Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Envestnet, through its subsidiaries, is transforming the way financial advice and insight are delivered. Our mission is to empower financial advisors and service providers with innovative technology, solutions and intelligence. Envestnet has been a leader in helping transform wealth management, working towards its goal of expanding a holistic financial wellness ecosystem so that our clients can deliver an Intelligent Financial Life to their clients.
Over 108,000 advisors and more than 6,000 companies, including 18 of the 20 largest U.S. banks, 47 of the 50 largest wealth management and brokerage firms, over 500 of the largest RIAs and hundreds of FinTech companies, leverage Envestnet technology and services that help drive better outcomes for enterprises, advisors and their clients.
Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting 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 SEC. We believe that our business model results in a high degree of recurring and predictable financial results.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak continues to cause disruptions to businesses and markets worldwide as the virus spreads and new variants emerge. The extent of the effect on our operational and financial performance will continue to depend on future developments, including the duration, spread and intensity of the pandemic, the emergence of variants and additional outbreaks of COVID-19, the availability and efficacy of vaccines, further governmental, regulatory and private sector responses and the timing and extent normal economic and operating conditions resume, all of which are uncertain and difficult to predict. Although we are unable to estimate the overall financial effect of the pandemic at this time, as the pandemic continues, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. As of December 31, 2021, these consolidated financial statements do not reflect any adjustments as a result of the pandemic.
Recent Developments
Credit Agreement Amendment
On February 4, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Third Credit Agreement”) with a group of banks. The Third Credit Agreement amends and restates, in its entirety, our prior Amended and Restated Credit Agreement, dated as of July 18, 2017, as amended (the “Prior Credit Agreement”).
The Third Credit Agreement amended certain provisions under the Prior Credit Agreement to, among other things, (i) extend the maturity of loans and the revolving credit commitments, (ii) reduce the interest rate payable on the loans and (iii) increase capacity and flexibility under certain of the negative covenants.
The Third Credit Agreement provides, subject to certain customary conditions, for a revolving credit facility (the “Credit Facility”), in an aggregate amount of $500.0 million, with a $20.0 million sub-facility for letters of credit.
The Credit Facility matures on February 4, 2027.
Outstanding loans under the Credit Facility accrue interest, at Envestnet’s option, at a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term SOFR rate plus an applicable margin ranging from 1.25% to 2.75% per annum, based upon the total net leverage ratio, as calculated pursuant to the Third Credit Agreement. The undrawn portion of the commitments under the Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum, based upon the total net leverage ratio as calculated pursuant to the Credit Agreement.
The obligations of Envestnet under the Third Credit Agreement are guaranteed by substantially all of Envestnet’s domestic subsidiaries and are secured by a first-priority lien on substantially all of the personal property (other than intellectual property) of Envestnet and the guarantors, subject to certain exclusions.
Investment in YieldX
On October 1, 2021, we acquired a 6.8% ownership interest in YieldX Inc. ("YieldX"), a Delaware corporation, for cash consideration of $15.0 million. YieldX provides an end-to-end digital platform with smart workflows, artificial intelligence powered analytics and a reimagined user experience for financial professionals and investors in the fixed income markets. We elected the measurement alternative for this investment as it did not have a readily determinable fair value. The investment is measured at cost, less impairment, adjusted by observable price changes.
In connection with this investment, we also entered into a commercial agreement with YieldX to integrate the products and solutions of YieldX into our platform offering. The consideration under the commercial agreement includes a warrant and quarterly cash payments subject to the satisfaction of certain performance targets.
Procurement of Technology Solutions
On June 21, 2021, we entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $18.0 million, including an advance of $3.0 million. The transaction closed on February 1, 2022 and we paid the remaining $15.0 million on February 2, 2022. This asset will be integrated into the Envestnet Data & Analytics segment. In addition, the agreement includes an earn-out payment of $10.0 million based upon the achievement of certain target metrics within five years after the date of our launch of the technology solutions.
Acquisition of Harvest
On April 7, 2021, we acquired Harvest Savings & Wealth Technologies (“Harvest”), a Delaware corporation (the "Harvest Acquisition"). Harvest provides automated goals-based saving and wealth solutions to banks, credit unions, trust companies and other financial institutions. Harvest has been integrated into the Envestnet Wealth Solutions segment. The acquisition optimizes our API-based financial wellness ecosystem and also helps strengthen our foothold to enable embedded finance, which we see as a key driver of the future of financial services.
In connection with the Harvest Acquisition, we paid estimated consideration of $32.8 million (of which approximately $3.0 million is being held in escrow for 18 months after the closing date), net of cash acquired, subject to certain post-closing adjustments. we funded the acquisition with cash on hand.
We recorded estimated goodwill of $18.5 million, which is not deductible for income tax purposes, and estimated identified intangible assets of $9.5 million. The tangible assets acquired and liabilities assumed were not material.
Acquisition of Proprietary Technology
We previously owned approximately 29% of the outstanding units in a privately held company and accounted for it as an equity method investment. On March 11, 2021, we entered into an intellectual property purchase agreement with this privately held company to acquire all of the proprietary technology developed by the privately held company for approximately $35.5 million. Concurrent with the intellectual property purchase agreement, the Company also entered into a redemption agreement with the same privately held company to redeem the Company's previously held equity interest for approximately $10 million. The Company accounted for these two arrangements as a single unit of account. As of the acquisition date, the net cost of the proprietary technology acquired, including capitalized transaction costs, was approximately $24.5 million, which will be amortized over a five-year period on a straight-line basis. The proprietary technology has been integrated into the Envestnet Wealth Solutions segment.
Accelerated Investment Plan
In February 2021, we announced that we would be accelerating our investment in our ecosystem, to fulfill our strategy of:
•Capturing more of the addressable market;
•Modernizing the digital engagement marketplace; and
•Opening the platform.
These investments totaled approximately $35.5 million in 2021. We expect to incur an additional $45 - $50 million in 2022 as we continue to invest in our ecosystem.
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 $5.2 million and $5.1 million of severance expense during the twelve months ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, we have accrued approximately $1.4 million and $5.1 million in accrued compensation and related taxes associated with these separation agreements, respectively.
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:
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in millions, except accounts and advisors data) |
Platform Assets | | | | | | |
AUM | | $ | 362,038 | | | $ | 263,043 | | | $ | 207,083 | |
AUA | | 456,316 | | | 405,365 | | | 343,505 | |
Total AUM/A | | 818,354 | | | 668,408 | | | 550,588 | |
Subscription | | 4,901,662 | | | 3,892,814 | | | 3,205,281 | |
Total Platform Assets | | $ | 5,720,016 | | | $ | 4,561,222 | | | $ | 3,755,869 | |
Platform Accounts | | | | | | |
AUM | | 1,345,274 | | | 1,073,122 | | | 935,039 | |
AUA | | 1,217,076 | | | 1,276,975 | | | 1,193,882 | |
Total AUM/A | | 2,562,350 | | | 2,350,097 | | | 2,128,921 | |
Subscription | | 14,986,531 | | | 11,079,048 | | | 9,793,175 | |
Total Platform Accounts | | 17,548,881 | | | 13,429,145 | | | 11,922,096 | |
Advisors | | | | | | |
AUM/A | | 39,735 | | | 41,206 | | | 40,563 | |
Subscription | | 68,808 | | | 65,104 | | | 61,180 | |
Total Advisors | | 108,543 | | | 106,310 | | | 101,743 | |
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 - 2021 |
| | As of December 31, 2020 | | Gross Sales | | Redemptions | | Net Flows | | Market Impact | | Reclass to Subscription | | As of December 31, 2021 |
| | | | | | | |
| | (in millions, except account data) |
AUM | | $ | 263,043 | | | $ | 117,066 | | | $ | (52,668) | | | $ | 64,398 | | | $ | 34,597 | | | $ | — | | | $ | 362,038 | |
AUA | | 405,365 | | | 116,675 | | | (92,299) | | | 24,376 | | | 40,787 | | | (14,212) | | | 456,316 | |
Total AUM/A | | $ | 668,408 | | | $ | 233,741 | | | $ | (144,967) | | | $ | 88,774 | | | $ | 75,384 | | | $ | (14,212) | | | $ | 818,354 | |
Fee-Based Accounts | | 2,350,097 | | | | | | | 322,138 | | | | | (109,885) | | | 2,562,350 | |
The above AUM/A gross sales figures include $34.9 billion in new client conversions. We onboarded an additional $312.4 billion in subscription conversions during 2021, bringing total conversions for the year to $347.3 billion.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Rollforward - 2020 |
| | As of December 31, 2019 | | Gross Sales | | Redemptions | | Net Flows | | Market Impact | | Reclass to Subscription | | As of December 31, 2020 |
| | | | | | | |
| | (in millions, except account data) |
AUM | | $ | 207,083 | | | $ | 74,118 | | | $ | (42,958) | | | $ | 31,160 | | | $ | 24,800 | | | $ | — | | | $ | 263,043 | |
AUA | | 343,505 | | | 117,138 | | | (84,328) | | | 32,810 | | | 40,052 | | | (11,002) | | | 405,365 | |
Total AUM/A | | $ | 550,588 | | | $ | 191,256 | | | $ | (127,286) | | | $ | 63,970 | | | $ | 64,852 | | | $ | (11,002) | | | $ | 668,408 | |
Fee-Based Accounts | | 2,128,921 | | | | | | | 278,863 | | | | | (57,687) | | | 2,350,097 | |
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.
Asset and account figures in the “Reclass to Subscription” columns for the years ended December 31, 2021 and 2020 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 32 million, 35 million and 25 million as of December 31, 2021, 2020 and 2019, respectively. The decrease from 2020 to 2021 is driven by a significant change in a current client's business and digital strategy.
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 60%, 54% and 54% of our total revenues for the years ended December 31, 2021, 2020 and 2019, 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 38%, 43% and 42% of our total revenues for the years ended December 31, 2021, 2020 and 2019, 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.
Over 75% of our asset-based recurring revenues from AUM/A are billed to customers at the beginning of each quarter and are based on the market value of their assets on our platforms as of the end of the prior quarter. For example, asset-based recurring revenues recognized during the fourth quarter of 2021 were primarily based on the market value of assets as of September 30, 2021. 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
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
As of January 1, 2021, we adopted 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.” The adoption of this standard resulted in a decrease to our interest expense in 2021.
Interest expense includes coupon interest and issuance cost amortization related to our convertible note issuances, as well as interest and amortization of upfront fees and monthly fees related to our Amended Credit Agreement. The issuance costs and upfront fees are amortized over the term of the related agreements. Prior to the adoption of ASU 2020-06, interest expense related to our convertible note issuances also included amortization of the original issue discount. See Part II, Item 8, “Note 10—Debt” for additional details regarding our third-party debt.
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
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | % Change | | 2019 | | % Change |
| | (in thousands, except for percentages) |
Revenues: | | | | | | | | | | |
Asset-based | | $ | 709,376 | | | $ | 540,947 | | | 31 | % | | $ | 484,312 | | | 12 | % |
Subscription-based | | 453,989 | | | 426,507 | | | 6 | % | | 378,813 | | | 13 | % |
Total recurring revenues | | 1,163,365 | | | 967,454 | | | 20 | % | | 863,125 | | | 12 | % |
Professional services and other revenues | | 23,152 | | | 30,776 | | | (25) | % | | 37,002 | | | (17) | % |
Total revenues | | 1,186,517 | | | 998,230 | | | 19 | % | | 900,127 | | | 11 | % |
Operating expenses: | | | | | | | | | | |
Cost of revenues | | 423,723 | | | 305,929 | | | 39 | % | | 278,811 | | | 10 | % |
Compensation and benefits | | 432,829 | | | 398,970 | | | 8 | % | | 383,554 | | | 4 | % |
General and administration | | 171,657 | | | 160,229 | | | 7 | % | | 152,564 | | | 5 | % |
Depreciation and amortization | | 117,767 | | | 113,661 | | | 4 | % | | 101,271 | | | 12 | % |
Total operating expenses | | 1,145,976 | | | 978,789 | | | 17 | % | | 916,200 | | | 7 | % |
Income (loss) from operations | | 40,541 | | | 19,441 | | | 109 | % | | (16,073) | | | * |
Other income (expense): | | | | | | | | | | |
Interest income | | 827 | | | 1,112 | | | (26) | % | | 3,347 | | | (67) | % |
Interest expense | | (16,931) | | | (31,504) | | | (46) | % | | (32,520) | | | (3) | % |
Other income (expense), net | | (4,076) | | | 2,906 | | | * | | (2,849) | | | * |
Total other expense, net | | (20,180) | | | (27,486) | | | (27) | % | | (32,022) | | | (14) | % |
Income (loss) before income tax provision (benefit) | | 20,361 | | | (8,045) | | | * | | (48,095) | | | (83) | % |
Income tax provision (benefit) | | 7,667 | | | (5,401) | | | * | | (30,893) | | | (83) | % |
Net income (loss) | | 12,694 | | | (2,644) | | | * | | (17,202) | | | (85) | % |
Add: Net (income) loss attributable to non-controlling interest | | 602 | | | (466) | | | * | | 420 | | | * |
Net income (loss) attributable to Envestnet, Inc. | | $ | 13,296 | | | $ | (3,110) | | | * | | $ | (16,782) | | | (81) | % |
*Not meaningful
Year ended December 31, 2021 compared to year ended December 31, 2020
Asset-based recurring revenues
Asset-based recurring revenues increased 31% from $540.9 million in 2020 to $709.4 million in 2021. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles as a result of the upswing in the equity markets relative to the comparable 2020 period. In 2021, revenues were also positively affected by new account growth and positive net flows of AUM/A. The revenue increase was partially offset by existing customers switching from an asset-based pricing model to a subscription-based pricing model.
The number of financial advisors with AUM or AUA on our technology platforms decreased from approximately 41,000 as of December 31, 2020 to approximately 40,000 as of December 31, 2021 and the number of AUM or AUA client accounts increased from approximately 2.4 million as of December 31, 2020 to approximately 2.6 million as of December 31, 2021.
Asset-based recurring revenue increased from 54% of total revenue in 2020 to 60% of total revenue in 2021, primarily due to a higher increase in asset-based recurring revenues as compared to subscription-based recurring revenues.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 6% from $426.5 million in 2020 to $454.0 million in 2021. This increase was primarily due to an increase of $18.9 million in the Envestnet Wealth Solutions segment and an increase of $8.6 million in the Envestnet Data & Analytics segment, which can be attributed to new and existing customer growth . Periodically, existing customers switch from an asset-based pricing model to a subscription-based pricing model.
Professional services and other revenues
Professional services and other revenues decreased 25% from $30.8 million in 2020 to $23.2 million in 2021. The decrease was due to timing of the completion of customer projects and deployments.
Cost of revenues
Cost of revenues increased 39% from $305.9 million in 2020 to $423.7 million in 2021. The increase was primarily due to an increase in asset-based cost of revenues of $115.1 million, which directly correlates with the increase to asset-based recurring revenues during the period. As a percentage of total revenues, cost of revenues increased from 31% to 36% for the years ended December 31, 2020 and 2021, primarily due to shifts in pricing and product mix for asset-based revenues.
Compensation and benefits
Compensation and benefits increased 8% from $399.0 million in 2020 to $432.8 million in 2021. The increase is comprised of increases in salaries, benefits and related payroll taxes of $19.8 million, incentive compensation of $19.3 million, non-cash compensation expense of $8.4 million and other immaterial increases within compensation and benefit accounts. These increases were partially offset by a decrease in severance expense of $13.8 million. The decrease in severance expense is primarily related to charges incurred during 2020 in connection with a voluntary early retirement program offered to eligible employees. Employees had until January 31, 2020 to voluntarily accept the program with separation of service no later than March 31, 2020. As a percentage of total revenues, compensation and benefits decreased from 40% in 2020 to 36% in 2021 due to a higher revenue increase compared to a lower compensation and benefits increase.
General and administration
General and administration expenses increased 7% from $160.2 million in 2020 to $171.7 million in 2021. The increase was primarily due to increases in website and systems development costs of $11.9 million, marketing expense of $10.9 million and professional and legal fees of $6.0 million. These increases were partially offset by decreases in restructuring charges and transaction costs of $7.9 million, miscellaneous general and administration expense of $3.3 million, non-income tax expense of $1.8 million, research and data services of $1.7 million, travel and entertainment expense of $1.6 million, and other immaterial decreases within general and administration expense. As a percentage of total revenues, general and administration expenses decreased from 16% in 2020 to 14% and 2021.
Depreciation and amortization
Depreciation and amortization expense increased 4% from $113.7 million in 2020 to $117.8 million in 2021, primarily due to an increase in internally developed software amortization expense of $9.9 million, partially offset by a decrease in intangible asset amortization expense of $5.0 million. As a percentage of total revenues, depreciation and amortization expense decreased from 11% in 2020 to 10% in 2021.
Interest income
Interest income decreased from $1.1 million in 2020 to $0.8 million in 2021, primarily due to lower effective interest rates earned on our cash and money market funds.
Interest expense
Interest expense decreased 46% from $31.5 million in 2020 to $16.9 million in 2021, primarily due to the adoption of ASU 2020-06 on January 1, 2021 and no outstanding borrowings on our revolving credit facility during fiscal year 2021.
Other income (expense), net
Other income (expense), net decreased from other income of $2.9 million in 2020 to other expense of $4.1 million in 2021, primarily due to a one-time gain of $4.2 million recorded in 2020 related to the remeasurement of a previously held interest in an equity method investee that we acquired the remaining outstanding equity for, a one-time gain of $2.5 million recorded in 2020 related to a fair value adjustment upon the settlement of a former Chief Executive Officer's stock options, a gain recorded in 2020 on the sale of our interest held in a private company of $1.6 million and $0.9 million in additional losses recorded in 2021 related to equity investments. These drivers were partially offset by a one-time gain of $1.2 million in 2021 related to the settlement of a contingent liability and a one-time gain of $1.0 million in 2021 related to an insurance reimbursement.
Income tax provision
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
Income (loss) before income tax provision (benefit) | | $ | 20,361 | | $ | (8,045) |
Income tax provision (benefit) | | 7,667 | | (5,401) |
Effective tax rate | | 37.7 | % | | 67.1 | % |
Our 2021 effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance we have placed on a portion of US deferred tax assets, the generation of research and development ("R&D") tax credits, executive compensation deduction limitations, income related to Indian partnerships, and state income taxes.
Our 2020 effective tax rate differs from the statutory rate primarily due to state income taxes, the excess tax benefit related to stock-based compensation, executive compensation deduction limitations, the generation of 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 we have placed on a portion of 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.
Year ended December 31, 2020 compared to year ended December 31, 2019
For a discussion of the 2020 Results of Operations compared to 2019, 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 26, 2021.
Business Segments
Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Part II, Item 8, “Note 19—Segment Information”. Our business segments are as follows:
Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an Intelligent Financial Life to their clients.
Envestnet Data & Analytics – a leading data aggregation 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, certain restructuring charges and other non-recurring and/or non-operationally related expenses.
The following table reconciles income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Envestnet Wealth Solutions | | $ | 124,651 | | | $ | 91,501 | | | $ | 67,713 | |
Envestnet Data & Analytics | | 2,033 | | | (9,943) | | | (25,262) | |
Nonsegment operating expenses | | (86,143) | | | (62,117) | | | (58,524) | |
Income (loss) from operations | | 40,541 | | | 19,441 | | | (16,073) | |
Interest income | | 827 | | | 1,112 | | | 3,347 | |
Interest expense | | (16,931) | | | (31,504) | | | (32,520) | |
Other income (expense), net | | (4,076) | | | 2,906 | | | (2,849) | |
Consolidated income (loss) before income tax benefit | | 20,361 | | | (8,045) | | | (48,095) | |
Income tax expense (benefit) | | 7,667 | | | (5,401) | | | (30,893) | |
Consolidated net income (loss) | | 12,694 | | | (2,644) | | | (17,202) | |
Add: Net (income) loss attributable to non-controlling interest | | 602 | | | (466) | | | 420 | |
Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | 13,296 | | | $ | (3,110) | | | $ | (16,782) | |
Envestnet Wealth Solutions
The following table presents income from operations for the Envestnet Wealth Solutions segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | % Change | | 2019 | | % Change |
| | (in thousands, except for percentages) |
Revenues: | | | | | | | | | | |
Asset-based | | $ | 709,376 | | | $ | 540,947 | | | 31 | % | | $ | 484,312 | | | 12 | % |
Subscription-based | | 267,720 | | | 248,810 | | | 8 | % | | 207,606 | | | 20 | % |
Total recurring revenues | | 977,096 | | | 789,757 | | | 24 | % | | 691,918 | | | 14 | % |
Professional services and other revenues | | 14,070 | | | 16,333 | | | (14) | % | | 17,540 | | | (7) | % |
Total revenues | | 991,166 | | | 806,090 | | | 23 | % | | 709,458 | | | 14 | % |
Operating expenses: | | | | | | | | | | |
Cost of revenues | | 399,313 | | | 283,497 | | | 41 | % | | 255,108 | | | 11 | % |
Compensation and benefits | | 269,153 | | | 257,698 | | | 4 | % | | 227,570 | | | 13 | % |
General and administration | | 107,976 | | | 92,680 | | | 17 | % | | 93,321 | | | (1) | % |
Depreciation and amortization | | 90,073 | | | 80,714 | | | 12 | % | | 65,746 | | | 23 | % |
Total operating expenses | | 866,515 | | | 714,589 | | | 21 | % | | 641,745 | | | 11 | % |
Income from operations | | $ | 124,651 | | | $ | 91,501 | | | 36 | % | | $ | 67,713 | | | 35 | % |
Year ended December 31, 2021 compared to year ended December 31, 2020 for the Envestnet Wealth Solutions segment
Revenues
Asset-based recurring revenues
Asset-based recurring revenues increased 31% from $540.9 million in 2020 to $709.4 million in 2021. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycles due to the impact of new account growth and positive net flows of AUM/A relative to the comparable 2020 period. In 2021, revenues were also positively affected by new account growth and positive net flows of AUM/A. The revenue increase was partially offset by existing customers switching from an asset-based pricing model to a subscription-based pricing model.
The number of financial advisors with AUM or AUA on our technology platforms decreased from approximately 41,000 as of December 31, 2020 to approximately 40,000 as of December 31, 2021 and the number of AUM or AUA client increased from approximately 2.4 million as of December 31, 2020 to approximately 2.6 million as of December 31, 2021.
As a percentage of total revenues, asset-based recurring revenue increased from 67% of total revenue in 2020 to 72% in 2021, primarily due to a higher increase in asset-based recurring revenues as compared to subscription-based recurring revenues.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 8% from $248.8 million in 2020 to $267.7 million in 2021, primarily due to new and existing customer growth along with additional revenue from existing customers switching from an asset-based pricing model to a subscription-based pricing model.
Professional services and other revenues
Professional services and other revenues decreased 14% from $16.3 million in 2020 to $14.1 million in 2021. The decrease was primarily due to timing of the completion of customer projects and deployments.
Cost of revenues
Cost of revenues increased 41% from $283.5 million in 2020 to $399.3 million in 2021. The increase was primarily due to an increase in asset-based cost of revenues of $115.1 million directly correlated with the increase in asset-based recurring revenues for the period. As a percentage of segment revenues, cost of revenues increased from 35% in 2020 to 40% in 2021, primarily due to shifts in pricing and product mix for asset-based revenues.
Compensation and benefits
Compensation and benefits increased 4% from $257.7 million in 2020 to $269.2 million in 2021, primarily due to increases in salaries, benefits and related payroll taxes of $12.3 million and increases in incentive compensation of $12.1 million. These increases are partially offset by a decrease in severance expense of $14.0 million. The decrease in severance expense is primarily related to charges incurred during 2020 in connection with a voluntary early retirement program offered to eligible employees. Employees had until January 31, 2020 to voluntarily accept the program with separation of service no later than March 31, 2020. As a percentage of segment revenues, compensation and benefits decreased from 32% in 2020 to 27% in 2021, primarily due to a higher revenue increase compared to a lower compensation and benefits increase.
General and administration
General and administration expenses increased 17% from $92.7 million in 2020 to $108.0 million in 2021, primarily due to increases in systems development costs of $10.0 million, marketing expense of $8.6 million, and professional and legal fees of $5.0 million. These increases were partially offset by decreases in miscellaneous general and administration expenses of $3.0 million, non-income tax expense of $2.0 million, communications, research and data services of $1.4 million, travel and entertainment expenses of $1.3 million and various other immaterial decreases. As a percentage of segment revenues, general and administration expenses remained consistent at 11% in 2020 and 2021.
Depreciation and amortization
Depreciation and amortization increased 12% from $80.7 million in 2020 to $90.1 million in 2021, primarily due to an increase in internally developed software amortization expense of $7.4 million and an increase in intangible asset amortization expense of $1.9 million. As a percentage of segment revenues, depreciation and amortization expense decreased from 10% in 2020 to 9% in 2021.
Year ended December 31, 2020 compared to year ended December 31, 2019 for the Envestnet Wealth Solutions segment
For a discussion of the 2020 Results of Operations compared to 2019 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 26, 2021.
Envestnet Data & Analytics
The following table presents loss from operations for the Envestnet Data & Analytics segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | % Change | | 2019 | | % Change |
| | (in thousands, except for percentages) |
Revenues: | | | | | | | | | | |
Subscription-based | | $ | 186,269 | | | $ | 177,697 | | | 5 | % | | $ | 171,207 | | | 4 | % |
Professional services and other revenues | | 9,082 | | | 14,443 | | | (37) | % | | 19,462 | | | (26) | % |
Total revenues | | 195,351 | | | 192,140 | | | 2 | % | | 190,669 | | | 1 | % |
Operating expenses: | | | | | | | | | | |
Cost of revenues | | 24,410 | | | 22,432 | | | 9 | % | | 23,703 | | | (5) | % |
Compensation and benefits | | 105,416 | | | 110,436 | | | (5) | % | | 118,062 | | | (6) | % |
General and administration | | 35,798 | | | 36,268 | | | (1) | % | | 38,641 | | | (6) | % |
Depreciation and amortization | | 27,694 | | | 32,947 | | | (16) | % | | 35,525 | | | (7) | % |
Total operating expenses | | 193,318 | | | 202,083 | | | (4) | % | | 215,931 | | | (6) | % |
Income (loss) from operations | | $ | 2,033 | | | $ | (9,943) | | | (120) | % | | $ | (25,262) | | | (61) | % |
Year ended December 31, 2021 compared to year ended December 31, 2020 for the Envestnet Data & Analytics segment
Revenues
Subscription-based recurring revenues
Subscription-based recurring revenues increased 5% from $177.7 million in 2020 to $186.3 million in 2021, primarily due to broad increases in revenue from new and existing customers.
Professional services and other revenues
Professional services and other revenues decreased 37% from $14.4 million in 2020 to $9.1 million in 2021, primarily due to the timing of the completion of customer projects and deployments.
Cost of revenues
Cost of revenues increased 9% from $22.4 million in 2020 to $24.4 million in 2021, primarily due to an increase in outside services spend. As a percentage of segment revenues, cost of revenues remained consistent at 12% in 2020 and 2021.
Compensation and benefits
Compensation and benefits decreased 5% from $110.4 million in 2020 to $105.4 million in 2021, primarily due to decreases in salaries, benefits and related payroll taxes of $3.3 million, non-cash compensation expense of $2.3 million and miscellaneous employee expenses of $1.9 million. These decreases were partially offset by increases in incentive compensation of $1.8 million and contract labor of $1.1 million. As a percentage of segment revenues, compensation and benefits decreased from 57% in 2020 to 54% in 2021. The decrease in compensation and benefits as a percentage of total revenues is primarily driven by a decrease in overall compensation and benefits costs as a result of lower headcount in the current year, partially offset by an increase in revenues in 2021 compared to 2020.
General and administration
General and administration expenses decreased 1% from $36.3 million in 2020 to $35.8 million in 2021, as decreases in occupancy costs of $1.9 million, bad debt expenses of $0.7 million, travel and entertainment expenses of $0.7 million and various other immaterial decreases within general and administration were primarily offset by increases in marketing expenses of $2.0 million and website and systems development costs of $1.7 million. As a percentage of segment revenues, general and administration expenses decreased from 19% in 2020 to 18% in 2021.
Depreciation and amortization
Depreciation and amortization decreased 16% from $32.9 million in 2020 to $27.7 million in 2021, primarily due to a decrease in intangible asset amortization expense of $6.9 million, partially offset by an increase in internally developed software amortization expense of $2.5 million. As a percentage of segment revenues, depreciation and amortization expense decreased from 17% in 2020 to 14% in 2021. The decrease in depreciation and amortization as a percentage of segment revenues is primarily driven by a technology intangible asset becoming fully amortized in the fourth quarter of 2020.
Year ended December 31, 2020 compared to year ended December 31, 2019 for the Envestnet Data & Analytics segment
For a discussion of the 2020 Results of Operations compared to 2019 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 26, 2021.
Nonsegment
The following table presents nonsegment operating expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | % Change | | 2019 | | % Change |
| | (in thousands, except for percentages) |
Operating expenses: | | | | | | | | | | |
Compensation and benefits | | $ | 58,260 | | | $ | 30,836 | | | 89 | % | | $ | 37,922 | | | (19) | % |
General and administration | | 27,883 | | | 31,281 | | | (11) | % | | 20,602 | | | 52 | % |
Total operating expenses | | $ | 86,143 | | | $ | 62,117 | | | 39 | % | | $ | 58,524 | | | 6 | % |
Year ended December 31, 2021 compared to year ended December 31, 2020 for Nonsegment
Compensation and benefits
Compensation and benefits increased 89% from $30.8 million in 2020 to $58.3 million in 2021, primarily due to increased headcount that resulted in increases in salaries, benefits and related payroll taxes of $10.8 million, non-cash compensation expense of $9.7 million and incentive compensation of $5.5 million.
General and administration
General and administration expenses decreased 11% from $31.3 million in 2020 to $27.9 million in 2021, primarily due to a decrease in restructuring charges and transaction costs of $5.7 million, primarily the result of various one-time 2020 corporate initiatives and acquisition related activities, partially offset by an increase in professional and legal fees of $1.3 million as well as other immaterial increases.
Year ended December 31, 2020 compared to year ended December 31, 2019 for Nonsegment
For a discussion of the 2020 Results of Operations compared to 2019 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 26, 2021.
Non‑GAAP Financial Measures
In addition to reporting results according to GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues,” “adjusted EBITDA,” “adjusted net income” and “adjusted net income per diluted share”.
“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. 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 is not meant as a substitute for revenue prepared in accordance with GAAP.
“Adjusted EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration and purchase liability, income tax provision (benefit), depreciation and amortization, non‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration liability, fair market value adjustment on investment in private company, litigation and regulatory related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, gain on acquisition of equity method investment, gain on sale of interest in private company, income or loss allocations from equity method investments and (income) loss attributable to non‑controlling interest.
“Adjusted net income” represents net income before deferred revenue fair value adjustment, accretion on contingent consideration and purchase liability, non‑cash interest expense, cash interest on our Convertible Notes (subsequent to the adoption of ASU 2020-06 on January 1, 2021), non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles and fair value adjustment to property and equipment, net, fair market value adjustment on contingent consideration liability, fair market value adjustment to investment in private company, litigation and regulatory related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, gain on acquisition of equity method investment, gain on sale of interest in private company, income or loss allocations from equity method investments and (income) loss attributable to non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income. The normalized tax rate is based solely on the estimated blended statutory income tax rates in the jurisdictions in which we operate. We monitor the normalized tax rate based on events or trends that could materially impact the rate, including tax legislation changes and changes in the geographic mix of our operations.
“Adjusted net income per diluted share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted-average shares outstanding. Beginning January 1, 2021, the dilutive effect of our Convertible Notes are calculated using the if-converted method in accordance with the adoption of ASU 2020-06 (See “Note 2—Summary of Significant Accounting Policies”). As a result, 9.9 million potential shares to be issued in connection with our Convertible Notes are considered to be dilutive for purposes of the adjusted net income per share calculation beginning January 1, 2021.
Our Board and management use these non-GAAP financial measures:
•As measures of operating performance;
•For planning purposes, including the preparation of annual budgets;
•To allocate resources to enhance the financial performance of our business;
•To evaluate the effectiveness of our business strategies; and
•In communications with our Board concerning our financial performance.
Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.
We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share as supplemental performance measures because we believe that they provide our Board, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provides comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, income tax provision (benefit), non-income tax expense, restructuring charges and transaction costs, accretion on contingent consideration and purchase liability, severance, fair market value adjustment on contingent consideration liability, income or loss allocations from equity method investments, litigation and regulatory related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, gain on acquisition of equity method investment, fair market value adjustment to investment in private company, income or loss allocations from equity method investments, 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 diluted share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investors and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
We understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under GAAP. In particular you should consider:
•Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
•Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect non‑cash components of employee compensation;
•Although depreciation and amortization are non‑cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
•Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards, we paid net cash of $7.9 million, $8.3 million, and $8.1 million in the years ended December 31, 2021, 2020 and 2019, respectively. In the event that we begin to generate taxable income and our existing net operating loss
carryforwards for federal and state income taxes have been fully utilized or have expired, income tax payments will be higher; and
•Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share differently than we do, limiting their usefulness as a comparative measure.
Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per diluted share to net income and net income per share, the most directly comparable GAAP measures. Further, our management also reviews GAAP measures and evaluates individual measures that are not included in some or all of our non‑GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Total revenues | | $ | 1,186,517 | | | $ | 998,230 | | | $ | 900,127 | |
Deferred revenue fair value adjustment | | 284 | | | 692 | | | 9,271 | |
Adjusted revenues | | $ | 1,186,801 | | | $ | 998,922 | | | $ | 909,398 | |
The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA based on our historical results:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Net income (loss) | | $ | 12,694 | | | $ | (2,644) | | | $ | (17,202) | |
Add (deduct): | | | | | | |
Deferred revenue fair value adjustment | | 284 | | | 692 | | | 9,271 | |
Interest income | | (827) | | | (1,112) | | | (3,347) | |
Interest expense | | 16,931 | | | 31,504 | | | 32,520 | |
Accretion on contingent consideration and purchase liability | | 730 | | | 1,688 | | | 1,772 | |
Income tax provision (benefit) | | 7,667 | | | (5,401) | | | (30,893) | |
Depreciation and amortization | | 117,767 | | | 113,661 | | | 101,271 | |
Non-cash compensation expense | | 68,020 | | | 57,113 | | | 60,444 | |
Restructuring charges and transaction costs | | 18,490 | | | 19,383 | | | 26,558 | |
Severance | | 11,347 | | | 25,110 | | | 15,367 | |
Fair market value adjustment on contingent consideration liability | | (1,067) | | | (3,105) | | | (8,126) | |
Fair market value adjustment on investment in private company | | (758) | | | — | | | — | |
Litigation and regulatory related expenses | | 7,591 | | | 7,825 | | | 2,879 | |
Foreign currency | | (7) | | | 116 | | | (72) | |
Gain on settlement of liability | | (1,206) | | | — | | | — | |
Gain on insurance reimbursement | | (968) | | | — | | | — | |
Non-income tax expense adjustment | | (1,347) | | | 421 | | | 374 | |
Gain on acquisition of equity method investment | | — | | | (4,230) | | | — | |
Gain on sale of interest in private company | | — | | | (1,647) | | | — | |
Loss allocations from equity method investments | | 7,093 | | | 5,399 | | | 2,361 | |
(Income) loss attributable to non-controlling interest | | (704) | | | (1,830) | | | 110 | |
Adjusted EBITDA | | $ | 261,730 | | | $ | 242,943 | | | $ | 193,287 | |
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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Net income (loss) | | $ | 12,694 | | | $ | (2,644) | | | $ | (17,202) | |
Income tax benefit (1) | | 7,667 | | | (5,401) | | | (30,893) | |
Loss before income tax benefit | | 20,361 | | | (8,045) | | | (48,095) | |
Add (deduct): | | | | | | |
Deferred revenue fair value adjustment | | 284 | | | 692 | | | 9,271 | |
Accretion on contingent consideration and purchase liability | | 730 | | | 1,688 | | | 1,772 | |
Non-cash interest expense | | 5,745 | | | 17,480 | | | 18,743 | |
Cash interest - Convertible Notes (2) | | 9,919 | | | — | | | — | |
Non-cash compensation expense | | 68,020 | | | 57,113 | | | 60,444 | |
Restructuring charges and transaction costs | | 18,490 | | | 19,383 | | | 26,558 | |
Severance | | 11,347 | | | 25,110 | | | 15,367 | |
Amortization of acquired intangibles and fair value adjustment to property and equipment, net | | 68,587 | | | 73,559 | | | 70,677 | |
Fair market value adjustment on contingent consideration liability | | (1,067) | | | (3,105) | | | (8,126) | |
Fair market value adjustment to investment in private company | | (758) | | | — | | | — | |
Litigation and regulatory related expenses | | 7,591 | | | 7,825 | | | 2,879 | |
Foreign currency | | (7) | | | 116 | | | (72) | |
Gain on settlement of liability | | (1,206) | | | — | | | — | |
Gain on insurance reimbursement | | (968) | | | — | | | — | |
Non-income tax expense adjustment | | (1,347) | | | 421 | | | 374 | |
Gain on acquisition of equity method investment | | — | | | (4,230) | | | — | |
Gain on sale of interest in private company | | — | | | (1,647) | | | — | |
Loss allocations from equity method investments | | 7,093 | | | 5,399 | | | 2,361 | |
(Income) loss attributable to non-controlling interest | | (704) | | | (1,830) | | | 110 | |
Adjusted net income before income tax effect | | 212,110 | | | 189,929 | | | 152,263 | |
Income tax effect (3) | | (54,088) | | | (48,432) | | | (38,827) | |
Adjusted net income | | $ | 158,022 | | | $ | 141,497 | | | $ | 113,436 | |
| | | | | | |
Basic number of weighted-average shares outstanding | | 54,470,975 | | | 53,589,232 | | | 50,937,919 | |
Effect of dilutive shares: | | | | | | |
Options to purchase common stock | | 206,022 | | | 416,593 | | | 1,015,164 | |
Unvested restricted stock units | | 633,384 | | | 592,033 | | | 691,740 | |
Convertible Notes | | 9,898,549 | | | 414,398 | | | 33,388 | |
Warrants | | 73,715 | | | 58,459 | | | — | |
Diluted number of weighted-average shares outstanding | | 65,282,645 | | | 55,070,715 | | | 52,678,211 | |
Adjusted net income per share - diluted | | $ | 2.42 | | | $ | 2.57 | | | $ | 2.15 | |
__________________________________________________________
(1)For the years ended December 31, 2021, 2020 and 2019, the effective tax rate computed in accordance with GAAP equaled 37.7%, 67.1% and 64.2%, respectively.
(2)Cash interest on the Company's Convertible Notes included only for the for the year ended December 31, 2021 due to the adoption of ASU 2020-06 on January 1, 2021 (See Part II, Item 8, "Note 2—Summary of Significant Accounting Policies”).
(3)Estimated normalized effective tax rate of 25.5% has been used to compute adjusted net income for all years presented.
Note on Income Taxes: As of December 31, 2021, we had net operating loss carryforwards of approximately $195 million and $233 million for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes we pay for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with GAAP, and from the normalized rate shown above.
The following tables set forth a reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Nonsegment | | Total |
| | (in thousands) |
Revenues | | $ | 991,166 | | | $ | 195,351 | | | $ | — | | | $ | 1,186,517 | |
Deferred revenue fair value adjustment | | 284 | | | — | | | — | | | 284 | |
Adjusted revenues | | $ | 991,450 | | | $ | 195,351 | | | $ | — | | | $ | 1,186,801 | |
| | | | | | | | |
Income (loss) from operations | | $ | 124,651 | | | $ | 2,033 | | | $ | (86,143) | | | $ | 40,541 | |
Add (deduct): | | | | | | | | |
Deferred revenue fair value adjustment | | 284 | | | — | | | — | | | 284 | |
Accretion on contingent consideration and purchase liability | | 632 | | | 98 | | | — | | | 730 | |
Depreciation and amortization | | 90,073 | | | 27,694 | | | — | | | 117,767 | |
Non-cash compensation expense | | 36,787 | | | 12,634 | | | 18,599 | | | 68,020 | |
Restructuring charges and transaction costs | | 13,795 | | | 242 | | | 4,453 | | | 18,490 | |
Severance | | 4,614 | | | 4,016 | | | 2,717 | | | 11,347 | |
Fair market value adjustment on contingent consideration liability | | — | | | (1,067) | | | — | | | (1,067) | |
Litigation related expense | | — | | | 7,591 | | | — | | | 7,591 | |
Other | | 78 | | | — | | | — | | | 78 | |
Non-income tax expense adjustment | | (1,507) | | | 160 | | | — | | | (1,347) | |
Loss attributable to non-controlling interest | | (704) | | | — | | | — | | | (704) | |
Adjusted EBITDA | | $ | 268,703 | | | $ | 53,401 | | | $ | (60,374) | | | $ | 261,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Nonsegment | | Total |
| | (in thousands) |
Revenues | | $ | 806,090 | | | $ | 192,140 | | | $ | — | | | $ | 998,230 | |
Deferred revenue fair value adjustment | | 692 | | | — | | | — | | | 692 | |
Adjusted revenues | | $ | 806,782 | | | $ | 192,140 | | | $ | — | | | $ | 998,922 | |
| | | | | | | | |
Income (loss) from operations | | $ | 91,501 | | | $ | (9,943) | | | $ | (62,117) | | | $ | 19,441 | |
Add: | | | | | | | | |
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 (deduct): | | | | | | | | — | |
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 | |
Liquidity and Capital Resources
As of December 31, 2021, we had total cash and cash equivalents of $429.3 million compared to $384.6 million as of December 31, 2020.
We plan to use existing cash as of December 31, 2021, 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.
Third Credit Agreement
On February 4, 2022, we entered into the Third Credit Agreement. The Third Credit Agreement amends and restates, in its entirety, the Prior Credit Agreement.
The Third Credit Agreement amended certain provisions under the Prior Credit Agreement to, among other things, (i) extend the maturity of loans and the revolving credit commitments, (ii) reduce the interest payable on the loans, and (iii) increase capacity and flexibility under certain of the negative covenants.
The Third Credit Agreement provides, subject to certain customary conditions, for the Credit Facility, in an aggregate amount of $500.0 million, with a $20.0 million sub-facility for the issuance of letters of credit.
Proceeds under the Third Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
Outstanding loans under the Credit Facility accrue interest, at our option, a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term SOFR rate plus an applicable margin ranging from 1.25% to 2.75% per annum, based upon our total net leverage ratio, as calculated pursuant to the Third Credit Agreement. The undrawn portion of the commitments under the Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum, based upon our total net leverage ratio, as calculated pursuant to the Third Credit Agreement. Borrowings made under the Third Credit Agreement are scheduled to mature on February 4, 2027.
There are no amounts outstanding under the Credit Facility and we have $500.0 million available to borrow under the Credit Facility, subject to covenant compliance.
Convertible Notes
In May 2018, we issued $345.0 million 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 $517.5 million 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.
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
On December 20, 2018, we issued and sold to BlackRock, Inc. (“BlackRock”) warrants to purchase approximately 470,000 common shares of our common stock at an exercise price of $65.16 per share, subject to customary anti-dilution adjustments. The warrants 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. As of December 31, 2021, BlackRock has not exercised any of the warrants.
Impact of Tax Cuts and Jobs Act
Beginning in 2022, the Tax Cuts and Jobs Act ("TCJA") eliminates the option to deduct R&D expenditures currently and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, we could expect to pay material cash taxes beginning in 2022.
Cash Flows
The following table presents information regarding our cash flows for the periods indicated:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 250,577 | | | $ | 169,836 | |
Net cash used in investing activities | | (176,138) | | | (99,996) | |
Net cash provided by (used in) financing activities | | (29,170) | | | 232,950 | |
Effect of exchange rate on changes on cash | | (555) | | | (831) | |
Net increase in cash, cash equivalents and restricted cash | | 44,714 | | | 301,959 | |
| | | | |
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2021 was $250.6 million compared to net cash provided by operating activities of $169.8 million for the same period in 2020. The increase was primarily due to:
•An increase in pre-tax income period over period of $28.4 million;
•An increase period over period for noncash addbacks for depreciation and amortization expense of $4.1 million;
•An increase in the change in operating assets and liabilities of $55.4 million which is primarily timing related.
These increases were partially offset by additional contingent consideration payments of approximately $2.4 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2021 was $176.1 million compared to net cash used in investing activities of $100.0 million for the same period in 2020. The increase was primarily due to an increase in cash disbursements of $25.5 million for an acquisition of proprietary technology and the related redemption of our equity interest in a privately held company, $22.8 million of increased disbursements related to various acquisitions and investments in privately held companies, $11.6 million of increased purchases of property and equipment, an additional $10.3 million of internally developed software costs capitalized in 2021 as compared to 2020 and a $3.0 million advance towards the acquisition of technology solutions being developed for us by an outside company in 2021.
Financing Activities
Net cash used in financing activities for the year ended December 31, 2021 was $29.2 million compared to net cash provided by financing activities of $233.0 million for the same period in 2020. In August 2020, we received net proceeds of approximately $503.0 million from the issuance of convertible debt. With these proceeds, we paid off the outstanding balance of our revolving credit facility. These transactions contributed to a net cash inflow related to our third party debt agreements of $243.0 million in 2020. Increased deferred payments related to prior acquisition activity of $9.3 million, lower proceeds from stock option exercises of $8.7 million and share repurchases of $4.0 million in 2021 also contributed to the year-over-year decrease. These decreases were partially offset by $2.6 million of additional capital contributions made by non-controlling shareholders of one of our subsidiaries.
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, 2021, the Company estimated future minimum unconditional purchase obligations of approximately $38.0 million.
As of December 31, 2021, future minimum lease payments under non-cancellable leases were $149.6 million. These leases expire at various dates prior to 2032.
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, 2021, these liabilities are valued at $0.7 million. We also have additional direct purchase obligations of $6.2 million related to our acquisitions. We granted membership interests in certain of the Company's equity method investments to two legacy PIEtech executives, from the PIEtech acquisition, with an estimated grant date fair market value of $8.9 million. 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 $3.0 million in future funding to certain of our equity method investees.
We expect to increase our capital expenditures to approximately $40 million in 2022 compared to approximately $24 million in 2021. Subsequent to 2022, we expect to spend approximately $10 - $11 million per year on capital expenditures.
We have entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $18.0 million, including an advance of $3.0 million. We closed the transaction on February 1, 2022 and paid the remaining $15.0 million on February 2, 2022. In addition, the agreement includes an earn-out payment of $10.0 million based upon the achievement of certain target metrics within five years after the date of our launch of the technology solutions.
We include various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. We have experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to these indemnification and guarantee provisions. We believe that it is unlikely that we will have to make material payments under these arrangements and therefore we have not recorded a contingent liability in the consolidated balance sheets.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“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.
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, 2021 for the fiscal year ended December 31, 2021. 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, 2021, 2020 and 2019.
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 the change in the valuation allowance the Company has placed on a portion of its US deferred tax assets, the generation of R&D tax credits, the executive compensation deduction limitation, income related to the India partnerships and state taxes. Our provision for income taxes varies based on, among other things, changes in the valuation of our deferred tax assets and liabilities, the tax effects of non-cash stock-based compensation or changes in applicable tax laws, regulations and accounting principles or interpretations thereof.
We are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our results of operations, financial condition and cash flows.
Our Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2020, 2019, 2018, 2017, 2012, 2011 and 2010. Based on the outcome of examinations of 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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible notes as of January 1, 2021 due to the adoption of Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.
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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over the IT elements of revenue recognition
As discussed in Notes 2 and 14 to the consolidated financial statements, the Company has recorded $1.2 billion of revenues for the year ended December 31, 2021. 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 25, 2022
Envestnet, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share information)
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 429,279 | | | $ | 384,565 | |
Fees receivable, net | | 95,291 | | | 80,064 | |
Prepaid expenses and other current assets | | 42,706 | | | 40,570 | |
Total current assets | | 567,276 | | | 505,199 | |
| | | | |
Property and equipment, net | | 50,215 | | | 47,969 | |
Internally developed software, net | | 133,659 | | | 96,501 | |
Intangible assets, net | | 400,396 | | | 435,041 | |
Goodwill | | 925,154 | | | 906,773 | |
Operating lease right-of-use assets, net | | 90,714 | | | 105,249 | |
Other non-current assets | | 73,768 | | | 47,558 | |
Total assets | | $ | 2,241,182 | | | $ | 2,144,290 | |
| | | | |
Liabilities and Equity | | | | |
Current liabilities: | | | | |
Accrued expenses and other liabilities | | $ | 224,416 | | | $ | 158,548 | |
Accounts payable | | 19,092 | | | 18,003 | |
Operating lease liabilities | | 10,999 | | | 13,649 | |
Contingent consideration | | 743 | | | 11,251 | |
Deferred revenue | | 33,473 | | | 34,918 | |
Total current liabilities | | 288,723 | | | 236,369 | |
| | | | |
Long-term debt | | 848,862 | | | 756,503 | |
| | | | |
| | | | |
| | | | |
Non-current operating lease liabilities | | 105,920 | | | 112,182 | |
Deferred tax liabilities, net | | 21,021 | | | 34,740 | |
Other non-current liabilities | | 17,114 | | | 28,678 | |
Total liabilities | | 1,281,640 | | | 1,168,472 | |
| | | | |
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, 2021 and December 31, 2020 | | — | | | — | |
Common stock, par value $0.005, 500,000,000 shares authorized; 68,879,152 and 67,832,706 shares issued as of December 31, 2021 and December 31, 2020, respectively; 54,793,088 and 54,093,535 shares outstanding as of December 31, 2021 and December 31, 2020, respectively | | 344 | | | 339 | |
Additional paid-in capital | | 1,131,628 | | | 1,166,774 | |
Accumulated deficit | | (37,988) | | | (79,912) | |
Treasury stock at cost, 14,086,064 and 13,739,171 shares as of December 31, 2021 and December 31, 2020, respectively | | (134,996) | | | (110,466) | |
Accumulated other comprehensive loss | | (1,899) | | | (398) | |
Total stockholders’ equity | | 957,089 | | | 976,337 | |
Non-controlling interest | | 2,453 | | | (519) | |
Total equity | | 959,542 | | | 975,818 | |
Total liabilities and equity | | $ | 2,241,182 | | | $ | 2,144,290 | |
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, |
| | 2021 | | 2020 | | 2019 |
Revenues: | | | | | | |
Asset-based | | $ | 709,376 | | | $ | 540,947 | | | $ | 484,312 | |
Subscription-based | | 453,989 | | | 426,507 | | | 378,813 | |
Total recurring revenues | | 1,163,365 | | | 967,454 | | | 863,125 | |
Professional services and other revenues | | 23,152 | | | 30,776 | | | 37,002 | |
Total revenues | | 1,186,517 | | | 998,230 | | | 900,127 | |
| | | | | | |
Operating expenses: | | | | | | |
Cost of revenues | | 423,723 | | | 305,929 | | | 278,811 | |
Compensation and benefits | | 432,829 | | | 398,970 | | | 383,554 | |
General and administration | | 171,657 | | | 160,229 | | | 152,564 | |
Depreciation and amortization | | 117,767 | | | 113,661 | | | 101,271 | |
Total operating expenses | | 1,145,976 | | | 978,789 | | | 916,200 | |
| | | | | | |
Income (loss) from operations | | 40,541 | | | 19,441 | | | (16,073) | |
| | | | | | |
Other income (expense): | | | | | | |
Interest income | | 827 | | | 1,112 | | | 3,347 | |
Interest expense | | (16,931) | | | (31,504) | | | (32,520) | |
Other income (expense), net | | (4,076) | | | 2,906 | | | (2,849) | |
Total other expense, net | | (20,180) | | | (27,486) | | | (32,022) | |
| | | | | | |
Income (loss) before income tax provision (benefit) | | 20,361 | | | (8,045) | | | (48,095) | |
| | | | | | |
Income tax provision (benefit) | | 7,667 | | | (5,401) | | | (30,893) | |
| | | | | | |
Net income (loss) | | 12,694 | | | (2,644) | | | (17,202) | |
Add: Net (income) loss attributable to non-controlling interest | | 602 | | | (466) | | | 420 | |
Net income (loss) attributable to Envestnet, Inc. | | $ | 13,296 | | | $ | (3,110) | | | $ | (16,782) | |
| | | | | | |
Net income (loss) per share attributable to Envestnet, Inc.: | | | | | | |
Basic | | $ | 0.24 | | | $ | (0.06) | | | $ | (0.33) | |
| | | | | | |
Diluted | | $ | 0.24 | | | $ | (0.06) | | | $ | (0.33) | |
| | | | | | |
Weighted average common shares outstanding: | | | | | | |
Basic | | 54,470,975 | | | 53,589,232 | | | 50,937,919 | |
| | | | | | |
Diluted | | 55,384,096 | | | 53,589,232 | | | 50,937,919 | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net income (loss) attributable to Envestnet, Inc. | | $ | 13,296 | | | $ | (3,110) | | | $ | (16,782) | |
Other comprehensive income (loss), net of taxes: | | | | | | |
Foreign currency translation gains (losses), net | | (1,501) | | | 1,351 | | | (755) | |
Comprehensive income (loss) attributable to Envestnet, Inc. | | $ | 11,795 | | | $ | (1,759) | | | $ | (17,537) | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share information)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | | |
| | Common Stock | | Treasury Stock | | Additional | | Other | | | | Non- | | |
| | | | | | Common | | | | Paid-in | | Comprehensive | | Accumulated | | controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Loss | | Deficit | | Interest | | Equity |
Balance, December 31, 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 income (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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adoption of ASC 326 | | — | | | — | | | — | | | — | | | — | | | — | | | (1,138) | | | — | | | (1,138) | |
Exercise of stock options | | 705,333 | | | 4 | | | — | | | — | | | 10,756 | | | — | | | — | | | — | | | 10,760 | |
Issuance of common stock - vesting of restricted stock units | | 804,982 | | | 4 | | | — | | | — | | | — | | | — | | | — | | | — | | | 4 | |
Issuance of common stock | | 1,685 | | | — | | | — | | | — | | | 126 | | | — | | | — | | | — | | | 126 | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 56,292 | | | — | | | — | | | — | | | 56,292 | |
Shares withheld to satisfy tax withholdings | | — | | | — | | | (260,171) | | | (19,501) | | | — | | | — | | | — | | | — | | | (19,501) | |
Transfer of non-controlling units, net of tax | | — | | | — | | | — | | | — | | | 666 | | | — | | | — | | | (139) | | | 527 | |
Capital contribution - non-controlling interest | | — | | | — | | | — | | | — | | | (66) | | | — | | | — | | | 672 | | | 606 | |
Issuance of Convertible Notes due 2025, net of offering costs and taxes of $8,694 | | — | | | — | | | — | | | — | | | 61,859 | | | — | | | — | | | — | | | 61,859 | |
Foreign currency translation gain, net of taxes | | — | | | — | | | — | | | — | | | — | | | 1,351 | | | — | | | — | | | 1,351 | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (3,110) | | | 466 | | | (2,644) | |
Balance, December 31, 2020 | | 67,832,706 | | | $ | 339 | | | (13,739,171) | | | $ | (110,466) | | | $ | 1,166,774 | | | $ | (398) | | | $ | (79,912) | | | $ | (519) | | | $ | 975,818 | |
-continued-
Envestnet, Inc.
Consolidated Statements of Stockholders’ Equity (continued)
(in thousands, except share information)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Accumulated | | | | | | |
| | Common Stock | | Treasury Stock | | Additional | | Other | | | | Non- | | |
| | | | | | Common | | | | Paid-in | | Comprehensive | | Accumulated | | controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Loss | | Deficit | | Interest | | Equity |
Balance, December 31, 2020 | | 67,832,706 | | | 339 | | | (13,739,171) | | | (110,466) | | | 1,166,774 | | | (398) | | | (79,912) | | | (519) | | | 975,818 | |
Adoption of ASU 2020-06, net of taxes of $7,640 (See Note 2) | | — | | | — | | | — | | | — | | | (108,470) | | | — | | | 28,628 | | | — | | | (79,842) | |
Exercise of stock options | | 76,303 | | | — | | | — | | | — | | | 2,090 | | | — | | | — | | | — | | | 2,090 | |
Issuance of common stock - vesting of restricted stock units | | 891,466 | | | 5 | | | — | | | — | | | — | | | — | | | — | | | — | | | 5 | |
Issuance of common stock | | 78,677 | | | — | | | — | | | — | | | 4,068 | | | — | | | — | | | — | | | 4,068 | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 67,525 | | | — | | | — | | | — | | | 67,525 | |
Shares withheld to satisfy tax withholdings | | — | | | — | | | (291,405) | | | (20,529) | | | — | | | — | | | — | | | — | | | (20,529) | |
Share repurchases | | — | | | — | | | (55,488) | | | (4,001) | | | — | | | — | | | — | | | — | | | (4,001) | |
Capital contribution - non-controlling interest | | — | | | — | | | — | | | — | | | (127) | | | — | | | — | | | 3,328 | | | 3,201 | |
Foreign currency translation loss, net of taxes | | — | | | — | | | — | | | — | | | — | | | (1,501) | | | — | | | — | | | (1,501) | |
Other | | — | | | — | | | — | | | — | | | (232) | | | — | | | — | | | 246 | | | 14 | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 13,296 | | | (602) | | | 12,694 | |
Balance, December 31, 2021 | | 68,879,152 | | | $ | 344 | | | (14,086,064) | | | $ | (134,996) | | | $ | 1,131,628 | | | $ | (1,899) | | | $ | (37,988) | | | $ | 2,453 | | | $ | 959,542 | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
OPERATING ACTIVITIES: | | | | | | |
Net income (loss) | | $ | 12,694 | | | $ | (2,644) | | | $ | (17,202) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 117,767 | | | 113,661 | | | 101,271 | |
Provision for doubtful accounts | | 1,598 | | | 2,817 | | | 2,855 | |
Deferred income taxes | | (320) | | | (1,884) | | | (39,630) | |
Release of uncertain tax positions | | — | | | (7,101) | | | — | |
Non-cash compensation expense | | 68,020 | | | 59,637 | | | 60,444 | |
Non-cash interest expense | | 5,799 | | | 18,515 | | | 19,246 | |
Accretion on contingent consideration and purchase liability | | 730 | | | 1,688 | | | 1,772 | |
Payments of contingent consideration | | (2,360) | | | — | | | (578) | |
Fair market value adjustment to contingent consideration liability | | (1,067) | | | (3,105) | | | (8,126) | |
Fair market value adjustment to investment in private company | | (758) | | | — | | | — | |
Gain on settlement of liability | | (1,206) | | | — | | | — | |
Gain on acquisition of equity method investment | | — | | | (4,230) | | | — | |
Loss allocation from equity method investments | | 7,093 | | | 5,399 | | | 2,361 | |
Gain on life insurance proceeds | | — | | | — | | | (5,000) | |
Impairment of right of use assets | | 1,537 | | | 2,661 | | | — | |
Other | | 465 | | | (729) | | | — | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Fees receivable, net | | (16,731) | | | (15,055) | | | 1,139 | |
Prepaid expenses and other current assets | | 399 | | | (9,666) | | | (6,440) | |
Other non-current assets | | 2,741 | | | (1,963) | | | (5,234) | |
Accrued expenses and other liabilities | | 53,265 | | | 22,109 | | | (811) | |
Accounts payable | | 1,290 | | | (187) | | | (2,863) | |
Deferred revenue | | (2,080) | | | (4,125) | | | 727 | |
Other non-current liabilities | | 1,701 | | | (5,962) | | | 4,795 | |
Net cash provided by operating activities | | 250,577 | | | 169,836 | | | 108,726 | |
| | | | | | |
INVESTING ACTIVITIES: | | | | | | |
Purchases of property and equipment | | (23,731) | | | (12,088) | | | (19,847) | |
Capitalization of internally developed software | | (65,170) | | | (54,908) | | | (34,096) | |
Investments in private companies | | (25,926) | | | (15,640) | | | (5,250) | |
Acquisitions of businesses, net of cash acquired | | (32,794) | | | (20,257) | | | (320,915) | |
Acquisition of proprietary technology | | (25,517) | | | — | | | — | |
Proceeds from life insurance policy | | — | | | — | | | 5,000 | |
Advance for technology solutions | | (3,000) | | | — | | | — | |
Other | | — | | | 2,897 | | | (600) | |
Net cash used in investing activities | | (176,138) | | | (99,996) | | | (375,708) | |
-continued-
Envestnet, Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
FINANCING ACTIVITIES: | | | | | | |
Proceeds from issuance of Convertible Notes due 2025 | | — | | | 517,500 | | | — | |
Convertible Notes due 2025 issuance costs | | — | | | (14,540) | | | — | |
Payment of Convertible Notes due 2019 | | — | | | — | | | (184,751) | |
Proceeds from borrowings on revolving credit facility | | — | | | 45,000 | | | 345,000 | |
Payments on revolving credit facility | | — | | | (305,000) | | | (85,000) | |
Revolving credit facility issuance costs | | — | | | — | | | (2,103) | |
Capital contribution - non-controlling interest | | 3,201 | | | 606 | | | — | |
Payments of deferred consideration on prior acquisitions | | — | | | (1,879) | | | — | |
Payments of contingent consideration | | (9,276) | | | — | | | (171) | |
Proceeds from exercise of stock options | | 2,090 | | | 10,760 | | | 10,592 | |
Taxes paid in lieu of shares issued for stock-based compensation | | (20,529) | | | (19,501) | | | (23,107) | |
Share repurchases | | (4,001) | | | — | | | — | |
Other | | (655) | | | 4 | | | 5 | |
Net cash provided by (used in) financing activities | | (29,170) | | | 232,950 | | | 60,465 | |
| | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | (555) | | | (831) | | | (399) | |
| | | | | | |
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | 44,714 | | | 301,959 | | | (206,916) | |
| | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (See Note 2) | | 384,714 | | | 82,755 | | | 289,671 | |
| | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) | | $ | 429,428 | | | $ | 384,714 | | | $ | 82,755 | |
| | | | | | |
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes | | $ | 7,920 | | | $ | 8,304 | | | $ | 8,119 | |
Supplemental disclosure of cash flow information - cash paid during the period for interest | | 11,132 | | | 12,990 | | | 13,530 | |
Supplemental disclosure of non-cash operating, investing and financing activities: | | | | | | |
Common stock issued in acquisition of business | | — | | | — | | | 222,484 | |
Common stock issued to settle purchase liability | | 4,068 | | | 126 | | | 772 | |
Contingent consideration issued in acquisition of businesses | | — | | | 5,239 | | | 15,780 | |
Internally developed software costs included in accrued expenses and other liabilities | | 591 | | | — | | | — | |
Leasehold improvements funded by lease incentive | | 164 | | | 1,806 | | | 1,816 | |
Membership interest liabilities included in other non-current liabilities | | 496 | | | 3,345 | | | 5,920 | |
Purchase liabilities included in accrued expenses and other liabilities | | 2,951 | | | 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 | | 1,328 | | | 1,841 | | | 1,832 | |
Right of use assets in exchange for lease liabilities | | 4,596 | | | 39,370 | | | 30,455 | |
Transfer of non-controlling units | | — | | | 771 | | | — | |
See accompanying notes to Consolidated Financial Statements.
Envestnet, Inc.
Notes to Consolidated Financial Statements
1.Organization and Description of Business
Envestnet, Inc. ("Envestnet"), through its subsidiaries (collectively, the "Company"), is transforming the way financial advice and insight are delivered. Its mission is to empower financial advisors and service providers with innovative technology, solutions and intelligence. Envestnet has been a leader in helping transform wealth management, working towards its goal of expanding a holistic financial wellness ecosystem so that our clients can deliver an intelligent financial life to their clients.
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in “Note 19—Segment Information”. The business segments are as follows:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an Intelligent Financial Life to their clients.
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 over 22,000 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 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 4,900 vetted third-party managed account products, multi-manager portfolios, fund strategist portfolios, as well as over 950 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers portfolio overlay and tax optimization services.
•Envestnet 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)
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, performance shares 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, 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 accounts for its revenue arrangements in accordance with FASB Topic 606 - Revenue from Contracts with Customers ("ASC 606"). 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. The majority of the Company's revenues are recognized when services are provided.
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)
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.
Certain subscription-based contracts include fixed and variable consideration. The amount of variable consideration that is included in the transaction price may be subject to constraint and included in the subscription-based recurring revenues only to the extent that is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company utilizes the expected value method to estimate variable consideration based on available historical, current, and forecasted information.
The usage-based pricing generally resets each quarter and the 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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Remaining Performance Obligations- Remaining performance obligations represent the transaction price allocated to unsatisfied or partially satisfied performance obligations. The disclosure includes estimates of variable consideration. The Company applies the practical expedients and exemption not to disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed; and (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.
Contract Balances—The Company records contract liabilities (deferred revenue) when cash payments are received in advance of its performance. The term between invoicing date and when payment is due is generally not significant. For the 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, 2021, and 2020, the Company’s allowance for doubtful accounts was $3.9 million and $2.8 million, 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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Restricted Cash—The following table reconciles cash, cash equivalents and restricted cash from the consolidated balance sheets to amounts reported in the consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Cash and cash equivalents | | $ | 429,279 | | | $ | 384,565 | | | $ | 82,505 | |
Restricted cash included in prepaid expenses and other current assets | | 149 | | | — | | | 82 | |
Restricted cash included in other non-current assets | | — | | | 149 | | | 168 | |
Total cash, cash equivalents and restricted cash | | $ | 429,428 | | | $ | 384,714 | | | $ | 82,755 | |
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. 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, 2021, 2020 and 2019.
For investments where the Company owns equity interests in privately held companies but does not have significant influence and there is no readily determinable fair value, it accounts for the investment under the measurement alternative at cost minus impairment, if any, plus or minus fair value changes when there are observable price changes.
Property and Equipment—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, 2021, 2020 and 2019.
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, 2021, 2020 and 2019.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2021, 2020 and 2019.
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, 2021, 2020 and 2019.
Leases— The Company accounts for its leases in accordance with FASB Topic 842 - Leases (“ASC 842”) and has elected the available package of practical expedients as well as elected to apply the short-term lease exemption to all of its classes of underlying assets.
At inception, the Company 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 accounts for its fair value measurements in accordance with FASB Topic 825 - Financial Instruments (“ASC 825”), which provides companies the option to report selected financial assets and 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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Financial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
| | | | | | | | |
Level I: | | Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date. |
| | |
Level II: | | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data. |
| | |
Level III: | | Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments. |
Income Taxes—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 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
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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 $345.0 million of 1.75% Convertible Notes due June 2023. In August 2020, the Company issued $517.5 million of 0.75% Convertible Notes due August 2025. Collectively the “Convertible Notes” are accounted for in accordance with FASB Topic 470 - Debt ("ASC 470"). The Company has determined that the embedded conversion options in the Convertible Notes are not required to be separately accounted for as a derivative under GAAP. Upon adoption of ASU 2020-06, the Company accounts for the Convertible Notes as a single liability measured at amortized cost. 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 $1.3 million. In connection with the acquisition, the Company was granted the ability to appoint two members to the private company's board of directors. The appointment of two board members gives the Company the majority of the board's voting rights. As a result, the Company uses the consolidation method of accounting for this investment. The private company was formed to enable financial advisors to provide insurance and income protection products to their clients.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements— In 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. These changes became effective for the Company's fiscal year beginning January 1, 2021. This standard will be applied prospectively. Adoption of this standard did not 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 has early adopted this standard as of January 1, 2021 using the modified retrospective approach. Adoption of this standard resulted in a decrease to accumulated deficit of $28.6 million (net of $0.9 million in taxes), a decrease to paid-in capital of $108.5 million (net of $6.7 million in taxes) and an increase to Convertible Notes of $87.5 million. Interest expense recognized in future periods is expected to be reduced as a result of accounting for the convertible debt instrument as a single liability measured at its amortized cost, with an expected decrease of approximately $22.1 million in 2021 as a result of the adoption.
Not Yet Adopted Accounting Pronouncements— In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805).” This update amends Topic 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities in accordance with ASC 606. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2022. Early adoption of the standard is permitted. The amendment is to be applied prospectively to business combinations occurring on or after the effective date of the amendment. The Company plans to adopt this standard on January 1, 2022. The Company does not expect the adoption of ASU 2021-08 to have a material impact on the Company's consolidated financial statements.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
3.Acquisitions
2019 Acquisitions
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 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 $7.6 million 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:
| | | | | | | | |
| | (in thousands) |
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 $8.1 million and recorded this as a reduction to general and administration expenses. As the earn-out performance period ended without targets being achieved, the contingent consideration was not be paid.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | |
| | (in thousands) |
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 |
| | (in thousands) |
Proprietary technology | | $ | 4,100 | | | 4 | | Straight-line |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2021, 2020, and 2019, acquisition related costs for the private AI company acquisition were not material, and are included in general and administration expenses.
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 $17.5 million 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 $8.2 million at the acquisition date and is included as a current liability in the December 31, 2020 consolidated balance sheet at its accreted balance of $10.2 million. The earn-out contingent consideration of $10.5 million, including accreted interest, was paid in 2021.
The consideration transferred in the acquisition was as follows:
| | | | | | | | |
| | (in thousands) |
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:
| | | | | | | | |
| | (in thousands) |
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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
A summary of estimated intangible assets acquired, estimated useful lives and amortization method follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Estimated | | Amortization |
| | Amount | | Useful Life in Years | | Method |
| | (in thousands) | | | | |
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 $6.7 million. PortfolioCenter's pre-tax loss for the year ended December 31, 2019 totaled $2.6 million. The pre-tax loss includes acquired intangible asset amortization of $1.5 million for the year ended December 31, 2019.
For the years ended December 31, 2021, 2020, and 2019, acquisition related costs for the PortfolioCenter acquisition were not material, and are included in general and administration expenses.
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 $298.7 million, 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 million 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, 2021, there were approximately 26,000 shares available to be issued under the 2019 Equity Plan. As part of the retention bonus pool, the Company also made cash retention payments in 2019 of approximately $8.8 million to certain legacy PIEtech employees who joined Envestnet |MoneyGuide. At the time of acquisition, the Company expected to pay an additional $5.3 million in cash bonus payments to legacy PIEtech employees over the next three years, for which $5.3 million has been paid through December 31, 2021.
The Company also granted membership interests in certain of the Company's equity investments to two legacy PIEtech executives with an estimated grant date fair market value of $8.9 million. These membership interests vested on May 1, 2020 and become exercisable on May 1, 2022, with the option to put the membership interests to the Company. For the years ended December 31, 2021, 2020, and 2019 the Company recorded approximately $0.5 million, $3.3 million and $5.9 million, respectively, as a component of compensation and benefits in the consolidated statements of operations. As of December 31, 2021, the corresponding liability was recorded in accrued expenses and other current liabilities. As of December 31, 2020, the liability was recorded in other non-current liabilities in the consolidated balance sheets.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The consideration transferred in the acquisition was as follows:
| | | | | | | | |
| | (in thousands) |
Cash consideration | | $ | 298,714 | |
Stock consideration | | 222,484 | |
Less: cash acquired | | (6,360) | |
Total consideration transferred, net of cash acquired | | $ | 514,838 | |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | |
| | (in thousands) |
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 |
| | (in thousands) | | | | |
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 year ended December 31, 2019 totaled $30.3 million. PIEtech's pre-tax loss for the year ended December 31, 2019 totaled $12.4 million. The pre-tax loss includes acquired intangible asset amortization of $17.6 million for the year ended December 31, 2019.
For the years ended December 31, 2021 and 2020, acquisition related costs for the PIEtech acquisition were not material. For the year ended December 31, 2019, acquisition related costs totaled approximately $16.7 million. Included in this 2019 amount is approximately $8.8 million 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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
2020 Acquisitions
Acquisition of Private Technology Company
On February 18, 2020, the Company, through its 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.
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 $2.3 million, net of cash acquired, subject to certain closing and post-closing adjustments, plus up to an additional $6.8 million in contingent consideration, based upon achieving certain performance targets. The Company recorded a liability as of the date of acquisition of $5.2 million, which represented the estimated fair value of contingent consideration on the date of acquisition.
In 2021 and 2020, we determined that certain performance targets for this acquisition would not be met. As a result, we reduced the contingent consideration liability plus accrued interest associated with this acquisition by $0.7 million and $3.1 million, respectively, 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. Contingent consideration of $1.1 million was paid during the year ended December 31, 2021.
The Company recorded estimated goodwill of $7.0 million, which is not deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $1.0 million. The tangible assets acquired and liabilities assumed were not material.
The results of the private technology company's operations are included in the consolidated statements of operations beginning February 18, 2020 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2021 and 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 $12.0 million, net of cash acquired. In connection with the acquisition, the Company recorded estimated goodwill of $10.9 million, which is deductible for income tax purposes. The tangible assets acquired and liabilities assumed were not material.
The results of the private cloud technology company's operations are included in the consolidated statements of operations beginning March 2, 2020 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2021 and 2020, acquisition related costs for the Private Cloud Technology Company Acquisition were not material, and are included in general and administration expenses.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Acquisition of Private Financial Technology Design Company
On March 3, 2020, the Company acquired the outstanding units of a private financial technology design company that were not owned by the Company and merged the acquired company into a wholly owned subsidiary of the Company (the “Private Financial Technology Design Company Acquisition”). The private financial technology design company designs integrated, intuitive digital technology applications for institutional financial services firms, bank wealth management organizations, independent advisor networks, and broker-dealers. The technology and operations of the private financial technology design company have been integrated into the Envestnet Wealth Solutions segment.
The Company previously owned approximately 45% of the outstanding units in this private financial technology design company, and accounted for it as an equity method investment. Based upon the estimated value of the private financial technology design company of $11.0 million, the Company paid estimated consideration of $5.9 million, net of cash acquired, for the remaining outstanding units. As a result of the acquisition, the Company recognized a gain of $4.2 million in the first quarter of 2020 on the re-measurement to fair value of its previously held interest, which is included in other income (expense), net in the consolidated statements of operations.
In connection with the Private Financial Technology Design Company Acquisition, the Company recorded estimated total goodwill of $9.2 million, of which approximately $6.2 million is deductible for income tax purposes, and estimated identifiable intangible assets for proprietary technologies of $2.0 million. The tangible assets acquired and liabilities assumed were not material.
The results of the private financial technology design company's operations are included in the consolidated statements of operations beginning March 3, 2020 and were not considered material to the Company’s results of operations.
For the years ended December 31, 2021 and 2020, acquisition related costs for the Private Financial Technology Design Company Acquisition were not material, and are included in general and administration expenses.
The goodwill arising from these 2020 acquisitions represents the expected synergistic benefits of these transactions, primarily related to an increase in future revenues as a result of potential new business and cross selling opportunities, as well as enhancements to our technologies.
2021 Acquisitions
Acquisition of Proprietary Technology
The Company previously owned approximately 29% of the outstanding units in a privately held company and accounted for it as an equity method investment. On March 11, 2021, the Company entered into an intellectual property purchase agreement with this privately held company to acquire all of the proprietary technology developed by the privately held company for approximately $35.5 million. Concurrent with the intellectual property purchase agreement, the Company also entered into a redemption agreement with the same privately held company to redeem the Company's previously held equity interest for approximately $10.0 million. The Company accounted for these two arrangements as a single unit of account. As of the acquisition date, the net cost of the proprietary technology acquired, including capitalized transaction costs, was approximately $24.5 million, which will be amortized over a five-year period on a straight-line basis. The proprietary technology has been integrated into the Envestnet Wealth Solutions.
Acquisition of Harvest
On April 7, 2021, pursuant to an agreement and plan of merger (the “Merger Agreement”), dated as of March 31, 2021, between, among others, Harvest Savings & Wealth Technologies (“Harvest”), a Delaware corporation, and Bounty Merger Sub, Inc, a wholly-owned subsidiary of the Company (“Merger Sub”), the Company completed the merger of Harvest with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Harvest Acquisition”) and operating as a wholly-owned subsidiary of Envestnet. Harvest has been integrated into the Envestnet Wealth Solutions segment.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Harvest provides automated goals-based saving and wealth solutions tools to customers of banks, credit unions, trust companies, and other financial institutions. The acquisition optimizes the Company's API-based financial wellness ecosystem, and also helps strengthen the Company's foothold to enable embedded finance, which the Company sees as a key driver of the future of financial services.
In connection with the Harvest Acquisition, the Company paid estimated consideration of $32.8 million (of which approximately $3.0 million is being held in escrow for 18 months after the closing date), net of cash acquired, subject to certain post-closing adjustments. The Company funded the acquisition with cash on hand.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate | | Measurement Period Adjustments | | Revised Estimate |
| | (in thousands) |
Tangible assets acquired, net of cash(1) | | $ | 2,032 | | | $ | 3,278 | | | $ | 5,310 | |
Total liabilities assumed | | (596) | | | 54 | | | (542) | |
Identifiable intangible assets | | 9,500 | | | — | | | 9,500 | |
Goodwill | | 21,858 | | | (3,332) | | | 18,526 | |
Total net assets acquired | | $ | 32,794 | | | $ | — | | | $ | 32,794 | |
(1) The Company recorded measurement period adjustments of $3.3 million primarily due to the establishment of deferred tax assets during the year ended December 31, 2021.
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, as well as enhancements to the Company's existing technologies. The goodwill is not deductible for income tax purposes.
A summary of estimated intangible assets acquired, estimated useful lives and amortization method is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Estimate (in thousands) | | Estimated Useful Life in Years | | Amortization Method |
Proprietary technology | | $ | 6,900 | | | 6 | | Straight-line |
Customer list | | 2,600 | | | 14 | | Accelerated |
Total intangible assets acquired | | $ | 9,500 | | | | | |
The results of Harvest’s operations are included in the consolidated statements of operations beginning April 7, 2021 and were not considered material to the Company’s results of operations.
For the year ended December 31, 2021, the Company’s acquisition related costs were not material, and are included in general and administration expenses. The Company may incur additional acquisition related costs in 2022.
Pro Forma Financial Information
The results of the Company's acquisitions since January 1, 2020 were not considered material to the Company's results of operations, therefore, pro forma information is not presented.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
4.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | | | |
| | (in thousands) |
Prepaid technology | | $ | 15,415 | | | $ | 13,165 | |
Non-income tax receivables | | 7,013 | | | 6,571 | |
Escrow for acquisition | | 2,951 | | | — | |
Prepaid insurance | | 2,234 | | | 1,777 | |
Advance payroll taxes and benefits | | 1,356 | | | 6,429 | |
Income tax prepayments and receivables | | 1,310 | | | 1,684 | |
Other | | 12,427 | | | 10,944 | |
Total prepaid expenses and other current assets | | $ | 42,706 | | | $ | 40,570 | |
5.Property and Equipment, Net
Property and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | Estimated Useful Life | | 2021 | | 2020 |
| | | | | | |
| | | | (in thousands) |
Cost: | | | | |
Computer equipment and software | | 3 years | | $ | 72,879 | | | $ | 72,443 | |
Leasehold improvements | | Shorter of the lease term or useful life of the asset | | 43,544 | | | 37,671 | |
Office furniture and fixtures | | 3-7 years | | 12,214 | | | 11,249 | |
Office equipment and other | | 3-5 years | | 7,973 | | | 7,151 | |
Building and building improvements | | 7-39 years | | 2,729 | | | 2,669 | |
Land | | Not applicable | | 940 | | | 940 | |
| | | | 140,279 | | | 132,123 | |
Less: accumulated depreciation and amortization | | (90,064) | | | (84,154) | |
Total property and equipment, net | | $ | 50,215 | | | $ | 47,969 | |
During 2021 and 2020, the Company retired property and equipment that was no longer in service for the Envestnet Wealth Solutions segment with an historical cost of $12.7 million and $8.5 million, respectively. During 2021 and 2020, the Company retired property and equipment that was no longer in service for the Envestnet Data & Analytics segment with an historical cost of $2.4 million and $3.8 million, respectively. Gains and losses on asset retirements during 2021 and 2020 were not material.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The following table presents the cost amounts and related accumulated depreciation written off by category:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | | | Accumulated | | | | Accumulated |
| | Cost | | Depreciation | | Cost | | Depreciation |
| | | | | | | | |
| | (in thousands) |
Computer equipment and software | | $ | 10,936 | | | $ | (10,838) | | | $ | 9,844 | | | $ | (9,606) | |
Leasehold improvements | | 197 | | | (178) | | | 1,775 | | | (1,326) | |
Office furniture and fixtures | | 1,702 | | | (1,646) | | | 320 | | | (243) | |
Office equipment and other | | 2,227 | | | (1,915) | | | 381 | | | (348) | |
| | | | | | | | |
Total property and equipment retirements | | $ | 15,062 | | | $ | (14,577) | | | $ | 12,320 | | | $ | (11,523) | |
Depreciation and amortization expense was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (in thousands) |
Depreciation and amortization expense | | $ | 20,577 | | | $ | 21,432 | | | $ | 20,777 | |
6.Internally Developed Software, Net
Internally developed software, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | Estimated Useful Life | | 2021 | | 2020 |
| | | | | | |
| | | | (in thousands) |
Internally developed software | | 5 years | | $ | 225,380 | | | $ | 159,619 | |
Less: accumulated amortization | | | | (91,721) | | | (63,118) | |
Internally developed software, net | | | | $ | 133,659 | | | $ | 96,501 | |
Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (in thousands) |
Amortization expense | | $ | 28,603 | | | $ | 18,670 | | | $ | 12,042 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
7.Goodwill and Intangible Assets, Net
Changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Total |
| | | | | | |
| | (in thousands) |
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 translation and other | | (70) | | | (199) | | | (269) | |
Balance at December 31, 2020 | | 603,350 | | | 303,423 | | | 906,773 | |
Harvest Acquisition | | 18,526 | | | — | | | 18,526 | |
Foreign currency translation | | — | | | (145) | | | (145) | |
Balance at December 31, 2021 | | $ | 621,876 | | | $ | 303,278 | | | $ | 925,154 | |
Intangible assets, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| | | Gross | | | | Net | | Gross | | | | Net |
| | | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
Customer lists | | | $ | 590,080 | | | $ | (241,189) | | | $ | 348,891 | | | $ | 591,520 | | | $ | (198,555) | | | $ | 392,965 | |
Proprietary technologies | | | 85,324 | | | (43,004) | | | 42,320 | | | 54,914 | | | (26,949) | | | 27,965 | |
Trade names | | | 33,700 | | | (24,515) | | | 9,185 | | | 33,700 | | | (19,589) | | | 14,111 | |
Total intangible assets | | $ | 709,104 | | | $ | (308,708) | | | $ | 400,396 | | | $ | 680,134 | | | $ | (245,093) | | | $ | 435,041 | |
During 2021 and 2020, the Company retired fully amortized intangible assets for the Envestnet Wealth Solutions segment with an historical cost of $5.0 million and $0.8 million, respectively, including proprietary technologies and customer lists. During 2021 the Company had no retirements of intangible assets for the Envestnet Data & Analytics segment. In 2020 the Company retired fully amortized proprietary technology intangible assets for the Envestnet Data & Analytics segment with an historical cost of $35.0 million.
Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Amortization expense | | $ | 68,587 | | | $ | 73,559 | | | $ | 68,452 | |
Future amortization expense of the Company's intangible assets as of December 31, 2021, is expected to be as follows:
| | | | | |
Years ending December 31: | |
2022 | $ | 66,186 | |
2023 | 51,791 | |
2024 | 45,013 | |
2025 | 41,736 | |
2026 | 33,894 | |
Thereafter | 161,776 | |
Total | $ | 400,396 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
8.Investments
Equity Method Investments
The Company owns equity interests in various privately held companies for which it has significant influence and, therefore, recognizes its investment under the equity method. 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, 2021, the Company’s ownership interests in these companies ranged from 4% to 47%. As of December 31, 2020, the Company’s ownership interests in these companies ranged from 4% to 44%. As of December 31, 2021 and December 31, 2020, the carrying value of the Company’s equity method investments was $18.6 million and $15.3 million, respectively, which are included in other non-current assets in the consolidated balance sheets. As of December 31, 2021, the Company has committed $3.0 million in future funding to certain of these equity method investees.
Summarized combined financial information for these investments is as follows (amounts represent 100% of investee financial information, except Envestnet’s proportional share of losses):
| | | | | | | | | | | | | | | | |
| | December 31, |
Balance Sheets | | 2021 | | 2020 | | |
| | (in thousands) | | |
Current assets | | $ | 40,333 | | | $ | 23,469 | | | |
Non-current assets | | 33,529 | | | 21,329 | | | |
Current liabilities | | 20,018 | | | 11,325 | | | |
Non-current liabilities | | 1,583 | | | 1,418 | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
Statements of Operations | | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Revenues | | $ | 65,085 | | | $ | 35,603 | | | $ | 866 | |
Loss from operations | | (149) | | | (4,758) | | | (6,192) | |
Net loss | | (134) | | | (5,062) | | | (6,193) | |
Envestnet’s proportional share of losses | | (7,093) | | | (5,399) | | | (2,361) | |
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 $11.0 million. 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 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 $16.4 million and $11.5 million in the twelve months ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company had recorded a net receivable of $3.0 million and $2.1 million, respectively, from the private services company.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2021 and 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 $9.5 million and $9.9 million, respectively, 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.
Other Equity Investments
The Company owns equity interests in various privately held companies for which it does not have significant influence, there is no readily determinable fair value, and its investment qualifies for recognition under the measurement alternative at cost minus impairment, if any, plus or minus fair value changes when there are observable price changes.
On October 1, 2021, the Company acquired an ownership interest in YieldX Inc. ("YieldX") for cash consideration of $15.0 million. YieldX provides an end-to-end digital platform with smart workflows, artificial intelligence powered analytics and a reimagined user experience for financial professionals and investors in the fixed income markets. The Company elected the measurement alternative for this investment as it did not have a readily determinable fair value. The investment is measured at cost, less impairment, adjusted by observable price changes.
In connection with this investment, the Company also entered into a commercial agreement with YieldX to integrate the products and solutions of YieldX into the Company’s platform offering. The consideration under the commercial agreement includes a warrant and quarterly cash payments subject to the satisfaction of certain performance targets.
As of December 31, 2021 and December 31, 2020, the carrying value of these other equity investments was $18.7 million and $0.3 million, respectively, which are included in other non-current assets in the consolidated balance sheets. There have been no impairments recognized for these investments as of December 31, 2021. Fair value adjustments, resulting from observable price changes, of $0.8 million were recognized during the year ended December 31, 2021.
9.Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Accrued compensation and related taxes | | $ | 97,523 | | | $ | 71,039 | |
Accrued investment manager fees | | 95,858 | | | 57,894 | |
Accrued technology | | 8,951 | | | 4,701 | |
Accrued professional services | | 7,746 | | | 9,240 | |
Non-income tax payables | | 4,907 | | | 8,398 | |
| | | | |
| | | | |
Other accrued expenses | | 9,431 | | | 7,276 | |
Total accrued expenses and other liabilities | | $ | 224,416 | | | $ | 158,548 | |
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 $5.2 million and $5.1 million of severance expense during the twelve months ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company has accrued approximately $1.4 million and $5.1 million in accrued compensation and related taxes associated with these separation agreements, respectively.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
10.Debt
The Company’s outstanding debt obligations as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Revolving credit facility balance | | $ | — | | | $ | — | |
| | | | |
Convertible Notes due 2023 | | $ | 345,000 | | | $ | 345,000 | |
Unaccreted discount on Convertible Notes due 2023 | | — | | | (24,058) | |
Unamortized issuance costs on Convertible Notes due 2023 | | (2,979) | | | (4,306) | |
Convertible Notes due 2023 carrying value | | $ | 342,021 | | | $ | 316,636 | |
| | | | |
Convertible Notes due 2025 | | $ | 517,500 | | | $ | 517,500 | |
Unaccreted discount on Convertible Notes due 2025 | | — | | | (65,902) | |
Unamortized issuance costs on Convertible Notes due 2025 | | (10,659) | | | (11,731) | |
Convertible Notes due 2025 carrying value | | $ | 506,841 | | | $ | 439,867 | |
| | | | |
| | | | |
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 October 2021.
Pursuant to the Amended Credit Agreement, the Banks have agreed to provide the Company with a revolving credit
facility of $500.0 million, of which amount may be increased by $150.0 million (the “Revolving Credit Facility”). The Amended Credit Agreement also includes a $5.0 million sub-facility for the issuances of letters of credit. As of December 31, 2021 and 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.
As of December 31, 2021, 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 $0.9 million and $1.5 million, 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 as of December 31, 2021.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2021, the Company had all $500.0 million available to borrow under the revolving credit facility, subject to covenant compliance.
See “Note 22—Subsequent Events” for details on the Company's Third Credit Agreement entered into on February 4, 2022.
Convertible Notes due 2023
In May 2018, the Company issued $345.0 million of convertible notes maturing June 1, 2023 (the “Convertible Notes due 2023”). Net proceeds from the offering were $335.0 million. 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.
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 an initial conversion rate of 14.6381 shares per one thousand principal amount of the Convertible Notes due 2023, which represents a conversion price of $68.31 per share and approximately 5.1 million shares issuable upon conversion, subject to adjustment under certain conditions. The initial conversion rate is subject to adjustment upon a "fundamental change", as defined in the indenture, if the Company calls all or any portion of the notes for optional redemption, or subject to antidilution provisions provided in the indenture. 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 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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Upon issuance, the Company separately accounted for the liability and equity components of the Convertible Notes due 2023 by allocating the proceeds from issuance of the Convertible Notes due 2023 between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include an embedded conversion option. The Company allocated $46.6 million to the equity component, presented within additional paid-in capital, net of offering costs of $1.4 million. The Company recorded a discount on the Convertible Notes due 2023 of $48.0 million which was accreted and recorded as additional interest expense.
Upon the adoption of ASU 2020-06 on January 1, 2021, the equity component is no longer separated from the host contract and is now accounted for as a single liability measured at amortized cost within Long-term debt in the consolidated balance sheets. Accordingly, as of December 31, 2021, the Convertible Notes due 2023 are presented at their gross proceeds of $345.0 million less unamortized debt issuance costs of $3.0 million with no future accretion of the original issue discount necessary. During the twelve months ended December 31, 2020 and 2019, the Company recognized $9.4 million and $9.2 million, respectively, in accretion related to the discount.
In connection with the issuance of the Convertible Notes due 2023, the Company incurred $10.0 million of issuance costs in 2018, of which $8.6 million was originally allocated to the debt component and presented net in Long-term debt and $1.4 million was originally allocated to the equity component and presented within additional paid-in capital in the consolidated balance sheets. Upon the adoption of ASU 2020-06, the costs originally allocated to the equity component are reflected within Long-term debt and are being amortized and recorded as additional interest expense over the life of the Convertible Notes due 2023.
Convertible Notes due 2025
In August 2020, the Company issued $517.5 million of convertible notes that mature on August 15, 2025 (the “Convertible Notes due 2025”). Net proceeds from the offering were $503.0 million. The Convertible Notes due 2025 bear interest at a rate of 0.75% per annum payable semiannually in arrears in cash on February 15 and August 15 of each year.
The Convertible Notes due 2025 are general unsecured senior obligations, subordinated in right of payment to the Company’s obligations under 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 an initial 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 and approximately 4.8 million shares issuable upon conversion, subject to adjustment under certain conditions. The initial conversion rate is subject to adjustment upon a "fundamental change", as defined in the indenture, if the Company calls all or any portion of the notes for optional redemption, or subject to antidilution provisions provided in the indenture. Holders may convert their Convertible Notes due 2025 at their option at any time prior to the close of business on the business day immediately preceding 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 reported sale price of the Company’s common stock, for
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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.
Upon issuance, the Company 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 $61.9 million to the equity component presented within additional paid-in capital, net of offering costs of $1.9 million and taxes of $6.7 million. The Company recorded a discount on the Convertible Notes due 2025 of $70.6 million which was accreted and recorded as additional interest expense.
Upon the adoption of ASU 2020-06 on January 1, 2021, the equity component is no longer separated from the host contract and is now accounted for as a single liability measured at amortized cost within Long-term debt in the consolidated balance sheets. Accordingly, as of December 31, 2021, the Convertible Notes due 2025 are presented at their gross proceeds of $517.5 million less unamortized debt issuance costs of $10.7 million with no future accretion of the original issue discount necessary. During the twelve months ended December 31, 2020 the Company recognized $4.7 million in accretion related to the discount.
In connection with the issuance of the Convertible Notes due 2025, the Company incurred a total of $14.5 million of issuance costs in 2020, of which $12.6 million was originally allocated to the debt component and presented net in Long-term debt and $1.9 million was originally allocated to the equity component and presented within additional paid-in capital in the consolidated balance sheets. Upon the adoption of ASU 2020-06, the costs originally allocated to the equity component are reflected within Long-term debt and are being amortized and recorded as additional interest expense over the life of the Convertible Notes due 2025.
See “Note 18—Net Income (Loss) Per Share” for further discussion of the effect of conversion on net income per common share.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Interest Expense
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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Coupon interest | | $ | 9,919 | | | $ | 7,442 | | | $ | 8,917 | |
Amortization of issuance costs | | 5,745 | | | 3,396 | | | 3,703 | |
Undrawn and other fees | | 1,267 | | | 796 | | | 795 | |
Accretion of debt discount | | — | | | 14,084 | | | 15,040 | |
Interest on revolving credit facility | | — | | | 5,786 | | | 4,065 | |
Total interest expense | | $ | 16,931 | | | $ | 31,504 | | | $ | 32,520 | |
For the years ended December 31, 2021, 2020, and 2019, total interest expense related to the Convertible Notes due 2023 was $8.0 million, $17.1 million, and $16.8 million, respectively, with coupon interest expense of $6.0 million, $6.0 million, and $6.0 million, and amortization of debt discount and issuance costs of $2.0 million, $11.1 million, and $10.8 million, respectively. The effective interest rate of the Convertible Notes due 2023 was approximately 2.4%, 6.0%, and 6.0% for the years ended December 31, 2021, 2020, and 2019, respectively. The effective interest rate of the Convertible Notes due 2023 is equal to the stated interest rate plus the amortization of the debt issuance costs subsequent to adoption of ASU 2020-06. Prior to the adoption of ASU 2020-06, the effective interest rate calculation also included the amortization of the original issue discount.
For the years ended December 31, 2021 and 2020, total interest expense related to the Convertible Notes due 2025 was $6.8 million and $6.9 million, respectively, with coupon interest expense of $3.9 million and $1.4 million, and amortization of debt discount and issuance costs of $2.9 million and $5.5 million, respectively. The effective interest rate of the Convertible Notes due 2025 for the years ended December 31, 2021 and 2020 was approximately 1.3% and 4%, respectively. The effective interest rate of the Convertible Notes due 2025 was equal to the stated interest rate plus the amortization of the debt issuance costs subsequent to adoption of ASU 2020-06. Prior to the adoption of ASU 2020-06, the effective interest rate calculation also included the amortization of the original issue discount.
For the year ended December 31, 2019, total interest expense related to a prior convertible note issuance that was repaid in 2019 was $9.7 million, with coupon interest expense of $2.9 million and amortization of debt discount and issuance costs of $6.8 million.
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 1 month to 12 years.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The following table illustrates information for the Company's leases as of and for the year ended December 2021 and 2020:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Total operating lease cost | | $ | 18,600 | | $ | 17,241 |
Short-term lease cost | | 4,940 | | 5,049 |
Weighted average remaining lease term (in years) | | 9.8 | | 10.2 |
Weighted average discount rate | | 5.1 | % | | 5.1 | % |
Cash paid for amounts included in the measurement of the operating lease liability | | 18,052 | | 21,467 |
* The Company did not have significant sublease income or variable lease cost for the years ended December 31, 2021 and 2020.
Future minimum lease payments under non-cancellable leases, as of December 31, 2021, were as follows:
| | | | | | | | |
| | Operating |
| | Leases |
Years Ending December 31, | | (in thousands) |
2022 | | $ | 14,781 | |
2023 | | 15,518 | |
2024 | | 14,628 | |
2025 | | 13,728 | |
2026 | | 14,684 | |
Thereafter | | 76,273 | |
Total future minimum lease payments | | 149,612 | |
Less imputed interest | | (32,693) | |
Total operating lease liabilities | | $ | 116,919 | |
As of December 31, 2021, 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 January 2024 with lease terms of up to 11 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. Throughout 2021, we repurchased 55,488 shares of the Company's common stock for $4.0 million. The Company made no repurchases in 2020. As of December 31, 2021, a maximum of 1,900,902 shares may yet be purchased under this program.
On December 20, 2018, the Company issued and sold to BlackRock, Inc. (“BlackRock”) 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. As of December 31, 2021, BlackRock has not exercised any of the warrants.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
In December 2021, the company issued 78,677 shares of the Company’s common stock for the settlement of liabilities connected with a prior acquisition.
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”.
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, 2021 and December 31, 2020, based on the three-tier
fair value hierarchy: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Fair Value | | Level I | | Level II | | Level III |
Assets: | | (in thousands) |
Money market funds | | $ | 2,684 | | | $ | 2,684 | | | $ | — | | | $ | — | |
Assets used to fund deferred compensation liability | | 11,140 | | | — | | | — | | | 11,140 | |
Total assets | | $ | 13,824 | | | $ | 2,684 | | | $ | — | | | $ | 11,140 | |
Liabilities: | | | | | | | | |
Contingent consideration liability | | $ | 743 | | | $ | — | | | $ | — | | | $ | 743 | |
Deferred compensation liability | | 10,418 | | | 10,418 | | | — | | | — | |
Total liabilities | | $ | 11,161 | | | $ | 10,418 | | | $ | — | | | $ | 743 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Fair Value | | Level I | | Level II | | Level III |
Assets: | | (in thousands) |
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 | |
Level I assets and liabilities include money-market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”) and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the consolidated balance sheets. The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds. The fair market value of the deferred compensation liability is based on the daily quoted market prices for the net asset value of the various funds in which the participants have selected, and is included in other non-current liabilities in the consolidated balance sheets.
Level III assets and liabilities consist of the estimated fair values of contingent consideration as well as the assets to fund the Company's deferred compensation liability. The fair market value of the assets used to fund the Company's deferred compensation liability approximates the cash surrender value of the Company's life insurance premiums and is included in other non-current assets in the consolidated balance sheets.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Fair Value of Contingent Consideration Liabilities
The fair value of the contingent consideration liabilities related to certain of the Company's acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level III fair value measurement. The significant inputs in the Company's Level III fair value measurement not supported by market activity included its assessments of expected future cash flows related to these acquisitions and 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 2021, 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 $0.7 million 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, 2020 to December 31, 2021:
| | | | | | | | |
| | Fair Value of |
| | Contingent |
| | Consideration |
| | Liabilities |
| | (in thousands) |
Balance at December 31, 2020 | | $ | 12,559 | |
Payments of contingent consideration liability | | (11,636) | |
Fair market value adjustment on contingent consideration liability | | (667) | |
Accretion on contingent consideration liabilities | | 487 | |
Balance at December 31, 2021 | | $ | 743 | |
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, 2020 to December 31, 2021:
| | | | | | | | |
| | Fair Value of |
| | Assets Used to |
| | Fund Deferred |
| | Compensation |
| | Liability |
| | (in thousands) |
Balance at December 31, 2020 | | $ | 9,961 | |
Contributions | | 215 | |
Fair value adjustments | | 964 | |
Balance at December 31, 2021 | | $ | 11,140 | |
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.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, 2021.
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, 2021 and 2020, 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, 2021 and 2020 (See “Note 10—Debt”).
In May 2018, the Company issued $345.0 million of Convertible Notes due 2023. As of December 31, 2021 and 2020, the carrying value of the Convertible Notes due 2023 equaled $342.0 million and $316.6 million, respectively, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of December 31, 2021 and 2020, the estimated fair value of the Convertible Notes due 2023 was $439.9 million and $460.8 million, respectively.
In August 2020, the Company issued $517.5 million of Convertible Notes due 2025. As of December 31, 2021 and 2020, the carrying value of the Convertible Notes due 2025 equaled $506.8 million and $439.9 million, and represented the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of December 31, 2021 and 2020, the estimated fair value of the Convertible Notes due 2025 was $526.1 million and $540.8 million, respectively.
As of December 31, 2021 and 2020, no advances were outstanding on the revolving credit facility under the Amended Credit Agreement. The Company considered the revolving credit facility to be a Level I liability as of December 31, 2021 and 2020 (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, 2021 based upon the short-term nature of these assets and liabilities.
14.Revenues and Cost of Revenues
Disaggregation of revenue
The following table presents the Company’s revenues disaggregated by major source:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
Revenues: | | (in thousands) |
Asset-based | | $ | 709,376 | | | $ | — | | | $ | 709,376 | |
Subscription-based | | 267,720 | | | 186,269 | | | 453,989 | |
Total recurring revenues | | 977,096 | | | 186,269 | | | 1,163,365 | |
Professional services and other revenues | | 14,070 | | | 9,082 | | | 23,152 | |
Total revenues | | $ | 991,166 | | | $ | 195,351 | | | $ | 1,186,517 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
Revenues: | | (in thousands) |
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 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
Revenues: | | (in thousands) |
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 | |
One customer accounted for more than 10% of the Company’s total revenues, substantially all of which are included within the Envestnet Wealth Solutions segment:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Fidelity | | 17 | % | | 15 | % | | 15 | % |
The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
United States | | $ | 1,166,251 | | | $ | 977,047 | | | $ | 871,456 | |
International (1) | | 20,266 | | | 21,183 | | | 28,671 | |
Total revenues | | $ | 1,186,517 | | | $ | 998,230 | | | $ | 900,127 | |
(1)No foreign country accounted for more than 10% of total revenues.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future as of December 31, 2021:
| | | | | |
Years ending December 31, | (in thousands) |
2022 | $ | 253,848 | |
2023 | 161,762 | |
2024 | 88,269 | |
2025 | 46,173 | |
2026 | 19,845 | |
Thereafter | 4,433 | |
Total | $ | 574,330 | |
The remaining performance obligations disclosed above are not indicative of revenue for future periods.
Contract balances
Total deferred revenue decreased $2.0 million and $3.8 million as of December 31, 2021 and December 31, 2020, respectively. The decrease in both years is primarily due to timing differences related to the satisfaction of outstanding performance obligations and the Company's billing cycles during the years then ended. The majority of the Company's deferred revenue as of December 31, 2021 will be recognized over the course of the next twelve months.
The amount of revenue recognized that was included in the opening deferred revenue balance was $33.8 million and $34.3 million for the years ended December 31, 2021 and 2020, respectively. The majority of this revenue consists of subscription-based services and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Deferred sales incentive compensation
Deferred sales incentive compensation was $11.8 million and $10.8 million as of December 31, 2021 and 2020, respectively. Amortization expense for the deferred sales incentive compensation was $4.4 million and $3.9 million for the years ended December 31, 2021 and 2020, 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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Asset-based | | $ | 393,717 | | | $ | 278,569 | | | $ | 243,913 | |
Subscription-based | | 29,445 | | | 26,934 | | | 28,904 | |
Professional services and other | | 561 | | | 426 | | | 5,994 | |
Total cost of revenues | | $ | 423,723 | | | $ | 305,929 | | | $ | 278,811 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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 12,375,000. Stock options and stock appreciation rights are granted with an exercise price no less than the fair-market-value price of the common stock at the date of the grant. As of December 31, 2021, the maximum number of options and restricted stock available for future issuance under the Company’s plans is 3,712,313.
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.
Stock-based compensation expense under the Company's plans was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Stock-based compensation expense | | $ | 67,525 | | | $ | 56,292 | | | $ | 54,436 | |
Tax effect on stock-based compensation expense | | (17,219) | | | (14,354) | | | (13,734) | |
Net effect on income | | $ | 50,306 | | | $ | 41,938 | | | $ | 40,702 | |
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.5%, 25.5% and 25.2% for the years ended December 31, 2021, 2020 and 2019, respectively.
Stock Options
The following weighted average assumptions were used to value options granted during the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Grant date fair value of options | | $ | 31.23 | | | $ | — | | | $ | 21.55 | |
Volatility | | 42.1 | % | | — | % | | 40.0 | % |
Risk-free interest rate | | 0.4 | % | | — | % | | 2.5 | % |
Dividend yield | | — | | | — | | | — | |
Expected term (in years) | | 6.5 | | 0.0 | | 6.5 |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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 |
| | | | | | | | (in thousands) |
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 | |
| | | | | | | | |
Exercised | | (705,333) | | | 18.83 | | | | | |
Forfeited | | (7,213) | | | 48.70 | | | | | |
Outstanding as of December 31, 2020 | | 438,040 | | | 36.28 | | | 4.1 | | 20,156 | |
Granted | | 4,781 | | | 74.83 | | | | | |
Exercised | | (76,303) | | | 27.37 | | | | | |
Forfeited | | (1,277) | | | 49.02 | | | | | |
Outstanding as of December 31, 2021 | | 365,241 | | | 38.61 | | | 3.3 | | 14,878 | |
Options exercisable | | 321,487 | | | 36.80 | | | 2.8 | | 13,675 | |
| | | | | | | | |
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, 2021, 2020 and 2019 of $79.34, $82.29 and $69.63, 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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Total intrinsic value of options exercised | | $ | 3,815 | | | $ | 35,687 | | | $ | 40,893 | |
Cash received from exercises of stock options | | 2,090 | | | 10,760 | | | 10,592 | |
Exercise prices of stock options outstanding as of December 31, 2021 range from $12.45 to $74.83. At December 31, 2021, 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 1.6 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 0% to 150% of the original grant number. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest three years from the grant date.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, 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 | |
Granted | | 1,195,313 | | | 71.03 | | | 129,865 | | | 70.92 | |
Vested | | (828,942) | | | 69.50 | | | (62,524) | | | 61.53 | |
Forfeited | | (204,294) | | | 70.71 | | | (10,954) | | | 78.97 | |
Outstanding as of December 31, 2021 | | 1,507,424 | | | 71.50 | | | 359,184 | | | 73.64 | |
At December 31, 2021, there was $83.8 million of unrecognized compensation expense related to unvested restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 2.0 years. At December 31, 2021, there was $10.4 million 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 1.9 years.
In connection with the unexpected death of our former CEO in 2019, 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 $4.3 million in 2019. In 2020, the Company recognized a gain of $2.5 million 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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Voluntary employer matching contributions | | $ | 6,873 | | | $ | 6,247 | | | $ | 6,044 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
17.Income Taxes
Income (loss) before income tax expense (benefit) was generated in the following jurisdictions:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Domestic | | $ | 9,730 | | | $ | (17,234) | | | $ | (61,047) | |
Foreign | | 10,631 | | | 9,189 | | | 12,952 | |
Total | | $ | 20,361 | | | $ | (8,045) | | | $ | (48,095) | |
The components of the income tax expense (benefit) charged to operations are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Current: | | (in thousands) |
Federal | | $ | — | | | $ | (1,086) | | | $ | 4 | |
State | | 3,488 | | | 2,111 | | | 2,803 | |
Foreign | | 4,499 | | | (4,542) | | | 5,930 | |
| | 7,987 | | | (3,517) | | | 8,737 | |
| | | | | | |
Deferred: | | | | | | |
Federal | | 4,021 | | | (2,659) | | | (33,952) | |
State | | (3,548) | | | 1,158 | | | (5,603) | |
Foreign | | (793) | | | (383) | | | (75) | |
| | (320) | | | (1,884) | | | (39,630) | |
| | | | | | |
Total | | $ | 7,667 | | | $ | (5,401) | | | $ | (30,893) | |
Net deferred tax assets (liabilities) consisted of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| | (in thousands) |
Deferred revenue | | $ | 6,436 | | | $ | 5,811 | |
Prepaid expenses and accruals | | 8,099 | | | 8,737 | |
| | | | |
Right of use asset | | (22,190) | | | (25,937) | |
Lease liability | | 28,994 | | | 30,752 | |
Net operating loss and tax credit carryforwards | | 85,698 | | | 87,648 | |
Property and equipment and intangible assets | | (100,314) | | | (113,041) | |
Stock-based compensation expense | | 9,652 | | | 9,122 | |
Investment in partnerships | | 2,941 | | | 1,727 | |
Convertible Notes | | — | | | (22,951) | |
Other | | (173) | | | 894 | |
Total deferred tax liabilities, net | | 19,143 | | | (17,238) | |
Less: valuation allowance | | (40,164) | | | (17,502) | |
Net deferred tax liabilities | | $ | (21,021) | | | $ | (34,740) | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Beginning in 2022, the Tax Cuts and Jobs Act ("TCJA") eliminates the option to deduct research and development ("R&D") expenditures currently and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, the Company could expect to pay material cash taxes beginning in 2022.
The deferred tax liability that is not being recorded because of the Company's assertion to permanently reinvest the earnings of its India subsidiaries is $6.2 million related to the withholding tax in India, net of an assumed foreign tax deduction for this amount in the U.S.
The valuation allowance for deferred tax assets as of December 31, 2021 and 2020 was $40.2 million and $17.5 million, respectively. The change in the valuation allowance from 2020 to 2021 was primarily related to the adoption of ASU 2020-06, additional R&D credits generated during 2021, the Harvest acquisition, and additional valuation allowance on state NOLs. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative pre-tax loss incurred over the three years ended December 31, 2021. 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, 2021, a valuation allowance of $40.2 million has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company's projections for growth.
The expected income tax provision (benefit) calculated at the statutory federal rate differs from the actual provision as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Tax provision (benefit), at U.S. federal statutory tax rate | | $ | 4,402 | | | $ | (1,787) | | | $ | (10,012) | |
State income tax provision (benefit), net of federal benefit | | 856 | | | (2,461) | | | (5,390) | |
Effect of stock-based compensation excess tax benefit | | (364) | | | (9,349) | | | (11,983) | |
Effect of limitation on executive compensation | | 1,678 | | | 961 | | | 1,940 | |
Effect of permanent items | | 661 | | | (703) | | | (892) | |
Effect of India partnerships | | 1,422 | | | 2,977 | | | — | |
Change in valuation allowance | | 5,660 | | | 16,210 | | | (3,364) | |
Effect of change in state and foreign income tax rates | | (1,184) | | | 1,323 | | | 2,449 | |
Uncertain tax positions | | 158 | | | (6,093) | | | 4,478 | |
Research and development credits | | (5,695) | | | (5,939) | | | (6,756) | |
State net operating loss adjustment | | — | | | 31 | | | (1,588) | |
Other | | 73 | | | (571) | | | 225 | |
Income tax provision (benefit) | | 7,667 | | | (5,401) | | | (30,893) | |
At December 31, 2021, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $195 million available to offset future federal taxable income, if any, of which $154 million expire through 2036 and $41 million are carried forward indefinitely. In addition, as of December 31, 2021, the Company had NOL carryforwards for state income tax purposes of approximately $233 million available to reduce future income subject to income taxes. The state NOL carryforwards that are subject to expiration expire through 2041. In addition, the Company had R&D credit carryforwards of approximately $32 million for federal and $13 million for California and
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
Illinois, as well as foreign tax credits of $0.9 million available to offset federal income tax. Federal R&D credits begin to expire in 2022 through 2041. California R&D credits carryover indefinitely.
A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Balance at beginning of year | | $ | 15,132 | | | $ | 18,939 | | | $ | 15,628 | |
Additions based on tax positions related to the current year | | 1,631 | | | 1,420 | | | 2,261 | |
Additions (reductions) based on tax positions related to prior years | | (550) | | | (2,793) | | | 1,050 | |
| | | | | | |
Reductions for settlements with taxing authorities related to prior years | | (394) | | | (2,434) | | | — | |
Reductions for lapses of statute of limitations | | (1,302) | | | — | | | — | |
Balance at end of year | | $ | 14,517 | | | $ | 15,132 | | | $ | 18,939 | |
At December 31, 2021, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $14.5 million. At this time, the Company estimates that the liability for unrecognized tax benefits will decrease by an estimated $3.6 million in the next twelve months as statutes of limitations expire.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2021 and 2020, income tax expense (benefit) included $0.6 million and $(4.9) million, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $1.9 million and $1.4 million as of December 31, 2021 and 2020, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Service (“IRS”) in August 2021 that the calendar year 2018 federal income tax return had been selected for audit by the IRS. The Company’s tax returns for the 2018-2020 calendar years remain open to examination by the IRS in their entirety. The IRS's audit of the Company's 2015 and 2016 tax returns has been closed. With respect to state taxing jurisdictions, the Company’s tax returns for the 2017-2020 calendar years remain open to examination by various state revenue services.
The Company's Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2020, 2019, 2018, 2017, 2012, 2011 and 2010. Based on the outcome of examinations of the Company's subsidiaries or the result of the expiration of statutes of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months.
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, if dilutive.
Prior to January 1, 2021, the Company accounted for the effect of its convertible notes 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 had no effect on diluted net income per share until the Company’s stock price exceeded the conversion price of $68.31 per share and $106.74 per share, respectively, and certain other criteria were met, or if the trading price of the convertible notes met certain criteria. Pursuant to the adoption of ASU 2020-06 on January 1, 2021, the Company now accounts for the effect of its convertible notes on diluted net income per share using the if-converted method (See “Note 2—Summary of Significant Accounting Policies” and “Note 10—Debt”).
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands, except share and per share amounts) |
Net income (loss) attributable to Envestnet, Inc. (a) | | $ | 13,296 | | | $ | (3,110) | | | $ | (16,782) | |
| | | | | | |
Weighted-average common shares outstanding: | | | | | | |
Basic (b) | | 54,470,975 | | | 53,589,232 | | | 50,937,919 | |
Effect of dilutive shares: | | | | | | |
Options to purchase common stock | | 206,022 | | | — | | | — | |
Unvested restricted stock units | | 633,384 | | | — | | | — | |
| | | | | | |
Warrants | | 73,715 | | | — | | | — | |
Diluted (c) | | 55,384,096 | | | 53,589,232 | | | 50,937,919 | |
| | | | | | |
Net income (loss) per share attributable to Envestnet, Inc common stock: | | | | | | |
Basic (a/b) | | $ | 0.24 | | | $ | (0.06) | | | $ | (0.33) | |
Diluted (a/c) | | $ | 0.24 | | | $ | (0.06) | | | $ | (0.33) | |
Securities that were anti-dilutive and therefore excluded from the computation of diluted net income (loss) per share are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
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 | | | 9,898,549 | | | 5,050,505 | |
Warrants | | — | | | 470,000 | | | 470,000 | |
Total anti-dilutive securities | | 9,898,549 | | | 12,454,733 | | | 8,244,079 | |
(1)From 2019 to 2020, this amount increased by 4.8 million potential common shares due to the Convertible Notes due 2025 (See “Note 10—Debt”).
19.Segment Information
Business segments are generally organized around the Company's business services. The Company's business segments are:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an intelligent financial life to their clients.
•Envestnet Data & Analytics – 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, 2021 and 2020.
See “Note 14—Revenues and Cost of Revenues” for detail of revenues by segment.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Envestnet Wealth Solutions | | $ | 124,651 | | | $ | 91,501 | | | $ | 67,713 | |
Envestnet Data & Analytics | | 2,033 | | | (9,943) | | | (25,262) | |
Nonsegment operating expenses | | (86,143) | | | (62,117) | | | (58,524) | |
Income (loss) from operations | | 40,541 | | | 19,441 | | | (16,073) | |
Interest expense, net of interest income | | (16,104) | | | (30,392) | | | (29,173) | |
Other income (expense), net | | (4,076) | | | 2,906 | | | (2,849) | |
Consolidated income (loss) before income tax benefit | | 20,361 | | | (8,045) | | | (48,095) | |
Income tax provision (benefit) | | 7,667 | | | (5,401) | | | (30,893) | |
Consolidated net income (loss) | | 12,694 | | | (2,644) | | | (17,202) | |
Add: Net (income) loss attributable to non-controlling interest | | 602 | | | (466) | | | 420 | |
Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | 13,296 | | | $ | (3,110) | | | $ | (16,782) | |
A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures by segment follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Segment assets: | | (in thousands) |
Envestnet Wealth Solutions | | $ | 1,720,779 | | | $ | 1,634,153 | |
Envestnet Data & Analytics | | 520,403 | | | 510,137 | |
Consolidated total assets | | $ | 2,241,182 | | | $ | 2,144,290 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Segment depreciation and amortization: | | (in thousands) |
Envestnet Wealth Solutions | | $ | 90,073 | | | $ | 80,714 | | | $ | 65,746 | |
Envestnet Data & Analytics | | 27,694 | | | 32,947 | | | 35,525 | |
Consolidated depreciation and amortization | | $ | 117,767 | | | $ | 113,661 | | | $ | 101,271 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Segment capital expenditures: | | (in thousands) |
Envestnet Wealth Solutions | | $ | 65,264 | | | $ | 46,891 | | | $ | 42,395 | |
Envestnet Data & Analytics | | 23,637 | | | 20,105 | | | 11,548 | |
Consolidated capital expenditures | | $ | 88,901 | | | $ | 66,996 | | | $ | 53,943 | |
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
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, |
| | 2021 | | 2020 |
| | (in thousands) |
United States | | $ | 180,680 | | | $ | 140,651 | |
India | | 2,923 | | | 2,970 | |
Other | | 271 | | | 849 | |
Total long-lived assets, net | | $ | 183,874 | | | $ | 144,470 | |
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, 2021, the Company estimated future minimum unconditional purchase obligations of approximately $38 million.
Procurement of Technology Solutions
On June 21, 2021, we entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $18.0 million, including an advance of $3.0 million. The Company closed the transaction on February 1, 2022 and paid the remaining $15.0 million on February 2, 2022. This asset will be integrated into the Envestnet Data & Analytics segment. In addition, the agreement includes an earn-out payment of $10.0 million based upon the achievement of certain target metrics within five years after the date of our launch of the technology solutions.
Legal Proceedings
The Company and its subsidiary, Yodlee, Inc. (“Yodlee”), have been named as defendants in a lawsuit filed on July 17, 2019, by FinancialApps, LLC (“FinancialApps”) in the United States District Court for the District of Delaware. The case caption is FinancialApps, LLC v. Envestnet Inc., et al., No. 19-cv-1337 (D. Del.). FinancialApps alleges that, after entering into a 2017 services agreement with Yodlee, Envestnet and Yodlee breached the agreement and misappropriated proprietary information to develop competing credit risk assessment software. The complaint includes claims for, among other things, misappropriation of trade secrets, fraud, tortious interference with prospective business opportunities, unfair competition, copyright infringement and breach of contract. FinancialApps is seeking significant monetary damages and various equitable and injunctive relief.
On September 17, 2019, the Company and Yodlee filed a motion to dismiss certain of the claims in the complaint filed by FinancialApps, including the copyright infringement, unfair competition and fraud claims. On August 25, 2020, the District Court granted in part and denied in part the Company and Yodlee’s motion. Specifically, the Company and Yodlee prevailed on
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
FinancialApps’ counts alleging copyright infringement and violations of the Illinois Deceptive Trade Practices Act. And while the Court was receptive to Envestnet and Yodlee’s argument that several of FinancialApps’ other counts are based on allegations that amount to copyright infringement—and therefore should fail due to copyright preemption—the Court found that FinancialApps had alleged enough conduct distinct from copyright infringement to survive dismissal at this early stage.
On October 30, 2019, the Company and Yodlee filed counterclaims against FinancialApps. Yodlee alleges that FinancialApps fraudulently induced it to enter into contracts with FinancialApps, then breached those contracts. FinancialApps has filed a motion to dismiss Yodlee’s counterclaims. On September 15, 2020, the District Court denied FinancialApps’ motion on all counts except for the breach-of-contract claim which was dismissed on a pleading technicality without prejudice. On that count, the Court granted Yodlee leave to amend its counterclaim, cure the technical deficiency, and reassert its claim. Yodlee and Envestnet filed amended counterclaims on September 30, 2020. The amended counterclaims (1) cure that technical deficiency and reassert Yodlee’s contract counterclaim; and (2) broaden the defamation counterclaims arising out of various defamatory statements FinancialApps disseminated in the trade press after filing the lawsuit. On January 14, 2021, the Court ordered that (i) FinancialApps’s claims against Yodlee—as well as Yodlee’s counterclaims against FinancialApps—must be tried before the judge instead of a jury pursuant to a jury waiver provision in the parties’ agreement; and (ii) FinancialApps’s claims against Envestnet (and Envestnet’s counterclaim) must be heard by a jury. The Court has scheduled the Envestnet jury trial to take place before the Yodlee bench trial. Fact discovery closed on April 23, 2021, other than a few outstanding matters, and expert discovery is underway.
The Company believes FinancialApps’s allegations are without merit and will continue to defend the claims against it and litigate the counterclaims vigorously.
The Company and Yodlee were also named as defendants in a putative class action lawsuit filed on August 25, 2020, by Plaintiff Deborah Wesch in the United States District Court for the Northern District of California. On October 21, 2020, an amended class action complaint was filed by Plaintiff Wesch and nine additional named plaintiffs. The case caption is Deborah Wesch, et al., v. Yodlee, Inc., et al., Case No. 3:20-cv-05991-SK. Plaintiffs allege that Yodlee unlawfully collected their financial transaction data when plaintiffs linked their bank accounts to a mobile application that uses Yodlee’s API, and plaintiffs further allege that Yodlee unlawfully sold the transaction data to third parties. The complaint alleges violations of certain California statutes and common law, including the Unfair Competition Law, and federal statutes, including the Stored Communications Act. Plaintiffs are seeking monetary damages and equitable and injunctive relief on behalf of themselves and a putative nationwide class and California subclass of persons who provided their log-in credentials to a Yodlee-powered app in an allegedly similar manner from 2014 to the present. The Company believes that it is not properly named as a defendant in the lawsuit and it further believes, along with Yodlee, that plaintiffs’ claims are without merit. On November 4, 2020, the Company and Yodlee filed separate motions to dismiss all of the claims in the complaint. On February 16, 2021, the district court granted in part and denied in part Yodlee’s motion to dismiss the amended complaint and granted the plaintiffs leave to further amend. The Court reserved ruling on the Company’s motion to dismiss and granted limited jurisdictional discovery to the plaintiffs. On March 15, 2021, Plaintiffs filed a second amended class action complaint re-alleging, among others, the claims the district court had dismissed. The second amended complaint did not allege any claims against the Company or Yodlee that were not previously alleged in first amended complaint. On May 5, 2021, the Company filed a motion to dismiss all claims asserted against it in the second amended complaint, and Yodlee filed a motion to dismiss most claims asserted against it in the second amended complaint. On July 19, 2021, the Court granted in part Yodlee’s motion, resulting in the dismissal of all federal law claims and two of the state-law claims. On August 5, 2021, the Court granted the Company's motion to dismiss, and dismissed the Company from the lawsuit. Discovery continues on the remaining state law claims against Yodlee. On October 8, 2021, Yodlee filed a motion for summary judgment, and is awaiting a schedule for the completion of briefing on this motion. Yodlee will continue to vigorously defend the claims against it.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
In addition, the Company is involved in legal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of December 31, 2021. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on the Company’s results of operations or cash flow in a particular quarter or year.
Contingencies
Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. During 2021 and 2020, the Company estimated a sales and use tax liability of $3.2 million and $6.6 million, respectively, related to revenues in multiple jurisdictions. This amount is included in accrued expenses and other liabilities in the consolidated balance sheets.
For the years ended December 31, 2021 and 2020, the Company also estimated a sales and use tax receivable of $2.6 million and $2.1 million, respectively, related to the estimated recoverability of a portion of the liability from customers. This amount is included in prepaid expenses and other current assets in the consolidated balance sheets.
Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.
22.Subsequent Events
On February 4, 2022, Envestnet and certain of its subsidiaries entered into a Third Amended and Restated Credit Agreement (the “Third Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”).
The Third Credit Agreement amends and restates, in its entirety, the Second Amended and Restated Credit Agreement, dated as of July 18, 2017, as amended, by and among Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Agreement”). The Third Credit Agreement amended certain provisions under the Prior Credit Agreement to, among other things, (i) extend the maturity of loans and the revolving credit commitments, (ii) reduce the interest rate payable on the loans and (iii) increase capacity and flexibility under certain of the negative covenants. The Third Credit Agreement provides, subject to certain customary conditions, for a revolving credit facility (the “Credit Facility”), in an aggregate amount of $500.0 million, with a $20.0 million sub-facility for letters of credit. The Credit Facility matures on February 4, 2027.
Outstanding loans under the Credit Facility accrue interest, at the Company's option, at a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term SOFR rate plus an applicable margin ranging from 1.25% to 2.75% per annum, in each case based upon the total net leverage ratio, as calculated pursuant to the Credit Agreement. The undrawn portion of the revolving credit commitments under the Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum, based upon the total net leverage ratio, as calculated pursuant to the Third Credit Agreement.
The obligations of Envestnet under the Credit Agreement are guaranteed by substantially all of Company's domestic subsidiaries and are secured by a first-priority lien on substantially all of the personal property (other than intellectual property) of Envestnet and the guarantors, subject to certain exclusions.
Envestnet, Inc.
Notes to Consolidated Financial Statements (continued)
The Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants and events of default. The covenants include certain financial covenants requiring Company to maintain compliance with (i) a quarterly maximum total net leverage ratio covenant set at 4.00 to 1.00, (ii) a quarterly minimum interest coverage ratio covenant set at 4.00 to 1.00 and (iii) a minimum liquidity covenant set at $100.0 million, which is tested as of the end of each of (x) the fourth fiscal quarter of 2022 and 2024 and (y) the first fiscal quarter of 2023 and 2025.
Proceeds under the Credit Agreement may be used to finance capital expenditures and permitted acquisitions and for working capital and other general corporate purposes.