

·

For planning purposes, including the preparation of annual budgets;

·

To allocate resources to enhance the financial performance of our business;

45

In communications with our Board concerning our financial performance.


·

To evaluate the effectiveness of our business strategies; and

·

In communications with our Board of Directors concerning our financial performance.

Our Compensation Committee, our 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 net 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 net revenues provide comparisons from period to period by excluding the effects of asset-based costs of revenue. While the amounts included in the calculation of adjusted net revenues are disclosed in our condensed consolidated financial statements and footnotes, management believes providing more transparency into this metric is beneficial to investors who wish to evaluate our performance in this fashion. Adjusted EBITDA provideprovides 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 fair market value adjustments on contingent consideration,and purchase liability, severance, litigation and regulatory related expense,expenses, pre-tax loss attributable to non-controlling interest, and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense from adjusted EBITDA and adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.

We believe adjusted revenues, adjusted net 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 net 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 net revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.

Adjusted revenues, adjusted net 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 net revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider:

·

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

·

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect changes in, or cash requirements for, our working capital needs;

Adjusted revenues, adjusted net revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

·

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect 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;

Adjusted revenues, adjusted net 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;

·

Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards we had net cash paid (refunds) of $1,449 and ($175) for the nine months ended September 30, 2017 and 2016, respectively. In the event that we begin to 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 share differently than we do, limiting their usefulness as a comparative measure.

Adjusted revenues, adjusted net revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect non-cash components of employee compensation;


Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;



Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards, we made net tax payments of $814 and $4,998 for the three months ended March 31, 2020 and 2019, respectively. In the event that we begin to 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 net revenues, adjusted EBITDA, adjusted net income and adjusted net income per share differently than we do, limiting their usefulness as a comparative measure.

Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA,net revenues, adjusted operating income,EBITDA, 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 and adjusted net revenues to revenues, the most directly comparable

46


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 and adjusted net revenues based on our historical results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

 

2017

    

2016

 

 

(in thousands)

 

(in thousands)

Total revenues

 

$

175,614

    

$

149,155

 

$

500,817

    

$

422,684

Deferred revenue fair value adjustment

 

 

15

 

 

331

 

 

120

 

 

781

Adjusted revenues

 

$

175,629

 

$

149,486

 

$

500,937

 

$

423,465

  Three Months Ended
  March 31,
  2020 2019
  (in thousands)
Total revenues $246,539
 $199,666
Deferred revenue fair value adjustment 439
 6
Adjusted revenues 246,978
 199,672
Less: Asset-based cost of revenues (68,592) (53,842)
Adjusted net revenues $178,386
 $145,830

The following table sets forth a reconciliation of net loss to adjusted EBITDA based on our historical results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

 

 

(in thousands)

 

(in thousands)

 

Net income (loss)

 

$

(1,320)

    

$

(4,057)

 

$

(20,925)

    

$

(22,993)

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue fair value adjustment

 

 

15

 

 

331

 

 

120

 

 

781

 

Interest income

 

 

(58)

 

 

(6)

 

 

(108)

 

 

(28)

 

Interest expense

 

 

3,858

 

 

4,122

 

 

12,671

 

 

12,345

 

Accretion on contingent consideration and purchase liability

 

 

104

 

 

23

 

 

408

 

 

143

 

Income tax provision (benefit)

 

 

1,682

 

 

(1,668)

 

 

10,824

 

 

(10,602)

 

Depreciation and amortization

 

 

15,492

 

 

16,692

 

 

46,792

 

 

49,872

 

Non-cash compensation expense

 

 

8,048

 

 

7,554

 

 

23,451

 

 

25,872

 

Restructuring charges and transaction costs

 

 

4,608

 

 

998

 

 

10,235

 

 

4,484

 

Severance

 

 

1,597

 

 

1,058

 

 

2,260

 

 

3,104

 

Fair market value adjustment on contingent consideration

 

 

 —

 

 

349

 

 

 —

 

 

838

 

Litigation related expense

 

 

 —

 

 

2,097

 

 

1,033

 

 

4,065

 

Foreign currency and related hedging activity

 

 

(116)

 

 

(383)

 

 

296

 

 

(672)

 

Non-income tax expense adjustment

 

 

571

 

 

 —

 

 

1,734

 

 

 —

 

Loss allocation from equity method investment

 

 

282

 

 

250

 

 

984

 

 

1,130

 

Loss attributable to non-controlling interest

 

 

26

 

 

145

 

 

377

 

 

787

 

Adjusted EBITDA

 

$

34,789

 

$

27,505

 

$

90,152

 

$

69,126

 

47


  Three Months Ended
  March 31,
  2020 2019
  (in thousands)
Net loss $(7,190) $(18,268)
Add (deduct):    
Deferred revenue fair value adjustment 439
 6
Interest income (391) (1,510)
Interest expense 7,134
 7,096
Accretion on contingent consideration and purchase liability 599
 240
Income tax provision (benefit) (1,964) 3,768
Depreciation and amortization 27,683
 19,517
Non-cash compensation expense 13,470
 12,864
Restructuring charges and transaction costs 2,820
 7,366
Severance 13,982
 2,480
Litigation and regulatory related expenses 703
 
Foreign currency (494) (1)
Non-income tax expense adjustment 188
 210
Gain on acquisition of equity method investment (4,230) 
Loss allocation from equity method investments 2,030
 203
(Income) loss attributable to non-controlling interest (201) 31
Adjusted EBITDA $54,578
 $34,002



The following table sets forth the reconciliation of net loss to adjusted net income and adjusted net income per diluted share based on our historical results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

 

 

(in thousands)

 

(in thousands)

 

Net income (loss)

 

$

(1,320)

    

$

(4,057)

 

$

(20,925)

    

$

(22,993)

 

Income tax provision (benefit) (1)

 

 

1,682

 

 

(1,668)

 

 

10,824

 

 

(10,602)

 

Income (loss) before income tax provision (benefit)

 

 

362

 

 

(5,725)

 

 

(10,101)

 

 

(33,595)

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue fair value adjustment

 

 

15

 

 

331

 

 

120

 

 

781

 

Accretion on contingent consideration and purchase liability

 

 

104

 

 

23

 

 

408

 

 

143

 

Non-cash interest expense

 

 

2,931

 

 

2,039

 

 

7,784

 

 

6,070

 

Non-cash compensation expense

 

 

8,048

 

 

7,554

 

 

23,451

 

 

25,872

 

Restructuring charges and transaction costs

 

 

4,608

 

 

998

 

 

10,235

 

 

4,484

 

Severance

 

 

1,597

 

 

1,058

 

 

2,260

 

 

3,104

 

Amortization of acquired intangibles

 

 

10,377

 

 

12,035

 

 

31,333

 

 

36,156

 

Fair market value adjustment on contingent consideration

 

 

 —

 

 

349

 

 

 —

 

 

838

 

Litigation related expense

 

 

 —

 

 

2,097

 

 

1,033

 

 

4,065

 

Foreign currency and related hedging activity

 

 

(116)

 

 

(383)

 

 

296

 

 

(672)

 

Non-income tax expense adjustment

 

 

571

 

 

 —

 

 

1,734

 

 

 —

 

Loss allocation from equity method investment

 

 

282

 

 

250

 

 

984

 

 

1,130

 

Loss attributable to non-controlling interest

 

 

26

 

 

145

 

 

377

 

 

787

 

Adjusted net income before income tax effect

 

 

28,805

 

 

20,771

 

 

69,914

 

 

49,163

 

Income tax effect (2)

 

 

(11,522)

 

 

(8,308)

 

 

(27,966)

 

 

(19,665)

 

Adjusted net income

 

$

17,283

 

$

12,463

 

$

41,948

 

$

29,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

 

44,044,527

 

 

42,843,103

 

 

43,604,869

 

 

42,704,383

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

1,664,351

 

 

1,331,256

 

 

1,669,092

 

 

1,286,968

 

Unvested restricted stock units

 

 

736,657

 

 

350,169

 

 

637,580

 

 

272,205

 

Diluted number of weighted-average shares outstanding

 

 

46,445,535

 

 

44,524,528

 

 

45,911,541

 

 

44,263,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income per share - diluted

 

$

0.37

 

$

0.28

 

$

0.91

 

$

0.67

 


  Three Months Ended
  March 31,
  2020 2019
  (in thousands)
Net loss $(7,190) $(18,268)
Income tax provision (benefit) (1)  
 (1,964) 3,768
Loss before income tax provision (benefit) (9,154) (14,500)
Add (deduct):    
Deferred revenue fair value adjustment 439
 6
Accretion on contingent consideration and purchase liability 599
 240
Non-cash interest expense 2,962
 4,616
Non-cash compensation expense 13,470
 12,864
Restructuring charges and transaction costs 2,820
 7,366
Severance 13,982
 2,480
Amortization of acquired intangibles 18,758
 12,528
Litigation and regulatory related expenses 703
 
Foreign currency (494) (1)
Non-income tax expense adjustment 188
 210
Gain on acquisition of equity method investment (4,230) 
Loss allocation from equity method investments 2,030
 203
(Income) Loss attributable to non-controlling interest (201) 31
Adjusted net income before income tax effect 41,872
 26,043
Income tax effect (2)  
 (10,670) (6,632)
Adjusted net income $31,202
 $19,411
     
Basic number of weighted-average shares outstanding 53,016,511
 48,237,265
Effect of dilutive shares:    
Options to purchase common stock 664,796
 1,198,197
Unvested restricted stock units 600,567
 656,798
Convertible notes 235,182
 
Warrants 42,551
 
Diluted number of weighted-average shares outstanding 54,559,607
 50,092,260
Adjusted net income per share - diluted $0.57
 $0.39
     

(1)

For the three months ended September 30, 2017March 31, 2020 and 2016,2019, the effective tax rate computed in accordance with US GAAP equaled 464.6%21.5% and 29.1%(26.0)%, respectively. For the nine months ended September 30, 2017 and 2016, the effective tax rate computed in accordance with US GAAP equaled (107.2%) and 31.6%, respectively.

(2)

An estimated normalized effective tax rate of 40%25.5% has been used to compute adjusted net income.

income for the three months ended March 31, 2020 and 2019.

Note on Income Taxes: As of September 30, 2017 the CompanyDecember 31, 2019 we had net operating lossNOL carryforwards of $261,475approximately $258,000 and $164,397$208,000 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 payswe pay 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.

48




The following tables set forth the reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the three and nine months ended September 30, 2017March 31, 2020 and 2016:

2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 

(in thousands)

Revenues

$

135,948

 

$

39,666

 

$

 —

 

$

175,614

  Deferred revenue fair value adjustment

 

 —

 

 

15

 

 

 —

 

 

15

Adjusted revenues

$

135,948

 

$

39,681

 

$

 —

 

$

175,629

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

18,955

 

$

(3,364)

 

$

(11,243)

 

$

4,348

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

 —

 

 

15

 

 

 —

 

 

15

  Accretion on contingent consideration and purchase liability

 

104

 

 

 —

 

 

 —

 

 

104

  Depreciation and amortization

 

6,414

 

 

9,078

 

 

 —

 

 

15,492

  Non-cash compensation expense

 

3,679

 

 

2,675

 

 

1,694

 

 

8,048

  Restructuring charges and transaction costs

 

73

 

 

 —

 

 

4,535

 

 

4,608

  Non-income tax expense adjustment

 

571

 

 

 —

 

 

 —

 

 

571

  Severance

 

1,519

 

 

78

 

 

 —

 

 

1,597

  Litigation related expense

 

 —

 

 

 —

 

 

 —

 

 

 —

  Other gain

 

 —

 

 

 —

 

 

(20)

 

 

(20)

  Loss attributable to non-controlling interest

 

26

 

 

 —

 

 

 —

 

 

26

Adjusted EBITDA

$

31,341

 

$

8,482

 

$

(5,034)

 

$

34,789

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 

(in thousands)

Revenues

$

114,511

 

$

34,644

 

$

 —

 

$

149,155

  Deferred revenue fair value adjustment

 

109

 

 

222

 

 

 —

 

 

331

Adjusted revenues

$

114,620

 

$

34,866

 

$

 —

 

$

149,486

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

12,361

 

$

(8,416)

 

$

(5,236)

 

$

(1,291)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

109

 

 

222

 

 

 —

 

 

331

  Accretion on contingent consideration and purchase liability

 

23

 

 

 —

 

 

 —

 

 

23

  Depreciation and amortization

 

6,362

 

 

10,330

 

 

 —

 

 

16,692

  Non-cash compensation expense

 

3,565

 

 

2,937

 

 

1,052

 

 

7,554

  Restructuring charges and transaction costs

 

34

 

 

 3

 

 

961

 

 

998

  Severance

 

990

 

 

68

 

 

 —

 

 

1,058

  Fair market value adjustment on contingent consideration

 

 —

 

 

 —

 

 

349

 

 

349

  Litigation related expense

 

 —

 

 

2,086

 

 

11

 

 

2,097

  Foreign currency and related hedging activity

 

 —

 

 

(462)

 

 

 —

 

 

(462)

  Other loss

 

 —

 

 

 —

 

 

11

 

 

11

  Loss attributable to non-controlling interest

 

145

 

 

 —

 

 

 —

 

 

145

Adjusted EBITDA

$

23,589

 

$

6,768

 

$

(2,852)

 

$

27,505

49


 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 

(in thousands)

Revenues

$

386,638

 

$

114,179

 

$

 —

 

$

500,817

  Deferred revenue fair value adjustment

 

36

 

 

84

 

 

 —

 

 

120

Adjusted revenues

$

386,674

 

$

114,263

 

$

 —

 

$

500,937

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

48,277

 

$

(16,707)

 

$

(27,833)

 

$

3,737

Add:

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

36

 

 

84

 

 

 —

 

 

120

  Accretion on contingent consideration and purchase liability

 

408

 

 

 —

 

 

 —

 

 

408

  Depreciation and amortization

 

19,196

 

 

27,596

 

 

 —

 

 

46,792

  Non-cash compensation expense

 

11,571

 

 

8,137

 

 

3,743

 

 

23,451

  Restructuring charges and transaction costs

 

768

 

 

 —

 

 

9,467

 

 

10,235

  Non-income tax expense adjustment

 

1,734

 

 

 —

 

 

 —

 

 

1,734

  Severance

 

1,942

 

 

302

 

 

16

 

 

2,260

  Litigation related expense

 

 —

 

 

1,033

 

 

 —

 

 

1,033

  Other loss

 

 —

 

 

 —

 

 

 5

 

 

 5

  Loss attributable to non-controlling interest

 

377

 

 

 —

 

 

 —

 

 

377

Adjusted EBITDA

$

84,309

 

$

20,445

 

$

(14,602)

 

$

90,152

 

 

 

��

 

 

 

 

 

Nine Months Ended September 30, 2016

 Three months ended March 31, 2020

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 Envestnet Wealth Solutions Envestnet Data & Analytics Nonsegment Total

(in thousands)

 (in thousands)

Revenues

$

328,417

 

$

94,267

 

$

 —

 

$

422,684

 $198,420
 $48,119
 $
 $246,539

Deferred revenue fair value adjustment

 

114

 

 

667

 

 

 —

 

 

781

 439
 
 
 439

Adjusted revenues

$

328,531

 

$

94,934

 

$

 —

 

$

423,465

 198,859
 48,119
 
 246,978
Less: Asset-based cost of revenues (68,592) 
 
 (68,592)
Adjusted net revenues $130,267
 $48,119
 $
 $178,386

 

 

 

 

 

 

 

 

        

Income (loss) from operations

$

32,425

 

$

(33,728)

 

$

(19,078)

 

$

(20,381)

 $11,340
 $(4,585) $(14,372) $(7,617)

Add (deduct):

 

 

 

 

 

 

 

 

Add:       

Deferred revenue fair value adjustment

 

114

 

667

 

 —

 

781

 439
 
 
 439

Accretion on contingent consideration and purchase liability

 

143

 

 —

 

 —

 

143

 373
 226
 
 599

Depreciation and amortization

 

18,786

 

31,086

 

 —

 

49,872

 19,420
 8,263
 
 27,683

Non-cash compensation expense

 

9,151

 

12,186

 

4,535

 

25,872

 9,697
 4,226
 2,071
 15,994

Restructuring charges and transaction costs

 

361

 

34

 

4,089

 

4,484

 1,189
 185
 1,446
 2,820
Non-income tax expense adjustment 250
 (62) 
 188

Severance

 

2,019

 

747

 

338

 

3,104

 11,002
 1,660
 1,320
 13,982

Fair market value adjustment on contingent consideration

 

 —

 

 —

 

838

 

838

Litigation related expense

 

 —

 

3,824

 

241

 

4,065

Foreign currency and related hedging activity

 

 —

 

(462)

 

 —

 

(462)

Other loss

 

 —

 

 —

 

23

 

23

Loss attributable to non-controlling interest

 

787

 

 

 —

 

 

 —

 

 

787

Litigation and regulatory related expenses 
 703
 
 703
Income attributable to non-controlling interest (201) 
 
 (201)
Other (12) 
 
 (12)

Adjusted EBITDA

$

63,786

 

$

14,354

 

$

(9,014)

 

$

69,126

 $53,497
 $10,616
 $(9,535) $54,578


  Three Months Ended March 31, 2019
  Envestnet Wealth Solutions Envestnet Data & Analytics Nonsegment Total
  (in thousands)
Revenues $152,705
 $46,961
 $
 $199,666
Deferred revenue fair value adjustment 6
 
 
 6
Adjusted revenues 152,711
 46,961
 
 199,672
Less: Asset-based cost of revenues (53,842) 
 
 (53,842)
Adjusted net revenues $98,869
 $46,961
 $
 $145,830
         
Income (loss) from operations $16,844
 $(7,928) $(17,653) $(8,737)
Add:        
Deferred revenue fair value adjustment 6
 
 
 6
Accretion on contingent consideration and purchase liability 240
 
 
 240
Depreciation and amortization 11,267
 8,250
 
 19,517
Non-cash compensation expense 5,677
 4,188
 2,999
 12,864
Restructuring charges and transaction costs 262
 965
 6,139
 7,366
Non-income tax expense adjustment 200
 10
 
 210
Severance 350
 2,048
 82
 2,480
Loss attributable to non-controlling interest 31
 
 
 31
Other 22
 1
 2
 25
Adjusted EBITDA $34,899
 $7,534
 $(8,431) $34,002



Liquidity and Capital Resources

As of September 30, 2017,March 31, 2020, we had total cash and cash equivalents of $48,704$68,601 compared to $52,592$82,505 as of December 31, 2016.2019. We plan to use existing cash, as of September 30, 2017 and cash generated in the ongoing operations of our business and amounts under our revolving credit facility to fund our current operations, capital expenditures repay debt and for possible acquisitions or other strategic activity.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 bankrevolving credit agreementfacility or incur additional debt to fund our ongoing operations or to fund potential acquisitions or other strategic activities. The Company will fund the FolioDynamix acquisition with a combination of cash on the Company’s balance sheet and borrowings under its revolving credit facility. 

50



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.

As of September 30, 2017, an amount of $101,168 was outstanding on the Revolving Credit Facility.

The July 18, 2017 amendmentMarch 31, 2020, we had $210,000 available 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 condensed consolidated balance sheets reflect these changes as of September 30, 2017 with no resulting portion of debt related to theborrow under our revolving credit facility, being classified as short-term, in accordance with the term of the amended and restated Credit Agreement.

subject to covenant compliance.


Cash Flows

The following table presents information regarding our cash flows and cash, and cash equivalents and restricted cash for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

    

    

2017

    

2016

 

 

 

(in thousands)

Net cash provided by operating activities

 

 

$

71,603

    

$

53,350

Net cash used in investing activities

 

 

 

(22,092)

 

 

(37,688)

Net cash used in financing activities

 

 

 

(53,569)

 

 

(16,718)

Effect of exchange rate on changes on cash

 

 

 

170

 

 

 —

Net decrease in cash and cash equivalents

 

 

 

(3,888)

 

 

(1,056)

Cash and cash equivalents, end of period

 

 

 

48,704

 

 

50,662

  Three Months Ended
  March 31,
  2020 2019
  (in thousands)
Net cash provided by (used in) operating activities $8,988
 $(12,575)
Net cash used in investing activities (45,689) (24,493)
Net cash provided by (used in) financing activities 24,211
 (6,654)
Effect of exchange rate on changes on cash (1,496) 112
Net decrease in cash, cash equivalents and restricted cash (13,986) (43,610)
Cash, cash equivalents and restricted cash, end of period 68,769
 246,061
Operating Activities

Net cash provided by operating activities for the ninethree months ended September 30, 2017 increased by $18,253March 31, 2020 was $8,988 compared to net cash used in operating activities of $12,575 for the same period in 2016,2019. The increase was primarily due to increasesa decrease in deferred income taxesnet losses from $18,268 for the three months ended March 31, 2019 to a net loss of $16,919, changes$7,190 in the three months ended March 31, 2020. An increase period over period for noncash addbacks for depreciation and amortization expense of $8,166 were partially offset by a non-cash gain of $4,230. Also contributing to the increase in net cash provided by operating activities is an increase in the change in operating assets and liabilities of $2,389 and net income of $2,068, offset by decreases in depreciation and amortization of $3,080 and stock-based compensation expense of $2,421.

$4,840, which is primarily timing related.

51


Investing Activities

Net cash used in investing activities for the ninethree months ended September 30, 2017 decreased by $15,596March 31, 2020 was $45,689 compared to net cash used in investing activities of $24,493 for the same period in 2016.2019. The decrease ischange was primarily a result of a decreasean increase in cash disbursements for business acquisitions of $18,394, offset$9,196. We also used $11,000 to acquire a 4.25% interest in a privately held company.
Financing Activities
Net cash provided by increases in capitalization of internally developed software of $2,993.

Financing Activities

Netfinancing activities for the three months ended March 31, 2020 was $24,211 compared to net cash used in financing activities of $6,654 for the nine months ended September 30, 2017 increased $36,851 compared to the same period in 2016.2019. The change was primarily the result of increases in paymentsincreased borrowings on Term Notes of $29,862 and payments on theour revolving credit facility of $17,500,$45,000, partially offset by an increase in proceeds from borrowingspayments on theour revolving credit facility of $10,000.

$15,000.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statementscondensed consolidated financial statements and accompanying notes. Note 2, “Note 2—Summary of Significant Accounting Policies,Policies” to the Consolidated Financial Statementsconsolidated financial statements in our most recent2019 Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.consolidated financial statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent2019 Form 10-K include, but are not limited to, the discussion of estimates used for recognition of revenues, the determination of the period of benefit for deferred sales incentive commissions, purchase


accounting, internally developed software, non-cash stock-based compensation expense,impairment of goodwill and acquired intangible assets and income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements,condensed consolidated financial statements, and actual results could differ materially from the amounts reported.


Commitments and Off-Balance Sheet Arrangements

Purchase Obligations and Indemnifications

The Company includes various types of indemnification

See “Part I, Note 18—Commitments and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.

The Company enters into unconditionalContingencies, Legal Proceedings” for purchase obligations arrangementsand indemnifications details.

Legal Proceedings
See “Part I, Note 18—Commitments and Contingencies, Legal Proceedings” for certain of its services that it receives in the normal course of business.

Litigation

In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had and was continuing to infringe on seven of Yodlee’s U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer to Yodlee’s complaint as well as counterclaims seeking declaratory judgment that Yodlee’s patents were not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims also alleged, among other things, violation of federal antitrust and false advertising laws and unfair competition under California state law and common law. The counterclaims sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. During the course of the litigation, Plaid also filed petitions for review before the Patent Office’s Board of Patent Trials and Appeals against the seven Yodlee patents that were the subject of the lawsuit as well as a petition for reexamination against one of the patents.

On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office.  Plaid also agreed not to participate further in the reexaminationlegal proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.

The Company is involved in litigation arising in the ordinary course of its business.  Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability

details.

52


has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of September 30, 2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.

Leases

The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of September 30, 2017, were as follows:

 

 

 

 

Years ending December 31:

    

 

 

Remainder of 2017

 

$

3,309

2018

 

 

13,640

2019

 

 

14,492

2020

 

 

14,343

2021

 

 

13,751

Thereafter

 

 

53,538

Total

 

$

113,073

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk

Risk

Our exposure to market risk is directly related to asset-based recurring revenues from asset management or administration services earned based upon a contractual percentage of AUM or AUA. In the three and nine months ended September 30, 2017, 60%March 31, 2020, 55% of our revenues were derived from revenues based on the market value of AUM or AUA. We expect this percentage to vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue to decline and our net loss to increase.

If there are continued financial market declines for COVID-19 or any other matter, our asset-based revenues may negatively be impacted in future periods.


Foreign Currency Risk
A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency risk

exchange rates through the translation of these monthly revenues into U.S. dollars. For the three months ended March 31, 2020, we estimate that a hypothetical 10% change in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of approximately $519 to pre‑tax earnings.


The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. For the three and nine months ended September 30, 2017,March 31, 2020, 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 $991 and $2,101, respectively,approximately $1,451 to prepre‑tax earnings, respectively, and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of $811 and $1,719, respectively,approximately $1,187 to prepre‑tax earnings.

A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly revenues into U.S. dollars. For the three and nine months ended September 30, 2017, we estimate that a hypothetical 10% increase in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $742 and $2,121, respectively, to pretax earnings. For the three and nine months ended September 30, 2017, we estimate that a hypothetical 10% decrease in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $724 and $2,065, respectively, to pretax earnings.

Interest rate risk

Rate Risk

We are subject to market risk from changes in interest rates. The Company hasWe have a revolving credit facility that bears interest at LIBOR plus an applicable margin between 1.50 percent1.50% and 3.25 percent.3.25%. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the Amended and Restated Credit Agreement. Interest charged on the revolving credit facility for

53


the majority of the thirdfirst quarter of 20172020 was approximately 3.6%. As of September 30, 2017,March 31, 2020, there was $101,168$290,000 of revolving credit amounts outstanding under the Amended and Restated Credit Agreement. The CompanyWe incurred interest expense of $3,795 and $5,368$2,671 for the three and nine months ended September 30, 2017, respectively,March 31, 2020, related to the Amended and Restated Credit Agreement. A sensitivity analysis performed on the interest expense indicated that a hypothetical 0.25% increase or decrease in our interest rate would increase or decrease interest expense by approximately $497 on an annual basis by approximately $286.

.



Item 4.Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management is responsible for establishing

Based on their evaluation of our disclosure controls and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Management concluded there were material weaknesses as identified below in internal control over financial reportingprocedures as of September 30, 2017. The control deficiencies identified below were previously identified by management as of DecemberMarch 31, 2016.

The following control deficiencies were identified as material weaknesses:

·

Ineffective design and operation of internal controls over the accounting for non-routine transactions and the relevance and reliability of data used to prepare financial statement disclosures. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over non-routine transactions and financial statement disclosures.

·

Ineffective design and operation of management review controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions. This material weakness was caused by an ineffective risk assessment process that failed to appropriately identify new employee resource needs and necessary internal controls over the acquisitions.

·

Ineffective design and operation of internal controls related to our state and local tax compliance process. Specifically, it was determined that we did not have adequate procedures and controls to appropriately determine compliance with, and accounting for, certain state and local non-income tax regulations.

These control deficiencies create a reasonable possibility that a material misstatement to the condensed consolidated financial statements will not be prevented or detected on a timely basis.  Due to the material weaknesses described above, our management, including2020, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017.

Remediation Plans

Management, under the supervision of our Audit Committee, is committed to remediating these material weaknesses in a timely fashion. We have begun executing remediation plans that address the material weaknesses in internal control over financial reporting. Specifically, we have hired and continue to actively recruit additional resources including personnel dedicated to providing additional management oversight over the documentation of non-routine accounting matters and accounting for acquisitions and to enhance our expertise in determining the appropriate accounting and reporting in these areas.

In addition, management’s planned actions to further address the material weaknesses include:

effective.

54


·

Review of the quarterly and annual financial reporting processes to identify and implement enhanced accounting processes and related internal control procedures;

·

Enhancement of our process and internal controls related to the preparation of accounting position papers documenting our analysis and conclusions for all non-routine accounting matters including purchase accounting over acquisitions;

·

Establishment of training and education programs for financial personnel responsible for the drafting of our consolidated financial statements and disclosures and accounting for newly acquired businesses and non-routine accounting matters; and

·

Update of our systems in order to collect the necessary data to comply with all required tax obligations.

The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and others that may be implemented will remediate the control deficiencies identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of our internal control processes and will continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above. Subject to the foregoing, we expect these remedial actions and or other remedial actions related to these material weaknesses will be completed in 2017.

If the remedial measures described above are insufficient to address the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual consolidated financial statements may occur in the future. Among other things, any unremediated material weakness could result in material post-closing adjustments in future financial statements. Furthermore, any such unremediated material weakness could have the effects described in “Risk Factors” in Part I, Item 1A of our 2016 Form 10-K that was filed with the Securities and Exchange Commission on March 24, 2017.

Changes in Internal Control Over Financial Reporting

During

There were no changes to our internal control over financial reporting during the ninethree months ended September 30, 2017, improvementsMarch 31, 2020, that have materially affected, or are reasonably likely to the processes of financial reporting have been 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 driven reports, thereby decreasing the likelihood of human error. In addition, management has reorganized the accounting department as well as increased its overall staffing levels.

During the remainder of the year, the Company will test the design and operating effectiveness of controls designed to remediate certain material weaknesses as discussed above in an effort to remediate the material weaknesses prior to the filing of the 2017 Form 10-K.

During the nine months ended September 30, 2017, the material weakness related to the ineffective design and operation of management reviewmaterially affect, our internal controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions has been remediated and the impacted controls were effective at September 30, 2017.

The remedial actions that management undertook in the nine months ended September 30, 2017 to address this material weakness included the following:

•Revised existing controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions

•Added specific controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions.  

financial reporting.

55


PART II — OTHER INFORMATION


Item 1.Legal Proceedings
The information in Part I, Note 18—Commitments and Contingencies - Legal Proceedings is incorporated herein by reference.

The Company is involved in litigation arising in the ordinary course of its business.  Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it 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. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of September 30, 2017.  Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.

Item 1A. Risk Factors

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized below and under the caption “Risk Factors” in Part I, Item 1A of our 20162019 Form 10-K when making investment decisions regarding our securities. TheOther than as provided below, the risk factors that were disclosed in our 20162019 Form 10-K have not materially changed since the date our 20162019 Form 10-K was filed.


The COVID-19 pandemic has caused, and is causing, significant harm to the global economy and may adversely affect our business, including our operations and financial condition, and may cause our assets under management or administration, revenue and earnings to decline.
On March 11, 2020, the World Health Organization declared Coronavirus Disease 2019 (“COVID-199”) a pandemic disease. The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter in place orders, and limitations on business activity, including closures. These measures are, among other things, severely restricting global economic activity, which is disrupting supply chains, lowering asset and equity market valuations, significantly increasing unemployment and underemployment levels, decreasing liquidity in markets for certain securities and causing significant volatility and disruption in the financial markets.
In response to COVID-19 concerns, the Company has instituted a travel ban for all of its domestic and international employees and is following mandatory stay-at-home orders where applicable. A majority of the Company's employees are working from home as a result of these mandatory stay-at-home orders. Remote work-from-home restrictions makes us more dependent on certain technologies that allow us to operate our business remotely and collaborate without face-to-face meetings both internally and with our customers. To the extent we experience a technological disruption in our work-from-home capabilities, we would anticipate a negative impact on our business operations. Further, to the extent supply chains are disrupted, it may become more difficult to provide necessary technology to our employees working from remote locations.


For the three months ended March 31, 2020, approximately 55% of the Company's revenues result from asset-based fee billing arrangements. These fees are generally based upon variable percentages of assets managed or administered under the Company's platforms. Approximately 90% of the Company's asset-based fee arrangements are billed at the beginning of each quarter based on the market value of customer assets on its platforms as of the end of the prior quarter. While we experienced minimal impact on our asset-based revenues in the first quarter of 2020, we expect the impact of the pandemic to be more significant in the second quarter of 2020 as a result of declines within the equity markets. Should current economic conditions persist or deteriorate, there may be an ongoing adverse effect on our business, including our results of operations and financial condition, as a result of, among other things:
adverse equity market conditions, volatility in the financial markets and unforeseen investment trends resulting in a reduction in our asset-based fees;
a decline in new client conversions as a result of extended sales cycles and longer implementation periods as clients work remotely;
the negative impact of the pandemic on our clients and key vendors, market participants and other third-parties with whom we do business;
the disruption to our workforce due to illness and health concerns, potential limitations on our remote work environment, and government-imposed restrictions, laws and regulations.
The extent to which COVID-19, and the related global economic crisis, affect our business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties in response to the pandemic, and the effects on our products, clients, employees and vendors. If we are not able to respond to and manage the impact of such events effectively, our business, results of operations and financial condition may be materially and adversely affected.
The COVID-19 pandemic, and the related global economic crisis, could also precipitate or aggravate the other risk factors discussed in our Annual Report on Form 10-K, which could materially and adversely affect our business, results of operations and financial condition. Further, the COVID-19 pandemic may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks. For additional discussion of the impacts of the COVID-19 pandemic, which could be materially adverse to our operations and financial results, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Recent Developments, Uncertainties Related to COVID-19” section in Item 2 of Part I of this Quarterly Report on Form 10-Q.

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

(c)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

July 1, 2017 through July 31, 2017

 

2,531

$

39.16

 

 —

 

1,956,390

August 1, 2017 through August 31, 2017

 

29,134

 

40.99

 

 —

 

1,956,390

September 1, 2017 through September 30, 2017

 

9,022

 

43.94

 

 —

 

1,956,390

On February 25, 2016, the Company announced that its Board

There were no purchases of Directors had authorized aequity securities made under our share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other forward transactions or otherwise, all in compliance with applicable laws and other restrictions.three months ended March 31, 2020. As of September 30, 2017,March 31, 2020, 1,956,390 of shares could still be purchased under this program.


Item 3.Defaults Upon Senior Securities
None.

None.

Item 4.Mine Safety Disclosures

Not applicable.


Item 5.Other Information
None.

None.

56


Item 6.Exhibits

(a)Exhibits

See the exhibit index, which is incorporated herein by reference.



INDEX TO EXHIBITS

Exhibit
No.

Description

Exhibit
No.
Description
31.1


31.2


32.1(1)

32.1


32.2(1)

32.2


101.INS


XBRL Instance 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


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

(1)


The materialCover Page Interactive Data File (formatted as Inline XBRL and 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.

101)


*Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the The following materials are formatted in Inline XBRL (Extensible Business Reporting Language): (i) the cover page; (ii) the Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 2016; (ii)2019; (iii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2020 and 2016; (iii)2019; (iv) the Condensed Consolidated Statement of Comprehensive Loss for the three and nine months ended September 30, 2017March 31, 2020 and 2016; (iv)2019; (v) the Condensed Consolidated StatementStatements of Stockholders' Equity for the ninethree months ended September 30, 2017; (v)March 31, 2020 and 2019; (vi) the Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016; (vi)2019; (vii) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.


57




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 9, 2017.

May 8, 2020.

ENVESTNET, INC.

By:

/s/ Judson Bergman

ENVESTNET, INC.

Judson Bergman

By:

Chairman and /s/ William C. Crager

William C. Crager
Chief Executive Officer

Principal Executive Officer

By:

/s/ Peter H. D’Arrigo

Peter H. D’Arrigo

Chief Financial Officer

Principal Financial Officer

By:

/s/ Matthew J. Majoros

Matthew J. Majoros

Senior Vice President, Financial Reporting

Principal Accounting Officer



58

48