Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

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

 

For the quarterly period ended September 30, 2013

 

o

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

 

Commission file number 001-34835

 


 

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

20-1409613

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S Employer

Identification No.)

 

 

 

35 East Wacker Drive, Suite 2400, Chicago, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(312) 827-2800

 


 

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

 

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

 

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

 

Large accelerated filer

o

 

Accelerated filer                   

x

 

 

 

 

 

Non-accelerated filer

o

 

Smaller reporting company  

o

 

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

 

As of November 1, 2013, 33,799,964 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

 

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012

 

4

Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013

 

5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

 

6

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

19

Forward-Looking Statements

 

19

Overview

 

20

Results of Operations

 

23

Liquidity and Capital Resources

 

30

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

Item 4. Controls and Procedures

 

32

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

35

 

 

 

Item 1A. Risk Factors

 

35

 

 

 

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

 

35

 

 

 

Item 6. Exhibits

 

35

 

2



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share information)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,683

 

$

29,983

 

Fees receivable, net

 

18,634

 

9,188

 

Deferred tax assets, net

 

2,716

 

2,089

 

Prepaid expenses and other current assets

 

8,198

 

2,501

 

Total current assets

 

66,231

 

43,761

 

 

 

 

 

 

 

Property and equipment, net

 

12,493

 

11,791

 

Internally developed software, net

 

5,352

 

4,324

 

Intangible assets, net

 

38,348

 

27,150

 

Goodwill

 

74,335

 

65,644

 

Deferred tax assets, net

 

6,942

 

6,194

 

Other non-current assets

 

4,800

 

3,535

 

Total assets

 

$

208,501

 

$

162,399

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued expenses

 

$

30,405

 

$

20,201

 

Accounts payable

 

4,505

 

2,614

 

Contingent consideration liability

 

5,591

 

 

Deferred revenue

 

6,522

 

5,768

 

Total current liabilities

 

47,023

 

28,583

 

 

 

 

 

 

 

Contingent consideration liability

 

10,539

 

 

Deferred rent liability

 

1,916

 

2,195

 

Lease incentive liability

 

3,381

 

3,886

 

Other non-current liabilities

 

2,683

 

1,739

 

Total liabilities

 

65,542

 

36,403

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, par value $0.005, 500,000,000 shares authorized; 45,510,657 and 44,071,564 shares issued as of September 30, 2013 and December 31, 2012, respectively; 33,758,951 and 32,355,675 shares outstanding as of September 30, 2013 and December 31, 2012, respectively

 

228

 

220

 

Additional paid-in capital

 

188,187

 

173,611

 

Accumulated deficit

 

(34,312

)

(37,277

)

Treasury stock at cost, 11,751,706 and 11,715,889 shares as of September 30, 2013 and December 31, 2012, respectively

 

(11,144

)

(10,558

)

Total stockholders’ equity

 

142,959

 

125,996

 

Total liabilities and stockholders’ equity

 

$

208,501

 

$

162,399

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share information)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

59,580

 

$

33,223

 

$

137,150

 

$

92,498

 

Licensing and professional services

 

10,300

 

9,060

 

30,987

 

20,389

 

Total revenues

 

69,880

 

42,283

 

168,137

 

112,887

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

30,154

 

15,088

 

66,600

 

40,163

 

Compensation and benefits

 

21,063

 

15,261

 

55,475

 

40,031

 

General and administration

 

11,985

 

7,621

 

30,840

 

22,542

 

Depreciation and amortization

 

4,467

 

3,393

 

10,666

 

9,016

 

Restructuring charges

 

474

 

 

474

 

115

 

Total operating expenses

 

68,143

 

41,363

 

164,055

 

111,867

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

1,737

 

920

 

4,082

 

1,020

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

4

 

3

 

13

 

26

 

Interest expense

 

 

 

 

(3

)

Other income

 

 

 

182

 

 

Total other income

 

4

 

3

 

195

 

23

 

 

 

 

 

 

 

 

 

 

 

Income before income tax provision

 

1,741

 

923

 

4,277

 

1,043

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

435

 

372

 

1,312

 

420

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,306

 

$

551

 

$

2,965

 

$

623

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.02

 

$

0.09

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.04

 

$

0.02

 

$

0.08

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

33,686,112

 

32,296,636

 

32,912,084

 

32,102,386

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

35,871,975

 

33,358,706

 

35,260,044

 

33,179,044

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

 

 

Total 

 

 

 

Shares

 

Amount

 

Common 
Shares

 

Amount

 

Paid-in 
Capital

 

Accumulated 
deficit

 

Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

44,071,564

 

$

220

 

(11,715,889

)

$

(10,558

)

$

173,611

 

$

(37,277

)

$

125,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

606,227

 

3

 

 

 

5,575

 

 

5,578

 

Issuance of common stock - vesting of restricted stock

 

70,964

 

1

 

 

 

 

 

1

 

Exercise of warrants

 

761,902

 

4

 

 

 

 

 

4

 

Stock-based compensation

 

 

 

 

 

6,281

 

 

6,281

 

Tax benefit attributable to exercise of stock options

 

 

 

 

 

2,704

 

 

2,704

 

Reversal of state uncertain tax position

 

 

 

 

 

16

 

 

16

 

Purchase of treasury stock (at cost)

 

 

 

(35,817

)

(586

)

 

 

(586

)

Net income

 

 

 

 

 

 

2,965

 

2,965

 

Balance, September 30, 2013

 

45,510,657

 

$

228

 

(11,751,706

)

$

(11,144

)

$

188,187

 

$

(34,312

)

$

142,959

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

2,965

 

$

623

 

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

 

 

 

 

 

Depreciation and amortization

 

10,666

 

9,016

 

Deferred rent and lease incentive

 

(784

)

1,366

 

Provision for doubtful accounts

 

153

 

 

Deferred income taxes

 

(1,375

)

(562

)

Stock-based compensation

 

6,281

 

3,125

 

Excess tax benefits from stock-based compensation

 

(2,704

)

 

Interest expense

 

392

 

3

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Fees receivable

 

(8,302

)

(487

)

Prepaid expenses and other current assets

 

(2,993

)

3,084

 

Other non-current assets

 

(1,265

)

(190

)

Accrued expenses

 

7,946

 

1,791

 

Accounts payable

 

1,891

 

545

 

Deferred revenue

 

754

 

600

 

Other non-current liabilities

 

960

 

179

 

Net cash provided by operating activities

 

14,585

 

19,093

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(4,301

)

(4,098

)

Capitalization of internally developed software

 

(2,293

)

(1,698

)

Repayment of notes payable assumed in acquisition

 

 

(174

)

Acquisition of businesses, net of cash acquired

 

(8,992

)

(61,463

)

Net cash used in investing activities

 

(15,586

)

(67,433

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from exercise of warrants

 

4

 

 

Proceeds from exercise of stock options

 

5,578

 

1,927

 

Issuance of restricted stock

 

1

 

2,759

 

Excess tax benefits from stock-based compensation

 

2,704

 

 

Purchase of treasury stock

 

(586

)

(122

)

Net cash provided by financing activities

 

7,701

 

4,564

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

6,700

 

(43,776

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

29,983

 

64,909

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

36,683

 

$

21,133

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes, net of refunds

 

$

4,389

 

$

604

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Leasehold improvements funded by lease incentive

 

 

1,054

 

Contigent consideration liability issued in acquisition of business

 

15,738

 

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

1.                       Organization and Description of Business

 

Envestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provides open-architecture wealth management services and technology to independent financial advisors and financial institutions. These services and related technology are provided via the Envestnet Advisor Suite®, Envestnet | PMC®, Envestnet | Vantage®, and Envestnet | TamaracTM.

 

Advisor Suite is a platform of integrated, internet-based technology applications and related services that provide 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.

 

The Company’s investment consulting group, Envestnet | PMC, provides investment manager due diligence and research, a full spectrum of investment offerings supported by both proprietary and third-party research, and overlay portfolio management services.

 

Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end Registered Investment Advisors (“RIAs”).

 

Through these platform and service offerings, the Company provides open-architecture support for a wide range of investment products (separately managed accounts, multi-manager accounts, mutual funds, exchange-traded funds, stock baskets, alternative investments, and other fee-based investment solutions) from Envestnet | PMC and other leading investment providers via multiple custodians, and also account administration and reporting services.

 

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

 

2.                       Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of September 30, 2013 and the results of operations, stockholders’ equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2012 was derived from the Company’s audited financial statements for the year ended December 31, 2012 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar amounts contained in these unaudited condensed consolidated financial statements are in thousands, except share and per share amounts.

 

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2012.

 

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with GAAP. Significant areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, costs capitalized for internally developed software, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of stock options issued, realization of deferred tax assets and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.

 

Segments — The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis. Historically, the Company has determined that it has a single reporting segment and operating unit structure. As a result of the acquisition as discussed in Note 3, the Company has re-examined its reporting and operating structure and has determined it continues to maintain a single reporting segment and operating unit structure.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

Prepaid expenses and other current assets — Federal and state income tax receivables of $5,375 and $186 are included in the prepaid expenses and other current asset amounts reported in the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, respectively.

 

3.                       Business Acquisitions

 

Acquisition of Wealth Management Solutions

 

On July 1, 2013, the Company completed the acquisition of the Wealth Management Solutions (“WMS”) division of Prudential Investments.  In accordance with the purchase agreement, the Company acquired substantially all of the assets and assumed certain liabilities of WMS for total consideration of $24,730.  WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings.  The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place.  The goodwill recognized is deductible for income tax purposes.

 

The consideration in the acquisition was as follows:

 

Cash consideration

 

$

8,992

 

Contingent consideration

 

15,738

 

Total estimated fair value of consideration

 

$

24,730

 

 

In connection with the acquisition of WMS, the Company is required to pay Prudential Investments, contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets. The Company has recorded a liability as of the date of acquisition of $15,738, which represents the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8.  This amount is the present value of an undiscounted liability of $19,043, applying a discount rate of 10%.  Payments will be made at the end of three twelve month closing periods.  The future undiscounted payments are anticipated to be $6,000 on July 31, 2014, $6,434 on July 31, 2015 and $6,609 on July 31, 2016.  The final future payments may be greater or lower than these amounts, based upon the attainment of performance targets.  Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company.

 

During the three months ended September 30, 2013, the Company recognized imputed interest expense on contingent consideration of $392, which is included in general and administration expense in the condensed consolidated statement of operations.

 

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Table of Contents

 

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

 

Total tangible assets acquired

 

$

1,296

 

Total liabilities assumed

 

(2,257

)

 

 

 

 

Identifiable intangible assets:

 

 

 

Customer list

 

14,000

 

Proprietary technology

 

3,000

 

Goodwill

 

8,691

 

Total net assets acquired

 

$

24,730

 

 

The estimated fair value of the intangible assets is provisional and is based on the information that was available as of the acquisition date to estimate the fair value of these amounts. The Company believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of intangible assets, and complete the acquisition accounting as soon as practicable but no later than December 31, 2013.

 

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

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Useful Life

 

Amortization

 

 

 

Amount

 

in Years

 

Method

 

Customer list

 

$

14,000

 

12

 

Accelerated

 

Proprietary technology

 

3,000

 

1.5

 

Accelerated

 

Total

 

$

17,000

 

 

 

 

 

 

The results of WMS operations are included in the condensed consolidated statement of operations beginning July 1, 2013.  WMS’s revenues and net loss for the three and nine month periods ended September 30, 2013 totaled $16,130 and $392, respectively.  The net loss includes acquired intangible asset amortization of $1,082 and imputed interest expense on contingent consideration of $392.

 

For the three and nine months ended September 30, 2013, acquisition related costs for WMS totaled $197 and $844, respectively, and are included in general and administration expenses. The Company may incur additional WMS acquisition related costs during the fourth quarter of 2013.

 

Pro forma results for Envestnet, Inc. giving effect to the Prima Capital Holding, Inc., Tamarac, Inc. and WMS acquisitions

 

The following pro forma financial information presents the combined results of operations of Envestnet, Prima Capital Holding, Inc. (“Prima”), acquired on April 1, 2012, Tamarac, Inc. (“Tamarac”), acquired on May 1, 2012, and WMS, acquired on July 1, 2013, for the three and nine months ended September 30, 2012 and the nine months ended September 30, 2013. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2012.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

The unaudited pro forma results presented include amortization charges for acquired intangible assets, the elimination of intercompany transactions, restructuring charges, unrealized gain or loss on warrant and imputed interest expense, stock-based compensation expense and the related tax effect on the aforementioned items.

 

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 2012.

 

 

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

 

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Revenue

 

$

57,342

 

$

200,585

 

$

164,024

 

Net loss

 

(3,005

)

(9,593

)

(13,700

)

Net loss per share:

 

 

 

 

 

 

 

Basic

 

(0.09

)

(0.29

)

(0.43

)

Diluted

 

(0.09

)

(0.29

)

(0.43

)

 

4.                       Property and Equipment

 

 

 

 

 

September 30,

 

December 31,

 

 

 

Estimated Useful Life

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

 

 

Office furniture and fixtures

 

5-7 years

 

$

3,884

 

$

3,613

 

Computer equipment and software

 

3 years

 

26,000

 

22,098

 

Other office equipment

 

5 years

 

598

 

598

 

Leasehold improvements

 

Shorter of the term of the lease or useful life of the asset

 

7,766

 

7,638

 

 

 

 

 

38,248

 

33,947

 

Less accumulated depreciation and amortization

 

 

 

(25,755

)

(22,156

)

Property and equipment, net

 

 

 

$

12,493

 

$

11,791

 

 

Depreciation and amortization expense was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

$

1,381

 

$

1,182

 

$

3,599

 

$

3,442

 

 

5.                       Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

September 30,

 

December 31,

 

 

 

Estimated Useful Life

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Internally developed software

 

5 years

 

$

15,525

 

$

13,232

 

Less accumulated amortization

 

 

 

(10,173

)

(8,908

)

Internally developed software, net

 

 

 

$

5,352

 

$

4,324

 

 

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Amortization expense was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

436

 

$

409

 

$

1,265

 

$

1,169

 

 

6.                       Goodwill and Intangible Assets

 

Changes in the carrying amount of the Company’s goodwill were as follows:

 

Balance at December 31, 2012

 

$

65,644

 

WMS acquisition

 

8,691

 

Balance at September 30, 2013

 

$

74,335

 

 

Intangible assets consist of the following:

 

 

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

4 - 12 years

 

$

42,103

 

$

(12,858

)

29,245

 

$

28,103

 

$

(8,720

)

$

19,383

 

Proprietary technology

 

1.5 - 8 years

 

9,580

 

(1,987

)

7,593

 

6,580

 

(657

)

5,923

 

Trade names

 

5 years

 

2,090

 

(580

)

1,510

 

2,090

 

(246

)

1,844

 

Total intangible assets

 

 

 

$

53,773

 

$

(15,425

)

$

38,348

 

$

36,773

 

$

(9,623

)

$

27,150

 

 

Amortization expense was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

2,650

 

$

1,802

 

$

5,802

 

$

4,405

 

 

7.                       Other Non-Current Assets

 

Other non-current assets consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Investment in private company

 

$

1,250

 

$

1,250

 

Deposits

 

 

 

 

 

Lease

 

1,647

 

1,655

 

Other

 

286

 

264

 

Other

 

1,617

 

366

 

Total other non-current assets

 

$

4,800

 

$

3,535

 

 

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8.                       Fair Value Measurements

 

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

 

Level 1:

 

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

 

 

 

Level 2:

 

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data.

 

 

 

Level 3:

 

Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

 

Fair Value on a Recurring Basis:

 

The Company periodically invests excess cash in money-market funds not insured by the Federal Deposit Insurance Corporation. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. The fair values of the Company’s investments in money market funds are based on the daily quoted market prices of the net asset value of the various money market funds. These money market funds are considered Level 1 assets, totaled approximately $25,639 and $20,682 as of September 30, 2013 and December 31, 2012, respectively, and are included in cash and cash equivalents in the condensed consolidated balance sheets.

 

The fair value of the contingent consideration liability described in Note 3 was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASB’s Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures.  The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows related to our acquisition of WMS during the subsequent three years from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.

 

The Company utilized a discounted cash flow method with expected future performance of WMS, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent consideration at each reporting date until settlement.  Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 liability for the nine months ended September 30, 2013:

 

 

 

Fair Value of

 

 

 

Contingent

 

 

 

Consideration

 

 

 

Liability

 

 

 

 

 

Balance at December 31, 2012

 

$

 

 

 

 

 

Fair value on WMS acquisition date of July 1, 2013

 

15,738

 

Imputed interest for the period July 1, 2013 - September 30, 2013

 

392

 

 

 

 

 

Balance at September 30, 2013

 

$

16,130

 

 

9.                       Accrued Expenses

 

Accrued expenses consist of the following:

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Accrued investment manager fees

 

$

17,659

 

$

12,937

 

Accrued compensation and related taxes

 

9,629

 

5,726

 

Accrued professional services

 

626

 

408

 

Other accrued expenses

 

2,491

 

1,130

 

Total accrued expenses

 

$

30,405

 

$

20,201

 

 

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10.                Income Taxes

 

The following table includes income tax provision and the effective tax rate for the Company’s income from operations:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

1,741

 

$

923

 

$

4,277

 

$

1,043

 

Income tax provision

 

435

 

372

 

1,312

 

420

 

Effective tax rate

 

25.0

%

40.3

%

30.7

%

40.3

%

 

The Company’s effective tax rate in the three and nine months ended September 30, 2013, was lower than the effective tax rate in the three and nine months ended September 30, 2012, primarily due to the effect of research and development tax credits.

 

The liability for unrecognized tax benefits reported in other non-current liabilities was $2,625 and $1,739 at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $1,785. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $261 in the next twelve months due to the completion of reviews by tax authorities, the voluntary filing of certain state income tax returns and the expiration of certain statutes of limitations.

 

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $661 and $642 as of September 30, 2013 and December 31, 2012, respectively.

 

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, a subsidiary of the Company files a tax return in a foreign jurisdiction. The Company’s tax returns for the calendar years ended December 31, 2012, 2011 and 2010 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2012, 2011 and 2010 remain open to examination by various state revenue services.

 

The Company’s India subsidiary is currently under examination by the India Taxing Authority for the fiscal years ended March 31, 2009 and March 31, 2010. Based on the outcome of examinations of the Company’s 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 condensed consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months. The Company’s subsidiary’s tax returns for the fiscal years ended March 31, 2007 through March 31, 2012 remain open to examination by the India Taxing Authority in their entirety.

 

11.                Stockholders’ Equity

 

In February 2010, in connection with a Platform Services Agreement between the Company and FundQuest Incorporated (“FundQuest”), a subsidiary of BNP Paribas Investment Partners USA Holdings, Inc., the Company issued to FundQuest a warrant to purchase 1,388,888 shares of the Company’s common stock, with an exercise price of $10.80 per share.  During 2011, the warrant was sold by FundQuest to a third party.  On June 24, 2013, the third party exercised the warrant via a cashless exercise, and as a result, the Company issued 761,902 shares of the Company’s common stock to the third party.

 

12.                Stock-Based Compensation

 

The Company has stock options and restricted stock outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). As of September 30, 2013, the maximum number of stock options and restricted stock available for future issuance under the Company’s plans is 1,263,640.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Employee stock-based compensation expense

 

$

2,015

 

$

1,195

 

$

6,281

 

$

3,125

 

Tax effect on employee stock-based compensation expense

 

(503

)

(482

)

(1,927

)

(1,256

)

Net effect on income

 

$

1,512

 

$

713

 

$

4,354

 

$

1,869

 

 

Stock Options

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Grant date fair value of options

 

$

 

$

 

$

6.11

 

$

4.96

 

Volatility

 

 

 

40.4

%

39.6

%

Risk-free interest rate

 

 

 

1.0

%

1.2

%

Dividend yield

 

 

 

0.0

%

0.0

%

Expected term (in years)

 

 

 

6.0

 

6.0

 

 

The following table summarizes option activity under the Company’s plans:

 

 

 

Options

 

Weighted-
Average Exercise
Price

 

Weighted-Average
Remaining
Contractual Life
(Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2012

 

5,277,412

 

$

8.86

 

 

 

 

 

Granted

 

190,413

 

15.34

 

 

 

 

 

Exercised

 

(9,050

)

6.24

 

 

 

 

 

Forfeited

 

(8,050

)

11.91

 

 

 

 

 

Outstanding as of March 31, 2013

 

5,450,725

 

9.08

 

6.2

 

$

45,939

 

Granted

 

 

 

 

 

 

 

Exercised

 

(233,603

)

9.13

 

 

 

 

 

Forfeited

 

(31,815

)

12.41

 

 

 

 

 

Outstanding as of June 30, 2013

 

5,185,307

 

9.06

 

6.0

 

$

80,583

 

Granted

 

 

 

 

 

 

 

Exercised

 

(363,574

)

9.28

 

 

 

 

 

Forfeited

 

(31,275

)

11.38

 

 

 

 

 

Outstanding as of September 30, 2013

 

4,790,458

 

9.03

 

5.6

 

$

105,267

 

Options exercisable

 

3,515,090

 

8.03

 

4.8

 

$

80,727

 

 

Exercise prices of stock options outstanding as of September 30, 2013 range from $0.11 to $15.34.

 

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Restricted Stock

 

Periodically, the Company grants restricted stock awards to employees that vest one-third on each of the first three anniversaries of the grant date. The following is a summary of the activity for unvested restricted stock awards granted under the Company’s plans:

 

 

 

Number of
Shares

 

Weighted-Average
Grant Date Fair
Value per Share

 

 

 

 

 

 

 

Balance at December 31, 2012

 

758,990

 

$

12.49

 

Granted

 

172,212

 

15.34

 

Vested

 

(70,964

)

 

Forfeited

 

(3,197

)

13.78

 

Balance at March 31, 2013

 

857,041

 

13.07

 

Granted

 

105,858

 

18.29

 

Forfeited

 

(152,653

)

12.54

 

Balance at June 30, 2013

 

810,246

 

14.51

 

Granted

 

101,908

 

26.74

 

Forfeited

 

(12,981

)

14.10

 

Balance at September 30, 2013

 

899,173

 

18.93

 

 

At September 30, 2013, there was $3,779 of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.2 years. At September 30, 2013, there was $5,554 of unrecognized compensation expense related to unvested restricted stock awards, which the Company expects to recognize over a weighted-average period of 1.9 years. At September 30, 2013, there was an additional $3,819 of potential unrecognized stock compensation expense related to unvested restricted stock granted under the 2012 Plan that vests based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition, which the Company expects to recognize, if earned, over the remaining estimated vesting period of 1.5 to 3.5 years.

 

On March 31, 2013, 181,625 shares of restricted stock became performance vested under the first year performance condition. These shares will become fully vested upon employees meeting the subsequent two-year service condition.

 

On April 11, 2013, the Company amended the 2012 Plan. The purpose of the amendment was to amend the methodology for determining the vesting requirements of performance awards granted under the 2012 Plan, as well as to grant awards to additional Envestnet | Tamarac employees eligible to participate in the 2012 Plan. The amendment to the 2012 Plan was treated as a modification.  As a result, 113,249 performance awards were valued as of the date of the modification.  Concurrent with the amendment, 103,521 performance awards were voluntarily forfeited by certain participants in the 2012 Plan and immediately reallocated to other participants in the 2012 Plan.

 

13.                Earnings Per Share

 

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants and restricted stock using the treasury stock method.

 

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The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per share:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,306

 

$

551

 

$

2,965

 

$

623

 

 

 

 

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

33,686,112

 

32,296,636

 

32,912,084

 

32,102,386

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

2,057,245

 

889,373

 

1,812,114

 

897,644

 

Common warrants

 

 

127,324

 

434,392

 

138,889

 

Unvested restricted stock

 

128,618

 

45,373

 

101,454

 

40,125

 

Diluted number of weighted-average shares outstanding

 

35,871,975

 

33,358,706

 

35,260,044

 

33,179,044

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.02

 

$

0.09

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.04

 

$

0.02

 

$

0.08

 

$

0.02

 

 

Common share equivalents for securities that were anti-dilutive and therefore excluded from the computation of diluted net income per share were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

1,224,748

 

 

1,224,748

 

Unvested restricted stock

 

377,926

 

559,551

 

434,609

 

559,551

 

 

14.                Major Customers

 

One customer accounted for more than 10% of the Company’s fees receivable:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Fidelity

 

*

 

11

%

 


* There were no fees receivable from a single customer greater than 10%.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Fidelity

 

19

%

21

%

21

%

22

%

 

15.                               Commitments and Contingencies

 

The Company is involved in litigation arising in the ordinary course of its business. The Company does not believe that the outcome of any of the current litigation, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on the Company’s results of operations, financial condition, cash flows or business.

 

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

 

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Table of Contents

 

damages and guarantees to certain service providers. 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.

 

In the third quarter of 2013, the Company exercised its right to early terminate the Denver and Raleigh office leases in accordance with the provisions of the leases.  The total termination fees were $1,142, of which approximately $551 was paid during the third quarter.  The remainder of the fee is due in July 2014. The impact of this early termination has been reflected in the lease commitment table below.  During the three and nine months ended September 30, 2013, the Company recorded $474 of restructuring charges, net of deferred rent adjustment, in the condensed consolidated statement of operations related to these lease termination fees.

 

Subsequent to the third quarter, the Company has negotiated to sign replacement and/or expansion amendments for the office leases in Denver, Raleigh, New York and Seattle.  The impact of these leases is included in the lease commitment table below.

 

The Company rents office space under leases that expire at various dates through 2026.  Future minimum lease commitments under these operating leases, as of September 30, 2013, was as follows:

 

Years ending December 31:

 

 

 

Remainder of 2013

 

$

1,588

 

2014

 

5,987

 

2015

 

5,592

 

2016

 

6,540

 

2017

 

6,125

 

Thereafter

 

34,489

 

 

 

$

60,321

 

 

16.                Subsequent Events

 

On October 11, 2013, the Company completed a public offering of common shares on behalf of selling stockholders. A total of 5,801,997 shares were sold, including an overallotment option exercised by the underwriters, at a public offering price of $29.25 per share. The Company did not receive any proceeds from the sale of shares by the selling stockholders.  The Company incurred costs of $280 during the three and nine months ended September 30, 2013 in relation to the public offering and this amount is included in general and administration expenses in the condensed consolidated statements of operations.  During the fourth quarter of 2013, the Company expects to incur approximately $700 of additional costs related to the public offering.

 

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Table of Contents

 

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

 

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

 

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

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:

 

·                  difficulty in sustaining rapid revenue growth, which may place significant demands on the Company’s administrative, operational and financial resources,

 

·                  fluctuations in the Company’s revenue,

 

·                  the concentration of nearly all of the Company’s revenues from the delivery of investment solutions and services to clients in the financial advisory industry,

 

·                  the Company’s reliance on a limited number of clients for a material portion of its revenue,

 

·                  the renegotiation of fee percentages or termination of the Company’s services by its clients,

 

·                  the Company’s ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies,

 

·                  the impact of market and economic conditions on the Company’s revenues,

 

·                  compliance failures,

 

·                  regulatory actions against the Company,

 

·                  the failure to protect the Company’s intellectual property rights,

 

·                  the Company’s inability to successfully execute the conversion of its clients’ assets from their technology platform to the Company’s technology platform in a timely and accurate manner,

 

·                  general economic conditions, and

 

·                  political and regulatory conditions, as well as management’s response to these factors.

 

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

 

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in our Annual Report on Form 10-K for

 

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the year ended December 31, 2012 (the “2012 Form 10-K”) under “Risk Factors”; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

 

You should read this quarterly report on Form 10-Q and our 2012 Form 10-K completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.

 

The following discussion and analysis should also be read along with our consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 2012 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

 

Overview

 

We are a leading provider of unified wealth management software and services to financial advisors and institutions. By integrating a wide range of investment solutions and services, our Web-based platform provides financial advisors with the flexibility to address their clients’ needs. As of September 30, 2013, approximately 29,000 advisors used our technology platform, supporting approximately $487 billion of assets in approximately 2.1 million investor accounts.

 

Envestnet empowers financial advisors to deliver fee-based advice to their clients. We work with both independent Registered Investment Advisors (“RIAs”), as well as advisors associated with financial institutions such as broker dealers and banks. The services we offer and market to financial advisors address advisors’ ability to grow their practice as well as operate more efficiently — the Envestnet platform spans the various elements of the wealth management process, from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice.

 

Our centrally-hosted technology platform, which we refer to as having “open architecture” because of its flexibility, provides financial advisors with access to a series of integrated services to help them better serve their clients. These services include risk assessment and selection of investment strategies and solutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party asset custodians.

 

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

 

·                  Envestnet’s wealth management software empowers advisors to better manage client outcomes and strengthen their practice. Our software unifies the applications and services advisors use to manage their practice and advise their clients, including financial planning; capital markets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, trading and rebalancing; multi-custodial, aggregated performance reporting; and billing calculation and administration.

 

·                  Our Portfolio Management Consultants group (“Envestnet | PMC®”) primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products. Envestnet | PMC’s investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios and ETF portfolios. Envestnet | PMC also offers Prima Premium Research, comprising institutional-quality research and due diligence on investment managers, mutual funds, ETFs and liquid alternatives funds.

 

·                  Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end RIAs.

 

·                  Envestnet Reporting Solutions software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice.

 

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Operational Highlights

 

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) increased 79% from $33,223 in the three months ended September 30, 2012 to $59,580 in the three months ended September 30, 2013. Total revenues, which include licensing and professional service fees, increased 65% from $42,283 in the three months ended September 30, 2012 to $69,880 in the three months ended September 30, 2013. The increase in total revenues were a result of the positive effects of new account growth and positive net flows of AUM or AUA, as well as an increase in revenues related to the WMS acquisition. Net income for the three months ended September 30, 2013 was $1,306, or $0.04 per diluted share, compared to net income of $551, or $0.02 per diluted share for the three months ended September 30, 2012.

 

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) increased 48% from $92,498 in the nine months ended September 30, 2012 to $137,150 in the nine months ended September 30, 2013. Total revenues, which include licensing and professional service fees, increased 49% from $112,887 in the nine months ended September 30, 2012 to $168,137 in the nine months ended September 30, 2013. The increase in total revenues were a result of the positive effects of new account growth and positive net flows of AUM or AUA, as well as an increase in revenues related to the Prima and Tamarac and WMS acquisitions. Net income for the nine months ended September 30, 2013 was $2,965, or $0.08 per diluted share, compared to $623, or $0.02 per diluted share for the nine months ended September 30, 2012.

 

Adjusted revenues for the three months ended September 30, 2013 was $69,880, an increase of 64% from $42,684 in the prior year period. Adjusted EBITDA for the three months ended September 30, 2013 was $10,041, an increase of 58% from $6,362 in the prior year period. Adjusted net income for the three months ended September 30, 2013 was $5,068, or $0.14 per diluted share, compared to adjusted net income of $2,853, or $0.09 per diluted share in the prior year period.

 

Adjusted revenues for the nine months ended September 30, 2013 was $168,297, an increase of 48% from $113,905 in the prior year period. Adjusted EBITDA for the nine months ended September 30, 2013 was $27,554, an increase of 64% from $16,770 in the prior year period. Adjusted net income for the nine months ended September 30, 2013 was $13,653, or $0.39 per diluted share, compared to adjusted net income of $7,282, or $0.22 per diluted share in the prior year period.

 

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

 

Recent Events

 

WMS Acquisition

 

On July 1, 2013, we completed the acquisition of the Wealth Management Solutions (“WMS”) division of Prudential Investments.  In accordance with the purchase agreement, we acquired substantially all of the assets of WMS for total consideration of $24,730.  WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings.  The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place.  The goodwill recognized is deductible for income tax purposes.

 

In connection with the acquisition of WMS, we are required to pay Prudential Investments contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets.  We have recorded a liability as of the date of acquisition of $15,738, which represents the estimated fair value of contingent consideration on the date of acquisition.  This amount is the present value of an estimated undiscounted liability of $19,043.  The fair value of this liability has been estimated using a discount rate of 10% and payments will be made at the end of a twelve month closing period, over three years.  The future undiscounted payments are anticipated to be $6,000 on July 31, 2014, $6,434 on July 31, 2015 and $6,609 on July 31, 2016.  The final future payments may be greater or lower than these amounts, based upon the attainment of performance targets.

 

Share offering

 

On October 11, 2013, the Company completed a public offering of common shares on behalf of selling stockholders. A total of 5,801,997 shares were sold, including an overallotment option exercised by the underwriters, at a public offering price of $29.25 per share. We did not receive any proceeds from the sale of shares by the selling stockholders.  We incurred costs of $280 during the three and nine months ended September 30, 2013 in relation to the public offering and this amount is included in general and administration expenses in the condensed consolidated statements of operations.  During the fourth quarter of 2013, we expect to incur approximately $700 of additional costs related to the public offering.

 

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Key Operating Metrics

 

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

 

AUM/A metrics in the table below, include WMS, which added approximately $25 billion in assets, 86,000 accounts and 3,100 advisors as of July 1, 2013.

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

2012

 

2012

 

2013

 

2013

 

2013

 

 

 

(in millions, except accounts and advisor data)

 

Platform Assets

 

 

 

 

 

 

 

 

 

 

 

Assets Under Management (AUM)

 

$

29,232

 

$

30,970

 

$

34,870

 

$

38,705

 

$

41,932

 

Assets Under Administration (AUA)

 

64,229

 

67,368

 

74,839

 

85,601

 

118,228

 

Subtotal AUM/A

 

93,461

 

98,338

 

109,709

 

124,306

 

160,160

 

Licensing

 

254,256

 

269,729

 

295,330

 

302,604

 

326,567

 

Total Platform Assets

 

$

347,717

 

$

368,067

 

$

405,039

 

$

426,910

 

$

486,727

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform Accounts

 

 

 

 

 

 

 

 

 

 

 

AUM

 

148,920

 

156,327

 

167,167

 

190,883

 

200,648

 

AUA

 

278,192

 

293,151

 

311,884

 

357,283

 

456,461

 

Subtotal AUM/A

 

427,112

 

449,478

 

479,051

 

548,166

 

657,109

 

Licensing

 

1,170,978

 

1,228,016

 

1,289,491

 

1,365,773

 

1,425,102

 

Total Platform Accounts

 

1,598,090

 

1,677,494

 

1,768,542

 

1,913,939

 

2,082,211

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisors

 

 

 

 

 

 

 

 

 

 

 

AUM/A

 

15,735

 

16,085

 

16,419

 

18,154

 

21,759

 

Licensing

 

6,878

 

6,941

 

6,970

 

7,261

 

7,511

 

Total Advisors

 

22,613

 

23,026

 

23,389

 

25,415

 

29,270

 

 

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.

 

 

 

Asset Rollforward - Three Months Ended September 30, 2013

 

 

 

As of

 

 

 

Gross

 

 

 

Net

 

Market

 

As of

 

 

 

6/30/13

 

WMS

 

Sales

 

Redemptions

 

Flows

 

Impact

 

9/30/13

 

 

 

(in millions, except account data)

 

Assets under Management (AUM)

 

$

38,705

 

$

 

$

4,437

 

$

(2,715

)

$

1,722

 

$

1,505

 

$

41,932

 

Assets under Administration (AUA)

 

85,601

 

24,680

 

10,841

 

(6,796

)

4,045

 

3,902

 

118,228

 

Subtotal AUM/A

 

$

124,306

 

$

24,680

 

$

15,278

 

$

(9,511

)

$

5,767

 

$

5,407

 

$

160,160

 

Fee-Based Accounts

 

548,166

 

86,014

 

53,804

 

(30,875

)

22,929

 

 

 

657,109

 

 

Gross sales for the three months ended September 30, 2013 included $3.1 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $4.0 billion of conversions in Licensing.

 

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Asset Rollforward - Nine Months Ended September 30, 2013

 

 

 

As of

 

 

 

Gross

 

 

 

Net

 

Market

 

As of

 

 

 

12/31/12

 

WMS

 

Sales

 

Redemptions

 

Flows

 

Impact

 

9/30/13

 

 

 

(in millions, except account data)

 

Assets under Management (AUM)

 

$

30,970

 

$

 

$

15,545

 

$

(7,012

)

$

8,533

 

$

2,429

 

$

41,932

 

Assets under Administration (AUA)

 

67,368

 

24,680

 

35,352

 

(15,231

)

20,121

 

6,059

 

118,228

 

Subtotal AUM/A

 

$

98,338

 

$

24,680

 

$

50,897

 

$

(22,243

)

$

28,654

 

$

8,488

 

$

160,160

 

Fee-Based Accounts

 

449,478

 

86,014

 

204,740

 

(83,123

)

121,617

 

 

 

657,109

 

 

Gross sales for the nine months ended September 30, 2013 included $18.0 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $21.3 billion of conversions in Licensing.

 

The mix of AUM and AUA was as follows for the periods indicated:

 

 

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

2012

 

2012

 

2013

 

2013

 

2013

 

Assets under management (AUM)

 

31

%

31

%

32

%

31

%

26

%

Assets under administration (AUA)

 

69

%

69

%

68

%

69

%

74

%

 

 

100

%

100

%

100

%

100

%

100

%

 

Results of Operations

 

Three months ended September 30, 2013 compared to three months ended September 30, 2012

 

 

 

Three Months Ended September 30,

 

Increase (Decrease)

 

 

 

2013

 

2012

 

Amount

 

%

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

59,580

 

$

33,223

 

$

26,357

 

79

%

Licensing and professional services

 

10,300

 

9,060

 

1,240

 

14

%

Total revenues

 

69,880

 

42,283

 

27,597

 

65

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

30,154

 

15,088

 

15,066

 

100

%

Compensation and benefits

 

21,063

 

15,261

 

5,802

 

38