3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2018

2019

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

Commission file number 001-34835

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-1409613

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 ☒ý  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 ☒

ý

As of August 1, 2018,  45,384,0042019, Envestnet, Inc. had 52,182,228 shares of the common stock with a par value of $0.005 per share were outstanding.

Table of Contents




TABLE OF CONTENTS


Page

Page
PART I - FINANCIAL INFORMATION

3

Item 1. Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets as of June 30, 20182019 and December 31, 20172018

3
3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 20182019 and 20172018

4
4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 20182019 and 20172018

5
5

Condensed Consolidated StatementStatements of Equity for the three and six months ended June 30, 2019 and 2018

6
6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20182019 and 20172018

8
7

Notes to Unaudited Condensed Consolidated Financial Statements

9
8

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

35

Forward-Looking Statements

33
35

Overview

35
36

Results of Operations

41
42

Liquidity and Capital Resources

57
57

Item 3. Quantitative and Qualitative Disclosures About Market Risk

59
59

Item 4. Controls and Procedures

60
60

PART II - OTHER INFORMATION

60

Item 1. Legal Proceedings

60
60

Item 1A. Risk Factors

60
61

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

61
61

Item 3. Defaults Upon Senior Securities

61
61

Item 4. Mine Safety Disclosures

61
61

Item 5. Other Information

61
61

Item 6. Exhibits

61
61

2



Table of Contents



Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,032

 

$

60,115

 

Fees receivable, net

 

 

64,164

 

 

51,522

 

Prepaid expenses and other current assets

 

 

22,721

 

 

19,470

 

Total current assets

 

 

220,917

 

 

131,107

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

40,397

 

 

35,909

 

Internally developed software, net

 

 

29,257

 

 

22,174

 

Intangible assets, net

 

 

313,743

 

 

222,731

 

Goodwill

 

 

526,955

 

 

432,955

 

Other non-current assets

 

 

23,907

 

 

17,176

 

Total assets

 

$

1,155,176

 

$

862,052

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

$

109,537

 

$

105,897

 

Accounts payable

 

 

21,133

 

 

11,097

 

Contingent consideration

 

 

707

 

 

2,115

 

Deferred revenue

 

 

25,739

 

 

21,246

 

Total current liabilities

 

 

157,116

 

 

140,355

 

 

 

 

 

 

 

 

 

Convertible Notes due 2019

 

 

162,299

 

 

158,990

 

Convertible Notes due 2023

 

 

289,562

 

 

 —

 

Revolving credit facility

 

 

 —

 

 

81,168

 

Contingent consideration

 

 

 —

 

 

666

 

Deferred revenue

 

 

7,929

 

 

12,047

 

Deferred rent and lease incentive

 

 

17,334

 

 

15,185

 

Deferred tax liabilities, net

 

 

2,154

 

 

969

 

Other non-current liabilities

 

 

16,744

 

 

15,102

 

Total liabilities

 

 

653,138

 

 

424,482

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable units in ERS

 

 

900

 

 

900

 

Equity:

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, par value $0.005,  500,000,000 shares authorized; 58,382,026 and 57,450,056 shares issued as of June 30, 2018 and December 31, 2017, respectively; 45,375,594 and 44,700,641 shares outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

291

 

 

287

 

Additional paid-in capital

 

 

624,378

 

 

556,257

 

Accumulated deficit

 

 

(62,059)

 

 

(73,854)

 

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

 

 

(61,437)

 

 

(47,042)

 

Accumulated other comprehensive income (loss)

 

 

(739)

 

 

624

 

Total stockholders’ equity

 

 

500,434

 

 

436,272

 

Non-controlling interest

 

 

704

 

 

398

 

Total equity

 

 

501,138

 

 

436,670

 

Total liabilities and equity

 

$

1,155,176

 

$

862,052

 

  June 30, December 31,
  2019 2018
Assets:    
Current assets:    
Cash and cash equivalents $77,717
 $289,345
Fees receivable, net 71,632
 68,004
Prepaid expenses and other current assets 40,046
 23,557
Total current assets 189,395

380,906
     
Property and equipment, net 51,016
 44,991
Internally developed software, net 48,059
 38,209
Intangible assets, net 509,159
 305,241
Goodwill 908,686
 519,102
Operating lease right-of-use assets, net 72,191
 —
Other non-current assets 33,834
 25,298
Total assets $1,812,340

$1,313,747
     
Liabilities and Equity:    
Current liabilities:    
Accrued expenses and other liabilities $118,608
 $133,298
Accounts payable 15,165
 19,567
Operating lease liabilities 12,918
 —
Convertible Notes due 2019 169,182
 165,711
Contingent consideration —
 732
Deferred revenue 37,601
 23,988
Total current liabilities 353,474

343,296
     
Convertible Notes due 2023 300,078
 294,725
Revolving credit facility 145,000
 —
Contingent consideration 16,423
 —
Deferred revenue 6,659
 6,910
Non-current operating lease liabilities 77,431
 —
Deferred rent and lease incentive —
 17,569
Deferred tax liabilities, net 31,292
 640
Other non-current liabilities 28,193
 18,005
Total liabilities 958,550
 681,145
     
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; 65,415,670 and 61,238,898 shares issued as of June 30, 2019 and December 31, 2018, respectively; 52,070,156 and 48,121,800 shares outstanding as of June 30, 2019 and December 31, 2018, respectively 327
 306
Additional paid-in capital 1,015,578
 761,128
Accumulated deficit (76,174) (58,882)
Treasury stock at cost, 13,345,514 and 13,117,098 shares as of June 30, 2019 and December 31, 2018, respectively (83,820) (67,858)
Accumulated other comprehensive loss (660) (994)
Total stockholders’ equity 855,251
 633,700
Non-controlling interest (1,461) (1,098)
Total equity 853,790
 632,602
Total liabilities and equity $1,812,340

$1,313,747
See accompanying notes to unaudited Condensed Consolidated Financial Statements.

3



Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

 

$

118,111

 

$

98,959

 

$

239,264

 

$

193,121

Subscription-based

 

 

71,779

 

 

59,802

 

 

141,474

 

 

117,712

Total recurring revenues

 

 

189,890

 

 

158,761

 

 

380,738

 

 

310,833

Professional services and other revenues

 

 

11,226

 

 

8,656

 

 

18,389

 

 

14,370

Total revenues

 

 

201,116

 

 

167,417

 

 

399,127

 

 

325,203

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

67,627

 

 

55,735

 

 

130,561

 

 

104,961

Compensation and benefits

 

 

80,210

 

 

64,996

 

 

163,750

 

 

130,528

General and administration

 

 

34,089

 

 

28,478

 

 

66,818

 

 

59,025

Depreciation and amortization

 

 

19,185

 

 

15,465

 

 

38,731

 

 

31,300

Total operating expenses

 

 

201,111

 

 

164,674

 

 

399,860

 

 

325,814

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 5

 

 

2,743

 

 

(733)

 

 

(611)

Other expense, net

 

 

(5,430)

 

 

(4,369)

 

 

(10,684)

 

 

(9,852)

Loss before income tax provision (benefit)

 

 

(5,425)

 

 

(1,626)

 

 

(11,417)

 

 

(10,463)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

 

566

 

 

4,844

 

 

(13,428)

 

 

9,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(5,991)

 

 

(6,470)

 

 

2,011

 

 

(19,605)

Add: Net loss attributable to non-controlling interest

 

 

465

 

 

 —

 

 

567

 

 

 —

Net income (loss) attributable to Envestnet, Inc.

 

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12)

 

$

(0.15)

 

$

0.06

 

$

(0.45)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

(0.12)

 

$

(0.15)

 

$

0.05

 

$

(0.45)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,247,331

 

 

43,855,479

 

 

44,963,735

 

 

43,513,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

45,247,331

 

 

43,855,479

 

 

47,156,205

 

 

43,513,074

 

 

 

 

 

 

 

 

 

 

 

 

 


  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Revenues:        
Asset-based $120,070
 $118,111
 $229,004
 $239,264
Subscription-based 92,258
 71,779
 175,345
 141,474
Total recurring revenues 212,328

189,890

404,349

380,738
Professional services and other revenues 12,117
 11,226
 19,762
 18,389
Total revenues 224,445
 201,116
 424,111

399,127
         
Operating expenses:        
Cost of revenues 72,080
 67,627
 133,725
 130,561
Compensation and benefits 103,286
 80,210
 190,003
 163,750
General and administration 42,421
 34,089
 82,945
 66,818
Depreciation and amortization 26,915
 19,185
 46,432
 38,731
Total operating expenses 244,702

201,111

453,105

399,860
         
Income (loss) from operations (20,257) 5
 (28,994) (733)
Other expense, net (7,512) (5,430) (13,275)
(10,684)
Loss before income tax provision (benefit) (27,769)
(5,425)
(42,269)
(11,417)
         
Income tax provision (benefit) (28,382) 566
 (24,614) (13,428)
         
Net income (loss) 613
 (5,991) (17,655)
2,011
Add: Net loss attributable to non-controlling interest 280
 465
 363
 567
Net income (loss) attributable to Envestnet, Inc. $893

$(5,526)
$(17,292)
$2,578
         
Net income (loss) per share attributable to Envestnet, Inc.:        
Basic $0.02
 $(0.12) $(0.35) $0.06
Diluted $0.02
 $(0.12) $(0.35) $0.05
         
Weighted average common shares outstanding:        
Basic 50,870,296
 45,247,331
 49,526,774
 44,963,735
Diluted 52,982,688
 45,247,331
 49,526,774
 47,156,205

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

4



Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

    

2017

 

2018

    

2017

Net income (loss) attributable to Envestnet, Inc.

 

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(1,036)

 

 

76

 

 

(1,363)

 

 

809

Comprehensive income (loss) attributable to Envestnet, Inc.

 

$

(6,562)

 

$

(6,394)

 

$

1,215

 

$

(18,796)

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Net income (loss) attributable to Envestnet, Inc. $893
 $(5,526) $(17,292) $2,578
Other comprehensive income (loss), net of taxes:        
Foreign currency translation gain (loss)
 112
 (1,036) 334
 (1,363)
Comprehensive income (loss) attributable to Envestnet, Inc.
 $1,005

$(6,562)
$(16,958)
$1,215

See accompanying notes to unaudited Condensed Consolidated Financial Statements.


5



Table of Contents

Envestnet, Inc.

Condensed Consolidated StatementStatements of Equity

(in thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

Other

 

 

 

 

Non-

 

 

 

 

 

    

 

 

    

Common

    

 

 

    

Paid-in

    

Comprehensive

    

Accumulated

    

controlling

 

Total

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Interest

    

Equity

Balance, December 31, 2017

 

57,450,056

 

$

287

 

(12,749,415)

 

$

(47,042)

 

$

556,257

 

$

624

 

$

(73,854)

 

$

398

 

$

436,670

Adoption of ASC 606 (See Note 4)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,217

 

 

 —

 

 

9,217

Exercise of stock options

 

175,023

 

 

 1

 

 —

 

 

 —

 

 

2,539

 

 

 —

 

 

 —

 

 

 —

 

 

2,540

Issuance of common stock - vesting of restricted stock units

 

756,947

 

 

 3

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

18,971

 

 

 —

 

 

 —

 

 

 —

 

 

18,971

Purchase of treasury stock for stock-based tax withholdings

 

 —

 

 

 —

 

(257,017)

 

 

(14,395)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(14,395)

Issuance of non-controlling units in private company

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

873

 

 

873

Issuance of Convertible Notes due 2023, net of offering costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 

46,611

 

 

 —

 

 

 —

 

 

 —

 

 

46,611

Foreign currency translation loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,363)

 

 

 —

 

 

 —

 

 

(1,363)

Net income (loss)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,578

 

 

(567)

 

 

2,011

Balance, June 30, 2018

 

58,382,026

 

$

291

 

(13,006,432)

 

$

(61,437)

 

$

624,378

 

$

(739)

 

$

(62,059)

 

$

704

 

$

501,138

            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, 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 (loss) —
 —
 —
 —
 —
 222
 —
 —
 222
Net income (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
Exercise of stock options 114,109
 1
 —
 —
 1,750
 —
 —
 —
 1,751
Issuance of common stock - vesting of restricted stock units 182,390
 1
 —
 —
 —
 —
 —
 —
 1
Acquisition of business 3,184,713
 16
 —
 —
 222,468
 —
 —
 —
 222,484
Stock-based compensation expense —
 —
 —
 —
 13,434
 —
 —
 —
 13,434
Purchase of treasury stock for stock-based tax withholdings —
 —
 (67,960) (6,143) —
 —
 —
 —
 (6,143)
Foreign currency translation gain (loss) —
 —
 —
 —
 —
 112
 —
 —
 112
Net income (loss) —
 —
 —
 —
 —
 —
 893
 (280) 613
Balance, June 30, 2019 65,415,670

$327

(13,345,514)
$(83,820)
$1,015,578

$(660)
$(76,174)
$(1,461)
$853,790


See accompanying notes to unaudited Condensed Consolidated Financial Statements.


6











Table of Contents


Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

Equity (continued)

(in thousands)

thousands, except share information)

(unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2018

    

2017

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income (loss)

 

$

2,011

 

$

(19,605)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

38,731

 

 

31,300

Deferred rent and lease incentive amortization

 

 

1,069

 

 

583

Provision for doubtful accounts

 

 

924

 

 

341

Deferred income taxes

 

 

(17,093)

 

 

6,524

Stock-based compensation expense

 

 

18,971

 

 

15,403

Non-cash interest expense

 

 

5,630

 

 

4,853

Accretion on contingent consideration and purchase liability

 

 

196

 

 

304

Payments of contingent consideration

 

 

 —

 

 

(357)

Loss allocation from equity method investment

 

 

811

 

 

702

Loss on disposal of fixed assets

 

 

10

 

 

69

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Fees receivable, net

 

 

(8,204)

 

 

(5,639)

Prepaid expenses and other current assets

 

 

(3,426)

 

 

(2,681)

Other non-current assets

 

 

(2,450)

 

 

(514)

Accrued expenses and other liabilities

 

 

(5,448)

 

 

(752)

Accounts payable

 

 

4,166

 

 

(184)

Deferred revenue

 

 

3,478

 

 

1,818

Other non-current liabilities

 

 

1,578

 

 

3,022

Net cash provided by operating activities

 

 

40,954

 

 

35,187

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,569)

 

 

(9,181)

Capitalization of internally developed software

 

 

(10,622)

 

 

(5,651)

Acquisition of businesses

 

 

(188,345)

 

 

 —

Net cash used in investing activities

 

 

(208,536)

 

 

(14,832)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from issuance of Convertible Notes due 2023

 

 

345,000

 

 

 —

Convertible Notes due 2023 issuance costs

 

 

(9,488)

 

 

 —

Proceeds from borrowings on revolving credit facility

 

 

195,000

 

 

25,000

Payments on revolving credit facility

 

 

(276,168)

 

 

(25,000)

Payments of contingent consideration

 

 

(2,193)

 

 

(1,929)

Payments of definite consideration

 

 

 —

 

 

(445)

Payments of purchase consideration liabilities

 

 

 —

 

 

(235)

Payment of Term Notes

 

 

 —

 

 

(35,862)

Proceeds from exercise of stock options

 

 

2,540

 

 

2,617

Purchase of treasury stock for stock-based tax withholdings

 

 

(14,395)

 

 

(9,650)

Issuance of restricted stock units

 

 

 3

 

 

 4

Net cash provided by (used in) financing activities

 

 

240,299

 

 

(45,500)

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(572)

 

 

283

 

 

 

 

 

 

 

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

 

 

72,145

 

 

(24,862)

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

62,115

 

 

54,592

 

 

 

 

 

 

 

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

 

$

134,260

 

$

29,730

 

 

 

 

 

 

 

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

 

$

2,225

 

$

275

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

 

 

4,271

 

 

3,960

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

 

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

 

1,080

 

 

281

Purchase liabilities included in accrued expenses and other liabilities

 

 

1,422

 

 

818

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

 

 

1,188

 

 

260

            Accumulated      
  Common Stock Treasury Stock Additional Other   Non-  
      Common   Paid-in Comprehensive Accumulated controlling Total
  Shares Amount Shares Amount Capital Income (Loss) Deficit Interest Equity
Balance, December 31, 2017 57,450,056
 $287
 (12,749,415) $(47,042) $556,257
 $624
 $(73,854) $398
 $436,670
Adoption of ASC 606 —
 —
 —
 —
 —
 —
 9,217
 —
 9,217
Exercise of stock options 162,857
 1
 —
 —
 2,403
 —
 —
 —
 2,404
Issuance of common stock - vesting of restricted stock units 503,668
 2
 —
 —
 —
 —
 —
 —
 2
Stock-based compensation expense —
 —
 —
 —
 8,495
 —
 —
 —
 8,495
Purchase of treasury stock for stock-based tax withholdings —
 —
 (166,217) (9,296) —
 —
 —
 —
 (9,296)
Issuance of non-controlling units in private company —
 —
 —
 —
 —
 —
 —
 873
 873
Foreign currency translation gain (loss) —
 —
 —
 —
 —
 (327) —
 —
 (327)
Net income (loss) —
 —
 —
 —
 —
 —
 8,104
 (102) 8,002
Balance, March 31, 2018 58,116,581
 290
 (12,915,632) (56,338) 567,155
 297
 (56,533) 1,169
 456,040
Exercise of stock options 12,166
 —
 —
 —
 136
 —
 —
 —
 136
Issuance of common stock - vesting of restricted stock units 253,279
 1
 —
 —
 —
 —
 —
 —
 1
Stock-based compensation expense —
 —
 —
 —
 10,476
 —
 —
 —
 10,476
Purchase of treasury stock for stock-based tax withholdings —
 —
 (90,800) (5,099) —
 —
 —
 —
 (5,099)
Issuance of Convertible Notes due 2023, net of offering costs —
 —
 —
 —
 46,611
 —
 —
 —
 46,611
Foreign currency translation gain (loss) —
 —
 —
 —
 —
 (1,036) —
 —
 (1,036)
Net income (loss) —
 —
 —
 —
 —
 —
 (5,526) (465) (5,991)
Balance, June 30, 2018 58,382,026
 $291
 (13,006,432) $(61,437) $624,378
 $(739) $(62,059) $704
 $501,138


See accompanying notes to unaudited Condensed Consolidated Financial Statements.


7



Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

Table of Contents

  Six Months Ended
  June 30,
  2019 2018
OPERATING ACTIVITIES:    
Net income (loss) $(17,655) $2,011
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation and amortization 46,432
 38,731
Deferred rent and lease incentive amortization —
 1,069
Provision for doubtful accounts 713
 924
Deferred income taxes (28,991) (17,093)
Non-cash based compensation expense 27,852
 18,971
Non-cash interest expense 9,896
 5,630
Accretion on contingent consideration and purchase liability 742
 196
Payments of contingent consideration (578) —
Loss allocation from equity method investment 550
 811
Changes in operating assets and liabilities, net of acquisitions:    
Fees receivable, net (536) (8,204)
Prepaid expenses and other current assets (15,507) (3,426)
Other non-current assets (3,241) (2,450)
Accrued expenses and other liabilities (19,060) (5,438)
Accounts payable (4,768) 4,166
Deferred revenue 3,940
 3,478
Other non-current liabilities 2,602
 1,578
Net cash provided by operating activities 2,391
 40,954
     
INVESTING ACTIVITIES:    
Purchases of property and equipment (8,815) (9,569)
Capitalization of internally developed software (15,583) (10,622)
Acquisitions of businesses, net of cash acquired (321,571) (188,345)
Other (2,000) —
Net cash used in investing activities (347,969) (208,536)
     
FINANCING ACTIVITIES:    
Proceeds from issuance of Convertible Notes due 2023 —
 345,000
Convertible Notes due 2023 issuance costs —
 (9,488)
Proceeds from borrowings on revolving credit facility 175,000
 195,000
Payments on revolving credit facility (30,000) (276,168)
Payments of contingent consideration (171) (2,193)
Proceeds from exercise of stock options 4,914
 2,540
Purchase of treasury stock for stock-based tax withholdings (15,962) (14,395)
Issuance of restricted stock units 3
 3
Net cash provided by financing activities 133,784
 240,299
     
EFFECT OF EXCHANGE RATE CHANGES ON CASH 166
 (572)
     
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (211,628)
72,145
     
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 289,671
 62,115
     
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) $78,043
 $134,260
     
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes $6,121
 $2,225
Supplemental disclosure of cash flow information - cash paid during the period for interest 5,952
 4,271
Supplemental disclosure of non-cash operating, investing and financing activities:    
Common stock issued in acquisition of business 222,484
 —
Contingent consideration issued in acquisition of businesses 15,880
 —
Purchase liabilities included in other non-current liabilities 5,468
 —
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities 1,567
 1,188
Membership interest liabilities included in other non-current liabilities 1,480
 —
Common stock issued to settle purchase liability 772
 —
Leasehold improvements funded by lease incentive 648
 1,080
Purchase liabilities included in accrued expenses and other liabilities —
 1,422
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. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.


Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 18—Segment Information” to the condensed consolidated financial statements. The business segments are as follows:
•
Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions.

Within Envestnet Wealth Solutions, the Company offers these solutions principally through the following productproducts 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 18,40019,900 investment products. Envestnet | Enterprise also sellsoffers data aggregation and reporting, data analytics and digital advice capabilities to customers.


·

•

Envestnet | TamaracTM™ provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high‑high‑end registered investment advisers (“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 nearly 4,900over 4,500 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as over 1,7001,000 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers an overlay service, which includes patented portfolio overlay and tax optimization services.


·

•

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

services, and includes product offerings from Envestnet | Yodlee and Envestnet | Analytics.

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

2.Basis of Presentation

Authority (“FINRA”).


2.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company as of June 30, 20182019 and for the three and six months ended June 30, 20182019 and 20172018 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, 20172018 and reflect all normal recurring adjustments which are,
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

in the opinion of management, necessary to present fairly the Company’s financial position as of June 30, 20182019 and the results of operations, equity, comprehensive income (loss) and cash flows for the periods presented herein. The unaudited condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries.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 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 results of operations for the three and six months ended June 30, 20182019 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.

8


Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC.Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAPU.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on February 28, 2018.

March 1, 2019.

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, the determination of the period of benefit for deferred sales incentive commissions, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of restricted stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, fair value of the liability portion of the convertible debt and assumptions used to allocate purchase prices in business combinations.accompanying notes. Actual results could differ materially from these estimates under different assumptions or conditions.

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:

 

 

 

 

 

 

 

June 30,

 June 30, December 31,

 

2018

    

2017

 2019 2018

Cash and cash equivalents

 

$

134,032

 

$

27,730

 $77,717
 $289,345

Restricted cash included in prepaid expenses and other current assets

 

 

228

 

 

2,000

 158
 158
Restricted cash included in other non-current assets 168
 168

Total cash, cash equivalents and restricted cash

 

$

134,260

 

$

29,730

 $78,043
 $289,671


Recent Accounting Pronouncements -
Recently Adopted Accounting Pronouncements—In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,2016-02, “Leases,” which amends the existing accounting standards for revenue recognition. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and have been reflected in these condensed consolidated financial statements (See “Note 4 – Revenue”).

In February 2016, the FASB issued ASU 2016-02, “Leases.” This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from the lease, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard will beis effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018 and will be applied using a modified retrospective approach with optional practical expedients. Early adoption of the standard is permitted. The Company will adopt the new standard on its effective date of January 1, 2019 and expects to elect certain available transitional practical expedients. Based on current analysis, the adoption of the standard may have a material impact on our consolidated balance sheets and related disclosures while not significantly impacting financial results. We continue to evaluate the accounting, transition, and disclosure requirements of this standard.  

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017.2018. These changes became effective for the Company’s fiscal year beginning January 1, 20182019 and have been reflected in these condensed consolidated financial statements. Retrospective adoption of ASU 2016-15 did not have a material impact on the Company’s presentation of the condensed consolidated statements of cash flows.

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

(See “Note 17—Leases”).

9

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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

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

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

In June 2018, the FASB issued ASU 2018-07, “Compensation – “Compensation—Stock Compensation (Topic 718):Improvements to NonemployeeNon-employee Share-Based Payment Accounting.” This update clarifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees.non-employees. Specifically, the update aligns the accounting for payments to nonemployeesnon-employees to match the accounting for payments to employees, no longer accounting for these transactions differently. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2018. These changes became effective for the Company's fiscal year beginning January 1, 2019. This standard will be applied prospectively to all future non-employee share-based payments and is reflected in these condensed consolidated financial statements.


In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” This update is intended to guide entities in evaluating the
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

accounting for fees paid by a customer in a cloud computing arrangement by providing guidance for determining when the arrangement includes a software license. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption of the standard is permitted. The Company early adopted this standard beginning January 1, 2019, noting that this standard will be applied prospectively. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
Not Yet Adopted—In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326).” This update significantly changes the way that entities will be required to measure credit losses. The new standard requires entities to estimate credit losses based upon an “expected credit loss” approach rather than the “incurred loss” approach, which is currently used. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable forecasts of collectability. The change in approach is anticipated to impact the timing of recognition of credit losses. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on ourits condensed consolidated financial statements.

3.Business Acquisitions

FolioDynamix


In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This update aims to improve the effectiveness of disclosure requirements on fair value measurement as part of the disclosure framework project. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on its condensed consolidated financial statements. 

3.Business Acquisitions

Acquisition of private company

On January 2, 2018,2019, pursuant to an agreement and plan of merger dated as of January 2, 2019 between Envestnet and a private company, the Company acquired (the “Acquisition”) all of the issued and outstanding membership interests of FolioDynamics Holdings,private company merged into Yodlee Inc. (“FolioDynamix”) through a merger of FolioDynamix with and into, a wholly owned subsidiary of Envestnet.

FolioDynamixthe Company (the “Private Company Acquisition”). The private company provides conversational artificial intelligence tools and applications to financial institutions, RIAs,services firms, improves the way Financial Service Providers (“FSPs”) can interact with their customers, and other wealth management clients with an end-to-endsupports these FSPs to better engage, support and assist their consumers leveraging this latest wave of customer-centric capabilities.


The technology solution paired with a suiteand operations of advisory tools including model portfolios, research, and overlay management services. FolioDynamixthe private company is included in the Company’s Envestnet Data & Analytics segment.


The seller of the private company is also entitled to an earn-out payment based on the private company's revenue and other retention targets for the twelve-month period beginning January 1, 2021. The discounted amount of the contingent consideration liability is estimated to be $7,580 and is included as a long-term liability on the condensed consolidated balance sheets.

The consideration transferred in the acquisition was as follows:
  Preliminary Estimate
Cash consideration $11,173
Purchase consideration liability 6,240
Contingent consideration liability 7,580
Working capital adjustment 70
Total $25,063


The estimated fair values of the deferred income taxes, identifiable intangible assets, contingent consideration liability, and goodwill balances are provisional and based on information that was available to the Company as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company acquired FolioDynamix to add complementary trading tools as well as commission and brokerage support to Envestnet’s existing suitebelieves the preliminary information provides a reasonable basis for estimating the fair values of offerings. Envestnet expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management channel, enabling the Company to further leverage its operating scale and data analytics capabilities.

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

these amounts, but is waiting for additional information

10

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of tangible assets acquired, liabilities assumed, identifiable intangible assets and goodwill balances and complete the acquisition accounting as soon as reasonably practicable but no later than January 2, 2020.

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

  Preliminary Estimate
Total tangible assets acquired $144
Total liabilities assumed (629)
Identifiable intangible assets 4,100
Goodwill 21,448
Total net assets acquired $25,063


The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to an increase in future revenues as a result of potential cross selling opportunities. The goodwill is not deductible for income tax purposes.

A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
  Preliminary Estimate Estimated Useful Life in Years Amortization Method
Proprietary technology $4,100
 4 Straight-line


The results of the private company's operations are included in the condensed consolidated statements of operations beginning January 2, 2019 and were not considered material to the Company’s results of operations. 

For the three and six months ended June 30, 2019, acquisition related costs for the Private Company Acquisition were not material, and are included in general and administration expenses. The Company may incur additional acquisition related costs over the remainder of 2019.

Acquisition of PortfolioCenter business

On April 1, 2019, pursuant to an asset purchase agreement, Tamarac, Inc. (“Tamarac”), a wholly owned subsidiary of Envestnet, acquired certain of the assets, primarily consisting of intangible assets, and the assumption of certain of the liabilities of the PortfolioCenter business from Performance Technologies, Inc. (the “PC Seller”), a wholly owned subsidiary of The Charles Schwab Corporation. The PortfolioCenter Business provides investment advisors and investment advisory service providers with desktop, hosted and outsourced multicustodial software solutions. These solutions provide data-management and performance-measurement tools, as well as customizable accounting, reporting, and billing functions delivered through the commercial software application products known as PortfolioCenter Desktop, PortfolioCenter Hosted, PortfolioServices and Service Bureau.
Tamarac acquired the PortfolioCenter Business to better serve small and mid-size RIA firms. The PortfolioCenter Business is included in the Company’s Envestnet Wealth Solutions segment.
In connection with the PortfolioCenter Acquisition, Tamarac paid $17,500 in cash. Tamarac funded the PortfolioCenter Acquisition with available cash resources. The PC Seller is also entitled to an earn-out payment based on the PortfolioCenter Business’ revenue for the twelve-month period beginning April 1, 2020. The discounted amount of the contingent consideration liability is estimated to be $8,300.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The preliminary consideration transferred in the acquisition was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

Preliminary

 

Period

 

Revised

 

Estimate

 

Adjustments

 

Estimate

 Preliminary Estimate

Cash consideration

 

$

187,580

 

$

12,297

 

$

199,877

 $17,500

Purchase consideration liability

 

 

12,297

 

 

(12,297)

 

 

 —

Working capital and other adjustments

 

 

(3,893)

 

 

(2,500)

 

 

(6,393)

Contingent consideration liability 8,300

Total

 

$

195,984

 

$

(2,500)

 

$

193,484

 $25,800


The estimated fair values of working capital balances, property and equipment, deferred revenue,the deferred income taxes, unrecognized tax benefits, identifiable intangible assets, contingent consideration liability and goodwill balances are provisional and are based on the information that was available to the Company as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of tangible assets anddeferred income taxes, liabilities assumed, identifiable intangible assets and goodwill balances and complete the acquisition accounting as soon as practicable but no later than January 2, 2019.

April 1, 2020.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

Preliminary

 

Period

 

Revised

 

 

Estimate

 

Adjustments

 

Estimate

Cash and cash equivalents

 

$

4,876

 

$

 —

 

$

4,876

Accounts receivable

 

 

4,962

 

 

 —

 

 

4,962

Prepaid expenses and other current assets

 

 

1,600

 

 

 —

 

 

1,600

Property and equipment, net

 

 

927

 

 

 —

 

 

927

Other non-current assets

 

 

441

 

 

 —

 

 

441

Identifiable intangible assets

 

 

117,700

 

 

 —

 

 

117,700

Goodwill

 

 

97,248

 

 

(2,624)

 

 

94,624

Total assets acquired

 

 

227,754

 

 

(2,624)

 

 

225,130

Accounts payable

 

 

(5,358)

 

 

 —

 

 

(5,358)

Accrued expenses

 

 

(7,173)

 

 

 —

 

 

(7,173)

Deferred tax liability

 

 

(18,245)

 

 

 —

 

 

(18,245)

Deferred revenue

 

 

(930)

 

 

124

 

 

(806)

Other non-current liabilities

 

 

(64)

 

 

 —

 

 

(64)

Total liabilities assumed

 

 

(31,770)

 

 

124

 

 

(31,646)

Total net assets acquired

 

$

195,984

 

$

(2,500)

 

$

193,484

  Preliminary Estimate
Total tangible assets acquired $13
Total liabilities assumed (1,600)
Identifiable intangible assets 12,400
Goodwill 14,987
Total net assets acquired $25,800


The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to an increase in future revenues as a result of expanding market opportunities within the mid-size and small RIA market, potential cross selling opportunities, and lower future operating expenses and the knowledge and experience of the workforce in place.expenses. The goodwill is not deductible for income tax purposes.

11


Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measurement

 

 

 

 

 

 

 

 

Preliminary

 

Period

 

Revised

 

 

 

Amortization

    

Estimate

    

Adjustments

    

Estimate

    

Useful Life in Years

    

Method

 Preliminary Estimate Estimated Useful Life in Years Amortization Method

Customer list

 

$

95,000

 

$

500

 

$

95,500

 

12

 

Accelerated

 $9,100
 10 Accelerated

Proprietary technology

 

 

18,000

 

 

(500)

 

 

17,500

 

 5

 

Straight-line

 3,300
 5 Straight-line

Trade names and domains

 

 

4,700

 

 

 —

 

 

4,700

 

 6

 

Straight-line

Total

 

$

117,700

 

$

 —

 

$

117,700

 

 

 

 

 $12,400
 


The results of FolioDynamix’sPortfolioCenter's operations are included in the condensed consolidated statements of operations beginning January 2, 2018. FolioDynamix’sApril 1, 2019. PortfolioCenter's revenues for the three and six month periodsmonths ended June 30, 20182019 totaled $17,346 and $34,800, respectively. FolioDynamix’s$2,017. PortfolioCenter's pre-tax loss for the three and six month periodsmonths ended June 30, 20182019 totaled $3,255 and $7,981, respectively.$1,624. The pre-tax loss includes estimated acquired intangible asset amortization of $4,390 and $8,701$514 for the three and six month periodsmonths ended June 30, 2018.

2019.

For the three and six month periodsmonths ended June 30, 2018,2019, acquisition related costs for FolioDynamix totaled $167 and $594, respectively,the PortfolioCenter Acquisition were not material, and are included in general and administration expenses. The Company willmay incur additional acquisition related costs during 2018.

over the remainder of 2019.

Acquisition of PIEtech

On May 1, 2019, the Company acquired all of the outstanding shares of capital stock of PIEtech, Inc., a Virginia corporation (“PIEtech”). PIEtech empowers financial advisors to use financial planning to efficiently motivate their clients to create, implement and maintain financial plans that best meet their lifetime financial goals. The technology and operations of PIEtech, which now operates as Envestnet | MoneyGuide, is included in the Envestnet Wealth Solutions segment.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The acquisition of PIEtech (the “PIEtech Acquisition”) establishes Envestnet as a leader in financial planning solutions, providing advisors and their clients with access to a full spectrum of financial planning capabilities, and offering a broad range of data-driven, financial plan-informed financial wellness solutions, both domestically and internationally over time. Integration of PIEtech's MoneyGuide software with the Company's integrated technology platform is expected to reduce friction and enhance productivity for advisors.

In connection with the PIEtech Acquisition, the Company paid net cash consideration of $299,370, subject to a working capital adjustment, and issued 3,184,713 shares of Envestnet common stock, par value $0.005 per share, to the sellers. The Company funded the PIEtech Acquisition with available cash resources and borrowings under its revolving credit facility.

In connection with the PIEtech Acquisition, the Company established a retention bonus pool consisting of approximately $30,000 of cash and restricted stock units to be granted to employees and management of PIEtech as inducement grants. As a result, the Company adopted the Envestnet, Inc. 2019 Acquisition Equity Incentive Plan (the “2019 Equity Plan”) in order to make inducement grants to certain PIEtech employees who will join Envestnet | MoneyGuide. Envestnet agreed to grant at future dates, not earlier than the sixty day anniversary of the PIEtech Acquisition, up to 301,469 shares of Envestnet common stock in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) pursuant to the 2019 Equity Plan and made cash retention payments of approximately $8,800 to certain legacy PIEtech employees who joined Envestnet | MoneyGuide. As of June 30, 2019, the Company has issued approximately 62,200 and 24,900 RSUs and PSUs, respectively, under the 2019 Equity Plan to legacy PIEtech employees. At this time the Company expects to issue approximately 214,000 additional RSUs and PSUs and expects to pay approximately $5,300 in cash bonus payments over the next three years in connection with the PIEtech Acquisition.

The Company also granted membership interests in certain of the Company's equity method investments to two PIEtech executives with an estimated grant date fair market value of $8,900. These membership interests will vest on May 1, 2020 and become exercisable in future periods. As of June 30, 2019, the Company has recorded approximately $1,480 as a component of compensation and benefits in the condensed consolidated statement of operations with a corresponding liability in other non-current liabilities in the condensed consolidated balance sheets.

The preliminary consideration transferred in the acquisition was as follows:
  Preliminary Estimate
Cash consideration $299,370
Stock consideration 222,484
Less: cash acquired (6,360)
Total estimated fair value of consideration transferred, net of cash acquired $515,494


The estimated fair values of the deferred revenue, deferred income taxes, identifiable intangible assets, and goodwill balances are provisional and based on the information that was available to the Company as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of deferred revenue, deferred income taxes, identifiable intangible assets and goodwill balances and complete the acquisition accounting as soon as practicable but no later than May 1, 2020.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
  Preliminary Estimate
Cash and cash equivalents $6,360
Accounts receivable 3,782
Prepaid expenses and other current assets 969
Other non-current assets 4,274
Property and equipment, net 6,057
Operating lease right-of-use assets, net 1,688
Identifiable intangible assets 217,000
Goodwill 353,085
Total assets acquired 593,215
Accounts payable and accrued expenses (2,166)
Operating lease liabilities (2,012)
Deferred income taxes (59,643)
Deferred revenue (7,540)
Total liabilities assumed (71,361)
Total net assets acquired $521,854

The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to an increase in future revenues as a result of potential new business and cross selling opportunities. The goodwill is not deductible for income tax purposes.

A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
  Preliminary Estimate Estimated Useful Life in Years Amortization Method
Customer lists $181,000
 10-16 Accelerated
Proprietary technologies 25,000
 5 Straight-line
Trade names 11,000
 6 Straight-line
Total $217,000
    

The results of PIEtech's operations are included in the condensed consolidated statements of operations beginning May 1, 2019. PIEtech's revenues for the three and six months ended June 30, 2019 totaled $6,632. PIEtech's pre-tax loss for the three and six months ended June 30, 2019 totaled $3,422. The pre-tax loss includes estimated acquired intangible asset amortization of $4,142 for the three and six months ended June 30, 2019.
For the three and six months ended June 30, 2019, acquisition related costs for the PIEtech Acquisition totaled approximately $11,269 and$16,189, respectively, and are included in general and administration expenses. Included in these amounts are approximately $8,800 in one-time cash retention bonuses, which are included the Company's corporate non-segment operating expenses in the condensed consolidated statements of operations. The Company may incur additional acquisition related costs over the remainder of 2019.
Pro forma results for Envestnet, Inc. giving effect to the FolioDynamix acquisition

financial information


The following pro forma financial information presents the combined results of operations of Envestnet, PortfolioCenter and FolioDynamixPIEtech for the three and six month periodsmonths ended June 30, 2017.2019 and 2018. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017.

2018. The results of the private company acquisition 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 include amortization charges for acquired intangible assets, interest expense, and stock-based compensation expense.

expense and income tax. The Company's 2018 pro forma information includes the reversal of a valuation allowance on its deferred tax assets, transaction fee payments and retention bonus payments that were incurred in

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

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 2017.

2018.

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2017

 

June 30, 2017

Revenues

$

177,297

 

$

344,514

Net loss

 

(12,624)

 

 

(31,873)

Net loss per share:

 

 

 

 

 

Basic

 

(0.29)

 

 

(0.73)

Diluted

 

(0.29)

 

 

(0.73)

4.Revenue

On January 1,

  Three Months Ended June 30, Six Months Ended June 30,
  2019 2018 2019 2018
Revenues $228,522
 $215,240
 $443,275
 $426,291
Net income (loss) attributable to Envestnet, Inc. (7,612) (1,661) (18,857) 5,186
Net income (loss) per share attributable to Envestnet, Inc.:        
Basic $(0.15) $(0.03) $(0.37) $0.11
Diluted $(0.15) $(0.03) $(0.37) $0.10


4.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
  June 30, December 31,
  2019 2018
Prepaid technology $9,801
 $6,766
Advance payroll taxes and benefits 10,802
 —
Non-income tax receivables 8,279
 6,240
Prepaid outside information services 1,989
 1,515
Other 9,175
 9,036
Total $40,046
 $23,557

5.Property and Equipment
Property and equipment consists of the following:
    June 30, December 31,
  Estimated Useful Life 2019 2018
Cost:    
  
Computer equipment and software 3 years $68,752
 $64,346
Leasehold improvements Shorter of the lease term or useful life of the asset 31,482
 28,191
Office furniture and fixtures 3-7 years 10,659
 9,291
Office equipment and other 3-5 years 6,425
 5,577
Building and building improvements 7-39 years 2,647
 —
Land Not applicable 940
 —
    120,905
 107,405
Less: accumulated depreciation and amortization (69,889) (62,414)
Total property and equipment, net $51,016
 $44,991

During the three and six months ended June 30, 2019, the Company retired property and equipment that was no longer in service for the Envestnet Wealth Solutions segment with an historical cost of $2,396 and $3,642, respectively. During the three and six months ended June 30, 2019, the Company retired property and equipment that was no longer in service for the Envestnet Data & Analytics segment with an historical cost of $1,640 and $4,121, respectively. Gains and losses on asset retirements during the three and six months ended June 30, 2019 were not material.

During the three and six months ended June 30, 2018, the Company adopted ASU 2014-09retired property and all subsequent ASUsequipment that modified Topic 606 (“ASC 606” or “new revenue standard”) usingwas no longer in service for the modified retrospective method applied to those contracts which were not completed asEnvestnet Wealth Solutions segment with an historical cost of January 1, 2018. The$1,126, and $3,337, respectively. During the three and six months ended June 30, 2018, the Company recognizedretired property and equipment that was no longer in service for the cumulative effect of the initial application of the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and will continue to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to the results of operations on an ongoing basis.

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

12

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

The cumulative effect

Envestnet Data & Analytics segment with an historical cost of $2,525 and $3,401, respectively. Gains and losses on asset retirements during the three and six months ended June 30, 2018 were not material.
Depreciation and amortization expense was as follows:
  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Depreciation and amortization expense $6,751
 $3,920
 $11,117
 $7,838

6.Internally Developed Software
Internally developed software consists of the changes made tofollowing:
    June 30, December 31,
  Estimated Useful Life 2019 2018
Internally developed software 5 years $85,993
 $70,410
Less: accumulated amortization   (37,934) (32,201)
Internally developed software, net   $48,059
 $38,209

Amortization expense was as follows:
  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Amortization expense $3,110
 $1,846
 $5,733
 $3,539

7.Goodwill and Intangible Assets, Net
Changes in the Company’s condensed consolidated balance sheetscarrying amount of goodwill were as of January 1, 2018 for the adoptionfollows:
  Envestnet Wealth Solutions Envestnet Data & Analytics Total
Balance at December 31, 2018 $243,809
 $275,293
 $519,102
Private company acquisition —
 21,448
 21,448
PortfolioCenter acquisition 14,987
 —
 14,987
PIEtech acquisition 353,085
 —
 353,085
Foreign currency —
 90
 90
Other (26) —
 (26)
Balance at June 30, 2019 $611,855
 $296,831
 $908,686


Intangible assets, net consist of the new revenue standard was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Cumulative Catch-up

 

Balance at

 

 

December 31, 2017

 

Adjustments

 

January 1, 2018

Balance Sheets

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Other non-current assets

    

$

17,176

    

$

5,315

    

$

22,491

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred revenue, current

 

 

21,246

 

 

(1,122)

 

 

20,124

Deferred revenue, non-current

 

 

12,047

 

 

(2,780)

 

 

9,267

Equity:

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(73,854)

 

 

9,217

 

 

(64,637)

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

 

Without Adoption of

 

Effect of Change

 

 

As Reported

 

ASC 606

 

Higher/(Lower)

Statements of Operations

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Asset-based

    

$

118,111

    

$

121,646

    

$

(3,535)

Subscription-based

 

 

71,779

 

 

71,779

 

 

 —

Total recurring revenues

 

 

189,890

 

 

193,425

 

 

(3,535)

Professional services and other revenues

 

 

11,226

 

 

11,385

 

 

(159)

Total revenues

 

 

201,116

 

 

204,810

 

 

(3,694)

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

67,627

 

 

71,162

 

 

(3,535)

Compensation and benefits

 

 

80,210

 

 

80,530

 

 

(320)

Total operating expenses

 

 

201,111

 

 

204,966

 

 

(3,855)

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 5

 

 

(156)

 

 

161

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(5,991)

 

 

(6,152)

 

 

161

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Envestnet, Inc.

 

 

(5,526)

 

 

(5,687)

 

 

161

13

following:

Table of Contents

    June 30, 2019 December 31, 2018
    Gross   Net Gross   Net
  Estimated Carrying Accumulated Carrying Carrying Accumulated Carrying
  Useful Life Amount Amortization Amount Amount Amortization Amount
Customer lists 7-16 years $551,120
 $(121,836) $429,284
 $361,020
 $(102,077) $258,943
Proprietary technologies 4-8 years 96,694
 (41,311) 55,383
 66,746
 (36,151) 30,595
Trade names 2-7 years 38,490
 (14,027) 24,463
 27,990
 (12,352) 15,638
Backlog 8 years 11,000
 (10,971) 29
 11,000
 (10,935) 65
Total intangible assets $697,304
 $(188,145) $509,159
 $466,756
 $(161,515) $305,241



Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

 

Without Adoption of

 

Effect of Change

 

 

As Reported

 

ASC 606

 

Higher/(Lower)

Statements of Operations

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Asset-based

    

$

239,264

    

$

246,399

    

$

(7,135)

Subscription-based

 

 

141,474

 

 

141,474

 

 

 —

Total recurring revenues

 

 

380,738

 

 

387,873

 

 

(7,135)

Professional services and other revenues

 

 

18,389

 

 

18,585

 

 

(196)

Total revenues

 

 

399,127

 

 

406,458

 

 

(7,331)

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

130,561

 

 

137,696

 

 

(7,135)

Compensation and benefits

 

 

163,750

 

 

164,197

 

 

(447)

Total operating expenses

 

 

399,860

 

 

407,442

 

 

(7,582)

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(733)

 

 

(984)

 

 

251

 

 

 

 

 

 

 

 

 

 

Net income

 

 

2,011

 

 

1,760

 

 

251

 

 

 

 

 

 

 

 

 

 

Net income attributable to Envestnet, Inc.

 

 

2,578

 

 

2,327

 

 

251

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2018

 

 

 

 

Without Adoption of

 

Effect of Change

 

 

As Reported

 

ASC 606

 

Higher/(Lower)

Balance Sheets

    

 

 

    

 

 

    

 

 

Assets:

 

 

 

 

 

 

 

 

 

Fees receivable, net

 

$

64,164

 

$

63,218

 

$

946

Other non-current assets

 

 

23,907

 

 

18,145

 

 

5,762

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

21,133

 

 

20,187

 

 

946

Deferred revenue, current

 

 

25,739

 

 

26,720

 

 

(981)

Deferred revenue, non-current

 

 

7,929

 

 

10,654

 

 

(2,725)

Equity:

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(62,059)

 

 

(71,527)

 

 

9,468

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Amortization expense $17,054
 $13,419
 $29,582
 $27,354


Future amortization expense of the intangible assets as of June 30, 2019, is expected to be as follows:
Years ending December 31, 
Remainder of 2019$37,887
202071,524
202161,555
202257,857
202346,748
Thereafter233,588
Total$509,159


8.
Accrued Expensesand Other Liabilities
Accrued expenses and other liabilities consist of the following:
  June 30, December 31,
  2019 2018
Accrued investment manager fees $43,966
 $50,635
Accrued compensation and related taxes 44,411
 50,598
Sales and use tax payable 12,006
 9,733
Accrued transaction costs 4,812
 4,543
Accrued professional services 2,599
 4,517
Other accrued expenses 10,814
 13,272
Total $118,608
 $133,298

9.Debt
The impactCompany’s outstanding debt obligations as of adoption on the Company’s condensed consolidated statements of cash flows is immaterial.

Summary of Significant Accounting Policies

Except for the accounting policies for revenue recognition, fees receivable including unbilled receivablesJune 30, 2019 and deferred sales incentive compensation that were updated as a result of adopting ASC 606, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018 that have had a material impact on our condensed consolidated financial statements and related notes.

Revenue Recognition

The Company derives revenues from asset-based and subscription-based services and professional services and other sources. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.

14

were as follows: 

Table of Contents

  June 30, December 31,
  2019 2018
Convertible Notes due 2019 $172,500
 $172,500
Unaccreted discount on Convertible Notes due 2019 (2,888) (5,890)
Unamortized issuance costs on Convertible Notes due 2019 (430) (899)
Convertible Notes due 2019 carrying value $169,182
 $165,711
     
Convertible Notes due 2023 $345,000
 $345,000
Unaccreted discount on Convertible Notes due 2023 (38,101) (42,641)
Unamortized issuance costs on Convertible Notes due 2023 (6,821) (7,634)
Convertible Notes due 2023 carrying value $300,078
 $294,725
     
Revolving credit facility balance $145,000
 $—


Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Asset-based revenue (formerly assets under management or administration revenue)

Asset-based revenue primarily consists

Interest expense was comprised of fees for providing customers continuous access to platform services through the Company’s uniquely customized platforms. These platform services include investment managerfollowing and is included in other expense, net in the condensed consolidated statement of operations:
  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Accretion of debt discount $3,784
 $2,411
 $7,542
 $3,829
Coupon interest 2,264
 1,366
 4,528
 2,121
Amortization of issuance costs 862
 621
 1,720
 1,071
Interest on revolving credit facility 1,196
 1,429
 1,196
 3,994
Undrawn and other fees 157
 165
 373
 213
 Total $8,263

$5,992

$15,359
 $11,228

Convertible Notes due diligence and research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration and are made available to customers throughout the contractual term from the date the customized platform is launched. 

The asset-based fees2019

In 2014, the Company earnsissued $172,500 of Convertible Notes due 2019 that mature on December 15, 2019. The Convertible Notes due 2019 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015. The Convertible Notes due 2019 are generally based upon variable percentagesgeneral, unsecured obligations, subordinated in right of assets managed or administeredpayment to the Company's obligations under its Credit Agreement.

 The effective interest rate of the liability component of the Convertible Notes due 2019 is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on our platforms.the liability component of the Convertible Notes due 2019 for three and six months ended June 30, 2019 and 2018 was 6%.

Convertible Notes due 2023

In May 2018, the Company issued $345,000 of Convertible Notes due 2023 that mature on June 1, 2023. The fee percentage variesConvertible Notes due 2023 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018. The Convertible Notes due 2023 are general unsecured obligations, subordinated in right of payment to the Company's obligations under its Credit Agreement.

The effective interest rate of the liability component of the Convertible Notes due 2023 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 due 2023 for the three and six months ended June 30, 2019 was 6%.

See “Note 15—Net Income (Loss) Per Share” for further discussion of the effect of conversion on net income (loss) per common share.

Credit Agreement
In July 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) with a group of banks (“Banks”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments (“Revolving Credit Facility”) in the aggregate amount of up to $350,000 which amount may be increased by $50,000.  
The Company incurs interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50% and 3.25% above LIBOR based on the levelCompany’s total leverage ratio. Borrowings under the Second Amended and typeRestated Credit Agreement are scheduled to mature on July 18, 2022.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of servicesthe Company’s U.S. subsidiaries. The Second Amended and Restated Credit Agreement includes certain financial covenants and, as of June 30, 2019, the Company provides to its customers, as well as the values of existing customer accounts. The values of the customer accounts are affected by inflows or outflows of customer funds and market fluctuations.

The platform services are substantially the same over each quarter and performedwas in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the customer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our services and each quarter is separately identified in the contract, and are considered to be a single performance obligation under the new revenue standard.

The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the variable amounts earned from the platform services relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.

The asset-based contracts generally contain one performance obligation and revenue is recognized on a ratable basis over the quarter beginning on the date that the platform services are made available to the customer as the customer simultaneously consumes and receives the benefits of the services. All asset-based fees are recognized in the Envestnet segment.

For certain services provided by third parties, the Company evaluates whether it is the principal (revenues reported on a gross basis) or agent (revenues reported on a net basis). Generally, the Company reports customer fees including charges for third party service providers where the Company has a direct contractcompliance with such third party service providers on a gross basis, whereas the amounts billed to its customers are recorded as revenues, and amounts paid to third party service providers are recorded as cost of revenues. The Company is the principal in the transaction because it controls the services before they are transferred to its customers. Control is evidenced by the Company being primarily responsible to its customers and having discretion in establishing pricing.

Subscription-based revenue (formerly subscription and licensing revenue)

Subscription-based revenue primarily consists of fees for providing customers continuous access to the Company’s platform for wealth management and financial wellness. The subscription-based fees generally include fixed fees and or usage-based fees.

Generally, the subscription services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. Quarterly subscription services are considered distinct as the customer can benefit from each increment of services on its own and each quarter is separately identified in the contract, and services are considered to be a single performance obligation under the new revenue standard.

The usage-based pricing generally resets each quarter and the pricing structure is generally consistent throughout the term of the contract. The fixed fees are generally calculated and billed quarterly in advance. The usage-based fees are generally calculated and are billed either monthly or quarterly based on the actual usage and relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.

Certain subscription-based contracts contain multiple performance obligations(i.e. platform services performance obligation and professional services performance obligation). Fixed fees are generally recognized on a ratable basis over the quarter beginning when the subscription services are made available to the customer, as the customer simultaneously receives and consumes the benefits of the

these requirements.

15


Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

subscription services. Usage-based revenue is recognized

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

Financial assets and liabilities recorded at fair value in the condensed consolidated balance sheet are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level I:Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level II:Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data.
Level III:Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a monthlyrecurring basis in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, based on the customer receivesthree-tier fair value hierarchy:
  June 30, 2019
  Fair Value Level I Level II Level III
Assets:        
Money market funds and other (1)
 $40,016
 $40,016
 $—
 $—
Assets to fund deferred compensation liability(2)
 8,091
 —
 —
 8,091
Total assets $48,107
 $40,016
 $—
 $8,091
Liabilities:  
  
  
  
Contingent consideration $16,423
 $—
 $—
 $16,423
Deferred compensation liability(3)
 7,974
 7,974
 —
 —
Total liabilities $24,397
 $7,974
 $—
 $16,423

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

  December 31, 2018
  Fair Value Level I Level II Level III
Assets:        
Money market funds(1)
 $265,554
 $265,554
 $—
 $—
Assets to fund deferred compensation liability(2)
 6,346
 —
 —
 6,346
Total assets $271,900

$265,554
 $—
 $6,346
Liabilities:  
  
  
  
Contingent consideration $732
 $—
 $—
 $732
Deferred compensation liability(3)
 6,196
 6,196
 —
 —
Total liabilities $6,928

$6,196
 $—
 $732
(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 the 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 fair market value of the deferred compensation liability is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected, and is included in other non-current liabilities in the condensed consolidated balance sheets.
Level I assets and liabilities include money market funds not insured by the benefit as the Company provides the services. Subscription-based fees are recognized in both the EnvestnetFederal Deposit Insurance Corporation (“FDIC”) and Envestnet | Yodlee segments.

Professional services and other revenues

deferred compensation liability. The Company earns professional services feesperiodically invests excess cash in money market funds not insured by providing contractual customized servicesthe FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and platform software developmentthat 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. Time deposit account fair values are determined by trade confirmations which mature daily and therefore are considered highly liquid investments. 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 values of contingent consideration as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverablesassets to fund the Company's deferred compensation liability. The fair market value of the assets to fund the Company's deferred compensation liability is based upon the cash surrender value of its life insurance premiums.
The fair value of the contingent consideration liabilities related to certain of the Company's acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the contract. Certain professional services contractsmarket and thus represents a Level III fair value measurement as defined in ASC 820, “Fair Value Measurements and Disclosures.“ The significant inputs in the Level III measurement not supported by market activity included our assessments of expected future cash flows related to these acquisitions during the subsequent periods from the date of acquisition are billedappropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of their respective agreements.
The Company utilized a discounted cash flow method with expected future performance of these acquisitions, and their ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair values of their respective contingent consideration. The Company will continue to reassess the fair values of its contingent consideration liabilities at each reporting date until settlement. Changes to these estimated fair values will be recognized in the Company's earnings and included in general and administrative expenses on the condensed consolidated statements of operations.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

The table below presents a reconciliation of contingent consideration liabilities, which the Company measured at fair value on a time and materialsrecurring basis and revenueusing significant unobservable inputs (Level III) for the period from December 31, 2018 to June 30, 2019:
  Fair Value of Contingent Consideration Liabilities
Balance at December 31, 2018 $732
Private company acquisition 7,580
PortfolioCenter acquisition 8,300
Settlement of contingent consideration liability (749)
Accretion on contingent consideration 560
Balance at June 30, 2019 $16,423


The table below presents a reconciliation of the assets used to fund deferred the Company's deferred compensation liability, which is recognized over time as the services are performed. For contracts billedmeasured at fair value on a fixed pricerecurring basis revenueusing significant unobservable inputs (Level III) for the period from December 31, 2018 to June 30, 2019:

  Fair Value of Assets to Fund Deferred Compensation Liability
Balance at December 31, 2018 $6,346
Contributions and fair value adjustments 1,745
Balance at June 30, 2019 $8,091

The asset value, which is included in other non-current assets on the condensed balance sheets, increased due to funding of the plan and gains on the underlying investment vehicles.
The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized over timeon the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the six months ended June 30, 2019.
On December 15, 2014, the Company issued $172,500 of Convertible Notes due 2019. As of June 30, 2019 and December 31, 2018, the carrying value of the Convertible Notes due 2019 equaled $169,182 and $165,711, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of June 30, 2019 and December 31, 2018, the estimated fair value of the Convertible Notes due 2019 was $193,983 and $174,101, respectively. The Company considered the Convertible Notes due 2019 to be a Level II liability at June 30, 2019 and used a market approach to calculate the fair value. The estimated fair value was determined based on the proportionestimated or actual bids and offers of services performed. Initial implementation fees are fixedthe Convertible Notes due 2019 in an over-the-counter market on June 30, 2019 (See “Note 9—Debt”).
On May 25, 2018, the Company issued $345,000 of Convertible Notes due 2023. As of June 30, 2019 and recognized ratably overDecember 31, 2018, the contract term. 

Other revenue primarily includes revenue relatedcarrying value of the Convertible Notes due 2023 equaled $300,078 and $294,725, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of June 30, 2019 and December 31, 2018, the fair value of the Convertible Notes due 2023 was $411,896 and $339,024, respectively. The Company considered the Convertible Notes due 2023 to be a Level II liability at June 30, 2019 and used a market approach to calculate the Advisor Summit. Other revenue is recognizedfair 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 June 30, 2019 (See “Note 9—Debt”).


As of June 30, 2019 and December 31, 2018, there was $145,000 and $0, respectively, outstanding on the revolving credit facility under the Second Amended and Restated Credit Agreement. As of June 30, 2019, the outstanding balance on the revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believe our
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

credit risk quality was consistent with when the events are held. Other revenue is not significant.

debt originated. The majorityCompany considered the revolving credit facility to be a Level I liability as of June 30, 2019 and December 31, 2018 (See “Note 9—Debt”).


We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the professional servicesrespective assets and other contracts contain one performance obligation. Professional servicesliabilities at June 30, 2019 based upon the short-term nature of these assets and other revenues are recognized in both the Envestnet and Envestnet | Yodlee segments.

Arrangements with multiple performance obligations

Certain of the Company’s contracts with customers contain multiple performance obligationssuch as platform services performance obligation and professional services performance obligation.  For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Standalone selling prices of services are estimated based on observable transactions when these services are sold on a standalone basis or based on expected cost plus margin.

liabilities.

11.Revenue

Disaggregation of Revenue

revenue

The following table presents the Company’s revenues disaggregated by major source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2018

 

2017

 

 

Envestnet

 

Envestnet | Yodlee

 

Consolidated

 

Envestnet(1)

 

Envestnet | Yodlee(1)

 

Consolidated(1)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

    

$

118,111

    

$

 —

    

$

118,111

    

$

98,959

    

$

 —

    

$

98,959

Subscription-based

 

 

33,023

 

 

38,756

 

 

71,779

 

 

25,471

 

 

34,331

 

 

59,802

Total recurring revenues

 

 

151,134

 

 

38,756

 

 

189,890

 

 

124,430

 

 

34,331

 

 

158,761

Professional services and other revenues

 

 

5,794

 

 

5,432

 

 

11,226

 

 

4,942

 

 

3,714

 

 

8,656

Total revenues

 

$

156,928

 

$

44,188

 

$

201,116

 

$

129,372

 

$

38,045

 

$

167,417

(1)

As noted above, prior period amounts have not been adjusted under the modified retrospective method.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2018

 

2017

 

 

Envestnet

 

Envestnet | Yodlee

 

Consolidated

 

Envestnet(1)

 

Envestnet | Yodlee(1)

 

Consolidated(1)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

    

$

239,264

    

$

 —

    

$

239,264

    

$

193,121

    

$

 —

    

$

193,121

Subscription-based

 

 

65,608

 

 

75,866

 

 

141,474

 

 

50,708

 

 

67,004

 

 

117,712

Total recurring revenues

 

 

304,872

 

 

75,866

 

 

380,738

 

 

243,829

 

 

67,004

 

 

310,833

Professional services and other revenues

 

 

8,044

 

 

10,345

 

 

18,389

 

 

6,861

 

 

7,509

 

 

14,370

Total revenues

 

$

312,916

 

$

86,211

 

$

399,127

 

$

250,690

 

$

74,513

 

$

325,203

(1)

As noted above, prior period amounts have not been adjusted under the modified retrospective method.

16

Table
  Three Months Ended June 30,
  2019 2018
  Envestnet Wealth Solutions Envestnet Data & Analytics Consolidated Envestnet Wealth Solutions Envestnet Data & Analytics Consolidated
Revenues:            
Asset-based $120,070
 $—
 $120,070
 $118,111
 $—
 $118,111
Subscription-based 50,078
 42,180
 92,258
 33,023
 38,756
 71,779
Total recurring revenues 170,148
 42,180
 212,328
 151,134
 38,756
 189,890
Professional services and other revenues 6,742
 5,375
 12,117
 5,794
 5,432
 11,226
Total revenues $176,890
 $47,555
 $224,445
 $156,928
 $44,188
 $201,116

  Six Months Ended June 30,
  2019 2018
  Envestnet Wealth Solutions Envestnet Data & Analytics Consolidated Envestnet Wealth Solutions Envestnet Data & Analytics Consolidated
Revenues:            
Asset-based $229,004
 $—
 $229,004
 $239,264
 $—
 $239,264
Subscription-based 91,104
 84,241
 175,345
 65,608
 75,866
 141,474
Total recurring revenues 320,108
 84,241
 404,349
 304,872
 75,866
 380,738
Professional services and other revenues 9,487
 10,275
 19,762
 8,044
 10,345
 18,389
Total revenues $329,595
 $94,516
 $424,111
 $312,916
 $86,211
 $399,127


One customer accounted for more than 10% of Contents

the Company’s total revenues:

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Fidelity 15% 16% 15% 16%

Fidelity accounted for 19% and 20% of Envestnet Wealth Solutions revenues for the three and six months ended June 30, 2019, respectively. Fidelity accounted for 21% and 21% of Envestnet Wealth Solutions revenues for the three and six months ended June 30, 2018, respectively.

No single customer amounts for Envestnet Data & Analytics exceeded 10% of the segment total for any period presented.

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

 

Six Months Ended

 

June 30,

 

June 30,

 

2018

    

2017(2)

 

2018

    

2017(2)

United States

$

193,237

 

$

151,621

 

$

381,552

 

$

293,583

International (1)

 

7,879

 

 

15,796

 

 

17,575

 

 

31,620

Total

$

201,116

 

$

167,417

 

$

399,127

 

$

325,203

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
United States $217,462
 $193,237
 $409,581
 $381,552
International (1)
 6,983
 7,879
 14,530
 17,575
Total $224,445
 $201,116
 $424,111
 $399,127

(1)

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


(2)

As noted above, prior period amounts have not been adjusted under the modified retrospective method.

One customer accounted for more than 10% of the Company’s total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

    

2018

    

2017

 

 

2018

    

2017

 

Fidelity

 

16

%  

16

%  

 

16

%  

16

%  

Remaining Performance Obligations

performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2018:

2019:

 

 

 

 

Years ending December 31:

    

 

 

Remainder of 2018

 

$

105,353

2019

 

 

164,482

2020

 

 

92,639

2021

 

 

53,793

2022

 

 

40,774

Thereafter

 

 

54,122

Total

 

$

511,163

Years ending December 31,  
Remainder of 2019 $122,303
2020 171,252
2021 106,389
2022 70,046
2023 32,354
Thereafter 41,237
Total $543,581


Only fixed consideration from significant contracts with customers is included in the amounts presented above.


The Company has applied the practical expedients and exemption 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

The Company records contract liabilities (deferred revenue) when cash payments are received in advancebalances


Total deferred revenue as of its performance. The term between invoicing date and when payment is due is generally not significant. For the majority of its arrangements, the Company requires advance quarterly payments before the services are delivered to the customer.

Deferred revenue primarily consists of implementation fees, professional services, and subscription fee payments received in advance from customers.

Contract assets would exist when revenues have been recorded (i.e. control of goods or services has been transferred to the customer) but customer payment is contingent on a future event beyond the passage of time (i.e. satisfaction of additional performance obligations). The Company does not have any material contract assets. Unbilled receivables, which are not classified as contract assets, represent arrangements in which revenues have been recorded prior to billing and right to payment is unconditional.

17

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

The opening and closing balances of the Company’s billed receivables, unbilled receivables, and deferred revenues are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables,

 

Unbilled receivables,

 

 

 

 

 

 

which are included in

 

which are included in

 

Deferred Revenue

 

Deferred Revenue

 

 

Fees receivable, net

 

Fees receivable, net

 

(current)

 

(non-current)

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance as of January 1, 2018

    

$

36,605

    

$

13,229

    

$

20,124

    

$

9,267

Increase/(decrease), net

 

 

11,177

 

 

3,153

 

 

5,615

 

 

(1,338)

Ending balance as of June 30, 2018

 

$

47,782

 

$

16,382

 

$

25,739

 

$

7,929

The increase in receivables is primarily a result of timing of payments for subscription-based revenues relative to the first six months of 2018 and the acquisition of FolioDynamix.  

The increase in unbilled receivables is primarily driven by revenue recognized in excess of billings related to asset-based services during the six months ended June 30, 2018.

The increase in deferred revenue2019 increased by $13,362, which is primarily the result of the PIEtech and PortfolioCenter acquisitions and an increase in deferred revenue related to subscription-based services during the six months ended June 30, 2018, most2019, the majority of which will be recognized over the course of the next twelve months.


The amount of revenue recognized that was included in the opening deferred revenue balance was $6,865 and $5,737 for the three months ended June 30, 2019 and 2018, respectively. The amount of revenue recognized that was included in the opening deferred revenue balance was $16,588 and $13,253 for the three and six months ended June 30, 2019 and 2018, respectively. The majority of this revenue consists of subscription-based revenueservices and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.


Deferred sales incentive compensation

Sales incentive compensation earned by the Company’s sales force is considered an incremental and recoverable cost to acquire a contract with a customer. Sales incentive compensation for initial contracts is deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five years. The Company determined the period of benefit by taking into consideration its customer contracts, life of the technology and other factors. Sales incentive compensation for renewal contracts are deferred and amortized on a straight-line basis over the related contractual renewal period. Deferred sales incentive compensation is included in other non-current assets on the consolidated balance sheet and amortization expense is included in compensation and benefits expenses on the condensed consolidated statements of operations.


Deferred sales incentive compensation was $5,762$9,598 and $7,014 as of June 30, 2018.2019 and December 31, 2018, respectively. Amortization expense for the deferred sales incentive compensation was $753 and $536 for the three months ended June 30, 2019, and 2018, respectively. Amortization expense for the deferred sales incentive compensation was $1,404 and $1,018 for the three and six months ended June 30, 2019, and 2018, respectively. No significant impairment loss for capitalized costs was recorded during the period.


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 on the condensed consolidated statements of operations.

18


12.Cost of Revenues

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

5.Cost of Revenues

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

Asset-based

    

$

56,748

    

$

47,015

    

$

114,320

    

$

91,500

Subscription-based

 

 

6,213

 

 

5,142

 

 

11,439

 

 

9,756

Professional services and other

 

 

4,666

 

 

3,578

 

 

4,802

 

 

3,705

Total

 

$

67,627

 

$

55,735

 

$

130,561

 

$

104,961

6.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2018

    

2017

Prepaid technology

 

$

7,293

 

$

1,843

Non-income tax receivable

 

 

3,332

 

 

2,704

Prepaid outside information services

 

 

1,556

 

 

1,395

Prepaid insurance

 

 

1,355

 

 

575

Service tax receivable

 

 

1,277

 

 

1,507

Prepaid rent

 

 

856

 

 

959

Restricted cash

 

 

228

 

 

2,000

Income tax receivable

 

 

 —

 

 

1,684

Other

 

 

6,824

 

 

6,803

 

 

$

22,721

 

$

19,470

7.     Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

    

December 31,

 

 

    

Estimated Useful Life

    

2018

    

2017

    

Cost:

 

 

 

 

 

 

 

 

 

Computer equipment and software

 

3 years

 

$

60,525

 

$

56,192

 

Leasehold improvements

 

Shorter of the lease term or useful life of the asset

 

 

25,448

 

 

23,192

 

Office furniture and fixtures

 

3-7 years

 

 

8,498

 

 

8,110

 

Other office equipment

 

3-5 years

 

 

5,075

 

 

2,052

 

 

 

 

 

 

99,546

 

 

89,546

 

Less: accumulated depreciation and amortization

 

 

 

 

(59,149)

 

 

(53,637)

 

Property and equipment, net

 

 

 

$

40,397

 

$

35,909

 

During the three and six months ended June 30, 2018, the Company retired property and equipment that were no longer in service in the amount of $3,651 and $6,738, primarily related to fully depreciated computer equipment and software assets. Of the $3,651,  $1,126 of the assets originated in the Envestnet segment and the remaining $2,525 originated in the Envestnet | Yodlee segment for the three months ended June 30, 2018. Of the $6,738,  $3,337 of the assets originated in the Envestnet segment and the remaining $3,401 originated in the Envestnet | Yodlee segment for the six months ended June 30, 2018. Asset retirements during the

19

category:

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Asset-based $60,293
 $56,748
 $114,135
 $114,320
Subscription-based 6,697
 6,213
 14,374
 11,439
Professional services and other 5,090
 4,666
 5,216
 4,802
Total $72,080

$67,627

$133,725
 $130,561

three and six months ended June 30, 2017 were not material. Losses on asset retirements were not material during the three and six months ended June 30, 2018 and 2017.

Depreciation and amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

Depreciation and amortization expense

 

$

3,920

 

$

3,853

 

$

7,838

 

$

7,944

8. Internally Developed Software, Net

Internally developed software, net consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

Estimated Useful Life

    

2018

    

2017

Internally developed software

 

 5 years

 

$

56,964

 

$

46,342

Less: accumulated amortization

 

 

 

 

(27,707)

 

 

(24,168)

Internally developed software, net

 

 

 

$

29,257

 

$

22,174

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

Amortization expense

 

$

1,846

 

$

1,241

 

$

3,539

 

$

2,400

9.Goodwill & Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Envestnet

 

Envestnet | Yodlee

 

Total

Balance at December 31, 2017

 

$

163,751

 

$

269,204

 

$

432,955

FolioDynamix acquisition

 

 

94,624

 

 

 —

 

 

94,624

Foreign currency

 

 

 —

 

 

(624)

 

 

(624)

Balance at June 30, 2018

 

$

258,375

 

$

268,580

 

$

526,955

Intangible assets, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

    

 

 

 

    

    

Gross

    

    

 

    

Net

    

Gross

    

    

 

    

Net

 

 

Estimated

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Customer lists

 

7

-

15

years

 

$

354,850

 

$

(96,095)

 

$

258,755

 

$

259,350

 

$

(78,482)

 

$

180,868

Proprietary technologies

 

4

-

8

years

 

 

75,543

 

 

(38,411)

 

 

37,132

 

 

57,377

 

 

(31,067)

 

 

26,310

Trade names

 

1

-

7

years

 

 

29,540

 

 

(11,923)

 

 

17,617

 

 

24,840

 

 

(9,701)

 

 

15,139

Backlog

 

 

 

4

years

 

 

11,000

 

 

(10,761)

 

 

239

 

 

11,000

 

 

(10,586)

 

 

414

Total intangible assets

 

 

 

 

 

 

$

470,933

 

$

(157,190)

 

$

313,743

 

$

352,567

 

$

(129,836)

 

$

222,731


20

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Amortization expense was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

Amortization expense

 

$

13,419

 

$

10,371

 

$

27,354

 

$

20,956

Future amortization expense of the intangible assets as of June 30, 2018, is expected to be as follows:

 

 

 

Years ending December 31:

 

 

Remainder of 2018

$

26,051

2019

 

47,690

2020

 

43,548

2021

 

34,762

2022

 

32,168

Thereafter

 

129,524

 

$

313,743

21

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

10.Other Non-Current Assets

Other non-current assets consist of the following:

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2018

    

2017

Assets to fund deferred compensation liability

$

6,729

 

$

5,185

Deposits:

 

 

 

 

 

Lease

 

4,086

 

 

4,291

Other

 

248

 

 

615

Deferred sales incentive compensation

 

5,762

 

 

 —

Unamortized issuance costs on revolving credit facility

 

2,679

 

 

3,106

Investments in private companies

 

1,920

 

 

2,731

Other

 

2,483

 

 

1,248

 

$

23,907

 

$

17,176

11.Accrued Expensesand Other Liabilities

Accrued expenses and other liabilities consist of the following:

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2018

    

2017

Accrued investment manager fees

 

$

44,154

 

$

39,324

Accrued compensation and related taxes

 

 

38,597

 

 

43,724

Sales and use tax payable

 

 

9,408

 

 

9,037

Accrued professional services

 

 

4,432

 

 

4,985

Accrued interest

 

 

864

 

 

 —

Definite consideration

 

 

 —

 

 

1,250

Other accrued expenses

 

 

12,082

 

 

7,577

 

 

$

109,537

 

$

105,897

12.    Debt

The Company’s outstanding debt obligations as of June 30, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2018

    

2017

Convertible Notes due 2019

 

$

172,500

 

$

172,500

Unaccreted discount on Convertible Notes due 2019

 

 

(8,832)

 

 

(11,677)

Unamortized issuance costs on Convertible Notes due 2019

 

 

(1,369)

 

 

(1,833)

Convertible Notes due 2019 carrying value

 

$

162,299

 

$

158,990

 

 

 

 

 

 

 

Convertible Notes due 2023

 

$

345,000

 

$

 —

Unaccreted discount on Convertible Notes due 2023

 

 

(47,016)

 

 

 —

Unamortized issuance costs on Convertible Notes due 2023

 

 

(8,422)

 

 

 —

Convertible Notes due 2023 carrying value

 

$

289,562

 

$

 —

 

 

 

 

 

 

 

Revolving credit facility balance

 

$

 —

 

$

81,168

22

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statement of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

 

2017

 

2018

 

2017

Interest on revolving credit facility

 

$

1,429

 

$

1,110

 

$

3,994

 

$

2,455

Accretion of debt discount

 

 

2,411

 

 

1,344

 

 

3,829

 

 

2,681

Coupon interest

 

 

1,366

 

 

754

 

 

2,121

 

 

1,509

Amortization of issuance costs

 

 

621

 

 

616

 

 

1,071

 

 

2,046

Undrawn and other fees

 

 

165

 

 

53

 

 

213

 

 

122

 

 

$

5,992

 

$

3,877

 

$

11,228

 

$

8,813

Credit Agreement

In July 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”).  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 Company incurs 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.

Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. The Second Amended and Restated Credit Agreement includes certain financial covenants and, as of June 30, 2018, the Company was in compliance with these requirements.

On May 24, 2018, Envestnet Inc. and certain of its subsidiaries entered into a first amendment to the second amended and restated credit agreement (the “Credit Agreement Amendment”) amending the second amended and restated credit agreement, dated as of July 18, 2017. The Credit Agreement Amendment made certain technical changes to the calculations of various covenants contained in the Credit Agreement.

Convertible Notes due 2019

On December 15, 2014, the Company issued $172,500 of Convertible Notes that mature on December 15, 2019. 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.

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, under certain circumstances. 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.

23

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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 due 2019 for the three and six months ended June 30, 2018 and 2017 was 6%.

Convertible Notes due 2023

In May 2018, the Company issued $345,000 of Convertible Notes that mature on June 1, 2023. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018. The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The notes are structurally subordinated to the indebtedness and other liabilities of any of our subsidiaries, other than our wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis.  The Convertible Notes rank equally in right of payment with all our other existing and future senior indebtedness.

Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at 100% of the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest. The Company may redeem for cash all or any portion of the notes, at our option, on or after June 5, 2021 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days, consecutive or non-consecutive, within a 30 consecutive trading day period ending on, and including, any of the five trading days immediately preceding the date on which we provide notice of redemption.  

The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 14.6381 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $68.31 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 December  15, 2022, under certain circumstances. 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 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 due 2023 for the three and six months ended June 30, 2018 was 6%.

See “Note 17 – Net Income (Loss) Per Share” for further discussion of the effect of conversion on net loss per common share.

13.    Other Non-Current Liabilities

Other non-current liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2018

    

2017

    

Uncertain tax positions

 

$

10,827

 

$

10,640

 

Deferred compensation liability

 

 

5,852

 

 

4,364

 

Other

 

 

65

 

 

98

 

 

 

$

16,744

 

$

15,102

 

14.Fair Value Measurements

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

24

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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

Level I:

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

13.

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.

Stock-Based Compensation

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 June 30, 2018 and December 31, 2017, based on the three-tier fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

   

June 30, 2018

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds and other (1)

$

106,038

   

$

106,038

   

$

—

 

$

—

Assets to fund deferred compensation liability(2)

 

6,729

 

 

—

 

 

—

 

 

6,729

Total assets

$

112,767

   

$

106,038

   

$

—

 

$

6,729

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

707

 

$

—

 

$

—

 

$

707

Deferred compensation liability(3)

 

5,852

 

 

5,852

 

 

—

 

 

—

Total liabilities

$

6,559

 

$

5,852

 

$

—

 

$

707

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

   

Fair Value

   

Level I

   

Level II

 

Level III

Assets

 

   

 

   

 

 

 

 

Money market funds(1)

$

39,400

   

$

39,400

   

$

—

 

$

—

Assets to fund deferred compensation liability(2)

 

5,185

 

 

—

 

 

—

 

 

5,185

Total assets

$

44,585

 

$

39,400

 

$

—

 

$

5,185

Liabilities

   

   

   

   

   

   

   

   

 

   

   

Contingent consideration

$

2,781

 

$

—

 

$

—

 

$

2,781

Deferred compensation liability(3)

 

4,364

   

 

4,364

   

 

—

 

 

—

Total liabilities

$

7,145

 

$

4,364

 

$

—

 

$

2,781

(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 and time deposit accounts which mature on a daily basis.

(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 values of the various funds in which the participants have selected.

25

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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. Time deposit account fair values are determined by trade confirmations which mature daily and therefore are considered highly liquid investments.

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 liability related to the Wheelhouse acquisition was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represent a Level III fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level III measurement not supported by market activity included our assessments of expected future cash flows related to our acquisition of Wheelhouse during the subsequent periods from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.

The Company utilized a discounted cash flow method with expected future performance of Wheelhouse, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of its respective contingent consideration. The Company will continue to reassess the fair value of the contingent consideration made subsequent to the measurement period for each acquisition at each reporting date until settlement. Changes to the estimated fair values of the contingent consideration will be recognized in earnings of the Company and included in general and administration on the condensed consolidated statements of operations.

The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2017 to June 30, 2018:

 

 

 

 

 

 

Fair Value of

 

    

Assets to Fund

 

 

Deferred

 

 

Compensation

 

 

Liability

Balance at December 31, 2017

 

$

5,185

Contributions and fair value adjustments

 

 

1,544

Balance at June 30, 2018

 

$

6,729

The asset value was increased due to contributions to the Plan and immaterial gains on the underlying investment vehicles which resulted in an asset value as of June 30, 2018 of $6,729, which was included in other non-current assets on the condensed consolidated balance sheets.

26

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2017 to June 30, 2018:

 

 

 

 

 

    

Fair Value of

 

 

Contingent

 

 

Consideration

 

 

Liabilities

Balance at December 31, 2017

 

$

2,781

Payment of contingent consideration liability

 

 

(2,193)

Accretion on contingent consideration

 

 

119

Balance at June 30, 2018

 

$

707

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 change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the six months ended June 30, 2018.

On December 15, 2014, the Company issued $172,500 of Convertible Notes due 2019. As of June 30, 2018 and December 31, 2017, the carrying value of the Convertible Notes due 2019 equaled $162,299 and $158,990, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of June 30, 2018 and December 31, 2017, the fair value of the Convertible Notes due 2019 was $182,333 and $180,180, respectively. The Company considers the Convertible Notes due 2019 to be Level II liabilities and uses a market approach to calculate the fair value. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes due 2019 in an over-the-counter market on June 30, 2018 (see “Note 12 – Debt”).

On May 25, 2018, the Company issued $345,000 of Convertible Notes due 2023. As of June 30, 2018, the carrying value of the Convertible Notes due 2023 equaled $289,562 and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of June 30, 2018, the fair value of the Convertible Notes due 2023 was $356,923. The Company considers the Convertible Notes due 2023 to be Level II liabilities and uses a market approach to calculate the fair 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 June 30, 2018 (see “Note 12 – Debt”).

As of June 30, 2018 and December 31, 2017, there was $0 and $81,168, respectively, outstanding on the revolving credit facility under the Second Amended and Restated Credit Agreement. As of December 31, 2017, the outstanding balance on our revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believe our credit risk quality is consistent with when the debt originated. The Company considers the revolving credit facility as of December 31, 2017 to be Level I liability (See “Note 12 – Debt”).

We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2018 based upon the short-term nature of the assets and liabilities.

15.Stock-Based Compensation

The Company has stock options and restricted stock units outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”) and, the 2010 Long-Term Incentive Plan (the “2010 Plan”).

and the 2019 Equity Plan.


As a result of the PIEtech Acquisition (See “Note 3—Business Acquisitions”), the Company adopted the 2019 Equity Plan in order to make inducement grants to certain PIEtech employees who will join Envestnet | MoneyGuide. Envestnet agreed to grant at future dates, not earlier than the sixty day anniversary of the PIEtech Acquisition, up to 301,469 shares of Envestnet common stock in the form of RSUs and PSUs pursuant to the 2019 Equity Plan. The RSUs vest over time and the PSUs vest upon the achievement of meeting certain performance conditions as well as a subsequent service condition. The Company is recognizing the estimated expense on a graded-vesting method over a requisite service period of three to five years, which is the estimated vesting period. The Company estimates the expected vesting amount and recognizes compensation expense only for those awards expected to vest. This estimate is reassessed by management each reporting period and may change based upon new facts and circumstances. Changes in the assumptions impact the total amount of expense and are recognized over the vesting period.

As of June 30, 2018,2019, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 3,091,345.  

2,233,604.  

27

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 Three Months Ended Six Months Ended

 

June 30,

 

June 30,

 June 30, June 30,

    

2018

    

2017

 

2018

    

2017

 2019 2018 2019 2018

Stock-based compensation expense

 

$

10,476

 

$

7,945

 

$

18,971

 

$

15,403

 $13,434
 $10,476
 $26,298
 $18,971

Tax effect on stock-based compensation expense

 

 

(2,650)

 

 

(2,983)

 

 

(4,800)

 

 

(5,784)

 (3,504) (2,650) (6,859) (4,800)

Net effect on income

 

$

7,826

 

$

4,962

 

$

14,171

 

$

9,619

 $9,930

$7,826

$19,439
 $14,171


The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 26.1% for the three and six months ended June 30, 2019. The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.3% for the three and six months ended June 30, 2018. The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 37.5% for the three

Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and six months ended June 30, 2017. 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 six months ended June 30, 2018.

per share amounts)


Stock Options

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 Three Months Ended Six Months Ended

 

June 30,

 

June 30,

 

 June 30, June 30,

    

2018

    

2017

    

 

2018

    

2017

    

 2019 2018 2019 2018

Grant date fair value of options

 

$

 —

 

$

 —

 

$

 —

 

$

14.51

 

 $—
 $—
 $21.55
 $—

Volatility

 

 

 —

%  

 

 —

%  

 

 

 —

%  

 

43.8

%  

 —% —% 40.0% —%

Risk-free interest rate

 

 

 —

%  

 

 —

%  

 

 

 —

%  

 

2.1

%  

 —% —% 2.5% —%

Dividend yield

 

 

 —

%  

 

 —

%  

 

 

 —

%  

 

 —

%  

 —% —% —% —%

Expected term (in years)

 

 

 —

 

 

 —

 

 

 —

 

 

6.3

 

 —
 —
 6.5
 —


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, 2017

 

2,254,565

 

$

19.23

 

4.3

 

$

69,939

Exercised

 

(162,857)

 

 

14.76

 

 

 

 

 

Forfeited

 

(1,668)

 

 

32.46

 

 

 

 

 

Outstanding as of March 31, 2018

 

2,090,040

 

 

19.57

 

4.1

 

 

78,859

 Options Exercise Price (Years) Intrinsic Value
Outstanding as of December 31, 2018 1,887,969
 $20.05
 3.4 $56,046

Granted

 

 —

 

 

 —

 

 

 

 

 

 81,807
 49.02
  

Exercised

 

(12,166)

 

 

11.42

 

 

 

 

 

 (200,326) 16.91
    

Forfeited

 

 —

 

 

 —

 

 

 

 

 

 (1,100) 31.70
    

Outstanding as of June 30, 2018

 

2,077,874

 

 

19.62

 

3.9

 

 

73,421

Outstanding as of March 31, 2019 1,768,350
 21.74
 3.5 77,197
Granted —
 —
  
Exercised (114,109) 13.36
  
Forfeited —
 —
  
Outstanding as of June 30, 2019 1,654,241
 22.31
 3.4 76,187

Options exercisable

 

1,975,716

 

 

19.17

 

3.6

 

$

70,703

 1,550,570
 $20.80
 3.1 $73,764


Exercise prices of stock options outstanding as of June 30, 20182019 range from $7.15 to $55.29. At June 30, 2018,2019, there was $1,197$1,806 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.42.3 years.

28

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


Restricted Stock Units and Restricted Stock Awards

Periodically, the Company grants restricted stock unit awards and performance stock units and awards to employees. Performance-based restricted unit awards vest upon the achievement of certain pre-established business and financial metrics as well as service condition. The business and financial metrics governing the vesting of these performance-based restricted stock unit 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 3 years from the 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:
  RSUs PSUs
  
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
per Share
 Number of
Shares		 Weighted-
Average Grant
Date Fair Value
per Share
Outstanding as of December 31, 2018 1,461,468
 $46.59
 124,320
 $44.64
Granted 872,104
 60.94
 68,510
 64.32
Vested (479,479) 45.98
 —
 —
Forfeited (20,830) 48.31
 (4,036) 61.27
Outstanding as of March 31, 2019 1,833,263
 53.67
 188,794
 51.42
Granted 48,032
 68.50
 123,812
 73.60
Vested (114,056) 47.94
 (68,334) 31.03
Forfeited (22,074) 56.55
 —
 —
Outstanding as of June 30, 2019 1,745,165
 $54.40
 244,272
 $67.78

 

 

 

 

 

 

 

    

    

    

Weighted-

 

 

 

 

Average Grant

 

 

Number of

 

Date Fair Value

 

 

Shares

 

per Share

Outstanding as of December 31, 2017

 

1,766,639

 

$

32.48

  Granted

 

925,641

 

 

55.21

  Vested

 

(503,668)

 

 

34.05

  Forfeited

 

(27,265)

 

 

30.79

Outstanding as of March 31, 2018

 

2,161,347

 

 

41.59

  Granted

 

 —

 

 

 —

  Vested

 

(253,279)

 

 

31.13

  Forfeited

 

(27,324)

 

 

39.78

Outstanding as of June 30, 2018

 

1,880,744

 

$

43.36

 

 

 

 

 

 


At June 30, 2018,2019, there was $73,482$82,846 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 2.2 years.

During March 2018, the Company granted 26,000 At June 30, 2019, there was $17,371 of unrecognized stock-based compensation expense related to unvested performance-based restricted stock unitunits and awards, which the Company expects to certain employees. These performance-based shares vest upon the achievementrecognize over a weighted-average period of certain business and financial metrics. The business and financial metrics governing the vesting of these stock unit awards provide thresholds which dictate the number of shares to vest upon each evaluation date, which range from 50% to 150%. If these metrics are achieved at 100%, as defined in the individual grant terms, these shares would vest over three annual tranches equally.

16.Income Taxes

2.7 years.

14.
Income Taxes
The following table includes the Company’s loss before income tax provision (benefit), income tax provision (benefit) and effective tax rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 Three Months Ended Six Months Ended

 

June 30,

 

 

June 30,

 

 June 30, June 30,

    

2018

 

2017

 

 

2018

 

2017

 

 2019 2018 2019 2018

Loss before income tax provision (benefit)

 

$

(5,425)

 

$

(1,626)

 

 

$

(11,417)

 

$

(10,463)

 

 $(27,769) $(5,425) $(42,269) $(11,417)

Income tax provision (benefit)

 

 

566

 

 

4,844

 

 

 

(13,428)

 

 

9,142

 

 (28,382) 566
 (24,614) (13,428)

Effective tax rate

 

 

(10.4)

%

 

(297.9)

%

 

 

117.6

%

 

(87.4)

%

 102.2% (10.4)% 58.2% 117.6%


For the three and six months ended June 30, 2019, the Company's effective tax rate differed from the statutory rate primarily due to the release of the Company's valuation allowance of $21,907 primarily as a result of additional deferred tax liabilities recorded from the PIEtech Acquisition, the windfall from share-based compensation, federal and state research and development credits, and additional accruals for uncertain tax positions.

For the three months ended June 30, 2018, ourthe Company's effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company hashad placed on all US deferreds with the exception of indefinite lived intangibles, additional accruals for uncertain tax positions, the impact of clarifying Base Erosion and Anti Abuse (“BEAT”) tax positions, as well as differences between the foreign tax rates and statutory US tax rate.

For the three months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the US.


For the six months ended June 30, 2018, ourthe Company's effective tax rate differed from the statutory rate primarily due to the release of the Company’s valuation allowance as a result of additional deferred tax liabilities recorded with the
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

acquisition of FolioDynamix, additional accruals for uncertain tax positions as well as differences between the foreign tax rates and statutory US tax rate.

29


Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

For the six months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the US.

In December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into United States law. Beginning in 2018, the Tax Act includes the global intangible low-taxed income (“GILTI”) provision and base erosion anti abuse tax (“BEAT”). WeBEAT provisions. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires usthe Company to include in ourits U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We expectThe Company expects to fully offset any GILTI income with Net Operating Losses (“NOLs”). The Company has reevaluated the entity classification of certain of its Controlled Foreign Corporations (“CFCs”); and as such, has changed the classification of its Indian entities to a flow-through status. As a result, of our domestic valuation allowance, we dothe Company does not currently expect a financial statement impact due to the GILTI provision.be subject to BEAT. Additionally, the Tax Act requires ustwo Indian entities are no longer subject to calculate a minimum tax on our foreign earnings and profits; BEAT. As a result of further research and developing guidance we do not require a BEAT provision to be recorded.

In accordance with Staff Accounting Bulletin 118, we recognized provisional tax impacts related to the deemed repatriated foreign earnings in our consolidated financial statements for the year ended December 31, 2017. GILTI.


The ultimate impact may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. During the six months ended June 30, 2018 we did not record any adjustments to our provisional amounts included in our consolidated financial statements for the year ended December 31, 2017. The accounting is expected to be completed when the 2017 U.S. corporate income tax return is filed in October of 2018.

TheCompany's total gross liability for unrecognized tax benefits, exclusive of interest and penalties, was $18,895$18,102 and $18,312$15,628 at June 30, 20182019 and December 31, 2017,2018, 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 is $4,871$6,411 and $4,626$4,429 at June 30, 20182019 and December 31, 2017,2018, respectively.

At June 30, 2018,2019, the amount of unrecognized tax benefits, including interest and penalties, that would benefit the Company’s effective tax rate, if recognized, was $10,827.$12,116. At this time, the Company estimates that the liability for unrecognized tax benefits will notcould decrease in the next twelve months as it is not anticipated that reviews by tax authorities will be completed and there will be any expiration of certain statutes of limitations in this time period.

completed.

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. Income tax expense includes $548$898 and $890$548 of potential interest and penalties related to unrecognized tax benefits for the six months ended June 30, 20182019 and 2017,2018, respectively. The Company had accrued interest and penalties of $6,566$6,924 and $6,018$5,977 as of June 30, 20182019 and December 31, 2017,2018, respectively.

17.Net Income (Loss) Per Share


15.Net Income (Loss) Per Share
Basic income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted income (loss)per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock awards, restricted stock units and Convertible Notes due 2019 and 2023 (collectively “Convertible Notes”)convertible notes using the treasury stock method, if dilutive.No items were included in the computation of diluted loss per share in the three months ended June 30, 2018 and 2017 as well as the six months ended June 30, 2017 because the Company incurred a net loss attributable to Envestnet, Inc. in those 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 earnings 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 2019 and Convertible Notes due 2023 will have no effect on diluted earnings per share until the Company’s stock price exceeds the conversion price of $62.88 and $68.31 per share and certain other criteria are met, respectively, or if the trading price of the Convertible Notesconvertible notes meets certain criteria (See “Note 12 – Debt” in Part II, Item 8 of our 2017 Form 10-K and “Note 12 – Debt” in this Form 10-Q).criteria. In the period of conversion, the Convertible Notesconvertible notes will have no impact on diluted earnings if the Convertible Notesthey are settled in cash and will have an impact on dilutive earnings per share if the Convertible Notesthey are settled in shares upon conversion.

30

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 Three Months Ended Six Months Ended

 

June 30,

 

June 30,

 June 30, June 30,

    

2018

    

2017

 

2018

    

2017

 2019 2018 2019 2018

Basic income (loss) per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

        

Net income (loss) attributable to Envestnet, Inc.

 

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

Net loss attributable to Envestnet, Inc. $893
 $(5,526) $(17,292) $2,578

 

 

 

 

 

 

 

 

 

 

 

 

        

Basic number of weighted-average shares outstanding

 

 

45,247,331

 

 

43,855,479

 

 

44,963,735

 

 

43,513,074

 50,870,296
 45,247,331
 49,526,774
 44,963,735

Basic net income (loss) per share

 

$

(0.12)

 

$

(0.15)

 

$

0.06

 

$

(0.45)		 $0.02
 $(0.12) $(0.35) $0.06

 

 

 

 

 

 

 

 

 

 

 

 

        

Diluted income (loss) per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

        

Net income (loss) attributable to Envestnet, Inc.

 

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

 $893
 $(5,526) $(17,292) $2,578

 

 

 

 

 

 

 

 

 

 

 

 

        

Basic number of weighted-average shares outstanding

 

 

45,247,331

 

 

43,855,479

 

 

44,963,735

 

 

43,513,074

 50,870,296
 45,247,331
 49,526,774
 44,963,735

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

        

Options to purchase common stock

 

 

 —

 

 

 —

 

 

1,360,300

 

 

 —

 1,164,246
 —
 —
 1,360,300

Unvested restricted stock units

 

 

 —

 

 

 —

 

 

832,170

 

 

 —

 662,853
 —
 —
 832,170
Convertible notes 261,075
 —
 —
 —
Warrants 24,218
 —
 —
 —

Diluted number of weighted-average shares outstanding

 

 

45,247,331

 

 

43,855,479

 

 

47,156,205

 

 

43,513,074

 52,982,688
 45,247,331
 49,526,774
 47,156,205

Diluted net income (loss) per share

 

$

(0.12)

 

$

(0.15)

 

$

0.05

 

$

(0.45)		 $0.02
 $(0.12) $(0.35) $0.05


Securities that were anti-dilutive forand therefore excluded from the three and six months ended June 30, 2018 and 2017 werecomputation of diluted lossper share are as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 Three Months Ended Six Months Ended

 

June 30,

 

June 30,

 June 30, June 30,

    

2018

    

2017

 

2018

    

2017

 2019 2018 2019 2018

Options to purchase common stock

 

2,077,874

 

2,804,420

 

9,045

 

2,804,420

 —
 2,077,874
 1,654,241
 9,045

Unvested restricted stock awards and units

 

1,880,744

 

2,023,898

 

 —

 

2,023,898

 —
 1,880,744
 1,989,437
 —
Warrants —
 —
 470,000
 —

Convertible Notes

 

7,793,826

 

2,743,321

 

7,793,826

 

2,743,321

 —
 7,793,826
 7,793,826
 7,793,826

Total

 

11,752,444

 

7,571,639

 

7,802,871

 

7,571,639

 —

11,752,444

11,907,504
 7,802,871

18.    Commitments and Contingencies


16.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 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 unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.

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

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. An unopposed scheduling motion is pending which, if granted, would require Envestnet and Yodlee to file their responsive pleadings, including counterclaims, by September 17, 2019.  The Company believes the allegations in the complaint are without merit and intends to defend the action vigorously.

In addition, the Company is involved in legal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These

31

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For 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 June 30, 2018.2019. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on Envestnet’sthe Company's results of operations or cash flow in a particular quarter or year.

Contingencies

Certain 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 June 30, 2019 and December 31, 2018, the Company estimated a sales and use tax liability of $9,234.$10,989 and $8,643, respectively, related to revenues in multiple jurisdictions. This amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheets. The Company also estimated a sales and use tax receivable of $3,413$5,139 and $5,246, respectively, related to the estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. As a result, a net sales and use tax liability of $5,830 related to multiple jurisdictions with respect to revenues in the three and six months ended June 30, 2018 and prior periods was probable. 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

17.Leases
On January 1, 2019, the Company adopted ASU 2016-02 and all subsequent ASUs that modified Topic 842 (“ASC 842”) using the effective date transition method. We elected the available package of practical expedients. The Company has elected to apply the short-term lease exemption to all of its classes of underlying assets.
The standard had a material impact on the Company's condensed consolidated balance sheets, but did not have an impact on the Company's condensed consolidated statements of operations. The most significant impact was the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases. Adoption of the standard had no impact to previously reported results.
At inception, the Company determines if an arrangement is a lease. Operating leases are included in ROU assets, current lease liabilities and non-current lease liabilities on our consolidated balance sheets. The Company does not have material finance leases.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the remaining lease term. As none of the Company's leases provide an implicit rate, the Company uses an estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

includes prepaid payments and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for non-lease components as part of the lease component for all asset classes. The majority of the Company's lease agreements are real estate leases.
The Company has operating leases for corporate offices and certain equipment, some of which may include options to extend the leases for up to 20 years, and some of which may include options to terminate the leases within 90 days. The Company's leases have remaining lease terms of 1 month to 14 years. For the three and six months ended June 30, 2019, the total operating lease cost was $4,377 and $8,495, respectively. The Company did not have significant sublease income, short-term lease cost, or variable lease cost for the three and six months ended June 30, 2019. As of June 30, 2019, the weighted average remaining lease term was 8.9 years and the weighted average discount rate was 6.3%. Cash paid for amounts included in the measurement of the operating lease liability for the three and six months ended June 30, 2019, was $4,730 and $9,386, respectively.
Future minimum lease payments under non-cancellable leases, as of June 30, 2019, were as follows:
  Operating
  Leases
Years Ending December 31,  
Remainder of 2019 $9,096
2020 17,558
2021 15,975
2022 11,850
2023 10,571
Thereafter 52,862
Total future minimum lease payments 117,912
Less imputed interest (27,563)
Total operating lease liabilities $90,349


As of June 30, 2019, the Company has several additional operating leases that have not yet commenced but will commence in 2019 with lease terms of 1 to 3 years.

For the year ended December 31, 2018, the Company disclosed the following information related to its leases:
The Company rents office space under leases that expire at various dates through 2030. As of June 30, 2018, the Company’s futureFuture minimum lease commitments under these operating leases, totaled $105,124.

19.Segment Information

as of December 31, 2018, were as follows:

Years ending December 31,  
2019 $15,997
2020 15,437
2021 14,705
2022 10,816
2023 9,910
Thereafter 39,449
Total $106,314


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

18.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 analytics platform powering dynamic, cloud-based innovation for digital financial services.

•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 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 fees,service expenses and insurance, acquisition related transaction costs, restructuring charges, and other non-recurring and/or non-operationally related expenses.Inter-segment revenues were not material for the three and six months ended June 30, 20182019 and 2017.

2018.

32

See “Note 11—Revenue” for detail of revenues by segment.

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


The following table presents revenue by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2018

    

2017

 

2018

    

2017

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Envestnet

 

$

156,928

 

$

129,372

 

$

312,916

 

$

250,690

Envestnet | Yodlee

 

 

44,188

 

 

38,045

 

 

86,211

 

 

74,513

Consolidated revenue

 

$

201,116

 

$

167,417

 

$

399,127

 

$

325,203

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity revenue as a percentage of Envestnet segment revenue:

 

 

21%

 

 

20%

 

 

21%

 

 

20%

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

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

June 30,

 

June 30,

 Three Months Ended Six Months Ended

2018

    

2017

 

2018

    

2017

 June 30, June 30,

Envestnet

$

16,359

 

$

15,811

 

$

32,220

 

$

29,322

Envestnet | Yodlee

 

(3,296)

 

 

(5,635)

 

 

(7,705)

 

 

(13,343)

 2019 2018 2019 2018
Envestnet Wealth Solutions $12,379
 $16,359
 $29,223
 $32,220
Envestnet Data & Analytics (8,960) (3,296) (16,888) (7,705)

Total segment income from operations

 

13,063

 

 

10,176

 

 

24,515

 

 

15,979

 3,419

13,063

12,335

24,515

Nonsegment operating expenses

 

(13,058)

 

 

(7,433)

 

 

(25,248)

 

 

(16,590)

 (23,676) (13,058) (41,329) (25,248)

Other expense, net

 

(5,430)

 

 

(4,369)

 

 

(10,684)

 

 

(9,852)

 (7,512) (5,430) (13,275) (10,684)

Consolidated loss before income tax provision (benefit)

 

(5,425)

 

 

(1,626)

 

 

(11,417)

 

 

(10,463)

 (27,769)
(5,425)
(42,269)
(11,417)

Income tax provision (benefit)

 

566

 

 

4,844

 

 

(13,428)

 

 

9,142

 (28,382) 566
 (24,614) (13,428)

Consolidated net income (loss)

 

(5,991)

 

 

(6,470)

 

 

2,011

 

 

(19,605)

 613
 (5,991) (17,655)
2,011

Add: Net loss attributable to non-controlling interest

 

465

 

 

 —

 

 

567

 

 

 —

 280
 465
 363
 567

Consolidated net income (loss) attributable to Envestnet, Inc.

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

 $893

$(5,526)
$(17,292)
$2,578


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,intangible assets, 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:

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2018

    

2017

Segment assets:

 

 

 

 

 

Envestnet

$

650,363

 

$

353,048

Envestnet | Yodlee

 

504,813

 

 

509,004

Consolidated total assets

$

1,155,176

 

$

862,052

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2018

    

2017

 

2018

    

2017

Segment depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

Envestnet

$

11,026

 

$

6,361

 

$

22,499

 

$

12,782

Envestnet | Yodlee

 

8,159

 

 

9,104

 

 

16,232

 

 

18,518

Consolidated depreciation and amortization

$

19,185

 

$

15,465

 

$

38,731

 

$

31,300

33

  June 30, December 31,
  2019 2018
Segment assets:    
Envestnet Wealth Solutions $1,279,408
 $810,971
Envestnet Data & Analytics 532,932
 502,776
Consolidated total assets $1,812,340
 $1,313,747

Table of Contents

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)


 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2018

    

2017

    

2018

    

2017

Segment capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

Envestnet

$

8,344

 

$

7,580

 

$

16,536

 

$

12,931

Envestnet | Yodlee

 

2,260

 

 

1,154

 

 

3,655

 

 

1,901

Consolidated capital expenditures

$

10,604

 

$

8,734

 

$

20,191

 

$

14,832

20.    Geographical Information

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Segment depreciation and amortization:        
Envestnet Wealth Solutions $16,376
 $11,026
 $27,643
 $22,499
Envestnet Data & Analytics 10,539
 8,159
 18,789
 16,232
Consolidated depreciation and amortization $26,915

$19,185

$46,432
 $38,731
  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Segment capital expenditures:        
Envestnet Wealth Solutions $10,027
 $8,344
 $20,865
 $16,536
Envestnet Data & Analytics 1,939
 2,260
 3,533
 3,655
Consolidated capital expenditures $11,966
 $10,604

$24,398
 $20,191

19.Geographical Information
The following table sets forth property and equipment, net by geographic area:

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2018

    

2017

United States

$

35,812

 

$

30,647

India

 

4,109

 

 

4,907

Other

 

476

 

 

355

Total

$

40,397

 

$

35,909

34

Table
  June 30, December 31,
  2019 2018
United States $45,759
 $39,412
India 3,919
 3,969
Other 1,338
 1,610
Total $51,016
 $44,991



See “Note 11—Revenue” for detail of Contents

revenues by geographic area.

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 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.” 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-looking statements may include, among others, statements relating to:

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,
the renegotiation of fees by our clients,
our ability to introduce new solutions and services,
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 regulations 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,
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,
adverse judicial or regulatory proceedings against us,
the failure to protect our intellectual property rights,
potential claims by third parties for infringement or their intellectual property rights,
risks associated with our international operations,
the impact of fluctuations in interest rates and turmoil in market conditions on our cost of borrowing and access to additional capital,
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,
issuances of additional shares of common stock or issuances of shares of preferred stock or convertible securities on our existing stockholders,
general economic conditions, political and regulatory conditions, 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 and successfully integrate acquired companies,

·

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 analytics 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, including tax 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 amount of our debt and our ability to service our debt,

35

Table of Contents

·

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

·

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 forward‑forward‑looking statements. All forward‑forward‑looking statements contained in this quarterly report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. Forward‑Forward‑looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward‑forward‑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 forward‑forward‑looking statements, no inference should be made that we will make additional updates with respect to those or other forward‑forward‑looking statements.

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

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”); 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 2018 Form 10-K for the year ended December 31, 2017 (the “2017 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 20172018 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 3,5004,100 companies, including 15 17of the 20 largest U.S. banks, 43 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.

36


Table of Contents

Founded in 1999, Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic financial wellness network that supports advisors and their clients.  


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 other international locations.


We believe that our business model results in a high degree of recurring and predictable financial results.
Recent Events


Acquisition of FolioDynamix

private company


On January 2, 2018,2019, pursuant to an agreement and plan of merger dated as of January 2, 2019 between Envestnet acquired (the “Acquisition”) Folio Dynamics Holdings,and a private company, the private company merged into Yodlee Inc., a Delaware corporation (“FolioDynamix”) through a merger of FolioDynamix with and into a wholly ownedwholly-owned subsidiary of Envestnet.ours (the “Private Company Acquisition”). The completion of the Private Company Acquisition on January 2, 20182019 followed the receipt of all necessary regulatory approvals and third party consents.

In connection with the Private Company Acquisition, Envestnet paidwe incurred estimated consideration of $193,484approximately $25,063, inclusive of estimated contingent consideration of $7,580, for FolioDynamix,all of the outstanding shares of the private company, subject to certain closing and post-closing adjustments.


Through the use of conversational artificial intelligence tools and applications that leverages the latest wave of customer-centric capabilities, we believe that the private company improves the way Financial Service Providers (“FSPs”) can interact with and support their customers. The technology and operations of the private company have been integrated into our Envestnet Data & Analytics segment.

Acquisition of PortfolioCenter business

On April 1, 2019, pursuant to an asset purchase agreement, Tamarac, Inc. (“Tamarac”), a wholly owned subsidiary of Envestnet, acquired certain of the assets, primarily consisting of intangible assets, and the assumption of certain of the liabilities of the PortfolioCenter business from Performance Technologies, Inc. (the “PC Seller”), a wholly owned subsidiary of The Charles Schwab Corporation. The PortfolioCenter Business provides investment advisors and investment advisory service providers with desktop, hosted and outsourced multicustodial software solutions. These solutions provide data-management and


performance-measurement tools, as well as customizable accounting, reporting, and billing functions delivered through the commercial software application products known as PortfolioCenter Desktop, PortfolioCenter Hosted, PortfolioServices and Service Bureau.
Tamarac acquired the PortfolioCenter Business to better serve small and mid-size RIA firms. The PortfolioCenter Business has become a part of our Envestnet Wealth Solutions segment.
In connection with the PortfolioCenter Acquisition, Tamarac paid $17,500 in cash and funded the acquisition with available cash resources. The Seller is also entitled to an earn-out payment based on a percentage of the PortfolioCenter Business’ eligible revenue for the twelve-month period beginning April 1, 2020. The discounted amount of the contingent consideration liability is estimated to be $8,300.
Acquisition priceof PIEtech

On May 1, 2019, we acquired all of the outstanding shares of capital stock of PIEtech, Inc., a Virginia corporation (“PIEtech”). PIEtech empowers financial advisors to use financial planning to efficiently motivate their clients to create, implement and maintain financial plans that best meet their lifetime financial goals. The technology and operations of PIEtech, which now operates as Envestnet | MoneyGuide, has been integrated into our Envestnet Wealth Solutions segment.

The acquisition of PIEtech establishes us as a leader in financial planning solutions, providing advisors and their clients with access to a combinationfull spectrum of financial planning capabilities, and offering a broad range of data-driven, financial plan-informed financial wellness solutions, both domestically and internationally over time. Integration of PIEtech's MoneyGuide software with the Company's integrated technology platform is expected to reduce friction and enhance productivity for advisors.

In connection with the PIEtech Acquisition, we paid net cash onconsideration of $299,370, subject to the Company’s balance sheet, purchase consideration liabilitiesworking capital adjustments set forth in the Merger Agreement, and issued 3,184,713 shares of Envestnet common stock, par value $0.005 per share, to the sellers. We funded the PIEtech Acquisition with available cash resources and borrowings under its revolving credit facility.

FolioDynamix provides financial institutions, RIAs,


In connection with the PIEtech Merger, we established a retention bonus pool consisting of approximately $30,000 of cash and other wealthrestricted stock units to be granted to employees and management clientsof PIEtech as inducement grants. As a result, we adopted the Envestnet, Inc. 2019 Acquisition Equity Incentive Plan (the “2019 Equity Plan”) in order to make inducement grants to certain PIEtech employees who will join Envestnet | MoneyGuide. We agreed to grant at future dates, not earlier than the sixty day anniversary of the PIEtech Merger, up to 301,469 shares of Envestnet common stock in the form of restricted stock units (“RSUs”) and performance stock units (“PSUs”) pursuant to the 2019 Equity Plan and made cash retention payments of approximately $8,800 to certain legacy PIEtech employees who joined Envestnet | MoneyGuide. As of June 30, 2019, we have issued approximately 62,200 of RSUs and 24,900 of PSUs under the Equity Plan to legacy PIEtech employees. At this time we expect to issue approximately 214,000 of additional RSUs and PSUs and expect to pay approximately $5,300 in cash bonus payments over the next three years in connection with the PIEtech Acquisition.

We also granted membership interests in certain of our equity method investments to two PIEtech executives with an end-to-end technology solution pairedestimated fair market value of $8,900. These membership interests will vest and become exercisable in future periods. As of June 30, 2019, the Company has recorded approximately $1,480 as a component of compensation and benefits in the condensed consolidated statement of operations with a suite of advisory tools including model portfolios, research, and overlay management services. 

The acquisition of FolioDynamix added complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. The Company expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management business, enabling the Company to further leverage its operating scale and data analytics capabilities. FolioDynamix is includedcorresponding liability in other non-current liabilities in the Envestnet segment.

Investment in Private Company

       On March 16, 2018, the Company purchased 4,000 units representing approximately 47% of the outstanding membership interests of a private company for cash consideration of $1,333. The Company uses the consolidation method of accounting for this investment. The private company was formed to enable financial advisors to provide insurance and income protection products to their clients.

Private Offering of Convertible Notes due 2023

       In May 2018, we issued $345,000 of Convertible Notes maturing June 1, 2023. Net proceeds from the offering were $335,513. The Convertible Notes due 2023 bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.  

       The Convertible Notes due 2023 are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes due 2023 are convertible into shares of the Company's common stock under certain circumstances prior to maturity at a conversion rate of 14.6381 shares per $1 principal amount of the Convertible Notes due 2023, which represents a conversion price of $68.31 per share, subject to adjustment under certain conditions. For more information on the Convertible Notes due 2023, see “Note 12 – Debt” in the notes to these unaudited condensed consolidated financial statements.

balance sheets.


Segments

Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 19 – 18—Segment Information” to the 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.


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·

•

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 June 30, 2018,2019, Envestnet’s platform assets grew to approximately $2.7$3 trillion in 10.211.6 million accounts overseen by approximately 90 thousandmore than 99,000 advisors.

Services provided to advisors include: financial planning, risk assessment and selection oftools, investment strategies and solutions, asset allocation models, research, and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi‑multi‑custodian performance reporting and communication tools, plus data analytics. Envestnet hasWe have access to a wide range of leading third‑third‑party asset custodians.

We offer these solutions principally through the following product and product/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 18,40019,900 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics and digital advice capabilities to customers.


·

•

Envestnet | TamaracTM™ provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high‑high‑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 nearly 4,9004,500 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as over 1,7001,000 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers an overlay service, which includes patented portfolio overlay and tax optimization services.




Key Metrics

Key metrics as of June 30, 2018 include impact of the acquisition of FolioDynamix on January 2, 2018, detailed within the following table.

 

 

 

 

 

 

 

 

FolioDynamix

 

Assets

 

Accounts

 

Advisors

AUM

 

$

8,736

 

57,163

 

 

AUA

 

 

33,182

 

79,131

 

 

AUM/A

 

 

41,918

 

136,294

 

3,838

Subscription

 

 

796,545

 

2,796,878

 

15,308

Total Platform

 

$

838,463

 

2,933,172

 

19,146

Additionally, beginning March 31, 2018 and for periods thereafter, subscription metrics include assets, accounts and advisors associated with Envestnet | Tamarac performance reporting, where applicable. Previously, Envestnet | Tamarac’s metrics were limited to those associated with its rebalancer solution. Prior period metrics have been conformed to the new definition in the table shown on the next page.

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

indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

    

2017

    

2017

    

2017

    

2018

    

2018

 

 

(in millions except accounts and advisors data)

Platform Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Under Management (AUM)

 

$

122,543

 

$

131,809

 

$

141,518

 

$

143,945

 

$

148,537

Assets Under Administration (AUA)

 

 

271,450

 

 

293,963

 

 

308,480

 

 

353,379

 

 

360,850

Total AUM/A

 

 

393,993

 

 

425,772

 

 

449,998

 

 

497,324

 

 

509,387

Subscription

 

 

1,099,775

 

 

1,161,893

 

 

1,253,528

 

 

2,076,382

 

 

2,167,084

Total Platform Assets

 

$

1,493,768

 

$

1,587,665

 

$

1,703,526

 

$

2,573,706

 

$

2,676,471

Platform Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM

 

 

614,973

 

 

652,060

 

 

685,925

 

 

724,774

 

 

759,926

AUA

 

 

1,083,417

 

 

1,145,050

 

 

1,217,697

 

 

1,389,489

 

 

1,417,795

Total AUM/A

 

 

1,698,390

 

 

1,797,110

 

 

1,903,622

 

 

2,114,263

 

 

2,177,721

Subscription

 

 

4,846,596

 

 

4,944,640

 

 

5,054,015

 

 

7,985,777

 

 

8,042,900

Total Platform Accounts

 

 

6,544,986

 

 

6,741,750

 

 

6,957,637

 

 

10,100,040

 

 

10,220,621

Advisors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUM/A

 

 

38,498

 

 

40,379

 

 

40,485

 

 

44,790

 

 

44,900

Subscription

 

 

24,499

 

 

24,501

 

 

25,566

 

 

43,037

 

 

43,700

Total Advisors

 

 

62,997

 

 

64,880

 

 

66,051

 

 

87,827

 

 

88,600

  As of
  June 30, September 30, December 31, March 31, June 30,
  2018 2018 2018 2019 2019
  (in millions, except accounts and advisors data)
Platform Assets          
Assets under Management (“AUM”) $148,537
 $153,862
 $150,591
 $176,144
 $182,143
Assets under Administration (“AUA”) 360,850
 388,066
 291,934
 319,129
 330,226
Total AUM/A 509,387
 541,928
 442,525
 495,273
 512,369
Subscription 2,167,084
 2,297,593
 2,314,253
 2,546,483
 2,835,780
Total Platform Assets $2,676,471
 $2,839,521
 $2,756,778
 $3,041,756
 $3,348,149
Platform Accounts          
AUM 759,926
 776,705
 816,354
 874,574
 907,034
AUA 1,417,795
 1,517,297
 1,182,764
 1,187,589
 1,196,114
Total AUM/A 2,177,721
 2,294,002
 1,999,118
 2,062,163
 2,103,148
Subscription 8,042,900
 8,185,667
 8,865,435
 8,909,581
 9,492,653
Total Platform Accounts 10,220,621
 10,479,669
 10,864,553
 10,971,744
 11,595,801
Advisors          
AUM/A 44,900
 47,292
 40,103
 39,035
 39,727
Subscription 43,700
 45,619
 56,237
 57,594
 59,292
Total Advisors 88,600
 92,911
 96,340
 96,629
 99,019
The following tables providetable 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 June 30, 2018

 Asset Rollforward - Three Months Ended June 30, 2019

 

As of

 

Gross

 

 

 

Net

 

Market

 

Reclass to

 

As of

 As of Gross   Net Market Reclass to As of

    

3/31/2018

 

Sales

 

Redemptions

 

Flows

 

Impact

 

Subscription

 

6/30/2018

 3/31/2019 Sales Redemptions Flows Impact Subscription 6/30/2019

 

(in millions except account data)

 (in millions except account data)

AUM

 

$

143,945

    

$

13,859

 

$

(8,138)

    

$

5,721

    

$

987

    

$

(2,116)

 

$

148,537

 $176,144
 $15,130
 $(7,415) $7,715
 $4,846
 $(6,562) $182,143

AUA

 

 

353,379

 

 

27,015

 

 

(23,186)

 

 

3,829

 

 

5,022

 

 

(1,380)

 

 

360,850

 319,129
 21,203
 (17,611) 3,592
 7,862
 (357) 330,226

Total AUM/A

 

$

497,324

 

$

40,874

 

$

(31,324)

 

$

9,550

 

$

6,009

 

$

(3,496)

 

$

509,387

 $495,273
 $36,333
 $(25,026) $11,307
 $12,708
 $(6,919) $512,369

Fee-Based Accounts

 

 

2,114,263

 

 

 

 

 

 

 

 

65,515

 

 

 

 

 

(2,057)

 

 

2,177,721

 2,062,163
  
  
 45,714
   (4,729) 2,103,148


The above AUM/A gross sales figures include $5.1$2.3 billion in new client conversions. The CompanyWe onboarded an additional $31.0$169.4 billion in subscription conversions during the three months ended June 30, 2018,2019 bringing total conversions for the second quarter to $36.1$171.7 billion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Rollforward - Six Months Ended June 30, 2018

 

 

As of

 

 

 

 

Gross

 

 

 

 

Net

 

Market

 

Reclass to

 

As of

 

    

12/31/2017

 

FolioDynamix

 

Sales

 

Redemptions

 

Flows

 

Impact

 

Subscription

 

6/30/2018

 

 

(in millions except account data)

AUM

 

$

141,518

    

$

8,736

 

$

29,634

    

$

(28,114)

    

$

1,520

    

$

(1,121)

 

$

(2,116)

 

$

148,537

AUA

 

 

308,480

 

 

33,182

 

 

70,888

 

 

(51,409)

 

 

19,479

 

 

1,089

 

 

(1,380)

 

 

360,850

Total AUM/A

 

$

449,998

 

$

41,918

 

$

100,522

 

$

(79,523)

 

$

20,999

 

$

(32)

 

$

(3,496)

 

$

509,387

Fee-Based Accounts

 

 

1,903,622

 

 

136,294

 

 

 

 

 

 

 

 

139,862

 

 

 

 

 

(2,057)

 

 

2,177,721


  Asset Rollforward - Six Months Ended June 30, 2019
  As of Gross   Net Market Reclass to As of
  12/31/2018 Sales Redemptions Flows Impact Subscription 6/30/2019
  (in millions, except account data)
AUM $150,591
 $36,818
 $(16,570) $20,248
 $17,866
 $(6,562) $182,143
AUA 291,934
 49,194
 (38,532) 10,662
 31,481
 (3,851) 330,226
Total AUM/A $442,525
 $86,012
 $(55,102) $30,910
 $49,347
 $(10,413) $512,369
Fee-Based Accounts 1,999,118
     125,891
   (21,861) 2,103,148

The above AUM/A gross sales figures on the previous page include $28.5$22.4 billion in new client conversions. The CompanyWe onboarded an additional $41.6$197.0 billion in subscription conversions during the six months ended June 30, 2018,2019 bringing total conversions for the quartertwo quarters to $70.1$219.4 billion.


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Envestnet Data & Analytics Segment

Envestnet | Yodlee Segment

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

More than 1,100analysis and application programming interfaces (“APIs”) for its customers.

Over 1,200 financial institutions, financial technology innovators and financial advisory firms, including 1315 of the 20 largest U.S. banks, subscribe to the Envestnet | YodleeData & Analytics platform to underpin personalized financial apps and services for over 2224 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”),APIs, end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Envestnet | YodleeData & 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’sEnvestnet Data & Analytic'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 18,00021,000 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 | YodleeData & 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 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 channels benefit customers by improving end-user satisfaction and retention, accelerating speed to market, creating technology savings and enhancing their data analytics solutions and market research capabilities. End users receive better 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, Envestnet | YodleeData & Analytics solutions provide access to critical data and payments solutions, faster speed to market and enhanced distribution.

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.

·

•

Envestnet | Analytics provides data analytics, mobile sales solutions, and online educationeducational 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.

Our dashboards deliver segmentation analytics, multi-dimensional benchmarking, and practice pattern analyses that provide mission-critical insights to clients.


Operational Highlights

Asset-based recurring revenues increased 19%2% from $98,959 in the three months ended June 30, 2017 to $118,111 in the three months ended June 30, 2018. Subscription-based recurring revenue increased 20% from $59,8022018 to $120,070 in the three months ended June 30, 2017 to2019. Subscription-based recurring revenues increased 29% from $71,779 in the three months ended June 30, 2018. Total revenues, which include professional services and other revenues,

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increased 20% from $167,4172018 to $92,258 in the three months ended June 30, 2017 to $201,116 in the three months ended June 30, 2018. The increase in total revenues was primarily a result of an increase of $17,346 related to the acquisition of FolioDynamix. The Envestnet segment total revenue excluding Folio increased $10,210 primarily due to the positive effects of new account growth and positive net flows of AUM/A as well as an increase in subscription-based revenues of $3,140. The Envestnet | Yodlee segment total revenue increased by $6,143 primarily due to an increase in subscription-based revenue of $4,425.

Asset-based recurring revenues increased 24% from $193,121 in the six months ended June 30, 2017 to $239,264 in the six months ended June 30, 2018. Subscription-based recurring revenue increased 20% from $117,712 in the six months ended June 30, 2017 to $141,474 in the six months ended June 30, 2018.2019. Total revenues, which include professional services and other revenues, increased 23%12% from $325,203$201,116 in the sixthree months ended June 30, 20172018 to $399,127$224,445 in the sixthree months ended June 30, 2018.2019. The increase inPortfolioCenter Acquisition and the PIEtech Acquisition contributed revenues of $2,017 and $6,632, respectively, to total revenues was primarily a result of an increase of $34,800 related toin the acquisition of FolioDynamix.three months ended June 30, 2019. The Envestnet segmentWealth Solutions segment's total revenuerevenues, excluding Foliothe PortfolioCenter Acquisition and the PIEtech Acquisition, increased $27,426by $11,313 primarily due to the positive effectsnet impact of new account growth and positive net flowsan increase in asset-based revenues of AUM/A as well as$1,959 combined with an increase in subscription-based revenues of $5,930.$9,180. The Envestnet | Yodlee segmentData & Analytics segment's total revenuerevenues increased by $11,698$3,367 primarily due to an increase in subscription-based revenue of $8,862.

$3,424.


Asset-based recurring revenues decreased 4% from $239,264 in the six months ended June 30, 2018 to $229,004 in the six months ended June 30, 2019. Subscription-based recurring revenues increased 24% from $141,474 in the six months ended June 30, 2018 to $175,345 in the six months ended June 30, 2019. Total revenues, which include professional services and other revenues, increased 6% from $399,127 in the six months ended June 30, 2018 to $424,111 in the six months ended June 30, 2019. The PortfolioCenter Acquisition and PIEtech Acquisition added revenues of $2,017 and $6,632, respectively, in the six months ended June 30, 2019. The Envestnet Wealth Solutions segment's total revenues excluding the PortfolioCenter Acquisition and the PIEtech Acquisition increased by $8,030 primarily due to the net lossimpact of an increase in subscription-based revenues of $17,621 offset by a decrease in asset-based revenues of $10,260. The Envestnet Data & Analytics segment's total revenues increased by $8,305 primarily due to an increase in subscription-based revenue of $8,375.
Net income attributable to Envestnet, Inc. for the three months ended June 30, 20182019 was $5,526,$893, or $0.12$0.02 per diluted share, compared to a net loss attributable to Envestnet, Inc. of $6,470$5,526 or $0.15$0.12 per diluted share, for the three months ended June 30, 2017. The net income2018. Net loss attributable to Envestnet, Inc. for the six months ended June 30, 20182019 was $2,578,$17,292, or $0.05$0.35 per diluted share, compared to a net lossincome attributable to Envestnet, Inc. of $19,605$2,578 or $0.45$0.05 per diluted share for the six months ended June 30, 2017.

2018.

Adjusted revenues for the three months ended June 30, 2018 was2019 were $227,859, compared to adjusted revenues of $201,178 an increasein the prior year period. Adjusted net revenues, a new non-GAAP metric introduced as of 20% from $167,469January 1, 2019, were $167,566 for the three months ended June 30, 2019, compared to adjusted net revenues of $144,430 in the prior year period. Adjusted EBITDA for the three months ended June 30, 20182019 was $34,759, an increase$43,211, compared to adjusted EBITDA of 18% from $29,525$34,759 in the prior year period. Adjusted net income for the three months ended June 30, 20182019 was $19,277,$24,470, or $0.41$0.46 per diluted share, compared to adjusted net income of $13,148,$19,277, or $0.29$0.41 per diluted share in the prior year period.


Adjusted revenues for the six months ended June 30, 2018 was2019 were $427,531, compared to adjusted revenues of $399,193 an increasein the prior year period. Adjusted net revenues were $313,396 for the six months ended June 30, 2019, compared to adjusted net revenues of 23% from $325,308$284,873 in the prior year period. Adjusted EBITDA for the six months ended June 30, 20182019 was $67,512, an increase$77,213, compared to adjusted EBITDA of 22% from $55,363$67,512 in the prior year period. Adjusted net income for the six months ended June 30, 20182019 was $36,931,$43,881, or $0.78$0.85 per diluted share, compared to adjusted net income of $24,665,$36,931, or $0.54$0.78 per diluted share in the prior year period.

Adjusted revenues, adjusted net 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.


41



Table of Contents

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

June 30,

 

 

 

 

2018

    

2017

    

Percent Change

 

2018

    

2017

    

Percent Change

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Revenues:

 

 

    

    

 

 

 

 

 

 

 

    

    

 

 

 

 

Asset-based

$

118,111

 

$

98,959

 

19

%  

 

$

239,264

 

$

193,121

 

24

%  

Subscription-based

 

71,779

 

 

59,802

 

20

%  

 

 

141,474

 

 

117,712

 

20

%  

Total recurring revenues

 

189,890

 

 

158,761

 

20

%  

 

 

380,738

 

 

310,833

 

22

%  

Professional services and other revenues

 

11,226

 

 

8,656

 

30

%  

 

 

18,389

 

 

14,370

 

28

%  

Total revenues

 

201,116

 

 

167,417

 

20

%  

 

 

399,127

 

 

325,203

 

23

%  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

67,627

 

 

55,735

 

21

%  

 

 

130,561

 

 

104,961

 

24

%  

Compensation and benefits

 

80,210

 

 

64,996

 

23

%  

 

 

163,750

 

 

130,528

 

25

%  

General and administration

 

34,089

 

 

28,478

 

20

%  

 

 

66,818

 

 

59,025

 

13

%  

Depreciation and amortization

 

19,185

 

 

15,465

 

24

%  

 

 

38,731

 

 

31,300

 

24

%  

Total operating expenses

 

201,111

 

 

164,674

 

22

%  

 

 

399,860

 

 

325,814

 

23

%  

Income (loss) from operations

 

 5

 

 

2,743

 

*

 

 

 

(733)

 

 

(611)

 

20

%  

Other expense, net

 

(5,430)

 

 

(4,369)

 

24

%  

 

 

(10,684)

 

 

(9,852)

 

 8

%  

Loss before income tax provision (benefit)

 

(5,425)

 

 

(1,626)

 

*

 

 

 

(11,417)

 

 

(10,463)

 

 9

%  

Income tax provision (benefit)

 

566

 

 

4,844

 

(88)

%  

 

 

(13,428)

 

 

9,142

 

*

 

Net income (loss)

 

(5,991)

 

 

(6,470)

 

(7)

%  

 

 

2,011

 

 

(19,605)

 

(110)

%  

Add: Net loss attributable to non-controlling interest

 

465

 

 

 —

 

*

 

 

 

567

 

 

 —

 

*

 

Net income (loss) attributable to Envestnet, Inc.

$

(5,526)

 

$

(6,470)

 

(15)

%  

 

$

2,578

 

$

(19,605)

 

(113)

%  

  Three Months Ended   Six Months Ended  
  June 30, 
 Percent
 June 30, 
 Percent
  2019 2018 Change 2019 2018 Change
  (in thousands)   (in thousands)  
Revenues:            
Asset-based $120,070
 $118,111
 2 % $229,004
 $239,264
 (4)%
Subscription-based 92,258
 71,779
 29 % 175,345
 141,474
 24 %
Total recurring revenues 212,328
 189,890
 12 % 404,349
 380,738
 6 %
Professional services and other revenues 12,117
 11,226
 8 % 19,762
 18,389
 7 %
Total revenues 224,445
 201,116
 12 % 424,111
 399,127
 6 %
Operating expenses:      
      
Cost of revenues 72,080
 67,627
 7 % 133,725
 130,561
 2 %
Compensation and benefits 103,286
 80,210
 29 % 190,003
 163,750
 16 %
General and administration 42,421
 34,089
 24 % 82,945
 66,818
 24 %
Depreciation and amortization 26,915
 19,185
 40 % 46,432
 38,731
 20 %
Total operating expenses 244,702
 201,111
 22 % 453,105
 399,860
 13 %
Income (loss) from operations (20,257) 5
 *
 (28,994) (733) *
Other expense, net (7,512) (5,430) 38 % (13,275) (10,684) 24 %
Loss before income tax provision (benefit) (27,769) (5,425) *
 (42,269) (11,417) *
Income tax provision (benefit) (28,382) 566
 *
 (24,614) (13,428) 83 %
Net income (loss) 613
 (5,991) *
 (17,655) 2,011
 *
Add: Net loss attributable to non-controlling interest 280
 465
 (40)% 363
 567
 (36)%
Net income (loss) attributable to Envestnet, Inc. $893
 $(5,526) *
 $(17,292) $2,578
 *
*Not meaningful.

Three months ended June 30, 20182019 compared to three months ended June 30, 2017

Revenues

Total2018

Asset-based recurring revenues
Asset-based recurring revenues increased 20%2% from $167,417$118,111 in the three months ended June 30, 20172018 to $201,116$120,070 in the three months ended June 30, 2018.2019. The increase was primarily due to an increase in revenues from asset-based recurring and subscription-based recurring revenues of $19,152 and $11,977, respectively. Asset-based revenue was 59% of total revenue in the three months ended June 30, 2017 and 2018.

Asset-based recurring revenues

Asset-based recurring revenues increased 19% from $98,959 the three months ended June 30, 2017 to $118,111 in three months ended June 30, 2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $12,639 of the increase as well as an increase in asset values applicable to our current quarterly billing cycle as a result of an upswing in 2018,the equity markets relative to the corresponding period in 2017.comparable 2018 period. In the second quarter of 2018,2019, revenues were also positively affected by new account growth and positive net flows of AUM/A.

The increase was offset by a reclassification of revenues to subscription-based recurring revenues for certain customers. Excluding the acquisitions of PortfolioCenter and PIEtech, asset-based recurring revenues decreased from 59% of total revenue in the three months ended June 30, 2018 to 56% of total revenue in the three months ended June 30, 2019.

The number of financial advisors with asset-based recurring revenue on our technology platforms increaseddecreased from 38,498 as of June 30, 2017 to 44,900 as of June 30, 2018 to 39,727 as of June 30, 2019 and the number of AUM/A client accounts increaseddecreased from approximately 1,700,000 as of June 30, 2017 to approximately 2,200,000 as of June 30, 2018 to approximately 2,100,000 as of June 30, 2019. The decline in advisors was due to a reclassification to subscription-based pricing models in 2018.

Subscription-based recurring revenues

Subscription-based recurring revenuerevenues increased 20%29% from $59,802 in the three months ended June 30, 2017 to $71,779 in the three months ended June 30, 2018.2018 to $92,258 in the three months ended June 30, 2019. This increase was primarily due to an increase of$17,055 in theEnvestnet Wealth Solutionssegment and an increase of $3,424 in the 2018 acquisition of FolioDynamix which comprised $4,412 of the total $7,552 Envestnet segment increase and Envestnet | Yodlee contributing an additional $4,425. Data & Analytics segment.

The increase in theEnvestnet

42

Table Wealth Solutionssegment was primarily due to the acquisitions of Contents

PortfolioCenter and PIEtech which contributed revenues of $2,014 and $5,861, respectively, to subscription-based recurring revenues in the three months ended June 30, 2019. The remaining increase of $9,180 within the Envestnet Wealth Solutions segment revenue is a result of continuing to addthe addition of new clients and selling additional services to existing clients. The increase was also due to a change in classification of revenues from asset-based recurring revenues for certain customers.




The increase in the Envestnet | YodleeData & Analytics segment revenue is primarily dueto broad increases in revenue from existing customers.

Professional services and other revenues

Professional services and other revenues increased 30%8% from $8,656 in the three months ended June 30, 2017 to $11,226 in the three months ended June 30, 2018 primarily due to timing of new data analytics customer deployments and upgrades of existing data analytics customers, an overall increase in existing customer revenue attributable to the Envestnet segment.

Cost of revenues

Cost of revenues increased 21% from $55,735$12,117 in the three months ended June 30, 20172019. The increase was primarily due to an increase of $771 contributed from the PIEtech Acquisition.


Cost of revenues
Cost of revenues increased 7% from $67,627 in the three months ended June 30, 2018 to $72,080 in the three months ended June 30, 2019. The increase was primarily due to a correspondingan increase in asset-based recurring revenues, the mix of such revenues, which is partially attributable to FolioDynamix, an increase in cost of revenues associatedof $3,545, which are directly correlated with subscription-basedthe increase to asset-based recurring revenues as well asduring the period. The acquisitions of PortfolioCenter and PIEtech had an increaseimmaterial impact to cost of revenues in Advisor Summit related costs.the three months ended June 30, 2019. As a percentage of total revenues, cost of revenues increaseddecreased from 33% in the three months ended June 30, 2017 to 34% in the three months ended June 30, 2018.

Compensation and benefits

Compensation and benefits increased 23% from $64,9962018 to 32% in the three months ended June 30, 2017 to2019.

Compensation and benefits
Compensation and benefits increased 29% from $80,210 in the three months ended June 30, 2018 to $103,286 in three months ended June 30, 2019. The increase was primarily due to an increaseincreases in incentive compensation of $7,875, salaries, benefits and related payroll taxes of $8,407, primarily a result of the 2018 FolioDynamix acquisition as well as an increase in headcount to support organic growth. Also contributing to the growth in compensation and benefits were increases in incentive compensation of $3,395,$7,803, non-cash compensation expense of $2,531, contract labor costs of $1,134$5,290 and severance expense of $711,$2,231. Included in the increase in incentive compensation is approximately $8,800 in retention bonuses paid in connection with the PIEtech Acquisition. The acquisitions of PortfolioCenter and various other immaterial cost increases.PIEtech contributed compensation and benefit expenses of $1,253 and $4,403, respectively, to total compensation and benefits expense in the three months ended June 30, 2019. As a percentage of total revenues, compensation and benefits increased from 39% in the three months ended June 30, 2017 and to 40% in the three months ended June 30, 2018.

General and administration

General and administration expenses increased 20% from $28,4782018 to 46% in the three months ended June 30, 2017 to2019. The increase as a percentage of revenue was primarily a result of retention bonuses paid in connection with the PIEtech Acquisition.

General and administration
General and administration expenses increased 24% from $34,089 in the three months ended June 30, 2018 to $42,421 in the three months ended June 30, 2019. The increase was primarily due to increases in rent expense of $2,126, legal fees of $1,781, systems costsdevelopment expense of $1,920, restructuring$1,121 and transaction costs of $1,096, external datacommunications and research services of $839, marketing costs of $562, and occupancy costs of $549, partially offset by decreases in foreign currency charges of $461 and non-income tax expense of $387.$966. The acquisitions of PortfolioCenter and PIEtech contributed general and administration expenses of $1,768 and $1,050, respectively, to general and administrative expense in the three months ended June 30, 2019. As a percentage of total revenues, general and administration expenses remained consistent atincreased from 17% in the three months ended June 30, 2017 and 2018.

Depreciation and amortization

Depreciation and amortization increased 24% from $15,4652018 to 19% in the three months ended June 30, 2017 to2019.

Depreciation and amortization
Depreciation and amortization expense increased 40% from $19,185 in the three months ended June 30, 2018 to $26,915 in the three months ended June 30, 2019. The increase was primarily due to increasesan increase in internally developed software amortization expense of $1,264 and an increase in intangible asset amortization expense of $3,048, mainly attributable to$3,635, primarily a result of additional intangible assets from the 2018 acquisitionacquisitions of FolioDynamix,PortfolioCenter and amortization of internally developed software of $605 driven by continued investment in our platforms.PIEtech. As a percentage of total revenues, depreciation and amortization expense increased from 9% in the three months ended June 30, 2017 to 10% in the three months ended June 30, 2018.

2018 to 12% in the three months ended June 30, 2019.

43


Table of Contents

Income tax provision

(benefit)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2018

 

2017

 

Loss before income tax provision

 

$

(5,425)

 

$

(1,626)

 

Income tax provision

 

 

566

 

 

4,844

 

Effective tax rate

 

 

(10.4)

%  

 

(297.9)

%

  Three Months Ended
  June 30,
  2019 2018
Loss before income tax provision (benefit) $(27,769) $(5,425)
Income tax provision (benefit) (28,382) 566
Effective tax rate 102.2% (10.4)%

For the three months ended June 30, 2019, our effective tax rate differed from the statutory rate primarily due to the release of our valuation allowance of $21,907 primarily as a result of additional deferred tax liabilities recorded with the


PIEtech Acquisition, the windfall from share-based compensation, federal and state research and development (“R&D") credits, and additional accruals for uncertain tax positions.

For the three months ended June 30, 2018, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company has placed on all US deferreds with the exception of indefinite lived intangibles, the impact of clarifying Base Erosion and Anti Abuse tax positions, additional accruals for uncertain tax positions as well as differences between the foreign tax rates and statutory US tax rate.

For the three months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the US.


Six months ended June 30, 20182019 compared to six months ended June 30, 2017

Revenues

Total2018

Asset-based recurring revenues increased 23%
Asset-based recurring revenues decreased 4% from $325,203$239,264 in the six months ended June 30, 20172018 to $399,127$229,004 in the six months ended June 30, 2018.2019. The increasedecrease was primarily due to an increasea decrease in asset values applicable to our quarterly billing cycles in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, due to a downturn in the equity markets during the fourth quarter of 2018. The decrease was also due to a change in the classification of revenues from asset-based recurring andto subscription-based recurring revenues for certain customers, partially offset by the impact of $46,143new account growth and $23,762, respectively. Asset-based revenue was 59%positive net flows of AUM/A in the second quarter of 2019. Excluding the acquisitions of PortfolioCenter and PIEtech, asset-based recurring revenues decreased from 60% of total revenue in the six months ended June 30, 2017 and 2018 respectively.

Asset-based recurring revenues

Asset-based recurring revenues increased 24% from $193,121 the six months ended June 30, 2017 to $239,26455% of total revenue in the six months ended June 30, 2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $25,433 of the increase as well as an increase in asset values applicable to our quarterly billing cycle in 2018, relative to the corresponding period in 2017. In the first two quarters of 2018, revenues were also positively affected by new account growth and positive net flows of AUM/A.

2019.

The number of financial advisors with asset-based recurring revenue on our technology platforms increaseddecreased from 38,498 as of June 30, 2017 to 44,900 as of June 30, 2018 to 39,727 as of June 30, 2019 and the number of AUM/A client accounts increaseddecreased from approximately 1,700,000 as of June 30, 2017 to approximately 2,200,000 as of June 30, 2018 to approximately 2,100,000 as of June 30, 2019. The decline was due to reclassifications to subscription-based pricing models in 2018.

Subscription-based recurring revenues

Subscription-based recurring revenue increased 20%24% from $117,712 in the six months ended June 30, 2017 to $141,474 in the six months ended June 30, 2018.2018 to $175,345 in the six months ended June 30, 2019. This increase was primarily due to an increase of$25,496 in theEnvestnet Wealth Solutionssegment and an increase of $8,375 in the 2018 acquisition of FolioDynamix which comprised $8,970 of the total $14,900 Envestnet segment increase and Envestnet | Yodlee contributing an additional $8,862. Data & Analytics segment.

The increase in the Envestnet Wealth Solutions segment revenuewas primary due to the acquisitions of PortfolioCenter and PIEtech, which contributed revenues of $2,014 and $5,861, respectively, to subscription-based recurring revenues in the six months ended June 30, 2019. The remaining increase of $17,621 within the Envestnet Wealth Solutions segment is a result of continuing to add clients and selling additional services to existing clients. The increase was also due to a change in classification of revenues from asset-based recurring revenues for certain customers.
The increase in Envestnet | YodleeData & Analytics revenue is primarily dueto broad increases in revenue from existing customers.


Professional services and other revenues

Professional services and other revenues increased 28%7% from $14,370 in the six months ended June 30, 2017 to $18,389 in the six months ended June 30, 2018 primarily due to Envestnet | Yodlee and the timing of new data analytics customer deployments and upgrades of existing data analytics customers as well as an overall increase in existing customer revenue attributable to Envestnet segment.

44

Table of Contents

Cost of revenues

Cost of revenues increased 24% from $104,961$19,762 in the six months ended June 30, 20172019. The increase was primarily due to an increase in revenues from existing customers and an increase of $771 contributed from the PIEtech Acquisition.


Cost of revenues
Cost of revenues increased 2% from $130,561 in the six months ended June 30, 2018 to $133,725 in the six months ended June 30, 2019. The increase was primarily due to a correspondingan increase in asset-based recurring revenues, the mix of such revenues, which is partially attributable to FolioDynamix, an increase in cost of revenues associatedof $2,859, directly correlated with subscription-basedthe increase to asset-based recurring revenues as well asduring the period. The acquisitions of PortfolioCenter and PIEtech had an increaseimmaterial impact to total cost of revenues in Advisor Summit related costs.the six months ended June 30, 2019. As a percentage of total revenues, cost of revenues increaseddecreased from 32% in the six months ended June 30, 2017 to 33% in the six months ended June 30, 2018. This increase is primarily attributable2018 to a lower margin on revenues for FolioDynamix.

Compensation and benefits

Compensation and benefits increased 25% from $130,52832% in the six months ended June 30, 2017 to2019.



Compensation and benefits
Compensation and benefits increased 16% from $163,750 in the six months ended June 30, 2018 to $190,003 in the six months ended June 30, 2019. The increase was primarily due to an increaseincreases in salaries, benefits and related payroll taxes of $17,713, primarily a result$11,486, non-cash compensation expense of $9,622, incentive compensation expense of $3,535 and severance expense of $1,898. Included in the 2018 FolioDynamix acquisition as well as an increase in headcountincentive compensation is approximately $8,800 in retention bonuses paid in connection with the PIEtech Acquisition. The acquisitions of PortfolioCenter and PIEtech contributed compensation and benefit expenses of $1,253 and $4,403, respectively, to support organic growth. Also contributing to the growth intotal compensation and benefits were increasesexpense in incentive compensation of $7,050, severance expense of $3,198, non-cash compensation of $3,568, contract labor costs of $2,090 and various other immaterial cost increases.the six months ended June 30, 2019. As a percentage of total revenues, compensation and benefits increased from 40% in the six months ended June 30, 2017 to 41% in the six months ended June 30, 2018.

General and administration

General and administration expenses increased 13% from $59,0252018 to 45% in the six months ended June 30, 2017 to2019. The increase as a percentage of revenue was primarily a result of the retention bonuses paid in connection with the PIEtech Acquisition.


General and administration
General and administration expenses increased 24% from $66,818 in the six months ended June 30, 2018 to $82,945 in the six months ended June 30, 2019. The increase was primarily due to increases in transaction related expense of $5,575, systems costsdevelopment expense of $3,228, external data$2,524, rent expense of $1,952, communications and research servicesexpense of $2,681, occupancy costs of $1,862, professional$1,389 and legal fees of $1,020, and travel and entertainment expense of $714, partially offset by decreases in non-income tax expense of $1,264 and litigation related expense of $1,033.$1,182. As a percentage of total revenues, general and administration expenses decreasedincreased from 18% in the six months ended June 30, 2017 to 17% in the six months ended June 30, 2018.

Depreciation and amortization

Depreciation and amortization expense increased 24% from $31,3002018 to 20% in the six months ended June 30, 20172019. The acquisitions of PortfolioCenter and PIEtech contributed general and administration expenses of $1,768 and $1,050, respectively, to general and administrative expense in the six months ended June 30, 2019.


Depreciation and amortization
Depreciation and amortization expense increased 20% from $38,731 in the six months ended June 30, 2018 to $46,432 in the six months ended June 30, 2019. The increase was primarily due to increases in property and equipment depreciation expense of $1,039, internally developed software amortization expense of $2,212 and an increase in intangible asset amortization expense of $6,398, mainly attributable to$2,228, primarily a result of additional intangible assets from the 2018 acquisitionacquisitions of FolioDynamix,PortfolioCenter and amortization of internally developed software of $1,139 driven by continued investment in our platforms.PIEtech. As a percentage of total revenues, depreciation and amortization expense remained consistent atincreased from 10% in the six months ended June 30, 2017 and 2018.

2018 to 11% in the six months ended June 30, 2019.

Income tax provision (benefit)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2018

 

2017

 

Loss before income tax provision (benefit)

 

$

(11,417)

 

$

(10,463)

 

Income tax provision (benefit)

 

 

(13,428)

 

 

9,142

 

Effective tax rate

 

 

117.6

%  

 

(87.4)

%

  Six Months Ended
  June 30,
  2019 2018
Loss before income tax provision (benefit) $(42,269) $(11,417)
Income tax benefit (24,614) (13,428)
Effective tax rate 58.2% 117.6%

For the six months ended June 30, 2019, our effective tax rate differed from the statutory rate primarily due to the release of our valuation allowance of $21,907 primarily as a result of additional deferred tax liabilities recorded with the PIEtech Acquisition, the windfall from share-based compensation, federal and state R&D credits, and additional accruals for uncertain tax positions.

For the six months ended June 30, 2018, our effective tax rate differed from the statutory rate primarily due to the partial release of the Company’sour valuation allowance as a result of additional deferred tax liabilities recorded with the acquisition of FolioDynamix, additional accruals for uncertain tax positions as well as differences between the foreign tax rates and statutory US tax rate.

For the six months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the US.

45


Segment Results

Table of Contents

Segments

Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in “Note 19 – 18—Segment Information” to the condensed consolidated financial statements. 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 analytics platform powering dynamic, cloud-based innovation for digital financial services.


The following table reconciles income (loss) from operations by segment to consolidate net income (loss) attributable to Envestnet, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2018

    

2017

 

2018

    

2017

Envestnet

$

16,359

 

$

15,811

 

$

32,220

 

$

29,322

Envestnet | Yodlee

 

(3,296)

 

 

(5,635)

 

 

(7,705)

 

 

(13,343)

  Total segment income from operations

 

13,063

 

 

10,176

 

 

24,515

 

 

15,979

Nonsegment operating expenses

 

(13,058)

 

 

(7,433)

 

 

(25,248)

 

 

(16,590)

Other expense, net

 

(5,430)

 

 

(4,369)

 

 

(10,684)

 

 

(9,852)

Consolidated loss before income tax provision (benefit)

 

(5,425)

 

 

(1,626)

 

 

(11,417)

 

 

(10,463)

Income tax provision (benefit)

 

566

 

 

4,844

 

 

(13,428)

 

 

9,142

Consolidated net income (loss)

 

(5,991)

 

 

(6,470)

 

 

2,011

 

 

(19,605)

  Add: Net loss attributable to non-controlling interest

 

465

 

 

 —

 

 

567

 

 

 —

Consolidated net income (loss) attributable to Envestnet, Inc.

$

(5,526)

 

$

(6,470)

 

$

2,578

 

$

(19,605)

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
Envestnet Wealth Solutions $12,379
 $16,359
 $29,223
 $32,220
Envestnet Data & Analytics (8,960) (3,296) (16,888) (7,705)
Total segment income from operations 3,419
 13,063
 12,335
 24,515
Nonsegment operating expenses (23,676) (13,058) (41,329) (25,248)
Other expense, net (7,512) (5,430) (13,275) (10,684)
Consolidated loss before income tax provision (benefit) (27,769) (5,425) (42,269) (11,417)
Income tax provision (benefit) (28,382) 566
 (24,614) (13,428)
Consolidated net income (loss) 613
 (5,991) (17,655) 2,011
Add: Net loss attributable to non-controlling interest 280
 465
 363
 567
Consolidated net income (loss) attributable to Envestnet, Inc. $893
 $(5,526) $(17,292) $2,578
Envestnet

Wealth Solutions Segment

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

Percent

 

June 30,

 

Percent

 

     

2018

     

2017

     

Change

     

2018

     

2017

     

Change

 

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

 

$

118,111

 

$

98,959

 

19

%

 

$

239,264

 

$

193,121

 

24

%

Subscription-based

 

 

33,023

 

 

25,471

 

30

%

 

 

65,608

 

 

50,708

 

29

%

Total recurring revenues

 

 

151,134

 

 

124,430

 

21

%

 

 

304,872

 

 

243,829

 

25

%

Professional services and other revenues

 

 

5,794

 

 

4,942

 

17

%

 

 

8,044

 

 

6,861

 

17

%

Total revenues

 

 

156,928

 

 

129,372

 

21

%

 

 

312,916

 

 

250,690

 

25

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

62,914

 

 

52,402

 

20

%

 

 

121,937

 

 

98,473

 

24

%

Compensation and benefits

 

 

48,026

 

 

38,742

 

24

%

 

 

99,937

 

 

78,220

 

28

%

General and administration

 

 

18,603

 

 

16,056

 

16

%

 

 

36,323

 

 

31,893

 

14

%

Depreciation and amortization

 

 

11,026

 

 

6,361

 

73

%

 

 

22,499

 

 

12,782

 

76

%

Total operating expenses

 

 

140,569

 

 

113,561

 

24

%

 

 

280,696

 

 

221,368

 

27

%

Income from operations

 

$

16,359

 

$

15,811

 

 3

%

 

$

32,220

 

$

29,322

 

10

%

46

  Three Months Ended   Six Months Ended  
  June 30, Percent June 30, Percent
  2019 2018 Change 2019 2018 Change
  (in thousands)   (in thousands)  
Revenues:      
      
Asset-based $120,070
 $118,111
 2 % $229,004
 $239,264
 (4)%
Subscription-based 50,078
 33,023
 52 % 91,104
 65,608
 39 %
Total recurring revenues 170,148
 151,134
 13 % 320,108
 304,872
 5 %
Professional services and other revenues 6,742
 5,794
 16 % 9,487
 8,044
 18 %
Total revenues 176,890
 156,928
 13 % 329,595
 312,916
 5 %
Operating expenses:            
Cost of revenues 66,250
 62,914
 5 % 122,105
 121,937
 — %
Compensation and benefits 56,219
 48,026
 17 % 104,774
 99,937
 5 %
General and administration 25,666
 18,603
 38 % 45,850
 36,323
 26 %
Depreciation and amortization 16,376
 11,026
 49 % 27,643
 22,499
 23 %
Total operating expenses 164,511
 140,569
 17 % 300,372
 280,696
 7 %
Income from operations
 $12,379
 $16,359
 (24)% $29,223
 $32,220
 (9)%

Table of Contents


Three months ended June 30, 20182019 compared to three months June 30, 2017 for the Envestnet segment

Revenues

Total revenues increased 21% from $129,372 in the three months ended June 30, 2017 to $156,928 in2018 for the three months ended June 30, 2018. The increase was primarily due to an increase in asset-based revenues of $19,152 and an increase in subscription-based revenues of $7,552. Revenues from asset-based revenues decreased from 76% of total revenues in the three months ended June 30, 2017 to 75% of total revenues in the three months ended June 30, 2018.

Envestnet Wealth Solutions segment

Asset-based recurring revenues

Asset-based recurring revenues increased 19%2% from $98,959 in the three months ended June 30, 2017 to $118,111 in the three months ended June 30, 2018.2018 to $120,070 in the three months ended June 30, 2019. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $12,639 of the increase as well as an increasein asset values applicable to our current quarterly billing cycle as a result of an upswing in 2018,the equity markets relative to the corresponding period in 2017.comparable 2018 period. In the second quarter of 2018,2019, revenues were also positively affected by new account growth and positive net flows of AUM/A.


Excluding the revenue impact from the acquisitions of PortfolioCenter and PIEtech, asset-based recurring revenue decreased from 75% of total revenue in the three months ended June 30, 2018 to 71% in three months ended June 30, 2019.
The number of financial advisors with asset-based recurring revenue on our technology platforms increaseddecreased from 38,498 as of June 30, 2017 to 44,900 as of June 30, 2018 to 39,727 as of June 30, 2019 and the number of AUM/A client accounts increaseddecreased from approximately 1,700,000 as of June 30, 2017 to


approximately 2,200,000 as of June 30, 2018 to approximately 2,100,000 as of June 30, 2019. The decline in advisors was due to a reclassification to subscription-based pricing models in 2018.

Subscription-based recurring revenues

Subscription-based recurring revenues increased 30%52% from $25,471 in the three months ended June 30, 2017 to $33,023 in the three months ended June 30, 2018 primarily due to the 2018 acquisition of FolioDynamix which comprised $4,412 of the increase as well as continuing to add clients and selling additional services to existing clients.

Professional services and other revenues

Professional services and other revenues increased 17% from $4,942$50,078 in the three months ended June 30, 20172019.


The acquisitions of PortfolioCenter and PIEtech contributed revenues of $2,014 and $5,861, respectively, to subscription-based recurring revenues in the three months ended June 30, 2019. Excluding these revenues, the remaining increase of $9,180 is a result of continuing to add new clients, selling additional services to existing clients, and a change in classification of revenues from asset-based recurring revenues for certain customers.
Professional services and other revenues
Professional services and other revenues increased 16% from $5,794 in the three months ended June 30, 2018 primarily due to an overall increase in existing customer revenue attributable to Envestnet | Enterprise.

Cost of revenues

Cost of revenues increased 20% from $52,402$6,742 in the three months ended June 30, 20172019. The increase was primarily due to an increase of $771 contributed from the PIEtech Acquisition.

Cost of revenues
Cost of revenues increased 5% from $62,914 in the three months ended June 30, 2018 to $66,250 in the three months ended June 30, 2019, primarily due to the correspondingas a result of an increase in asset-based recurringcost of revenues. The acquisitions of PortfolioCenter and PIEtech had an immaterial impact to total cost of revenues andin the mix of such revenues, which is partially attributable to FolioDynamix as well as an increase in Advisor Summit related costs.three months ended June 30, 2019. As a percentage of total revenues, cost of revenues decreased from 41% in the three months ended June 30, 2017 to 40% in the three months ended June 30, 2018.

Compensation and benefits

Compensation and benefits increased 24% from $38,7422018 to 37% in the three months ended June 30, 20172019, due to the relative increase in subscription-based revenues, which generally carries a lower cost of revenue than asset-based revenues.

Compensation and benefits
Compensation and benefits increased 17% from $48,026 in the three months ended June 30, 2018 to $56,219 in the three months ended June 30, 2019. This increase is primarily due to an increase in salaries, benefits and related payroll taxes of $5,659, primarily a result of the 2018 acquisition of FolioDynamix$3,928 and an increase in headcount to support organic growth. An increase in incentive compensation of $1,343, contract labor costs of $954, non-cash compensation expense of $862$4,269. The acquisitions of PortfolioCenter and severance of $742 alsoPIEtech contributed to the increase in compensation and benefits. As a percentagebenefit expenses of $1,253 and $4,403, respectively, to total revenues, compensation and benefits increased from 30%expense in the three months ended June 30, 2017 to 31% in the three months ended June 30, 2018.

General and administration

General and administration expenses increased 16% from $16,056 in the three months ended June 30, 2017 to $18,603 in the three months ended June 30, 2018, primarily due to increases in systems development costs of $1,141 and external data and research services expenses of $1,095, marketing costs of $496 and occupancy costs of $441, partially offset by decreases in restructuring charges and transaction costs of $412 and non-income tax expense of $387. As a percentage of total revenues, general and administration expenses remained consistent at 12% in the three months ended June 30, 2017 and 2018.

47

Table of Contents

Depreciation and amortization

Depreciation and amortization expense increased 73% from $6,361 in the three months ended June 30, 2017 to $11,026 in the three months ended June 30, 2018. The increase was primarily due to the addition of intangible assets related to the 2018 FolioDynamix acquisition. As a percentage of total revenues, depreciation and amortization expense increased from 5% in the three months ended June 30, 2017 to 7% in the three months ended June 30, 2018. The increase in depreciation and amortization expense as a percentage of total revenues is primarily due to the intangible asset amortization related to the acquisition of FolioDynamix.

Six months ended June 30, 2018 compared to six months June 30, 2017 for the Envestnet segment

Revenues

Total revenues increased 25% from $250,690 in the six months ended June 30, 2017 to $312,916 in the six months ended June 30, 2018. The increase was primarily due to an increase in asset-based revenues of $46,143 and an increase in subscription-based revenues of $14,900. Revenues from asset-based revenues decreased from 77% of total revenues in the six months ended June 30, 2017 to 76% in the six months ended June 30, 2018.

Asset-based recurring revenues

Asset-based recurring revenues increased 24% from $193,121 in the six months ended June 30, 2017 to $239,264 in the six months ended June 30, 2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $25,433 of the increase as well as an increase in asset values applicable to our quarterly billing cycle in 2018, relative to the corresponding period in 2017. In the first two quarters of 2018, revenues were also positively affected by new account growth and positive net flows of AUM/A.

The number of financial advisors with asset-based revenue on our technology platforms increased from 38,498 as of June 30, 2017 to 44,900 as of June 30, 2018 and the number of AUM/A client accounts increased from approximately 1,700,000 as of June 30, 2017 to approximately 2,200,000 as of June 30, 2018.

Subscription-based recurring revenues

Subscription-based recurring revenues increased 29% from $50,708 in the six months ended June 30, 2017 to  $65,608 in the six months ended June 30, 2018, primarily due to the 2018 acquisition of FolioDynamix which comprised $8,970 of the Envestnet segment increase as well ascontinuing to add clients and selling additional services to existing clients.

Professional services and other revenues

Professional services and other revenues increased 17% from $6,861 in the six months ended June 30, 2017 to $8,044 in the six months ended June 30, primarily due to an overall increase in existing customers.

Cost of revenues

Cost of revenues increased 24% from $98,473 in the six months ended June 30, 2017 to $121,937 in the six months ended June 30, 2018, primarily due to the corresponding increase in asset-based recurring revenues, and the mix of such revenues, which is partially attributable to FolioDynamix, as well as an increase in Advisor Summit related costs. As a percentage of total revenues, cost of revenues remained consistent at 39% in the six months ended June 30, 2017 and 2018.

Compensation and benefits

Compensation and benefits increased 28% from $78,220 in the six months ended June 30, 2017 to $99,937 in the six months ended June 30, 2018, primarily due to an increase in salaries, benefits and related payroll taxes of $12,452, primarily a result of the 2018 acquisition of FolioDynamix and an increase in headcount to support organic growth. An increase in severance of $3,055, incentive compensation of $2,958, contract labor costs of $1,766, and non-cash compensation of $1,242 also contributed to the increase in compensation and benefits.2019. As a percentage of total revenues, compensation and benefits increased from 31% in the sixthree months ended June 30, 20172018 to 32% in the sixthree months ended June 30, 2018.

2019.

48


Table of Contents

General and administration

General and administration expenses increased 14%38% from $31,893$18,603 in the six months ended June 30, 2017 to $36,323 in the sixthree months ended June 30, 2018 to $25,666 in the three months ended June 30, 2019. The increase was primarily due to increases in external datarent expense of $2,077, legal fees of $1,481 and research servicessystems development expense of $1,117. The acquisitions of PortfolioCenter and PIEtech contributed general and administration expenses of $2,688, systems development costs of $1,919,$1,768 and occupancy costs of $1,505, partially offset by decreases$1,050, respectively, to total general and administration expense in non-income tax expense of $1,264.the three months ended June 30, 2019. As a percentage of total revenues, general and administration expenses increased from 12% in the three months ended June 30, 2018 to 15% in the three months ended June 30, 2019. The increase in general and administration expenses as a percentage of revenues is primarily due to higher growth in general and administration expenses compared to lower growth in revenues.

Depreciation and amortization
Depreciation and amortization expense increased 49% from $11,026 in the three months ended June 30, 2018 to $16,376 in the three months ended June 30, 2019. The increase was primarily due to an increase in internally developed software amortization expense of $1,266 and an increase in intangible asset amortization expense of $3,729, primarily a result of additional intangible assets related to the acquisitions of PortfolioCenter and PIEtech. As a percentage of revenues, depreciation and amortization expense increased from 7% in the three months ended June 30, 2018 to 9% in the three months ended June 30, 2019.



Six months ended June 30, 2019 compared to six months ended June 30, 2018 for the Envestnet Wealth Solutions segment
Asset-based recurring revenues
Asset-based recurring revenues decreased 4% from 13%$239,264 in the six months ended June 30, 20172018 to 12%$229,004 in the six months ended June 30, 2018.

Depreciation and amortization

Depreciation and amortization expense increased 76% from $12,7822019. The decrease was primarily due to a decrease in asset values applicable to our quarterly billing cycles in the six months ended June 30, 20172019 compared to $22,499the six months ended June 30, 2018, due to a downturn in the equity markets during the fourth quarter of 2018. The decrease was also due to a change in classification of revenues to subscription-based recurring revenues for certain customers, partially offset by the impact of new account growth and positive net flows of AUM/A in the second quarter of 2019.


Excluding the revenues contributed by the acquisitions of PortfolioCenter and PIEtech, asset-based recurring revenue decreased from 76% of total revenue in the six months ended June 30, 2018. The increase was primarily due2018 to the addition of intangible assets related to the 2018 FolioDynamix acquisition. As a percentage71% of total revenues, depreciation and amortization expense increased from 5%revenue in the six months ended June 30, 20172019.
The number of financial advisors with asset-based recurring revenue on our technology platforms decreased from 44,900 as of June 30, 2018 to 7%39,727 as of June 30, 2019 and the number of AUM/A client accounts decreased from approximately 2,200,000 as of June 30, 2018 to approximately 2,100,000 as of June 30, 2019. The decline in advisors was due to a reclassification to subscription-based pricing models in 2018.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 39% from $65,608 in the six months ended June 30, 2018. The increase2018 to $91,104 in depreciation and amortization expense as a percentage of total revenues is primarily due to the intangible asset amortization related to the acquisition of FolioDynamix.

Envestnet | Yodlee

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

Percent

 

June 30,

 

Percent

 

    

2018

    

2017

    

Change

    

2018

    

2017

    

Change

 

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription-based

 

$

38,756

 

$

34,331

 

13

%

 

$

75,866

 

$

67,004

 

13

%

Professional services and other revenues

 

 

5,432

 

 

3,714

 

46

%

 

 

10,345

 

 

7,509

 

38

%

Total revenues

 

 

44,188

 

 

38,045

 

16

%

 

 

86,211

 

 

74,513

 

16

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,713

 

 

3,333

 

41

%

 

 

8,624

 

 

6,488

 

33

%

Compensation and benefits

 

 

25,848

 

 

23,342

 

11

%

 

 

52,006

 

 

46,592

 

12

%

General and administration

 

 

8,764

 

 

7,901

 

11

%

 

 

17,054

 

 

16,258

 

 5

%

Depreciation and amortization

 

 

8,159

 

 

9,104

 

(10)

%

 

 

16,232

 

 

18,518

 

(12)

%

Total operating expenses

 

 

47,484

 

 

43,680

 

 9

%

 

 

93,916

 

 

87,856

 

 7

%

Loss from operations

 

$

(3,296)

 

$

(5,635)

 

(42)

%

 

$

(7,705)

 

$

(13,343)

 

(42)

%

Threesix months ended June 30, 2018 compared2019.


The acquisitions of PortfolioCenter and PIEtech contributed revenues of $2,014 and $5,861, respectively, to three months ended June 30, 2017 for the Envestnet | Yodlee segment

Revenues

Totalsubscription-based recurring revenues increased 16% from $38,045 in the three months ended June 30, 20172019. The remaining increase of $17,621 is a result of continuing to $44,188add new clients, selling additional services to existing clients, and a change in classification of revenues from asset-based recurring revenues for certain customers.

Professional services and other revenues
Professional services and other revenues increased 18% from $8,044 in the threesix months ended June 30, 2018.2018 to $9,487 in the six months ended June 30, 2019. The increase was primarily due to an increase in revenues from subscription-based recurringexisting customers and an increase of $771 contributed from the PIEtech Acquisition.
Cost of revenues
Cost of $4,425. Revenuesrevenues remained consistent from professional services and other increased by $1,718.

Subscription-based recurring revenues

Subscription-based recurring revenues increased 13% from $34,331$121,937 in the six months ended June 30, 2018 to $122,105 in the six months ended June 30, 2019. The acquisitions of PortfolioCenter and PIEtech had an immaterial impact to total cost of revenues in the six months ended June 30, 2019. As a percentage of total revenues, cost of revenues decreased from 39% in the six months ended June 30, 2018 to 37% in the six months ended June 30, 2019.

Compensation and benefits
Compensation and benefits increased 5% from $99,937 in the six months ended June 30, 2018 to $104,774 in the six months ended June 30, 2019. The increase is primarily due to increases in salaries, benefits and related payroll taxes of $3,951 and non-cash compensation expense of $5,876, partially offset by decreases in incentive compensation expense of $1,738 and severance expense of $2,310. The acquisitions of PortfolioCenter and PIEtech contributed compensation and benefit expenses of $1,253 and $4,403, respectively, to compensation and benefits expense in the six months ended June 30, 2019. As a percentage of total revenues, compensation and benefits remained consistent at 32% in the six months ended June 30, 2018 and 2019.

General and administration
General and administration expenses increased 26% from $36,323 in the six months ended June 30, 2018 to $45,850 in the six months ended June 30, 2019. The increase was primarily due to increases in rent expense of $1,866, systems development expense of $1,798, communications and research expense of $1,459, legal fees of $1,209, transaction related


expense of $813 and travel and entertainment expense of $757. The acquisitions of PortfolioCenter and PIEtech contributed general and administrative expenses of $1,768 and $1,050, respectively, to total general and administrative expense in the six months ended June 30, 2019. As a percentage of total revenues, general and administration expenses increased from 12% in the six months ended June 30, 2018 to 14% in the six months ended June 30, 2019.
Depreciation and amortization
Depreciation and amortization expense increased 23% from $22,499 in the six months ended June 30, 2018 to $27,643 in the six months ended June 30, 2019. The increase was primarily due to an increase in internally developed software amortization expense of $2,212 and an increase in intangible asset amortization expense of $2,337, primarily a result of additional intangible assets related to the acquisitions PortfolioCenter Acquisition and the PIEtech Acquisition. As a percentage of revenues, depreciation and amortization expense increased from 7% in the six months ended June 30, 2018 to 8% in the six months ended June 30, 2019.
Envestnet Data & Analytics Segment

The following table presents loss from operations for the Envestnet Data & Analytics segment:
  Three Months Ended  
 Six Months Ended  
  June 30, Percent June 30, Percent
  2019 2018 Change 2019 2018 Change
  (in thousands)   (in thousands)  
Revenues:      
      
Subscription-based $42,180
 $38,756
 9 % $84,241
 $75,866
 11 %
Professional services and other revenues 5,375
 5,432
 (1)% 10,275
 10,345
 (1)%
Total revenues 47,555
 44,188
 8 % 94,516
 86,211
 10 %
Operating expenses:      
      
Cost of revenues 5,830
 4,713
 24 % 11,620
 8,624
 35 %
Compensation and benefits 31,593
 25,848
 22 % 62,957
 52,006
 21 %
General and administration 8,553
 8,764
 (2)% 18,038
 17,054
 6 %
Depreciation and amortization 10,539
 8,159
 29 % 18,789
 16,232
 16 %
Total operating expenses 56,515
 47,484
 19 % 111,404
 93,916
 19 %
Loss from operations $(8,960) $(3,296) 172 % $(16,888) $(7,705) 119 %
Three Months Ended June 30, 2019 compared to three months ended June 30, 2017 to2018 for the Envestnet Data & Analytics segment
Subscription-based recurring revenues
Subscription-based recurring revenues increased 9% from $38,756 in the three months ended June 30, 2018 to $42,180 in the three months ended June 30, 2019, primarily due to broad increases in revenue from existing customers.

Professional services and other revenues

Professional services and other revenues increased 46%remained consistent from $3,714 in the three months ended June 30, 2017 to $5,432 in the three months ended June 30, 2018 primarily due to timing of new data analytics customer deployments and upgrades of existing data analytics customers.

49

Table of Contents

Cost of revenues

Cost of revenues increased 41% from $3,333$5,375 in the three months ended June 30, 2017 to2019.


Cost of revenues
Cost of revenues increased 24% from $4,713 in the three months ended June 30, 2018 to $5,830 in the three months ended June 30, 2019, primarily driven by higher professional services and support revenues. Third party consulting and related services increased $612 due to new data analytics customer deployments. We also experienced an increase of $768 in hosting and payment processing services to support our overall revenue growth.subscription-based recurring revenues. As a percentage of total revenues, cost of revenues increased from 9% in the three months ended June 30, 2017 to 11% in the three months ended June 30, 2018. The increase in cost of revenues as a percentage of total revenues is primarily due2018 to a higher increase in expense compared to lower growth in quarterly revenues.

Compensation and benefits

Compensation and benefits increased 11% from $23,34212% in the three months ended June 30, 2017 to2019.

Compensation and benefits
Compensation and benefits increased 22% from $25,848 in the three months ended June 30, 2018 to $31,593 in the three months ended June 30, 2019, primarily due to an increase in salaries, benefits and related payroll taxes of $1,727,$3,499 as a result of increased headcount to support organic growth, an increase in incentive compensation of $1,012 and non-cash compensation expense of $215.  These costs were$843 and severance


expense of $2,449 partially offset by a decrease in short-term variableincentive compensation expense of $550.$1,046. As a percentage of total revenues, compensation and benefits decreasedincreased from 61% in the three months ended June 30, 2017 to 58% in the three months ended June 30, 2018.2018 to 66% in the three months ended June 30, 2019. The decreaseincrease in compensation and benefits as a percentage of total revenues is primarily due to aincreased severance expense as well as higher revenue increasegrowth in compensation and benefits expense compared to lower growth in compensation and benefit expenses.

revenue.


General and administration

General and administration expenses increased 11%decreased 2% from $7,901 in the three months ended June 30, 2017 to $8,764 in the three months ended June 30, 2018 to $8,553 in the three months ended June 30, 2019, primarily due to increasesa decrease in restructuring charges and transaction costsrelated expense of $403 marketing and promotional expenses of $300, and software purchase and maintenance of $288,$599, partially offset by lower communications and research expensesan increase of $261.$212 in legal fees. As a percentage of total revenues, general and administration expenses decreased from 21% in20% to 18% for the three months ended June 30, 2017 to 20% in the three months ended June 30, 2018. 

2018 and 2019.

Depreciation and amortization

Depreciation and amortization expense decreased 10%increased 29% from $9,104 in the three months ended June 30, 2017 to $8,159 in the three months ended June 30, 2018 to $10,539 in the three months ended June 30, 2019, primarily due to an increase in depreciation of property and equipment of
$2,224 resulting from a decrease in intangible asset amortization of $1,026 compared to the same period last year.purchase price accounting adjustment. As a percentage of total revenues, depreciation and amortization expense decreasedincreased from 24% in the three months ended June 30, 2017 to 18% in the three months ended June 30, 2018. The decrease2018 to 22% in depreciation and amortization as a percentage of total revenues is primarily due to a higher revenue increase and a decrease in amortization expense.

the three months ended June 30, 2019.


Six months ended June 30, 20182019 compared to six months ended June 30, 20172018 for the Envestnet | YodleeData & Analytics segment

Revenues

Total revenues increased 16% from $74,513 in the six months ended June 30, 2017 to $86,211 in the six months ended June 30, 2018. The increase was primarily due to an increase in revenues from subscription-based recurring revenues of $8,862. Revenues from professional services and other increased from 10% of total revenues in the six months ended June 30, 2017 to 12% in the six months ended June 30, 2018.

Subscription-based recurring revenues

Subscription-based recurring revenues increased 13%11% from $67,004 in the six months ended June 30, 2017 to $75,866 in the six months ended June 30, 2018 to $84,241 in the six months ended June 30, 2019, primarily due to broad increases in revenue from existing customers.

Professional services and other revenues

Professional services and other revenues increased 38% remained consistentfrom $7,509 in the six months ended June 30, 2017 to $10,345 in the six months ended June 30, 2018 primarily due to timing of new data analytics customer deployments and upgrades of existing data analytics customers.

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Cost of revenues

Cost of revenues increased 33% from $6,488$10,275 in the six months ended June 30, 2017 to2019.


Cost of revenues
Cost of revenues increased 35% from $8,624 in the six months ended June 30, 2018 to $11,620 in the six months ended June 30, 2019, primarily due to increasesan increase in third party consulting and related services of $642 due to new data analytics customer deployments as well as hosting and payment processing services of $1,494 in support of our overall revenue growth.subscription-based recurring revenues. As a percentage of total revenues, cost of revenues increased from 9% in the six months ended June 30, 2017 to 10% in the six months ended June 30, 2018.

Compensation and benefits

Compensation and benefits increased2018 to 12% from $46,592 in the six months ended June 30, 2017 to2019.

Compensation and benefits
Compensation and benefits increased 21% from $52,006 in the six months ended June 30, 2018 to $62,957 in the six months ended June 30, 2019, primarily due to an increase in salaries, benefits and related payroll taxes of $3,137,$6,984 as a result of increased headcount to support organic growth,an increase in non-cash compensation expense of $2,555 and severance expense of $4,113 partially offset by a decrease in incentive and variable compensation expense of $2,090, and third party contract, employee training and recruiting costs totaling $277.$3,060. As a percentage of total revenues, compensation and benefits decreasedincreased from 63% in the six months ended June 30, 2017 to 60% in the six months ended June 30, 2018.2018 to 67% in the six months ended June 30, 2019. The decreaseincrease in compensation and benefits as a percentage of total revenues is primarily due to aincreased severance expense as well as higher revenue increasegrowth in compensation and benefits expense compared to lower growth in compensation and benefit expenses.

revenue.


General and administration

General and administration expenses increased 5%6% from $16,258 in the six months ended June 30, 2017 to $17,054 in the six months ended June 30, 2018 to $18,038 in the six months ended June 30, 2019, primarily due to increases in restructuring chargestravel and transaction costsentertainment expense of $603, systems$233, website development costsexpense of $518, occupancy costs of $358,$272 and other miscellaneous increases, partially offset by a decrease in non-recurring legalcommunications and relatedresearch expense of $1,033.$319. As a percentage of total revenues, general and administration expenses decreased from 22% in20% to 19% for the six months ended June 30, 2017 to 20% in the six months ended June 30, 2017. The decrease in general2018 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.

2019.

Depreciation and amortization

Depreciation and amortization expense decreased 12%increased 16% from $18,518 in the six months ended June 30, 2017 to $16,232 in the six months ended June 30, 2018 to $18,789 in the six months ended June 30, 2019, primarily due to a decrease in intangible asset amortization of $2,254 compared to the same period last year. This decrease was partially offset byan increase of $31 in depreciation expense compared to the same period last year.of property and equipment of


$2,224 resulting from a purchase price accounting adjustment. As a percentage of total revenues, depreciation and amortization expense decreasedincreased from 25% in the six months ended June 30, 2017 to 19% in the six months ended June 30, 2018. The decrease2018 to 20% in depreciation and amortization as a percentage of total revenues is primarily due to a higher revenue increase and a decrease in amortization expense.

the six months ended June 30, 2019.

Nonsegment

The following table presents nonsegment operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

Percent

 

June 30,

 

Percent

 

    

2018

    

2017

    

Change

    

2018

    

2017

    

Change

 

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

6,336

 

$

2,912

 

118

%

 

$

11,807

 

$

5,716

 

107

%

General and administration

 

 

6,722

 

 

4,521

 

49

%

 

 

13,441

 

 

10,874

 

24

%

Nonsegment operating expenses

 

$

13,058

 

$

7,433

 

76

%

 

$

25,248

 

$

16,590

 

52

%

  Three Months Ended  
 Six Months Ended  
  June 30, Percent June 30, Percent
  2019 2018 Change 2019 2018 Change
  (in thousands)   (in thousands)  
Operating expenses:            
Compensation and benefits $15,474
 $6,336
 144% $22,272
 $11,807
 89%
General and administration 8,202
 6,722
 22% 19,057
 13,441
 42%
Nonsegment operating expenses $23,676
 $13,058
 81% $41,329
 $25,248
 64%

Three months endedMonths Ended June 30, 20182019 compared to three months ended June 30, 20172018 for Nonsegment

Compensation and benefits

Compensation and benefits increased 118%144% from $2,912 in the three months ended June 30, 2017 to $6,336 in the three months ended June 30, 2018 primarily due to increases in non-cash compensation of $1,454, incentive compensation of $1,039 and salaries, benefits and related payroll taxes of $1,021.

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General and administration

General and administration expenses increased 49% from $4,521$15,474 in the three months ended June 30, 20172019, primarily due to an increase of $8,496 in incentive compensation, primarily a result of approximately $8,800 in retention bonuses paid in connection with the PIEtech Acquisition.

General and administration
General and administration expenses increased 22% from $6,722 in the three months ended June 30, 2018 to $8,202 in the three months ended June 30, 2019, primarily due to increasesan increase in restructuring charges and transaction costsrelated expenses of $1,105, systems development costs of $490, professional and legal fees of $376.

$853.


Six months ended June 30, 20182019 compared to six months ended June 30, 20172018 for Nonsegment

Compensation and benefits

Compensation and benefits increased 107%89% from $5,716 in the six months ended June 30, 2017 to $11,807 in the six months ended June 30, 2018 primarily due to increases in non-cash compensation expense of $2,388, salaries, benefits and related payroll taxes of $2,332, and incentive compensation of $1,490.

General and administration

General and administration expenses increased 24% from $10,874$22,272 in the six months ended June 30, 20172019, primarily due to an increase in incentive compensation of $8,378, primarily a result of approximately $8,800 in retention bonuses paid in connection with the PIEtech Acquisition, and an increase in non-cash based compensation expense of $1,191 and salaries and benefits of $583.

General and administration
General and administration expenses increased 42% from $13,441 in the six months ended June 30, 2018 to $19,057 in the six months ended June 30, 2019, primarily due to increasesan increase in professional and legal feestransaction related expense of $1,088$4,637, increased website and systems development costsexpense of $790.

$454 and other miscellaneous increases.

Non-GAAP Financial Measures


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

share.”




We introduced adjusted net revenues as a non-GAAP financial metric in the first quarter of 2019 to eliminate the effects of asset-based costs of revenue, which is included in both asset-based recurring revenue and cost of revenue in the our condensed consolidated statements of operations. As our business model moves towards a more subscription-based recurring revenue model, excluding this portion of our revenue from certain analysis performed by management improves the usefulness and comparability of such analysis when evaluating the growth and profitability of the overall business, and in comparing segment performance.  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 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‑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 EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration and purchase liability, income tax provision (benefit), depreciation and amortization, non‑non‑cash compensation expense, restructuring charges and transaction costs, severance, litigation related expense, foreign currency, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non‑non‑controlling interest.

“Adjusted net income” represents net income (loss) before deferred revenue fair value adjustment, accretion on contingent consideration and purchase liability, non‑non‑cash interest expense, non‑non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, litigation related expense, foreign currency, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non‑non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income.

“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted‑weighted‑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;

·

To evaluate the effectiveness of our business strategies; and

52

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


Table of Contents

·

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

Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.

We also present adjusted revenues, adjusted 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 EBITDA provides comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, income tax provision (benefit), non-income tax expense, restructuring charges and transaction costs, accretion on contingent consideration and purchase liability, severance, litigation related expense, 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 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 our cash expenditures, or future requirements for capital expenditures or contractual commitments;

·

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 of $2,225 and $275 for the six months ended June 30, 2018 and 2017, 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 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 non-cash components of employee compensation;

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

Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards we paid net cash of $6,121 and $2,225 for the six months ended June 30, 2019 and 2018, 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 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

53

Table of Contents

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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

 

 

(in thousands)

 

(in thousands)

Total revenues

 

$

201,116

    

$

167,417

 

$

399,127

    

$

325,203

Deferred revenue fair value adjustment

 

 

62

 

 

52

 

 

66

 

 

105

Adjusted revenues

 

$

201,178

 

$

167,469

 

$

399,193

 

$

325,308

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
  (in thousands) (in thousands)
Total revenues $224,445
 $201,116
 $424,111
 $399,127
Deferred revenue fair value adjustment 3,414
 62
 3,420
 66
Adjusted revenues 227,859
 201,178
 427,531
 399,193
Less: Asset-based cost of revenues (60,293) (56,748) (114,135) (114,320)
Adjusted net revenues $167,566
 $144,430
 $313,396
 $284,873



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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

 

 

(in thousands)

 

(in thousands)

Net income (loss)

 

$

(5,991)

    

$

(6,470)

 

$

2,011

    

$

(19,605)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue fair value adjustment

 

 

62

 

 

52

 

 

66

 

 

105

Interest income

 

 

(374)

 

 

(29)

 

 

(784)

 

 

(50)

Interest expense

 

 

5,992

 

 

3,877

 

 

11,228

 

 

8,813

Accretion on contingent consideration and purchase liability

 

 

95

 

 

148

 

 

196

 

 

304

Income tax provision (benefit)

 

 

566

 

 

4,844

 

 

(13,428)

 

 

9,142

Depreciation and amortization

 

 

19,185

 

 

15,465

 

 

38,731

 

 

31,300

Non-cash compensation expense

 

 

10,476

 

 

7,945

 

 

18,971

 

 

15,403

Restructuring charges and transaction costs

 

 

3,345

 

 

2,249

 

 

5,937

 

 

5,627

Severance

 

 

1,049

 

 

338

 

 

3,861

 

 

663

Litigation related expense

 

 

 —

 

 

52

 

 

 —

 

 

1,033

Foreign currency

 

 

(339)

 

 

122

 

 

(571)

 

 

412

Non-income tax expense adjustment

 

 

27

 

 

414

 

 

(101)

 

 

1,163

Loss allocation from equity method investment

 

 

151

 

 

417

 

 

811

 

 

702

Loss attributable to non-controlling interest

 

 

515

 

 

101

 

 

584

 

 

351

Adjusted EBITDA

 

$

34,759

 

$

29,525

 

$

67,512

 

$

55,363

54

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
  (in thousands) (in thousands)
Net income (loss) $613
 $(5,991) $(17,655) $2,011
Add (deduct):        
Deferred revenue fair value adjustment 3,414
 62
 3,420
 66
Interest income (901) (374) (2,411) (784)
Interest expense 8,263
 5,992
 15,359
 11,228
Accretion on contingent consideration and purchase liability 502
 95
 742
 196
Income tax provision (benefit) (28,382) 566
 (24,614) (13,428)
Depreciation and amortization 26,915
 19,185
 46,432
 38,731
Non-cash compensation expense 14,988
 10,476
 27,852
 18,971
Restructuring charges and transaction costs 13,208
 3,345
 20,574
 5,937
Severance 3,280
 1,049
 5,760
 3,861
Foreign currency (154) (339) (155) (571)
Non-income tax expense adjustment 908
 27
 1,118
 (101)
Loss allocation from equity method investment 347
 151
 550
 811
Loss attributable to non-controlling interest 210
 515
 241
 584
Adjusted EBITDA $43,211
 $34,759
 $77,213
 $67,512


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

 

2018

    

2017

 

 

(in thousands)

 

(in thousands)

Net income (loss)

 

$

(5,991)

    

$

(6,470)

 

$

2,011

    

$

(19,605)

Income tax provision (benefit) (1)

 

 

566

 

 

4,844

 

 

(13,428)

 

 

9,142

Loss before income tax provision (benefit)

 

 

(5,425)

 

 

(1,626)

 

 

(11,417)

 

 

(10,463)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue fair value adjustment

 

 

62

 

 

52

 

 

66

 

 

105

Accretion on contingent consideration and purchase liability

 

 

95

 

 

148

 

 

196

 

 

304

Non-cash interest expense

 

 

3,032

 

 

1,331

 

 

4,900

 

 

4,853

Non-cash compensation expense

 

 

10,476

 

 

7,945

 

 

18,971

 

 

15,403

Restructuring charges and transaction costs

 

 

3,345

 

 

2,249

 

 

5,937

 

 

5,627

Severance

 

 

1,049

 

 

338

 

 

3,861

 

 

663

Amortization of acquired intangibles

 

 

13,419

 

 

10,371

 

 

27,354

 

 

20,956

Litigation related expense

 

 

 —

 

 

52

 

 

 —

 

 

1,033

Foreign currency

 

 

(339)

 

 

122

 

 

(571)

 

 

412

Non-income tax expense adjustment

 

 

27

 

 

414

 

 

(101)

 

 

1,163

Loss allocation from equity method investment

 

 

151

 

 

417

 

 

811

 

 

702

Loss attributable to non-controlling interest

 

 

515

 

 

101

 

 

584

 

 

351

Adjusted net income before income tax effect

 

 

26,407

 

 

21,914

 

 

50,591

 

 

41,109

Income tax effect (2)

 

 

(7,130)

 

 

(8,766)

 

 

(13,660)

 

 

(16,444)

Adjusted net income

 

$

19,277

 

$

13,148

 

$

36,931

 

$

24,665

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

 

45,247,331

 

 

43,855,479

 

 

44,963,735

 

 

43,513,074

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

1,325,947

 

 

1,597,746

 

 

1,360,300

 

 

1,670,493

Unvested restricted stock units

 

 

643,319

 

 

473,892

 

 

832,170

 

 

551,227

Diluted number of weighted-average shares outstanding

 

 

47,216,597

 

 

45,927,117

 

 

47,156,205

 

 

45,734,794

Adjusted net income per share - diluted

 

$

0.41

 

$

0.29

 

$

0.78

 

$

0.54

  Three Months Ended Six Months Ended
  June 30, June 30,
  2019 2018 2019 2018
  (in thousands) (in thousands)
Net income (loss) $613
 $(5,991) $(17,655) $2,011
Income tax provision (benefit) (1)
 (28,382) 566
 (24,614) (13,428)
Loss before income tax provision (benefit) (27,769) (5,425) (42,269) (11,417)
Add (deduct):        
Deferred revenue fair value adjustment 3,414
 62
 3,420
 66
Accretion on contingent consideration and purchase liability 502
 95
 742
 196
Non-cash interest expense 4,646
 3,032
 9,262
 4,900
Non-cash compensation expense 14,988
 10,476
 27,852
 18,971
Restructuring charges and transaction costs 13,208
 3,345
 20,574
 5,937
Severance 3,280
 1,049
 5,760
 3,861
Amortization of acquired intangibles and fair value adjustment to property and equipment, net 19,278
 13,419
 31,806
 27,354
Foreign currency (154) (339) (155) (571)
Non-income tax expense adjustment 908
 27
 1,118
 (101)
Loss allocation from equity method investment 347
 151
 550
 811
Loss attributable to non-controlling interest 210
 515
 241
 584
Adjusted net income before income tax effect 32,858
 26,407
 58,901
 50,591
Income tax effect (2)
 (8,388) (7,130) (15,020) (13,660)
Adjusted net income $24,470
 $19,277
 $43,881
 $36,931
         
Basic number of weighted-average shares outstanding 50,870,296
 45,247,331
 49,526,774
 44,963,735
Effect of dilutive shares:        
Options to purchase common stock 1,164,246
 1,325,947
 1,185,480
 1,360,300
Unvested restricted stock units 662,853
 643,319
 666,116
 832,170
Convertible notes 261,075
 —
 12,532
 —
Warrants 24,218
 —
 —
 —
Diluted number of weighted-average shares outstanding 52,982,688
 47,216,597
 51,390,902
 47,156,205
Adjusted net income per share - diluted $0.46
 $0.41
 $0.85
 $0.78
         

(1)

For the three months ended June 30, 20182019 and 2017,2018, the effective tax rate computed in accordance with US GAAP equaled (10.4%)102.2% and (297.9%)(10.4)%, respectively. For the six months ended June 30, 20182019 and 2017,2018, the effective tax rate computed in accordance with US GAAP equaled 117.6%58.2% and (87.4%)117.6%, respectively.

(2)

Estimated normalized effective tax rates of 27%25.5% and 40%27.0% have been used to compute adjusted net income for the three and six months ended June 30, 2019 and 2018, and 2017, respectively.


Note on Income Taxes: As of December 31, 2017 the Company2018 we had net operating loss carryforwards of $249,653approximately $267,000 and $143,775$153,000 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.


55



Table of Contents

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 six months ended June 30, 20182019 and 2017:

2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 

(in thousands)

Revenues

$

156,928

 

$

44,188

 

$

 —

 

$

201,116

  Deferred revenue fair value adjustment

 

60

 

 

 2

 

 

 —

 

 

62

Adjusted revenues

$

156,988

 

$

44,190

 

$

 —

 

$

201,178

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

16,359

 

$

(3,296)

 

$

(13,058)

 

$

 5

Add:

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

60

 

 

 2

 

 

 —

 

 

62

  Accretion on contingent consideration and purchase liability

 

95

 

 

 —

 

 

 —

 

 

95

  Depreciation and amortization

 

11,026

 

 

8,159

 

 

 —

 

 

19,185

  Non-cash compensation expense

 

5,080

 

 

2,936

 

 

2,460

 

 

10,476

  Restructuring charges and transaction costs

 

188

 

 

403

 

 

2,754

 

 

3,345

  Non-income tax expense adjustment

 

27

 

 

 —

 

 

 —

 

 

27

  Severance

 

1,049

 

 

 —

 

 

 —

 

 

1,049

  Loss attributable to non-controlling interest

 

515

 

 

 —

 

 

 —

 

 

515

Adjusted EBITDA

$

34,399

 

$

8,204

 

$

(7,844)

 

$

34,759

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 

(in thousands)

Revenues

$

129,372

 

$

38,045

 

$

 —

 

$

167,417

  Deferred revenue fair value adjustment

 

 7

 

 

45

 

 

 —

 

 

52

Adjusted revenues

$

129,379

 

$

38,090

 

$

 —

 

$

167,469

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

15,811

 

$

(5,635)

 

$

(7,433)

 

$

2,743

Add:

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

 7

 

 

45

 

 

 —

 

 

52

  Accretion on contingent consideration and purchase liability

 

148

 

 

 —

 

 

 —

 

 

148

  Depreciation and amortization

 

6,361

 

 

9,104

 

 

 —

 

 

15,465

  Non-cash compensation expense

 

4,218

 

 

2,721

 

 

1,006

 

 

7,945

  Restructuring charges and transaction costs

 

600

 

 

 —

 

 

1,649

 

 

2,249

  Non-income tax expense adjustment

 

414

 

 

 —

 

 

 —

 

 

414

  Severance

 

307

 

 

15

 

 

16

 

 

338

  Litigation related expense

 

 —

 

 

52

 

 

 —

 

 

52

  Other loss

 

 —

 

 

 —

 

 

18

 

 

18

  Loss attributable to non-controlling interest

 

101

 

 

 —

 

 

 —

 

 

101

Adjusted EBITDA

$

27,967

 

$

6,302

 

$

(4,744)

 

$

29,525

  Three months ended June 30, 2019
  Envestnet Wealth Solutions Envestnet Data & Analytics Nonsegment Total
  (in thousands)
Revenues $176,890
 $47,555
 $—
 $224,445
Deferred revenue fair value adjustment 3,414
 —
 —
 3,414
Adjusted revenues 180,304
 47,555
 —
 227,859
Less: Asset-based cost of revenues (60,293) —
 —
 (60,293)
Adjusted net revenues $120,011
 $47,555
 $—
 $167,566
         
Income (loss) from operations $12,379
 $(8,960) $(23,676) $(20,257)
Add:        
Deferred revenue fair value adjustment 3,414
 —
 —
 3,414
Accretion on contingent consideration and purchase liability 502
 —
 —
 502
Depreciation and amortization 16,376
 10,539
 —
 26,915
Non-cash compensation expense 8,592
 3,767
 2,629
 14,988
Restructuring charges and transaction costs 794
 (196) 12,610
 13,208
Non-income tax expense adjustment 908
 —
 —
 908
Severance 818
 2,448
 14
 3,280
Other 43
 —
 —
 43
Loss attributable to non-controlling interest 210
 —
 —
 210
Adjusted EBITDA $44,036
 $7,598
 $(8,423) $43,211

56


  Three Months Ended June 30, 2018
  Envestnet Wealth Solutions Envestnet Data & Analytics Nonsegment Total
  (in thousands)
Revenues $156,928
 $44,188
 $—
 $201,116
Deferred revenue fair value adjustment 60
 2
 —
 62
Adjusted revenues 156,988
 44,190
 —
 201,178
Less: Asset-based cost of revenues (56,748) —
 —
 (56,748)
Adjusted net revenues $100,240
 $44,190
 $—
 $144,430
         
Income (loss) from operations $16,359
 $(3,296) $(13,058) $5
Add:        
Deferred revenue fair value adjustment 60
 2
 —
 62
Accretion on contingent consideration and purchase liability 95
 —
 —
 95
Depreciation and amortization 11,026
 8,159
 —
 19,185
Non-cash compensation expense 5,080
 2,936
 2,460
 10,476
Restructuring charges and transaction costs 188
 403
 2,754
 3,345
Non-income tax expense adjustment 27
 —
 —
 27
Severance 1,049
 —
 —
 1,049
Loss attributable to non-controlling interest 515
   —
 515
Adjusted EBITDA $34,399
 $8,204
 $(7,844) $34,759

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 

(in thousands)

Revenues

$

312,916

 

$

86,211

 

$

 —

 

$

399,127

  Deferred revenue fair value adjustment

 

58

 

 

 8

 

 

 —

 

 

66

Adjusted revenues

$

312,974

 

$

86,219

 

$

 —

 

$

399,193

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

32,220

 

$

(7,705)

 

$

(25,248)

 

$

(733)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

  Deferred revenue fair value adjustment

 

58

 

 

 8

 

 

 —

 

 

66

  Accretion on contingent consideration and purchase liability

 

196

 

 

 —

 

 

 —

 

 

196

  Depreciation and amortization

 

22,499

 

 

16,232

 

 

 —

 

 

38,731

  Non-cash compensation expense

 

9,134

 

 

5,400

 

 

4,437

 

 

18,971

  Restructuring charges and transaction costs

 

225

 

 

603

 

 

5,109

 

 

5,937

  Non-income tax expense adjustment

 

(101)

 

 

 —

 

 

 —

 

 

(101)

  Severance

 

3,478

 

 

383

 

 

 —

 

 

3,861

  Loss attributable to non-controlling interest

 

584

 

 

 —

 

 

 —

 

 

584

Adjusted EBITDA

$

68,293

 

$

14,921

 

$

(15,702)

 

$

67,512

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 Six months ended June 30, 2019

 

Envestnet

 

 

Envestnet | Yodlee

 

 

Nonsegment

 

 

Total

 Envestnet Wealth Solutions Envestnet Data & Analytics Nonsegment Total

(in thousands)

 (in thousands)

Revenues

$

250,690

 

$

74,513

 

$

 —

 

$

325,203

 $329,595
 $94,516
 $—
 $424,111

Deferred revenue fair value adjustment

 

36

 

 

69

 

 

 —

 

 

105

 3,420
 —
 —
 3,420

Adjusted revenues

$

250,726

 

$

74,582

 

$

 —

 

$

325,308

 333,015
 94,516
 —
 427,531
Less: Asset-based cost of revenues (114,135) —
 —
 (114,135)
Adjusted net revenues $218,880
 $94,516
 $—
 $313,396

 

 

 

 

 

 

 

 

        

Income (loss) from operations

$

29,322

 

$

(13,343)

 

$

(16,590)

 

$

(611)

 $29,223
 $(16,888) $(41,329) $(28,994)

Add:

 

 

 

 

 

 

 

 

       

Deferred revenue fair value adjustment

 

36

 

69

 

 —

 

105

 3,420
 —
 —
 3,420

Accretion on contingent consideration and purchase liability

 

304

 

 —

 

 —

 

304

 742
 —
 —
 742

Depreciation and amortization

 

12,782

 

18,518

 

 —

 

31,300

 27,643
 18,789
 —
 46,432

Non-cash compensation expense

 

7,892

 

5,462

 

2,049

 

15,403

 14,269
 7,955
 5,628
 27,852

Restructuring charges and transaction costs

 

695

 

 —

 

4,932

 

5,627

 1,056
 769
 18,749
 20,574

Non-income tax expense adjustment

 

1,163

 

 —

 

 —

 

1,163

 1,108
 10
 —
 1,118

Severance

 

423

 

224

 

16

 

663

 1,168
 4,496
 96
 5,760

Litigation related expense

 

 —

 

1,033

 

 —

 

1,033

Other loss

 

 —

 

 —

 

25

 

25

Other 65
 1
 2
 68

Loss attributable to non-controlling interest

 

351

 

 

 —

 

 

 —

 

 

351

 241
 —
 —
 241

Adjusted EBITDA

$

52,968

 

$

11,963

 

$

(9,568)

 

$

55,363

 $78,935
 $15,132
 $(16,854) $77,213


  Six Months Ended June 30, 2018
  Envestnet Wealth Solutions Envestnet Data & Analytics Nonsegment Total
  (in thousands)
Revenues $312,916
 $86,211
 $—
 $399,127
Deferred revenue fair value adjustment 58
 8
 —
 66
Adjusted revenues 312,974
 86,219
 —
 399,193
Less: Asset-based cost of revenues (114,320) —
 —
 (114,320)
Adjusted net revenues $198,654
 $86,219
 $—
 $284,873
         
Income (loss) from operations $32,220
 $(7,705) $(25,248) $(733)
Add:        
Deferred revenue fair value adjustment 58
 8
 —
 66
Accretion on contingent consideration and purchase liability 196
 —
 —
 196
Depreciation and amortization 22,499
 16,232
 —
 38,731
Non-cash compensation expense 9,134
 5,400
 4,437
 18,971
Restructuring charges and transaction costs 225
 603
 5,109
 5,937
Non-income tax expense adjustment (101) —
 —
 (101)
Severance 3,478
 383
 —
 3,861
Loss attributable to non-controlling interest 584
 —
 —
 584
Adjusted EBITDA $68,293
 $14,921
 $(15,702) $67,512



Liquidity and Capital Resources

As of June 30, 2018,2019, we had total cash and cash equivalents of $134,032$77,717 compared to $60,115$289,345 as of December 31, 2017.2018. We plan to use existing cash as of June 30, 2018 and2019, cash generated in the ongoing operations of our business and amounts available under our revolving credit facility to fund our current operations, capital expenditures and possible acquisitions or other strategic activity, and to meet our debt service obligations. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements, we may be required to borrow under our revolving credit facility or incur additional debt to fund our ongoing operations or to fund potential acquisitions or other strategic activities. The CompanyAs of June 30, 2019, we had $205,000 available to borrow under our revolving credit facility, subject to covenant compliance. We funded the FolioDynamixMay 1, 2019 PIEtech acquisition with a combination of cash on the Company’sour balance sheet purchase consideration liabilities and additional borrowings under itsour revolving credit facility.

As a result of these borrowings, we expect our cash interest payments to increase. Our Convertible Notes due 2019 mature on December 15, 2019. We plan to either use cash on hand or borrow on our revolving credit facility to settle the Convertible Notes due 2019.

57


Table of Contents

Cash Flows

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

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2018

    

2017

 

 

(in thousands)

Net cash provided by operating activities

 

$

40,954

    

$

35,187

Net cash used in investing activities

 

 

(208,536)

 

 

(14,832)

Net cash provided by (used in) financing activities

 

 

240,299

 

 

(45,500)

Effect of exchange rate on changes on cash

 

 

(572)

 

 

283

Net decrease in cash and cash equivalents

 

 

72,145

 

 

(24,862)

Cash, cash equivalents and restricted cash, end of period

 

 

134,260

 

 

29,730

  Six Months Ended
  June 30,
  2019 2018
  (in thousands)
Net cash provided by operating activities $2,391
 $40,954
Net cash used in investing activities (347,969) (208,536)
Net cash provided by financing activities 133,784
 240,299
Effect of exchange rate on changes on cash 166
 (572)
Net increase (decrease) in cash, cash equivalents and restricted cash (211,628) 72,145
Cash, cash equivalents and restricted cash, end of period 78,043
 134,260
Operating Activities

Net cash provided by operating activities for the six months ended June 30, 20182019 was $40,954 as$2,391 compared to net cash provided by operating activities of $35,187$40,954 for the same period in 2017.2018. The increasedecrease was primarily due to a net incomeloss of $2,011$17,655 in the six months ended June 30, 20182019 compared to a net lossincome of $19,605$2,011 for the six months ended June 30, 2017, an increasesame period in depreciation and amortization of $7,431, an increase in stock based compensation of $3,568, partially offset by the2018, a change in deferred income taxes of $23,617$11,898 and a net decrease in the change in operating assets and liabilities of $5,376.

$26,274, partially offset by an increase in non-cash compensation of $8,881, an increase in depreciation and amortization of $7,701 and an increase in non-cash interest expense of $4,266.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 20182019 was $208,536$347,969 compared to net cash used in investing activities of $14,832$208,536 for the same period in 2017.2018. The change was primarily a result of an increase in cash disbursements for acquisitions of $188,345 combined with$133,226 and an increase in capitalization of internally developed software of $4,971.

$4,961.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 20182019 was $240,299$133,784 compared to net cash used inprovided by financing activities of $45,500$240,299 for the same period in 2017.2018. The change was primarily the result of increasesa decrease in proceeds from a May 2018 issuance of the Convertible Notes due 2023convertible notes of $345,000 and an increase in proceeds fromreduced borrowings on theour revolving credit facility of $170,000,$20,000, partially offset by increasesa decrease in payments on theour revolving credit facility of $251,168, and debt issuance costs paid of $9,488.

$246,168.

Critical Accounting 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 statements and accompanying notes. “Note 2 – 2—Summary of Significant Accounting Policies” to the consolidated financial statements in our most recent2018 Form 10-K describes the significant accounting policies and methods used in the preparation of the consolidated financial statements and “Note 4 – Revenue”17—Leases” to the condensed consolidated financial statements in this accompanying Form 10-Q describes the updated accounting policies for revenue recognition, fees receivable including unbilled accounts receivableright of use assets and deferred sales incentive compensationoperating lease liabilities that were updated as a result of adopting ASC 606.842. 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 recent2018 Form 10-K and “Note 4 – Revenue”17—Leases” to the condensed consolidated financial statements in this accompanying Form 10-Q 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, 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, and actual results could differ materially from the amounts reported.

58


Table of Contents

Commitments and Off-Balance Sheet Arrangements

Purchase Obligations and Indemnifications

The Company includes

We include various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company hasWe have experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to suchthese indemnification and guarantee provisions. The Company believesWe believe that it is unlikely itthat we will have to make material payments under these arrangements and therefore haswe have not recorded a contingent liability in the condensed consolidated balance sheets.

The Company enters

We enter into unconditional purchase obligations arrangements for certain of itsour services that it receiveswe receive in the normal course of business.

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. An unopposed scheduling motion is pending which, if granted, would require Envestnet and Yodlee to file their responsive pleadings, including counterclaims, by September 17, 2019.  We believe the allegations in the complaint are without merit and intends to defend the action vigorously.

We are involved in legal proceedings arising in the ordinary course of its business.  Legal fees and other costs associated with such actions are expensed as incurred. The CompanyWe will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For 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 believesWe believe that liabilities associated with any claims, while possible, are not probable, and therefore haswe have not recorded any accrual for any claims as of June 30, 2018.2019. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company doeswe do not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it,us, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on Envestnet’sour results of operations or cash flow in a particular quarter or year.

Leases

The Company rents office space

We have operating leases for corporate offices and certain equipment, some of which may include options to extend the leases for up to 20 years, and some of which may include options to terminate the leases within 90 days. Our leases have remaining lease terms of 1 to 14 years. For the three and six months ended June 30, 2019, our total operating lease cost was $4,377 and $8,495, respectively.



Future minimum lease payments under non-cancellable leases, that expire at various dates through 2030. as of June 30, 2019, were as follows:
  Operating
  Leases
Years Ending December 31,  
Remainder of 2019 $9,096
2020 17,558
2021 15,975
2022 11,850
2023 10,571
Thereafter 52,862
Total future minimum lease payments 117,912
Less imputed interest (27,563)
Total operating lease liabilities $90,349

As of June 30, 2018, the Company’s future minimum lease commitments under these2019, we have entered into several additional operating leases totaled $105,124.

that have not yet commenced but will commence in 2019 with lease terms of 1 to 3 years.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk

Our exposure to market risk is directly related to asset-based recurring revenues earned based upon a contractual percentage of AUM or AUA. In the three and six months ended June 30, 2018, 59% and 60%, respectively,2019, 54% 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 income to decrease.

Foreign currency risk

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 six months ended June 30, 2018,2019, 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 $1,184$286 and $2,363, respectively,$265 to pre‑pre‑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 $969$234 and $1,934, respectively,$217 to pre‑pre‑tax earnings.

earnings, respectively.

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 six months ended June 30, 2018,

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2019, 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 $335approximately $472 and $1,068, respectively,$941 to pre‑pre‑tax earnings.

earnings, respectively.

Interest rate risk

We are subject to market risk from changes in interest rates. The Company has 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 Credit Agreement. Interest charged on the revolving credit facility for the second quarter of 20182019 was approximately 4.5%5.2%. As of June 30, 2018,2019, there was $0$145,000 of revolving credit amounts outstanding under the Credit Agreement. The Company incurred interest expense of $1,561$1,353 and $4,174$1,569 for the three and six months ended June 30, 2018,2019, respectively, related to the 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 $340 on an annual basis by approximately $448.

.



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 June 30, 2018.2019. 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.

Based on their evaluation of our disclosure controls and procedures as of June 30, 2018,2019, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting during the three months ended June 30, 2018.

2019, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1.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. An unopposed scheduling motion is pending which, if granted, would require Envestnet and Yodlee to file their responsive pleadings, including counterclaims, by September 17, 2019.  The Company believes the allegations in the complaint are without merit and intends to defend the action vigorously.

In addition, the Company is involved in legal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For legal proceedingslitigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of June 30, 2018.2019. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on Envestnet’sthe Company’s results of operations or cash flow in a particular quarter or year.

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Item 1A. Risk Factors

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our 20172018 Form 10-K, when making investment decisions regarding our securities. The risk factors that were disclosed in our 20172018 Form 10-K have not materially changed since the date our 20172018 Form 10-K was filed.




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

April 1, 2018 through April 30, 2018

 

5,219

$

53.60

 

 —

 

1,956,390

May 1, 2018 through May 31, 2018

 

56,931

 

55.23

 

 —

 

1,956,390

June 1, 2018 through June 30, 2018

 

28,650

 

57.14

 

 —

 

1,956,390

        Maximum number (or
      Total number of approximate dollar
      shares purchased value) of shares
  Total number Average as part of publicly that may yet be
  of shares price paid announced plans purchased under the
  purchased per share or programs plans or programs
April 1, 2019 through April 30, 2019 3,306
 $68.68
 —
 1,956,390
May 1, 2019 through May 31, 2019 63,562
 68.86
 —
 1,956,390
June 1, 2019 through June 30, 2019 1,091
 68.48
 —
 1,956,390
On February 25, 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other forward transactions or otherwise, all in compliance with applicable laws and other restrictions. As of June 30, 2018,2019, 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.

Item 6.Exhibits

(a) Exhibits

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

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INDEX TO EXHIBITS

Exhibit
No.

Description

Exhibit
No.
Description
31.1


Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002

31.2


Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002

32.1(1)


Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2(1)


Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS


XBRL Instance Document *

**

101.SCH


XBRL Taxonomy Extension Schema Document *

**

101.CAL


XBRL Taxonomy Extension Calculation Linkbase Document *

**

101.LAB


XBRL Taxonomy Extension Label Linkbase Document *

**

101.PRE


XBRL Taxonomy Extension Presentation Linkbase Document *

**

101.DEF


XBRL Taxonomy Extension Definition Linkbase Document *

**


(1)

The material contained in Exhibit 32.1 and 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.


* Management contract or compensation plan.
** Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of June 30, 20182019 and December 31, 2017;2018; (ii) the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 20182019 and 2017;2018; (iii) the Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 20182019 and 2017;2018; (iv) the Condensed Consolidated StatementStatements of Equity for the six months ended June 30, 2019 and 2018; (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20182019 and 2017;2018; (vi) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.


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SIGNATURES

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 August 8, 2018.

2019.

ENVESTNET, INC.

By:

ENVESTNET, INC.

By:/s/ Judson Bergman

Judson Bergman

Chairman and 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



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