Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except where we have otherwise indicated or the context otherwise requires, all amounts presented in this Form 10‑K are in thousands, except share and per share information and numbers of financial advisors and client accounts.
Overview
Envestnet, through its subsidiaries, is transforming the way financial advice and wellness are delivered. Its mission is to empower advisors and financial service providers with innovative technology, solutions and intelligence to make financial wellness a reality for everyone. Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic financial wellness ecosystem to improve the financial lives of millions of consumers.
Over 106,000 advisors and more than 5,100 companies, including 17 of the 20 largest U.S. banks, 47 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIAs”) and hundreds of internet services companies, leverage Envestnet technology and services that help drive better outcomes for enterprises, advisors and their clients.
Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting technology, solutions and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet, a Delaware corporation originally founded in 1999, serves clients from its headquarters based in Chicago, Illinois, as well as other locations throughout the United States, India and other international locations.
We also operate five RIAs registered with the U.S. Securities and Exchange Commission (“SEC”). We believe that our business model results in a high degree of recurring and predictable financial results.
Recent Developments
Uncertainties Related to COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease. We are closely monitoring developments with the COVID-19 pandemic and are taking proactive measures to ensure business continuity. Our priority is to protect the well-being of our employees, while we continue to provide uninterrupted service and support to our clients. As part of our existing business continuity protocol, we created a pandemic steering committee that meets regularly and communicates information or guidance to our employees and customers.
We have instituted travel bans and are following mandatory stay-at-home orders where applicable. A majority of our employees are working from home as a result of these stay-at-home orders. Where permissible, we have also implemented in-office work rotations. For employees working at our offices, preventative measures have been taken, including the adapting of work spaces to allow for appropriate social distancing and enhanced cleaning regimens. We also canceled our 2020 and 2021 in-person Advisor Summit Conferences, instead offering a reimagined Advisor Summit On-Demand, which allows participants access to a library of online sessions. We continue to monitor developments related to COVID-19 and, as the situation evolves, will continue to coordinate our operations response based on existing business continuity plans and on guidance from global health organizations, relevant governments and general response pandemic best practices. The actions that we took in 2020 resulted in lower operating expenses in certain areas, particularly travel and marketing. We expect our operating expenses to increase as COVID-related restrictions are removed and business activity improves.
At the start of the COVID-19 pandemic, significant declines occurred within the equity markets. This is significant to us as we provide asset-based, subscription-based and professional services on a business-to-business-to-consumer basis to financial services clients, whereby customers offer solutions based on our platform to their end users. For the twelve months ended December 31, 2020, approximately 54% of our revenues resulted from asset-based fee billing arrangements. Asset-based recurring revenues primarily consisted of fees for providing customers access to our platforms. These fees are generally based upon variable percentages of assets managed or administered under our platforms. Our fee percentages vary based on the level and type of services that we provide to our customers, as well as the values of existing customer accounts. The values of our customer accounts are affected by inflows or outflows of customer funds and market fluctuations. Approximately 75% of our asset-based fee arrangements are billed at the beginning of each quarter based on the market value of customer assets on our platforms as of the end of the prior quarter.
As a result of the structure of our revenue arrangements and our customer-types, our revenues during the three months ended March 31, 2020 were not materially impacted by COVID-19. While we experienced a decrease to our asset-based revenues in the second quarter of 2020 compared to the first quarter of 2020 as a result of the decline in the equity markets as of March 31, 2020, our asset-based revenues were minimally impacted in the third quarter of 2020 as the equity markets have generally recovered to pre-pandemic levels. We have experienced no business interruptions, nor did we lose any significant customers as a result of the COVID-19 pandemic.
For the twelve months ended December 31, 2020, approximately 43% of revenues were subscription-based. These revenues primarily consisted of fees for providing customers continuous access to our platforms. These subscription-based fees generally include fixed fees or usage-based fees. These fees vary based on the services being offered. Our subscription-based fee arrangements are typically established through multi-year contracts.
In the event that the equity markets fall again as a result of COVID-19 or for any other reason, our revenues will be negatively impacted. Based on our most recent internal forecasts and other qualitative factors, we have determined that we currently have no impairments to our assets as of December 31, 2020.
We have not modified our revolving credit agreement in connection with the COVID-19 pandemic. Additionally, in August 2020, we successfully acquired additional financing in the form of convertible notes on terms favorable to the Company.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. One provision of the CARES Act provides a five-year carryback of net operating losses (“NOLs”) generated in tax years beginning after December 31, 2017 and before January 1, 2021. We estimate a refund of approximately $1,200 from the carryback of NOLs.
Investment in Private Services Company
On January 8, 2020, we acquired a 4.25% membership interest in a private services company for cash consideration of $11,000. The private services company partners with independent network advisory firms to help them grow, become more profitable and run more efficiently. We account for this investment under the equity method basis of accounting.
Acquisition of Private Technology Company
On February 18, 2020, through our wholly owned subsidiary Yodlee, Inc. (“Yodlee”), we acquired a private technology company (the “Private Technology Company Acquisition”). The private technology company enables the consent generation and data flow between financial information providers, such as banks and financial institutions, and financial information users, such as financial technology lenders and other financial services agencies, through a network of cloud-based interoperable interfaces or application programming interfaces. The technology and operations of the private technology company have been integrated into our Envestnet Data & Analytics segment.
In connection with the Private Technology Company Acquisition, we acquired all of the outstanding shares and paid cash consideration of $2,343, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6,750 in contingent consideration, based upon the achievement of certain performance targets. On the date of acquisition, we recorded a liability of approximately $5,239, which represented the estimated fair value of contingent consideration as of that date.
In 2020, we determined that certain performance targets for this acquisition would not be met. As a result, we reduced the contingent consideration liability plus accrued interest associated with this acquisition by $3,105 and recorded this as a reduction to general and administration expenses. Future changes to the estimated fair value of the contingent consideration, if any, will be recognized in our earnings.
We recorded estimated goodwill of $7,019, which is not deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $1,000. The tangible assets acquired and liabilities assumed were not material.
Acquisition of Private Cloud Technology Company
On March 2, 2020, we acquired certain assets of a private cloud technology company (the “Private Cloud Technology Company Acquisition”). The private cloud technology company enables enterprises to design and implement the digital
transition from legacy systems and applications to a modern cloud computing platform. The technology and operations of the private cloud technology company have been integrated into our Envestnet Wealth Solutions segment.
In connection with the Private Cloud Technology Company Acquisition, we paid estimated consideration of $11,968, net of cash acquired. In connection with the acquisition, we recorded estimated goodwill of $10,932, which is deductible for income tax purposes. The tangible assets acquired and liabilities assumed were not material.
Acquisition of Private Financial Technology Design Company
On March 3, 2020, we acquired the outstanding units of a private financial technology design company that were not owned by the Company and merged the acquired company into a wholly owned subsidiary of ours (the “Private Financial Technology Design Company Acquisition”). The private financial technology design company designs integrated, intuitive digital technology applications for institutional financial services firms, bank wealth management organizations, independent advisor networks, and broker-dealers. The technology and operations of the private financial technology design company have been integrated into our Envestnet Wealth Solutions segment.
We previously owned approximately 45% of the outstanding units in this private financial technology design company, and accounted for it as an equity method investment. Based upon the estimated value of the private financial technology design company of $11,026, we paid estimated consideration of $5,946, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, we recognized a gain of $4,230 on the re-measurement to fair value of its previously held interest, which is included in other income (expense), net in the consolidated statements of operations.
In connection with the Private Financial Technology Design Company Acquisition, we recorded estimated total goodwill of $9,241, of which approximately $6,232 is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2,000. The tangible assets acquired and liabilities assumed were not material.
Private Offering of Convertible Notes due 2025
In August 2020, we issued $517,500 of convertible notes maturing on August 15, 2025 (“Convertible Notes due 2025”). Net proceeds from the offering were approximately $503,000. The Convertible Notes due 2025 bear interest at a rate of 0.75 percent per annum payable semiannually in arrears in cash on February 15 and August 15 of each year, beginning on February 15, 2021.
The Convertible Notes due 2025 are general unsecured obligations, subordinated in right of payment to our obligations under our revolving credit facility. The Convertible Notes due 2025 are convertible into shares of our common stock under certain circumstances prior to maturity at a conversion rate of 9.3682 shares per one thousand principal amount of notes, which represents a conversion price of $106.74 per share, subject to adjustment under certain conditions. See Part II, Item 8, “Note 10—Debt, Convertible Notes due 2025” for more details regarding the issuance of these convertible notes.
Early Retirement Program
In the fourth quarter of 2019, we offered a voluntary early retirement program (the “Early Retirement Program”) to employees over a certain age, who have a combined age and years of experience with the Company of at least 65 years. Employees had until January 31, 2020 to voluntarily accept the program with separation of service no later than March 31, 2020. In connection with this program, we recorded approximately $12,500 of severance expense during the twelve months ended December 31, 2020. As of December 31, 2020, we have accrued approximately $1,904 in future payments that extend through 2030.
Organizational Realignment
In the fourth quarter of 2020, as part of an organizational realignment, we entered into separation agreements with several employees. In connection with this realignment, we recognized approximately $5,100 of severance expense during the twelve months ended December 31, 2020, with an additional $5,300 of severance expense expected to be recognized in the first half of 2021. As of December 31, 2020, we have accrued approximately $5,100 in accrued compensation and related taxes associated with these separation agreements.
Executive Leadership Appointments
Effective March 30, 2020, our Board of Directors (the “Board”) appointed Bill Crager as Envestnet's Chief Executive Officer (“CEO”), a role he had held on an interim basis following the passing of our former Chairperson and CEO Judson Bergman in 2019. Additionally, on March 30, 2020 the Board appointed Stuart DePina as Envestnet's President. James Fox, a current member of our Board, was named Chairperson of the Board.
Key Metrics
Envestnet Wealth Solutions Segment
The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated:
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As of December 31,
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2020
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2019
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2018
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(in millions, except accounts and advisors data)
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Platform Assets
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AUM
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$
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263,043
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$
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207,083
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$
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150,591
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AUA
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405,365
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343,505
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291,934
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Total AUM/A
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668,408
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550,588
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442,525
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Subscription
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3,892,814
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3,205,281
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2,314,253
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Total Platform Assets
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$
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4,561,222
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$
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3,755,869
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$
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2,756,778
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Platform Accounts
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AUM
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1,073,122
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935,039
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816,354
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AUA
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1,276,975
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1,193,882
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1,182,764
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Total AUM/A
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2,350,097
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2,128,921
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1,999,118
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Subscription
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11,079,048
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9,793,175
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8,865,435
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Total Platform Accounts
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13,429,145
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11,922,096
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10,864,553
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Advisors
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AUM/A
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41,206
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40,563
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40,103
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Subscription
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65,104
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61,180
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56,237
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Total Advisors
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106,310
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101,743
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96,340
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The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated:
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Asset Rollforward - 2020
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As of 12/31/2019
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Gross Sales
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Redemptions
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Net Flows
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Market Impact
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Reclass to Subscription
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As of 12/31/2020
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(in millions, except account data)
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AUM
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$
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207,083
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$
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74,118
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$
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(42,958)
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$
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31,160
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$
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24,800
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$
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—
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$
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263,043
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AUA
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343,505
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117,138
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(84,328)
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32,810
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40,052
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(11,002)
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405,365
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Total AUM/A
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$
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550,588
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$
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191,256
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$
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(127,286)
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$
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63,970
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$
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64,852
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$
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(11,002)
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$
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668,408
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Fee-Based Accounts
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2,128,921
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278,863
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(57,687)
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2,350,097
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The above AUM/A gross sales figures include $38.6 billion in new client conversions. We onboarded an additional $119.6 billion in subscription conversions during 2020, bringing total conversions for the year to $158.2 billion.
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Asset Rollforward - 2019
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As of 12/31/2018
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Gross Sales
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Redemptions
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Net Flows
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Market Impact
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Reclass to Subscription
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As of 12/31/2019
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(in millions, except account data)
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AUM
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$
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150,591
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$
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68,652
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$
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(33,980)
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$
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34,672
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$
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28,382
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$
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(6,562)
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$
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207,083
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AUA
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291,934
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93,901
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(68,534)
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25,367
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48,899
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(22,695)
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343,505
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Total AUM/A
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$
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442,525
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$
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162,553
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$
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(102,514)
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$
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60,039
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$
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77,281
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$
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(29,257)
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$
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550,588
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Fee-Based Accounts
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1,999,118
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228,759
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(98,956)
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2,128,921
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The above AUM/A gross sales figures include $31.5 billion in new client conversions. We onboarded an additional $297.9 billion in subscription conversions during 2019, bringing total conversions for the year to $329.4 billion.
Asset and account figures in the “Reclass to Subscription” columns for the years ended December 31, 2020 and 2019 represent enterprise customers whose billing arrangements in future periods are subscription-based, rather than asset-based. Such amounts are included in Subscription metrics at the end of the quarter in which the reclassification occurred, with no impact on total platform assets or accounts.
Envestnet Data & Analytics Segment
Paid Users
A paid user is defined as a user of an application or service provided to our customer using the Envestnet Data & Analytics platform whose status corresponds to a billable activity under the associated customer contract. We believe that our ability to increase the number of paid users is an indicator of our market penetration, the growth of our business, and our potential future business opportunities.
Paid users were approximately 35.0 million, 25.0 million and 23.3 million as of December 31, 2020, 2019 and 2018, respectively. The increase was primarily driven by an increase in our number of customers as well as expansion of user base within certain existing customers.
Revenues
Overview
We earn revenues primarily under three pricing models. First, a majority of our revenues is derived from fees charged as a percentage of the assets that are managed or administered on our technology platforms by financial advisors. These revenues are recorded under asset-based revenues. Our asset‑based fees vary based on the types of investment solutions and services that financial advisors utilize. Asset‑based fees accounted for approximately 54%, 54% and 59% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively. In future periods, the percentage of our total revenues attributable to asset‑based fees is expected to vary based on fluctuations in securities markets, whether we enter into significant subscription agreements, the mix of AUM or AUA, and other factors.
We also generate revenues from recurring, contractual subscription fees for providing access to our technology platforms. This subscription revenue includes both contractual minimum payments and usage-based fees and is driven primarily by the number of customers, including new customers as well as customers who renew their existing subscription contracts, and the number of paid users. These revenues are recorded under subscription-based revenues. Subscription fees vary based on the scope of technology solutions and services being used, and are priced in a variety of constructs based on the size of the business, number of users or number of accounts and in many cases can increase over time based on the growth of these factors. Subscription fees accounted for 43%, 42% and 36% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
Finally, a portion of our revenues are generated from fees received in connection with professional services and other revenue.
Asset-based recurring revenues
We generally charge our customers fees based on a higher percentage of the market value of AUM than the fees we charge on the market value of AUA, because we provide fiduciary oversight and/or act as the investment advisor in connection with assets we categorize as AUM. The level of fees varies based on the nature of the investment solutions and services we provide, as well as the specific investment manager, fund and/or custodian chosen by the financial advisor. A portion of our revenues from assets under management or administration include costs paid by us to third parties for sub‑advisory, clearing, custody and brokerage services. These expenses are recorded under cost of revenues. We do not have fiduciary responsibility in connection with AUA and, therefore, generally charge lower fees on these assets. Our fees for AUA vary based on the nature of the investment solutions and services we provide.
For approximately 75% of our asset-based recurring revenues from assets under management or administration, we bill customers at the beginning of each quarter based on the market value of customer assets on our platforms as of the end of the prior quarter. For example, asset-based recurring revenues recognized during the fourth quarter of 2020 were primarily based on the market value of assets as of September 30, 2020. Our asset-based recurring revenues are generally recognized ratably throughout the quarter based on the number of days in the quarter.
Our asset-based recurring revenues are affected by the amount of new assets that are added to existing and new client accounts, which we refer to as gross sales. Gross sales, from time to time, also include conversions of client assets to our technology platforms. The amounts of assets that are withdrawn from client accounts are referred to as redemptions. We refer to the difference between gross sales and redemptions as net flows. Positive net flows indicate that the market value of assets added to client accounts exceeds the market value of assets that have been withdrawn from client accounts.
Our asset-based revenues are also affected by changes in the market values of securities held in client accounts due to fluctuations in the securities markets. Certain types of securities have historically experienced greater market price fluctuations, such as equity securities, than other securities, such as fixed income securities, though in any given period the type of securities that experience the greatest fluctuations may vary.
Subscription-based recurring revenues
Subscription-based recurring revenues are recognized ratably over the contracted term of each respective subscription agreement, commencing on the date the service is provisioned to the customer, provided all applicable revenue recognition criteria have been satisfied. As part of the subscription contracts, our customers generally commit to a minimum level of paid users from which a minimum level of non-refundable subscription revenue is derived. As paid users in excess of the guaranteed minimum level access the platform, the customer is then required to pay additional usage fees calculated based upon a contracted per-paid-user fee. No refunds or credits are given if fewer paid users access the platform than the contracted minimum level. Usage-based revenue is recognized as earned, provided all applicable revenue recognition criteria have been satisfied.
Professional services and other revenues
To a lesser degree we also receive revenues from professional services fees by providing customers with certain technology platform software development and implementation services. These revenues are recognized when completed, under a proportional‑performance model utilizing an output‑based approach or on a straight‑line basis over the estimated life of the customer relationship. Our contracts generally have fixed prices and generally specify or quantify interim deliverables.
Expenses
The following is a description of our principal expense items:
Cost of revenues
Cost of revenues primarily includes expenses related to our receipt of sub‑advisory and clearing, custody and brokerage services from third parties. The largest component of cost of revenues is paid to third party investment managers. Clearing, custody and brokerage services are performed by third‑party providers. These expenses are typically calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each fiscal quarter and are recognized ratably throughout the quarter based on the number of days in the quarter. Also included in cost of revenues are vendor specific expenses related to the direct support of revenues associated with the Envestnet Data & Analytics products.
Compensation and benefits
Compensation and benefits expenses primarily relate to employee compensation, including salaries, short-term incentive compensation, non‑cash stock‑based compensation, incentive compensation, benefits and employer‑related taxes.
General and administration
General and administration expenses include costs and expenses related to occupancy, communications services, research and data services, website and system development, marketing, professional and legal services, travel and entertainment and acquisition/transaction related expenses.
Depreciation and amortization
Depreciation and amortization expenses include depreciation and amortization related to:
•fixed assets, including land, building and building improvements, computer equipment and software, leasehold improvements, office furniture and fixtures and office equipment and other;
•internally developed software; and
•intangible assets, primarily related to customer lists, proprietary technology and trade names, the values of which are capitalized in connection with our acquisitions.
Building, furniture and equipment are depreciated using the straight‑line method based on the estimated useful lives of the depreciable assets. Leasehold improvements are amortized using the straight‑line method over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs and maintenance costs are recorded as expenses in the period they are incurred. Assets are tested for recoverability whenever events or circumstances indicate that the carrying value of the assets may not be recoverable.
Internally developed software is amortized on a straight‑line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Intangible assets are depreciated using an accelerated or straight‑line basis over their estimated economic useful lives and are reviewed for possible impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Interest income
Interest income primarily includes amounts earned on our bank accounts and money market funds.
Interest expense
Interest expense includes coupon interest, discount amortization and issuance cost amortization related our convertible note issuances, as well as interest and amortization of upfront fees and monthly fees related to our Amended Credit Agreement. See Part II, Item 8, “Note 10—Debt” for details. The discount, issuance costs and upfront fees are amortized over the term of the related agreements. As of January 1, 2021, we plan to adopt FASB ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.” We expect our interest expense to decrease as a result of adopting this new standard.
Other income (expense), net
Other income (expense), net includes gains (losses) on our portion of our equity method investees' results and foreign exchange gains or losses as well as other miscellaneous income or expense items as appropriate.
Results of Operations
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Year Ended December 31,
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2020
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2019
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% Change
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2018
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% Change
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(in thousands, except for percentages)
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Revenues:
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Asset-based
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$
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540,947
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$
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484,312
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12
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%
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$
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481,233
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1
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%
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Subscription-based
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426,507
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378,813
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13
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%
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295,467
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28
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%
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Total recurring revenues
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967,454
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863,125
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12
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%
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776,700
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11
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%
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Professional services and other revenues
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30,776
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37,002
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(17)
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%
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35,663
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4
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%
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Total revenues
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998,230
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900,127
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11
|
%
|
|
812,363
|
|
|
11
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
305,929
|
|
|
278,811
|
|
|
10
|
%
|
|
263,400
|
|
|
6
|
%
|
Compensation and benefits
|
|
398,970
|
|
|
383,554
|
|
|
4
|
%
|
|
317,188
|
|
|
21
|
%
|
General and administration
|
|
160,229
|
|
|
152,564
|
|
|
5
|
%
|
|
139,984
|
|
|
9
|
%
|
Depreciation and amortization
|
|
113,661
|
|
|
101,271
|
|
|
12
|
%
|
|
77,626
|
|
|
30
|
%
|
Total operating expenses
|
|
978,789
|
|
|
916,200
|
|
|
7
|
%
|
|
798,198
|
|
|
15
|
%
|
Income (loss) from operations
|
|
19,441
|
|
|
(16,073)
|
|
|
*
|
|
14,165
|
|
|
*
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
1,112
|
|
|
3,347
|
|
|
(67)
|
%
|
|
2,363
|
|
|
42
|
%
|
Interest expense
|
|
(31,504)
|
|
|
(32,520)
|
|
|
(3)
|
%
|
|
(25,203)
|
|
|
29
|
%
|
Other income (expense), net
|
|
2,906
|
|
|
(2,849)
|
|
|
*
|
|
(487)
|
|
|
*
|
Total other expense, net
|
|
(27,486)
|
|
|
(32,022)
|
|
|
(14)
|
%
|
|
(23,327)
|
|
|
37
|
%
|
Loss before income tax benefit
|
|
(8,045)
|
|
|
(48,095)
|
|
|
(83)
|
%
|
|
(9,162)
|
|
|
*
|
Income tax benefit
|
|
(5,401)
|
|
|
(30,893)
|
|
|
(83)
|
%
|
|
(13,172)
|
|
|
135
|
%
|
Net income (loss)
|
|
(2,644)
|
|
|
(17,202)
|
|
|
(85)
|
%
|
|
4,010
|
|
|
*
|
Add: Net (income) loss attributable to non-controlling interest
|
|
(466)
|
|
|
420
|
|
|
*
|
|
1,745
|
|
|
(76)
|
%
|
Net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
(81)
|
%
|
|
$
|
5,755
|
|
|
*
|
*Not meaningful
Year ended December 31, 2020 compared to year ended December 31, 2019
Asset-based recurring revenues
Asset-based recurring revenues increased 12% from $484,312 in 2019 to $540,947 in 2020. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle as a result of the upswing in the equity markets relative to the comparable 2019 period. In 2020, revenues were also positively affected by new account growth and positive net flows of AUM/A.
The number of financial advisors with AUM or AUA on our technology platforms increased from 40,563 as of December 31, 2019 to 41,206 as of December 31, 2020 and the number of AUM or AUA client accounts increased from approximately 2.1 million as of December 31, 2019 to approximately 2.4 million as of December 31, 2020.
Asset-based recurring revenue was 54% of total revenue for both years.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 13% from $378,813 in 2019 to $426,507 in 2020. This increase was primarily due to an increase of $41,204 in the Envestnet Wealth Solutions segment and an increase of $6,490 in the Envestnet Data & Analytics segment.
The increase in the Envestnet Wealth Solutions segment was primarily due to our 2019 acquisitions of PortfolioCenter and Pietech, Inc. (collectively, the “2019 Acquisitions”) and growth from new and existing customers.
The increase in Envestnet Data & Analytics revenue was primarily due to broad increases in revenue from new and existing customers.
Professional services and other revenues
Professional services and other revenues decreased 17% from $37,002 in 2019 to $30,776 in 2020. The decrease was due to timing of the completion of customer projects and deployments, as well as a decrease in revenues resulting from the cancellation of our 2020 Advisor Summit.
Cost of revenues
Cost of revenues increased 10% from $278,811 in 2019 to $305,929 in 2020, primarily due to an increase in asset-based cost of revenues of $34,656, partially offset by decreases in professional services and other revenues of $5,568 and subscription-based cost of revenues of $1,970. As a percentage of total revenues, cost of revenues remained consistent at 31% for the years ended December 31, 2019 and 2020.
Compensation and benefits
Compensation and benefits increased 4% from $383,554 in 2019 to $398,970 in 2020, primarily due to increases in severance expense of $9,742 and incentive compensation of $6,925, partially offset by salary, benefits and related payroll taxes of $1,922. The increase in severance expense is primarily related to charges connected with the Early Retirement Program that was offered to eligible employees through January 31, 2020. The 2019 Acquisitions contributed compensation and benefits expenses of $22,891 and $28,601, to total compensation and benefits expense in 2019 and 2020, respectively. As a percentage of total revenues, compensation and benefits decreased from 43% in 2019 to 40% in 2020, primarily due to revenue growth of our 2019 Acquisitions outpacing compensation and benefit growth for these same acquisitions.
General and administration
General and administration expenses increased 5% from $152,564 in 2019 to $160,229 in 2020, primarily due to increases in non-recurring restructuring charges and transaction costs of $11,202, systems development expense of $4,772, trade errors of $3,045, permits, licenses and fees of $1,425, professional and legal expenses of $1,363 and other miscellaneous general and administrative expenses of $1,278. These increases were partially offset by decreases in travel and entertainment expense of $12,335, occupancy costs of $3,296 and marketing expense of $3,159. The 2019 Acquisitions contributed general and administration expenses of $8,701 and $6,593, to total general and administration expenses in 2019 and 2020 respectively. As a percentage of total revenues, general and administration expenses decreased from 17% in 2019 to 16% and 2020.
Depreciation and amortization
Depreciation and amortization expense increased 12% from $101,271 in 2019 to $113,661 in 2020, primarily due to increases in internally developed software amortization expense of $6,628 and intangible asset amortization expense of $5,107. As a percentage of total revenues, depreciation and amortization expense remained consistent at 11% in 2019 and 2020.
Interest income
Interest income decreased from $3,347 in 2019 to $1,112 in 2020, primarily due to less interest earned on our bank accounts and money market funds. While our cash and cash equivalent balance increased significantly in 2020 as a result of the proceeds we received from our convertible debt offering in August 2020, interest earned on this cash continued to be low.
Interest expense
Interest expense decreased 3% from $32,520 in 2019 to $31,504 in 2020, primarily due to the payment of $345,000 of convertible notes in December 2019 and the paydown of our revolving credit facility in 2020, partially offset by additional interest incurred on the issuance of Convertible Notes due 2025 in August 2020. As a percentage of total revenues, interest expense decreased from 4% in 2019 to 3% in 2020.
Other income (expense), net
Other income (expense), net increased from other expense of $2,849 in 2019 to other income of $2,906 in 2020, primarily due to a gain of $4,230 recognized in 2020 on the remeasurement of our previously held interest in the private financial technology design company, a gain of $2,524 as a result of a fair value adjustment upon settlement of our former Chief Executive Officer's stock options and a gain on the sale of our interest held in a private company of $1,647. This increase was partially offset by additional equity method losses of $3,038 recorded in 2020 as compared to 2019.
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
Loss before income tax benefit
|
|
$
|
(8,045)
|
|
|
$
|
(48,095)
|
|
Income tax benefit
|
|
(5,401)
|
|
|
(30,893)
|
|
Effective tax rate
|
|
67.1
|
%
|
|
64.2
|
%
|
Our 2020 effective tax rate differs from the statutory rate primarily due to state taxes, the excess tax benefit related to stock-based compensation, the executive compensation deduction limitation, the generation of research and development (“R&D”) tax credits, income related to the Indian partnerships, the impact of the CARES Act related to NOL carryback, the change in the valuation allowance the Company has placed on a portion of its US deferred tax assets and the settlement of ASC 740-10 amounts due to the settlement of the bilateral advance pricing agreement with India and the filing of voluntary disclosure agreement returns.
Our 2019 effective tax rate differs from the statutory rate primarily due to state taxes, excess tax benefit related to stock-based compensation, the generation of R&D tax credits, unrecognized tax benefits, prior period true-ups and changes in valuation allowances.
Year ended December 31, 2019 compared to year ended December 31, 2018
For a discussion of the 2019 Results of Operations compared to 2018, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 28, 2020.
Business Segments
Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Part II, Item 8, “Note 19—Segment Information”. Our business segments are as follows:
Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions.
Envestnet Data & Analytics – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services.
We also incur expenses not directly attributable to the segments listed above. These nonsegment operating expenses include salary and benefits for certain corporate officers, certain types of professional service expenses and insurance, acquisition related transaction costs, restructuring charges and other non-recurring and/or non-operationally related expenses.
The following table reconciles income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Envestnet Wealth Solutions
|
|
$
|
91,501
|
|
|
$
|
67,713
|
|
|
$
|
75,491
|
|
Envestnet Data & Analytics
|
|
(9,943)
|
|
|
(25,262)
|
|
|
(10,013)
|
|
Nonsegment operating expenses
|
|
(62,117)
|
|
|
(58,524)
|
|
|
(51,313)
|
|
Income (loss) from operations
|
|
19,441
|
|
|
(16,073)
|
|
|
14,165
|
|
Interest income
|
|
1,112
|
|
|
3,347
|
|
|
2,363
|
|
Interest expense
|
|
(31,504)
|
|
|
(32,520)
|
|
|
(25,203)
|
|
Other income (expense), net
|
|
2,906
|
|
|
(2,849)
|
|
|
(487)
|
|
Consolidated loss before income tax benefit
|
|
(8,045)
|
|
|
(48,095)
|
|
|
(9,162)
|
|
Income tax benefit
|
|
(5,401)
|
|
|
(30,893)
|
|
|
(13,172)
|
|
Consolidated net income (loss)
|
|
(2,644)
|
|
|
(17,202)
|
|
|
4,010
|
|
Add: Net (income) loss attributable to non-controlling interest
|
|
(466)
|
|
|
420
|
|
|
1,745
|
|
Consolidated net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
$
|
5,755
|
|
Envestnet Wealth Solutions
The following table presents income from operations for the Envestnet Wealth Solutions segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
% Change
|
|
2018
|
|
% Change
|
|
|
(in thousands, except for percentages)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Asset-based
|
|
$
|
540,947
|
|
|
$
|
484,312
|
|
|
12
|
%
|
|
$
|
481,233
|
|
|
1
|
%
|
Subscription-based
|
|
248,810
|
|
|
207,606
|
|
|
20
|
%
|
|
138,372
|
|
|
50
|
%
|
Total recurring revenues
|
|
789,757
|
|
|
691,918
|
|
|
14
|
%
|
|
619,605
|
|
|
12
|
%
|
Professional services and other revenues
|
|
16,333
|
|
|
17,540
|
|
|
(7)
|
%
|
|
13,000
|
|
|
35
|
%
|
Total revenues
|
|
806,090
|
|
|
709,458
|
|
|
14
|
%
|
|
632,605
|
|
|
12
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
283,497
|
|
|
255,108
|
|
|
11
|
%
|
|
244,658
|
|
|
4
|
%
|
Compensation and benefits
|
|
257,698
|
|
|
227,570
|
|
|
13
|
%
|
|
191,893
|
|
|
19
|
%
|
General and administration
|
|
92,680
|
|
|
93,321
|
|
|
(1)
|
%
|
|
75,424
|
|
|
24
|
%
|
Depreciation and amortization
|
|
80,714
|
|
|
65,746
|
|
|
23
|
%
|
|
45,139
|
|
|
46
|
%
|
Total operating expenses
|
|
714,589
|
|
|
641,745
|
|
|
11
|
%
|
|
557,114
|
|
|
15
|
%
|
Income from operations
|
|
$
|
91,501
|
|
|
$
|
67,713
|
|
|
35
|
%
|
|
$
|
75,491
|
|
|
(10)
|
%
|
Year ended December 31, 2020 compared to year ended December 31, 2019 for the Envestnet Wealth Solutions segment
Revenues
Asset-based recurring revenues
Asset-based recurring revenues increased 12% from $484,312 in 2019 to $540,947 in 2020. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle as a result of the upswing in the equity markets relative to the comparable 2019 period. In 2020, revenues were also positively affected by new account growth and positive net flows of AUM/A.
The number of financial advisors with AUM or AUA on our technology platforms increased from 40,563 as of December 31, 2019 to 41,206 as of December 31, 2020 and the number of AUM or AUA client accounts increased from approximately 2.1 million as of December 31, 2019 to approximately 2.4 million as of December 31, 2020.
As a percentage of total revenues, asset-based recurring revenue decreased from 68% of total revenue in 2019 to 67% in 2020.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 20% from $207,606 in 2019 to $248,810 in 2020.
The 2019 Acquisitions contributed incremental revenues of $31,527 to subscription-based recurring revenues in 2020. The remaining increase of $9,677, is a result of growth from new and existing customers.
Professional services and other revenues
Professional services and other revenues decreased 7% from $17,540 in 2019 to $16,333 in 2020. The decrease was due to timing of the completion of customer projects and deployments, as well as a decrease in revenues resulting from the cancellation of our 2020 Advisor Summit.
Cost of revenues
Cost of revenues increased 11% from $255,108 in 2019 to $283,497 in 2020. The increase was primarily due to an increase in asset-based cost of revenues of $34,656, directly correlated with the increase in asset-based recurring revenues for the period. This increase was partially offset by a decrease in professional services and other cost of revenues of $5,568, primarily as a result of the cancellation of our 2020 Advisor Summit. As a percentage of segment revenues, cost of revenues decreased from 36% in 2019 to 35% in 2020.
Compensation and benefits
Compensation and benefits increased 13% from $227,570 in 2019 to $257,698 in 2020, primarily due to increases in severance expense of $12,301, incentive compensation of $10,555, salaries, benefits and related payroll taxes of $5,287 and non-cash compensation expense of $1,829. The increase in severance expense is primarily related to charges in connection with the Early Retirement Program. The 2019 Acquisitions contributed compensation and benefits expenses of $22,891 and $28,601 to total compensation and benefits expense in 2019 and 2020, respectively. As a percentage of segment revenues, compensation and benefits remained consistent at 32% in 2019 and 2020.
General and administration
General and administration expenses decreased 1% from $93,321 in 2019 to $92,680 in 2020, primarily due to decreases in travel and entertainment expense of $7,667 and marketing expense of $3,153, partially offset by increases in systems development expense of $3,386, trade errors of $3,000, communications, research and data services of $1,583 and non-recurring restructuring charges and transaction costs of $1,219. The 2019 Acquisitions contributed general and administration expenses of $8,701 and $6,593 to total general and administration expense in 2019 and 2020, respectively. As a percentage of segment revenues, general and administration expenses decreased from 13% in 2019 to 11% in 2020.
Depreciation and amortization
Depreciation and amortization increased 23% from $65,746 in 2019 to $80,714 in 2020, primarily due to increases in intangible asset amortization expense of $6,472, internally developed software amortization expense of $5,659 and property and equipment depreciation expense of $2,837. As a percentage of segment revenues, depreciation and amortization expense increased from 9% in 2019 to 10% in 2020.
Year ended December 31, 2019 compared to year ended December 31, 2018 for the Envestnet Wealth Solutions segment
For a discussion of the 2019 Results of Operations compared to 2018 for the Envestnet Wealth Solutions segment, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 28, 2020.
Envestnet Data & Analytics
The following table presents loss from operations for the Envestnet Data & Analytics segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
% Change
|
|
2018
|
|
% Change
|
|
|
(in thousands, except for percentages)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Subscription-based
|
|
$
|
177,697
|
|
|
$
|
171,207
|
|
|
4
|
%
|
|
$
|
157,095
|
|
|
9
|
%
|
Professional services and other revenues
|
|
14,443
|
|
|
19,462
|
|
|
(26)
|
%
|
|
22,663
|
|
|
(14)
|
%
|
Total revenues
|
|
192,140
|
|
|
190,669
|
|
|
1
|
%
|
|
179,758
|
|
|
6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
22,432
|
|
|
23,703
|
|
|
(5)
|
%
|
|
18,742
|
|
|
26
|
%
|
Compensation and benefits
|
|
110,436
|
|
|
118,062
|
|
|
(6)
|
%
|
|
102,378
|
|
|
15
|
%
|
General and administration
|
|
36,268
|
|
|
38,641
|
|
|
(6)
|
%
|
|
36,164
|
|
|
7
|
%
|
Depreciation and amortization
|
|
32,947
|
|
|
35,525
|
|
|
(7)
|
%
|
|
32,487
|
|
|
9
|
%
|
Total operating expenses
|
|
202,083
|
|
|
215,931
|
|
|
(6)
|
%
|
|
189,771
|
|
|
14
|
%
|
Loss from operations
|
|
$
|
(9,943)
|
|
|
$
|
(25,262)
|
|
|
(61)
|
%
|
|
$
|
(10,013)
|
|
|
152
|
%
|
Year ended December 31, 2020 compared to year ended December 31, 2019 for the Envestnet Data & Analytics segment
Revenues
Subscription-based recurring revenues
Subscription-base recurring revenues increased 4% from $171,207 in 2019 to $177,697 in 2020, primarily due to broad increases in revenue from new and existing customers.
Professional services and other revenues
Professional services and other revenues decreased 26% from $19,462 in 2019 to $14,443 in 2020, primarily due to the timing of the completion of projects and customer deployments.
Cost of revenues
Cost of revenues decreased 5% from $23,703 in 2019 to $22,432 in 2020, primarily due to a decrease in outside services spend. As a percentage of segment revenues, cost of revenues remained consistent at 12% in 2019 and 2020.
Compensation and benefits
Compensation and benefits decreased 6% from $118,062 in 2019 to $110,436 in 2020, primarily due to decreases in salaries, benefits and related payroll taxes of $11,024 resulting from increased capitalization of internally developed software and a decrease in severance expense of $2,584 primarily related to a reduction in force at one location in 2019, offset by increases in incentive compensation expense of $5,285 and in commission expense of $590. As a percentage of segment revenues, compensation and benefits decreased from 62% in 2019 to 57% in 2020.
General and administration
General and administration expenses decreased 6% from $38,641 in 2019 to $36,268 in 2020, primarily due to decreases in travel and entertainment expense of $4,053, occupancy costs of $2,482 and professional fees of $266. These decreases were partially offset by increases in restructuring charges and transaction costs of $3,542 and miscellaneous general and administrative expense of $613. As a percentage of segment revenues, general and administration expenses decreased from 20% in 2019 to 19% in 2020.
Depreciation and amortization
Depreciation and amortization decreased 7% from $35,525 in 2019 to $32,947 in 2020, primarily due to a decrease in depreciation of property and equipment of $2,224 resulting from a non-recurring prior year event. As a percentage of segment revenues, depreciation and amortization expense decreased from 19% in 2019 to 17% in 2020.
Year ended December 31, 2019 compared to year ended December 31, 2018 for the Envestnet Data & Analytics segment
For a discussion of the 2019 Results of Operations compared to 2018 for the Envestnet Data & Analytics segment, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 28, 2020.
Nonsegment
The following table presents nonsegment operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
% Change
|
|
2018
|
|
% Change
|
|
|
(in thousands, except for percentages)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
30,836
|
|
|
$
|
37,922
|
|
|
(19)
|
%
|
|
$
|
22,917
|
|
|
65
|
%
|
General and administration
|
|
31,281
|
|
|
20,602
|
|
|
52
|
%
|
|
28,396
|
|
|
(27)
|
%
|
Total operating expenses
|
|
$
|
62,117
|
|
|
$
|
58,524
|
|
|
6
|
%
|
|
$
|
51,313
|
|
|
14
|
%
|
Year ended December 31, 2020 compared to year ended December 31, 2019 for Nonsegment
Compensation and benefits
Compensation and benefits decreased 19% from $37,922 in 2019 to $30,836 in 2020, primarily due to decreases in incentive compensation of $8,915 (primarily a result of approximately $8,800 in retention bonuses paid in connection with the PIEtech Acquisition in 2019) and non-cash compensation expense of $2,605, partially offset by an increase in salaries, benefits and related payroll taxes of $3,815 and an increase in contract labor of $568.
General and administration
General and administration expenses increased 52% from $20,602 in 2019 to $31,281 in 2020, primarily due to increases in restructuring charges and transaction costs of $6,441 related to multiple 2020 corporate initiatives and acquisition related activities, professional and legal fees of $1,535, permits, license and fees of $1,203, systems and development costs of $898 and miscellaneous general and administrative expense of $763. These increases were partially offset by a decrease in travel and entertainment expense of $615.
Year ended December 31, 2019 compared to year ended December 31, 2018 for Nonsegment
For a discussion of the 2019 Results of Operations compared to 2018 for Nonsegment expenses, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 28, 2020.
Non‑GAAP Financial Measures
In addition to reporting results according to GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues,” “adjusted EBITDA,” “adjusted net income” and “adjusted net income per share”.
“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑alone entities. Adjusted revenues has
limitations as a financial measure, should be considered as supplemental in nature and are not meant as a substitute for revenue prepared in accordance with GAAP
“Adjusted EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration and purchase liability, income tax benefit, depreciation and amortization, non‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration liability, litigation and regulatory related expenses, foreign currency, non-income tax expense adjustment, gain on acquisition of equity method investment, gain on sale of interest in private company, loss allocation from equity method investments and (income) loss attributable to non‑controlling interest.
“Adjusted net income” represents net income before deferred revenue fair value adjustment, accretion on contingent consideration and purchase liability, non‑cash interest expense, non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles and fair value adjustment to property and equipment, net, fair market value adjustment on contingent consideration liability, litigation and regulatory related expenses, foreign currency, non-income tax expense adjustment, gain on acquisition of equity method investment, gain on sale of interest in private company, loss allocation from equity method investments and (income) loss attributable to non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income. The normalized tax rate is based solely on the estimated blended statutory income tax rates in the jurisdictions in which we operate. We monitor the normalized tax rate based on events or trends that could materially impact the rate, including tax legislation changes and changes in the geographic mix of our operations.
“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted‑average shares outstanding.
Our Board and management use these non-GAAP financial measures:
•As measures of operating performance;
•For planning purposes, including the preparation of annual budgets;
•To allocate resources to enhance the financial performance of our business;
•To evaluate the effectiveness of our business strategies; and
•In communications with our Board 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 present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measures because we believe that they provide our Board, 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 EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investors and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share in such evaluation.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
•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;
•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 $8,304, $8,119, and $5,531 in the years ended December 31, 2020, 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 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, adjusted net income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per share to net income and net income per share, the most directly comparable GAAP measures. Further, our management also reviews GAAP measures and evaluates individual measures that are not included in some or all of our non‑U.S. GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Total revenues
|
|
$
|
998,230
|
|
|
$
|
900,127
|
|
|
$
|
812,363
|
|
Deferred revenue fair value adjustment
|
|
692
|
|
|
9,271
|
|
|
118
|
|
Adjusted revenues
|
|
$
|
998,922
|
|
|
$
|
909,398
|
|
|
$
|
812,481
|
|
The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Net income (loss)
|
|
$
|
(2,644)
|
|
|
$
|
(17,202)
|
|
|
$
|
4,010
|
|
Add (deduct):
|
|
|
|
|
|
|
Deferred revenue fair value adjustment
|
|
692
|
|
|
9,271
|
|
|
118
|
|
Interest income
|
|
(1,112)
|
|
|
(3,347)
|
|
|
(2,363)
|
|
Interest expense
|
|
31,504
|
|
|
32,520
|
|
|
25,203
|
|
Accretion on contingent consideration and purchase liability
|
|
1,688
|
|
|
1,772
|
|
|
222
|
|
Income tax benefit
|
|
(5,401)
|
|
|
(30,893)
|
|
|
(13,172)
|
|
Depreciation and amortization
|
|
113,661
|
|
|
101,271
|
|
|
77,626
|
|
Non-cash compensation expense
|
|
57,113
|
|
|
60,444
|
|
|
40,245
|
|
Restructuring charges and transaction costs
|
|
19,383
|
|
|
26,558
|
|
|
15,580
|
|
Severance
|
|
25,110
|
|
|
15,367
|
|
|
8,318
|
|
Fair market value adjustment on contingent consideration liability
|
|
(3,105)
|
|
|
(8,126)
|
|
|
—
|
|
Litigation and regulatory related expenses
|
|
7,825
|
|
|
2,879
|
|
|
—
|
|
Foreign currency
|
|
116
|
|
|
(72)
|
|
|
(589)
|
|
Non-income tax expense adjustment
|
|
421
|
|
|
374
|
|
|
(590)
|
|
Gain on acquisition of equity method investment
|
|
(4,230)
|
|
|
—
|
|
|
—
|
|
Gain on sale of interest in private company
|
|
(1,647)
|
|
|
—
|
|
|
—
|
|
Loss allocation from equity method investments
|
|
5,399
|
|
|
2,361
|
|
|
1,146
|
|
(Income) loss attributable to non-controlling interest
|
|
(1,830)
|
|
|
110
|
|
|
1,791
|
|
Adjusted EBITDA
|
|
$
|
242,943
|
|
|
$
|
193,287
|
|
|
$
|
157,545
|
|
The following table sets forth a reconciliation of net income (loss) to adjusted net income and adjusted net income per diluted share based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Net income (loss)
|
|
$
|
(2,644)
|
|
|
$
|
(17,202)
|
|
|
$
|
4,010
|
|
Income tax benefit (1)
|
|
(5,401)
|
|
|
(30,893)
|
|
|
(13,172)
|
|
Loss before income tax benefit
|
|
(8,045)
|
|
|
(48,095)
|
|
|
(9,162)
|
|
Add (deduct):
|
|
|
|
|
|
|
Deferred revenue fair value adjustment
|
|
692
|
|
|
9,271
|
|
|
118
|
|
Accretion on contingent consideration and purchase liability
|
|
1,688
|
|
|
1,772
|
|
|
222
|
|
Non-cash interest expense
|
|
17,480
|
|
|
18,743
|
|
|
13,905
|
|
Non-cash compensation expense
|
|
57,113
|
|
|
60,444
|
|
|
40,245
|
|
Restructuring charges and transaction costs
|
|
19,383
|
|
|
26,558
|
|
|
15,580
|
|
Severance
|
|
25,110
|
|
|
15,367
|
|
|
8,318
|
|
Amortization of acquired intangibles and fair value adjustment to property and equipment, net
|
|
73,559
|
|
|
70,677
|
|
|
53,856
|
|
Fair market value adjustment on contingent consideration liability
|
|
(3,105)
|
|
|
(8,126)
|
|
|
—
|
|
Litigation and regulatory related expenses
|
|
7,825
|
|
|
2,879
|
|
|
—
|
|
Foreign currency
|
|
116
|
|
|
(72)
|
|
|
(589)
|
|
Non-income tax expense adjustment
|
|
421
|
|
|
374
|
|
|
(590)
|
|
Gain on acquisition of equity method investment
|
|
(4,230)
|
|
|
—
|
|
|
—
|
|
Gain on sale of interest in private company
|
|
(1,647)
|
|
|
—
|
|
|
—
|
|
Loss allocation from equity method investments
|
|
5,399
|
|
|
2,361
|
|
|
1,146
|
|
(Income) loss attributable to non-controlling interest
|
|
(1,830)
|
|
|
110
|
|
|
1,791
|
|
Adjusted net income before income tax effect
|
|
189,929
|
|
|
152,263
|
|
|
124,840
|
|
Income tax effect (2)
|
|
(48,432)
|
|
|
(38,827)
|
|
|
(33,705)
|
|
Adjusted net income
|
|
$
|
141,497
|
|
|
$
|
113,436
|
|
|
$
|
91,135
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding
|
|
53,589,232
|
|
|
50,937,919
|
|
|
45,268,002
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
Options to purchase common stock
|
|
416,593
|
|
|
1,015,164
|
|
|
1,304,493
|
|
Unvested restricted stock units
|
|
592,033
|
|
|
691,740
|
|
|
811,590
|
|
Convertible Notes
|
|
414,398
|
|
|
33,388
|
|
|
—
|
|
Warrants
|
|
58,459
|
|
|
—
|
|
|
—
|
|
Diluted number of weighted-average shares outstanding
|
|
55,070,715
|
|
|
52,678,211
|
|
|
47,384,085
|
|
Adjusted net income per share - diluted
|
|
$
|
2.57
|
|
|
$
|
2.15
|
|
|
$
|
1.92
|
|
__________________________________________________________
(1)For the years ended December 31, 2020, 2019 and 2018, the effective tax rate computed in accordance with GAAP equaled 67.1%, 64.2% and 143.8%, respectively.
(2)Estimated normalized effective tax rates of 25.5%, 25.5% and 27.0%, respectively, have been used to compute adjusted net income for the years ended December 31, 2020, 2019 and 2018, respectively.
Note on Income Taxes: As of December 31, 2020, we had net operating loss carryforwards of approximately $242,000 and $211,000 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 we pay for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with GAAP, and from the normalized rate shown above.
The following tables set forth a reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Envestnet Wealth Solutions
|
|
Envestnet Data & Analytics
|
|
Nonsegment
|
|
Total
|
|
|
(in thousands)
|
Revenues
|
|
$
|
806,090
|
|
|
$
|
192,140
|
|
|
$
|
—
|
|
|
$
|
998,230
|
|
Deferred revenue fair value adjustment
|
|
692
|
|
|
—
|
|
|
—
|
|
|
692
|
|
Adjusted revenues
|
|
$
|
806,782
|
|
|
$
|
192,140
|
|
|
$
|
—
|
|
|
$
|
998,922
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
91,501
|
|
|
$
|
(9,943)
|
|
|
$
|
(62,117)
|
|
|
$
|
19,441
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment
|
|
692
|
|
|
—
|
|
|
—
|
|
|
692
|
|
Accretion on contingent consideration and purchase liability
|
|
1,430
|
|
|
258
|
|
|
—
|
|
|
1,688
|
|
Depreciation and amortization
|
|
80,714
|
|
|
32,947
|
|
|
—
|
|
|
113,661
|
|
Non-cash compensation expense
|
|
35,797
|
|
|
14,932
|
|
|
8,908
|
|
|
59,637
|
|
Restructuring charges and transaction costs
|
|
6,878
|
|
|
2,304
|
|
|
10,201
|
|
|
19,383
|
|
Severance
|
|
18,617
|
|
|
4,628
|
|
|
1,865
|
|
|
25,110
|
|
Fair market value adjustment on contingent consideration liability
|
|
—
|
|
|
(3,105)
|
|
|
—
|
|
|
(3,105)
|
|
Litigation related expense
|
|
—
|
|
|
7,825
|
|
|
—
|
|
|
7,825
|
|
Other
|
|
15
|
|
|
5
|
|
|
—
|
|
|
20
|
|
Non-income tax expense adjustment
|
|
514
|
|
|
(93)
|
|
|
—
|
|
|
421
|
|
Loss attributable to non-controlling interest
|
|
(1,830)
|
|
|
—
|
|
|
—
|
|
|
(1,830)
|
|
Adjusted EBITDA
|
|
$
|
234,328
|
|
|
$
|
49,758
|
|
|
$
|
(41,143)
|
|
|
$
|
242,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Envestnet Wealth Solutions
|
|
Envestnet Data & Analytics
|
|
Nonsegment
|
|
Total
|
|
|
(in thousands)
|
Revenues
|
|
$
|
709,458
|
|
|
$
|
190,669
|
|
|
$
|
—
|
|
|
$
|
900,127
|
|
Deferred revenue fair value adjustment
|
|
9,271
|
|
|
—
|
|
|
—
|
|
|
9,271
|
|
Adjusted revenues
|
|
$
|
718,729
|
|
|
$
|
190,669
|
|
|
$
|
—
|
|
|
$
|
909,398
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
67,713
|
|
|
$
|
(25,262)
|
|
|
$
|
(58,524)
|
|
|
$
|
(16,073)
|
|
Add:
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment
|
|
9,271
|
|
|
—
|
|
|
—
|
|
|
9,271
|
|
Accretion on contingent consideration and purchase liability
|
|
1,772
|
|
|
—
|
|
|
—
|
|
|
1,772
|
|
Depreciation and amortization
|
|
65,746
|
|
|
35,525
|
|
|
—
|
|
|
101,271
|
|
Non-cash compensation expense
|
|
33,968
|
|
|
14,963
|
|
|
11,513
|
|
|
60,444
|
|
Restructuring charges and transaction costs
|
|
2,491
|
|
|
635
|
|
|
22,633
|
|
|
25,759
|
|
Severance
|
|
6,315
|
|
|
7,212
|
|
|
1,840
|
|
|
15,367
|
|
Fair market value adjustment on contingent consideration liability
|
|
—
|
|
|
—
|
|
|
(8,126)
|
|
|
(8,126)
|
|
Litigation related expense
|
|
—
|
|
|
2,879
|
|
|
—
|
|
|
2,879
|
|
Other
|
|
239
|
|
|
—
|
|
|
—
|
|
|
239
|
|
Non-income tax expense adjustment
|
|
500
|
|
|
(126)
|
|
|
—
|
|
|
374
|
|
Loss attributable to non-controlling interest
|
|
110
|
|
|
—
|
|
|
—
|
|
|
110
|
|
Adjusted EBITDA
|
|
$
|
188,125
|
|
|
$
|
35,826
|
|
|
$
|
(30,664)
|
|
|
$
|
193,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Envestnet Wealth Solutions
|
|
Envestnet Data & Analytics
|
|
Nonsegment
|
|
Total
|
|
|
(in thousands)
|
Revenues
|
|
$
|
632,605
|
|
|
$
|
179,758
|
|
|
$
|
—
|
|
|
$
|
812,363
|
|
Deferred revenue fair value adjustment
|
|
110
|
|
|
8
|
|
|
—
|
|
|
118
|
|
Adjusted revenues
|
|
$
|
632,715
|
|
|
$
|
179,766
|
|
|
$
|
—
|
|
|
$
|
812,481
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
75,491
|
|
|
$
|
(10,013)
|
|
|
$
|
(51,313)
|
|
|
$
|
14,165
|
|
Add (deduct):
|
|
|
|
|
|
|
|
—
|
|
Deferred revenue fair value adjustment
|
|
110
|
|
|
8
|
|
|
—
|
|
|
118
|
|
Accretion on contingent consideration and purchase liability
|
|
222
|
|
|
—
|
|
|
—
|
|
|
222
|
|
Depreciation and amortization
|
|
45,139
|
|
|
32,487
|
|
|
—
|
|
|
77,626
|
|
Non-cash compensation expense
|
|
19,342
|
|
|
11,552
|
|
|
9,351
|
|
|
40,245
|
|
Restructuring charges and transaction costs
|
|
3,143
|
|
|
1,735
|
|
|
10,702
|
|
|
15,580
|
|
Severance
|
|
7,810
|
|
|
480
|
|
|
28
|
|
|
8,318
|
|
Litigation related expense
|
|
66
|
|
|
4
|
|
|
—
|
|
|
70
|
|
Non-income tax expense adjustment
|
|
(1,177)
|
|
|
587
|
|
|
—
|
|
|
(590)
|
|
Loss attributable to non-controlling interest
|
|
1,791
|
|
|
—
|
|
|
—
|
|
|
1,791
|
|
Adjusted EBITDA
|
|
$
|
151,937
|
|
|
$
|
36,840
|
|
|
$
|
(31,232)
|
|
|
$
|
157,545
|
|
Liquidity and Capital Resources
As of December 31, 2020, we had total cash and cash equivalents of $384,565, compared to $82,505 as of December 31, 2019. In August 2020, we issued $517,500 of convertible notes that mature on August 15, 2025. See Part II, Item 8, “Note 10—Debt, Convertible Notes due 2025” for more details regarding the issuance of these convertible notes. With the proceeds from this convertible note issuance, we repaid the outstanding balance on our revolving credit facility of $150,000.
We plan to use existing cash as of December 31, 2020, cash generated in the ongoing operations of our business and amounts under our revolving credit facility to fund our current operations, capital expenditures and possible acquisitions or other strategic activity, and to meet our debt service obligations. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements we may be required to borrow under our revolving credit facility or incur additional debt to fund our ongoing operations or to fund potential acquisitions or other strategic activities.
Amended Credit Agreement
In 2014, we and certain of our subsidiaries entered into a credit agreement with a group of banks (the “Banks”), for which Bank of Montreal acted as administrative agent. Since 2014, the credit agreement has been amended several times, the latest of which occurred in September 2019 (the “Amended Credit Agreement”).
Pursuant to the Amended Credit Agreement, the Banks agreed to provide to the Company with a revolving credit facility of $500,000, of which amount may be increased by $150,000 (the “Revolving Credit Facility”). The Amended Credit Agreement also includes a $5,000 sub-facility for the issuance of letters of credit.
Proceeds under the Amended Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
Borrowings made under the Amended Credit Agreement incur interest at rates between 1.50% and 3.25% above LIBOR based on our total leverage ratio. Borrowings made under the Amended Credit Agreement are scheduled to mature on September 27, 2024.
As of December 31, 2020, there were no amounts outstanding under the Revolving Credit Facility. As of December 31, 2020, we had $500,000 available to borrow under the under the Revolving Credit Facility, subject to covenant compliance.
See Part II, Item 8, “Note 10—Debt” for further information regarding the terms of our Amended Credit Agreement.
Convertible Notes
In May 2018, we issued $345,000 of convertible notes that mature on June 1, 2023 (the “Convertible Notes due 2023”). The Convertible Notes due 2023 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 1 and December 1 of each year.
In August 2020, we issued $517,500 of convertible notes that mature on August 15, 2025 (the “Convertible Notes due 2025”). The Convertible Notes due 2025 bear interest at a rate of 0.75% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2021.
See Part II, Item 8, “Note 10—Debt” for further information regarding the terms of our Convertible Notes.
Issuance and sale of Common Shares to BlackRock
In December 2018, we issued and sold to BlackRock, Inc. (“BlackRock”) approximately 2,356,000 common shares at a purchase price of $52.13 per share, and warrants to purchase approximately 470,000 common shares at an exercise price of $65.16 per share, subject to customary anti-dilution adjustments. The warrants are exercisable at BlackRock’s option for four years from the date of issuance. The warrants may be exercisable through cash exercise or net issue exercise with cash settlement at our sole discretion.
Cash Flows
The following table presents information regarding our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
Net cash provided by operating activities
|
|
$
|
169,836
|
|
|
$
|
108,726
|
|
Net cash used in investing activities
|
|
(99,996)
|
|
|
(375,708)
|
|
Net cash provided by financing activities
|
|
232,950
|
|
|
60,465
|
|
Effect of exchange rate on changes on cash
|
|
(831)
|
|
|
(399)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
301,959
|
|
|
(206,916)
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2020 was $169,836 compared to net cash provided by operating activities of $108,726 for the same period in 2019. The increase was primarily due to:
•A decrease in pre-tax losses period over period of $40,050;
•An increase period over period for noncash addbacks for depreciation and amortization expense of $12,390;
•Reduced fair market value adjustments on estimated contingent consideration liabilities of $5,021; and
•Reduced gains on proceeds of $5,000 received from a life insurance policy that was paid out in 2019.
These increases were partially offset by a decrease in the change in operating assets and liabilities of $6,162 which is primarily timing related.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 was $99,996 compared to net cash used in investing activities of $375,708 for the same period in 2019. The change was primarily a result of a decrease in cash disbursements for business acquisitions of $300,658. In January 2020, we also used $11,000 to acquire a 4.25% interest in a privately held company. For the year ended December 31, 2020, we capitalized an additional $20,812 of internally developed software costs as compared to the same period in 2019.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $232,950 compared to net cash provided by financing activities of $60,465 for the same period in 2019. In August 2020, we received net proceeds of approximately $503,000 from the issuance of convertible debt. With these proceeds, we paid off the outstanding balance of our revolving credit facility. On a year over year basis, our revolver activity resulted in an additional $520,000 of net cash outflows. In 2019, we paid $184,751 towards convertible notes that matured on December 15, 2019.
Commitments
We enter into unconditional purchase obligations arrangements for certain of our services that we receive in the normal course of business. As of December 31, 2020, the Company estimated future minimum unconditional purchase obligations of approximately $56,000.
As of December 31, 2020, future minimum lease payments under non-cancellable leases were $163,537. These leases expire at various dates prior to 2030.
In connection with certain of our acquisitions, we have entered into contingent consideration arrangements whereby we have agreed to pay additional amounts based upon the achievement of certain performance targets. As of December 31, 2020, these liabilities are valued at $12,559. We also have additional direct purchase obligations of $6,229 related to our acquisitions. We granted membership interests in certain of the Company's equity method investments to two legacy PIEtech executives with an estimated grant date fair market value of $8,900. These membership interests vested on May 1, 2020 and become exercisable on May 1, 2022, with the option to put the membership interests to the Company.
We have also committed $5,740 in future funding to certain of our equity method investees.
We expect to spend approximately $14,000 on capital expenditures in 2021, with a forecasted 10% annual increase thereafter for the next four years.
We include various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. We have experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to these indemnification and guarantee provisions. We believe that it is unlikely that we will have to make material payments under these arrangements and therefore we have not recorded a contingent liability in the consolidated balance sheets.
Backlog
We sell subscriptions to our solutions through contracts that are generally one to three years in length, although terms can extend to as long as five years. Our subscription agreements with our customers generally contain scheduled minimum subscription fees, and usage-based fees which depend on the extent their customers or end users use our platform. We consider the unpaid contractual minimum payments under our subscription agreements to be our backlog. Due to the inherent volatility of backlog measured using contractual minimums, and the fact that contractual minimums are becoming increasingly less important to our business, we do not utilize backlog as a key management metric internally and we do not believe that it is a meaningful measurement of our future revenues.
We expect that the amount of backlog relative to the total value of our subscription agreements will change from year to year for several reasons, including the timing of contract renewals, the proportion of total subscription revenue represented by contractual minimum payments and the average non-cancellable terms of our subscription agreements. The change in backlog that results from these events may not be an indicator of the likelihood of renewal or expected future revenues.
We also expect that as our customer base continues to mature and customer deployments scale usage, renewals over time will increasingly have fewer contractual minimum fees because such fees are intended to decrease the timing risk associated with initial deployment commitments.
In addition, because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of the period, as well as contracts that are renewed and new customer contracts that are entered into during the period, backlog at the beginning of any period is not necessarily indicative of future performance.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The accounting policies described below require management to apply significant judgment in connection with the preparation of our consolidated financial statements. In particular, judgment is applied to determine the appropriate assumptions to be used in calculating estimates that affect certain reported amounts in our consolidated financial statements. These estimates and assumptions are based on historical experience and on various other factors that we believe to be reasonable under the circumstances. If different estimates or assumptions were used, our results of operations, financial condition and cash flows could have been materially different than those reflected in our consolidated financial statements. For additional information regarding our critical accounting policies, see Part II, Item 8, “Note 2—Summary of Significant Accounting Policies”.
Revenue Recognition
Revenues are derived from asset-based and subscription-based services and professional services and other sources. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.
Asset-based recurring revenues— Asset-based recurring revenues primarily consist of fees for providing customers continuous access to platform services through our uniquely customized platforms. These platform services include investment manager research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration and are made available to customers throughout the contractual term from the date the customized platform is launched.
The asset-based fees we earn are generally based upon variable percentages of assets managed or administered on our platforms. The fee percentage varies based on the level and type of services we provide to our 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 performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the customer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our services and each quarter is separately identified in the contract, and are considered to be a single performance obligation under ASC 606.
The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the 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 Wealth Solutions segment.
For certain services provided by third parties, we evaluate whether we are the principal (revenues reported on a gross basis) or agent (revenues reported on a net basis). Generally, we report customer fees including charges for third party service providers where we have a direct contract with such third party service providers on a gross basis, whereas the amounts billed to our customers are recorded as revenues, and amounts paid to third party service providers are recorded as cost of revenues. We are the principal in the transaction because we control the services before they are transferred to our customers. Control is evidenced by being primarily responsible to our customers and having discretion in establishing pricing.
Subscription-based recurring revenues— Subscription-based recurring revenues primarily consist of fees for providing customers continuous access to our 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 ASC 606.
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 month or 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 subscription services. Usage-based revenue is recognized on a monthly basis as the customer receives and consumes the benefit as we provide the services. Subscription-based fees are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Professional services and other revenues— We earn professional services fees by providing contractual customized services and platform software development as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverables in the contract. Certain professional services contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Initial implementation fees are fixed and are generally recognized ratably over the contract term.
Other revenue primarily includes revenue related to the Advisor Summit. Other revenue is recognized when the events are held. Other revenue is not significant.
The majority of the professional services and other contracts contain one performance obligation. Professional services and other revenues are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Arrangements with multiple performance obligations— Certain of the our contracts with customers contain multiple performance obligations such as platform services performance obligation and professional services performance obligation. For such arrangements, we allocate 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.
Purchase accounting
Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions, we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and contingent consideration.
Acquired intangible assets, excluding goodwill, are valued using a discounted cash flow methodology based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, margins and forecasted cash flows based on the discount rate and terminal growth rate. Management projects revenue growth rates, margins and cash flows based on the historical operating results of the acquired entity adjusted for synergies anticipated to be achieved through integration, expected future performance, operational strategies and the general macroeconomic environment. We review finite‑lived intangible assets for triggering events such as significant changes in operations, customers or future revenue that might indicate the need to impair the assets acquired or change the useful lives of the assets acquired. There was no impairment recognized on intangible assets in 2020, 2019 or 2018.
Assumed liabilities are valued based on estimates of anticipated expenditures to be incurred to satisfy the assumed obligations, including contractual liabilities assumed, which require the exercise of professional judgment.
Assumed contracts may have favorable or unfavorable terms that must be valued as of the acquisition date. Such valuation is subject to management judgment regarding the evaluation and interpretation of contract terms in relation to other economic circumstances, such as the market rates for office space leases.
If we assume a performance obligation to customers as of the acquisition date, a deferred revenue obligation is recognized. Judgment is required to evaluate whether a future performance obligation exists and to assign a value to the performance obligation.
Assumed acquired tax liabilities for uncertain tax positions are dependent on assessing the past practices of the acquisition target based on our review of actual tax filings and information obtained through due diligence procedures. Evaluation of the validity of tax positions taken by the acquisition target are subject to management judgment.
We determine the fair value of contingent acquisition consideration payable on the acquisition date using a discounted cash flow approach utilizing an appropriate discount rate. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as adjustments to fair market value adjustment on contingent consideration liability within general and administration expenses on the consolidated statements of operations. Changes in the fair value of the contingent acquisition consideration liability can result from adjustments to the estimated revenue forecasts included in the contingent payment calculations. For the years ended December 31, 2020 and 2019, we reduced our contingent consideration liabilities plus accrued interest by $3,105 and $8,126, respectively, as we determined that certain performance targets would not be met. We did not record any fair value adjustments to our contingent consideration for the year ended December 31, 2018.
Reviews for impairment of goodwill and acquired intangible assets
Goodwill is tested for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the relevant GAAP authoritative guidance, we aggregate components of a single operating segment into a reporting unit, if appropriate. For purposes of performing the impairment tests, we identify reporting units in accordance with GAAP. The identification of reporting units and consideration of aggregation criteria requires management judgment.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a quantitative evaluation must be performed. If the carrying value of a reporting unit’s goodwill exceeds its fair value, then an impairment loss equal to the difference will be recorded. In accordance with applicable accounting guidance, prior to performing the quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, we are not required to complete the quantitative goodwill impairment evaluation. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves management judgment.
We completed our annual goodwill impairment test as of October 31, 2020 for the fiscal year ended December 31, 2020. At that date, we determined it was appropriate to aggregate certain components of the same operating segment into a single reporting unit. We concluded that we have two reporting units. We also determined that it was more likely than not that the fair value of the reporting units exceeded the carrying value and concluded that goodwill was not impaired. As a result, we did not perform the quantitative goodwill impairment evaluation.
As part of the our ongoing monitoring efforts to assess goodwill for possible indications of impairment, we will continue to consider a wide variety of factors, including but not limited to the global economic environment and its potential impact on our business. There can be no assurance that our estimates and assumptions regarding forecasted cash flows of certain reporting units, the current economic environment, or the other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.
Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. No intangible asset impairment charges have been recorded for the years ended December 31, 2020, 2019 and 2018.
Convertible debt
We have issued $345,000 of 1.75% convertible notes due June 2023 and $517,500 of 0.75% convertible notes due August 2025. These convertible notes are accounted for in accordance with ASC 470-20. We have determined that the embedded conversion options in our convertible notes are not required to be separately accounted for as a derivative under GAAP. We separately account for the liability and equity components of convertible notes that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option, or equity component, in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. We recognize the accretion of the resulting discount using the effective interest method as part of interest expense in its consolidated statements of operations. The determination of the interest rate used to value the equity component requires management judgment. Small changes to this interest rate could have a significant effect on the amounts allocated to the liability component and on the amortization of the debt discount.
Income taxes
We are subject to income taxes in the United States, Australia, Canada, India, and the United Kingdom. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.
We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our income tax provision in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount that we determine is more-likely-than-not to be realized in the future.
In our ordinary course of business, we may enter into transactions for which the ultimate tax determination is uncertain. In such cases, we establish reserves for tax-related uncertainties based on our estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will be reflected in our provision for income taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The amount of income tax we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for the foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitations on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Our effective tax rates differ from the statutory rates primarily due to state taxes, the effect of the excess tax benefit related to stock-based compensation, the executive compensation deduction limitation, the generation of R&D tax credits, income related to the India partnerships, impact of the CARES Act related to NOL carryback, the change in the valuation allowance the Company has placed on a portion of its US deferred tax assets, and the settlement of ASC 740-10 amounts due to
the settlement of the bilateral advanced pricing agreement with India and the filing of voluntary disclosure agreement returns. Our provision for income taxes varies based on, among other things, changes in the valuation of our deferred tax assets and liabilities, the tax effects of non-cash stock-based compensation or changes in applicable tax laws, regulations and accounting principles or interpretations thereof.
We are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our results of operations, financial condition and cash flows.
Our Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2020, 2011, and 2010. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months.
Recent Accounting Pronouncements
See Part II, Item 8, “Note 2—Summary of Significant Accounting Policies” for a detailed description of Recent Accounting Pronouncements.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Envestnet, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Envestnet, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases, as amended.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the carrying value of the liability component of convertible senior notes
As discussed in Note 10 to the consolidated financial statements, in August 2020, the Company issued 0.75% convertible senior notes due August 15, 2025 (the Notes) for an aggregate principal amount of $517.5 million. In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The determination of the carrying amount of the liability component was based on the fair value of a similar debt instrument that does not have a conversion feature as of the issuance date. As a result, the Company recorded debt discount and the related equity component of approximately $70.5 million as a result of the convertible note issuance.
We identified the evaluation of the carrying value of the liability component of the Notes as a critical audit matter. A high degree of auditor judgment was required in assessing the interest rate that would be available to the Company for a similar debt instrument that does not have a conversion feature. Additionally, minor changes to the interest rate could have a significant effect on the amounts allocated to the liability component and on the amortization of the debt discount.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the carrying value of the liability component of the Notes, including the interest rate that would be available to the Company for a similar debt instrument that does not have a conversion feature. We read the indenture documents related to the Notes and involved professionals with specialized skills and knowledge who assisted in developing an independent fair value estimate of the liability component of the Notes using independently determined interest rates based on available market data, which we compared to management’s estimate.
Sufficiency of audit evidence over the IT elements of revenue recognition
As discussed in Notes 2 and 14 to the consolidated financial statements, the Company has recorded $998,230 thousand of revenues for the year ended December 31, 2020. Revenues are derived from asset‑based services, subscription or licensing‑based services, and professional services and other sources, and sold with varying price structures. The Company recognizes revenues when control of the services is transferred to customers.
We identified the evaluation of the sufficiency of audit evidence over the information technology (“IT”) elements of revenue recognition as a critical audit matter. Subjective and complex auditor judgment was required to assess the sufficiency of audit procedures performed and the nature and extent of audit evidence obtained due to the complexity and number of IT systems and the specialized skills needed to test the IT elements of the revenue recognition process.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the IT elements of revenue recognition, including the determination of IT systems for which those procedures were to be performed based on the nature of the information processed by the systems. We evaluated the design and tested the operating effectiveness of certain internal controls within the Company’s revenue recognition process, including the automated elements of the flow of transactions and certain manual controls over the underlying transaction data processed by the IT systems. We
involved IT professionals with specialized skills and knowledge, who assisted in testing certain general IT controls and certain application controls interacting within the Company’s revenue recognition process. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Denver, Colorado
February 26, 2021
Envestnet, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
384,565
|
|
|
$
|
82,505
|
|
Fees receivable, net
|
|
80,064
|
|
|
67,815
|
|
Prepaid expenses and other current assets
|
|
40,570
|
|
|
32,183
|
|
Total current assets
|
|
505,199
|
|
|
182,503
|
|
|
|
|
|
|
Property and equipment, net
|
|
47,969
|
|
|
53,756
|
|
Internally developed software, net
|
|
96,501
|
|
|
60,263
|
|
Intangible assets, net
|
|
435,041
|
|
|
505,589
|
|
Goodwill
|
|
906,773
|
|
|
879,850
|
|
Operating lease right-of-use assets, net
|
|
105,249
|
|
|
82,796
|
|
Other non-current assets
|
|
47,558
|
|
|
37,127
|
|
Total assets
|
|
$
|
2,144,290
|
|
|
$
|
1,801,884
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accrued expenses and other liabilities
|
|
$
|
158,548
|
|
|
$
|
137,944
|
|
Accounts payable
|
|
18,003
|
|
|
17,277
|
|
Operating lease liabilities
|
|
13,649
|
|
|
13,816
|
|
Contingent consideration
|
|
11,251
|
|
|
—
|
|
Deferred revenue
|
|
34,918
|
|
|
34,753
|
|
Total current liabilities
|
|
236,369
|
|
|
203,790
|
|
|
|
|
|
|
Convertible Notes
|
|
756,503
|
|
|
305,513
|
|
Revolving credit facility
|
|
—
|
|
|
260,000
|
|
Contingent consideration
|
|
1,308
|
|
|
9,045
|
|
Deferred revenue
|
|
1,813
|
|
|
5,754
|
|
Non-current operating lease liabilities
|
|
112,182
|
|
|
88,365
|
|
Deferred tax liabilities, net
|
|
34,740
|
|
|
29,481
|
|
Other non-current liabilities
|
|
25,557
|
|
|
32,360
|
|
Total liabilities
|
|
1,168,472
|
|
|
934,308
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, par value $0.005, 50,000,000 shares authorized; no shares issued and outstanding as of December 31, 2020 and December 31, 2019
|
|
—
|
|
|
—
|
|
Common stock, par value $0.005, 500,000,000 shares authorized; 67,832,706 and 66,320,706 shares issued as of December 31, 2020 and December 31, 2019, respectively; 54,093,535 and 52,841,706 shares outstanding as of December 31, 2020 and December 31, 2019, respectively
|
|
339
|
|
|
331
|
|
Additional paid-in capital
|
|
1,166,774
|
|
|
1,037,141
|
|
Accumulated deficit
|
|
(79,912)
|
|
|
(75,664)
|
|
Treasury stock at cost, 13,739,171 and 13,479,000 shares as of December 31, 2020 and December 31, 2019, respectively
|
|
(110,466)
|
|
|
(90,965)
|
|
Accumulated other comprehensive loss
|
|
(398)
|
|
|
(1,749)
|
|
Total stockholders’ equity
|
|
976,337
|
|
|
869,094
|
|
Non-controlling interest
|
|
(519)
|
|
|
(1,518)
|
|
Total equity
|
|
975,818
|
|
|
867,576
|
|
Total liabilities and equity
|
|
$
|
2,144,290
|
|
|
$
|
1,801,884
|
|
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
Asset-based
|
|
$
|
540,947
|
|
|
$
|
484,312
|
|
|
$
|
481,233
|
|
Subscription-based
|
|
426,507
|
|
|
378,813
|
|
|
295,467
|
|
Total recurring revenues
|
|
967,454
|
|
|
863,125
|
|
|
776,700
|
|
Professional services and other revenues
|
|
30,776
|
|
|
37,002
|
|
|
35,663
|
|
Total revenues
|
|
998,230
|
|
|
900,127
|
|
|
812,363
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Cost of revenues
|
|
305,929
|
|
|
278,811
|
|
|
263,400
|
|
Compensation and benefits
|
|
398,970
|
|
|
383,554
|
|
|
317,188
|
|
General and administration
|
|
160,229
|
|
|
152,564
|
|
|
139,984
|
|
Depreciation and amortization
|
|
113,661
|
|
|
101,271
|
|
|
77,626
|
|
Total operating expenses
|
|
978,789
|
|
|
916,200
|
|
|
798,198
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
19,441
|
|
|
(16,073)
|
|
|
14,165
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
Interest income
|
|
1,112
|
|
|
3,347
|
|
|
2,363
|
|
Interest expense
|
|
(31,504)
|
|
|
(32,520)
|
|
|
(25,203)
|
|
Other income (expense), net
|
|
2,906
|
|
|
(2,849)
|
|
|
(487)
|
|
Total other expense, net
|
|
(27,486)
|
|
|
(32,022)
|
|
|
(23,327)
|
|
|
|
|
|
|
|
|
Loss before income tax benefit
|
|
(8,045)
|
|
|
(48,095)
|
|
|
(9,162)
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
(5,401)
|
|
|
(30,893)
|
|
|
(13,172)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
(2,644)
|
|
|
(17,202)
|
|
|
4,010
|
|
Add: Net (income) loss attributable to non-controlling interest
|
|
(466)
|
|
|
420
|
|
|
1,745
|
|
Net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
$
|
5,755
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06)
|
|
|
$
|
(0.33)
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.06)
|
|
|
$
|
(0.33)
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
53,589,232
|
|
|
50,937,919
|
|
|
45,268,002
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,589,232
|
|
|
50,937,919
|
|
|
47,384,085
|
|
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
$
|
5,755
|
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net
|
|
1,351
|
|
|
(755)
|
|
|
(1,618)
|
|
Comprehensive income (loss) attributable to Envestnet, Inc.
|
|
$
|
(1,759)
|
|
|
$
|
(17,537)
|
|
|
$
|
4,137
|
|
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Other
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
controlling
|
|
Total
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
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 14)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,217
|
|
|
—
|
|
|
9,217
|
|
Exercise of stock options
|
|
359,345
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
5,303
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,305
|
|
Issuance of common stock - vesting of restricted stock units
|
|
1,073,681
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,969
|
|
|
—
|
|
|
—
|
|
|
276
|
|
|
40,245
|
|
Shares withheld to satisfy tax withholdings
|
|
—
|
|
|
—
|
|
|
(367,683)
|
|
|
(20,816)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,816)
|
|
Issuance of non-controlling units in private company
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
473
|
|
|
473
|
|
Issuance of Convertible Notes due 2023, net of offering costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,611
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,611
|
|
Issuance of common stock and warrants - private placement, net of offering costs
|
|
2,355,816
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
118,148
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
118,161
|
|
Purchase of non-controlling units in ERS
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,160)
|
|
|
—
|
|
|
—
|
|
|
(1,400)
|
|
|
(6,560)
|
|
Reclassification of redeemable units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
900
|
|
|
900
|
|
Foreign currency translation loss, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,618)
|
|
|
—
|
|
|
—
|
|
|
(1,618)
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,755
|
|
|
(1,745)
|
|
|
4,010
|
|
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
|
|
783,216
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
10,588
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,592
|
|
Issuance of common stock - vesting of restricted stock units
|
|
1,098,124
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Acquisition of business
|
|
3,200,468
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
223,240
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
223,256
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,436
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,436
|
|
Shares withheld to satisfy tax withholdings
|
|
—
|
|
|
—
|
|
|
(361,902)
|
|
|
(23,107)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,107)
|
|
Payment of Convertible Notes due 2019
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,251)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,251)
|
|
Foreign currency translation loss, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(755)
|
|
|
—
|
|
|
—
|
|
|
(755)
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,782)
|
|
|
(420)
|
|
|
(17,202)
|
|
Balance, December 31, 2019
|
|
66,320,706
|
|
|
$
|
331
|
|
|
(13,479,000)
|
|
|
$
|
(90,965)
|
|
|
$
|
1,037,141
|
|
|
$
|
(1,749)
|
|
|
$
|
(75,664)
|
|
|
$
|
(1,518)
|
|
|
$
|
867,576
|
|
-continued-
Envestnet, Inc.
Consolidated Statements of Stockholders’ Equity (continued)
(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Other
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
controlling
|
|
Total
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income (Loss)
|
|
Deficit
|
|
Interest
|
|
Equity
|
Balance, December 31, 2019
|
|
66,320,706
|
|
|
$
|
331
|
|
|
(13,479,000)
|
|
|
$
|
(90,965)
|
|
|
$
|
1,037,141
|
|
|
$
|
(1,749)
|
|
|
$
|
(75,664)
|
|
|
$
|
(1,518)
|
|
|
$
|
867,576
|
|
Adoption of ASC 326 (See Note 2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,138)
|
|
|
—
|
|
|
(1,138)
|
|
Exercise of stock options
|
|
705,333
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
10,756
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,760
|
|
Issuance of common stock - vesting of restricted stock units
|
|
804,982
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Issuance of common stock
|
|
1,685
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
126
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
126
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,292
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56,292
|
|
Shares withheld to satisfy tax withholdings
|
|
—
|
|
|
—
|
|
|
(260,171)
|
|
|
(19,501)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,501)
|
|
Transfer of non-controlling units, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
666
|
|
|
—
|
|
|
—
|
|
|
(139)
|
|
|
527
|
|
Capital contribution - non-controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
|
—
|
|
|
—
|
|
|
672
|
|
|
606
|
|
Issuance of Convertible Notes due 2025, net of offering costs and taxes of $8,694
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
61,859
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
61,859
|
|
Foreign currency translation gain, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,351
|
|
|
—
|
|
|
—
|
|
|
1,351
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,110)
|
|
|
466
|
|
|
(2,644)
|
|
Balance, December 31, 2020
|
|
67,832,706
|
|
|
$
|
339
|
|
|
(13,739,171)
|
|
|
$
|
(110,466)
|
|
|
$
|
1,166,774
|
|
|
$
|
(398)
|
|
|
$
|
(79,912)
|
|
|
$
|
(519)
|
|
|
$
|
975,818
|
|
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,644)
|
|
|
$
|
(17,202)
|
|
|
$
|
4,010
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
113,661
|
|
|
101,271
|
|
|
77,626
|
|
Deferred rent and lease incentive amortization
|
|
—
|
|
|
—
|
|
|
671
|
|
Provision for doubtful accounts
|
|
2,817
|
|
|
2,855
|
|
|
1,618
|
|
Deferred income taxes
|
|
(1,884)
|
|
|
(39,630)
|
|
|
(23,629)
|
|
Release of uncertain tax positions
|
|
(7,101)
|
|
|
—
|
|
|
—
|
|
Non-cash compensation expense
|
|
59,637
|
|
|
60,444
|
|
|
40,245
|
|
Non-cash interest expense
|
|
18,515
|
|
|
19,246
|
|
|
14,534
|
|
Accretion on contingent consideration and purchase liability
|
|
1,688
|
|
|
1,772
|
|
|
222
|
|
Payments of contingent consideration
|
|
—
|
|
|
(578)
|
|
|
—
|
|
Fair market value adjustment to contingent consideration liability
|
|
(3,105)
|
|
|
(8,126)
|
|
|
—
|
|
Gain on acquisition of equity method investment
|
|
(4,230)
|
|
|
—
|
|
|
—
|
|
Loss allocation from equity method investments
|
|
5,399
|
|
|
2,361
|
|
|
1,146
|
|
Gain on life insurance proceeds
|
|
—
|
|
|
(5,000)
|
|
|
—
|
|
Impairment of right of use assets
|
|
2,661
|
|
|
—
|
|
|
—
|
|
Other
|
|
(729)
|
|
|
—
|
|
|
—
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
Fees receivable, net
|
|
(15,055)
|
|
|
1,139
|
|
|
(12,890)
|
|
Prepaid expenses and other current assets
|
|
(9,666)
|
|
|
(6,440)
|
|
|
(887)
|
|
Other non-current assets
|
|
(1,963)
|
|
|
(5,234)
|
|
|
(3,336)
|
|
Accrued expenses and other liabilities
|
|
22,109
|
|
|
(811)
|
|
|
12,939
|
|
Accounts payable
|
|
(187)
|
|
|
(2,863)
|
|
|
1,743
|
|
Deferred revenue
|
|
(4,125)
|
|
|
727
|
|
|
345
|
|
Other non-current liabilities
|
|
(5,962)
|
|
|
4,795
|
|
|
3,028
|
|
Net cash provided by operating activities
|
|
169,836
|
|
|
108,726
|
|
|
117,385
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(12,088)
|
|
|
(19,847)
|
|
|
(20,524)
|
|
Capitalization of internally developed software
|
|
(54,908)
|
|
|
(34,096)
|
|
|
(24,068)
|
|
Investments in private companies
|
|
(15,640)
|
|
|
(5,250)
|
|
|
(1,200)
|
|
Acquisitions of businesses, net of cash acquired
|
|
(20,257)
|
|
|
(320,915)
|
|
|
(194,617)
|
|
Proceeds from life insurance policy
|
|
—
|
|
|
5,000
|
|
|
—
|
|
Other
|
|
2,897
|
|
|
(600)
|
|
|
(1,270)
|
|
Net cash used in investing activities
|
|
(99,996)
|
|
|
(375,708)
|
|
|
(241,679)
|
|
-continued-
Envestnet, Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from issuance of Convertible Notes due 2025
|
|
517,500
|
|
|
—
|
|
|
—
|
|
Convertible Notes due 2025 issuance costs
|
|
(14,540)
|
|
|
—
|
|
|
—
|
|
Proceeds from issuance of Convertible Notes due 2023
|
|
—
|
|
|
—
|
|
|
345,000
|
|
Convertible Notes due 2023 issuance costs
|
|
—
|
|
|
—
|
|
|
(9,982)
|
|
Payment of Convertible Notes due 2019
|
|
—
|
|
|
(184,751)
|
|
|
—
|
|
Proceeds from borrowings on revolving credit facility
|
|
45,000
|
|
|
345,000
|
|
|
195,000
|
|
Payments on revolving credit facility
|
|
(305,000)
|
|
|
(85,000)
|
|
|
(276,168)
|
|
Revolving credit facility issuance costs
|
|
—
|
|
|
(2,103)
|
|
|
—
|
|
Capital contribution - non-controlling interest
|
|
606
|
|
—
|
|
|
—
|
|
Payments of deferred consideration on prior acquisitions
|
|
(1,879)
|
|
|
—
|
|
|
—
|
|
Payments of contingent consideration
|
|
—
|
|
|
(171)
|
|
|
(2,193)
|
|
Issuance of common stock and warrants - private placement, net of offering costs
|
|
—
|
|
|
—
|
|
|
122,704
|
|
Purchase of ERS units
|
|
—
|
|
|
—
|
|
|
(6,560)
|
|
Proceeds from exercise of stock options
|
|
10,760
|
|
|
10,592
|
|
|
5,305
|
|
Taxes paid in lieu of shares issued for stock-based compensation
|
|
(19,501)
|
|
|
(23,107)
|
|
|
(20,816)
|
|
Issuance of restricted stock units
|
|
4
|
|
|
5
|
|
|
4
|
|
Net cash provided by financing activities
|
|
232,950
|
|
|
60,465
|
|
|
352,294
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
(831)
|
|
|
(399)
|
|
|
(592)
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
301,959
|
|
|
(206,916)
|
|
|
227,408
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (See Note 2)
|
|
82,755
|
|
|
289,671
|
|
|
62,263
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2)
|
|
$
|
384,714
|
|
|
$
|
82,755
|
|
|
$
|
289,671
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes
|
|
$
|
8,304
|
|
|
$
|
8,119
|
|
|
$
|
5,531
|
|
Supplemental disclosure of cash flow information - cash paid during the period for interest
|
|
12,990
|
|
|
13,530
|
|
|
10,409
|
|
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
|
|
5,239
|
|
|
15,780
|
|
|
—
|
|
Transaction costs of issuance of common stock and warrants included in accrued expenses and other liabilities
|
|
—
|
|
|
—
|
|
|
4,543
|
|
Purchase liabilities included in accrued expenses and other liabilities
|
|
632
|
|
|
—
|
|
|
—
|
|
Purchase liabilities included in other non-current liabilities
|
|
—
|
|
|
5,468
|
|
|
—
|
|
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities
|
|
1,841
|
|
|
1,832
|
|
|
1,997
|
|
Membership interest liabilities included in other non-current liabilities
|
|
3,345
|
|
|
5,920
|
|
|
—
|
|
Common stock issued to settle purchase liability
|
|
126
|
|
|
772
|
|
|
—
|
|
Leasehold improvements funded by lease incentive
|
|
1,806
|
|
|
1,816
|
|
|
1,780
|
|
Transfer of non-controlling units
|
|
771
|
|
|
—
|
|
|
—
|
|
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
1.Organization and Description of Business
Envestnet, Inc. (“Envestnet”) through its subsidiaries (collectively, the “Company”), is transforming the way financial advice and wellness are delivered. Its mission is to empower advisors and financial service providers with innovative technology, solutions and intelligence to make financial wellness a reality for everyone. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet provides a unique financial network connecting technology, solutions and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 19—Segment Information”. The business segments are as follows:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions.
Envestnet Wealth Solutions serves its clients principally through the following product and service suites:
•Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to nearly 21,000 investment products. Envestnet | Enterprise also offers data aggregation and reporting, data analytics and digital advice capabilities to customers.
•Envestnet | Tamarac™ provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high‑end 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 and consulting services to assist advisors in creating investment solutions for their clients. These solutions include over 4,700 vetted third party managed account products, multi-manager portfolios, fund strategist portfolios, as well as nearly 900 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers portfolio overlay and tax optimization services.
•Envestnet Data & Analytics – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services, and includes product offerings from Envestnet | Yodlee and Envestnet | Analytics.
Envestnet operates five RIAs registered with the U.S. Securities and Exchange Commission (“SEC”).
2.Summary of Significant Accounting Policies
The Company follows accounting standards established by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting of financial condition, results of operations and cash flows. References to accounting principles generally accepted in the United States (“GAAP”) in these notes are to the FASB Accounting Standards Codification™ (“ASC”) and related updates (“ASU”).
Principles of Consolidation—The consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Foreign Currency—Accounts for the Envestnet Wealth Solutions segment that are denominated in a non-U.S. currency have been remeasured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet Data & Analytics segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a functional currency other than the U.S. dollar are translated at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates. Differences arising from these foreign currency translations are recorded in the consolidated balance sheets as accumulated other comprehensive income (loss) within stockholders' equity. The Company is also subject to gains and losses from foreign currency denominated transactions and the remeasurement of foreign currency denominated balance sheet accounts, both of which are included in other income (expense), net in the consolidated statements of operations.
Management Estimates—Management has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, right of use assets, restricted stock and stock options issued, contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, operating lease liabilities, fair value of the liability portion of the convertible debt, fair value of warrants issued, commitments and contingencies and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.
Revenue Recognition
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 consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.
Asset-Based Recurring Revenues—Asset-based recurring revenues primarily consist of fees for providing customers continuous access to platform services through the Company’s uniquely customized platforms. These platform services include investment manager research, portfolio diagnostics, proposal generation, investment model management, 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 fees the Company earns are generally based upon variable percentages of assets managed or administered on our platforms. The fee percentage varies based on the level and type of services the Company provides to its customers, as well as the values of existing customer accounts. The values of the customer accounts are affected by inflows or outflows of customer funds and market fluctuations.
The platform services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the 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 ASC 606.
The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the variable amounts earned from the platform services relate specifically to the benefits transferred to the customer during that month or quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
The asset-based contracts generally contain one performance obligation and revenue is recognized on a ratable basis over the quarter beginning on the date that the platform services are made available to the customer as the customer simultaneously consumes and receives the benefits of the services. All asset-based fees are recognized in the Envestnet Wealth Solutions segment.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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 contract 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 Recurring Revenues—Subscription-based recurring revenues primarily consist 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 ASC 606.
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.
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 subscription services. Usage-based revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the services. Subscription-based fees are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Professional Services and Other Revenues—The Company earns professional services fees by providing contractual customized services and platform software development as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverables in the contract. Certain professional services contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Initial implementation fees are fixed and are generally recognized ratably over the contract term.
Other revenues primarily includes revenue related to the Advisor Summit. Other revenues are recognized when the events are held. Other revenues are not significant.
The majority of the Company's professional services and other contracts contain one performance obligation. Professional services and other revenues are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Arrangements with Multiple Performance Obligations—Certain of the Company’s contracts with customers contain
multiple performance obligations such 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.
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 obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Contract Balances—The Company records contract liabilities (deferred revenue) when cash payments are received in advance of its performance. The term between invoicing date and when payment is due is generally not significant. For the majority of its arrangements, the Company requires advance quarterly payments before the services are delivered to the customer.
Deferred Revenue—Deferred revenue primarily consists of implementation fees, professional services and subscription fee payments received in advance from customers.
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. The Company determined the period of benefit by taking into consideration its customer contracts, life of the technology and other factors. Sales incentive compensation for renewal contracts are deferred and amortized on a straight-line basis over the related contractual renewal period. Deferred sales incentive compensation is included in other non-current assets in the consolidated balance sheets and amortization expense is included in compensation and benefits expenses in the consolidated statements of operations.
The Company has applied the practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in compensation and benefits expenses in the consolidated statements of operations.
Cost of Revenues—Cost of revenues primarily includes expenses related to third party investment management and clearing, custody and brokerage services. Generally, these expenses are calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each quarter and are recognized ratably throughout the quarter based on the number of days in the quarter.
Allowance for Doubtful Accounts—The Company evaluates the need for an allowance for doubtful accounts for potentially uncollectible fees receivable. In establishing the amount of the allowance, if any, customer-specific information is considered related to delinquent accounts, including historical loss experience and current economic conditions. As of December 31, 2020, and 2019, the Company’s allowance for doubtful accounts was $2,751 and $1,093, respectively.
Cash and Cash Equivalents—The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents.
Restricted Cash—The following table reconciles cash, cash equivalents and restricted cash from the consolidated balance sheets to amounts reported in the consolidated statements of cash flows:
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|
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
|
$
|
384,565
|
|
|
$
|
82,505
|
|
|
$
|
289,345
|
|
Restricted cash included in prepaid expenses and other current assets
|
|
—
|
|
|
82
|
|
|
158
|
|
Restricted cash included in other non-current assets
|
|
149
|
|
|
168
|
|
|
168
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
384,714
|
|
|
$
|
82,755
|
|
|
$
|
289,671
|
|
Investments—The Company has investments in private companies that are recorded using the equity method of accounting. The Company uses the equity method of accounting because of its less than 50% ownership and lack of control in these companies. These investments are included in other non-current assets on the consolidated balance sheets. The Company records the portion of its earnings or losses in these privately held companies’ net income or loss on a one quarter lag from the actual results of operations as a component of other income (expense), net on the consolidated statements of operations.
The Company reviews all investments on a regular basis to evaluate the carrying amount and economic viability. This evaluation process is based on information that the Company requests directly from these investees and includes, but is not limited to, the review of the investee’s cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. As this information is not subject to the same disclosure regulations as U.S.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
publicly traded companies, the basis for these evaluations is subject to the timing and accuracy of the data received from these investees.
When a review of an investee’s operations indicates that there is a decline in its value and it has been determined that this decline is other than temporary, the Company assesses the investment for impairment. Impaired investments are written down to estimated fair value. Fair value is estimated using a variety of valuation methodologies, including comparing the investee with publicly traded companies in similar lines of business, applying valuation multiples to estimated future operating results and analyzing estimated discounted future cash flows. There were no impairments of investments for the years ended December 31, 2020, 2019 and 2018.
Property and Equipment—Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is computed using the straight-line method based on estimated useful lives of the depreciable assets. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs and maintenance costs are charged to operations as incurred. Assets are reviewed for recoverability whenever events or circumstances indicate the carrying value may not be recoverable. There were no impairments of property and equipment for the years ended December 31, 2020, 2019 and 2018.
Internally Developed Software for Internal Use—Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Internally developed software is amortized on a straight-line basis over its estimated useful life. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no material impairments of internally developed software for internal use for the years ended December 31, 2020, 2019 and 2018.
Goodwill and Intangible Assets—Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is reviewed for impairment each year using a qualitative or quantitative process that is performed at least annually or whenever events or circumstances indicate a likely reduction in the fair value of a reporting unit below its carrying amount. The Company has concluded that it has two reporting units.
The Company performs the annual impairment analysis on October 31 in order to provide management time to complete the analysis prior to year-end. Prior to performing the quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value. If it is determined that it is unlikely that the carrying value exceeds the fair value, the Company is not required to complete the quantitative goodwill impairment evaluation. If it is determined that the carrying value may exceed fair value when considering qualitative factors, a quantitative goodwill impairment evaluation is performed. When performing the quantitative evaluation, if the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the difference will be recorded. No goodwill impairment charges have been recorded for the years ended December 31, 2020, 2019 and 2018.
Intangible assets are recorded at cost less accumulated amortization. Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. No intangible asset impairment charges have been recorded for the years ended December 31, 2020, 2019 and 2018.
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 and 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.
Adoption of the standard had a material impact on the Company's consolidated balance sheets, but did not have an impact on the Company's 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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
At inception, the Company determines if an arrangement is a lease. Operating leases are included in operating ROU assets, current operating lease liabilities and non-current operating lease liabilities in the Company's 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. The operating lease ROU asset also includes prepaid payments and excludes lease incentives. As none of the Company's leases provide an implicit rate, the Company uses an estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for non-lease components as part of the lease component for all asset classes. The majority of the Company's lease agreements are real estate leases.
Fair Value Measurements—The Company follows ASC 825-10, “Financial Instruments,” which provides companies the option to report selected financial assets and liabilities at fair value and also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheets. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that 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.
Financial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
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Level I:
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Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.
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Level II:
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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.
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Level III:
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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.
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Income Taxes—The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce deferred tax assets to an amount that is more likely than not to be realized.
The Company follows authoritative guidance related to how uncertain tax positions should be recognized, measured, disclosed and presented in the consolidated financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. The tax benefits recognized in the consolidated financial statements from tax positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Business Combinations—The Company accounts for business combinations under the acquisition method. The cost of an acquired company is assigned to the tangible and intangible assets acquired and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
management to make estimates and use valuation techniques when market values are not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred. The Company determines the fair value of contingent consideration payable on the acquisition date using a discounted cash flow approach utilizing an appropriate discount rate. Each reporting period thereafter, the Company revalues these obligations and records increases or decreases in their fair value as adjustments to fair market value adjustment on contingent consideration in the Company’s consolidated statements of operations. Changes in the fair value of the contingent consideration payable can result from adjustments to the estimated revenue forecasts included in the contingent consideration calculations.
Stock-Based Compensation—Compensation cost relating to stock-based awards made to employees and directors is recognized in the consolidated financial statements using the Black-Scholes option-pricing model in the case of non-qualified stock option awards, and intrinsic value in the case of restricted stock awards. The Company measures the cost of such awards based on the estimated fair value of the award measured at the grant date and recognizes the expense on a straight-line basis over the requisite service period, which is the vesting period.
Determining the fair value of stock options requires the Company to make several estimates, including the volatility of its stock price, the expected life of the option, forfeiture rate, dividend yield and interest rates. The Company estimates the expected life of its options using historical internal forfeiture data. The Company estimates stock-price volatility using historical third-party quotes of Envestnet’s common stock. The Company utilizes a risk-free interest rate, which is based on the yield of U.S. zero coupon securities with a maturity equal to the expected life of the options. The Company has not and does not expect to pay dividends on its common shares.
The Company is required to estimate expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for those awards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions may impact the total amount of expense ultimately recognized over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.
Convertible Notes—In May 2018, the Company issued $345,000 of 1.75% convertible notes due June 2023. In August 2020, the Company issued $517,500 of 0.75% convertible notes due August 2025. Collectively the “Convertible Notes” are accounted for in accordance with ASC 470-20. The Company has determined that the embedded conversion options in the Convertible Notes are not required to be separately accounted for as a derivative under GAAP. The Company separately accounts for the liability and equity components of Convertible Notes that can be settled in cash by allocating the proceeds from issuance between the liability component and the embedded conversion option, or equity component, in accordance with accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The value of the equity component is calculated by first measuring the fair value of the liability component, using the interest rate of a similar liability that does not have a conversion feature, as of the issuance date. The difference between the proceeds from the convertible debt issuance and the amount measured as the liability component is recorded as the equity component with a corresponding discount recorded on the debt. The Company recognizes the accretion of the resulting discount using the effective interest method as part of interest expense in its consolidated statements of operations. See “Recent Accounting Pronouncements” within this footnote.
Non-controlling Interest—In March 2018, the Company initially acquired a 43% fully diluted interest in a private company for cash consideration of $1,333. In connection with the acquisition, the Company was granted the ability to appoint two members to the private company's board of directors. The appointment of two board members gives the Company the majority of the board's voting rights. As a result, the Company uses the consolidation method of accounting for this investment. The private company was formed to enable financial advisors to provide insurance and income protection products to their clients.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements—In February 2016, the FASB issued ASU 2016-02, “Leases,” which amends the requirements for assets and liabilities recognized for all leases longer than twelve months. This standard was effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. These changes became effective for the Company's fiscal year beginning January 1, 2019 and have been reflected in these consolidated financial statements. See “Note 11—Leases.”
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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. This standard requires that entities estimate credit losses based upon an “expected credit loss” approach rather than the “incurred loss” approach. The new approach requires entities to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable forecasts of collectability. This standard was effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. These changes became effective for the Company's fiscal year beginning January 1, 2020. Upon adoption, the Company recognized the cumulative effect of the initial application of ASU 2016-13 as an adjustment of $1,138, net of tax, to the opening balance of accumulated deficit. The Company does not expect the adoption of ASU 2016-13 to have a material impact to the results of its operations on an ongoing basis.
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 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 was effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company early adopted this standard beginning January 1, 2019, noting that this standard was applied prospectively. Adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Not Yet Adopted Accounting Pronouncements—In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This update aims to reduce complexity within the accounting for income taxes as part of the simplification initiative. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2020. The Company will adopt this standard beginning January 1, 2021, noting that this standard will be applied prospectively. Adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.” This update simplifies the accounting for certain convertible instruments by reducing the number of accounting models available for convertible debt instruments and revises Topic 815-40, which provides guidance on how an entity must determine whether a contract qualifies for a scope exception from derivative accounting. Under the new guidance, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. In addition, the new guidance requires the if-converted method to be applied for all convertible instruments. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2021. Early adoption of the standard is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption of the standard requires using either a modified retrospective or a full retrospective approach.
The Company will early adopt this standard beginning January 1, 2021 using the modified retrospective approach. Adoption of this standard is expected to result in a decrease to accumulated deficit of approximately $28,000, a decrease to paid-in capital of approximately $115,000 and an increase to Convertible Notes of approximately $87,000. Interest expense recognized in future periods is expected to be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost. The adoption will have no impact on the Company's consolidated statements of cash flows.
3.Business Acquisitions
FolioDynamix
On January 2, 2018, the Company acquired all of the issued and outstanding membership interests of FolioDynamics Holdings, Inc. (“FolioDynamix”) through a merger of FolioDynamix with and into a wholly owned subsidiary of Envestnet.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
FolioDynamix provides financial institutions, RIAs, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research and overlay management services. FolioDynamix is included in the Envestnet Wealth Solutions segment.
The Company acquired FolioDynamix to add complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. Envestnet is continuing 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 acquisition with a combination of cash on hand and borrowings under its revolving credit facility. Total consideration transferred in the acquisition was $193,135.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
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Cash and cash equivalents
|
|
$
|
4,876
|
|
Accounts receivable
|
|
4,962
|
|
Prepaid expenses and other current assets
|
|
3,773
|
|
Property and equipment, net
|
|
927
|
|
Other non-current assets
|
|
441
|
|
Identifiable intangible assets
|
|
135,700
|
|
Goodwill
|
|
79,891
|
|
Total assets acquired
|
|
230,570
|
|
Accounts payable
|
|
(5,358)
|
|
Accrued expenses
|
|
(7,907)
|
|
Deferred tax liability
|
|
(23,300)
|
|
Deferred revenue
|
|
(806)
|
|
Other non-current liabilities
|
|
(64)
|
|
Total liabilities assumed
|
|
(37,435)
|
|
Total net assets acquired
|
|
$
|
193,135
|
|
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
A summary of estimated identifiable intangible assets acquired, estimated useful lives and amortization method follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Amortization
|
|
|
Amount
|
|
Useful Life in Years
|
|
Method
|
Customer list
|
|
$
|
113,500
|
|
|
13
|
|
Accelerated
|
Proprietary technology
|
|
17,500
|
|
|
5
|
|
Straight-line
|
Trade names and domains
|
|
4,700
|
|
|
6
|
|
Straight-line
|
Total intangible assets acquired
|
|
$
|
135,700
|
|
|
|
|
|
The results of FolioDynamix’s operations are included in the consolidated statements of operations beginning January 2, 2018. FolioDynamix’s revenues for the year ended December 31, 2018 totaled $68,122. FolioDynamix’s pre-tax loss for the year ended December 31, 2018 totaled $13,777. The pre-tax loss includes acquired intangible asset amortization of $17,908 for the year ended December 31, 2018.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Acquisition of Private Artificial Intelligence (“AI”) Company
On January 2, 2019, pursuant to an agreement and plan of merger dated as of January 2, 2019 between Envestnet and a private AI company, the private AI company merged into Yodlee Inc., a wholly owned subsidiary of the Company (the “private AI company acquisition”). The private AI company provides conversational artificial intelligence tools and applications to financial services firms, improves the way Financial Service Providers (“FSPs”) can interact with their customers, and supports these FSPs to better engage, support and assist their consumers leveraging this latest wave of customer-centric capabilities.
The technology and operations of the private company are included in the Company’s Envestnet Data & Analytics segment.
The seller of the private AI company is also entitled to an additional unlimited earn-out payment with an estimated fair value of $7,580 as of the acquisition date. The unlimited earn-out payment is based on the private company's revenue and other retention targets for the twelve-month period beginning January 1, 2021.
The consideration transferred in the acquisition was as follows:
|
|
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
11,173
|
|
Purchase consideration liability
|
|
6,240
|
|
Contingent consideration liability
|
|
7,580
|
|
Working capital adjustment
|
|
70
|
|
Total consideration transferred
|
|
$
|
25,063
|
|
In December 2019, the Company determined that revenue targets for this acquisition would not be met. As a result, the Company reduced the contingent consideration liability plus accrued interest associated with this acquisition by $8,126 and recorded this as a reduction to general and administration expenses.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
Total tangible assets acquired
|
|
$
|
144
|
|
Total liabilities assumed
|
|
(688)
|
|
Identifiable intangible assets
|
|
4,100
|
|
Goodwill
|
|
21,507
|
|
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 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Amortization
|
|
|
Amount
|
|
Useful Life in Years
|
|
Method
|
Proprietary technology
|
|
$
|
4,100
|
|
|
4
|
|
Straight-line
|
The results of the private AI company's operations are included in the consolidated statements of operations beginning January 2, 2019 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2020 and 2019, acquisition related costs for the private AI company acquisition were not material, and are included in general and administration expenses.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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 (“PortfolioCenter”) from Performance Technologies, Inc. (the “PC Seller”), a wholly owned subsidiary of The Charles Schwab Corporation (“PortfolioCenter acquisition”). 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 PortfolioCenter's revenue for the twelve-month period beginning April 1, 2020. The discounted amount of the contingent consideration liability was estimated to be $8,200 at the acquisition date and is included as a non-current liability in the December 31, 2019 consolidated balance sheet and as a current liability in the December 31, 2020 consolidated balance sheet.
The consideration transferred in the acquisition was as follows:
|
|
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
17,500
|
|
Contingent consideration liability
|
|
8,200
|
|
Total consideration transferred
|
|
$
|
25,700
|
|
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
Total tangible assets acquired
|
|
$
|
13
|
|
Total liabilities assumed
|
|
(1,600)
|
|
Identifiable intangible assets
|
|
11,700
|
|
Goodwill
|
|
15,587
|
|
Total net assets acquired
|
|
$
|
25,700
|
|
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. The goodwill is deductible for income tax purposes.
A summary of estimated intangible assets acquired, estimated useful lives and amortization method follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Amortization
|
|
|
Amount
|
|
Useful Life in Years
|
|
Method
|
Customer list
|
|
$
|
8,500
|
|
|
10
|
|
Accelerated
|
Proprietary technology
|
|
3,200
|
|
|
5
|
|
Straight-line
|
Total intangible assets acquired
|
|
$
|
11,700
|
|
|
|
|
|
The results of PortfolioCenter's operations are included in the consolidated statements of operations beginning April 1, 2019. PortfolioCenter's revenues for the year ended December 31, 2019 totaled $6,705. PortfolioCenter's pre-tax loss for the year ended December 31, 2019 totaled $2,568. The pre-tax loss includes acquired intangible asset amortization of $1,459 for the year ended December 31, 2019.
For the years ended December 31, 2020 and 2019, acquisition related costs for the PortfolioCenter acquisition were not material, and are included in general and administration expenses.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
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, are included in the Envestnet Wealth Solutions segment.
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 $298,714, subject to a working capital adjustment, and issued 3,184,713 shares of Envestnet common stock 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”) (See “Note 15—Stock-Based Compensation”). The Company has 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. As of December 31, 2020, the Company has issued approximately 177,000 RSUs and approximately 25,000 PSUs under the 2019 Equity Plan to legacy PIEtech employees. As of December 31, 2020, the Company expects to issue approximately 100,000 additional RSUs and PSUs. As part of the retention bonus pool, the Company also made cash retention payments in 2019 of approximately $8,800 to certain legacy PIEtech employees who joined Envestnet | MoneyGuide. At the time of acquisition, the Company expected to pay an additional $5,300 in cash bonus payments to legacy PIEtech employees over the next three years, for which approximately $3,050 has been paid through December 31, 2020.
The Company also granted membership interests in certain of the Company's equity method investments to two legacy PIEtech executives with an estimated grant date fair market value of $8,900. These membership interests vested on May 1, 2020 and become exercisable on May 1, 2022, with the option to put the membership interests to the Company. As of December 31, 2020 and 2019, the Company has recorded approximately $3,345 and $5,920, respectively, as a component of compensation and benefits in the consolidated statements of operations with a corresponding liability in other non-current liabilities in the consolidated balance sheets.
The consideration transferred in the acquisition was as follows:
|
|
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
298,714
|
|
Stock consideration
|
|
222,484
|
|
Less: cash acquired
|
|
(6,360)
|
|
Total consideration transferred, net of cash acquired
|
|
$
|
514,838
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
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
|
|
2,012
|
|
Identifiable intangible assets
|
|
253,000
|
|
Goodwill
|
|
323,951
|
|
Total assets acquired
|
|
600,405
|
|
Accounts payable and accrued expenses
|
|
(1,661)
|
|
Operating lease liabilities
|
|
(2,012)
|
|
Deferred income taxes
|
|
(68,534)
|
|
Deferred revenue
|
|
(7,000)
|
|
Total liabilities assumed
|
|
(79,207)
|
|
Total net assets acquired
|
|
$
|
521,198
|
|
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 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Amortization
|
|
|
Amount
|
|
Useful Life in Years
|
|
Method
|
Customer lists
|
|
$
|
222,000
|
|
|
10-20
|
|
Accelerated
|
Proprietary technologies
|
|
23,000
|
|
|
4
|
|
Straight-line
|
Trade names
|
|
8,000
|
|
|
7
|
|
Straight-line
|
Total intangible assets acquired
|
|
$
|
253,000
|
|
|
|
|
|
The results of PIEtech's operations are included in the consolidated statements of operations beginning May 1, 2019. PIEtech's revenues for the years ended December 31, 2019 totaled $30,315. PIEtech's pre-tax loss for the year ended December 31, 2019 totaled $12,374. The pre-tax loss includes acquired intangible asset amortization of $17,634 for the year ended December 31, 2019.
For the year ended December 31, 2020, acquisition related costs for the PIEtech acquisition were not material. For the year ended December 31, 2019, acquisition related costs totaled approximately $16,738. Included in this 2019 amount is approximately $8,800 in one-time cash retention bonuses plus related tax withholdings, which are included in compensation and benefits in the consolidated statements of operations. The remainder is included within general and administration expenses in the consolidated statements of operations.
Acquisition of Private Technology Company
On February 18, 2020, the Company, through it's wholly owned subsidiary Yodlee, Inc. (“Yodlee”), acquired a private technology company (the “Private Technology Company Acquisition”). The private technology company enables the consent generation and data flow between financial information providers, such as banks and financial institutions, and financial information users, such as financial technology lenders and other financial services agencies, through a network of cloud-based interoperable interfaces or application programming interfaces. The technology and operations of the private technology company have been integrated into the Company's Envestnet Data & Analytics segment.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
In connection with the Private Technology Company Acquisition, the Company acquired all of the outstanding shares of the private technology company and paid cash consideration of $2,343, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6,750 in contingent consideration, based upon achieving certain performance targets. The Company recorded a liability as of the date of acquisition of $5,239, which represented the estimated fair value of contingent consideration on the date of acquisition.
In 2020, we determined that certain performance targets for this acquisition would not be met. As a result, we reduced the contingent consideration liability plus accrued interest associated with this acquisition by $3,105 and recorded this as a reduction to general and administration expenses. Future changes to the estimated fair value of the contingent consideration, if any, will be recognized in our earnings.
The Company recorded estimated goodwill of $7,019, which is not deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $1,000. The tangible assets acquired and liabilities assumed were not material.
The results of the private technology company's operations are included in the condensed consolidated statements of operations beginning February 18, 2020 and were not considered material to the Company’s results of operations.
For the year ended December 31, 2020, acquisition related costs for the Private Technology Company Acquisition were not material, and are included in general and administration expenses.
Acquisition of Private Cloud Technology Company
On March 2, 2020, the Company acquired certain assets of a private cloud technology company (the “Private Cloud Technology Company Acquisition”). The private cloud technology company enables enterprises to design and implement the digital transition from legacy systems and applications to a modern cloud computing platform. The technology and operations of the private cloud technology company have been integrated into the Company's Envestnet Wealth Solutions segment.
In connection with the Private Cloud Technology Company Acquisition, the Company paid estimated consideration of $11,968, net of cash acquired. In connection with the acquisition, the Company recorded estimated goodwill of $10,932, which is deductible for income tax purposes. The tangible assets acquired and liabilities assumed were not material.
The results of the private cloud technology company's operations are included in the condensed consolidated statements of operations beginning March 2, 2020 and were not considered material to the Company’s results of operations.
For the year ended December 31, 2020, acquisition related costs for the Private Cloud Technology Company Acquisition were not material, and are included in general and administration expenses.
Acquisition of Private Financial Technology Design Company
On March 3, 2020, the Company acquired the outstanding units of a private financial technology design company that were not owned by the Company and merged the acquired company into a wholly owned subsidiary of the Company (the “Private Financial Technology Design Company Acquisition”). The private financial technology design company designs integrated, intuitive digital technology applications for institutional financial services firms, bank wealth management organizations, independent advisor networks, and broker-dealers. The technology and operations of the private financial technology design company have been integrated into the Envestnet Wealth Solutions segment.
The Company previously owned approximately 45% of the outstanding units in this private financial technology design company, and accounted for it as an equity method investment. Based upon the estimated value of the private financial technology design company of $11,026, the Company paid estimated consideration of $5,946, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, the Company recognized a gain of $4,230 in the first quarter of 2020 on the re-measurement to fair value of its previously held interest, which is included in other income (expense), net in the condensed consolidated statements of operations
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
In connection with the Private Financial Technology Design Company Acquisition, the Company recorded estimated total goodwill of $9,241, of which approximately $6,232 is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2,000. The tangible assets acquired and liabilities assumed were not material.
The results of the private financial technology design company's operations are included in the condensed consolidated statements of operations beginning March 3, 2020 and were not considered material to the Company’s results of operations.
For the year ended December 31, 2020, acquisition related costs for the Private Financial Technology Design Company Acquisition were not material, and are included in general and administration expenses.
The goodwill arising from these 2020 acquisitions represents the expected synergistic benefits of these transactions, primarily related to an increase in future revenues as a result of potential new business and cross selling opportunities, as well as enhancements to our existing technologies.
Pro Forma Financial Information (Unaudited)
The following pro forma financial information presents the combined results of operations of Envestnet, PortfolioCenter and PIEtech for the year ended December 31, 2019 and assumes the acquisitions of PortfolioCenter and PIEtech had occurred as of the beginning of 2018. The results of the Company's other acquisitions since January 1, 2019 are not included in the pro forma financial information presented below as they were not considered material to the Company's results of operations.
The unaudited pro forma results presented below include amortization charges for acquired intangible assets, interest expense, stock-based compensation expense and income tax. The Company's pro forma information below includes the reversal of a valuation allowance on its deferred tax assets as of January 1, 2018 and the reversal of transaction costs that were incurred in 2019 as a result of these acquisitions and reverses these amounts from the appropriate periods in 2019. All intercompany revenues have been eliminated within this pro forma information.
Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31, 2019
|
Revenues
|
|
|
|
$
|
919,291
|
|
Net loss attributable to Envestnet, Inc.
|
|
|
|
(16,860)
|
|
Net loss per share attributable to Envestnet, Inc.:
|
|
|
|
|
Basic
|
|
|
|
$
|
(0.32)
|
|
Diluted
|
|
|
|
$
|
(0.32)
|
|
4.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Prepaid technology
|
|
$
|
13,165
|
|
|
$
|
10,387
|
|
Non-income tax receivables
|
|
6,571
|
|
|
5,555
|
|
Advance payroll taxes and benefits
|
|
6,429
|
|
|
5,446
|
|
Prepaid insurance
|
|
1,777
|
|
|
1,919
|
|
Income tax prepayments and receivables
|
|
1,684
|
|
|
—
|
|
Other
|
|
10,944
|
|
|
8,876
|
|
Total prepaid expenses and other current assets
|
|
$
|
40,570
|
|
|
$
|
32,183
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
5.Property and Equipment, Net
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Estimated Useful Life
|
|
2020
|
|
2019
|
Cost:
|
|
|
|
|
|
|
Computer equipment and software
|
|
3 years
|
|
$
|
72,443
|
|
|
$
|
72,190
|
|
Leasehold improvements
|
|
Shorter of the lease term or useful life of the asset
|
|
37,671
|
|
|
34,645
|
|
Office furniture and fixtures
|
|
3-7 years
|
|
11,249
|
|
|
10,832
|
|
Office equipment and other
|
|
3-5 years
|
|
7,151
|
|
|
6,850
|
|
Building and building improvements
|
|
7-39 years
|
|
2,669
|
|
|
2,647
|
|
Land
|
|
Not applicable
|
|
940
|
|
|
940
|
|
|
|
|
|
132,123
|
|
|
128,104
|
|
Less: accumulated depreciation and amortization
|
|
(84,154)
|
|
|
(74,348)
|
|
Total property and equipment, net
|
|
$
|
47,969
|
|
|
$
|
53,756
|
|
During 2020 and 2019, the Company retired property and equipment that was no longer in service for the Envestnet Wealth Solutions segment with an historical cost of $8,495 and $8,264, respectively. During 2020 and 2019, the Company retired property and equipment that was no longer in service for the Envestnet Data & Analytics segment with an historical cost of $3,825 and $4,621, respectively. Gains and losses on asset retirements during 2020 and 2019 were not material.
The following table presents the cost amounts and related accumulated depreciation written off by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Year Ended December 31, 2019
|
|
|
|
|
Accumulated
|
|
|
|
Accumulated
|
|
|
Cost
|
|
Depreciation
|
|
Cost
|
|
Depreciation
|
Computer equipment and software
|
|
$
|
9,844
|
|
|
$
|
(9,606)
|
|
|
$
|
12,597
|
|
|
$
|
(12,542)
|
|
Leasehold improvements
|
|
1,775
|
|
|
(1,326)
|
|
|
229
|
|
|
(135)
|
|
Office furniture and fixtures
|
|
320
|
|
|
(243)
|
|
|
42
|
|
|
(21)
|
|
Office equipment and other
|
|
381
|
|
|
(348)
|
|
|
17
|
|
|
(17)
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment retirements
|
|
$
|
12,320
|
|
|
$
|
(11,523)
|
|
|
$
|
12,885
|
|
|
$
|
(12,715)
|
|
Depreciation and amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Depreciation and amortization expense
|
|
$
|
21,432
|
|
|
$
|
20,777
|
|
|
$
|
15,737
|
|
6.Internally Developed Software, Net
Internally developed software, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Estimated Useful Life
|
|
2020
|
|
2019
|
Internally developed software
|
|
5 years
|
|
$
|
159,619
|
|
|
$
|
104,703
|
|
Less: accumulated amortization
|
|
|
|
(63,118)
|
|
|
(44,440)
|
|
Internally developed software, net
|
|
|
|
$
|
96,501
|
|
|
$
|
60,263
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Amortization expense
|
|
$
|
18,670
|
|
|
$
|
12,042
|
|
|
$
|
8,033
|
|
7.Goodwill and Intangible Assets, Net
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Envestnet
Wealth Solutions
|
|
Envestnet
Data & Analytics
|
|
Total
|
Balance at December 31, 2018
|
|
$
|
243,809
|
|
|
$
|
275,293
|
|
|
$
|
519,102
|
|
Private AI company acquisition
|
|
—
|
|
|
21,507
|
|
|
21,507
|
|
PortfolioCenter acquisition
|
|
15,587
|
|
|
—
|
|
|
15,587
|
|
PIEtech acquisition
|
|
323,951
|
|
|
—
|
|
|
323,951
|
|
Foreign currency and other
|
|
(100)
|
|
|
(197)
|
|
|
(297)
|
|
Balance at December 31, 2019
|
|
583,247
|
|
|
296,603
|
|
|
879,850
|
|
Private Technology company acquisition
|
|
—
|
|
|
7,019
|
|
|
7,019
|
|
Private Cloud Technology company acquisition
|
|
10,932
|
|
|
—
|
|
|
10,932
|
|
Private Financial Technology Design company acquisition
|
|
9,241
|
|
|
—
|
|
|
9,241
|
|
Foreign currency and other
|
|
(70)
|
|
|
(199)
|
|
|
(269)
|
|
Balance at December 31, 2020
|
|
$
|
603,350
|
|
|
$
|
303,423
|
|
|
$
|
906,773
|
|
Intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
Customer lists
|
|
|
$
|
591,520
|
|
|
$
|
(198,555)
|
|
|
$
|
392,965
|
|
|
$
|
591,520
|
|
|
$
|
(148,517)
|
|
|
$
|
443,003
|
|
Proprietary technologies
|
|
|
54,914
|
|
|
(26,949)
|
|
|
27,965
|
|
|
87,714
|
|
|
(44,165)
|
|
|
43,549
|
|
Trade names
|
|
|
33,700
|
|
|
(19,589)
|
|
|
14,111
|
|
|
33,700
|
|
|
(14,663)
|
|
|
19,037
|
|
Total intangible assets
|
|
$
|
680,134
|
|
|
$
|
(245,093)
|
|
|
$
|
435,041
|
|
|
$
|
712,934
|
|
|
$
|
(207,345)
|
|
|
$
|
505,589
|
|
During 2020 and 2019, the Company retired fully amortized intangible assets for the Envestnet Wealth Solutions segment with a historical cost of $800 and $11,520, respectively, including proprietary technologies and trade names. During 2020 and 2019, the Company retired fully amortized intangible assets for the Envestnet Data & Analytics segment with a historical cost of $35,000 and $11,100, respectively, including proprietary technology, trade names and backlog.
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Amortization expense
|
|
$
|
73,559
|
|
|
$
|
68,452
|
|
|
$
|
53,856
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Future amortization expense of the Company's intangible assets as of December 31, 2020, is expected to be as follows:
|
|
|
|
|
|
Years ending December 31:
|
|
2021
|
$
|
63,645
|
|
2022
|
59,900
|
|
2023
|
45,551
|
|
2024
|
38,751
|
|
2025
|
35,485
|
|
Thereafter
|
191,709
|
|
Total
|
$
|
435,041
|
|
8.Equity Method Investments
The Company owns equity interests in various privately held companies. As of December 31, 2020, the Company’s ownership interests in these companies ranged from 4% to 44%. As of December 31, 2019, the Company’s ownership interests in these companies ranged from 28% to 47%.
Equity method investments are initially recorded at cost. Under the equity method of accounting, the investment is adjusted for the Company’s proportionate share of earnings or losses, dividends, capital contributions and changes in ownership interests.
As of December 31, 2020 and December 31, 2019, the carrying value of the Company’s equity method investments was $15,318 and $5,014 respectively, which are included in other non-current assets in the consolidated balance sheets.
As of December 31, 2020, the Company has committed $5,740 in future funding to certain of these equity method investees.
Summarized combined financial information for these investments is as follows (amounts represent 100% of investee financial information, except Envestnet’s proportional share of losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheets
|
|
2020
|
|
2019
|
|
|
Current assets
|
|
$
|
23,469
|
|
|
$
|
2,457
|
|
|
|
Non-current assets
|
|
21,329
|
|
|
1,413
|
|
|
|
Current liabilities
|
|
11,325
|
|
|
775
|
|
|
|
Non-current liabilities
|
|
1,418
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Statements of Operations
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
35,603
|
|
|
$
|
866
|
|
|
$
|
1,327
|
|
Loss from operations
|
|
(4,758)
|
|
|
(6,192)
|
|
|
(2,418)
|
|
Net loss
|
|
(5,062)
|
|
|
(6,193)
|
|
|
(2,438)
|
|
Envestnet’s proportional share of losses
|
|
(5,399)
|
|
|
(2,361)
|
|
|
(1,146)
|
|
Envestnet's proportional share of losses from the Company’s equity method investments are included in other income (expense), net in the consolidated statements of operations.
Investment in Private Services Company
On January 8, 2020, the Company acquired a 4.25% membership interest in a private services company for cash consideration of $11,000. The private services company partners with independent network advisory firms to help them grow, become more profitable and run more efficiently. The Company uses the equity method of accounting to record its portion of the private services company’s net income or loss on a one quarter lag from the actual results of operations. The Company uses
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
the equity method of accounting because of its less than 50% ownership and lack of control and does not otherwise exercise control over the significant economic decisions of the private services company.
The private services company is and remains a client of the Company and has thus been determined to be a related party. Revenues from the private services company totaled $11,494 in the twelve months ended December 31, 2020. As of December 31, 2020, the Company had recorded a net receivable of $2,088 from the private services company.
As of December 31, 2020, the carrying value of the Company’s investment in the private services company exceeded its proportionate share of the net assets of the private services company by approximately $9,900, which represents goodwill and amortizable intangible assets arising from acquisitions. The Company recognizes amortization on the basis difference allocated to intangible assets over a period between six to fifteen years. This amortization is included within Envestnet's proportional share of losses in other income (expense), net in the consolidated statements of operations.
9.Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Accrued compensation and related taxes
|
|
$
|
71,039
|
|
|
$
|
53,627
|
|
Accrued investment manager fees
|
|
57,894
|
|
|
48,720
|
|
Accrued professional services
|
|
9,240
|
|
|
6,315
|
|
Non-income tax payables
|
|
8,398
|
|
|
11,040
|
|
Accrued technology
|
|
4,701
|
|
|
3,042
|
|
|
|
|
|
|
Accrued charitable contribution
|
|
—
|
|
|
5,020
|
|
Other accrued expenses
|
|
7,276
|
|
|
10,180
|
|
Total accrued expenses and other liabilities
|
|
$
|
158,548
|
|
|
$
|
137,944
|
|
In the fourth quarter of 2019, the Company offered a voluntary early retirement program to employees over a certain age, who have a combined age and years of experience with the Company of at least 65 years. Employees had until January 31, 2020 to voluntarily accept the program with separation of service no later than March 31, 2020. In connection with this program, the Company recorded approximately $12,500 of severance expense during the twelve months ended December 31, 2020. The Company accrued approximately $380 and $1,733 in accrued compensation and related taxes as of December 31, 2020 and 2019, respectively, and $1,524 and $599 in other non-current liabilities as of December 31, 2020 and 2019, respectively. These payments will extend through 2030.
In the fourth quarter of 2020, as part of an organizational realignment, the Company entered into separation agreements with several employees. In connection with this realignment, the Company recognized approximately $5,100 of severance expense during the twelve months ended December 31, 2020, with an additional $5,300 of severance expense expected to be recognized in the first half of 2021. As of December 31, 2020, the Company has accrued approximately $5,100 in accrued compensation and related taxes associated with these separation agreements.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
10.Debt
The Company’s outstanding debt obligations as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Revolving credit facility balance
|
|
$
|
—
|
|
|
$
|
260,000
|
|
|
|
|
|
|
Convertible Notes due 2023
|
|
$
|
345,000
|
|
|
$
|
345,000
|
|
Unaccreted discount on Convertible Notes due 2023
|
|
(24,058)
|
|
|
(33,491)
|
|
Unamortized issuance costs on Convertible Notes due 2023
|
|
(4,306)
|
|
|
(5,996)
|
|
Convertible Notes due 2023 carrying value
|
|
$
|
316,636
|
|
|
$
|
305,513
|
|
|
|
|
|
|
Convertible Notes due 2025
|
|
$
|
517,500
|
|
|
$
|
—
|
|
Unaccreted discount on Convertible Notes due 2025
|
|
(65,902)
|
|
|
—
|
|
Unamortized issuance costs on Convertible Notes due 2025
|
|
(11,731)
|
|
|
—
|
|
Convertible Notes due 2025 carrying value
|
|
$
|
439,867
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense was comprised of the following and is included in other income (expense), net in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
December 31, 2020
|
|
2019
|
|
2018
|
Accretion of debt discount
|
|
$
|
14,084
|
|
|
$
|
15,040
|
|
|
$
|
11,134
|
|
Coupon interest
|
|
7,442
|
|
|
8,917
|
|
|
6,650
|
|
Interest on revolving credit facility
|
|
5,786
|
|
|
4,065
|
|
|
3,994
|
|
Amortization of issuance costs
|
|
3,396
|
|
|
3,703
|
|
|
2,771
|
|
Undrawn and other fees
|
|
796
|
|
|
795
|
|
|
654
|
|
Total interest expense
|
|
$
|
31,504
|
|
|
$
|
32,520
|
|
|
$
|
25,203
|
|
Amended Credit Agreement
In 2014, Envestnet and certain of its subsidiaries entered into a credit agreement with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent. Since 2014, the credit agreement has been amended several times, the latest of which occurred in September 2019 (the “Amended Credit Agreement”).
Pursuant to the Amended Credit Agreement, the Banks have agreed to provide the Company with a revolving credit facility of $500,000, of which amount may be increased by $150,000 (the “Revolving Credit Facility”). The Amended Credit Agreement also includes a $5,000 sub-facility for the issuances of letters of credit. As of December 31, 2020, there were no amounts outstanding under the Revolving Credit Facility.
Obligations under the Amended Credit Agreement are guaranteed by substantially all of Envestnet’s U.S. subsidiaries. In accordance with the terms of the Security Agreement, dated November 19, 2015, among the Company, the Debtors party thereto, the Banks and the Administrative Agent, obligations under the Amended Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Proceeds under the Amended Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
In the event the Company has borrowings under the Amended Credit Agreement, it will pay interest on these borrowings at rates between 1.50% and 3.25% above LIBOR based on the Company’s total leverage ratio. Any borrowings under the Amended Credit Agreement will mature on September 27, 2024. There is also a commitment fee equal to 0.25% per annum on the daily unused portion of the Revolving Credit Facility.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
As of December 31, 2020, debt issuance costs related to the Amended Credit Agreement are presented in prepaid expenses and other non-current assets in the consolidated balance sheets which have outstanding amounts of $853 and $2,337, respectively.
The Amended Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum adjusted EBITDA. The Amended Credit Agreement also contains provisions that require the Company to maintain minimum liquidity levels, limit the ability of Envestnet and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities. The Company was in compliance with these financial covenants and other requirements as of December 31, 2020.
Convertible Notes due 2023
In May 2018, the Company issued $345,000 of convertible notes maturing June 1, 2023 (the “Convertible Notes due 2023”). Net proceeds from the offering were $335,018. The Convertible Notes due 2023 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.
In connection with the issuance of the Convertible Notes due 2023, the Company incurred $8,593 of issuance costs in 2018, which are presented net in Convertible Notes in the consolidated balance sheets. These costs are being amortized and are recorded as additional interest expense over the life of the Convertible Notes due 2023.
The Convertible Notes due 2023 are general unsecured senior obligations, subordinated in right of payment to the Company’s obligations under the Amended Credit Agreement. The Convertible Notes due 2023 rank equally in right of payment with all of the Company’s other existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated obligations. The Convertible Notes due 2023 will be structurally subordinated to the indebtedness and other liabilities of any of the Company’s subsidiaries, other than its wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis, and other than to the extent the Convertible Notes due 2023 are guaranteed in the future by any of our other subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Upon the occurrence of a “fundamental change”, as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes due 2023 for cash at 100% of the principal amount of the Convertible Notes due 2023 being purchased, plus any accrued and unpaid interest.
The Company may redeem for cash all or any portion of the notes, at 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 the Company provides notice of redemption.
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 one thousand principal amount of the Convertible Notes due 2023, which represents a conversion price of $68.31 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes due 2023 at their option at any time prior to the close of business on the business day immediately preceding December 15, 2022, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes due 2023 in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price per one thousand principal amount of the Convertible Notes due 2023 for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; (c) if we call any or all of the Convertible Notes due 2023 for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (d) upon the occurrence of specified corporate events as defined in the
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
indenture. On or after December 15, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle the debt component of the Convertible Notes due 2023 at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.
The Company has separately accounted for the liability and equity components of the Convertible Notes due 2023 by allocating the proceeds from issuance of the Convertible Notes due 2023 between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $46,611 to the equity component, net of offering costs of $1,389. The Company recorded a discount on the Convertible Notes due 2023 of $48,000 which is accreted and recorded as additional interest expense. During the twelve months ended December 31, 2020 and 2019, the Company recognized $9,434 and $9,150, respectively, in accretion related to the discount. 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 years ended December 31, 2020 and 2019 was approximately 6%.
Convertible Notes due 2025
In August 2020, the Company issued $517,500 of convertible notes that mature on August 15, 2025 (the “Convertible Notes due 2025”). Net proceeds from the offering were $502,960. The Convertible Notes due 2025 bear interest at a rate of 0.75% per annum payable semiannually in arrears in cash on February 15 and August 15 of each year, beginning on February 15, 2021.
In connection with the issuance of the Convertible Notes due 2025, the Company incurred $12,558 of issuance costs in 2020, which are presented net in Convertible Notes in the consolidated balance sheets. These costs are being amortized and are recorded as additional interest expense over the life of the Convertible Notes due 2025.
The Convertible Notes due 2025 are general unsecured senior obligations, subordinated in right of payment to the Company’s obligations under the Amended Credit Agreement. The Convertible Notes due 2025 rank equally in right of payment with all of the Company’s other existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated obligations. The Convertible Notes due 2025 will be structurally subordinated to the indebtedness and other liabilities of any of the Company’s subsidiaries, other than its wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis, and other than to the extent the Convertible Notes due 2025 are guaranteed in the future by any of our other subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes due 2025 for cash at 100% of the principal amount of the Convertible Notes due 2025 being purchased, plus any accrued and unpaid interest.
The Company may redeem for cash all or any portion of the notes, at our option, on or after August 15, 2023 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 the Company provides notice of redemption.
The Convertible Notes due 2025 are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 9.3682 shares per one thousand principal amount of the Convertible Notes due 2025, which represents a conversion price of $106.74 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes due 2025 at their option at any time prior to the close of business on the business day immediately preceding February 15, 2025, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
reported sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day is less than 98% of the last reported sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (c) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (d) upon the occurrence of specified corporate events described in the Indenture. On or after February 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle the debt component of the Convertible Notes due 2025 at least partially or wholly in cash. This policy is based both on the Company’s intent and its ability to settle these instruments in cash.
The Company has separately accounted for the liability and equity components of the Convertible Notes due 2025 by allocating the proceeds from issuance of the Convertible Notes due 2025 between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $61,859 to the equity component, net of offering costs of $1,982 and taxes of $6,712. The Company recorded a discount on the Convertible Notes due 2025 of $70,552 which will be accreted and recorded as additional interest expense. During the twelve months ended December 31, 2020, the Company recognized $4,650 in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes due 2025 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 2025 for the year ended December 31, 2020 was approximately 4%.
See “Note 18—Net Income (Loss) Per Share” for further discussion of the effect of conversion on net income per common share.
11.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. Terms of the Company's operating leases may change from time to time. The Company's leases have remaining lease terms of 3 months to 13 years.
For the year ended December 31, 2020, the Company's total operating lease cost and short-term lease cost were $17,241 and $5,049, respectively. For the year ended December 31, 2019, the Company's total operating lease cost and short-term lease cost were $17,736 and $4,683, respectively. The Company did not have significant sublease income or variable lease cost for the years ended December 31, 2020 and 2019. As of December 31, 2020, the weighted average remaining lease term was 10.2 years and the weighted average discount rate was 5.1%. As of December 31, 2019, the weighted average remaining lease term was 9.2 years and the weighted average discount rate was 6.0%. Cash paid for amounts included in the measurement of the operating lease liability for the years ended December 31, 2020 and 2019 was $21,467 and $19,002, respectively. The ROU assets obtained in exchange for operating lease liabilities for the years ended December 31, 2020 and 2019 was $39,370 and $30,455, respectively.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Future minimum lease payments under non-cancellable leases, as of December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Leases
|
Years Ending December 31,
|
|
|
2021
|
|
$
|
18,789
|
|
2022
|
|
15,993
|
|
2023
|
|
14,731
|
|
2024
|
|
13,654
|
|
2025
|
|
13,067
|
|
Thereafter
|
|
87,303
|
|
Total future minimum lease payments
|
|
163,537
|
|
Less imputed interest
|
|
(37,706)
|
|
Total operating lease liabilities
|
|
$
|
125,831
|
|
As of December 31, 2020, the Company has several operating lease commitments, primarily for our corporate offices, that have not yet commenced. These operating leases are expected to commence before September 2023 with lease terms of up to 10 years.
12.Stockholders’ Equity
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. The Company has not repurchased any shares of its common stock since 2016. As of December 31, 2020, a maximum of 1,956,390 shares may yet be purchased under this program.
On December 20, 2018, the Company issued and sold to BlackRock, Inc. (“BlackRock”) approximately 2,356,000 common shares at a purchase price of $52.13 per share, and warrants to purchase approximately 470,000 common shares at an exercise price of $65.16 per share, subject to customary anti-dilution adjustments. The warrants are exercisable at BlackRock’s option for four years from the date of issuance. The warrants may be exercisable through cash exercise or net issue exercise with cash settlement at the sole discretion of the Company. The gross proceeds received of approximately $122,788 were allocated to the common shares and the warrants and recorded within stockholders’ equity. In connection with this transaction, the Company incurred total transaction costs of approximately $4,627 and recorded them as a reduction in equity.
On May 1, 2019, in connection with the PIEtech acquisition, the Company issued 3,184,713 shares of Envestnet common stock with a fair value of $222,484 to the sellers. See “Note 3—Business Acquisitions”.
The Company has issued Convertible Notes due 2023 and Convertible Notes due 2025 that are convertible into shares of the Company’s common stock under certain conditions prior to maturity. See “Note 10—Debt”.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
13. Fair Value Measurements
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets as of December 31, 2020 and December 31, 2019, based on the three-tier fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Fair Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
84,110
|
|
|
$
|
84,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assets used to fund deferred compensation liability
|
|
9,961
|
|
|
—
|
|
|
—
|
|
|
9,961
|
|
Total assets
|
|
$
|
94,071
|
|
|
$
|
84,110
|
|
|
$
|
—
|
|
|
$
|
9,961
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration liability
|
|
$
|
12,559
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,559
|
|
Deferred compensation liability
|
|
8,720
|
|
|
8,720
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
|
$
|
21,279
|
|
|
$
|
8,720
|
|
|
$
|
—
|
|
|
$
|
12,559
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Fair Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
37,730
|
|
|
$
|
37,730
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assets used to fund deferred compensation liability
|
|
8,390
|
|
|
—
|
|
|
—
|
|
|
8,390
|
|
Total assets
|
|
$
|
46,120
|
|
|
$
|
37,730
|
|
|
$
|
—
|
|
|
$
|
8,390
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent consideration liability
|
|
$
|
9,045
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,045
|
|
Deferred compensation liability
|
|
8,208
|
|
|
8,208
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
|
$
|
17,253
|
|
|
$
|
8,208
|
|
|
$
|
—
|
|
|
$
|
9,045
|
|
Level I assets and liabilities include money-market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”) and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the consolidated balance sheets. The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds. The fair market value of the deferred compensation liability is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected, and is included in other non-current liabilities in the consolidated balance sheets.
Level III assets and liabilities consist of the estimated fair values of contingent consideration as well as the assets to fund the Company's deferred compensation liability. The fair market value of the assets used to fund the Company's deferred compensation liability approximates the cash surrender value of the Company's life insurance premiums and is included in other non-current assets in the consolidated balance sheets.
The fair values 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 market and thus represents a Level III fair value measurement as defined in ASC 820, “Fair Value Measurements and Disclosures”. The significant inputs in the Company's Level III fair value measurement not supported by market activity included its assessments of expected future cash flows related to these acquisitions and their ability to meet the target performance objectives during the subsequent periods from the date of acquisition, which management believes are appropriately discounted considering the uncertainties associated with these obligations, and are calculated in accordance with the terms of their respective agreements.
The Company will continue to reassess the fair values of the contingent consideration liabilities at each reporting date until settlement. Changes to these estimated fair values will be recognized in the Company's earnings and included in general and administration expenses in the consolidated statements of operations. In 2020, the Company determined that certain performance targets related to the private technology company acquisition would not be met. As a result, the Company reduced the contingent consideration liability plus accrued interest associated with this acquisition by $3,105 and recorded this as a reduction to general and administration expenses.
The table below presents a reconciliation of the Company's contingent consideration liabilities, which were measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2019 to December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Contingent
|
|
|
Consideration
|
|
|
Liabilities
|
Balance at December 31, 2019
|
|
$
|
9,045
|
|
Private technology company acquisition
|
|
5,239
|
|
Fair market value adjustment on contingent consideration liability
|
|
(3,105)
|
|
Accretion on contingent consideration liabilities
|
|
1,380
|
|
Balance at December 31, 2020
|
|
$
|
12,559
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The table below presents a reconciliation of assets used to fund deferred compensation liability, which was measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2019 to December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Assets Used to
|
|
|
Fund Deferred
|
|
|
Compensation
|
|
|
Liability
|
Balance at December 31, 2019
|
|
$
|
8,390
|
|
Contributions
|
|
1,060
|
|
Fair value adjustments
|
|
511
|
|
Balance at December 31, 2020
|
|
$
|
9,961
|
|
The fair market value of the assets used to fund the Company's deferred compensation liability is based upon the cash surrender value of the Company's life insurance premiums. The value of the assets used to fund the Company's deferred compensation liability, which are included in other non-current assets in the consolidated balance sheets, increased due to funding of the plan and gains on the underlying investment vehicles. These gains are recognized in the Company's earnings and included in general and administration expenses in the consolidated statements of operations.
The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or when changes in circumstances cause the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the year ended December 31, 2020.
Fair Value of Debt Agreements and Other Financial Assets and Liabilities
The Company considered the Convertible Notes due 2023 and Convertible Notes due 2025 to be Level II liabilities as of December 31, 2020 and 2019, and used a market approach to calculate their respective fair values. The estimated fair value for each convertible note was determined based on the estimated or actual bids and offers in an over-the-counter market on December 31, 2020 and 2019 (See “Note 10—Debt”).
In May 2018, the Company issued $345,000 of Convertible Notes due 2023. As of December 31, 2020 and 2019, the carrying value of the Convertible Notes due 2023 equaled $316,636 and $305,513, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of December 31, 2020 and 2019, the estimated fair value of the Convertible Notes due 2023 was $460,817 and $414,852, respectively.
In August 2020, the Company issued $517,500 of Convertible Notes due 2025. As of December 31, 2020, the carrying value of the Convertible Notes due 2025 equaled $439,867, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of December 31, 2020, the estimated fair value of the Convertible Notes due 2025 was $540,788.
As of December 31, 2020 and 2019, there was $0 and $260,000, respectively, outstanding on the revolving credit facility under the Amended Credit Agreement. As of December 31, 2019, the outstanding balance on the revolving credit facility approximated fair value as borrowings under the revolving credit facility bore interest at variable rates and the Company believes its credit risk quality was consistent with when the debt originated. The Company considered the revolving credit facility to be a Level I liability as of December 31, 2020 and 2019 (See “Note 10—Debt”).
The Company considered the recorded values of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, fees receivable and accounts payable, to approximate the fair values of the respective assets and liabilities at December 31, 2020 based upon the short-term nature of these assets and liabilities.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
14.Revenues and Cost of Revenues
On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent ASUs that modified Topic 606 (“ASC 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The Company recognized the cumulative effect of the initial application of ASC 606 as an adjustment of $9,217 to the opening balance of accumulated deficit. Comparative information was not restated and will continue to be reported under the accounting standards in effect for those periods.
In accordance with ASC 606 requirements, the impact of adoption on the Company’s consolidated statements of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
As Reported
|
|
Without Adoption of ASC 606
|
|
Effect of Change Higher/(Lower)
|
Statements of Operations
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Asset-based
|
|
$
|
481,233
|
|
|
$
|
495,646
|
|
|
$
|
(14,413)
|
|
Subscription-based
|
|
295,467
|
|
|
295,467
|
|
|
—
|
|
Total recurring revenues
|
|
776,700
|
|
|
791,113
|
|
|
(14,413)
|
|
Professional services and other revenues
|
|
35,663
|
|
|
35,840
|
|
|
(177)
|
|
Total revenues
|
|
812,363
|
|
|
826,953
|
|
|
(14,590)
|
|
Operating expenses:
|
|
|
|
|
|
|
Cost of revenues
|
|
263,400
|
|
|
277,813
|
|
|
(14,413)
|
|
Compensation and benefits
|
|
317,188
|
|
|
318,887
|
|
|
(1,699)
|
|
Total operating expenses
|
|
798,198
|
|
|
814,310
|
|
|
(16,112)
|
|
Income from operations
|
|
14,165
|
|
|
12,643
|
|
|
1,522
|
|
Net income
|
|
4,010
|
|
|
2,488
|
|
|
1,522
|
|
Net income attributable to Envestnet, Inc.
|
|
$
|
5,755
|
|
|
$
|
4,233
|
|
|
$
|
1,522
|
|
The majority of the Company's revenues continue to be recognized when services are provided. The adoption of ASC 606 primarily impacted 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.
Disaggregation of revenue
The following table presents the Company’s revenues disaggregated by major source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Envestnet Wealth Solutions
|
|
Envestnet Data & Analytics
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
Asset-based
|
|
$
|
540,947
|
|
|
$
|
—
|
|
|
$
|
540,947
|
|
Subscription-based
|
|
248,810
|
|
|
177,697
|
|
|
426,507
|
|
Total recurring revenues
|
|
789,757
|
|
|
177,697
|
|
|
967,454
|
|
Professional services and other revenues
|
|
16,333
|
|
|
14,443
|
|
|
30,776
|
|
Total revenues
|
|
$
|
806,090
|
|
|
$
|
192,140
|
|
|
$
|
998,230
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Envestnet Wealth Solutions
|
|
Envestnet Data & Analytics
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
Asset-based
|
|
$
|
484,312
|
|
|
$
|
—
|
|
|
$
|
484,312
|
|
Subscription-based
|
|
207,606
|
|
|
171,207
|
|
|
378,813
|
|
Total recurring revenues
|
|
691,918
|
|
|
171,207
|
|
|
863,125
|
|
Professional services and other revenues
|
|
17,540
|
|
|
19,462
|
|
|
37,002
|
|
Total revenues
|
|
$
|
709,458
|
|
|
$
|
190,669
|
|
|
$
|
900,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Envestnet Wealth Solutions(1)
|
|
Envestnet Data & Analytics(1)
|
|
Consolidated(1)
|
Revenues:
|
|
|
|
|
|
|
Asset-based
|
|
$
|
481,233
|
|
|
$
|
—
|
|
|
$
|
481,233
|
|
Subscription-based
|
|
138,372
|
|
|
157,095
|
|
|
295,467
|
|
Total recurring revenues
|
|
619,605
|
|
|
157,095
|
|
|
776,700
|
|
Professional services and other revenues
|
|
13,000
|
|
|
22,663
|
|
|
35,663
|
|
Total revenues
|
|
$
|
632,605
|
|
|
$
|
179,758
|
|
|
$
|
812,363
|
|
(1)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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Fidelity
|
|
15
|
%
|
|
15
|
%
|
|
17
|
%
|
Fidelity accounted for 18%, 19% and 21% of the Envestnet Wealth Solutions segment's revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
No single customer revenue amounts for Envestnet Data & Analytics exceeded 10% of the segment revenue total.
The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
United States
|
|
$
|
977,047
|
|
|
$
|
871,456
|
|
|
$
|
778,565
|
|
International (1), (2)
|
|
21,183
|
|
|
28,671
|
|
|
33,798
|
|
Total revenues
|
|
$
|
998,230
|
|
|
$
|
900,127
|
|
|
$
|
812,363
|
|
(1)No foreign country accounted for more than 10% of total revenues.
(2)In 2018, upon adoption of ASU 2014-09, gross revenue recognition changed to net revenue recognition for one customer.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Remaining 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 December 31, 2020:
|
|
|
|
|
|
Years ending December 31,
|
|
2021
|
$
|
243,989
|
|
2022
|
172,981
|
|
2023
|
101,768
|
|
2024
|
53,620
|
|
2025
|
27,744
|
|
Thereafter
|
13,030
|
|
Total
|
$
|
613,132
|
|
Only fixed consideration from significant contracts with customers is included in the amounts presented above.
Contract balances
Total deferred revenue as of December 31, 2020 decreased by $3,776, primarily due to timing differences related to the satisfaction of outstanding performance obligations and the Company's billing cycles during the year ended December 31, 2020. Total deferred revenue as of December 31, 2019 increased by $9,609, primarily the result of the PIEtech and PortfolioCenter acquisitions and an increase in deferred revenue related to subscription-based services during the year ended December 31, 2019. The majority of the Company's deferred revenue will be recognized over the course of the next twelve months.
The amount of revenue recognized that was included in the opening deferred revenue balance was $34,261 and $23,714 for the years ended December 31, 2020 and 2019, respectively. The majority of this revenue consists of subscription-based services and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Deferred sales incentive compensation
Deferred sales incentive compensation was $10,814 and $9,387 as of December 31, 2020 and 2019, respectively. Amortization expense for the deferred sales incentive compensation was $3,936 and $3,452 for the years ended December 31, 2020 and 2019, respectively. Deferred sales incentive compensation is included in other non-current assets on the consolidated balance sheets and amortization expense is included in compensation and benefits expenses on the consolidated statements of operations. No significant impairment loss for capitalized costs was recorded during the periods.
Cost of Revenues
The following table summarizes cost of revenues by revenue category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Asset-based
|
|
$
|
278,569
|
|
|
$
|
243,913
|
|
|
$
|
232,145
|
|
Subscription-based
|
|
26,934
|
|
|
28,904
|
|
|
25,192
|
|
Professional services and other
|
|
426
|
|
|
5,994
|
|
|
6,063
|
|
Total cost of revenues
|
|
$
|
305,929
|
|
|
$
|
278,811
|
|
|
$
|
263,400
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
15.Stock-Based Compensation
On June 22, 2010, the Board of Directors approved the 2010 Long-Term Incentive Plan (“2010 Plan”), effective upon the closing of the Company’s initial public offering. The 2010 Plan provides for the grant of options, stock appreciation rights, Full Value Awards (as defined in the 2010 Plan agreement) and cash incentive awards to employees, consultants and non-employee directors to purchase common stock, which vest over time and have a ten-year contractual term. As approved by the Company’s shareholders, the 2010 Plan has since been amended whereby the maximum number of shares of common stock that may be delivered under the 2010 Plan is 8,925,000. Stock options and stock appreciation rights are granted with an exercise price no less than the fair-market-value price of the common stock at the date of the grant.
As a result of the PIEtech acquisition, described in “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 assumptions impact the total amount of expense and are recognized over the vesting period.
As of December 31, 2020, the maximum number of options and restricted stock available for future issuance under the Company’s plans is 1,375,747.
Stock-based compensation expense under the Company's plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Stock-based compensation expense
|
|
$
|
56,292
|
|
|
$
|
54,436
|
|
|
$
|
40,245
|
|
Tax effect on stock-based compensation expense
|
|
(14,354)
|
|
|
(13,734)
|
|
|
(10,093)
|
|
Net effect on income
|
|
$
|
41,938
|
|
|
$
|
40,702
|
|
|
$
|
30,152
|
|
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.5%, 25.2%, and 25.1% for the years ended December 31, 2020, 2019 and 2018, respectively. However, due to the valuation allowance recorded on the Company's domestic deferred tax assets, there was no tax effect related to stock-based compensation expense for the year ended December 31, 2018.
Stock Options
The following weighted average assumptions were used to value options granted during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Grant date fair value of options
|
|
$
|
—
|
|
|
$
|
21.55
|
|
|
$
|
—
|
|
Volatility
|
|
—
|
%
|
|
40.0
|
%
|
|
—
|
%
|
Risk-free interest rate
|
|
—
|
%
|
|
2.5
|
%
|
|
—
|
%
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected term (in years)
|
|
0.0
|
|
6.5
|
|
0.0
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table summarizes option activity under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
Contractual Life
|
|
Aggregate
|
|
|
Options
|
|
Exercise Price
|
|
(Years)
|
|
Intrinsic Value
|
Outstanding as of December 31, 2017
|
|
2,254,565
|
|
|
$
|
19.23
|
|
|
4.3
|
|
$
|
69,939
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(359,345)
|
|
|
14.76
|
|
|
|
|
|
Forfeited
|
|
(7,251)
|
|
|
27.51
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
1,887,969
|
|
|
20.05
|
|
|
3.4
|
|
56,046
|
|
Granted
|
|
81,807
|
|
|
49.02
|
|
|
|
|
|
Exercised
|
|
(783,216)
|
|
|
13.52
|
|
|
|
|
|
Forfeited
|
|
(35,974)
|
|
|
48.33
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
1,150,586
|
|
|
25.66
|
|
|
3.4
|
|
50,590
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(705,333)
|
|
|
18.83
|
|
|
|
|
|
Forfeited
|
|
(7,213)
|
|
|
48.70
|
|
|
|
|
|
Outstanding as of December 31, 2020
|
|
438,040
|
|
|
36.28
|
|
|
4.1
|
|
20,156
|
|
Options exercisable
|
|
397,861
|
|
|
34.99
|
|
|
3.7
|
|
18,817
|
|
The aggregate intrinsic values in the table below represent the total pre-tax intrinsic value (the aggregate difference between the fair value of the Company’s common stock on December 31, 2020, 2019 and 2018 of $82.29, $69.63 and $49.19, respectively, and the exercise price of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of that date.
Other information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Total intrinsic value of options exercised
|
|
$
|
35,687
|
|
|
$
|
40,893
|
|
|
$
|
15,667
|
|
Cash received from exercises of stock options
|
|
10,760
|
|
|
10,592
|
|
|
5,305
|
|
Exercise prices of stock options outstanding as of December 31, 2020 range from $10.40 to $55.29. At December 31, 2020, there was an immaterial amount of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.1 years.
Restricted Stock Units and Restricted Stock Awards
Periodically, the Company grants restricted stock units and awards and performance stock units and awards to employees. Restricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. Performance-based restricted units and awards vest upon the achievement of certain pre-established business and financial metrics as well as a subsequent service condition. The business and financial metrics governing the vesting of these performance-based restricted stock unit awards provide thresholds that dictate the number of shares to vest upon each evaluation date, which range from 50% to 150% of the original grant number. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest three years from the grant date.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following is a summary of the activity for unvested restricted stock units and awards granted under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
|
Average Grant
|
|
|
|
Average Grant
|
|
|
Number of
|
|
Date Fair Value
|
|
Number of
|
|
Date Fair Value
|
|
|
Shares
|
|
per Share
|
|
Shares
|
|
per Share
|
Outstanding as of December 31, 2017
|
|
1,629,971
|
|
|
$
|
32.60
|
|
|
136,668
|
|
|
$
|
31.03
|
|
Granted
|
|
940,113
|
|
|
55.24
|
|
|
55,986
|
|
|
61.25
|
|
Vested
|
|
(1,005,347)
|
|
|
32.73
|
|
|
(68,334)
|
|
|
31.03
|
|
Forfeited
|
|
(103,269)
|
|
|
40.37
|
|
|
—
|
|
|
—
|
|
Outstanding as of December 31, 2018
|
|
1,461,468
|
|
|
46.59
|
|
|
124,320
|
|
|
44.64
|
|
Granted
|
|
997,971
|
|
|
61.91
|
|
|
202,168
|
|
|
69.68
|
|
Vested
|
|
(1,029,790)
|
|
|
45.11
|
|
|
(68,334)
|
|
|
31.03
|
|
Forfeited
|
|
(110,779)
|
|
|
53.16
|
|
|
(4,036)
|
|
|
61.27
|
|
Outstanding as of December 31, 2019
|
|
1,318,870
|
|
|
58.88
|
|
|
254,118
|
|
|
67.96
|
|
Granted
|
|
970,390
|
|
|
74.61
|
|
|
81,689
|
|
|
83.47
|
|
Vested
|
|
(804,982)
|
|
|
57.77
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(138,931)
|
|
|
62.14
|
|
|
(33,010)
|
|
|
64.70
|
|
Outstanding as of December 31, 2020
|
|
1,345,347
|
|
|
70.56
|
|
|
302,797
|
|
|
72.50
|
|
At December 31, 2020, there was $72,238 of unrecognized compensation expense related to unvested restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 1.9 years. At December 31, 2020, there was $8,201 of unrecognized compensation expense related to unvested performance-based restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 1.8 years.
In connection with the unexpected death of our former CEO, the Company modified certain of his outstanding equity awards. The modifications included the extension of exercise periods for his outstanding stock options and the immediate vesting of his outstanding RSUs. All unvested PSUs were forfeited. As a result of these modifications, the Company recorded additional non-cash compensation expense of $4,286 in 2019. In 2020, the Company recognized a gain of $2,524 in other income (expense), net as a result of a fair value adjustment upon settlement of the former CEO’s stock options.
16.Benefit Plan
The Company sponsors a profit sharing and savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all domestic employees. The Company made voluntary employer matching contributions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Voluntary employer matching contributions
|
|
$
|
6,247
|
|
|
$
|
6,044
|
|
|
$
|
4,778
|
|
17.Income Taxes
Loss before income tax benefit was generated in the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
|
$
|
(17,234)
|
|
|
$
|
(61,047)
|
|
|
$
|
(18,242)
|
|
Foreign
|
|
9,189
|
|
|
12,952
|
|
|
9,080
|
|
Total
|
|
$
|
(8,045)
|
|
|
$
|
(48,095)
|
|
|
$
|
(9,162)
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The components of the income tax expense (benefit) charged to operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,086)
|
|
|
$
|
4
|
|
|
$
|
4,564
|
|
State
|
|
2,111
|
|
|
2,803
|
|
|
1,044
|
|
Foreign
|
|
(4,542)
|
|
|
5,930
|
|
|
4,849
|
|
|
|
(3,517)
|
|
|
8,737
|
|
|
10,457
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(2,659)
|
|
|
(33,952)
|
|
|
(19,444)
|
|
State
|
|
1,158
|
|
|
(5,603)
|
|
|
(3,182)
|
|
Foreign
|
|
(383)
|
|
|
(75)
|
|
|
(1,003)
|
|
|
|
(1,884)
|
|
|
(39,630)
|
|
|
(23,629)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,401)
|
|
|
$
|
(30,893)
|
|
|
$
|
(13,172)
|
|
Net deferred tax assets (liabilities) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Deferred revenue
|
|
$
|
5,811
|
|
|
$
|
5,148
|
|
Prepaid expenses and accruals
|
|
8,737
|
|
|
9,533
|
|
Deferred rent and lease incentives
|
|
255
|
|
|
273
|
|
Right of use asset
|
|
(25,937)
|
|
|
(18,507)
|
|
Lease liability
|
|
30,752
|
|
|
22,983
|
|
Net operating loss and tax credit carryforwards
|
|
87,648
|
|
|
86,952
|
|
Property and equipment and intangible assets
|
|
(113,041)
|
|
|
(127,255)
|
|
Stock-based compensation expense
|
|
9,122
|
|
|
8,033
|
|
Investment in partnerships
|
|
1,727
|
|
|
2,196
|
|
Convertible Notes
|
|
(22,951)
|
|
|
(8,471)
|
|
Other
|
|
639
|
|
|
2,218
|
|
Total deferred tax liabilities, net
|
|
(17,238)
|
|
|
(16,897)
|
|
Less: valuation allowance
|
|
(17,502)
|
|
|
(12,584)
|
|
Net deferred tax liabilities
|
|
$
|
(34,740)
|
|
|
$
|
(29,481)
|
|
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”) and Base-Erosion Anti-abuse Tax (“BEAT”) provisions. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The Company expects to fully offset any GILTI income with Net Operating Losses (“NOLs”). In 2019, the Company reevaluated the entity classification of its Indian entities to a flow-through status. As a result, the Company does not currently expect to be subject to BEAT. Additionally, the two Indian entities also are no longer subject to GILTI.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted into United States law. The CARES Act includes provisions which impact the Company, namely the temporary increase of the 163(j) limitation to 50% for tax years beginning in 2019 and 2020, the adjustment of qualified improvement property to a 15-year depreciable life, and a five-year carryback of any NOL generated in a taxable year beginning after December 31, 2017 and before January 1, 2021. A carryback of the 2019 NOL generated by the Company was filed in 2020 and the related refund of $1,224 is expected to be received in early 2021.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The deferred tax liability that is not being recorded because of the Company's assertion to permanently reinvest the earnings of its India subsidiaries is $5,550 related to the withholding tax in India, net of an assumed foreign tax deduction for this amount in the U.S.
The valuation allowance for deferred tax assets as of December 31, 2020 and 2019 was $17,502 and $12,584, respectively. The change in the valuation allowance from 2019 to 2020 was primarily related to additional R&D credits generated during 2020. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative pre-tax loss incurred over the three years ended December 31, 2020. Such objective evidence limits the ability to consider other subjective evidence such as the Company's projections for future growth. On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $17,502 has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company's projections for growth.
The expected income tax provision (benefit) calculated at the statutory federal rate differs from the actual provision as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Tax benefit, at U.S. federal statutory tax rate
|
|
$
|
(1,787)
|
|
|
$
|
(10,012)
|
|
|
$
|
(1,559)
|
|
|
|
|
|
|
|
|
State income tax benefit, net of federal benefit
|
|
(2,461)
|
|
|
(5,390)
|
|
|
(1,714)
|
|
Effect of stock-based compensation excess tax benefit
|
|
(9,349)
|
|
|
(11,983)
|
|
|
(7,782)
|
|
Effect of permanent items
|
|
258
|
|
|
1,048
|
|
|
2,967
|
|
Effect of India partnerships
|
|
2,977
|
|
|
—
|
|
|
—
|
|
Change in valuation allowance
|
|
16,210
|
|
|
(3,364)
|
|
|
(4,244)
|
|
Effect of change in state and foreign income tax rates
|
|
1,323
|
|
|
2,449
|
|
|
(269)
|
|
Uncertain tax positions
|
|
(6,093)
|
|
|
4,478
|
|
|
(2,062)
|
|
BEAT liability
|
|
—
|
|
|
—
|
|
|
3,760
|
|
Research and development credits
|
|
(5,939)
|
|
|
(6,756)
|
|
|
(4,770)
|
|
State net operating loss adjustment
|
|
31
|
|
|
(1,588)
|
|
|
—
|
|
Other
|
|
(571)
|
|
|
225
|
|
|
2,501
|
|
Income tax benefit
|
|
$
|
(5,401)
|
|
|
$
|
(30,893)
|
|
|
$
|
(13,172)
|
|
At December 31, 2020, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $242,000 available to offset future federal taxable income, if any, of which $241,000 expire through 2040 and $1,000 are carried forward indefinitely. In addition, as of December 31, 2020, the Company had NOL carryforwards for state income tax purposes of approximately $211,000 available to reduce future income subject to income taxes. The state NOL carryforwards expire through 2040.
In addition, at December 31, 2020, the Company had a federal income tax receivable of approximately $727 related to the Alternative Minimum Tax (“AMT”) refund which it expects to receive in early 2021. As a result of tax reform, AMT credits are refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the minimum tax credit was reclassified from a deferred tax asset to an income tax receivable. The Company also had minimal AMT credits for California, which are available to reduce future California income taxes, if any, over an indefinite period. In addition, the Company had research and development (“R&D”) credit carryforwards of approximately $26,958 for federal and $11,799 for California and Illinois, as well as foreign tax credits
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
of $886 available to offset federal income tax. Federal R&D credits begin to expire in 2022 through 2040. California R&D credits carryover indefinitely.
A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Balance at beginning of year
|
|
$
|
18,939
|
|
|
$
|
15,628
|
|
|
$
|
18,312
|
|
Additions based on tax positions related to the current year
|
|
1,420
|
|
|
2,261
|
|
|
1,907
|
|
Additions (reductions) based on tax positions related to prior years
|
|
(2,793)
|
|
|
1,050
|
|
|
(3,976)
|
|
|
|
|
|
|
|
|
Reductions for settlements with taxing authorities related to prior years
|
|
(2,434)
|
|
|
—
|
|
|
(615)
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
15,132
|
|
|
$
|
18,939
|
|
|
$
|
15,628
|
|
At December 31, 2020, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $15,132. At this time, the Company estimates that the liability for unrecognized tax benefits could decrease by an estimated $1,495 in the next twelve months as it is anticipated that reviews by tax authorities will be completed and voluntary disclosure agreements settled.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2020 and 2019, income tax expense (benefit) included $(4,875) and $1,476, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $1,383 and $7,336 as of December 31, 2020 and 2019, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Service (“IRS”) in December 2017 that the calendar year 2015 and 2016 federal income tax returns have been selected for audit by the IRS. The Company’s tax returns for the 2015-2019 calendar years remain open to examination by the IRS in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for the 2016-2019 calendar years remain open to examination by various state revenue services.
The Company's Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2020, 2011 and 2010. Based on the outcome of examinations of the Company's subsidiaries or the result of the expiration of statutes of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months.
18.Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted net 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 using the treasury stock method, if dilutive.
The Company accounts for the effect of its convertible notes (See “Note 10—Debt”) on diluted net income per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes due 2023 and Convertible Notes due 2025 have no effect on diluted net income per share until the Company’s stock price exceeds the conversion price of $68.31 per share and $106.74 per share, respectively, and certain other criteria are met, or if the trading price of the convertible notes meets certain criteria. In the period of conversion, the convertible notes will have no impact on diluted net income per share if they are settled in cash and will have an impact on dilutive net income per share if they are settled in shares upon conversion. See “Note 2—Summary of Significant Accounting Policies” for information regarding the adoption of ASU 2020-06.
Envestnet, Inc.
Notes to 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.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Basic income (loss) per share calculation:
|
|
|
|
|
|
|
Net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
$
|
5,755
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding
|
|
53,589,232
|
|
|
50,937,919
|
|
|
45,268,002
|
|
Basic net income (loss) per share
|
|
$
|
(0.06)
|
|
|
$
|
(0.33)
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share calculation:
|
|
|
|
|
|
|
Net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
$
|
5,755
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding
|
|
53,589,232
|
|
|
50,937,919
|
|
|
45,268,002
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
Options to purchase common stock
|
|
—
|
|
|
—
|
|
|
1,304,493
|
|
Unvested restricted stock units
|
|
—
|
|
|
—
|
|
|
811,590
|
|
Convertible Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
Warrants
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted number of weighted-average shares outstanding
|
|
53,589,232
|
|
|
50,937,919
|
|
|
47,384,085
|
|
Diluted net income (loss) per share
|
|
$
|
(0.06)
|
|
|
$
|
(0.33)
|
|
|
$
|
0.12
|
|
Securities that were anti-dilutive and therefore excluded from the computation of diluted net income (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Options to purchase common stock
|
|
438,040
|
|
|
1,150,586
|
|
|
—
|
|
Unvested RSU's and PSU's
|
|
1,648,144
|
|
|
1,572,988
|
|
|
—
|
|
Convertible Notes (1)
|
|
9,898,549
|
|
|
5,050,505
|
|
|
7,793,826
|
|
Warrants
|
|
470,000
|
|
|
470,000
|
|
|
470,000
|
|
Total anti-dilutive securities
|
|
12,454,733
|
|
|
8,244,079
|
|
|
8,263,826
|
|
(1)For 2020, this amount includes 4,848,044 of additional potential common shares related to the Convertible Notes due 2025 which were issued in August 2020 (See “Note 10—Debt”). For 2019, this amount does not include 2,743,321 of potential common shares related to the Convertible Notes due 2019 as they were settled in cash at maturity in December 2019.
19.Segment Information
Business segments are generally organized around the Company's business services. The Company's business segments are:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions.
•Envestnet Data & Analytics – 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 operating expenses include salary and benefits for certain corporate officers, certain types of professional service expenses and insurance, acquisition related transaction costs, restructuring charges and other non-recurring and/or non-operationally related expenses. Intersegment revenues were not material for the year ended December 31, 2020.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
See “Note 14—Revenues and Cost of Revenues” for detail of revenues by segment.
The following table presents a reconciliation from income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Envestnet Wealth Solutions
|
|
$
|
91,501
|
|
|
$
|
67,713
|
|
|
$
|
75,491
|
|
Envestnet Data & Analytics
|
|
(9,943)
|
|
|
(25,262)
|
|
|
(10,013)
|
|
Nonsegment operating expenses
|
|
(62,117)
|
|
|
(58,524)
|
|
|
(51,313)
|
|
Income (loss) from operations
|
|
19,441
|
|
|
(16,073)
|
|
|
14,165
|
|
Interest expense, net
|
|
(30,392)
|
|
|
(29,173)
|
|
|
(22,840)
|
|
Other income (expense), net
|
|
2,906
|
|
|
(2,849)
|
|
|
(487)
|
|
Consolidated loss before income tax benefit
|
|
(8,045)
|
|
|
(48,095)
|
|
|
(9,162)
|
|
Income tax benefit
|
|
(5,401)
|
|
|
(30,893)
|
|
|
(13,172)
|
|
Consolidated net income (loss)
|
|
(2,644)
|
|
|
(17,202)
|
|
|
4,010
|
|
Add: Net (income) loss attributable to non-controlling interest
|
|
(466)
|
|
|
420
|
|
|
1,745
|
|
Consolidated net income (loss) attributable to Envestnet, Inc.
|
|
$
|
(3,110)
|
|
|
$
|
(16,782)
|
|
|
$
|
5,755
|
|
A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures by segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Segment assets:
|
|
|
|
|
Envestnet Wealth Solutions
|
|
$
|
1,634,153
|
|
|
$
|
1,297,891
|
|
Envestnet Data & Analytics
|
|
510,137
|
|
|
503,993
|
|
Consolidated total assets
|
|
$
|
2,144,290
|
|
|
$
|
1,801,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Segment depreciation and amortization:
|
|
|
|
|
|
|
Envestnet Wealth Solutions
|
|
$
|
80,714
|
|
|
$
|
65,746
|
|
|
$
|
45,139
|
|
Envestnet Data & Analytics
|
|
32,947
|
|
|
35,525
|
|
|
32,487
|
|
Consolidated depreciation and amortization
|
|
$
|
113,661
|
|
|
$
|
101,271
|
|
|
$
|
77,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Segment capital expenditures:
|
|
|
|
|
|
|
Envestnet Wealth Solutions
|
|
$
|
46,891
|
|
|
$
|
42,395
|
|
|
$
|
36,406
|
|
Envestnet Data & Analytics
|
|
20,105
|
|
|
11,548
|
|
|
8,186
|
|
Consolidated capital expenditures
|
|
$
|
66,996
|
|
|
$
|
53,943
|
|
|
$
|
44,592
|
|
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
20.Geographical Information
The following table sets forth certain long-lived assets including property and equipment, net and internally developed software, net by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
United States
|
|
$
|
140,651
|
|
|
$
|
108,992
|
|
India
|
|
2,970
|
|
|
3,988
|
|
Other
|
|
849
|
|
|
1,039
|
|
Total long-lived assets, net
|
|
$
|
144,470
|
|
|
$
|
114,019
|
|
See “Note 14—Revenues and Cost of Revenues” for detail of revenues by geographic area.
21.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 consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business. As of December 31, 2020, the Company estimated future minimum unconditional purchase obligations of approximately $56,000.