ENVESTNET, INC. - Quarter Report: 2017 March (Form 10-Q)

Three Months Ended

Depreciation and amortization expense

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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

Commission file number 001-34835

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-1409613
(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)

35 East Wacker Drive, Suite 2400, Chicago, IL		60601
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(312) 827-2800

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

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

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

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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

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

As of May 3, 2017, 43,828,109 shares of the common stock with a par value of $0.005 per share were outstanding.

Table of Contents

TABLE OF CONTENTS

	Page

PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016	4
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016	5
Condensed Consolidated Statement of Equity for the three months ended March 31, 2017	6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	7
Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Forward-Looking Statements	26
Overview	27
Results of Operations	31
Liquidity and Capital Resources	41

Item 3. Quantitative and Qualitative Disclosures About Market Risk	43

Item 4. Controls and Procedures	44

PART II - OTHER INFORMATION	46

Item 1. Legal Proceedings	46

Item 1A. Risk Factors	46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3. Defaults Upon Senior Securities	47

Item 4. Mine Safety Disclosures	47

Item 5. Other Information	47

Item 6. Exhibits	47

Table of Contents

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(unaudited)


	March 31,		December 31,
	2017		2016
Assets
Current assets:
Cash and cash equivalents	$	39,479	$	52,592
Fees and other receivables, net		44,731		44,268
Prepaid expenses and other current assets		20,156		16,224
Total current assets		104,366		113,084

Property and equipment, net		33,540		33,000
Internally developed software, net		15,792		14,860
Intangible assets, net		254,973		265,558
Goodwill		432,339		431,936
Other non-current assets		13,135		13,963
Total assets	$	854,145	$	872,401

Liabilities and Equity
Current liabilities:
Accrued expenses and other liabilities	$	79,272	$	87,763
Accounts payable		12,618		11,480
Current portion of debt		60,221		37,926
Contingent consideration		—		2,286
Deferred revenue		19,591		16,499
Total current liabilities		171,702		155,954

Convertible Notes		154,146		152,575
Term Notes		70,448		100,409
Contingent consideration		2,700		2,582
Deferred revenue		15,170		15,643
Deferred rent and lease incentive		12,327		12,060
Deferred tax liabilities, net		8,239		5,555
Other non-current liabilities		14,614		13,436
Total liabilities		449,346		458,214

Commitments and contingencies

Redeemable units in ERS		900		900
Equity:
Stockholders’ equity:
Preferred stock, par value $0.005, 50,000,000 shares authorized		—		—
Common stock, par value $0.005, 500,000,000 shares authorized; 56,364,799 and 55,642,686 shares issued as of March 31, 2017 and December 31, 2016, respectively; 43,785,653 and 43,240,567 shares outstanding as of March 31, 2017 and December 31, 2016, respectively		282		278
Additional paid-in capital		526,335		516,675
Accumulated deficit		(83,709)		(70,574)
Treasury stock at cost, 12,579,146 and 12,402,119 shares as of March 31, 2017 and December 31, 2016, respectively		(39,718)		(33,068)
Accumulated other comprehensive income (loss)		311		(422)
Total stockholders’ equity		403,501		412,889
Non-controlling interest		398		398
Total equity		403,899		413,287
Total liabilities and equity	$	854,145	$	872,401

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

(unaudited)


	Three Months Ended
	March 31,
	2017		2016
Revenues:
Assets under management or administration	$	94,162	$	82,871
Subscription and licensing		57,910		43,620
Professional services and other		5,714		5,330
Total revenues		157,786		131,821

Operating expenses:
Cost of revenues		49,226		40,158
Compensation and benefits		65,532		62,616
General and administration		30,547		25,727
Depreciation and amortization		15,835		16,080
Total operating expenses		161,140		144,581

Loss from operations		(3,354)		(12,760)
Other expense, net		(5,483)		(3,949)
Loss before income tax provision		(8,837)		(16,709)

Income tax provision (benefit)		4,298		(5,716)

Net loss		(13,135)		(10,993)
Add: Net loss attributable to non-controlling interest		—		—
Net loss attributable to Envestnet, Inc.	$	(13,135)	$	(10,993)

Net loss per share attributable to Envestnet, Inc.:
Basic	$	(0.30)	$	(0.26)

Diluted	$	(0.30)	$	(0.26)

Weighted average common shares outstanding:
Basic		43,362,037		42,506,557

Diluted		43,362,037		42,506,557

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2017		2016
Net loss attributable to Envestnet, Inc.	$	(13,135)	$	(10,993)
Other comprehensive income, net of taxes
Foreign currency translation gain (loss)		733		(15)
Gains on foreign currency contracts designated as cash flow hedges reclassified to earnings		—		177
Total other comprehensive income, net of taxes		733		162
Comprehensive loss, net of taxes	$	(12,402)	$	(10,831)

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statement of Equity

(in thousands, except share information)

(unaudited)


									Accumulated
	Common Stock			Treasury Stock			Additional		Other				Non-		Total
				Common			Paid-in		Comprehensive		Accumulated		controlling		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Income		Deficit		Interest		Equity
Balance, December 31, 2016	55,642,686	$	278	(12,402,119)	$	(33,068)	$	516,675	$	(422)	$	(70,574)	$	398	$	413,287

Exercise of stock options	208,334		1	—		—		1,899		—		—		—		1,900
Issuance of common stock - vesting of restricted stock units	513,779		3	—		—		—		—		—		—		3
Stock-based compensation expense	—		—	—		—		7,761		—		—		—		7,761
Purchase of treasury stock for stock-based tax withholdings	—		—	(177,027)		(6,650)		—		—		—		—		(6,650)
Foreign currency translation loss	—		—	—		—		—		733		—		—		733
Net loss	—		—	—		—		—		—		(13,135)		—		(13,135)
Balance, March 31, 2017	56,364,799	$	282	(12,579,146)	$	(39,718)	$	526,335	$	311	$	(83,709)	$	398	$	403,899

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2017		2016
OPERATING ACTIVITIES:
Net loss	$	(13,135)	$	(10,993)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		15,835		16,080
Deferred rent and lease incentive		182		(171)
Provision for doubtful accounts		82		23
Deferred income taxes		2,684		3,599
Stock-based compensation expense		7,458		11,615
Non-cash interest expense		3,522		2,013
Accretion on contingent consideration and purchase liability		156		62
Fair market value adjustment on contingent consideration		—		50
Loss allocation from equity method investment		285		—
Changes in operating assets and liabilities, net of acquisitions:
Fees and other receivables		(545)		11,278
Prepaid expenses and other current assets		(3,932)		(9,780)
Other non-current assets		543		(1,556)
Accrued expenses and other liabilities		(8,758)		(11,335)
Accounts payable		865		32
Deferred revenue		2,619		2,181
Other non-current liabilities		1,140		418
Net cash provided by operating activities		9,001		13,516

INVESTING ACTIVITIES:
Purchase of property and equipment		(4,007)		(1,811)
Capitalization of internally developed software		(2,091)		(1,388)
Purchase of ERS units		—		(1,500)
Acquisition of businesses, net of cash acquired		—		(18,125)
Net cash used in investing activities		(6,098)		(22,824)

FINANCING ACTIVITIES:
Proceeds from borrowings on revolving credit facility		25,000		15,000
Payment on revolving credit facility		—		(13,000)
Payments of contingent consideration		(2,286)		—
Payments of definite consideration		(445)		—
Payment of term notes		(33,862)		(2,000)
Proceeds from exercise of stock options		1,900		1,207
Purchase of treasury stock for stock-based tax withholdings		(6,650)		(7,071)
Issuance of restricted stock units		3		4
Net cash used in financing activities		(16,340)		(5,860)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		324		—

DECREASE IN CASH AND CASH EQUIVALENTS		(13,113)		(15,168)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		52,592		51,718

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	39,479	$	36,550

Supplemental disclosure of cash flow information - net cash refunded during the period for income taxes	$	(716)	$	(1,513)
Supplemental disclosure of cash flow information - cash paid during the period for interest		1,414		2,079
Supplemental disclosure of non-cash operating, investing and financing activities:
Contingent consideration issued in a business acquisition		—		1,929
Purchase liabilities included in accrued expenses		—		269
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities		471		—

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

1.Organization and Description of Business

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

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

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

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

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

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

Envestnet | Yodlee is a leading data aggregation and data intelligence platform. As a “big data” specialist, Yodlee gathers, refines and aggregates a massive set of end-user permissioned transaction level data, which it then provides to customers as data analytics solutions and market research services.

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

2.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2016 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2017 and the results of operations, equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of March 31, 2017 was derived from the Company’s audited financial statements for the year ended December 31, 2016 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet segment that are denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet | Yodlee segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a foreign currency functional currency 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 condensed consolidated balance sheets as accumulated other comprehensive income (loss) within shareholders' equity. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.

Table of Contents

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 24, 2017.

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

Share repurchase program – 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 transactions or otherwise, all in compliance with applicable laws and other restrictions. As of March 31, 2017, 1,956,390 shares could still be purchased under this program. For the three month period ended March 31, 2017 the Company purchased no shares with respect to this program.

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

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

In 2016, the Company began evaluating the impact of the adoption of the new revenue standard on its consolidated financial statements, including enhanced disclosures, as well as assessing the impact on systems, processes, controls. The Company expects the new revenue standard to have an impact on the estimation of variable transaction considerations, the allocation of variable considerations across distinct services, and the tracking and amortization of contract costs. We expect to begin capitalizing certain costs to obtain and fulfill a contract upon adoption of the new standard and are currently in the process of evaluating the period over which to amortize these capitalized costs. The Company has not yet quantified these amounts.

The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Although the Company has not finalized the adoption disclosure approach, the Company currently anticipates applying the standard retrospectively with the cumulative effect recognized as of the date of adoption.

In February 2016, the FASB issued ASU 2016-02, “Leases.” This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from the lease, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.

Table of Contents

In March 2016, The FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This update is intended to reduce the cost and complexity of accounting for share-based payments; however, some changes may also increase volatility in reported earnings. Under the new guidance, all excess tax benefits and deficiencies will be recorded as an income tax benefit or expense in the income statement and excess tax benefits will be recorded as an operating activity in the statements of cash flows. Upon adoption, we determined that we did not have previously unrecognized excess tax benefits to be recognized on a modified retrospective transition method as an adjustment to retained earnings. The new guidance also allows withholding up to the maximum individual statutory tax rate without classifying the awards as a liability. We did not elect an accounting policy change to withhold at the maximum individual statutory tax rate. The cash paid to satisfy the statutory income tax withholding obligation will continue to be classified as a financing activity in the statements of cash flows. Lastly, the update allows forfeitures to be estimated or recognized when they occur. The requirements for the excess tax effects related to share-based payments at settlement must be applied on a prospective basis, and the other requirements under this standard are to be applied on a retrospective basis. We did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. These changes became effective for the Company’s fiscal year beginning January 1, 2017 and have been reflected in these condensed consolidated financial statements. As a result of the adoption of ASU 2016-09, for the three months ended March 31, 2016, net cash provided by operating activities decreased by $275 with a corresponding offset to net cash used for financing activities.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASU is effective for the Company January 1, 2018 with early adoption permitted. The ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. Upon adoption, the Company does not anticipate significant changes to the Company’s existing accounting policies or presentation of the consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),” which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the timing of adoption; however it does not believe this ASU will have material impact on the Company’s consolidated financial statements.

3.Business Acquisitions

Wheelhouse Analytics LLC

On October 3, 2016, the Company acquired all of the issued and outstanding membership interests of Wheelhouse Analytics LLC (“Wheelhouse”). Wheelhouse is a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. Wheelhouse is included in the Yodlee segment.

The Company acquired Wheelhouse to be integrated with Yodlee’s industry-leading data and analytics solutions to strengthen Envestnet’s data-driven insights to financial advisors, asset managers and enterprises enabling them to better manage their businesses and client relationships and deliver better outcomes to their clients. Envestnet expects to deeply integrate Wheelhouse’s tools, delivering robust online dashboards and reporting that provides actionable intelligence.

In connection with the acquisition of Wheelhouse, the Company paid cash consideration of $13,299 and is required to pay contingent consideration with the aggregate amount not to exceed $4,000 and certain holdbacks upon release. Changes to the estimated fair value of the contingent consideration, if any, will be recognized in earnings of the Company.

Table of Contents

The preliminary estimated consideration transferred in the acquisition was as follows:


Cash consideration	$	13,299
Contingent consideration liability		2,582
Purchase consideration liability		887
Working capital adjustment		110
Cash acquired		(80)
Total	$	16,798

The estimated fair values of certain working capital balances, contingent consideration, deferred revenue, identifiable intangible assets and goodwill are provisional and are based on the information that was available as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of working capital balances, contingent consideration, deferred revenue, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than October 3, 2017.

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


	Preliminary
	Estimate at
	March 31, 2017
Total tangible assets acquired	$	399
Total liabilities assumed		(1,459)
Identifiable intangible assets		7,300
Goodwill		10,558
Total net assets acquired	$	16,798

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


			Estimated	Amortization
	Amount		Useful Life in Years	Method
Customer list	$	4,100	12	Accelerated
Proprietary technology		3,000	5	Straight-line
Trade names and domains		200	5	Straight-line
Total	$	7,300

The results of Wheelhouse’s operations are included in the condensed consolidated statements of operations beginning October 3, 2016, and are not considered material to the Company’s results of operations. As such, no pro forma information is presented for the three months ended March 31, 2016.

4. Cost of Revenues

The following table summarizes cost of revenues by revenue category for the periods ended March 31, 2017 and 2016:


	Three Months Ended
	March 31,
	2017		2016
Assets under management or administration	$	44,485	$	36,909
Subscription and licensing		4,614		3,104
Professional services and other		127		145
Total	$	49,226	$	40,158

Table of Contents

5. Property and Equipment

Property and equipment consists of the following:


		March 31,		December 31,
	Estimated Useful Life	2017		2016
Cost:
Computer equipment and software	3 years	$	56,293	$	52,921
Office furniture and fixtures	3-7 years		7,365		6,911
Leasehold improvements	Shorter of the lease term or useful life of the asset		18,177		17,286
Other office equipment	3-5 years		1,554		1,367
			83,389		78,485
Less accumulated depreciation and amortization			(49,849)		(45,485)
Property and equipment, net		$	33,540	$	33,000

Depreciation and amortization expense was as follows:

6. Internally Developed Software

Internally developed software consists of the following:


		March 31,		December 31,
	Estimated Useful Life	2017		2016
Internally developed software	5 years	$	35,809	$	33,718
Less accumulated amortization			(20,017)		(18,858)
Internally developed software, net		$	15,792	$	14,860

Amortization expense was as follows:

Table of Contents

7.Intangible Assets

Intangible assets consist of the following:


					March 31, 2017						December 31, 2016
					Gross				Net		Gross				Net
					Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Useful Life				Amount		Amortization		Amount		Amount		Amortization		Amount
Customer lists	4	-	15	years	$	259,490	$	(60,879)	$	198,611	$	259,490	$	(54,861)	$	204,629
Backlog			4	years		11,000		(7,489)		3,511		11,000		(6,456)		4,544
Proprietary technologies	2	-	8	years		57,770		(22,886)		34,884		57,770		(20,214)		37,556
Trade names	2	-	7	years		24,995		(7,028)		17,967		25,007		(6,178)		18,829
Total intangible assets					$	353,255	$	(98,282)	$	254,973	$	353,267	$	(87,709)	$	265,558

Amortization expense was as follows:

Future amortization expense of the intangible assets as of March 31, 2017, is expected to be as follows:


Years ending December 31:
Remainder of 2017	$	31,383
2018		35,948
2019		32,361
2020		28,615
2021		20,746
2022		18,729
Thereafter		87,191
	$	254,973

8.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:


	March 31,		December 31,
	2017		2016
Non-income tax receivable	$	4,370	$	3,879
Income tax receivable		2,255		1,864
Prepaid insurance		1,125		552
Prepaid technology		1,188		1,318
FinaConnect escrow		2,000		429
Other		9,218		8,182
	$	20,156	$	16,224

Table of Contents

9.Other Non-Current Assets

Other non-current assets consist of the following:


	March 31,		December 31,
	2017		2016
Investments in private companies	$	2,465	$	2,750
Deposits:
Lease		4,373		4,262
Other		512		2,083
Assets to fund deferred compensation liability		3,761		2,738
Other		2,024		2,130
	$	13,135	$	13,963

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

The Company owns 1,500,000 Class A units representing 21.4% of the outstanding membership interests of a privately held company for cash consideration of $1,500. Upon the approval by a majority of the Board of Directors of the privately held company in its sole discretion, prior to December 31, 2017, the privately held company may require that Envestnet purchase up to an additional 1,500,000 Class A units.

The Company uses the equity method of accounting to record its portion of this privately held company’s net income or loss on a one quarter lag from the actual results of operations. The Company uses the equity method of accounting because of its less than 50 percent ownership. The Company’s interest in the earnings or losses of the privately held company is reflected in other expense, net on the condensed consolidated statements of operations.

10.Fair Value Measurements

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

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

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

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

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

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

Table of Contents


	As of March 31, 2017
	Fair Value		Level I		Level II		Level III
Assets
Money market funds(1)	$	17,683	$	17,683	$	—	$	—
Assets to fund deferred compensation liability(2)		3,761		—		—		3,761
Total assets	$	21,444	$	17,683	$	—	$	3,761
Liabilities
Contingent consideration	$	2,700	$	—	$	—	$	2,700
Deferred compensation liability(3)		3,898		3,898		—		—
Total liabilities	$	6,598	$	3,898	$	—	$	2,700


	As of December 31, 2016
	Fair Value		Level I		Level II		Level III
Assets
Money market funds(1)	$	31,644	$	31,644	$	—	$	—
Assets to fund deferred compensation liability(2)		2,738		—		—		2,738
Total assets	$	34,382	$	31,644	$	—	$	2,738
Liabilities
Contingent consideration	$	4,868	$	—	$	—	$	4,868
Deferred compensation liability(3)		2,885		2,885		—		—
Total liabilities	$	7,753	$	2,885	$	—	$	4,868

(1)

The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds.

(2)

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

(3)

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

Level I assets and liabilities include money-market funds not insured by the FDIC and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level 1 and are included in cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the deferred compensation liability is based upon the daily quoted market prices for net asset value on the various funds selected by participants.

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

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

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

Table of Contents

The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to March 31, 2017:


	Fair Value of
	Contingent
	Consideration
	Liabilities
Balance at December 31, 2016	$	4,868
Settlement of contingent consideration liabilities		(2,286)
Accretion on contingent consideration		118
Balance at March 31, 2017	$	2,700

The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to March 31, 2017:


	Fair Value of
	Assets to Fund
	Deferred
	Compensation
	Liability
Balance at December 31, 2016	$	2,738
Contributions		1,023
Balance at March 31, 2017	$	3,761

During the three months ended March 31, 2017, the Company recognized no income or expense on the assets to fund deferred compensation liability, identified as Level III, on the condensed consolidated statements of operations. The asset value was increased due to funding of the plan, which resulted in an asset value as of March 31, 2017 of $3,761, which was included in other non-current assets on the condensed consolidated balance sheets.

The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the three months ended March 31, 2017.

On December 15, 2014, the Company issued $172,500 of Convertible Notes. As of March 31, 2017 and December 31, 2016, the carrying value of the 2019 Convertible Notes equaled $154,146 and $152,575, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of March 31, 2017 and December 31, 2016, the fair value of the Convertible Notes was $160,817 and $164,824, respectively. The Company considers the Convertible Notes to be a Level II liability and uses a market approach to calculate the fair value of the Convertible Notes. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on March 31, 2017 (see Note 14).

As of March 31, 2017 and December 31, 2016, there was $108,138 and $142,000, respectively, of Term Notes outstanding. As of March 31, 2017 and December 31, 2016, there was $25,000 and $0 of revolving credit amounts outstanding under the Amended and Restated Credit Agreement. The outstanding value of our Term Notes and revolving credit facility approximated fair value as they bear interest at variable rates and we believe our credit risk quality is consistent with when the debt originated. As of March 31, 2017 and December 31, 2016, the carrying value of the Term Notes equaled $105,669 and $138,335, respectively, and represents the aggregate principal amount outstanding less the unamortized debt issuance costs. The Company considers the Term Notes and revolving credit facility to be a Level II liability as of March 31, 2017.

We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2017 based upon the short-term nature of the assets and liabilities.

Table of Contents

11.Accrued Expenses

Accrued expenses and other liabilities consist of the following:


	March 31,		December 31,
	2017		2016
Accrued investment manager fees	$	32,329	$	31,278
Accrued compensation and related taxes		23,053		35,287
Sales and use tax payable		11,348		10,108
Accrued professional services		5,153		3,213
Definite consideration		1,250		445
Other accrued expenses		6,139		7,432
	$	79,272	$	87,763

12. Other Non-Current Liabilities

Other non-current liabilities consist of the following:


	March 31,		December 31,
	2017		2016
Uncertain tax positions	$	9,663	$	7,762
Accrued deferred compensation		3,898		2,885
Accrued purchase liability		—		1,250
Other		1,053		1,539
	$	14,614	$	13,436

13. Income Taxes

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


	Three Months Ended
	March 31,
	2017			2016
Loss before income tax provision (benefit)	$	(8,837)		$	(16,709)
Income tax provision (benefit)		4,298			(5,716)
Effective tax rate		(48.6)	%		34.2	%

The Company’s effective tax rates in the three months ended March 31, 2017 and 2016 were (48.6)% and 34.2%, respectively. The change was primarily due to the valuation allowance the company has put on all U.S. deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the U.S.

The gross liability for unrecognized tax benefits was $16,972 and $16,476 at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $16,972. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will not decrease in the next twelve months.

The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $510 and $880 as of March 31, 2017 and December 31, 2016, respectively.

The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company’s tax returns for the calendar years ended December 31, 2016, 2015, 2014, and 2013 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2016, 2015, 2014, 2013, 2012 and 2011 remain open to examination by various state revenue services.

Table of Contents

The Company’s Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2006 and forward. 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 sheet. It is possible that one or more of these audits may be finalized within the next twelve months.

14. Debt

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


	March 31,		December 31,
	2017		2016
Convertible Notes	$	172,500	$	172,500
Unaccreted discount on Convertible Notes		(15,812)		(17,149)
Unamortized issuance costs on Convertible Notes		(2,542)		(2,776)
Convertible Notes carrying value	$	154,146	$	152,575

Term Notes	$	108,138	$	142,000
Unamortized issuance costs on Term Notes		(2,469)		(3,665)
Term Notes carrying value	$	105,669	$	138,335

Revolving credit facility balance	$	25,000	$	—

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


	Three Months Ended
	March 31,
	2017		2016
Coupon interest	$	755	$	755
Amortization of issuance costs		1,430		725
Accretion of debt discount		1,337		1,286
Interest on credit agreement		1,345		1,262
Undrawn and other fees		69		64
	$	4,936	$	4,092

Credit Agreement

On November 19, 2015, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Amended and Restated Credit Agreement amended and restated the Credit Agreement, dated as of June 19, 2014, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent. Pursuant to the Amended and Restated Credit Agreement, the Banks agreed to provide (i) term loans (“Term Notes”) in the aggregate principal amount of $160,000, which were used to fund a portion of the cash consideration paid by the Company in connection with the acquisition of Yodlee, and (ii) revolving credit commitments in the aggregate amount of up to $100,000, which includes a $5,000 subfacility for the issuance of letters of credit.

Obligations under the Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Security Agreement, dated November 19, 2015 (the “Security Agreement”), among the Company, the Debtors party thereto, the Banks and the Administrative Agent, obligations under the Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Future borrowings under the Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.

Table of Contents

Envestnet will pay interest on borrowings made under the Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Amended and Restated Credit Agreement are scheduled to mature on November 19, 2018. The Term Notes are payable in quarterly installments of $2,000 per installment and commenced in March 2016, with the final payment of all remaining term loan principal due and payable on the scheduled maturity date. Within 90 days of each year-end, beginning December 31, 2016, an excess cash flow prepayment, as defined in the Amended and Restated Credit Agreement, may also be required if the Company’s total leverage ratio is greater than 2.0 to 1.0 as of the end of the mostly recently completed two consecutive fiscal quarters of the Company. During the first quarter of 2017, the Company made an excess cash flow payment of $31,862. As of March 31, 2017, the Company has estimated the 2018 prepayment to be approximately $28,730.

The Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants and events of default. The covenants include certain financial covenants requiring Envestnet to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum adjusted EBITDA, and provisions that 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.

As of March 31, 2017, there was $108,138 of Term Notes and $25,000 revolving credit amount outstanding under the Amended and Restated Credit Agreement. The revolving credit amount is included in the current portion of debt on the condensed consolidated balance sheets as the intent of the Company is to repay the outstanding amount within twelve months of March 31, 2107. The Company was in compliance with all covenants under the Amended and Restated Credit Agreement as of March 31, 2017.

Convertible Notes

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

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

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

The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; or (c) upon the occurrence of specified corporate events as defined in the indenture.

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

Table of Contents

The Company has separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds from issuance of the Convertible Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618 to the equity component, net of offering costs of $882. The Company recorded a discount on the Convertible Notes of $27,500 which is being accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three month periods ended March 31, 2017 and 2016, the Company recognized $1,337 and $1,286, respectively, in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes for the three month periods ended March 31, 2017 and 2016 was 6.0% and 6.1%, respectively.

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

15.Stock-Based Compensation

The Company has stock options and restricted stock units outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). On May 13, 2015, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 2,700,000 shares.

In connection with the Yodlee merger (see Note 3), the Company adopted the 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the grant of restricted common stock units for certain Envestnet | Yodlee employees. The maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,052,000. These awards vest over a period of 43 months subsequent to the acquisition date of November 19, 2015. As of March 31, 2017, the remaining amount of unrecognized expense totaled $9,438.

As of March 31, 2017, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 417,317.

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


	Three Months Ended
	March 31,
	2017		2016
Stock-based compensation expense	$	7,458	$	11,615
Tax effect on stock-based compensation expense		(2,800)		(4,646)
Net effect on income	$	4,658	$	6,969

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

Stock Options

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


	Three Months Ended
	March 31,
	2017			2016
Grant date fair value of options	$	14.51		$	20.51
Volatility		43.8	%		42.1	%
Risk-free interest rate		2.1	%		1.4	%
Dividend yield		—	%		—	%
Expected term (in years)		6.3			6.6

Table of Contents

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


				Weighted-Average
		Weighted-		Remaining
		Average		Contractual Life	Aggregate
	Options	Exercise Price		(Years)	Intrinsic Value
Outstanding as of December 31, 2016	3,033,194	$	16.33	4.3	$	63,264
Granted	75,238		31.70
Exercised	(208,334)		9.12
Forfeited	(9,062)		45.81
Outstanding as of March 31, 2017	2,891,036		17.15	4.5		50,792
Options exercisable	2,612,682		15.50	4.0		49,767

Exercise prices of stock options outstanding as of March 31, 2017 range from $0.11 to $55.29. At March 31, 2017, there was $4,792 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 2.3 years.

Restricted Stock Units

Periodically, the Company grants restricted stock unit awards to employees that vest one-third on each of the first three anniversaries of the grant date. Beginning with grants issued in February 2016, restricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. The following is a summary of the activity for unvested restricted stock unit awards granted under the Company’s plans:


		Weighted-
		Average Grant
	Number of	Date Fair Value
	Shares	per Share
Outstanding as of December 31, 2016	1,894,759	$	30.40
Granted	872,941		31.89
Vested	(526,572)		31.68
Forfeited	(20,084)		27.52
Outstanding as of March 31, 2017	2,221,044		31.98

At March 31, 2017, there was $64,056 of unrecognized stock-based compensation expense related to unvested restricted stock unit awards, which the Company expects to recognize over a weighted-average period of 2.4 years.

16.Net Loss Per Share

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

The Company accounts for the effect of the Convertible Notes on diluted earnings per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes have no effect on diluted earnings per share until the Company’s stock price exceeds the conversion price of $62.88 per share, or if the trading price of the Convertible Notes meets certain criteria as described in Note 14 at which point, the effect of the conversion feature would be included in the Company’s calculation of diluted earnings per share. In the period of conversion, the Convertible Notes will have no impact on diluted earnings if the Convertible Notes are settled in cash and will have an impact on dilutive earnings per share if the Convertible Notes are settled in shares upon conversion.

Table of Contents

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


	Three Months Ended
	March 31,
	2017		2016
Net loss attributable to Envestnet, Inc.	$	(13,135)	$	(10,993)

Basic number of weighted-average shares outstanding		43,362,037		42,506,557
Effect of dilutive shares:
Options to purchase common stock		—		—
Unvested restricted stock units		—		—
Diluted number of weighted-average shares outstanding		43,362,037		42,506,557

Net loss per share attributable to Envestnet, Inc.
Basic	$	(0.30)	$	(0.26)

Diluted	$	(0.30)	$	(0.26)

Securities that were anti-dilutive and therefore excluded from the computation of diluted earnings per share are as follows:


	Three Months Ended
	March 31,
	2017	2016
Options to purchase common stock	2,891,036	3,448,439
Unvested restricted stock units	2,221,044	1,707,944
Convertible Notes	2,743,321	2,743,321
Total	7,855,401	7,899,704

17.Major Customers

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


	Three Months Ended
	March 31,
	2017		2016
Fidelity	16	%	15	%

18.Commitments and Contingencies

Purchase Obligations and Indemnifications

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

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

Table of Contents

Litigation

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

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

The Company is involved in litigation arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Litigation accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of March 31, 2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigation could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.

Contingencies

Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. As of March 31, 2017, the Company estimated a sales and use tax liability of $11,348. This amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheets. The Company also estimated a sales and use tax receivable of $4,370 related to estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. As a result, net sales and use taxes of $6,978 were probable of being assessed related to multiple jurisdictions with respect to revenues in the three month period ended March 31, 2017 and prior years. 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.

Leases

The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of March 31, 2017, were as follows:


Years ending December 31:
Remainder of 2017	$	9,814
2018		13,677
2019		14,151
2020		14,003
2021		13,193
Thereafter		52,568
Total	$	117,406

Table of Contents

19.Segment Information

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

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

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

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

The following table presents revenue by segment:


	Three Months Ended
	March 31,
	2017		2016
Revenue:
Envestnet	$	121,318	$	103,190
Envestnet \| Yodlee		36,468		28,631
Consolidated revenue	$	157,786	$	131,821

Fidelity revenue as a percentage of Envestnet segment revenue:		19%		20%

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

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


	Three Months Ended
	March 31,
	2017		2016
Envestnet	$	13,511	$	9,574
Envestnet \| Yodlee		(7,708)		(14,041)
Total segment income (loss) from operations		5,803		(4,467)
Nonsegment operating expenses		(9,157)		(8,293)
Other expense, net		(5,483)		(3,949)
Consolidated loss before income taxes (benefit)		(8,837)		(16,709)
Income tax provision (benefit)		4,298		(5,716)
Consolidated net loss		(13,135)		(10,993)
Add: Net loss attributable to non-controlling interest		—		—
Consolidated net loss attributable to Envestnet, Inc.	$	(13,135)	$	(10,993)

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

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


	March 31,		December 31,
	2017		2016
Segment assets:
Envestnet	$	328,887	$	341,602
Envestnet \| Yodlee		525,258		530,799
Consolidated total assets	$	854,145	$	872,401

Table of Contents


	Three Months Ended
	March 31,
	2017		2016
Segment depreciation and amortization:
Envestnet	$	6,421	$	6,065
Envestnet \| Yodlee		9,414		10,015
Consolidated depreciation and amortization	$	15,835	$	16,080


	Three Months Ended
	March 31,
	2017		2016
Segment capital expenditures:
Envestnet	$	5,351	$	2,029
Envestnet \| Yodlee		747		1,170
Consolidated capital expenditures	$	6,098	$	3,199

20. Geographical Information

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


	Three Months Ended
	March 31,
	2017		2016
United States	$	141,962	$	120,291
International (1)		15,824		11,530
Total	$	157,786	$	131,821

(1)

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

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


	March 31,		December 31,
	2017		2016
United States	$	28,884	$	28,713
India		4,036		3,596
Other		620		691
Total	$	33,540	$	33,000

Table of Contents

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

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

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

Forward-Looking Statements

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

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

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

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

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

our ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies,

the impact of market and economic conditions on revenues,

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

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

compliance failures,

adverse judicial or regulatory proceedings against us,

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

changes in laws and regulations,

general economic conditions, political and regulatory conditions,

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

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

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

our financial performance,

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

Table of Contents

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

failure of our systems to work properly,

our ability to realize operating efficiencies,

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

the failure to protect our intellectual property rights,

our ability to establish and maintain intellectual property rights,

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

management’s response to these factors.

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

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

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I under “Risk Factors” accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

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

The following discussion and analysis should also be read along with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 2016 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

Overview

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

More than 2,500 companies, including 16 of the 20 largest U.S. banks, 38 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”), and hundreds of Internet services companies, leverage Envestnet technology and services. Envestnet solutions enhance knowledge of the client, accelerate client on-boarding, improve client digital experiences, and help drive better outcomes for enterprises, advisors, and their clients.

Founded in 1999, Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic, end-to-end wealth management platform that supports advisors and their clients.

Table of Contents

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

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

Segments

Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in Note 19 to the notes to condensed consolidated financial statements. Our business segments are as follows:

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

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

Envestnet Segment

Envestnet empowers financial advisors at broker-dealers, banks, and RIAs with all the tools they require to deliver holistic wealth management to their end clients. In addition, the firm provides advisors with practice management support so that they can grow their practices and operate more efficiently. In the first quarter of 2017, Envestnet’s platform assets grew to over $1.1 trillion in approximately 6 million accounts overseen by more than 55,000 advisors.

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

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

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

Table of Contents

Key Metrics

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


	As of
	March 31,		June 30,		September 30,		December 31,		March 31,
	2016		2016		2016		2016		2017
	(in millions except accounts and advisors data)
Platform Assets
Assets Under Management (AUM)	$	95,489	$	96,700	$	101,924	$	105,178	$	113,544
Assets Under Administration (AUA)		207,537		220,690		231,831		241,682		248,445
Subtotal AUM/A		303,026		317,390		333,755		346,860		361,989
Licensing		576,988		685,952		721,690		748,125		763,372
Total Platform Assets	$	880,014	$	1,003,342	$	1,055,445	$	1,094,985	$	1,125,361
Platform Accounts
AUM		498,449		503,147		519,717		545,130		574,132
AUA		904,373		935,870		961,590		994,583		986,554
Subtotal AUM/A		1,402,822		1,439,017		1,481,307		1,539,713		1,560,686
Licensing		2,237,427		4,304,645		4,394,670		4,558,883		4,263,002
Total Platform Accounts		3,640,249		5,743,662		5,875,977		6,098,596		5,823,688
Advisors
AUM/A		35,718		35,067		35,861		36,483		36,985
Licensing		13,675		16,081		16,191		17,852		18,159
Total Advisors		49,393		51,148		52,052		54,335		55,144

The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.


	Asset Rollforward - Three Months Ended March 31, 2017
	As of		Gross				Net		Market		Reclass (to) from		As of
	12/31/2016		Sales		Redemptions		Flows		Impact		Licensing		3/31/2017
	(in millions except account data)
Assets under Management (AUM)	$	105,178	$	11,838	$	(7,489)	$	4,349	$	4,017	$	—	$	113,544
Assets under Administration (AUA)		241,682		19,483		(16,718)		2,765		8,889		(4,891)		248,445
Total AUM/A	$	346,860	$	31,321	$	(24,207)	$	7,114	$	12,906	$	(4,891)	$	361,989
Fee-Based Accounts		1,539,713						43,737				(22,764)		1,560,686

The above AUM/A gross sales figures include $0.3 billion in new client conversions. The Company onboarded an additional $13.4 billion in licensing conversions during the three months ended March 31, 2017, bringing total conversions for the quarter to $13.7 billion.

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


	March 31,		June 30,		September 30,		December 31,		March 31,
	2016		2016		2016		2016		2017
Assets under management (AUM)	32	%	30	%	31	%	30	%	31	%
Assets under administration (AUA)	68	%	70	%	69	%	70	%	69	%
	100	%	100	%	100	%	100	%	100	%

Envestnet | Yodlee Segment

Table of Contents

More than 1,000 financial institutions, financial technology innovators and financial advisory firms, including 12 of the 20 largest U.S. banks, subscribe to the Envestnet | Yodlee platform to underpin personalized financial apps and services for over 21 million paid subscribers.

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

The Financial Institutions group provides customers with secure access to open application programming interfaces (“APIs”), end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Yodlee also enables customers to develop their own applications through its open APIs, which deliver secure data, money movement solutions, and other functionality. FinApps can be subscribed to individually or in combinations that include personal financial management, wealth management, card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, card, lenders, and other financial services sectors. These FinApps help consumers and small businesses simplify and manage their finances, review their financial accounts, track their spending, calculate their net worth, and perform a variety of other activities. For example, Yodlee’s Expense FinApp helps consumers track their spending, and a Payroll FinApp from a third party helps small businesses process their payroll. The suite of reports is designed to supplement traditional credit reports by utilizing consumer permissioned aggregated data from over 15,500 sources, including banking, investment, loan, and credit card information.

The Yodlee Interactive group enables customers to develop new applications and enhance existing solutions. These customers operate in a number of sub-vertical markets, including wealth management, personal financial management, small business accounting, small business lending and authentication. They use the Envestnet | Yodlee platform to build solutions that leverage our open APIs and access to a large end user base. In addition to aggregated transaction-level account data elements, we provide YI customers with secure access to account verification, money movement and risk assessment tools via our APIs. We play a critical role in transferring innovation from financial technology innovators to financial institutions. For example, YI customers use Yodlee applications to provide working capital to small businesses online; personalized financial management, planning and advisory services; e-commerce payment solutions; and online accounting systems for small businesses. We provide access to our solutions across multiple channels, including web, tablet and mobile.

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

Envestnet Analytics provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. These tools empower financial services firms to extract key business insights to run their business better and provide timely and focused support to advisors.

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

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

Operational Highlights

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 14% from $82,871 in the three months ended March 31, 2016 to $94,162 in the three months ended March 31, 2017. Subscription and licensing revenues increased 33% from $43,620 in the three months ended March 31, 2016 to $57,910 in the three months ended March 31, 2017. Total revenues, which include professional service and other fees, increased 20% from $131,821 in the three months ended March 31, 2016 to $157,786 in the three months ended March 31, 2017. The increase in total revenues was a result of the positive effects of new account growth and positive net flows of AUM/AUA as well as an increase in revenues related to Envestnet | Yodlee totaling $7,837.

Table of Contents

The net loss attributable to Envestnet, Inc. for the three months ended March 31, 2017 was $13,135, or $0.30 per diluted share, compared to net loss attributable to Envestnet, Inc. of $10,993 or $0.26 per diluted share for the three months ended March 31, 2016.

Adjusted revenues for the three months ended March 31, 2017 was $157,839, an increase of 20% from $132,032 in the prior year period. Adjusted EBITDA for the three months ended March 31, 2017 was $25,838, an increase of 35% from $19,193 in the prior year period. Adjusted net income for the three months ended March 31, 2017 was $11,517, or $0.25 per diluted share, compared to adjusted net income of $7,784, or $0.18 per diluted share in the prior year period.

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

Results of Operations

Three months ended March 31, 2017 compared to three months March 31, 2016


	Three Months Ended
	March 31,
	2017		2016			Percent Change
		(in thousands)
Revenues:
Assets under management or administration	$	94,162		$	82,871	14	%
Subscription and licensing		57,910			43,620	33	%
Professional services and other		5,714			5,330	7	%
Total revenues		157,786			131,821	20	%
Operating expenses:
Cost of revenues		49,226			40,158	23	%
Compensation and benefits		65,532			62,616	5	%
General and administration		30,547			25,727	19	%
Depreciation and amortization		15,835			16,080	(2)	%
Total operating expenses		161,140			144,581	11	%
Loss from operations		(3,354)			(12,760)	(74)	%
Other expense, net		(5,483)			(3,949)	39	%
Loss before income tax provision (benefit)		(8,837)			(16,709)	(47)	%
Income tax provision (benefit)		4,298			(5,716)	*
Net loss		(13,135)			(10,993)	19	%
Add: Net loss attributable to non-controlling interest		—			—	—	%
Net loss attributable to Envestnet, Inc.	$	(13,135)		$	(10,993)	19	%

*Not meaningful.

Revenues

Total revenues increased 20% from $131,821 in the three months ended March 31, 2016 to $157,786 in the three months ended March 31, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $14,290. Revenues from AUM/A decreased as a percentage of total revenues from 63% to 60% in the three months ended March 31, 2016 and 2017, respectively, primarily as the increase in AUM/A related revenue was lower than the increase in revenues from subscription and licensing.

Assets under management or administration

Revenues earned from AUM/AUA increased 14% from $82,871 in the three months ended March 31, 2016 to $94,162 in the three months ended March 31, 2017. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2017, relative to the corresponding period in 2016. In the first quarter of 2017, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during 2016.

Table of Contents

The number of financial advisors with AUM or AUA on our technology platforms increased from 35,718 as of March 31, 2016 to 36,985 as of March 31, 2017 and the number of AUM or AUA client accounts increased from approximately 1,400,000 as of March 31, 2016 to approximately 1,600,000 as of March 31, 2017.

Subscription and licensing

Subscription and licensing revenues increased 33% from $43,620 in the three months ended March 31, 2016 to $57,910 in the three months ended March 31, 2017. This increase was primarily due to an increase in Envestnet related revenue of $3,233 and an increase in Envestnet | Tamarac related revenue of $3,428 and Envestnet | Yodlee contributing an additional $7,628. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee revenue is primarily due to an increase in revenue from existing customers of $2,589, new customers of $2,107 and Wheelhouse related revenue of $748.

Professional services and other

Professional services and other revenues increased 7% from $5,330 in the three months ended March 31, 2016 to $5,714 in the three months ended March 31, 2017. This increase was primarily due to an increase in Envestnet | Tamarac related revenue of $308 and Envestnet | Yodlee contributing an additional $209. The increase in Envestnet and Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients. The increase in Envestnet | Yodlee is primarily due to increased professional services revenue from data solutions.

Cost of revenues

Cost of revenues increased 23% from $40,158 in the three months ended March 31, 2016 to $49,226 in the three months ended March 31, 2017, primarily due to a corresponding increase in revenues from AUM or AUA, the mix of such revenues from AUM or AUA, and an increase in cost of revenues associated with subscription and licensing revenues. As a percentage of total revenues, cost of revenues increased from 30% in the three months ended March 31, 2016 to 31% in the three months ended March 31, 2017.

Compensation and benefits

Compensation and benefits increased 5% from $62,616 in the three months ended March 31, 2016 to $65,532 in the three months ended March 31, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $7,180, primarily a result of an increase in headcount to support organic growth, as well as increases in headcount related to the FinaConnect and Wheelhouse acquisitions. The increase in salaries, benefits and related payroll taxes was offset by a decrease in stock-based compensation expense of $4,157. As a percentage of total revenues, compensation and benefits decreased from 48% in the three months ended March 31, 2016 to 42% in the three months ended March 31, 2017. The decrease in the compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.

General and administration

General and administration expenses increased 19% from $25,727 in the three months ended March 31, 2016 to $30,547 in the three months ended March 31, 2017, primarily due to increases in audit related services of $2,252, marketing of $1,259, professional and legal fees of $580, and occupancy costs of $1,029. As a percentage of total revenues, general and administration expenses decreased from 20% in the three months ended March 31, 2016 to 19% in the three months ended March 31, 2017.

Depreciation and amortization

Depreciation and amortization expense decreased 2% from $16,080 in the three months ended March 31, 2016 to $15,835 in the three months ended March 31, 2017, primarily due to a decrease in intangible asset amortization of $1,341 offset by an increase in depreciation of $1,096. As a percentage of total revenues, depreciation and amortization expense decreased from 12% in the three months ended March 31, 2016 to 10% in the three months ended March 31, 2017.

Other expense, net

Other expense, net includes an increase in interest expense of $844 primarily as a result of an increase in debt issuance cost amortization.

Table of Contents

Income tax provision (benefit)


	Three Months Ended
	March 31,
	2017			2016
Loss before income tax provision (benefit)	$	(8,837)		$	(16,709)
Income tax provision (benefit)		4,298			(5,716)
Effective tax rate		(48.6)	%		34.2	%

For the three months ended March 31, 2017, our effective tax rate differs from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a result of the valuation allowance on domestic deferreds, compared to the book loss in 2016 with the absence of a valuation allowance.

For the three months ended March 31, 2016, our effective tax rate differs from the statutory rate primarily due to various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.

Segments

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

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

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

The following table presents income (loss) by segment:


	Three Months Ended
	March 31,
	2017		2016
Envestnet	$	13,511	$	9,574
Envestnet \| Yodlee		(7,708)		(14,041)
Total segment income (loss) from operations		5,803		(4,467)
Nonsegment operating expenses		(9,157)		(8,293)
Other expense, net		(5,483)		(3,949)
Consolidated loss before income taxes (benefit)		(8,837)		(16,709)
Income tax provision (benefit)		4,298		(5,716)
Consolidated net loss		(13,135)		(10,993)
Add: Net loss attributable to non-controlling interest		—		—
Consolidated net loss attributable to Envestnet, Inc.	$	(13,135)	$	(10,993)

Table of Contents

Envestnet

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


	Three Months Ended
	March 31,
	2017		2016		Percent Change
	(in thousands)
Revenues:
Assets under management or administration	$	94,162	$	82,871	14	%
Subscription and licensing		25,237		18,576	36	%
Professional services and other		1,919		1,743	10	%
Total revenues		121,318		103,190	18	%

Operating expenses:
Cost of revenues		46,071		38,353	20	%
Compensation and benefits		39,478		35,116	12	%
General and administration		15,837		14,082	12	%
Depreciation and amortization		6,421		6,065	6	%
Total operating expenses		107,807		93,616	15	%
Income from operations	$	13,511	$	9,574	41	%

Three months ended March 31, 2017 compared to three months March 31, 2016 for the Envestnet segment

Revenues

Total revenues increased 18% from $103,190 in the three months ended March 31, 2016 to $121,318 in the three months ended March 31, 2017. The increase was primarily due to an increase in revenues from AUM/A of $11,291 and an increase in revenues from subscription and licensing of $6,661. Revenues from AUM/A were 80% and 78% of total revenues in the three months ended March 31, 2016 and 2017, respectively.

Assets under management or administration

Subscription and licensing

Subscription and licensing revenues increased 36% from $18,576 in the three months ended March 31, 2016 to $25,237 in the three months ended March 31, 2017, primarily due to an increase in Envestnet related revenue of $3,233 and an increase in Envestnet | Tamarac related revenue of $3,428. The increase in Envestnet and Envestnet | Tamarac revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.

Professional services and other

Professional services and other revenues increased 10% from $1,743 in the three months ended March 31, 2016 to $1,919 in the three months ended March 31, 2017, primarily due to an increase in Envestnet | Tamarac professional services related revenue of $308. The increase in Envestnet | Tamarac professional service revenue was a result of an increase in implementation revenue from onboarding new clients.

Table of Contents

Cost of revenues

Cost of revenues increased 20% from $38,353 in the three months ended March 31, 2016 to $46,071 in the three months ended March 31, 2017, primarily due to the corresponding increase in revenues from AUM or AUA, and the mix of such revenues. As a percentage of total revenues, cost of revenues increased from 37% in the three months ended March 31, 2016 to 38% in the three months ended March 31, 2017.

Compensation and benefits

Compensation and benefits increased 12% from $35,116 in the three months ended March 31, 2016 to $39,478 in the three months ended March 31, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $3,286, primarily a result of an increase in headcount to support organic growth as well as increases in headcount related to the FinaConnect acquisition. An increase in non-cash compensation expense of $459 also contributed to the increase in compensation and benefits. As a percentage of total revenues, compensation and benefits decreased from 34% in the three months ended March 31, 2016 to 33% in the three months ended March 31, 2017.

General and administration

General and administration expenses increased 12% from $14,082 in the three months ended March 31, 2016 to $15,837 in the three months ended March 31, 2017, primarily due to increases in sales tax expense of $749, marketing expenses of $682, occupancy costs of $634, and external data and research services expenses of $480, offset by a decrease in website and systems costs of $1,076. As a percentage of total revenues, general and administration expenses decreased from 14% in the three months ended March 31, 2016 to 13% in the three months ended March 31, 2017.

Depreciation and amortization

Depreciation and amortization expense increased 6% from $6,065 in the three months ended March 31, 2016 to $6,421 in the three months ended March 31, 2017, primarily due to an increase in depreciation of $869 offset by a decrease in amortization of $513. As a percentage of total revenues, depreciation and amortization expense decreased from 6% in the three months ended March 31, 2016 to 5% in the three months ended March 31, 2017.

Envestnet | Yodlee

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


	Three Months Ended
	March 31,
	2017		2016		Percent Change
	(in thousands)
Revenues:
Subscription and licensing	$	32,673	$	25,045	30	%
Professional services and other		3,795		3,586	6	%
Total revenues		36,468		28,631	27	%

Operating expenses:
Cost of revenues		3,155		1,806	75	%
Compensation and benefits		23,250		23,641	(2)	%
General and administration		8,357		7,210	16	%
Depreciation and amortization		9,414		10,015	(6)	%
Total operating expenses		44,176		42,672	4	%
Loss from operations	$	(7,708)	$	(14,041)	(45)	%

Table of Contents

Three months ended March 31, 2017 compared to three months ended March 31, 2016 for the Envestnet | Yodlee segment

Revenues

Total revenues increased 27% from $28,631 in the three months ended March 31, 2016 to $36,468 in the three months ended March 31, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $7,628. Revenues from professional services and other were 13% and 10% of total revenues in the three months ended March 31, 2016 and 2017, respectively.

Subscription and licensing

Subscription and licensing revenues increased 30% from $25,045 in the three months ended March 31, 2016 to $32,673 in the three months ended March 31, 2017, primarily due to an increase in revenue from existing customers of $2,589, new customers of $2,107 and Wheelhouse related revenue of $748.

Professional services and other

Professional services and other revenues increased 6% from $3,586 in the three months ended March 31, 2016 to $3,795 in the three months ended March 31, 2017, primarily due to increased professional services revenue from data solutions.

Cost of revenues

Cost of revenues increased 75% from $1,806 in the three months ended March 31, 2016 to $3,155 in the three months ended March 31, 2017, primarily due to an increase in third party consulting and professional services of $864 and hosting and payment processing services of $483 to support our overall revenue growth. As a percentage of total revenues, cost of revenues increased from 6% in the three months ended March 31, 2016 to 9% in the three months ended March 31, 2017.

Compensation and benefits

Compensation and benefits decreased 2% from $23,641 in the three months ended March 31, 2016 to $23,250 in the three months ended March 31, 2017, primarily due to a decrease in non-cash compensation expense of $3,407 offset by an increase in salaries, incentive compensation, benefits and related payroll taxes of $3,135, as a result of increased headcount to support organic growth and an increase related to the Wheelhouse acquisition. As a percentage of total revenues, compensation and benefits decreased from 83% in the three months ended March 31, 2016 to 64% in the three months ended March 31, 2017.

General and administration

General and administration expenses increased 16% from $7,210 in the three months ended March 31, 2016 to $8,357 in the three months ended March 31, 2017, primarily due to increases in software purchase and maintenance of $525, legal expense of $478, employee travel expenses of $433, and occupancy cost of $397, offset by a decrease in communication and research costs of $930. As a percentage of total revenues, general and administration expenses were 23% and 25% for the three months ended March 31, 2017 and 2016, respectively. As a percentage of total revenues, general and administration expenses decreased from 25% in the three months ended March 31, 2016 to 23% in the three months ended March 31, 2017.

Depreciation and amortization

Depreciation and amortization expense decreased 6% from $10,015 in the three months ended March 31, 2016 to $9,414 in the three months ended March 31, 2017, primarily due to decrease in intangible asset amortization of $1,122 related to the Yodlee acquisition. The decrease was offset by an increase of $271 in intangible asset amortization as a result of the Wheelhouse acquisition and an increase in depreciation expense of $190 primarily related to purchases of computers and equipment. As a percentage of total revenues, depreciation and amortization expense decreased from 35% in the three months ended March 31, 2016 to 26% in the three months ended March 31, 2017.

Table of Contents

Nonsegment

The following table presents nonsegment loss from operations:


	Three Months Ended
	March 31,
Operating expenses:	2017		2016		Percent Change
Cost of revenues	$	—	$	—	*	%
Compensation and benefits		2,804		3,851	(27)	%
General and administration		6,353		4,442	43	%
Depreciation and amortization		—		—	*	%
Total operating expenses		9,157		8,293	10	%
Loss from operations	$	(9,157)	$	(8,293)	10	%

*Not meaningful.

Compensation and benefits

Compensation and benefits decreased 27% from $3,851 in the three months ended March 31, 2016 to $2,804 in the three months ended March 31, 2017, primarily due to a decrease in non-cash compensation expense of $1,208, offset by increases in salaries, benefits and related payroll taxes of $487 and severance expense of $318.

General and administration

General and administration expenses increased 43% from $4,442 in the three months ended March 31, 2016 to $6,353 in the three months ended March 31, 2017, primarily due to increases in audit related services of $2,252, professional and legal fees of $474, marketing expense of $290, and employee travel expenses of $99, offset by a decrease in transaction costs of $676.

Non-GAAP Financial Measures

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

“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under U.S. GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑alone entities.

“Adjusted EBITDA” represents net loss before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration, income tax provision (benefit), depreciation and amortization, non‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non‑controlling interest.

“Adjusted net income” represents net loss before deferred revenue fair value adjustment, accretion on contingent consideration, non‑cash interest expense, non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fair‑market value adjustment on contingent consideration, litigation related expense, foreign currency and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and 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.

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

Table of Contents

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

As measures of operating performance;

For planning purposes, including the preparation of annual budgets;

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

To evaluate the effectiveness of our business strategies; and

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

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

We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measures because we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provide 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, non-income tax expense, restructuring charges and transaction costs, accretion on contingent consideration, fair market value adjustments on contingent consideration, severance, litigation related expense, pre-tax loss attributable to non-controlling interest, and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense from adjusted EBITDA and adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.

We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.

Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.

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

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

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

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

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

Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards we had net refunds of ($716) and ($1,513) for the three months ended March 31, 2017 and 2016, respectively. In the event

Table of Contents

that we begin to generate taxable income and our existing net operating loss carryforwards for federal and state income taxes have been fully utilized or have expired, income tax payments will be higher; and

Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share differently than we do, limiting their usefulness as a comparative measure.

Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted operating income, adjusted net income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable U.S. GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per share to net income and net income per share, the most directly comparable U.S. GAAP measure. Further, our management also reviews U.S. GAAP measures and evaluates individual measures that are not included in some or all of our non-U.S. GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.

The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:


	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Total revenues	$	157,786	$	131,821
Deferred revenue fair value adjustment		53		211
Adjusted revenues	$	157,839	$	132,032

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


	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Net loss	$	(13,135)	$	(10,993)
Add (deduct):
Deferred revenue fair value adjustment		53		211
Interest income		(21)		(14)
Interest expense		4,936		4,092
Accretion on contingent consideration and purchase liability		156		62
Income tax provision (benefit)		4,298		(5,716)
Depreciation and amortization		15,835		16,080
Non-cash compensation expense		7,458		11,491
Restructuring charges and transaction costs		3,378		2,329
Severance		325		627
Fair market value adjustment on contingent consideration		—		50
Litigation related expense		981		499
Foreign currency and related hedging activity		290		(162)
Non-income tax expense adjustment		749		—
Loss allocation from equity method investment		285		43
Loss attributable to non-controlling interest		250		594
Adjusted EBITDA	$	25,838	$	19,193

Table of Contents

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


	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Net loss	$	(13,135)	$	(10,993)
Income tax provision (benefit) (1)		4,298		(5,716)
Loss before income tax provision (benefit)		(8,837)		(16,709)
Add (deduct):
Deferred revenue fair value adjustment		53		211
Accretion on contingent consideration and purchase liability		156		62
Non-cash interest expense		3,522		2,013
Non-cash compensation expense		7,458		11,491
Restructuring charges and transaction costs		3,378		2,329
Severance		325		627
Amortization of acquired intangibles		10,585		11,926
Fair market value adjustment on contingent consideration		—		50
Litigation related expense		981		499
Foreign currency and related hedging activity		290		(162)
Non-income tax expense adjustment		749		—
Loss allocation from equity method investment		285		43
Loss attributable to non-controlling interest		250		594
Adjusted net income before income tax effect		19,195		12,974
Income tax effect (2)		(7,678)		(5,190)
Adjusted net income	$	11,517	$	7,784

Basic number of weighted-average shares outstanding		43,362,037		42,506,557
Effect of dilutive shares:
Options to purchase common stock		1,744,020		1,209,397
Unvested restricted stock units		582,641		76,357
Diluted number of weighted-average shares outstanding		45,688,698		43,792,311
Adjusted net income per share - diluted	$	0.25	$	0.18

(1)

For the three months ended March 31, 2017 and 2016, the effective tax (benefit) rate computed in accordance with US GAAP equaled 48.6% and (34.2%), respectively.

(2)

For both periods shown, an estimated normalized effective tax rate of 40% has been used to compute adjusted net income.

Note on Income Taxes: As of March 31, 2017 the Company had NOL carryforwards of $261,475 and $164,397 for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes the Company pays for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with U.S. GAAP, and from the normalized rate shown above.

Table of Contents

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


	For the Three Months Ended March 31, 2017
		Envestnet		Envestnet \| Yodlee		Non-Segment		Total
	(in thousands)
Revenues	$	121,318	$	36,468	$	—	$	157,786
Deferred revenue fair value adjustment		29		24		—		53
Adjusted revenues	$	121,347	$	36,492	$	—	$	157,839

Income (loss) from operations	$	13,511	$	(7,708)	$	(9,157)	$	(3,354)
Add (deduct):
Deferred revenue fair value adjustment		29		24		—		53
Accretion on contingent consideration and purchase liability		156		—		—		156
Depreciation and amortization		6,421		9,414		—		15,835
Non-cash compensation expense		3,674		2,741		1,043		7,458
Restructuring charges and transaction costs		95		—		3,283		3,378
Non-income tax expense adjustment		749		—		—		749
Severance		116		209		—		325
Fair market value adjustment on contingent consideration		—		—		—		—
Litigation related expense		—		981		—		981
Other loss		—		—		7		7
Loss attributable to non-controlling interest		250		—		—		250
Adjusted EBITDA	$	25,001	$	5,661	$	(4,824)	$	25,838


	For the Three Months Ended March 31, 2016
		Envestnet		Envestnet \| Yodlee		Non-Segment		Total
	(in thousands)
Revenues	$	103,190	$	28,631	$	—	$	131,821
Deferred revenue fair value adjustment		(11)		222		—		211
Adjusted revenues	$	103,179	$	28,853	$	—	$	132,032

Income (loss) from operations	$	9,574	$	(14,041)	$	(8,293)	$	(12,760)
Add (deduct):
Deferred revenue fair value adjustment		(11)		222		—		211
Accretion on contingent consideration and purchase liability		62		—		—		62
Depreciation and amortization		6,065		10,015		—		16,080
Non-cash compensation expense		3,215		6,025		2,251		11,491
Restructuring charges and transaction costs		87		4		2,238		2,329
Severance		—		309		318		627
Fair market value adjustment on contingent consideration		—		—		50		50
Litigation related expense		—		499		—		499
Other loss		—		—		10		10
Loss attributable to non-controlling interest		594		—		—		594
Adjusted EBITDA	$	19,586	$	3,033	$	(3,426)	$	19,193

Liquidity and Capital Resources

As of March 31, 2017, we had total cash and cash equivalents of $39,479 compared to $52,592 as of December 31, 2016. We plan to use existing cash as of March 31, 2017 and cash generated in the ongoing operations of our business to fund our current operations, capital expenditures, repay debt and for possible acquisitions or other strategic activity. 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 bank credit agreement to fund our ongoing operations or to fund potential acquisitions or other strategic activities.

Table of Contents

Cash Flows

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


	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Net cash provided by operating activities	$	9,001	$	13,516
Net cash used in investing activities		(6,098)		(22,824)
Net cash used in financing activities		(16,340)		(5,860)
Net decrease in cash and cash equivalents		(13,113)		(15,168)
Cash and cash equivalents, end of period		39,479		36,550

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2017 decreased by $4,515 compared to the same period in 2016, primarily due to a decrease in non-cash adjustments of $3,067 and net income of $2,142, offset by changes in operating assets and liabilities, net of acquisition of $1,018.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2017 decreased by $16,726 compared to the same period in 2016. The decrease is primarily a result of a decrease in cash disbursements for acquisitions of $18,125, offset by increases in purchase of property and equipment purchases of $2,196 and capitalization of internally developed software of $703.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2017 increased $10,480 compared to the same period in 2016. The change was primarily the result of increases in payments on Term Notes of $31,862 and payments of contingent consideration of $2,286, offset by an increase in proceeds from borrowings on revolving credit facility of $10,000 and a decrease in payments on our revolving credit facility of $13,000.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K include the discussion of estimates used for recognition of revenues, purchase accounting, internally developed software, non-cash stock-based compensation expense, and income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from the amounts reported.

Commitments and Off-Balance Sheet Arrangements

Purchase Obligations and Indemnifications

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

Table of Contents

Litigation

Leases

The Company rents office space under leases that expire at various dates through 2030. Future minimum lease commitments under these operating leases, as of March 31, 2017, were as follows:


Years ending December 31:
Remainder of 2017	$	9,814
2018		13,677
2019		14,151
2020		14,003
2021		13,193
Thereafter		52,568
Total	$	117,406

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk

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

Table of Contents

Foreign currency risk

The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. For the three months ended March 31, 2017, we estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of $855 to pre‑tax earnings and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of $1,046 to pre‑tax earnings.

A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly revenues into U.S. dollars. For the three months ended March 31, 2017, we estimate that a hypothetical 10% increase or decrease in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $690 to pre‑tax earnings.

Interest rate risk

We are subject to market risk from changes in interest rates. The Company has Term Notes and a revolving credit facility that bears interest at LIBOR plus an applicable margin between 1.50 percent and 3.25 percent. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the Amended and Restated Credit Agreement. As of March 31, 2017, there was $108,138 of Term Notes and $25,000 revolving credit amounts outstanding under the Amended and Restated Credit Agreement. The Company incurred interest expense of $2,610 for the three months ended March 31, 2017 related to the Amended and Restated Credit Agreement. A sensitivity analysis performed on the interest expense indicated that a hypothetical 0.25% increase or decrease in our interest rate would increase or decrease interest expense on an annual basis by approximately $355.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

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

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Management concluded there were material weaknesses as identified below in internal control over financial reporting as of March 31, 2017. The control deficiencies identified below were previously identified by management as of December 31, 2016.

The following control deficiencies were identified as material weaknesses:

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

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

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

Table of Contents

These control deficiencies create a reasonable possibility that a material misstatement to the condensed consolidated financial statements will not be prevented or detected on a timely basis. Due to the material weaknesses described above, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective as of March 31, 2017.

Remediation Plans

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

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

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

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

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

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

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

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

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

Changes in Internal Control Over Financial Reporting

During the three months ended March 31, 2017, there were no changes to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we are currently involved in the following matters:

In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had been infringing on seven of its U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer and counterclaims to Yodlee’s complaint. Plaid’s counterclaims sought declaratory judgment that Yodlee’s patents are not infringed, invalid, and unenforceable. In addition, Plaid’s counterclaims alleged an antitrust violation under federal law, unfair competition under California State Law and common law, and violation of the federal Lanham Act. The counterclaims sought seek unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. On June 24, 2016, Yodlee filed its answer to Plaid’s counterclaims in which it denied Plaid’s allegations and denied that Plaid is entitled to any relief. On January 31, 2017, Yodlee and Plaid executed a Settlement Agreement and Patent License which, among other terms, fully disposed of all claims and counterclaims in the above-described Delaware litigation. On February 3, 2016, the parties jointly filed a stipulation of dismissal of prejudice of all claims and counterclaims. On February 6, 2017, the Court formally closed the case.

In December 2015, Plaid filed petitions for Inter-Partes Review (“IPR”) before the Patent Office’s Board of Patent Trials and Appeals (“PTAB”) against the Yodlee patents that are the subject of the lawsuit described in the immediately preceding paragraph. In 2016, Plaid filed a series of Covered Business Method (“CBM”) Reviews against the Yodlee patents already at issue in the IPR Petitions and the litigation described above. As part of the January 31, 2017 Settlement Agreement and Patent License, Yodlee and Plaid submitted joint requests for the PTAB to terminate all of the pending IPR and CBM proceedings and the PTAB issued an order on February 8, 2017 terminating all of the pending IPR and CBM proceedings.

In January 2017, Plaid requested an Ex Parte re-examination on one of Yodlee’s patents with the U.S. Patent Office (the “USPTO”). On January 26, 2017, the USPTO determined that a substantial new question of patentability and granted the request for re-examination. On February 8, 2017, Plaid filed notice with the Patent Office stating that the related litigation has been resolved and that Plaid does not intend to participate further in the reexamination proceedings. The USPTO may continue the reexamination without Plaid’s participation. On March 27, 2017, the Company filed a Patent Owner’s Statement with the USPTO addressing the grounds in the Re-examination. In response to that statement, the Patent Office may either dismiss the re-examination or issue a first office action rejecting one or more of the claims of the patent. At that point, Yodlee will be permitted another response. As of April 20, 2017, the USPTO had not responded to that statement.

Item 1A. Risk Factors

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our 2016 Form 10-K, when making investment decisions regarding our securities. The risk factors that were disclosed in our 2016 Form 10-K have not materially changed since the date our 2016 Form 10-K was filed.

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


					Maximum number (or
				Total number of	approximate dollar
				shares purchased	value) of shares
	Total number		Average	as part of publically	that may yet be
	of shares		price paid	announced plans	purchased under the
	purchased		per share	or programs	plans or programs
January 1, 2017 through January 31, 2017	8,690	$	36.80	—	1,956,390
February 1, 2017 through February 28, 2017	135,478		38.27	—	1,956,390
March 1, 2017 through March 31, 2017	32,859		34.54	—	1,956,390

On February 25, 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be

Table of Contents

determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other forward transactions or otherwise, all in compliance with applicable laws and other restrictions. As of March 31, 2017, 1,956,390 of shares could still be purchased under this program.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.Exhibits

(a) Exhibits

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

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10, 2017.

	ENVESTNET, INC.

	By:	/s/ Judson Bergman
		Judson Bergman
		Chairman and Chief Executive Officer
		Principal Executive Officer

	By:	/s/ Peter H. D’Arrigo
		Peter H. D’Arrigo
		Chief Financial Officer
		Principal Financial Officer

	By:	/s/ Matthew J. Majoros
		Matthew J. Majoros
		Senior Vice President, Financial Reporting
		Principal Accounting Officer

Table of Contents

INDEX TO EXHIBITS

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(1)		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document *
101.SCH		XBRL Taxonomy Extension Schema Document *
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB		XBRL Taxonomy Extension Label Linkbase Document *
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document *

(1)

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

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