UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
| | |
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended | December 31, 20142017 |
OR
|
| | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to | |
Commission File Number 000-25131
BLUCORA, INC.
(Exact name of registrant as specified in its charter)
|
| | |
| Delaware | | 91-1718107 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
10900 NE 8th Street, Suite 800, Bellevue, Washington 980046333 State Hwy 161, 6th Floor, Irving, Texas 75038
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code:
(425) 201-6100(972) 870-6000
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
| Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $0.0001 per share | | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oý
No ýo
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | |
| Large accelerated filer | ý | Accelerated filer | o |
| Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
| | | Emerging growth company | | (Do not check if a smaller reporting company) | | o |
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 o No ý
The aggregate market value of the Common Stock held by non-affiliates of the registrant outstanding as of June 30, 2014,2017, based upon the closing price of Common Stock on June 30, 20142017 as reported on the NASDAQ Global Select Market, was $735.3$937.8 million. Common Stock held by each officer and director (or his or her affiliate) has been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 20, 2015, 41,044,04821, 2018, 46,710,439 shares of the registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the definitive proxy statement to be filed by the registrant in connection with the 20152018 Annual Meeting of Stockholders (the “Proxy Statement”).
TABLE OF CONTENTS
|
| | |
| | Page |
| | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | | |
| | |
| | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| | | |
| | |
| | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| | | |
| | |
| | |
| Item 15. | | |
| | |
| |
2CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue,” and similar expressions identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. These forward-looking statements include, but are not limited to, statements regarding projections of regarding:
our future financial performance; trends in our businesses;ability to effectively implement our future business plans and growth strategy, including our plansability to expand, develop, or acquire particular operations or businesses;achieve the anticipated benefits of our Strategic Transformation (as defined below);
our ability to effectively compete within our industry;
our ability to attract and retain customers, as well as our ability to provide strong customer service;
our future capital requirements and the sufficiencyavailability of financing, if necessary;
our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
our ability to generate strong investment performance for our customers and the impact of the financial markets on our customers’ portfolios;
political and economic conditions and events that directly or indirectly impact the wealth management and tax preparation industries;
our ability to attract and retain productive financial advisors;
our ability to respond to rapid technological changes, including our ability successfully release new products and services or improve upon existing products and services;
our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;
our ability to comply with regulations applicable to the wealth management and tax preparation industries, including increased costs associated with new or changing regulations;
our ability to successfully transition our wealth management business to a new clearing platform and our expectations concerning the benefits that may be derived therefrom;
risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses and computer hacking attacks;
our ability to comply with laws and regulations regarding privacy and protection of user data;
our ability to maintain our relationships with third party partners, providers, suppliers, vendors, distributors, contractors, financial institutions and licensing partners;
our beliefs and expectations regarding the seasonality of our cash balancesbusiness;
risks associated with litigation;
our ability to attract and cash generated from operating, investing,retain qualified employees;
our assessments and financing activities forestimates that determine our future liquidityeffective tax rate;
the impact of new or changing tax legislation on our business and capital resource needs.our ability to attract and retain customers;
our ability to develop, establish and maintain strong brands;
our ability to protect our intellectual property and the impact of any claim that we have infringed on the intellectual property rights of others; and
our ability to effectively integrate companies or assets that we acquire.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Item 1A, “"Risk Factors,”" and elsewhere in this report. You should not rely on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We do not undertake any obligation to update any forward-looking statement to reflect new information, events, or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.events, except as required by law.
PART I
ITEM 1. Business
General Overview
Blucora, Inc. (the “(referred to throughout this report as Company“Blucora,” ,the ” “"Company", "we," "us," Blucoraor, "our"” or “we”) is a Delaware corporation that was founded in 1996, and, incorporatedthrough organic growth and strategic acquisitions, we have become a leading provider of technology-enabled financial solutions to consumers, small business owners, and tax professionals. Our products and services in wealth management and tax preparation that we offer through HDV Holdings, Inc. and its subsidiaries (“HD Vest”) and TaxAct, Inc. and its subsidiary (“TaxAct”), respectively, help consumers to manage their financial lives.
HD Vest provides financial advisors, who affiliate with HD Vest’s registered broker-dealer, investment adviser and/or insurance subsidiaries as independent contractors, an integrated, open platform that includes a broad variety of products offered through our brokerage, investment advisory, and insurance services to assist in making each financial advisor a financial service center for his/her clients. We regularly review the commissions and fees we charge for these products and services in light of the evolving regulatory and competitive environment and changes in client preferences and needs. We do not offer any proprietary products. As of December 31, 2017, approximately 4,000 advisors with branch offices in all 50 states utilized our HD Vest platform and supported approximately $44.0 billion of assets for almost 350,000 clients. HD Vest generates revenue primarily through securities and insurance commissions, quarterly investment advisory fees based on assets under management, and other fees.
TaxAct provides affordable digital do-it-yourself (“DDIY”) tax preparation solutions for consumers and small business owners, and preparation software for tax professionals. During the year ended December 31, 2017, TaxAct powered approximately 4,500,000 consumer e-files and another 1,800,000 e-files through the 21,000 tax professionals who used TaxAct to prepare and file their taxes or those of their clients. TaxAct generates revenue primarily through its online service at www.TaxAct.com. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state of Delaware. Our principal corporate office is located in Bellevue, Washington. jurisdictions, and Canada.
Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
Our History
Blucora Inc. operates a portfolio of Internet businesses. Our Search and Content business (formerly known as our Search business) operates through ourbegan in 1996 under the name InfoSpace, LLC subsidiaryInc. (“InfoSpace”). Over the next two decades, InfoSpace operated a number of digital businesses in search, directory, online commerce, media, and providesmobile infrastructure markets, with operations since 2008 focusing on internet search services and content (our “Search and Content” business).
In January 2012, InfoSpace acquired TaxAct, a leading provider of digital tax preparation solutions for consumers, small business owners, and tax professionals (our “Tax Preparation” business). In connection with this acquisition, InfoSpace changed its name to usersBlucora, Inc. in June 2012.
In August 2013, Blucora acquired Monoprice, Inc. (“Monoprice”), an e-commerce company that sold self-branded electronics and accessories to both consumers and businesses (our “E-Commerce” business).
In July 2015, Blucora acquired SimpleTax Software Inc. (“SimpleTax”), a provider of online tax preparation services for individuals in Canada.
For further detail on these acquisitions, see "Note 3: Business Combinations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
On October 14, 2015, we announced our ownedplans to continue to operate our TaxAct subsidiary and operatedto acquire HD Vest in order to focus on the technology-enabled financial solutions market (the “Strategic Transformation”). The acquisition of HD Vest closed on December 31, 2015. Through its registered broker-dealer, registered investment adviser, and distribution partners’ web properties,insurance agency subsidiaries, HD Vest operates the largest U.S. tax-professional-oriented independent broker-dealer, providing wealth management solutions to financial advisors and their clients nationwide (our “Wealth Management” business). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as well as online content. Oura holding company for our various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (a registered broker-dealer), HD Vest Advisory Services, Inc. (a registered investment adviser), and HD Vest Insurance Agency, LLC (three insurance agencies domiciled in Texas, Massachusetts, and Montana). The Tax Preparation business consists of the operations of TaxACT,TaxAct, Inc. and its subsidiary (“TaxACT"TaxAct"”), which we acquired on January 31, 2012, and provides onlinedigital tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. Our E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”), which we acquired on August 22, 2013, and sells self-branded electronics and accessories to both consumers and businesses.
Followingpreparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the acquisitions"Tax Preparation business" or the "Tax Preparation segment").
As part of TaxACT and Monoprice,the October 14, 2015 announcement, we determined that we have three reportable segments:also stated our plans to divest the Search and Content (formerly known as Search), Tax Preparation, and E-Commerce. OurE-Commerce businesses. We completed both divestitures in 2016. Specifically, on August 9, 2016, we closed the sale of the Search and Content business to OpenMail LLC (“OpenMail”). On November 17, 2016, we closed the sale of the E-Commerce business to YFC-Boneagle Electric Co., Ltd (“YFC”). The results of operations of the Search and Content and E-Commerce businesses have been classified as discontinued operations for all periods presented in this report. See "Note 4: Discontinued Operations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information.
On October 27, 2016, as part of the Strategic Transformation and “One Company” operating model, Blucora announced plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate the corporate headquarters were intended to drive efficiencies and improve operational effectiveness. See "Note 5: Restructuring" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information. The restructuring is now substantially complete and it is expected to be completed by early 2018.
We have two reportable segments: the Wealth Management segment, which is comprised of the InfoSpaceHD Vest business, ourand the Tax Preparation segment, which is comprised of the TaxACT business, and our E-Commerce segment is the MonopriceTaxAct business. Unless the context indicates otherwise, we use the term “Search and Content” to represent the InfoSpace business, we use the term “Tax Preparation” to represent the TaxACT business, and we use the term “E-Commerce” to represent the Monoprice business.
See "Note"Note 2: Summary of Significant Accounting Policies"Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information on our Searchthe Wealth Management and Content, Tax Preparation and E-Commerce businesses and revenues.their revenue. See "Note 11:"Note 13: Segment Information"Information" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for information regarding revenues,revenue, operating income, and assets for eachour Wealth Management and Tax Preparation businesses.
Business Overview
Wealth Management Business
HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. Unlike traditional independent broker-dealers and/or investment advisers whose client relationships are limited to providing investment advice, most HD Vest advisors have long-standing tax advisory relationships that anchor their wealth management businesses. We believe that tax and accounting professionals, with their existing client relationships and in-depth knowledge of their clients’ financial situations, have a competitive advantage and are better positioned than competitors to provide tailored financial solutions that enable clients to meet their goals. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest has designed a learning management system for its advisors, branded VestU™, with curriculum that introduces advisors to the investment business and helps them build their practices. The comprehensive training curriculum is administered through numerous outlets, including an annual three-day national sales conference, approximately 600 specialized local training events held annually, and on-demand learning paths.
HD Vest's business model provides an open-architecture investment platform and technology tools to help financial advisors identify investment opportunities for their clients, while the long-standing tax advisory relationships provide a large client base of possible investment clients. This results in an experienced and stable network of financial advisors, who have multiple revenue-generating options to diversify their earnings sources, and have access to HD Vest's innovative Mentor program and Chapter meetings. HD Vest also has a highly experienced home office team that is focused on solutions tailored to the advisor's practice. The home office team provides marketing, practice management, insurance and annuity, wealth management, compliance, succession planning, and other support to our segments.advisors.
Tax Preparation Business
TaxAct, a top-three provider of digital tax preparation solutions, based upon the number of e-files made in 2017, has leveraged its strong brand, comprehensive suite of tax preparation solutions, and proven online lead generation capabilities to enable the filing of more than 64 million federal consumer tax returns in the U.S. and Canada since 2000. TaxAct operates as the value player in its market, with a mission to empower people to navigate the complexities of tax preparation with ease and accuracy at a fair price.
TaxAct's offerings come with a price lock guarantee, whereby the price at the start of the tax return filing process is the price when the return is filed, rather than pricing the offering at the time that the tax return is filed. We believe this price lock guarantee ensures price transparency and differentiates TaxAct from its competitors. TaxAct also provides an accuracy guarantee, where, if an error in our software results in a smaller refund or larger tax liability than the customer would receive
Searchusing the same data with another tax preparation product, we will pay to the customer the difference in the refund or liability (up to $100,000) and Content Business
Our InfoSpace business primarily offers search services to users of our owned and operated and distribution partners' web properties, as well as online content. These search services generally involverefund the generation and display of a set of hyperlinks to websites deemed relevant to search queries entered by users, predominantly from desktop and laptop computers.applicable software fees the customer paid us. In addition to these algorithmic search results, paid listings are also generally displayed in response to search queries. Search and contentcore offerings, TaxAct offers ancillary services provided through our owned and operated properties include services through websites such as Dogpile.com, WebCrawler.com, HowStuffWorks.com (acquired May 30, 2014, see below),refund payment transfer, audit defense, stored value cards, and retirement investment accounts through HD Vest, and a marketplace for customers to take advantage of personalized tax and financial savings opportunities through third party web pagesproduct providers. TaxAct has an established reputation that we operate. Search services providedbelieve is attractive to our distribution partners include services to a network of approximately 100 distribution partners throughcustomers.
We had three offerings for consumers for tax year 2016, which is the respective web properties of those distribution partners, which are generally private-labeledbasis for TaxAct's 2017 operating results:
A "free" federal and customized to address the unique requirements of each distribution partner.
Our Search and Content revenue primarily consists of advertising revenue generated through end-users clicking on paid listings included in the search results display, as well as from advertisements appearing on our HowStuffWorks.com website. The paid listings, as well as algorithmic search results, are primarily supplied by Google and Yahoo!, whom we refer to as our "Search Customers." When a user submits a search query through one of our owned and operated or distribution partner sites and clicks on a paid listing displayed in response to the query, the Search Customer bills the advertiserstate edition that purchased the paid listing directly and shares a portion of its related paid listing fee with us. If the paid listing click occurred on one of our distribution partners' properties, we pay a significant share of our revenue to the distribution partner. Revenue is recognized in the period in which such clicks on paid listings occur and is based on the amounts earned by and ultimately remitted to us by our Search Customers.handled simple returns;
Our main Search Customer agreements are with Google and Yahoo!. We derive a significant portion of our search revenue from Google, and we expect this concentration to continue in the foreseeable future and at levelsA "plus" offering that are substantially similar to 2014. Google accounted for approximately 80% of our total Search and Content revenues in 2014. If either of these Search Customers reduce or eliminate the services provided to us or our distribution partners, or if either is unwilling to pay amounts owed to us, it could materially harm our business and financial results. Our agreement with Yahoo! runs through December 31, 2015, and our agreement with Google runs through March 31, 2017 and may be extended for an additional year upon the mutual agreement of both parties. Both Google and Yahoo! have requirements and guidelines regarding, and reserve certain rights of approval over, the use and distribution of their respective search products and services. Both Google and Yahoo! may modify certain requirements and guidelines of their agreements with us at their discretion, and even when unmodified, we occasionally disagree with our Search Customers on interpretations of these requirements and guidelines. If Google or Yahoo! believe that we or our search distribution partners have failed to meet the requirements and guidelines of the Search Customer agreements, they may suspend or terminate our or our distribution partners’ use and distribution of their search products and services, with or without notice, and in the event of certain violations, may terminate their agreements with us. We and our distribution partners have limited rights to cure breaches of the requirements and guidelines.
Our partners for distribution of our online search services include software application providers, web portals, and internet service providers. Traffic from our largest distribution partners generates a significant percentage of our Search and Content revenue. In 2014, 36% of our Search and Content revenue was generated by traffic from the web properties operated by our top five distribution partners, and this percentage was 33% in 2013 and 47% in 2012. Our agreements with our distribution partners typically renew annually. In addition, our agreements with some of our distribution partners are not exclusive, meaning that they have the right to shift some orcontained all of the search trafficbasic offering features in addition to tools to maximize credits and deductions, and enhanced reporting; and
A "premium" offering that they send to us to our competitors.
Our primary focus for the Search and Content business is on maximizing cash flow from our search services while redeploying resources in pursuit of new initiatives that capitalize on the assets and competenciescontained all of the organization. As discussedplus offering features in more detail in "Management's Discussionaddition to tools for self-employed individuals to maximize credits and Analysis of Financial Condition and Results of Operations" in Part II Item 7,deductions.
For our offerings, state returns can be filed for free for free simple filers, or through the Search and Contentseparately-sold state edition. We also had an offering for small business experienced significant volatility in 2014 due to a number of factors, with the result that its year-over-year financial performance declined materially. Although we expect that search services will continue to provide meaningful revenue and profit in the near term, we anticipate continued volatility. In response, we are making investments that we believe will better align with our Search Customers’ preferences in the short-term and will allow us to diversify our product and service offering in the long-term. These new investments are centered on growing the audience for our owned and operated sites, including HowStuffWorks.com, as well as third party web pages that we operate, by leveraging owned and licensed content to create unique and engaging user experiences.owners.
Tax Preparation Business
Our TaxACT business consists of an online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. TaxACT generates revenue primarily through its online service at www.taxact.com. The TaxACT business’s basic federal tax preparation online software service is "free for everyone," meaning that any taxpayer can use the services to e-file his or her federal income tax return without paying for upgraded services and may do so for every form that the IRS allows to be e-filed. This free offer differentiates TaxACT’s offerings from many of its competitors who limit their free software and/or services offerings to certain categories of customers or certain forms. The TaxACT business generates revenue from a percentage of these "free" users who purchase a state form or choose to upgrade for a fee to the Deluxe or Ultimate offering, which includes additional support, tools, or state forms in the case of the Ultimate offering. In addition, revenue is generated from the sale of ancillary services, which include, among other things, tax preparation support services, data archive services, bank services (including reloadable pre-paid debit card services), and additional e-filing services. TaxACT is the recognized value player in the digital do-it-yourself space, offering comparable software and/or services at a lower cost to the end user compared to larger competitors. This, coupled with its "free for everyone" offer, provides TaxACT a valuable marketing position. TaxACT’sTaxAct’s professional tax preparer software allows professional tax preparers to prepare and file individual and business returns for their clients. Revenue from professionalTaxAct offers flexible pricing and packaging options that help tax preparers historically has
constituted a relatively small percentage of the TaxACT business’s overall revenue and requires relatively modest incremental development costs asprofessionals save money by paying only for what they need. In addition, the professional tax preparer software is substantially similarincludes valuable features that tax professionals count on to maximize their efficiency and productivity, including the consumer-facing software and online service.option of entering data directly into tax forms, utilizing the question-and-answer interview method to enter data, or easily toggling between the two data entry methods.
Growth Strategy
Our primary focusevolving growth strategy for HD Vest and TaxAct includes participating in favorable industry trends and executing growth strategies that we believe will result in customer and advisor retention and growth beyond that of the broader markets in which we operate. Our approach is grounded on the belief that the best way to sustainably grow a business is to earn loyalty based on continuously delivering ever-greater value to target customers and clients.
Favorable Industry Trends
Wealth Management Industry Trends - We believe that HD Vest is and will be the beneficiary of several positive industry trends, including growth of investable assets driven by baby boomers’ retirement accounts, a continued migration to independent advisor channels, liquidity events and a continued shift toward household use of financial advisors.
Tax Preparation Industry Trends - TaxAct participates in the consumer DDIY tax preparation solutions market, which is the fastest growing segment in the tax preparation industry and is bolstered by a growing millennial population that continues to adopt technology-enabled financial solutions that drive value and ease in their everyday lives, and we believe that tax simplification will drive digital consumer growth.
Executing our Growth Strategies
Brand Differentiation - A key objective of our strategy is to differentiate our HD Vest and TaxAct brands. It is important that our advisors, their clients, and our customers clearly identify and connect with our brands for the TaxACT business is on enhancing tax preparationquality of products and services and software offerings to our end users, maintaining and adding tax preparation customers, and expanding and diversifying our tax preparation offerings and ancillary services.
E-Commerce Business
Our E-Commerce business, Monoprice, is an online retailer of self-branded electronics and accessories to both consumers and businesses. Monoprice offers its products for sale through the www.monoprice.com website, where the majority of our E-Commerce revenue is derived, and fulfills those orders from our warehouse in Rancho Cucamonga, California. We also sell our products through reseller and marketplace agreements. Monoprice has built a well-respected brand by delivering products with quality on par with well-known national brands, selling these products at prices far below the prices for those well-known brands, and providing top-tier service and rapid product delivery. The Monoprice website showcases 14 product categories and over 6,900 individual products. Monoprice has developed an efficient product cost structure that is enabled by a direct import supply chain solution that eliminates traditional layers of mark-ups imposed by intermediaries. Consumers are able to access and purchase products 24 hours a day from the convenience of a computer or a mobile device. Monoprice’s team of customer service representatives assists customers primarily by online chat or email. Nearly all sales are to customers located in the United States.
Our primary focus for the E-Commerce business is on expanding and diversifying our e-commerce offerings, maintaining and adding Monoprice.com customers, extending our sales channels through geographic expansion and other means, and building our brand recognition.
Business Strategy
In addition to the strategies for growth outlined above for each of our business segments, an important component of Blucora's strategy for future growth is to acquire new technology businesses. In the ordinary course of business, we are continuously engaged in various stages of diligence, discussion, and negotiation with acquisition targets, including companies and assets that complement our existing businesses,offer, as well as companiesour values. In 2017, we took initial steps in this effort, beginning in the tax season, and we expect to make additional investments over time. Additionally, we believe that the synergies between HD Vest and TaxAct will provide additional brand differentiation opportunities and strengthen our connection with our advisors, their clients, and our customers.
Innovate Continuously - As emerging technology and market trends change the way people manage their financial lives, our solutions also evolve. The retention and growth of our customer and advisor base are dependent, in part, upon our ability to deliver technology-enabled financial solutions that optimize user experience and capitalize on current technology, and provide innovations that integrate proven wealth management goals-based planning and portfolio management technology with tax planning and preparation technology.
Offer a Comprehensive Product Suite - The products and services offered by HD Vest and TaxAct constitute a comprehensive suite of financial solutions. We believe that continued expansion of financial solutions, whether proprietary or third party, will be a source of growth for each business. In addition, the combination of HD Vest and TaxAct provides meaningful cross-serving opportunities for both businesses, further contributing to customer and advisor retention and growth.
Continue to Provide Quality Customer Support, Education, and Training - A key element of our HD Vest business model is the ongoing education and training of tax professionals, which enables them to become financial advisors and effectively manage a growing wealth management practice. HD Vest provides these tax professionals with the resources and support to build confidence and competence, enabling them to grow assets that are unrelatedunder administration. The importance of quality customer support and education also flows through to our existing businesses. Potential acquisitions may be materialTaxAct business, where a seasoned tax support team provides support and education to our business, financial condition,consumers and results of operations.tax professionals.
Research and Development
Our wealth management and tax preparation services are delivered primarily via software and online platforms. Since the markets for software and online technology are characterized by rapid technological change, shifting customer needs and frequent new product introductions and enhancements, a continuous high level of investment is required to innovate and quickly develop new products and services as well as enhance existing offerings. Our product development efforts are becoming more important than ever as people and businesses are increasingly connected by technology and expect access to services at any place or time. Our research and development expenses were $13.3 million in 2017, $13.7 million in 2016 (which includes research and development by the HD Vest business beginning on January 1, 2016), and $4.8 million in 2015.
Seasonality
Our Tax Preparation business is highly seasonal, with a significant portion of our annual revenue for such services earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue. We anticipate that the seasonal nature of that part of the business will continue in the foreseeable future.
Competition
We face intense competition in all markets in which our businesses operate. Many of our competitors or potential competitors have substantially greater financial, technical, and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, better access to vendors, and more established relationships. Our competitors may be able to adopt more aggressive pricing policies, develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their products and services than we can. For our businesses to be successful, we must be competitive in the Wealth Management and Tax Preparation markets, as described in more detail below.
Wealth Management Competition
The wealth management industry is a highly competitive global industry. We and our financial advisors compete directly with a variety of financial institutions, including traditional wirehouses, independent broker-dealers, registered investment advisers, asset managers, banks and insurance companies, and direct distributors such as 1st Global and Cetera Financial Group, as well as larger broker-dealers such as Raymond James Financial. Mergers and acquisitions have resulted in consolidation in the wealth management industry. As a result, many of our competitors may have greater financial resources, broader and deeper distribution capabilities, and a more comprehensive offering of products and services. We and our financial advisors compete directly with those companies for the provision of products and services to clients, as well as for retention and hiring of financial advisors.
We believe that our competitive position in the wealth management industry is a function of our ability to enable our advisors to offer investment guidance in the context of their clients' tax situations and more specifically to:
offer high-quality portfolio investment options and competitive product pricing;
offer a differentiated value proposition (in terms of brand recognition, reputation, and financial advisor payouts) that is sufficient to recruit and retain financial advisors;
offer products that are attractive to financial advisors and their clients;
negotiate competitive compensation arrangements with third-parties, including vendors, suppliers, and product sponsors;
develop and react to new technology, services, and regulation in the financial services industry; and
put in place a sufficient support and service network required to support our financial advisors and clients.
Tax Preparation Competition
Our TaxAct business operates in a very competitive marketplace. There are many competing software products and online services. Intuit’s TurboTax and H&R Block's DDIY consumer products and services have a significant percentage of the software and online service market. Our TaxAct business must also compete with alternate methods of tax preparation such as storefront tax preparation services, which includes both local tax preparers and large chains such as H&R Block, Liberty Tax, and Jackson Hewitt, and it may also be subject to new market entrants who may take some of our market share. Finally, our TaxAct business faces the risk that state or federal taxing agencies will offer software or systems to provide direct access for individual filers that will reduce the need for TaxAct’s software and services.
We believe that our competitive position in the market for tax preparation software and services is essentiala function of our ability to:
differentiate our brand versus those of competitors;
offer competitive pricing;
continue to expandoffer high-quality, easy-to-use, and enhanceaccessible software and services that are compelling to consumers;
market the software and services in a cost effective way; and
offer ancillary services that are attractive to users, including enhanced tax and wealth management services through HD Vest.
Privacy and Security of Customer Information and Transactions
Our TaxAct business is subject to various federal, state and international laws and regulations and to financial institution and healthcare provider requirements relating to the privacy and security of the personal information of customers and employees. We are also subject to laws and regulations that apply to the Internet, behavioral tracking and advertising, mobile applications and messaging, telemarketing, email activities, data hosting and retention, financial and health information, and credit reporting. Additional laws in all of these areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which we can collect, use, host, store, or transmit the personal information and data of our customers or employees, communicate with our customers, and deliver products and services, or may significantly increase our compliance costs. As our business expands to new industry segments and new uses of data that are regulated for privacy and security, or to countries outside the United States that have strict data protections laws, our compliance requirements and costs will increase.
Through a privacy policy framework designed to be consistent with globally recognized privacy principles, we comply with United States federal and other country guidelines and practices to help ensure that customers and employees are aware of, and can control, how we use information about them. The TaxAct.com website and its online products have been certified by TRUSTe, an independent organization that operates a website and online product privacy certification program representing industry standard practices to address users’ and regulators’ concerns about online privacy. We also use privacy statements to provide notice to customers of our privacy practices, as well as provide them the opportunity to furnish instructions with respect to use of their personal information. We participate in industry groups whose purpose is to develop or shape industry best practices, and to influence public policy for privacy and security.
To address security concerns, we use security safeguards to help protect the systems and the information customers give to us from loss, misuse and unauthorized alteration. Whenever customers transmit sensitive information, such as credit card information or tax return data, through one of our websites or products, we use industry standards to encrypt the data as it is transmitted to us. We work to protect our systems from unauthorized internal or external access using numerous commercially available computer security products as well as internally developed security procedures and practices.
HD Vest’s subsidiaries are subject to privacy regulation under federal and state law, which has been, and will continue to be, an area of focus for regulators.
Governmental Regulation
Blucora is a publicly traded company that is subject to Securities and Exchange Commission (“SEC”) and NASDAQ Global Select Market rules and regulations regarding public disclosure, financial reporting, internal controls, and corporate governance. The adoption of the Sarbanes-Oxley Act of 2002, as well as the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), have significantly expanded the nature and scope of these rules and regulations. Our Wealth Management and Tax Preparation segments are subject to federal and state government requirements, including regulations related to consumer protection, user privacy, security, pricing, taxation, intellectual property, labor, advertising, broker-dealers, securities, investment advisers, asset management, insurance, listing standards, and product and services quality.
Our Wealth Management segment is subject to additional financial industry regulations and supervision, including by the SEC, the Financial Industry Regulatory Authority (“FINRA”), the Department of Labor (“DOL”), state securities and insurance regulators, and other regulatory authorities. Our Wealth Management subsidiary HD Vest Investment Securities, Inc. is a broker-dealer registered with the SEC, a member of FINRA, and a member of the Securities Investor Protection Corporation and the Depository Trust & Clearing Corporation. Broker-dealers and their representatives are subject to rules and regulations covering all aspects of the securities business, including sales and trading practices, use and safekeeping of clients’ funds and securities, capital adequacy, recordkeeping and reporting, the conduct of directors, officers, and employees, and general anti-fraud provisions. Broker-dealers and their representatives are also regulated by state securities administrators in those jurisdictions where they do business. Compliance with many of the rules and regulations applicable to us involves a number of risks, because rules and regulations frequently change and are subject to varying interpretations, among other reasons. Regulators make periodic examinations of our broker-dealer operations and review annual, monthly, and other reports on our operations and financial condition. Violations of rules and regulations governing a broker-dealer’s actions could result in censure, penalties and fines, the issuance of cease-and-desist orders, the restriction, suspension, or expulsion from the securities industry of such broker-dealer, its representatives or its officers or employees, or other similar adverse consequences.
Our Wealth Management subsidiary, HD Vest Advisory Services, Inc. is registered with the SEC as an investment adviser and is subject to the requirements of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and the regulations promulgated thereunder. Such requirements relate to, among other things, fiduciary duties to clients, advisory fees, maintaining an effective compliance program, solicitation arrangements, conflicts of interest, advertising, limitations on agency cross and principal transactions between the advisor and advisory clients, recordkeeping and reporting requirements, disclosure requirements, and general anti-fraud provisions. The SEC periodically examines our investment adviser operations and reviews annual, monthly, and other reports on our operations and financial condition. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and other federal securities laws, ranging from fines and censure to termination of an investment adviser’s registration. Investment adviser representatives also are subject to certain state securities laws and regulations. Failure to comply with the Advisers Act or other federal and state securities laws and regulations could result in investigations, sanctions, profit disgorgement, fines, or other similar adverse consequences.
Our Wealth Management subsidiaries offer certain products and services subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 4975 of the Internal Revenue Code (the “Code”), and to regulations promulgated under ERISA or the Code, insofar as they provide services with respect to plan clients, or otherwise deal with plan clients that are subject to ERISA or the Code. ERISA imposes certain duties on persons who are “fiduciaries” (as defined in Section 3(21) of ERISA) and prohibits certain transactions involving plans subject to ERISA and fiduciaries or other service providers to such plans. Non-compliance with these provisions may expose an ERISA fiduciary or other service provider to liability under ERISA, which may include monetary penalties as well as equitable remedies for the affected plan. Section 4975 of the Code prohibits certain transactions involving plans (as defined in Section 4975(e)(1), which includes individual retirement accounts and Keogh plans) and service providers, including fiduciaries, to such plans. Section 4975 imposes excise taxes for violations of these prohibitions.
In April 2016, the DOL adopted regulations (the “DOL fiduciary rule”) expanding the definition of who is a fiduciary under ERISA, and specifying how such fiduciaries must provide investment advice to account holders in ERISA plans, individual retirement accounts (“IRAs”), and certain other types of accounts described in the Code (collectively, “Covered Accounts”). The DOL fiduciary rule as currently drafted brings virtually all of the investment products and services HD Vest currently provides to IRA owners within the scope of ERISA and would require HD Vest to make significant changes to its policies, procedures and products with respect to Covered Accounts. In November 2017, however, the DOL formally delayed the effective date of key portions of the DOL fiduciary rule until July 2019. The purpose of this delay is to allow the DOL time
to review and potentially substantially revise the fiduciary rule, and to facilitate coordination between the DOL and SEC potentially to promulgate uniform standards of conduct for all financial professionals. It is uncertain what further actions the DOL or SEC will take with respect to these matters or when any further rulemaking will be complete or effective. During this delay, HD Vest, when dealing with Covered Accounts, must follow the DOL’s Impartial Conduct Standards, which require HD Vest to act in the best interest of investors in Covered Accounts, charge no more than reasonable compensation, and avoid making material misrepresentations. See the section entitled "Risks Associated With our Businesses" in Part I Item 1A of this report for more information about the risks associated with future regulations and their potential impact on our operations.
Our Tax Preparation segment is subject to federal and state government requirements, including regulations related to the electronic filing of tax returns, the provision of tax preparer assistance, and the use and disclosure of customer information. We also offer certain other products and services to small businesses and consumers, which are also subject to regulatory requirements. As we expand our products and services, both domestically and maintaininternationally, we may become subject to additional government regulation. Further, regulators may adopt new laws or regulations or their attractivenessinterpretation of existing laws or regulations may differ from ours or expand to cover additional products and competitiveness. Researchservices. These increased regulatory requirements could impose higher regulatory compliance costs, limitations on our ability to provide some services in some states or countries, and development expenses were $8.9 millionliabilities that might be incurred through lawsuits or regulatory penalties.
The Trump Administration has called for a broad review of, and potentially significant changes to, U.S. fiscal and tax laws and regulations. These changes have resulted in 2014, $7.3 million in 2013,comprehensive tax reform and $6.1 million in 2012. These amounts excludeinclude the rolling back or repeal of various financial regulations, including the DOL fiduciary rule and the Dodd-Frank Act. We cannot predict the impact, if any, amounts spentof these changes to our businesses. However, it is possible that some policies adopted by the TaxACTnew administration will benefit us and Monoprice businessesothers will negatively affect us. Until we know what changes are enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes.
We are subject to federal and state laws and government regulations concerning employee safety and health and environmental matters. The Occupational Safety and Health Administration, the Environmental Protection Agency, and other federal and state agencies have the authority to promulgate regulations that may have an impact on research and development priorour operations.
See the section entitled "Risks Associated With our Businesses" in Part I, Item 1A of this report for additional information regarding risks related to governmental regulation of our acquisition of those businesses.
business.
Intellectual Property
Our success depends significantly upon our technology and intellectual property rights. ToWe seek to protect oursuch rights and the value of our corporate brands and reputation we rely onthrough a combinationvariety of measures, including: domain name registrations, confidentiality and intellectual property assignment agreements with employees and third parties, protective contractual provisions, and laws regarding copyrights, patents, trademarks, and trade secrets. We hold multiple issued patents and registered trademarks in the United States and in various foreign countries, and we may apply for additional patents and trademarks as business needs require. We may not be successful in obtaining issuance or registration for such applications or in maintaining existing patents and trademarks. In addition, issued patents and registered marks may not provide us with any competitive advantages. We may be unable to adequately or cost-effectively protect or enforce our intellectual property rights, and failure to do so could weaken our competitive position and negatively impact our business and financial results. If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, re-engineer our products, engage in expensive and time-consuming litigation, or stop marketing and licensing our products. See the section entitled "Risk Factors""Risks Associated With our Businesses" in Part I Item 1A of this report for additional information regarding protecting and enforcing intellectual property rights by us and third parties against us.
Competition
We face intense competition in all markets in which our businesses operate. Many of our competitors or potential competitors have substantially greater financial, technical, and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, better access to vendors, or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies, develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their products and services than we can. In addition, we may face increasing competition for market share from new startups, mobile providers, and social media sites and applications. For our businesses to be successful, we must be competitive in some or all of the specific competitive factors in the Search and Content, Tax Preparation, and E-Commerce markets that are described below.
Search and Content Competition
In the online search market, we face competition for various elements of our search business from multiple sources, including our Search Customers. In particular, Google, Yahoo!, and Bing (Microsoft) collectively control a significant majority of the consumer-facing online search market serviced by our owned and operated sites and those of our distribution partners. Each of these three companies provides search results to our search services in addition to competing for internet users. Our distribution partners also compete with us for Internet users. We also compete with our Search Customers and other content providers for contracts with new and existing distribution partners. We believe that the primary competitive factors in the market for online search services are:
the ability to continue to meet the evolving information, content, and service demands of Internet users and our distribution partners;
the ability to offer our distribution partners competitive rates and comprehensive search and advertising content;
the cost-effectiveness, reliability, and security of the search applications and services;
the ability to attract Internet users to search services in a cost effective way;
the ability to provide and support products or services, such as embedded search browsers, default search provider settings within the search browsers, or downloadable applications, that may displace competing search services; and
the ability to develop innovative products and services that enhance the appearance and utility of search services, both to Internet users and to current and potential distribution partners.
Tax Preparation Competition
Our Tax Preparation business operates in a very competitive marketplace. There are many competing software products and online services, including two competitors who have a significant percentage of the software and online service market: Intuit’s TurboTax and H&R Block's products and services. Our Tax Preparation business must also compete with alternate methods of tax preparation, including "pencil and paper" do-it-yourself return preparation by individual filers and storefront tax preparation services, including both local tax preparers and large chains such as H&R Block, Liberty, and Jackson Hewitt. Finally, our Tax Preparation business faces the risk that state or federal taxing agencies will offer software or systems to provide direct access for individual filers that will reduce the need for TaxACT’s software and services. We believe that the primary competitive factors in the market for tax preparation software and services are:
the ability to continue to offer software and services that have quality and ease-of-use that are compelling to consumers;
the ability to market the software and services in a cost effective way;
the ability to offer ancillary services that are attractive to users; and
the ability to develop the software and services at a low enough cost to be able to offer them at a competitive price point.
.
E-Commerce Competition
Our E-Commerce business operates in a very competitive marketplace with low barriers to entry. Our competitors that offer similar products include existing well-known brands, including online e-commerce sites and offline retail stores, as well as new entrants to the e-commerce market. We believe that the primary competitive factors in the market for our E-Commerce business are:
product quality and selection;
brand loyalty;
price;
customer service;
shopping convenience;
website organization and load speed; and
order processing, fulfillment and delivery time.
Governmental Regulation
We face increasing governmental regulation in all of our businesses. U.S. and foreign governments have adopted, or may in the future adopt, applicable laws and regulations addressing issues such as consumer protection, user privacy, security, pricing, age verification, content, taxation, intellectual property, advertising, and product and services quality. These or other laws or regulations that may be enacted in the future could have adverse effects on our business, including higher regulatory compliance costs, limitations on our ability to provide some services in some states or countries, and liabilities that might be incurred through lawsuits or regulatory penalties. See the section entitled "Risk Factors" in Part I Item 1A of this report for additional information regarding the potential impact of governmental regulation on our operations and results.
Seasonality
Our Tax Preparation segment is highly seasonal, with the significant majority of its annual revenue earned in the first four months of our fiscal year. Revenue from our E-Commerce segment also is seasonal, with revenues historically being the lowest in the second quarter, a period that does not include consumer back-to-school or holiday-related spending. We anticipate that these seasonal effects will continue in the foreseeable future.
Employees
As of December 31, 2014,2017, we had 496487 full-time employees. None of our employees are represented by a labor union, and we consider employee relations to be positive. There is significant competition for qualified personnel in the industries in which we operate, particularly for software development and other technical staff. We believe that our future success will depend in part on our continued ability to hire and retain qualified personnel.
Acquisitions
On May 30, 2014, InfoSpace acquired the HowStuffWorks business (“HSW”). On August 22, 2013, we acquired Monoprice. On January 31, 2012, we acquired TaxACT, and TaxACT acquired Balance Financial, Inc. (“Balance Financial”) on October 4, 2013. For further detail on our acquisitions of these businesses, see “Note 3: Business Combinations” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Company Internet Site and Availability of SEC Filings
Our corporate website is located at www.blucora.com. We make available on that site, as soon as reasonably practicable, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy statements, Current Reports on Form 8-K, other reports filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC,”), as well as any amendments to those filings. Our SEC filings, as well as our Code of Ethics and Conduct and other corporate governance documents, can be found in the Investor Relations section of our site and
are available free of charge. Information on our website is not part of this Annual Report on Form 10-K. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.
ITEM 1A. Risk Factors
ROur business and future results may be affected by a number of risks and uncertainties that should be considered carefully. In addition, this report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including the risks described below. The occurrence of one or more of the events listed below could also have a material adverse effect on the Company’s business, prospects, results of operations, reputation, financial condition, cash flows or ability to continue current operations without any direct or indirect impairment or disruption, which is referred to throughout these Risk Factors as a “Material Adverse Effect.”
RISKS ASSOCIATED WITH OUR BUSINESSES
We may not be able to achieve the anticipated benefits of our Strategic Transformation, which could have a Material Adverse Effect.
On October 14, 2015, we announced our Strategic Transformation plans. The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary and our E-Commerce business that consisted of the operations of Monoprice, Inc. in 2016. As part of the Strategic Transformation and our model of operating as "One Company," we relocated our corporate headquarters in 2017 from Bellevue, Washington to Irving, Texas.
We may fail to realize the anticipated benefits of the Strategic Transformation, including the expected operational, revenue, cost synergies, and other business synergies between our Wealth Management and Tax Preparation businesses and the level of revenue and profitability growth that we are expecting, whether attributable to regulatory limitations, operational realities, or otherwise. In addition, we have incurred and may continue to incur liabilities in connection with the Strategic Transformation, including liabilities from retention bonuses, severance payments, early termination or assignment of contracts, potential failure to meet obligations due to loss of employees or resources, and resulting litigation. We may also face difficulties, including loss of personnel, disruptions in our ongoing operations, and diversion of management’s attention from ongoing operations and opportunities, as we continue to integrate our operations, technologies, products, services, IT systems, controls, benefit plans, and policies and procedures. If we are not able to achieve the anticipated benefits of the Strategic Transformation, it could have a Material Adverse Effect.
In connection with our Strategic Transformation, we have had a leadership transition and have replaced nearly all of our executive officers (excluding our Chief Executive Officer). While many of our executive officers have relevant industry experience, they are new to our Company. In addition, in connection with the relocation, we have also replaced nearly all of our corporate employees. Changes in senior management and employee transitions are inherently disruptive and can be difficult to manage, and efforts to implement any new strategic or operating goals may not succeed in the absence of a long-term management team. Periods of transition in senior management leadership are often difficult as the new executives gain detailed knowledge of our operations and due to cultural differences that may result from changes in strategy and style. Our lack of consistent leadership that is experienced with our Company may cause concerns to third parties with whom we do business, and may increase the likelihood of turnover of our employees and, in the case of our Wealth Management business, turnover of advisors. If we are not effective in managing these leadership and employee transitions, our business could be adversely impacted and could have Material Adverse Effect.
The Tax Preparation and Wealth Management markets are very competitive, and failure to effectively compete could result in a Material Adverse Effect.
Our Tax Preparation business operates in a very competitive marketplace. There are many competing software products and online services. Intuit’s TurboTax and H&R Block’s products and services have a significant percentage of the software and online service market. ISKSOur Tax Preparation business must also compete with alternate methods of tax preparation, such as storefront tax preparation services, which includes both local tax preparers and large chains such as H&R Block, Liberty Tax, and Jackson Hewitt, and it may also be subject to new market entrants who may take some of our market share. Finally, our Tax Preparation business faces the risk that state or federal taxing agencies will offer software or systems to provide direct access for individual filers that will reduce the need for TaxAct’s software and services. As digital do-it-yourself tax preparation continues to be characterized by intense competition, including heavy marketing expenditures, price-based
competition, and new entrants, maintaining and growing share becomes more challenging unless brand relevance, customer experience, and feature/functionality provide meaningful incremental value. If we cannot continue to offer software and services that have quality and ease-of-use that are compelling to consumers; market the software and services in a cost-effective manner; offer ancillary services that are attractive to users; and develop the software and services at a low enough cost to be able to offer them at a competitive price point, it could result in a Material Adverse Effect.
Our Tax Preparation business also faces potential competition from the public sector, where we face the risk of federal and state taxing authorities developing software or other systems to facilitate tax return preparation and electronic filing at no charge to taxpayers. These or similar programs may be introduced or expanded in the future, which may cause us to lose customers and revenue. Although the Free File Alliance, which is an Internal Revenue Service partnership that provides free electronic tax filing services to taxpayers meeting certain income-based guidelines, has kept the federal government from being a direct competitor to our tax offerings, we anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future. The current agreement with the Free File Alliance is scheduled to expire in October 2020.
The wealth management industry in which our Wealth Management business also operates is highly competitive, and we may not be able to maintain our customers, financial advisors, distribution network, or the terms on which we provide our products and services. Our Wealth Management business competes based on a number of factors, including name recognition, service, the quality of investment advice, investment performance, technology, product offerings and features, price, and perceived financial strength. Competitors in the wealth management industry include broker-dealers, banks, asset managers, insurers, and other financial institutions. Many of these competitors have greater market share, offer a broader range of products, and have greater financial resources. In addition, over time certain sectors of the wealth management industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms. This consolidation could result in our competitors gaining greater resources, and we may experience pressures on our pricing and market share as a result of these factors and as some of our competitors seek to increase market share by reducing prices. In addition, our Wealth Management business seeks to differentiate itself on the basis of offering tax-smart investing advice and solutions. There is no guarantee that this differentiation will be meaningful to our customers and potential customers, or that another competitor will not adopt a similar strategy more effectively. In either case, our ability to compete effectively in the market could be damaged.
Poor service or performance of the financial products we offer or competitive pressures on pricing of such services or products may cause our Wealth Management business customers to withdraw assets on short notice.
Customer service and investment performance are important factors in the success of our Wealth Management business. Strong customer service and investment performance help increase customer retention and generate sales of products and services. In contrast, poor service or investment performance could impair our revenues and earnings, as well as our prospects for growth. Customers can terminate their relationships with us or our financial advisors at will. There can be no assurance as to how future investment performance will compare to that of our competitors, and historical performance is not indicative of future returns. A decline or perceived decline in investment performance, on an absolute or relative basis, could cause a decline in sales of mutual funds and other investment products, an increase in redemptions and the termination of asset management relationships. Such actions may reduce our aggregate amount of assets under management and reduce management fees. Poor investment performance could also adversely affect our ability to expand the distribution of our products through independent financial advisors.
In addition, the emergence of new financial products or services from others, or competitive pressures on pricing of such services or products, may result in the loss of accounts in our Wealth Management business. We must also monitor the pricing of our services and financial products in relation to competitors and periodically may need to adjust commission and fee rates, interest rates on deposits and margin loans, and other fee structures to remain competitive. Competition from other financial services firms, such as reduced commissions to attract customers or trading volume, direct-to-investor online financial services, or higher deposit interest rates to attract customer cash balances, could adversely impact our business. Customers of our Wealth Management business can also reduce the aggregate amount of their assets managed by us or shift their funds to other types of accounts with different rate structures, for any number of reasons, including investment performance, changes in prevailing interest rates, changes in investment preferences, changes in our (or our financial advisors’) reputation in the marketplace, changes in customer management or ownership, loss of key investment management personnel and financial market performance. A reduction in managed assets and decrease in revenues and earnings from any of these events, could have a Material Adverse Effect.
Changes in domestic and international economic, political and other factors could have a Material Adverse Effect on our business.
Our Wealth Management business operates in the United States and global financial markets, and our Tax Preparation business offers tax filing services in the United States federal jurisdiction, various state jurisdictions and Canada. Accordingly, we are affected by United States and global economic and political conditions that directly and indirectly impact a number of factors in the domestic and global financial markets and economies, which may be detrimental to our operating results. In addition, because the significant majority of our revenue is derived within the United States, economic conditions in the United States have an even greater impact on us than companies with a more diverse international presence.
Domestic and international factors that could affect our business include, but are not limited to, trading levels, investing, origination activity in the securities markets, security and underlying asset valuations, the absolute and relative level and volatility of interest and currency rates, real estate values, the actual and perceived quality of issuers and borrowers, the supply of and demand for loans and deposits, United States and foreign government fiscal and tax policies, United States and foreign government ability, real or perceived, to avoid defaulting on government securities, inflation, decline and stress or recession in the United States and global economies generally, terrorism and armed conflicts, and natural disasters such as weather catastrophes and widespread health emergencies. Furthermore, changes in consumer economic variables, such as the number and size of personal bankruptcy filings, the rate of unemployment, decreases in property values, certain life events, and the level of consumer confidence and consumer debt, may substantially affect consumer loan levels and credit quality.
While United States and global financial markets have, at a macro level, recently experienced growth, uncertainty and potential volatility remain. A period of sustained downturns and/or volatility in the securities markets, prolonged continuation of the artificially low level of short-term interest rates, a return to increased credit market dislocations, reductions in the value of real estate, and other negative market factors could have a Material Adverse Effect on our business. We could experience a decline in commission revenue from lower trading volumes, a decline in fees from reduced portfolio values of securities managed on behalf of our customers, a reduction in revenue from capital markets and advisory transactions due to reduced activity, increased credit provisions and charge-offs, losses sustained from our customers’ and market participants’ failure to fulfill their settlement obligations, reduced net interest earnings, and other losses. Periods of reduced revenue and other losses could be accompanied by periods of reduced profitability because certain of our expenses, including, but not limited to, our interest expense on debt, rent, facilities and salary expenses are fixed and, our ability to reduce them over short time periods is limited.
Other more specific trends may also affect our financial condition and results of operations, including, for example: changes in the mix of products preferred by investors that may cause increases or decreases in our fee revenues associated with such products, depending on whether investors gravitate towards or away from such products. The timing of such trends, if any, and their potential impact on our financial condition and results of operations are beyond our control.
Challenging economic times and changes to the tax code (personal and/or corporate), such as the recent changes passed under the Tax Cuts and Jobs Act, could cause potential new customers not to purchase or to delay purchasing of our products and services, and could cause our existing customers to discontinue purchasing or delay upgrades of our existing products and services, thereby negatively impacting our revenues and future financial results. Poor economic conditions and high unemployment have caused, and could in the future cause, a significant decrease in the number of tax returns filed, which may have a significant effect on the number of tax returns we prepare and file. In addition, weakness in the end-user consumer and small business markets could negatively affect the cash flow of our distributors and resellers who could, in turn, delay paying their obligations to us, which could increase our credit risk exposure and cause delays in our recognition of revenue or future sales to these customers. Any of these events could have a Material Adverse Effect. See " CWe may be negatively impacted by the recently passed Tax Cuts and Jobs Act or by any future changes in tax lawsOMMON" for a discussion of risks related to changes in the tax code.
Each of these factors could impact customer activity in all of our businesses and have a Material Adverse Effect. In addition, these factors also may have an impact on our ability to achieve our strategic objectives and to grow our business.
If we are unable to attract and retain productive advisors, our financial results will be negatively impacted.
Our Wealth Management business derives a large portion of its revenues from commissions and fees generated by its advisors. Our ability to attract and retain productive advisors has contributed significantly to our growth and success. If we fail to attract new advisors or to retain and motivate our current advisors, our business may suffer. In addition, the wealth management industry in general is experiencing a decline in the number of younger financial advisors entering the industry. We are not immune to that industry trend. If we are unable to replace advisors as they retire, or to assist retiring advisors with transitioning their practices to existing advisors, we could experience a decline in revenue and earnings.
The market for productive advisors is highly competitive, and we devote significant resources to attracting and retaining the most qualified advisors. In attracting and retaining advisors, we compete directly with a variety of financial institutions such as wirehouses, regional broker-dealers, banks, insurance companies and other independent broker-dealers.
Financial industry competitors are increasingly offering guaranteed contracts, upfront payments, and greater compensation to attract successful financial advisors. These can be important factors in a current advisor’s decision to leave us as well as in a prospective advisor’s decision to join us. If we are not successful in retaining highly qualified advisors, we may not be able to recover the expense involved in attracting and training these individuals. There can be no assurance that we will be successful in our efforts to attract and retain the advisors needed to achieve our growth objectives. Moreover, the costs associated with successfully attracting and retaining advisors could be significant and there is no assurance that we will generate sufficient revenues from those advisors’ business to offset those costs.
TOALLOFOURIn addition, as some of HD Vest’s advisors grow their assets under management, they may decide to disassociate from HD Vest to establish their own registered investment advisers (“ BRIAsUSINESSES”) and take customers and associated assets into those businesses. HD Vest seeks to deter advisors from taking this route by continuously evaluating its technology, product offerings, and service, as well as its advisor compensation, fees, and pay-out policies, to ensure that HD Vest is competitive in the market and attractive to successful advisors. We may not be successful in dissuading such advisors from forming their own RIAs, which could cause a material volume of customer assets to leave HD Vest’s platform, which would reduce our revenues and could cause a Material Adverse Effect.
Future revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products and services.
The online service, software,tax preparation and e-commercewealth management industries are characterized by rapidly changing technology, evolving industry and security standards, and frequent new product introductions. Our competitors in the Search and Content, Tax Preparation, and E-Commerce segmentsthese industries offer new and enhanced products and services every year. Consequently, customer expectations are constantly changing. We must successfully innovate and develop or offer new products and features to meet evolving customer needs and demands, while continually updating our technology infrastructure. We must devote significant resources to continue to developdeveloping our skills, tools, and capabilities in order to capitalize on existing and emerging technologies. Our inability to quickly and effectively innovate our products, services, and infrastructure could harmresult in a Material Adverse Effect.
We have recently begun offering our business and financial results.
Ouronline tax preparation products and services have historically been provided through desktop computers, but the number of people who access similar offerings throughour mobile devices has increased dramatically in the past few years.app. We have limited experience to date in mobile platform development, and our existing user experience may not be compelling on this new generation of technology.mobile devices. Given the speed at which new devices and platforms are being released, it is difficult to predict the problems we may encounter in developing versions ofconnection with our products and services for use on newly developed devices,mobile app, and we may need to devote significant resources to the creation, support, and maintenance of new user experience.experiences. If we are slow to develop products and services that are compatible with theseour customers don’t deem our new devices, particularlymobile app user friendly or if we cannot do so as quickly asthey deem our competitors,competitors’ mobile app more user friendly or better than ours, our market share will decline.decline, which could have a Material Adverse Effect. In addition, suchwe regularly make upgrades to the technology we use for our tax preparation product that are expected to provide a better user experience and help us to keep existing customers or attract new products and services maycustomers. If our mobile app or the other upgrades we make to the technology we use in our Tax Preparation business are not succeedsuccessful, it could result in the marketplace, resulting in lost market share, wasted development costs, and damage to our brands.brands and market share, any of which could have a Material Adverse Effect.
Our business depends on fees generated from the distribution of financial products and fees earned from management of advisory accounts.
A large portion of our strong reputationrevenues are derived from fees generated from the distribution of financial products, such as mutual funds and variable annuities. Changes in the structure or amount of the fees paid by the sponsors of these products could directly affect our revenues, business and financial condition. In addition, if these products experience losses or increased investor redemptions, we may receive lower fee revenue from the investment management and distribution services we provide on behalf of the mutual funds and annuities. The investment management fees we are paid may also decline over time due to factors such as increased competition, renegotiation of contracts and the valueintroduction of new, lower-priced investment products and services. Changes in market values or in the fee structure of asset management accounts would affect our revenues, business and financial condition. Asset management fees often are primarily comprised of base management and incentive fees. Management fees are primarily based on assets under management, which are impacted by net inflow/outflow of customer assets and market values. Below-market investment performance by our funds and portfolio managers could result in a loss of managed accounts and could result in reputational damage that might make it more difficult to attract new customers and thus further impact our business and financial condition. If we were to experience the loss of managed accounts, our fee revenue would decline. In addition, in periods of declining market values, our asset values under management may also decline, which would negatively impact our fee revenues and could have a Material Adverse Effect.
Government regulation of our brands.business, including increased regulation or the interpretation of existing laws, rules or regulations, could have a Material Adverse Effect.
Developing
We are subject to federal, state, and maintaining awarenesslocal laws and regulations that affect our business, such as financial services, data privacy and security requirements, tax, digital content, employment, consumer protection and fraud protection, among others.In addition, there have been significant new regulations and heightened focus by the government on many of the laws and regulations that affect our brands is critical to achieving widespread acceptance ofboth our existingWealth Management and future productsour Tax Preparation businesses, as well as in areas such as insurance and serviceshealthcare. As we complete our Strategic Transformation and is an important element in attracting new customers. Adverse publicity (whether or not justified) relating to events or activities attributed to our businesses, our employees, our vendors, or our partners may tarnish our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce demand forexpand our products and services and revise our business models, we may become subject to additional government regulation or increased regulatory scrutiny. Regulators may adopt new laws or regulations or their interpretation of existing laws or regulations may differ from ours as well as the laws of other jurisdictions in which we operate, and if we are found to not be in compliance with certain laws, rules or regulations, it could have a Material Adverse Effect. Increased or new regulatory requirements or changes in the interpretation of existing laws, rules or regulations could, among other things, result in penalties or fines, impose significant limitations, require changes to our business, require certain notifications to customers, customers, or employees, restrict our use of personal information, cause our customers cease utilizing our products or services, could make our business more costly, less efficient, or impossible to conduct, may require us to modify our current or future products or services in a manner that is detrimental to our business and could result in additional compliance costs, which could have a Material Adverse Effect
The Trump Administration has called for a broad review of, and potentially significant changes to, certain U.S. laws and regulations, including but not limited to the U.S. tax code, the Department of Labor (the "DOL") fiduciary rule (the "Fiduciary Rule") and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which could result in changes that negatively affect us. We cannot predict whether, when or to what extent any new or changes to existing U.S. federal laws, regulations, interpretations or rulings will be issued or the impact of any such changes on our Tax Preparation or Wealth Management businesses. See “The recently passed Tax Cuts and Jobs Act could have a Material Adverse Effect” for additional risks recent changes in tax laws.
The tax preparation industry continues to receive heightened attention from federal and state governments. New legislation, regulation, public policy considerations, changes in the cybersecurity environment, litigation by the government or private entities, new interpretations of existing laws may result in greater oversight of the tax preparation industry, restrict the types of products and services that we can offer or the prices we can charge, or otherwise cause us to change the way we operate our Tax Preparation business or offer our tax preparation products and services. We may not be able to respond quickly to such regulatory, legislative and other developments, and these changes may in turn increase our cost of doing business and limit our revenue opportunities. In addition, if our practices are not consistent with new interpretations of existing laws, rules or regulations, we may become subject to lawsuits, penalties, fines and other liabilities that did not previously apply. We are also required to comply with Federal Trade Commission (the “FTC”) requirements and a variety of state revenue agency standards. Requirements imposed by the FTC or state agencies, including new requirements or their interpretation of existing laws, rules or regulations, could be burdensome on our business, cause us to lose market share due to product changes we are required to implement or may significantly increase the costs of providing those services to our customers and may prevent us from delivering a quality product to our customers in a timely manner and at an acceptable price, all of which could have a Material Adverse Effect. In addition, in our Tax Preparation business, we generate revenue from certain financial products related to our tax preparation software and services. These products include prepaid debit cards on which a tax filer may receive his or her tax refund and the ability of certain of our users to have the fees for our services deducted from their tax refund. Any regulation of these products by state or federal governments, or any competing products offered by state and federal tax collection agencies, could materially and adversely impact our revenue from these financial products.
In addition, we are subject to laws, regulations, and industry rules relating to the collection, use, and security of user data. We expect regulation in this area to increase, and our current data protection policies and practices may not be sufficient and thus may require modification. We have incurred, and may continue to incur, significant expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards, and contractual obligations.
Our ability to comply with all applicable laws, rules and regulations, and interpretations is largely dependent on our establishment and maintenance of compliance, audit, and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit, and risk management personnel. While we have adopted systems, policies, and procedures reasonably designed to comply or facilitate compliance with all applicable laws, rules and regulations, and interpretations, these systems, policies, and procedures may not be fully effective. There can be no assurance that we will not be subject to investigations, claims, or other actions or proceedings by regulators or third-parties with respect to our past or future compliance with applicable laws, rules, and regulations, the outcome of which may have a Material Adverse Effect.
If we fail to comply with applicable laws, rules, regulations and guidance, such failure could have a Material Adverse Effect. See “Our Wealth Management business is subject to extensive regulation, and failure to comply with these regulations could have a Material Adverse Effect" for additional information regarding the regulation of our business.
Our Wealth Management business is subject to extensive regulation, and failure to comply with these regulations could have a Material Adverse Effect.
Our Wealth Management business is heavily regulated by multiple agencies, including the Securities and Exchange Commission (“SEC”), the DOL, the Financial Industry Regulatory Authority, state securities and insurance regulators, and other regulatory authorities. Failure to comply with these regulators’ laws, rules, and regulations could result in the restriction of the ongoing conduct or growth, or even liquidation of, parts of our business and otherwise cause a Material Adverse Effect.
The regulatory environment in which our Wealth Management business operates is continually evolving, and the level of financial regulation to which we are subject has generally increased in recent years. Among the most significant regulatory changes affecting our Wealth Management business is the Dodd-Frank Act, which mandates broad changes in the supervision and regulations of the wealth management industry. Regulators implementing the Dodd-Frank Act have adopted, proposed to adopt, and may in the future adopt regulations that could impact the manner in which we will market HD Vest products and services, manage HD Vest operations, and interact with regulators. In addition, the Trump Administration has called for a broad review of, and potentially significant changes to, U.S. fiscal laws and regulations, including the Dodd-Frank Act. If such changes are enacted, they could negatively impact our Wealth Management business and cause a Material Adverse Effect.
In 2016, the DOL enacted the Fiduciary Rule, which redefines who may be considered a fiduciary under ERISA and how such fiduciaries must provide investment advice to individual retirement accounts or other accounts, the assets of which are subject to section 4975 of the Internal Revenue Code (collectively, the "Covered Accounts"). During 2017, Covered Accounts made up over half of the assets under administration in our Wealth Management business. The Fiduciary Rule will bring virtually all of the investment products and services that our Wealth Management business currently provides to Covered Account owners within the scope of ERISA.
The DOL has delayed the effective date of key portions of the Fiduciary Rule to July 2019. Other portions of the Fiduciary Rule, however, remain in effect, including the Impartial Conduct Standards. The purpose of the delay is to permit the DOL to reassess the Fiduciary Rule, as well as to facilitate coordination between the DOL and the SEC on rulemaking toward possible uniform standards of conduct for all investment professionals. We cannot predict if and when the DOL or the SEC will complete any such rulemaking or what it will entail. Should the DOL or SEC adopt new standards of conduct and other requirements that heighten the duties of broker-dealers or investment advisers, it could result in additional compliance costs, lesser compensation, and management distraction, all of which could have a Material Adverse Effect on our business. Because the DOL’s Impartial Conduct Standards remain in effect, our Wealth Management business is required to continue good faith efforts to conform its business to these standards. Because Covered Accounts comprise a significant portion of our business, our failure to successfully conform to these standards could negatively impact our results due to increased costs related to compliance, legal and information technology changes.
Our Wealth Management business distributes its products and services through financial advisors who affiliate with us as independent contractors. There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our financial advisors as independent contractors. Although we believe we have properly classified our advisors as independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities may determine that we have misclassified our advisors as independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties, which could have a material adverse effect on our futurebusiness model, financial results. Such damage also wouldcondition, and results of operations.
In addition, the SEC and FINRA have extensive rules and regulations with respect to capital requirements. As a registered broker-dealer, our Wealth Management business is subject to Rule 15c3-1 (the “Net Capital Rule”) under the Securities Exchange Act of 1934, and related requirements of self-regulatory organizations, which specify minimum capital requirements that are intended to ensure the general soundness and liquidity of broker-dealers. As a result of the Net Capital Rule, our ability to withdraw capital from our subsidiaries that comprise our Wealth Management business could be restricted, which in turn could limit our ability to repay debt, redeem or purchase shares of our outstanding stock, or pay dividends, which could have a Material Adverse Effect. A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business.
Our Wealth Management business offers products sponsored by third parties, including but not limited to mutual funds, insurance, annuities and alternative investments. These products are subject to complex regulations that change frequently. Although we have controls in place to facilitate compliance with such regulations, there can be no assurance that our interpretation of the regulations will be consistent with various regulators’ interpretations, that our procedures will be viewed as adequate by regulatory examiners, or that the operating subsidiaries will be deemed to be in compliance with regulatory requirements in all material respects. If products sold by our Wealth Management business do not perform as anticipated due to market factors or otherwise, or if product sponsors become insolvent or are otherwise unable to meet their obligations, this
could result in material litigation and regulatory action against us. In addition, we could face liabilities for actual or alleged breaches of legal duties to customers with respect to the suitability of the financial products we make available in our open architecture product platform or the investment advice of our financial advisors.
See “ Government regulation of our business, including increased regulation or the interpretation of existing laws, rules or regulations, could have a Material Adverse Effect" for additional information regarding the regulation of our business.
The transition of our Wealth Management business to a new clearing platform may negatively impact our operations and our advisors and the customers of our Wealth Management business.
Our Wealth Management business has entered into a new clearing services relationship with Fidelity Clearing & Custody Solutions (“FCCS”), which becomes effective in September 2018 (the “Target Date”). The transition of our clearing business to FCCS involves significant operational, technological, and logistical effort, since it will require additionalall HD Vest brokerage business and customer accounts to migrate to FCCS’s clearing platform, together with all of the underlying customer data. Should we experience material delays or complications in this effort, it could have a Material Adverse Effect on our business. In addition, our advisors or customers could be dissatisfied by the process of transitioning to FCCS, or by the different technology, systems, processes, policies and products FCCS offers. Should a significant number of advisors or customers, or assets under administration leave as a result, it could have a Material Adverse Effect.
The movement of business to a new clearing firm is an extremely complex and intensive undertaking and we have committed a significant amount of human, technological, and financial resources to rebuildensure that the transition is successfully completed by the target date. Given the complexity and magnitude of the transition effort, however, there can be no guarantee that we will not experience delays, unexpected costs, technological failures, incompatibility of systems or policies, or loss of employees, advisors and customers. In completing the transition, we are dependent on key employees as well as outside contractors. If those employees or contractors leave HD Vest or the project before completion, it could significantly delay the completion of the transition. Failure to complete the transition to FCCS by the Target Date for any reason could result in a Material Adverse Effect.
We may not realize the financial, operational, and customer-experience benefits that we project from our transition to FCCS’s clearing platform. The technology, service and product offerings presented by FCCS may not be accepted by our advisors or customers at the levels we anticipate, and may not provide the level of benefits that we expect even if accepted. We also may not realize the level of conversion of direct-to-fund assets onto FCCS’s clearing platform that we anticipate. Should the number of accounts or assets that convert to FCCS’s platform fall short of expectations, we will likely receive less economic benefit from the new clearing arrangement than we expected, which could be material. Likewise, should the Federal Reserve not increase interest rates at the pace or to the levels anticipated, we would likely recognize lower revenue from the cash-sweep program under the new clearing arrangement, potentially in a material amount.
Our Wealth Management business is dependent on the performance, liquidity and continuity of its clearing firm. Should its clearing firm fail to provide clearing services at the contracted levels for any reason, or to suffer a liquidity event, it could result in a Material Adverse Effect.
Our operation systems and network infrastructure is subject to significant and constantly evolving cybersecurity and other technological risks, and the security measures that we have implemented to secure confidential and personal information may be breached; a potential breach may pose risks to the uninterrupted operation of our systems, expose us to mitigation costs, litigation, investigation, fines and penalties by authorities, claims by persons whose information was disclosed, and damage to our reputation.
We collect and retain certain sensitive personal data. Our Tax Preparation and Wealth Management businesses collect, use, and retain large amounts of confidential personal and financial information from their customers, including information regarding income, assets, family members, credit cards, tax returns, bank accounts, social security numbers, and healthcare. Maintaining the integrity of our systems and networks is critical to the success of our business operations, including the retention of our customers and advisors, and to the protection of our proprietary information and our customers' personal information. A major breach of our systems or those of our third-party service providers may have materially negative consequences for our businesses, including possible fines, penalties and damages, reduced demand for our services, harm to our reputation and restorebrands, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process customer credit card orders or tax returns. We may detect, or we may receive notices from customers or public or private agencies that they have detected, vulnerabilities in our servers or our software. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, and we may not be able to discover or remediate such security vulnerabilities before they are exploited.
In addition, hackers may develop and deploy viruses, worms, and other malicious software programs that can be used to attack our offerings. Although we utilize network and application security measures, internal controls, and physical security procedures to safeguard our systems, there can be no assurance that a security breach, intrusion, or loss or theft of personal information will not occur. Any such incident could cause a Material Adverse Effect and require us to expend significant resources to address these problems, including notification under data privacy regulations. In addition, our employees (including temporary and seasonal employees) and contractors may have access to sensitive and personal information of our customers, and employees. While we conduct background checks of our employees and these other individuals and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach. In addition, we rely on third party vendors to host certain of our sensitive and personal information and data through cloud services. While we conduct due diligence on these third party partners with respect to their security and business controls, we may not have the ability to effectively monitor or oversee the implementation of these control measures, and, in any event, individuals or third parties may be able to circumvent and/or exploit vulnerabilities that may exist in these security and business controls, resulting in a loss of sensitive and personal customer or employee information and data.
While we maintain cyber liability insurance that provides both third-party liability and first-party liability coverages, this insurance is subject to exclusions and may not be sufficient to protect us against all losses. In addition, the trend toward broad consumer and general public notification of such incidents could exacerbate the harm to our business, financial condition, or results of operations. Even if we successfully protect our technology infrastructure and the confidentiality of sensitive data, we may incur significant expenses in connection with our responses to any such attacks as well as the adoption, implementation, and maintenance of appropriate security measures. We could also suffer harm to our business and reputation if attempted security breaches are publicized. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical system or network break-ins, inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks and systems used in connection with our businesses.
Stolen identity refund fraud could impede our Tax Preparation customers’ ability to timely and successfully file their tax returns and receive their tax refunds, and could diminish customers’ perceptions of the security and reliability of our tax preparation products and services, resulting in negative publicity. Increased governmental regulation to attempt to combat that fraud could result in a Material Adverse Effect.
We and other companies offering tax preparation services (especially those offering DDIY solutions) have seen a rise in instances of criminals utilizing stolen information obtained through hacking, phishing, and other means of identity theft in order to electronically file fraudulent federal and state tax returns. As a result, impacted taxpayers must complete additional forms and go through additional steps in order to report to appropriate authorities that their identities have been stolen and their tax returns were filed fraudulently. Though we offer assistance in the refund recovery process, stolen identity refund fraud could impede our customers’ ability to timely and successfully file their returns and receive their tax refunds, and could diminish customers’ perceptions of the security and reliability of our tax preparation products and services, resulting in negative publicity, despite there having been no breach in the security of our systems. In addition, if stolen identity refund fraud is perpetrated at a material level through our tax preparation products or services, state, federal, or foreign tax authorities may refuse to allow us to continue to process our customers’ tax returns electronically. As a result, stolen identity fraud could have a Material Adverse Effect on our Tax Preparation business.
Federal, state, and foreign governmental authorities in jurisdictions in which we operate have taken action, and may take action in the future, in an attempt to combat stolen identity refund fraud, which may require changes to our systems and business practices in ways we cannot anticipate. These actions may have a Material Adverse Effect on our Tax Preparation business.
If we are unable to develop, manage, and maintain critical third party business relationships for our Tax Preparation and Wealth Management businesses, it could result in a Material Adverse Effect.
Our Tax Preparation and Wealth Management businesses are dependent on the strength of our business relationships and our ability to continue to develop, maintain, and leverage new and existing relationships. We rely on various third party partners, including software and service providers, suppliers, vendors, distributors, contractors, financial institutions, and licensing partners, among others, in many areas of these businesses to deliver our services and products. In certain instances, the products or services provided through these third party relationships may be difficult to replace or substitute, depending on the level of integration of the third party’s products or services into, or with, our offerings and/or the general availability of such third party’s products and services. In addition, there may be few or no alternative third party providers or vendors in the market. The failure of third parties to provide acceptable and high quality products, services, and technologies or to update their products, services, and technologies may result in a disruption to our business operations, which may materially reduce our
revenues and profits, cause us to lose customers and customers, and damage our reputation. Alternative arrangements and services may not be available to us on commercially reasonable terms or we may experience business interruptions upon a transition to an alternative partner.
Our Wealth Management business does not offer any proprietary financial products. Instead, it distributes investment and insurance products through distribution agreements with third-party financial institutions, including banks, mutual funds, and insurance companies. These products are sold by our advisors, who are independent contractors. Maintaining and deepening relationships with these unaffiliated distributors and advisors is an important part of our growth strategy because strong third-party distribution arrangements enhance our ability to market our products and increase our assets under management, revenues, and profitability. There can be no assurance that the distribution and advisor relationships we have established will continue. Our distribution partners and advisors may cease to operate, consolidate, institute cost-cutting efforts, or otherwise terminate their relationship with us. Any such reduction in access to third-party distributors and advisors may have a material adverse effect on our ability to market our products and to generate revenue in our Wealth Management segment. In addition, there are risks associated with our third-party clearing firm that we rely on to provide clearing services for our Wealth Management business that are discussed above.
Access to investment and insurance product distribution channels is subject to intense competition due to the large number of competitors and products in the broker-dealer, investment advisory and insurance industries. Relationships with distributors are subject to periodic negotiation that may result in increased distribution costs and/or reductions in the amount of revenue we realize based on sales of particular products or customer assets. In addition, regulatory changes (such as the Fiduciary Rule) may negatively impact our revenues and profits related to particular products or services. Any increase in the costs to distribute our products or reduction in the type or amount of products made available for sale, or revenue associated with those products, could have a Material Adverse Effect.
The seasonality of our Tax Preparation business requires a precise development and release schedule and any delays or issues with accuracy or quality may damage our reputation and could result in a Material Adverse Effect.
Our tax preparation software and online service must be ready to launch in final form near the beginning of each calendar year to take advantage of the full tax season. We must update the code for our software and service on a precise schedule each year to account for annual changes in tax laws and regulations and ensure that the software and service are accurate. Delayed and unpredictable changes to federal and state tax laws and regulations can cause an already tight development cycle to become even more challenging. If we are unable to meet this precise schedule and we launch our software and service late, we risk losing customers to our competitors. If we cannot develop our software with a high degree of accuracy and quality, we risk errors in the tax returns that are generated. Such errors could result in loss of reputation, lower customer retention, or legal claims, fees, and payouts related to the warranty on our software and service, which could result in a Material Adverse Effect.
The specialized and highly seasonal nature of our Tax Preparation business presents financial risks and operational challenges, which, if not satisfactorily addressed, could result in a Material Adverse Effect.
Our Tax Preparation business is highly seasonal, with a significant portion of our annual revenue for such services earned in the first four months of our fiscal year. The concentration of our revenue-generating activity during this relatively short period presents a number of challenges for us, including cash and resource management during the last eight months of our fiscal year, when our Tax Preparation business generally operates at a loss and incurs fixed costs of preparing for the upcoming tax season, responding to changes in competitive conditions, including marketing, pricing, and new product offerings, which could affect our position during the tax season, and ensuring optimal uninterrupted operations and service delivery during the tax season. If we experience significant business disruptions during the tax season or if we are unable to satisfactorily address the challenges described above and related challenges associated with a seasonal business, it could result in a Material Adverse Effect.
If our Tax Preparation business fails to process transactions effectively or fails to adequately protect against disputed or potential fraudulent activities, it could have a Material Adverse Effect.
Our Tax Preparation business processes a significant volume and dollar value of transactions on a daily basis, particularly during tax season. Due to the brands.size and volume of transactions that we handle, effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that fraudulent activity may affect our services. In addition to any direct damages and fines that may result from any such problems, which may be substantial, a loss of confidence in our controls may materially harm our business and damage our brand. The systems supporting our Tax Preparation business are comprised of multiple technology platforms, some of which are difficult to scale. If we are unable to effectively manage our systems and processes, we may be unable to process customer data in an accurate, reliable, and timely manner, which could result in a Material Adverse Effect.
Our website and transaction management software, data center systems, or the systems of third-party co-location facilities and cloud service providers could fail or become unavailable or otherwise be inadequate, which could materially harm our reputation and result in a material loss of revenues and current or potential customers.customers and customers and have a Material Adverse Effect.
Any system interruptions that result in the unavailability or unreliability of our websites, transaction processing systems, or network infrastructure could materially reduce our revenue and impair our ability to properly process transactions. We use both internally developed and third-party systems, including cloud computing and storage systems, for our online services and certain aspects of transaction processing. Some of our systems are relatively new and untested and thus may be subject to failure or unreliability. Any system unavailability or unreliability may cause unanticipated system disruptions, slower response times, degradation in customer satisfaction, additional expense, or delays in reporting accurate financial information. For example, we have been migrating data to the cloud. This migration has been costly and has diverted some of management’s attention and resources in order to ensure a smooth transition to the cloud.
Our data centers and cloud service could be susceptible to damage or disruption, which could have a material adverse effect on our business.Material Adverse Effect. Our SearchTax Preparation and Content and E-CommerceWealth Management businesses rely on third-party co-location facilities and cloud service providers. Although these third party services provide some redundancy, not all of our systems and operations have backup redundancy. Our TaxACT business has acontinuity plans that include secondary disaster recovery center,centers, but if thattheir primary data center failscenters fail and thethose disaster recovery center doescenters do not fully restore the failed environments, our TaxACT business will suffer, particularlysuffer. In particular, if such interruption occurs during the "tax season."tax season, it could have a Material Adverse Effect on our Tax Preparation business.
Our systems and operations, and those of our third-party service providers and partners, could be damaged or interrupted by fire, flood, earthquakes, other natural disasters, power loss, telecommunications failure, internet breakdown, break-in, human error, software bugs, hardware failures, malicious attacks, computer viruses, computer denial of service attacks, terrorist attacks, or other events beyond our control. Such damage or interruption may affect internal and external systems that we rely upon to provide our services, take and fulfill customer orders, handle customer service requests, and host other products and services. During the period in which services are unavailable, we will be unable or severely limited in our ability to generate revenues, and we may also be exposed to liability from those third parties to whom we provide services. We could face significant losses
as a result of these events, and our business interruption insurance may not be adequate to compensate us for all potential losses. For these reasons,losses, which could result in a Material Adverse Effect.
Current and future litigation or regulatory proceedings or adverse court interpretations of the laws under which the Company operates could have a Material Adverse Effect.
Many aspects of our business involve substantial risks of liability. We are currently subject to lawsuits and financial results couldare likely to be materially harmed if our systems and operations are damaged or interrupted.
Ifsubject to litigation in the future. In highly volatile markets, the volume of trafficclaims and amount of damages sought in litigation and regulatory proceedings against financial institutions have historically increased. Any lawsuits to which we are subject, such as purported class actions, shareholder derivative lawsuits or claims by wealth management customers, could result in substantial expenditures, generate adverse publicity and could significantly impair our business, or force us to cease offering certain products or services. Defense of any lawsuit, even if successful, could require substantial time and attention of our management and could require the expenditure of significant amounts for legal fees and other related costs. In addition, litigation or regulatory proceedings or actions brought by state or federal agencies relating to our infrastructure increases substantially, we must respondproducts or services may result in a timely fashion by expanding our systems, which may entail upgrading our technology, transaction processing systems, and network infrastructure. Our ability to support our expansion and upgrade requirements may be constrained due to our business demands or limitsadditional restrictions on the offering of certain of our third-party co-location facility providers and cloud service providers. Due toproducts or services. To the number of our customers and the servicesextent that we offer, we could experience periodic capacity constraints that may cause temporary unanticipated system disruptions, slower response times and lower levels of customer service, and limitany such additional restrictions or legal claims restrict our ability to develop, offer such products or release new or enhanced products and services. Our businessservices, it could be harmed ifresult in a Material Adverse Effect.
If we are unable to accurately project the rate or timing of increases, if any, in the use of our services or we fail to adequately expand and upgrade our systems and infrastructure to accommodate these increases.
The security measures we have implemented to secure confidential and personal information may be breached, and such a breach may pose risks to the uninterrupted operation of our systems, expose us to mitigation costs, litigation, investigation and penalties by authorities, claims by persons whose information was disclosed, and damage to our reputation.
Our networks and those from our third-party service providers may be vulnerable to unauthorized access by hackers, rogue employees or contractors, computer viruses, and other disruptive problems. A person who is able to circumvent security measures could misappropriate proprietary or personal information or cause interruptions in our operations. Unauthorized access to, or abuse of, this information could result in significant harm to our business.
We collect and retain certain sensitive personal data. Our TaxACT business collects, uses, and retains large amounts of customer personal and financial information, including information regarding income, family members, credit cards, tax returns, bank accounts, social security numbers, and healthcare. Our Search and Content services receive,hire, retain, and transmit certain personal information aboutmotivate highly qualified employees, including our website visitors. Subscribers to some of our Search and Content services are required to provide information that may be considered to be personally identifiable or private information. Our E-Commerce business and its partners collect and retain certain information regarding its customers, including certain payment information, purchase information, e-mail addresses, and shipping addresses.
We are subject to laws, regulations, and industry rules relating to the collection, use, and security of user data. We expect regulation in this area to increase. As a result of such new regulation, our current data protection policies and practices may not be sufficient and thus may require modification. New regulations may also impose burdens that may require notification to customers orkey employees, of a security breach, restrict our use of personal information, and hinder our ability to acquire new customers or market to existing customers. As our business continues to expand to new industry segments that may be more highly regulated for privacy and data security, our compliance requirements and costs may increase. We have incurred, and may continue to incur, significant expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards, and contractual obligations.
A major breach of our systems or those of our third-party service providers may have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced customer demand for our services, harm to our reputation and brands, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process customer credit card orders or tax returns. We may detect, or we may receive notices from customers or public or private agencies that they have detected, vulnerabilities in our servers, our software or third-party software components that are distributed with our products. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, and we may not be able to discoversuccessfully manage our businesses.
Our future success depends on our ability to identify, attract, hire, retain, and motivate highly skilled management, technical, sales and marketing, and corporate development personnel, including personnel with experience and expertise in the wealth management, tax preparation, and technology industries to support our new strategic focus. Qualified personnel with experience relevant to our businesses are scarce, and competition to recruit them is intense. If we fail to successfully hire and retain a sufficient number of highly qualified employees, we may have difficulties in supporting or remediate such security vulnerabilities before theyexpanding our businesses. Realignments of resources, reductions in workforce, or other operational decisions have created and could continue to create an unstable work environment and may have a negative effect on our ability to hire, retain, and motivate employees.
Our business and operations are exploited.substantially dependent on the performance of our key employees. Changes of management or key employees may disrupt operations, which may materially and adversely affect our business and financial results or delay achievement of our business objectives. In addition, hackersif we lose the services of one or more key employees and are unable to recruit and retain a suitable successor with relevant experience, we may developnot be able to successfully and deploy viruses, worms and other malicious software programs that can be used to attacktimely manage our offerings. Although we utilize network and application security measures, internal control measures, and physical security procedures to safeguardbusiness or achieve our systems, therebusiness objectives. There can be no assurance that any retention program we initiate will be successful at retaining employees, including key employees.
We use stock options, restricted stock units, and other equity-based awards to recruit and retain senior level employees. With respect to those employees to whom we issue such equity-based awards, we face a security breach, intrusion,significant challenge in retaining them if the value of equity-based awards in aggregate or lossindividually is either not deemed by the employee to be substantial enough or theftdeemed so substantial that the employee leaves after their equity-based awards vest. If our stock price does not increase significantly above the exercise prices of personal informationour options, we may need to issue new equity-based awards in order to motivate and retain our key employees. We may undertake or seek stockholder approval to undertake other equity-based programs to retain our employees, which may be viewed as dilutive to our stockholders or may increase our compensation costs. There can be no assurance that any such programs, if approved by stockholders, or any other incentive programs, would be successful in motivating and retaining our employees.
We may be negatively impacted by the recently passed Tax Cuts and Jobs Act or by any future changes in tax laws.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. The change in the tax law will be effective for our 2018 calendar year financial reporting period. The primary impacts to us include a reduction of the federal corporate tax rate from 35% to 21% affecting our net deferred tax liabilities, repeal of corporate alternative minimum tax and associated potential refunds of prior paid taxes, and potential deductible limits of certain executive compensation. These changes could have a material impact to the value of deferred tax assets and liabilities and the Company’s future taxable income and effective tax rate.The Company is continuing to analyze the Tax Cuts and Jobs Act. Until such analysis is complete, the full impact of the new tax law on the Company in future periods is uncertain.
In addition, changes in tax laws, whether federal or state tax laws, require updates to our tax preparation software used in our Tax Preparation business. Such updates are costly and may be time consuming to ensure that they accurately reflect the new laws that are adopted. It is difficult to know at this time how our customers will view the new federal tax laws that were enacted in late 2017. Possible outcomes include a short-term or long-term increase in customers that prefer professional tax advice and preparation services rather than using our software or we may see a change in our how customers value our software services as customers may perceive their tax preparation has become simpler as a result of the new tax laws, which could result in lower demand for our products and could reduce revenue and/or the number of units sold. Further changes in the way that state and federal governments structure their taxation regimes could also cause a Material Adverse Effect on our Tax Preparation Business. The introduction of a simplified or flattened federal or state taxation structure may make our services less necessary or attractive to individual filers, which could reduce revenue and the number of units sold. We also face risk from the possibility of increased complexity in taxation structures, which may encourage some of our customers to seek professional tax advice instead of using our software or services. In the event that such changes to tax structures cause us to lose market share or cause a decline in customers, it could cause a Material Adverse Effect.
Our risk management and conflicts of interest policies and procedures may be ineffective or leave us exposed to unidentified or unanticipated risks.
We are subject to the risks of errors and misconduct by our employees and financial advisors, such as fraud, non-compliance with policies, recommending transactions that are not occur. Such a security breach maysuitable, and improperly using or disclosing confidential information. Although we have internal controls and other risk-mitigating factors in place, this type of conduct is difficult to detect and deter, and could materially harm our business, customer reputationresults of operations or financial condition. We are further subject to the risk of nonperformance or inadequate performance of contractual obligations by third-party vendors of products and future financial resultsservices that are used in our businesses. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Insurance and other traditional risk-shifting tools may be held by or available to us in order to manage certain exposures, but they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as the risk of counterparty denial of coverage, default or insolvency.
In our Wealth Management business, prevention and detection of wrongdoing or fraud by our advisors, who are not our employees and tend to be located remotely from our headquarters, present unique challenges. There cannot be any assurance that misconduct by our advisors will not lead to a Material Adverse Effect on our business.
RIAs have fiduciary obligations that require us and our advisors to expend significant resourcesact in the best interests of our customers and to disclose any material conflicts of interest. Conflicts of interest are under growing scrutiny by U.S. federal and state regulators. Our risk management processes include addressing potential conflicts of interest that arise in our business. Management of potential conflicts of interest has become increasingly complex. A perceived or actual failure to address these problems, including notification under data privacy regulations.
We rely onconflicts of interest adequately could affect our reputation, the infrastructurewillingness of the Internet, over which we have no control and the failurecustomers to transact business with us or give rise to litigation or regulatory actions, any of which could substantially underminehave a Material Adverse Effect.
Our business depends on our operations.
The successstrong reputation and the value of our Searchbrands, which could be negatively impacted by poor performance.
Developing and Content, Tax Preparation,maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and E-Commercefuture products and services and is an important element in attracting new customers and customers. Adverse publicity (whether or not justified) relating to regulatory proceedings or other events or activities attributed to our businesses, depends onour employees, our vendors, or our partners may tarnish our reputation and reduce the maintenancevalue of our brands. Damage to our reputation and expansionloss of the infrastructure of the Internet. In particular, we rely on other companies to maintain reliable network systems
that provide adequate speed, data capacity,brand equity may reduce demand for our products and security. As the Internet continues to experience growth in the number of users, frequency of use,services and amount of data transmitted, the segments of the internet infrastructure that we rely on may be unable to support the demands placed upon it. The failure of any parts of the internet infrastructure that we rely on, even for a short period of time, would substantially undermine our operations and would have a material adverse effect on our businessfuture financial results. Such damage also would require additional resources to rebuild our reputation and financial results.
We regularly consider acquisition opportunities, and our financial and operating results may suffer if we are unsuccessful in completing any such acquisitions on favorable terms.
An important component of our strategy for future growth is to acquire new technologies and businesses. We may seek to acquire companies or assets that complement our existing businesses. We may also consider acquisitions of companies and assets that are not related to search, content, tax preparation, or e-commerce. We regularly explore such opportunities in the ordinary course of our business, and potential acquisition targets range in size from relatively small to a size comparable to our own, and, therefore, may be material to our business, financial condition, and results of operations. There can be no guarantee that any of the opportunities that we evaluate will result in the purchase by us of any business or asset being evaluated, or that, if acquired, we will be able to successfully integrate such acquisition.
If we are successful in our pursuit of any acquisition opportunities, we intend to use available cash, debt and/or equity financings, and/or other capital or ownership structures designed to diversify our capital sources and attract a competitive cost of capital, all of which may change our leverage profile. There are a number of factors that impact our ability to succeed in acquiring the companies and assets we identify, including competition for these companies and assets, sometimes from larger or better-funded competitors. As a result, our success in completing acquisitions is not guaranteed. Our expectation is that, to the extent we are successful, any acquisitions will be additive to our business, taking into account potential benefits of diversification or operational synergies. However, these new business additions and acquisitions involve a number of risks and may not achieve our expectations, and, therefore, we could be adversely affected by any such new business additions or acquisitions. There can be no assurance that the short or long-term value of any business or technology that we develop or acquire will be equal torestore the value of the cash and other consideration that we pay or expenses we incur.
Our financial and operating results may suffer if we are unsuccessful in integrating acquisitions we may complete, and any new businesses or technologies may not be complementary to our current operations or leverage our current infrastructure and operational experience.
Even if we are successful in identifying and completing acquisitions of new businesses or technologies, the process of integrating such new businesses and technologies involves numerous risks that could materially and adversely affect our results of operations or stock price, including:
expenses related to the acquisition process, both for consummated and unconsummated transactions, and impairment charges to goodwill and other intangible assets related to certain acquisitions;
diversion of management’s or other key personnel’s attention from current operations and other business concerns and potential strain on financial and managerial controls and reporting systems and procedures;
disruption of our ongoing business or the ongoing acquired business, including impairment of existing relationships with the employees, distributors, suppliers, or customers of our existing businesses or those of the acquired companies;
difficulties in assimilating the operations, products, technology, information systems, and management and other personnel of acquired companies that result in unanticipated allocation of resources, costs, or delays;
the dilutive effect on earnings per share as a result of issuances of stock, incurring operating losses, and the amortization of intangible assets for the acquired business;
stock volatility due to the perceived value of the acquired business by investors;
any debt incurred to finance acquisitions would increase costs, may increase volatility in our stock price, and could accelerate a decline in stockholder equity in the event of poor financial performance;
diversion of capital from other uses;
failure to achieve the anticipated benefits of the acquisitions in a timely manner, or at all;
difficulties in acquiring foreign companies, including risks related to integrating operations across different cultures and languages, currency risks, and the particular economic, political, and regulatory risks associated with specific countries; and
adverse outcome of litigation matters or other contingent liabilities assumed in or arising out of the acquisitions.
Developing or acquiring a business or technology, and then integrating it with our other operations, will be complex, time consuming, and expensive. The successful integration of an acquisition requires, among other things, that we: retain key personnel; maintain and support preexisting supplier, distribution, and customer relationships; and integrate accounting and support functions. The complexity of the technologies and operations being integrated and the disparate corporate cultures and/or industries being combined, may increase the difficulties of integrating an acquired technology or business. If our integration of acquired or internally developed technologies or businesses, including our recent acquisition of the Monoprice business, is not successful, we may experience adverse financial or competitive effects.
Our stock price has been highly volatile and such volatility may continue.
The trading price of our common stock has been highly volatile. Between January 1, 2013 and December 31, 2014, our closing stock price ranged from $13.12 to $29.82. On February 20, 2015, the closing price of our common stock was $13.33. Our stock price could decline or fluctuate significantly in response to many factors, including the other risks discussed in this report and the following:
actual or anticipated variations in quarterly and annual results of operations;
announcements of significant acquisitions, dispositions, charges, changes in or loss of material contracts and relationships, or other business developments by us, our partners, or our competitors;
conditions or trends in the search and content services, tax preparation, or e-commerce markets;
changes in general conditions in the U.S. and global economies or financial markets;
announcements of technological innovations or new services by us or our competitors;
changes in financial estimates or recommendations by securities analysts;
disclosures of any accounting issues, such as restatements or material weaknesses in internal control over financial reporting;
equity issuances resulting in the dilution of stockholders;
the adoption of new regulations or accounting standards; and
announcements or publicity relating to litigation or governmental enforcement actions.
In addition, the market for technology company securities has experienced extreme price and volume fluctuations, and our stock has been particularly susceptible to such fluctuations. Often, class action litigation has been instituted against companies after periods of volatility in the price of such companies’ stock. We have been defendants in such class action litigation in prior periods and could be subject to future litigation, potentially resulting in substantial cost and diversion of management’s attention and resources.
Our financial results may fluctuate, which could cause our stock price to be volatile or decline.
Our financial results have varied on a quarterly basis and are likely to continue to fluctuate in the future. These fluctuations could cause our stock price to be volatile or decline. Many factors could cause our quarterly results to fluctuate materially, including but not limited to:
changes in our relationships with Google, Yahoo!, or future significant Search Customers, such as alterations to their policies, policy enforcement, revenue share agreements, or qualitative scoring of traffic we direct to their advertiser networks, any of which may result in a potential or total loss of content we may use or provide to our distribution partners;
the loss, termination, or reduction in scope of key search distribution relationships as a result of, for example, distribution partners licensing content directly from our Search Customers or other content providers, or any
suspension by our Search Customers (particularly Google) of the right to use or distribute content on the web properties of our distribution partners;
the inability of any of our businesses to meet our expectations;
the extreme seasonality of our TaxACT business and the resulting large quarterly fluctuations in our revenues;
the success or failure of our strategic initiatives and our ability to implement those initiatives in a cost effective manner;
the mix of search services revenue generated by our owned and operated web properties versus our distribution partners’ web properties;
the mix of revenues generated by existing businesses, or other businesses we develop or acquire;
our, and our distribution partners’, ability to attract and retain quality traffic for our search services;
gains or losses driven by mark to market fair value accounting;
litigation expenses and settlement costs;
expenses incurred in finding, negotiating, consummating, and integrating acquisitions;
variable demand for our services, rapidly evolving technologies and markets, and consumer preferences;
any restructuring charges we may incur;
any economic downturn, which may lead to lower online advertising revenue from advertisers on our Search and Content business, lower acceptance rates on premium products and services offered by our Tax Preparation business, and reduced sales for our E-Commerce business;
new court rulings, or the adoption of new laws, rules, or regulations, that adversely affect our ability to acquire content and distribute our search services, that adversely affect our tax preparation products and services, or that otherwise increase our potential liability or compliance costs;
impairment in the value of long-lived assets or the value of acquired assets, including goodwill, core technology, and acquired contracts and relationships; and
the effect of changes in accounting principles or standards or in our accounting treatment of revenues or expenses.
For these reasons, among others, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors and financial results volatility could make us less attractive to investors, either of which could cause the trading price of our stock to decline.
We sold $201.25 million of Convertible Senior Notes in 2013, which may impact our financial results, result in the dilution of existing stockholders, and restrict our ability to take advantage of future opportunities.
In March 2013, we sold $201.25 million aggregate principal amount of 4.25% Convertible Senior Notes (the “Notes”) due 2019. The accounting for the Notes will result in our having to recognize interest expense significantly more than the stated interest rate of the Notes and may result in volatility to our financial results. Upon issuance of the Notes, we were required to establish a separate initial value for the conversion option and bifurcate this value from the value attributable to the balance of the Notes, or the debt component. As a result, for accounting purposes, we were required to treat the Notes as having been issued with a discount to their face principal amount, which is referred to as debt discount. We are accreting the debt discount to interest expense ratably over the term of the Notes, which results in an effective interest rate in our consolidated statement of comprehensive income that is in excess of the stated coupon rate of the Notes. This will reduce our earnings and could adversely affect the price at which our common stock trades, but will have no effect on the amount of cash interest paid to holders or on our cash flows.
Our intent is to settle conversions of the Notes with cash for the principal amount of the debt and shares of common stock for any related conversion premium. Shares associated with the conversion premium will be included in diluted earnings per share when the average stock price exceeds the conversion price of the Notes and could adversely affect our diluted earnings per share and the price at which our common stock trades.
The conditional conversion feature of the Notes, if triggered, and the requirement to repurchase the Notes upon a fundamental change may adversely affect our financial condition and financial results. In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert the Notes at any time during specified periods at their option. If we undergo a fundamental change (as described in the applicable Indenture), subject to certain conditions, holders of the Notes may require us to repurchase all or part of their Notes for cash at a price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest.
The payment of the interest and the repayment of principal at maturity, conversion, or under a fundamental change will require the use of a substantial amount of our cash. If such cash is not available, we may be required to sell other assets or enter into alternate financing arrangements at terms that may or may not be desirable. The existence of the Notes and the obligations we incurred by issuing them may hinder our ability to take advantage of certain future opportunities, such as engaging in future debt or equity financing activities, which may in turn reduce or impair our ability to acquire new businesses or invest in our existing businesses.
We incurred debt in connection with our acquisitions of the Monoprice and TaxACT businesses, and may incur future debt related to other acquisitions, which may adversely affect our financial condition and future financial results.
In connection with our acquisition of Monoprice, Monoprice incurred debt in November 2013, of which $42.0 million remained outstanding as of December 31, 2014. In addition, as part of our acquisition of TaxACT’s business, TaxACT incurred debt, which was refinanced with a new credit agreement on August 30, 2013 and of which $51.9 million remained outstanding as of December 31, 2014. Both are non-recourse debts that are guaranteed by Monoprice Holdings, Inc. and TaxACT Holdings, Inc., respectively, both of which are Blucora’s direct subsidiaries. These debts may adversely affect our financial condition and future financial results by, among other things:
increasing Monoprice’s or TaxACT’s vulnerability to downturns in their businesses, to competitive pressures, and to adverse economic and industry conditions;
requiring the dedication of a portion of our expected cash from Monoprice’s and TaxACT’s operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions;
requiring cash infusions from Blucora to Monoprice or TaxACT if either or both are unable to meet their payment or other obligations under the applicable credit facilities;
increasing our interest payment obligations in the event that interest rates rise dramatically; and
limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.
These credit facilities impose restrictions on Monoprice and TaxACT, including restrictions on their ability to create liens on their assets and on our ability to incur indebtedness, and require Monoprice and TaxACT to maintain compliance with specified financial ratios. Their ability to comply with these ratios may be affected by events beyond their control. In addition, these credit facilities include covenants, the breach of which may cause the outstanding indebtedness to be declared immediately due and payable. These debts, and our ability to repay them, may also negatively impact our ability to obtain additional financing in the future and may affect the terms of any such financing.
We or our subsidiaries may incur additional debt in the future to finance additional acquisitions or for other purposes. Such debt may result in risks similar to those discussed above related to the Monoprice and TaxACT debts or in other risks specific to the credit agreements entered into for those debts.
Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures.
Although we believe that existing cash and cash equivalents, short-term investments, and cash generated from operations will be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures for at least the next 12 months, the underlying levels of revenues and expenses that we project may not prove to be accurate. In March 2013, we sold $201.25 million aggregate principal amount of 4.25% Convertible Senior Notes due 2019. In addition, as of December 31, 2014, Monoprice and TaxACT had $42.0 million and $51.9 million outstanding, respectively, under the credit agreements entered into in November 2013 and August 2013, respectively. Servicing these debts will require the dedication of a portion of our expected cash flow from operations, thereby reducing the amount of our cash flow available for other purposes. In addition, our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control.
Our businesses may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
In addition, we evaluate acquisitions of businesses, products, or technologies from time to time. Any such transactions, if completed, may use a significant portion of our cash balances and marketable investments. If we are unable to liquidate our investments when we need liquidity for acquisitions or for other business purposes, we may need to change or postpone such acquisitions or find alternative financing for them. We may seek additional funding through public or private financings, through sales of equity, or through other arrangements. Our ability to raise funds may be adversely affected by a number of factors, including factors beyond our control, such as economic conditions in the markets in which we operate and increased uncertainty in the financial, capital, and credit markets. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, we may be unable, or delayed in our ability, to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could harm our business.brands.
If others claim that our services infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our services, engage in expensive and time-consuming litigation, or stop marketing and licensing our services.
Companies and individuals with rights relating to the technology and consumer electronics industriesindustry have frequently resorted to litigation regarding intellectual property rights. In some cases, the ownership or scope of an entity’s or person’s rights is unclear. In addition, the ownership or scope of such rights may be altered by changes in the legal landscape, such as through developments in U.S. or international intellectual property laws or regulations or through court, agency, or regulatory board decisions. These parties have in the past made and may in the future make claims against us alleging infringement of patents, copyrights, trademarks, trade secrets, or other intellectual property or proprietary rights, or alleging unfair competition or violations of privacy or publicity rights. Responding to any such claims could be time-consuming, result in costly litigation, divert management’s attention, cause product or service release delays, or require removal or redesigning of our products or services, payment of damages for infringement, or entry into royalty or licensing agreements. Our technology, services, and products may not be able to withstand any third-party claims or rights against their use. Our business could suffer ifIn some cases, the ownership or scope of an entity’s or person’s rights is unclear. In addition, the ownership or scope of such rights may be altered by changes in the legal landscape, such as through developments in U.S. or international intellectual property laws or regulations or through court, agency, or regulatory board decisions. If a successful claim of infringement waswere made against us and we could not develop non-infringing technology or content, or license the infringed or similar technology or content, on a timely and cost-effective basis.basis, our financial condition and results of operations could be materially and adversely affected.
We do not regularly conduct patent searches to determine whether the technology used in our products or services infringes patents held by third parties. Patent searches may not return every issued patent or patent application that may be deemed relevant to a particular product or service. It is therefore difficult to determine, with any level of certainty, whether a particular product or service may be construed as infringing a current or future U.S. or foreign patent.
We rely heavily on our technology and intellectual property, but we may be unable to adequately or cost-effectively protect or enforce our intellectual property rights, thereby weakening our competitive position and negatively impacting our business and financial results. We may have to litigate to enforce our intellectual property rights, which can be time consuming, expensive, and difficult to predict.
To protect our rights in our services and technology, we rely on a combination of copyright and trademark laws, patents, trade secrets, confidentiality agreements with employees and third parties, and protective contractual provisions. We also rely on laws pertaining to trademarks and domain names to protect the value of our corporate brands and reputation. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our services or technology, obtain and use information, marks, or technology that we regard as proprietary, or otherwise violate or infringe our intellectual property rights. In addition, it is possible that others could independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, or if others independently develop substantially equivalent intellectual property, our competitive position could be materially weakened.
Effectively policing the unauthorized use of our services and technology is time-consuming and costly, and the steps taken by us may not prevent misappropriation of our technology or other proprietary assets. The efforts we have taken to protect our proprietary rights may not be sufficient or effective, and unauthorized parties may copy aspects of our services, use similar marks or domain names, or obtain and use information, marks, or technology that we regard as proprietary. In some
cases, the ownership or scope of an entity’s or person’s rights is unclear and may also change over time, including through changes in U.S. or international intellectual property laws or regulations or through court, agency, or regulatory board decisions. Our intellectual property may be subject to even greater risk in foreign jurisdictions, as protection is not sought or obtained in every country in which our services and technology are available and it is often more difficult and costly to obtain, register, and enforce our rights in foreign jurisdictions.
We may have to litigate to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of others’ proprietary rights, which are sometimes not clear or may change. Litigation can be time consumingtime-consuming and expensive, and the outcome can be difficult to predict.
LegislationWe may seek to acquire companies or assets that complement our Wealth Management and regulation may impact our business operations, restrict our opportunities, increase our costs, and create potential liability.
All of our businesses are subject to laws and regulations relating to how they conduct their operations, and we anticipate that additional applicable laws and regulations will be enacted in the future. Many of these laws and regulations restrict the operations and opportunities of ourTax Preparation businesses, and resultif we are unsuccessful in compliance costs. In addition, interpretations of these laws and regulations are not always clear, and failure to comply with regulatory boardcompleting any such acquisitions on favorable terms or court interpretationsintegrating any company acquired it could result in liability. For example,a Material Adverse Effect.
We may seek to acquire companies or assets that complement our Wealth Management and Tax Preparation businesses. There can be no guarantee that any of the opportunities that we evaluate will result in the purchase by us of any business or asset being evaluated, or that, if acquired, we will be able to successfully integrate such acquisition.
If we are successful in our pursuit of any complementary acquisition opportunities, we intend to use available cash, debt and/or equity financing, and/or other capital or ownership structures designed to diversify our capital sources and attract a competitive cost of capital, all of which may change our leverage profile. There are a number of factors that impact our ability to succeed in acquiring the companies and assets we identify, including competition for these companies and assets, sometimes from larger or better-funded competitors. As a result, our success in completing acquisitions is not guaranteed. Our expectation is that, to the extent we are successful, any acquisitions will be additive to our businesses, have privacy compliance obligations,taking into account potential benefits of operational synergies. However, these new business additions and acquisitions, if any, failureinvolve a number of risks and may not achieve our expectations, and, therefore, we could be materially and adversely affected by usany such new business additions or acquisitions. There can be no assurance that the short or long-term value of any business or technology that we develop or acquire will be equal to complythe value of the cash and other consideration that we pay or expenses we incur.
RISKS RELATED TO OUR FINANCING ARRANGEMENTS
We incurred debt in connection with our posted privacy policies, Federal Trade Commission (“FTC”) requirements, or other privacy-related laws and regulations could result in proceedings by the FTC or others, including class action litigation, which could have an adverse effect on our business, results of operations, and financial condition. Additional applicable legal and regulatory requirements for eachrepayment of our businesses are discussed below undercredit facility used for the sectionsacquisition of these Risk Factors that are specific to those businesses. It is not possible to predict whether or when additional applicable legislation or regulationHD Vest and the redemption of our convertible senior notes and may be adopted and certain proposals, if adopted, couldincur future debt, which may materially and adversely affect our business. financial condition and future financial results.
As of December 31, 2017, we had $345.0 million of outstanding indebtedness in the form of a term loan under a Credit Agreement to which we, and most of our direct and indirect domestic subsidiaries (in their capacity as guarantors), are parties. The final maturity date of the term loan is May 22, 2024. The proceeds of the term loan were used to repay in full the credit facility used for the acquisition of HD Vest and to redeem in full our convertible senior notes. We may also borrow an additional amount under this Credit Agreement of up to $50.0 million under a revolving credit arrangement.
This borrowing may materially and adversely affect our financial condition and future financial results by, among other things:
increasing our vulnerability to downturns in our businesses, to competitive pressures, and to adverse economic and industry conditions;
requiring the dedication of a portion of our expected cash from operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and complementary acquisitions;
increasing our interest payment obligations in the event that interest rates rise; and
limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.
Our failureCredit Agreement imposes certain restrictions on us, including restrictions on our ability to create liens, incur indebtedness and make investments. In addition, our Credit Agreement includes covenants, the breach of which may cause the outstanding indebtedness to be declared immediately due and payable. This borrowing, and our ability to repay it, may also negatively impact our ability to obtain additional financing in the future and may affect the terms of any such financing.
In addition, we or inabilityour subsidiaries, may incur additional debt in the future. Any additional debt may result in risks similar to comply with applicable lawsthose discussed above or in other risks specific to the credit agreements entered into for those debts.
Existing cash and regulationscash equivalents, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures.
Although we believe that existing cash and cash equivalents, and cash generated from operations will be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures for at least the next 12 months, the underlying levels of revenues and expenses that we project may not prove to be accurate. As of December 31, 2017, we had $345.0 million outstanding under our term loan that was entered into in May 2017. Servicing this debt will require the dedication of a portion of our expected cash flow from operations, thereby reducing the amount of our cash flow available for other purposes. In addition, our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our businesses may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial
condition and results at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
In addition, we may evaluate complementary acquisitions of businesses, products, or technologies from time to time. Any such transactions, if completed, may use a significant portion of our cash balances and marketable investments. If we are unable to liquidate our investments when we need liquidity for complementary acquisitions or for other business purposes, we may need to change or postpone such acquisitions or find alternative financing for them. We may seek additional funding through public or private financings, through sales of equity, or through other arrangements. Our ability to raise funds may be materially and adversely affected by a number of factors, including factors beyond our control, such as economic conditions in the markets in which we operate and increased uncertainty in the financial, capital, and credit markets. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, we may be unable, or delayed in our ability, to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could materially harm our business.
OTHER RISKS
Our stock price has been highly volatile and such volatility may continue.
The trading price of our common stock has been highly volatile, and such volatility does not always correspond to fluctuations in the market. Between January 1, 2016 and December 31, 2017, our closing stock price ranged from $4.76 to $25.90. On February 21, 2018, the closing price of our common stock was $24.50. Our stock price could decline or fluctuate significantly in response to many factors, including the other risks discussed in this report and the following:
actual or anticipated variations in quarterly and annual results of operations;
impairment charges, changes in or loss of material contracts and relationships, dispositions or announcements of complementary acquisitions, or other business developments by us, our partners, or our competitors;
conditions or trends in the tax preparation or wealth management markets or changes in market share;
changes in general conditions in the United States and global economies or financial markets;
announcements of technological innovations or new services by us or our competitors;
changes in financial estimates or recommendations by securities analysts;
disclosures of any accounting issues, such as restatements or material weaknesses in internal control over financial reporting;
equity issuances resulting in the dilution of stockholders;
the adoption of new regulations or accounting standards;
adverse publicity (whether justified or not) with respect to our business; and
announcements or publicity relating to litigation or governmental enforcement actions.
In addition, the equities market has experienced extreme price and volume fluctuations, and our stock has been particularly susceptible to such fluctuations. Often, class action litigation has been instituted against companies after periods of volatility in the price of such companies’ stock. We have been defendants in such class action litigation in prior periods and could be subject to future litigation, potentially resulting in substantial cost and diversion of management’s attention and resources.
Our financial results may fluctuate, which could cause our stock price to be volatile or decline.
Our financial results have varied on a quarterly basis and are likely to continue to fluctuate in the future. These fluctuations could cause our stock price to be volatile or decline. Many factors could cause our quarterly results to fluctuate materially, including but not limited to:
the inability of any of our businesses to meet our expectations;
the seasonality of our Tax Preparation business and the resulting large quarterly fluctuations in our revenues;
the success or failure of our Strategic Transformation and our ability to implement those initiatives in a cost effective manner;
variable demand for our services, rapidly evolving technologies and markets, and consumer preferences;
the level and mix of assets we have under management and administration, which are subject to fluctuation based on market conditions and customer activity;
the mix of revenues generated by existing businesses, discontinued operations or other businesses that we develop or acquire;
gains or losses driven by fair value accounting;
litigation expenses and settlement costs;
misconduct by employees and/or HD Vest financial advisors, which is difficult to detect and deter;
expenses incurred in finding, evaluating, negotiating, consummating, and integrating acquisitions;
impairment or negative performance of the many different industries and counterparties we rely on and are exposed to;
any restructuring charges we may incur;
any economic downturn, which could result in lower acceptance rates on premium products and services offered by our Wealth Management business and impact the commissions and fee revenues of our financial advisory services;
new court rulings, or the adoption of new or interpretation of existing laws, rules, or regulations, that adversely affect our business or that otherwise increase our potential liability or compliance costs;
impairment in the value of long-lived assets or the value of acquired assets, including goodwill, technology, and acquired contracts and relationships; and
the effect of changes in accounting principles or standards or in our accounting treatment of revenues or expenses.
For these reasons, among others, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors and financial results volatility could make us less attractive to investors, either of which could cause the trading price of our stock to decline.
Our utilization of our net operating loss carryforwards (“NOLs”) may be severely limited or potentially eliminated.
As of December 31, 2017, we had federal NOLs of $519.7 million that will expire primarily between 2020 and 2027, with the majority of them expiring between 2020 and 2024. We are currently able to offset all of our tax liabilities with our NOLs, but we don’t expect to generate sufficient taxable income in future years to utilize all of our NOLs prior to their expiration. If our NOLs expire unused, their full benefit will not be achieved. In addition, in years where our income exceeds our NOLs, which we expect to begin occurring in 2022, we will be required to make additional income tax payments.
In addition, if we were to have a change of ownership within the meaning of Section 382 of the Internal Revenue Code (defined as a cumulative change of 50 percentage points or more in the ownership positions of certain stockholders owning five percent or more of a company’s common stock over a three-year rolling period), then under certain conditions, the amount of NOLs we could use in any one year could be limited. Our certificate of incorporation imposes certain limited transfer restrictions on our common stock that we expect will assist us in preventing a change of ownership and preserving our NOLs, but there can be no assurance that these restrictions will be sufficient. In addition, other restrictions on our ability to use the NOLs may be triggered by a merger or acquisition, depending on the structure of such a transaction. It is our intention to limit the potential impact of these restrictions, but there can be no guarantee that such efforts will be successful.
If we are unable to use our NOLs before they expire, or if the use of this tax benefit is severely limited or eliminated, there could be a material reduction in the amount of after-tax income and cash flow from operations, and financial results.it could have an effect on our ability to engage in certain transactions.
Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our shares to decline.
We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire us, even if a change of control would be beneficial to our existing stockholders. For example, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder. In addition, our certificate of incorporation and bylaws contain provisions that may discourage, delay, or prevent a third party from acquiring us without the consent of our board of directors, even if doing so would be beneficial to our stockholders. Provisions of our charter documents that could have an anti-takeover effect include:
the classification of our board of directors, which is being phased out between 2017 and 2020, into three groups so that directors serve staggered three-year terms, which may make it difficult for a potential acquirer to gain control of our board of directors;
the requirement for super majority approval by stockholders for certain business combinations;
the ability of our board of directors to authorize the issuance of shares of undesignated preferred stock without a vote by stockholders;
the ability of our board of directors to amend or repeal our bylaws;
limitations on the removal of directors;
limitations on stockholders’ ability to call special stockholder meetings;
advance notice requirements for nominating candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
certain restrictions in our charter on transfers of our common stock designed to preserve our federal net operating loss carryforwards (“NOLs”).NOLs.
At our 2009 annual meeting, our stockholders approved an amendment to our certificate of incorporation that restricts any person or entity from attempting to transfer our stock, without prior permission from the Board of Directors, to the extent that such transfer would (i) create or result in an individual or entity becoming a five-percent stockholder of our stock, or (ii) increase the stock ownership percentage of any existing five-percent stockholder. This amendment provides that any transfer that violates its provisions shall be null and void and would require the purported transferee to, upon our demand,
transfer the shares that exceed the five percent limit to an agent designated by us for the purpose of conducting a sale of such excess shares. This provision in our certificate of incorporation may make the acquisition of Blucora more expensive to the acquirer and could significantly delay, discourage, or prevent third parties from acquiring Blucora without the approval of our board of directors.
If there is a change in our ownership within the meaning of Section 382 of the Internal Revenue Code, our ability to use our NOLs may be severely limited or potentially eliminated.
As of December 31, 2014, we had federal NOLs of $570.4 million that will expire primarily between 2020 and 2024. If we were to have a change of ownership within the meaning of Section 382 of the Internal Revenue Code (defined as a cumulative change of 50 percentage points or more in the ownership positions of certain stockholders owning five percent or more of a company’s common stock over a three-year rolling period), then under certain conditions, the amount of NOLs we could use in any one year could be limited to an amount equal to our market capitalization, net of substantial non-business assets, at the time of the ownership change multiplied by the federal long-term tax exempt rate. Our certificate of incorporation imposes certain limited transfer restrictions on our common stock that we expect will assist us in preventing a change of ownership and preserving our NOLs, but there can be no assurance that these restrictions will be sufficient. In addition, other restrictions on our ability to use the NOLs may be triggered by a merger or acquisition, depending on the structure of such a transaction. It is our intention to limit the potential impact of these restrictions, but there can be no guarantee that such efforts will be successful. If we are unable to use our NOLs before they expire, or if the use of this tax benefit is severely limited or eliminated, there could be a material reduction in the amount of after-tax income and cash flow from operations, and it could have an effect on our ability to engage in certain transactions.
If we are unable to hire, retain, and motivate highly qualified employees, including our key employees, we may not be able to successfully manage our business.
Our future success depends on our ability to identify, attract, hire, retain, and motivate highly skilled management, technical, sales and marketing, and corporate development personnel. Qualified personnel with experience relevant to our businesses are scarce and competition to recruit them is intense. If we fail to successfully hire and retain a sufficient number of highly qualified employees, we may have difficulties in supporting or expanding our businesses. Realignments of resources, reductions in workforce, or other operational decisions have created and could continue to create an unstable work environment and may have a negative effect on our ability to hire, retain, and motivate employees.
Our business and operations are substantially dependent on the performance of our key employees. Changes of management or key employees may disrupt operations, which may materially and adversely affect our business and financial results or delay achievement of our business objectives. In addition, if we lose the services of one or more key employees and are unable to recruit and retain a suitable successor, we may not be able to successfully and timely manage our business or achieve our business objectives. For example, the success of our Search and Content business is partially dependent on key personnel who have long-term relationships with our Search Customers and distribution partners. There can be no assurance that any retention program we initiate will be successful at retaining employees, including key employees.
Like many technology companies, we use stock options, restricted stock units, and other equity-based awards to recruit and retain senior level employees. With respect to those employees to whom we issue such equity-based awards, we face a significant challenge in retaining them if the value of equity-based awards in aggregate or individually is either not deemed by the employee to be substantial enough or deemed so substantial that the employee leaves after their equity-based awards vest. If our stock price does not increase significantly above the exercise prices of our options, we may need to issue new equity-based awards in order to motivate and retain our executives. We may undertake or seek stockholder approval to undertake other equity-based programs to retain our employees, which may be viewed as dilutive to our stockholders or may increase our compensation costs. Additionally, there can be no assurance that any such programs, or any other incentive programs, we undertake will be successful in motivating and retaining our employees.
Restructuring and streamlining our business, including implementing reductions in workforce, discretionary spending, and other expense reductions, may harm our business.
We have in the past and may in the future find it advisable to take measures to streamline operations and reduce expenses, including, without limitation, reducing our workforce or discontinuing products or businesses. Such measures may place significant strains on our management and employees, and could impair our development, marketing, sales, and customer support efforts. We may also incur liabilities from these measures, including liabilities from early termination or assignment of contracts, potential failure to meet obligations due to loss of employees or resources, and resulting litigation. Such effects from restructuring and streamlining could have a negative impact on our business and financial results.
RISKS RELATEDTOOUR SEARCH AND CONTENT BUSINESS
The current challenges in the search business may continue.
Our Search and Content business faced significant challenges in 2014, resulting in a significant decline in financial results for this business as compared to the prior year. These challenges included the impacts of a technology change, changes to our mobile advertising offering as a result of the renewal of the agreement with Google in 2014, and suspended or limited access to our services for certain distribution partners due to regular monitoring of policy and compliance requirements. Although we have addressed, to varying degrees, some of the challenges that initially caused this slowdown, we have been unable to stabilize all of these challenges, and additional issues have emerged, leading to continued and significant pressure on our Search and Content business. In addition, we were unable to accurately predict the long-term impact of some these challenges in 2014, and we may be unable to accurately predict the long-term impact going forward. If we are unable to successfully address our current challenges, or if new issues emerge, we are likely to see a continued material adverse effect on our Search and Content business and its financial results.
We may be unable to compete successfully in the search market.
We face intense competition in the search market. Many of our competitors have substantially greater financial, technical, and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, better access to vendors, or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies, develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies and changes in content provider and distribution partner requirements more quickly, achieve greater economies of scale, and devote greater resources to the marketing and sale of their products and services than we can. Some of the companies that we compete with in the search market are currently Search Customers of ours, the loss of any of which could harm our business. In addition, we may face increasing competition for search market share from new search startups, mobile search providers, and social media sites and applications. If we are unable to match or exceed our competitors’ marketing reach and customer service experience, our business may not be successful. Because of these competitive factors and due to our relatively small size and financial resources, we may be unable to compete successfully in the search market and, to the extent that these competitive factors apply to other markets that we pursue, in such other markets.
Most of our search services revenue is attributable to Google, and the loss of, or a payment dispute with, Google or any other significant Search Customer would harm our business and financial results.
If Google, Yahoo!, or any future significant Search Customer were to substantially reduce or eliminate the content it provides to us or to our distribution partners, our business results could materially suffer if we are unable to establish and maintain new Search Customer relationships, or expand our remaining Search Customer relationships, to replace the lost or disputed revenue. Google accounted for approximately 45% of our total Company revenues in 2014. Yahoo! remains an important partner and contributes to our value proposition as a metasearch provider, but Yahoo! is currently a much less significant source of revenue than Google. Although we believe that if our Google relationship ended or was impaired, we could replace a portion of the lost revenue with revenue from Yahoo! or other potential content providers, because of Google's position as the overwhelming market leader in the search industry, these two Search Customers are not interchangeable. In addition, Yahoo! has entered into an agreement with Microsoft’s Bing search service, under which Bing provides all of Yahoo!’s algorithmic search results and some of its paid listings. If Yahoo! cannot maintain an agreement with Bing on favorable terms, or if Bing is unable to adequately perform its obligations to Yahoo!, then Yahoo!’s ability to provide us with algorithmic and paid listings may be impaired. In addition, if a Search Customer is unwilling to pay us amounts that it owes us, or if it disputes amounts it owes us or has previously paid to us for any reason (including for the reasons described in the risk factors below), our business and financial results could materially suffer.
The success of our search business depends on our ability to negotiate extensions of our Search Customer agreements on favorable terms. We recently renewed our agreement with Google, which now runs to March 31, 2017. Our agreement with Yahoo! also recently renewed and now runs to December 31, 2015. If we cannot negotiate extensions of our current agreements or new agreements on favorable terms (including revenue share rates, our continued ability to offer combined search results or advertisements from different partners as part of our metasearch service, and other operational aspects of our search services), the financial results of our search business will suffer.
We may be unable to successfully compete in the search market as the market shifts to mobile search.
Our search business, and that of most of our distribution partners, is primarily based on searches conducted from browsers and other applications on desktop and laptop computers. As mobile phones, tablets, and other mobile devices increase in popularity, functionality, and usage, mobile searches will constitute an increasing percentage of the search market. Because our search business has been primarily focused on the desktop and laptop markets, we may have less experience and capability in offering and monetizing mobile search services than our competitors. In addition, because we rely on our Search Customers to provide us with search results and advertisements, our ability to innovate for mobile search and to expand in that market is dependent on the cooperation of, and collaboration with, those Search Customers. Under the terms of our current agreement with Google, which took effect on April 1, 2014, Google was no longer obligated to provide us with AdSense for Search advertisements on our mobile search services, and this change required us to increase usage of our other current advertising solutions for mobile and/or find additional mobile advertising solutions and partners. Although we recently executed an amendment to our agreement with Google that allows a broader implementation of mobile search advertisements, that agreement provides a revenue share rate that is significantly lower than the revenue share rate for desktop advertisements and is thus likely to have a limited impact. If we cannot develop services and partners that allow us to sufficiently innovate for the mobile search market and if our mobile advertising solutions monetize at a significantly lower level than our desktop advertising solutions, our ability to participate in the market shift to mobile search will be impaired, which will likely have a material adverse effect on our search business and its financial results.
Failure by us or our search distribution partners to comply with the policies promulgated by Google and Yahoo! may cause that Search Customer to temporarily or permanently suspend the use of its content or terminate its agreement with us, or may require us to modify or terminate certain distribution relationships.
If we or our search distribution partners fail to meet the policies promulgated by Google or Yahoo! for the use of their content, we may not be able to continue to use their content or provide the content to such distribution partners. Our agreements with Google and Yahoo! give them the ability to suspend the use and the distribution of their content for non-compliance with their requirements and policies and, in the case of breaches of certain other provisions of their agreements, to terminate their agreements with us immediately, regardless of whether such breaches could be cured. The terms of the Search Customer agreements with Google and Yahoo! and the related requirements and policies are also subject to differing interpretations by the parties, and we have experienced situations, both in the past and in recent periods, in which our interpretation substantially differs from that of our Search Customers. In addition, Google and Yahoo! have broad discretion, at any time, to unilaterally revise their existing requirements and policies, to implement new requirements and policies, or to change their interpretation or enforcement of existing requirements and policies. Such revisions, implementations, or changes may prohibit or severely restrict certain business methods used by our search business or those of our distribution partners, and the resulting impact could have a material adverse effect on our business and financial results.
Google and Yahoo! have suspended, both in the past and in recent periods, their content provided to our websites and the websites of our distribution partners, often without notice, when they believe that we or our distribution partners are not in compliance with their policies or are in breach of the terms of their agreements. During such suspensions, which could occur again in the future, we will not receive any revenue from any property of ours or a distribution partner that is affected by the suspended content, and the loss of such revenue could harm our business and financial results.
Restrictions on our ability, and the ability of our search distribution partners, to distribute, market, or offer search-related applications, products, and services may impact our financial results.
A significant portion of our Search and Content revenue is dependent on business models that can be negatively impacted by changes in policies, requirements, or technology. For example, many of our search distribution partners distribute applications, extensions, or toolbars that are monetized through the search services that we provide. Our Search Customers require that such applications, extensions, or toolbars, and the distribution of those applications, extensions, or toolbars, comply with certain policies, and recent modifications of these policies have impacted the distribution of applications, extensions, or toolbars that drive traffic and revenue to our search services, and future changes may further restrict such traffic and revenue. In addition, changes to our Search Customers’ policies, and their interpretations or application of those policies, have previously negatively affected our ability, and the ability of our search distribution partners, to drive traffic to our search services through the use of online marketing, and similar changes in the future could further restrict or eliminate certain online marketing practices used by our owned and operated sites and those of our distribution partners.
Further, certain third parties have introduced, and can be expected to continue to introduce, new or updated technologies, applications, and policies that may interfere with the ability of users to access our search services or those of our search distribution partners. For example third parties have introduced technologies and applications (including new and enhanced
web browsers) that prevent users from downloading the extensions or toolbars provided by some of our search partners. Those applications may also have features and policies that interfere with the functionality of search boxes embedded within extensions and toolbars and with the maintenance of home page and other settings previously selected by users. In addition, our Search Customers can require us to make technology changes to our search services that may negatively impact our search business or the businesses of our distribution partners. For example, a required technology change in the first quarter of 2014 resulted in a significant negative impact on the return on our marketing expenditures. Similar changes may be required again in the future.
Any changes in technologies, applications, and policies that restrict the distribution, marketing, and offering of search-related applications, extensions, toolbars, products, and services could have a material adverse effect on our operating and financial results.
A substantial portion of our search services revenue is dependent on our relationships with a small number of distribution partners, the loss of which could have a material adverse effect on our business and financial results.
We rely on our relationships with search distribution partners, including Internet service providers, web portals, and software application providers, for distribution of our search services. Approximately 44% of our total revenues for 2014 came from searches conducted by end users on the web properties of our search distribution partners, of which approximately 20% came from searches conducted by end users on the web properties of our top five distribution partners. Our agreements with many of our distribution partners will come up for renewal in 2015, and some of our distributors have the right to immediately terminate their agreements in the event of certain breaches or events. There can be no assurance that these relationships will continue or will be renewed on terms that are as favorable as current terms. In addition, if these larger partners violate our policies or requirements, or those of our Search Customers, we, or our Search Customers, may suspend or limit their access to our search services. We lost some of our larger distribution partners in 2014 and early 2015, either due to competition from other content providers, including our Search Customers, or due to inability of those partners to successfully adapt to changes in the marketplace or in Search Customer policies. If we are unable to maintain relationships with our distribution partners on favorable terms, or if our distribution partners cannot continue to use our search services, our business and financial results could be materially adversely affected.
A significant percentage of our Search and Content business’s revenue is generated by our distribution partner network. Given the nature of our relationships with our distribution partners, we have limited insight into the methods that our partners use to drive search traffic, which may result in unanticipated volatility in our financial results.
We operate a distribution partner network of approximately 100 distribution partners, which generates the majority of our Search and Content revenue. We have contractual relationships with each partner in the network, but many of these relationships are not exclusive and may not provide us with the ability to have full insight into the methods that our partners use to drive search traffic or their business models. As a result, partners can vary their traffic serviced by our search services, and we may not be able to foresee or control this variation. Additionally, our ability to grow our revenue depends on both our ability to attract new distribution partners and retain existing distribution partners and on our partners’ ability to acquire and retain new users that use our search services. For example, a distribution partner may increase or decrease marketing initiatives in ways that we did not predict, and if that partner’s traffic is significantly correlated to marketing, such increase or decrease in marketing may result in a significant increase or decrease in search traffic. Without full insight into a partner’s business model and related revenue drivers, our ability to accurately predict the traffic driven and revenue generated by that partner is limited, in part, to historical patterns. The historical revenue patterns of partners may not be consistent with actual and forecasted results due to unknown factors that impact the partner’s business model and/or any related changes to such model.
If advertisers or our Search Customers perceive that they are not receiving quality traffic through our search services, they may reduce or eliminate their advertising through our services, withhold payment for such traffic, or restrict the traffic provided through our services, each of which could have a negative material impact on our business and financial results.
Most of our revenue from our search business is based on the number of clicks on paid listings that are served on our web properties or those of our distribution partners. Each time a user clicks on a paid search result, the Search Customer that provided the paid search result receives a fee from the advertiser who paid for the click and the Search Customer pays us a portion of that fee. If the click originated from one of our distribution partners’ web properties, we share a portion of the fee we receive with such partner. If an advertiser receives what it perceives to be poor quality traffic, meaning that the advertiser’s objectives are not met for a sufficient percentage of clicks for which it pays, the advertiser may reduce or eliminate its advertisements through the Search Customer that provided the commercial search result to us. This leads to a loss of revenue for our Search Customers and consequently lower fees paid to us. Also, if a Search Customer perceives that the traffic
originating from one of our web properties or the web property of a distribution partner is of poor quality, the Search Customer may discount the amount it charged all advertisers whose paid click advertisements appeared on such website or web property, and accordingly may reduce the amount it pays us. The Search Customer may also suspend or terminate our ability to provide its content through such websites or web properties if such activities are not modified to satisfy the Search Customer’s concerns.
Poor quality traffic may be a result of invalid click activity. Such invalid click activity occurs, for example, when a person or automated click generation program clicks on a commercial search result to generate fees for the web property displaying the commercial search result rather than to view the webpage underlying the commercial search result. Some of this invalid click activity is referred to as "click fraud." When such invalid click activity is detected, the Search Customer may not charge the advertiser or may refund the fee paid by the advertiser for such invalid clicks. If the invalid click activity originated from one of our distribution partners’ web properties or our owned and operated properties, such non-charge or refund of the fees paid by the advertisers in turn reduces the amount of fees the Search Customer pays us. Initiatives we undertake to improve the quality of the traffic that we send to our Search Customers may not be successful and, even if successful, may result in loss of revenue in a given reporting period.
We may be subject to liability for our use or distribution of information that we gather or receive from third parties and indemnity protections or insurance coverage may be inadequate to cover such liability.
Our search services obtain content and commerce information from third parties and link users, either directly through our own websites or indirectly through the web properties of our distribution partners, to third-party webpages and content in response to search queries and other requests. These services could expose us to legal liability from claims relating to such third-party content and sites, the manner in which these services are distributed and displayed by us or our distribution partners, or how the content provided by our Search Customers was obtained or provided by our Search Customers. This could subject us to legal liability for such things as defamation, negligence, intellectual property infringement, violation of privacy or publicity rights, and product or service liability, among others. Laws or regulations of certain jurisdictions may also deem some content illegal, which also may expose us to liability. Regardless of the legal merits of any such claims, they could result in costly litigation, be time consuming to defend, and divert management’s attention and resources. If there was a determination that we had violated third-party rights or applicable law, we could incur substantial monetary liability, be required to enter into costly royalty or licensing arrangements (if available), or be required to change our business practices. We are also subject to laws and regulations, both in the United States and abroad, regarding the collection and use of end user information and search related data. If we do not comply with these laws and regulations, we may be exposed to legal liability.
Although the agreements by which we obtain content contain indemnity provisions, these provisions may not cover a particular claim or type of claim or the party giving the indemnity may not have the financial resources to cover the claim. Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made against us. In addition, we may also have an obligation to indemnify and hold harmless certain of our Search Customers or distribution partners from damages they suffer for such violations under our contracts with them. Implementing measures to reduce our exposure to such claims could require us to expend substantial resources and limit the attractiveness of our services. As a result, these claims could result in material harm to our business. Any liability that we incur as a result of content we receive from third parties could harm our financial results.
Governmental regulation and the application of existing laws may slow business growth, increase our costs of doing business, and create potential liability.
The growth and development of the Internet has led to new laws and regulations, as well as the application of existing laws to the Internet, in both the U.S. and foreign jurisdictions. Application of these laws can be unclear. For example, it is unclear how many existing laws regulating or requiring licenses for certain businesses (such as gambling, online auctions, distribution of pharmaceuticals, alcohol, tobacco, firearms, insurance, securities brokerage, or legal services) apply to search services, online advertising, and our business. The costs of complying or failure to comply with these laws and regulations could limit our ability to operate in our market (including limiting our ability to distribute our services; conduct targeted advertising; collect, use, or transfer user information; or comply with new data security requirements), expose us to compliance costs and substantial liability, and result in costly and time-consuming litigation. It is impossible to predict whether or when any new legislation may be adopted or existing legislation or regulatory requirements will be deemed applicable to us, any of which could materially and adversely affect our business.
The FTC has recommended that search engine providers delineate paid-ranking search results from non-paid results. To the extent that we are required to modify presentation of search results as a result of specific regulations or requirements that may be issued in the future by the FTC or other state or federal agencies or legislative bodies with respect to the nature of such
delineation or other aspects of advertising in connection with search services, revenue from the affected search engines could be negatively impacted. Addressing these regulations may require us to develop additional technology or otherwise expend significant time and expense.
Due to the nature of the Internet, it is possible that the governments of states and foreign countries might attempt to regulate Internet transmissions, through data protection laws amongst others, or institute proceedings for violations of their laws. We might unintentionally violate such laws, such laws may be modified, and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) could increase the costs of regulatory compliance for us or force us to change our business practices.
Some of our Search and Content properties, and those of our distribution partners, depend on search engine traffic to drive revenue, and changes in how search engines display links to those properties can negatively impact traffic to those properties and thus the revenues generated by those properties.
Some of our properties, particularly our HowStuffWorks content properties, generate a significant amount of their traffic from search engine result pages. Some of our distribution partners also have properties that generate traffic through search engine result pages. Search engines, including our Search Customers, regularly update the algorithms that power their search results. These algorithm changes can affect the placement of our web properties, or those of our partners, on search result pages, and those placement changes can have a significant impact on traffic driven through search engines, with a resulting negative impact on revenues. If we, or our partners, cannot maintain sufficiently high placement on search engine result pages, the business may be negatively impacted.
RISKS RELATEDTOOUR TAX PREPARATION BUSINESS
The tax preparation market is very competitive, and failure to effectively compete will adversely affect our financial results.
Our TaxACT business operates in a very competitive marketplace. There are many competing software products and online services, including two competitors who have a significant percentage of the software and online service market: Intuit’s TurboTax and H&R Block’s products and services. Our TaxACT business must also compete with alternate methods of tax preparation, including "pencil and paper" do-it-yourself return preparation by individual filers and storefront tax preparation services, including both local tax preparers and large chains such as H&R Block, Liberty, and Jackson Hewitt. Finally, our TaxACT business faces the risk that state or federal taxing agencies will offer software or systems to provide direct access for individual filers that will reduce the need for TaxACT’s software and services. Our financial results will suffer if we cannot continue to offer software and services that have quality and ease-of-use that are compelling to consumers; market the software and services in a cost effective way; offer ancillary services that are attractive to users; and develop the software and services at a low enough cost to be able to offer them at a competitive price point.
The seasonality of our Tax Preparation business requires a precise development and release schedule and any delays or issues with accuracy or quality may damage our reputation and harm our future financial results.
Our tax preparation software and online service must be ready to launch in final form near the beginning of each calendar year to take advantage of the full tax season. We must update the code for our software and service each year to account for annual changes in tax laws and regulations. Delayed and unpredictable changes to federal and state tax laws and regulations can cause an already tight development cycle to become even more challenging. We must develop our code on a precise schedule that both incorporates all such changes and ensures that the software and service are accurate. If we are unable to meet this precise schedule and we launch our software and service late, we risk losing customers to our competitors. If we cannot develop our software with a high degree of accuracy and quality, we risk errors in the tax returns that are generated. Such errors could result in loss of reputation, lower customer retention, or legal fees and payouts related to the warranty on our software and service.
The hosting, collection, use, and retention of personal customer information and data by our TaxACT business create risk that may harm our business.
Our TaxACT business collects, uses, and retains large amounts of customer personal and financial information, including information regarding income, family members, credit cards, tax returns, bank accounts, social security numbers, and healthcare. Some of this personal customer information is held by third-party vendors that process certain transactions. In addition, as many of our products and services are web-based, the amount of data we store for our users on our servers (including personal information) has been increasing and will continue to increase as we further evolve our businesses. We and
our vendors use security technologies to protect transactions and personal information and use security and business controls to limit access and use of personal information. However, individuals or third parties, including rogue employees, contractors, temporary workers, vendors, business partners, or hackers, may be able to circumvent these security and business measures. In addition, our clients may access our online tax preparation services from their computers and mobile devices, install and use our tax preparation software on their computers and mobile devices, and access online banking services from their computers and mobile devices. Because our business model relies on our clients’ use of their own personal computers, mobile devices, and the Internet, computer viruses and other attacks on our clients’ personal computer systems and mobile devices could create losses for our clients even without any breach in the security of our systems, and could thereby harm our business and our reputation.
If we are unable to develop, manage, and maintain critical third party business relationships for our TaxACT business, it may be adversely affected.
Our TaxACT business is dependent on the strength of our business relationships and our ability to continue to develop, maintain, and leverage new and existing relationships. We rely on various third party partners, including software and service providers, suppliers, vendors, distributors, contractors, financial institutions, and licensing partners, among others, in many areas of this business to deliver our services and products. In certain instances, the products or services provided through these third party relationships may be difficult to replace or substitute, depending on the level of integration of the third party’s products or services into, or with, our offerings and/or the general availability of such third party’s products and services. In addition, there may be few or no alternative third party providers or vendors in the market. The failure of third parties to provide acceptable and high quality products, services, and technologies or to update their products, services, and technologies may result in a disruption to our business operations, which may reduce our revenues and profits, cause us to lose customers, and damage our reputation. Alternative arrangements and services may not be available to us on commercially reasonable terms or we may experience business interruptions upon a transition to an alternative partner.
In particular, our TaxACT business has relationships with banks, credit unions or other financial institutions, both as customers and as suppliers of certain critical services we offer to our other customers. If any of these institutions fail, consolidate, stop providing certain services, or institute cost-cutting efforts, our results may suffer and we may be unable to offer those services to our customers.
We may be unable to effectively adapt to changing government regulations relating to tax preparation, which may harm our operating results.
The tax preparation industry is heavily regulated at the state and federal level, and is frequently subject to significant new and revised laws and regulations. The application of these laws and regulations to our businesses is often unclear and compliance with these regulations may involve significant costs or require changes to our business practices. Any changes to our business practices that result from a change to laws or regulations, or from any change in the interpretation of a law or regulation (for example due to a court ruling or an administrative ruling or interpretation), may result in a negative impact on our operating results. We are also required to comply with a variety of IRS and state revenue agency standards in order to successfully operate our tax preparation and electronic filing services. Changes in these requirements, including the required use of specific technologies or technology standards, may significantly increase the costs of providing those services to our customers and may prevent us from delivering a quality product to our customers in a timely manner.
In order to meet regulatory standards, we may be required to increase investment in compliance and auditing functions or new technologies. In addition, government authorities may enact other laws, rules or regulations that place new burdens or restrictions on our business or determine that our operations are directly subject to existing rules or regulations, such as requirements related to data collection, use, transmission, retention, processing and security, which may make our business more costly, less efficient or impossible to conduct, and may require us to modify our current or future products or services, which may harm our future financial results.
Restrictions on our ability to offer certain financial products related to our tax preparation services may harm our financial results.
We offer certain financial products related to our tax preparation software and services, and we generate some of our Tax Preparation segment revenue from such products. These products include prepaid debit cards on which a tax filer may receive his or her tax refund and the ability of certain of our users to have the fees for our services deducted from their tax refund. Any regulation of these products by state or federal governments, or any competing products offered by state and federal tax collection agencies could impact our revenue from these financial products. In addition, litigation brought by consumers or state or federal agencies relating to these products may result in additional restrictions on the offering of these products. To the
extent that any additional restrictions on our tax preparation related financial products restrict our ability to offer such products, our financial results may suffer.
Unanticipated changes in income tax rates, deduction types, or the taxation structure may adversely affect our TaxACT business.
Changes in the way that the state and federal governments structure their taxation regimes may affect our results. The introduction of a simplified or flattened taxation structure may make our services less necessary or attractive to individual filers. We also face risk from the possibility of increased complexity in taxation structures, which may encourage some of our customers to seek professional tax advice instead of using our software or services. In the event that such changes to tax structures cause us to lose market share, our results may suffer.
If our TaxACT business fails to process transactions effectively or fails to adequately protect against disputed or potential fraudulent activities, our revenue and earnings may be harmed.
Our TaxACT business processes a significant volume and dollar value of transactions on a daily basis. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that fraudulent activity may affect our services. In addition to any direct damages and fines that any such problems may create, which may be substantial, a loss of confidence in our controls may seriously harm our business and damage our brand. The systems supporting our business are comprised of multiple technology platforms that are difficult to scale. If we are unable to effectively manage our systems and processes we may be unable to process customer data in an accurate, reliable, and timely manner, which may harm our business.
RISKS RELATEDTOOUR E-COMMERCE BUSINESS
The electronics and accessories market is highly competitive, and failure to effectively compete will adversely affect our financial results.
The electronics and accessories market in which our Monoprice business sells products is highly competitive. All of Monoprice’s products face competition from many sellers of similar products, some of which are much larger and more well-known than Monoprice. We attempt to offer products that provide similar quality and technology as those offered by our competitors, but at a lower price, and we attempt to do so with customer service and support that equals or exceeds that of many of our competitors. Many of our competitors have significant competitive advantages over us that may adversely affect our ability to successfully compete on price, quality, technology, service, or support, including larger scale, advanced research facilities, extensive experience in the industry, proprietary intellectual property, greater financial resources, more advanced and extensive supply chain and distribution capacity, better service and support capability, and stronger relationships with suppliers and resellers. If we are unable to successfully compete on price, quality, technology, service, or support, we may not be able to attract and retain customers.
We also face competition in attracting the attention of customers in a cost-effective manner. Many of our competitors have better brand recognition, have stronger distribution networks, and spend significantly more than us on marketing efforts. Our financial results depend on our ability to effectively attract customers at a cost that allows us to continue to offer low prices and maintain our margins, and if our efforts are not effective and cost-efficient, our financial results will suffer.
If we fail to accurately forecast customer demand, our inventory may either exceed demand or be insufficient to meet demand, which could harm our financial results.
We rely on our supplier network to manufacture our products, and as a result, we must forecast demand for our products well in advance of the sale of those products when placing orders from our suppliers. If our orders exceed eventual demand, we will have excess inventory, which will increase our inventory carrying costs, may increase risk that those products will become obsolete prior to sale, and may result in write-offs and/or significant price reductions of that inventory. If our orders are insufficient to meet demand, we may not be able to adequately replace that inventory to meet all customer orders in a timely manner, resulting in back-orders, potential lost sales, and negative customer experiences. Significant failure to accurately forecast customer demand may thus impact our short- and long-term financial results.
Our ability to be competitive depends on our ability to introduce new and updated products with sufficient speed to satisfy customers and thus maintain and grow our market share.
The electronics and accessories market is subject to frequent new product introductions, rapid advancements in technology, changes in industry standards, and evolving consumer preferences. Many of our electronics and accessories have short life cycles and/or must be updated frequently. Our future success depends on our ability to develop, introduce, and deliver on a timely basis, and in sufficient quantity, new products and enhancements to current products. The success of any new product or any update to a current product will depend on several factors, including our ability to:
Accurately predict features that are compelling to customers;
Acquire or develop technology to incorporate those features in our products;
Ensure that the design of products is appealing to consumers;
Arrange for the manufacture and delivery of a sufficient amount of the products on a timely and cost-effective basis; and
Ensure that the products are of sufficient quality to maintain customer satisfaction.
If we cannot successfully execute on the above factors, our offerings may not match customer demand, with the result that our inventory may become obsolete, we may not be able to maintain or grow sales, our reputation may suffer, and we may be unable to attract and retain customers.
Our ability to maintain and grow market share depends on our ability to offer quality products at price well below the average market price for such products.
We attempt to offer electronics and accessories at a price below our competitors’ prices for similar products, while still maintaining similar quality. Our ability to continue to offer quality products at lower prices depends on our ability to adequately source such products at sufficient quality, quantity, and cost and on our ability to keep other operating expenses proportionally low. Because prices for electronics and accessories tend to decline over time, our continued success will depend on our ability to offer some of our products at even lower prices in the future and on our ability to identify new products or product categories that we can offer at similar low prices. If we cannot continue to offer current products, and introduce new products, at such quality, quantity, and low cost, we will be unable to maintain or grow our revenues and our financial results will suffer.
We depend on international third-party manufacturers to supply our electronics and accessories and risks related to the manufacture and shipping of our products could adversely affect our operations and financial results.
We outsource most of the manufacturing of our electronics and accessories to suppliers in Asia. We rely on the performance of these suppliers, and any problems with such performance could result in cost overruns, delayed deliveries, shortages, poor quality control, intellectual property issues (both theft of our intellectual property and infringement by our suppliers of the intellectual property of others), and compliance issues. Performance problems by our suppliers could result from many events, including the following: suppliers’ willful or unintentional breach of supply agreements; their failure to comply with applicable laws and regulations; labor unrest at their facilities; civil unrest; natural or human disasters at production or shipping facilities; equipment or other facility failures; their inability to acquire sufficient quantities or qualities of components or raw materials at expected prices; infrastructure problems in their countries (e.g., power or transportation infrastructure problems); their bankruptcy, insolvency, or other financial problems; and requests or requirements by their other customers that may conflict with our requirements. In addition, because most of our products are shipped from Asia, we face risks related to such shipping, including performance failures by our shipping partners and those of our suppliers, natural disasters, shipping equipment failure, and export and import regulation compliance issues. In late 2014 and early 2015, our ability to maintain adequate inventory has been impacted by slowdowns in offloading container ships resulting from labor disputes. These slowdowns may continue, with the result that the impact on our ability to maintain inventory may continue.
The performance of our manufacturers, suppliers, and shippers is largely outside of our control. As the result of any performance failures, we may lose sales, or we may be required to adjust product designs, change production schedules, or develop suitable alternative contract manufacturers, suppliers, or shippers, which could result in delays in the delivery of products to our customers and/or increased costs. Any such delays, disruptions, or quality problems could adversely impact our ability to sell our products, harm our reputation, impair our customer relationships, and adversely affect our operations and financial results.
Our electronics and accessories could experience quality or safety defects that could result in damage to our reputation, require us to provide replacement products, or cause us to institute product recalls.
We expect that all of our electronics and accessories will meet or exceed all applicable standards for quality and safety. We monitor and attempt to address any quality or safety issues during the design and manufacturing processes, but some problems or defects may not be identified until after introduction and shipment of products to consumers. Resolving such problems or defects may result in increased costs related to production and shipment of replacement parts or products, increased customer support requirements, and redesign and manufacture of products. If we are unable to fix defects in a timely manner or adequately address quality control issues, our relationships with our customers may be impaired, our reputation may suffer, and we may lose customers. If the problems or defects result in a significant safety hazard, we may be forced to institute a product recall, resulting in negative publicity, loss of reputation, administrative costs, distraction of personnel from regular duties, and recall, refund, and replacement expenses. In addition, such product recalls may result in disputes with suppliers and customers or lead to adverse proceedings such as arbitration or litigation, which can be costly and expensive.
Product liability claims or regulatory actions could adversely affect our financial results or harm our reputation.
As the seller of consumer products, we face the possibility that there will be claims for losses or injuries caused by some of our products. In addition to the risk of substantial monetary judgments and penalties that could have a material effect on our financial condition and results of operations, product liability claims or regulatory actions could result in negative publicity that could harm our reputation in the marketplace. We also could be required to recall and possibly discontinue the sale of possible defective or unsafe products, which could result in adverse publicity and significant expenses. Although we maintain product liability insurance coverage, potential product liability claims may exceed the amount of coverage or could be excluded under the terms of the policy.
If our products or operations, or those of our suppliers fail to comply with domestic and international government regulations, or if these regulations result in restrictions on our business, our results could be negatively impacted.
Our products and operations, and the operations of our suppliers and partners, must comply with various domestic and international laws, regulations, and standards, which are complicated and subject to interpretation. Failure by us or our partners to comply with existing or evolving laws or regulations, including export and import restrictions and barriers, or to obtain domestic or foreign regulatory approvals or certificates on a timely basis could result in restrictions on our operations or in our inability to obtain or sell certain products, with the result that our business may be adversely impacted.
We require that all of our suppliers comply with our design and product content specifications, ethical and human rights requirements, applicable laws (including product safety, security, labor, and environmental laws), and otherwise be certified as meeting our supplier code of conduct. While we do conduct a monitoring program to attempt to ensure compliance by our suppliers, our program cannot ensure 100% compliance. Any failure by our suppliers to comply with our supplier code of conduct, or with any other applicable standard, law, or regulation, could result in our inability or unwillingness to continue working with that supplier, additional monitor costs, and/or negative publicity and damage to our brand and reputation.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our principal corporate office is located in Bellevue, Washington. The primary operations for our InfoSpace business also are located in Bellevue, with the exception of the HSW operations, which are located in Atlanta, Georgia. We provide some data center services for our search operations from a third-party co-location facility located in Tukwila, Washington. The headquarters and data center facility for our TaxACT business are in Cedar Rapids, Iowa, and we have a disaster recovery center for our TaxACT business in Waukee, Iowa. The headquarters and distribution facility for our E-Commerce business are in Rancho Cucamonga, California. All of our facilities are leased. We believe our properties are suitable and adequate for our present and anticipated near-term needs.
Our principal corporate office is located in Irving, Texas. The headquarters and data center facility for our HD Vest business, which comprises our Wealth Management segment, are in Irving, Texas, and we have a backup data center for our HD Vest business in Elk Grove, Illinois, as well as access to multiple disaster recovery and data centers across the country through a third party vendor. The headquarters and data center facility for our TaxAct business, which comprises our Tax Preparation segment, are in Cedar Rapids, Iowa, and we also use a cloud computing platform for disaster recovery.
ITEM 3. Legal Proceedings
See "Note 8:"Note 10: Commitments and Contingencies"Contingencies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for information regarding legal proceedings.
ITEM 4. Mine Safety Disclosures
None.
None.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Stock
Our common stock trades on the NASDAQ Global Select Market under the symbol “BCOR.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market.
| | | | High | | Low | High | | Low |
| Year ended December 31, 2014 | | | | |
| Year ended December 31, 2017 | | | | |
| First Quarter | $ | 28.73 |
| | $ | 19.11 |
| $ | 18.00 |
| | $ | 14.25 |
|
| Second Quarter | $ | 19.85 |
| | $ | 17.07 |
| $ | 22.50 |
| | $ | 16.65 |
|
| Third Quarter | $ | 18.96 |
| | $ | 15.24 |
| $ | 25.95 |
| | $ | 19.40 |
|
| Fourth Quarter | $ | 17.04 |
| | $ | 13.12 |
| $ | 26.15 |
| | $ | 19.05 |
|
| Year ended December 31, 2013 | | | | |
| Year ended December 31, 2016 | | | | |
| First Quarter | $ | 16.56 |
| | $ | 14.44 |
| $ | 10.11 |
| | $ | 4.69 |
|
| Second Quarter | $ | 19.11 |
| | $ | 14.45 |
| $ | 10.55 |
| | $ | 4.96 |
|
| Third Quarter | $ | 23.61 |
| | $ | 19.12 |
| $ | 13.03 |
| | $ | 9.64 |
|
| Fourth Quarter | $ | 29.82 |
| | $ | 22.60 |
| $ | 15.85 |
| | $ | 10.98 |
|
On February 20, 2015,21, 2018, the last reported sale price for our common stock on the NASDAQ Global Select Market was $13.33$24.50 per share.
Holders
As of February 20, 2015,21, 2018, there were 439373 holders of record of our common stock. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers, and other financial institutions.
Dividends
There were no dividends paid in 20142017 and 2013. We currently intend to retain our earnings to finance future growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.
2016.
Share Repurchases
See "Note 9: Stockholder’s Equity""Note 11: Stockholders' Equity" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information regarding the Company’s stock repurchase program. Share repurchase activity during the fourth quarter 2014 was as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs |
| October 1 – 31, 2014 | — |
| | $ | — |
| | — |
| | $ | 45,155 |
|
| November 1 – 30, 2014 | 600 |
| | $ | 14.50 |
| | 600 |
| | $ | 36,452 |
|
| December 1 – 31, 2014 | — |
| | $ | — |
| | — |
| | $ | 36,452 |
|
| Total | 600 |
| | $ | 14.50 |
| | 600 |
| | |
ITEM 6. Selected Financial Data
The following selecteddata are derived from our audited consolidated financial datastatements and should be read in conjunctionalong with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7, our consolidated financial statements and notes thereto in Part II Item 8, and other financial information included elsewhere in this report. The selected consolidated statements of operations data and the consolidated balance sheet data are derived from our audited consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 (4) | | 2012 (5) | | 2011 | | 2010 |
| | (in thousands, except per share data) |
| Consolidated Statements of Operations Data: | | | | | | | | |
| Revenues: | | | | | | | | | |
| Services revenue | $ | 429,989 |
| | $ | 519,677 |
| | $ | 406,919 |
| | $ | 228,813 |
| | $ | 214,343 |
|
| Product revenue, net | 150,731 |
| | 54,303 |
| | — |
| | — |
| | — |
|
Total revenues (1) | 580,720 |
| | 573,980 |
| | 406,919 |
| | 228,813 |
| | 214,343 |
|
Operating income (loss) (1) | (8,441 | ) | | 74,449 |
| | 44,205 |
| | 21,479 |
| | 2,751 |
|
Other income (loss), net (1) | (14,766 | ) | | (29,623 | ) | | (6,677 | ) | | (1,246 | ) | | 15,247 |
|
| Income (loss) from continuing operations before income taxes | (23,207 | ) | | 44,826 |
| | 37,528 |
| | 20,233 |
| | 17,998 |
|
Income tax benefit (expense) (1) (2) | (12,340 | ) | | (20,427 | ) | | (15,002 | ) | | 11,288 |
| | (8,725 | ) |
| Income (loss) from continuing operations | (35,547 | ) | | 24,399 |
| | 22,526 |
| | 31,521 |
| | 9,273 |
|
Discontinued operations (3): | | | | | | | | | |
| Loss from discontinued operations, net of taxes | — |
| | — |
| | — |
| | (2,253 | ) | | (4,593 | ) |
| Loss on sale of discontinued operations, net of taxes | — |
| | — |
| | — |
| | (7,674 | ) | | — |
|
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
| | $ | 21,594 |
| | $ | 4,680 |
|
| Net income (loss) per share - basic: | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.86 | ) | | $ | 0.59 |
| | $ | 0.56 |
| | $ | 0.83 |
| | $ | 0.26 |
|
| Loss from discontinued operations | — |
| | — |
| | — |
| | (0.06 | ) | | (0.13 | ) |
| Loss on sale of discontinued operations | — |
| | — |
| | — |
| | (0.20 | ) | | — |
|
| Basic net income (loss) per share | $ | (0.86 | ) | | $ | 0.59 |
| | $ | 0.56 |
| | $ | 0.57 |
| | $ | 0.13 |
|
| Weighted average common shares outstanding, basic | 41,396 |
| | 41,201 |
| | 40,279 |
| | 37,954 |
| | 35,886 |
|
| Net income (loss) per share - diluted: | | | | | | | | | |
| Income (loss) from continuing operations | $ | (0.86 | ) | | $ | 0.56 |
| | $ | 0.54 |
| | $ | 0.82 |
| | $ | 0.25 |
|
| Loss from discontinued operations | — |
| | — |
| | — |
| | (0.06 | ) | | (0.12 | ) |
| Loss on sale of discontinued operations | — |
| | — |
| | — |
| | (0.20 | ) | | — |
|
| Diluted net income (loss) per share | $ | (0.86 | ) | | $ | 0.56 |
| | $ | 0.54 |
| | $ | 0.56 |
| | $ | 0.13 |
|
| Weighted average common shares outstanding, diluted | 41,396 |
| | 43,480 |
| | 41,672 |
| | 38,621 |
| | 36,829 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Statements of Operations Data: | (1) | (In thousands, except per share data) |
| Revenue: | | | | | | | | | | |
| Wealth management services revenue | | $ | 348,620 |
| | $ | 316,546 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Tax preparation services revenue | | 160,937 |
| | 139,365 |
| | 117,708 |
| | 103,719 |
| | 91,213 |
|
| Total revenue | | 509,557 |
| | 455,911 |
| | 117,708 |
| | 103,719 |
| | 91,213 |
|
| Operating income (loss) | | 48,037 |
| | 37,117 |
| | (4,807 | ) | | 4,603 |
| | (3,478 | ) |
| Other loss, net | | (44,551 | ) | | (39,781 | ) | | (12,542 | ) | | (13,489 | ) | | (29,568 | ) |
| Income (loss) from continuing operations before income taxes | | 3,486 |
| | (2,664 | ) | | (17,349 | ) | | (8,886 | ) | | (33,046 | ) |
| Income tax benefit |
| 25,890 |
| | 1,285 |
| | 4,623 |
| | 3,342 |
| | 7,385 |
|
| Income (loss) from continuing operations | | 29,376 |
| | (1,379 | ) | | (12,726 | ) | | (5,544 | ) | | (25,661 | ) |
| Discontinued operations, net of income taxes | (2) | — |
| | (63,121 | ) | | (27,348 | ) | | (30,003 | ) | | 50,060 |
|
| Net income (loss) | | 29,376 |
| | (64,500 | ) | | (40,074 | ) | | (35,547 | ) | | 24,399 |
|
| Net income attributable to noncontrolling interests | | (2,337 | ) | | (658 | ) | | — |
| | — |
| | — |
|
| Net income (loss) attributable to Blucora, Inc. | | $ | 27,039 |
| | $ | (65,158 | ) | | $ | (40,074 | ) | | $ | (35,547 | ) | | $ | 24,399 |
|
| Net income (loss) per share attributable to Blucora, Inc. - basic: | | | | | | | | |
| Continuing operations | | $ | 0.61 |
| | $ | (0.05 | ) | | $ | (0.31 | ) | | $ | (0.13 | ) | | $ | (0.62 | ) |
| Discontinued operations | | — |
| | (1.52 | ) | | (0.67 | ) | | (0.73 | ) | | 1.21 |
|
| Basic net income (loss) per share | | $ | 0.61 |
| | $ | (1.57 | ) | | $ | (0.98 | ) | | $ | (0.86 | ) | | $ | 0.59 |
|
| Weighted average shares outstanding, basic | | 44,370 |
| | 41,494 |
| | 40,959 |
| | 41,396 |
| | 41,201 |
|
| Net income (loss) per share attributable to Blucora, Inc. - diluted: | | | | | | | | |
| Continuing operations | | $ | 0.57 |
| | $ | (0.05 | ) | | $ | (0.31 | ) | | $ | (0.13 | ) | | $ | (0.62 | ) |
| Discontinued operations | | — |
| | (1.52 | ) | | (0.67 | ) | | (0.73 | ) | | 1.21 |
|
| Diluted net income (loss) per share | | $ | 0.57 |
| | $ | (1.57 | ) | | $ | (0.98 | ) | | $ | (0.86 | ) | | $ | 0.59 |
|
| Weighted average shares outstanding, diluted | | 47,211 |
| | 41,494 |
| | 40,959 |
| | 41,396 |
| | 41,201 |
|
| | | | Years ended December 31, | |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | |
| | (in thousands) | | | | | | | | | | | | |
| Consolidated Balance Sheet Data: | | | | | | | | | | (1) | |
| Cash, cash equivalents, short-term and long-term investments | $ | 301,298 |
| | $ | 333,705 |
| | $ | 162,288 |
| | $ | 293,551 |
| | $ | 253,736 |
| |
Working capital (6) | 303,246 |
| | 139,305 |
| | 144,385 |
| | 281,873 |
| | 242,440 |
| |
| Cash, cash equivalents, and investments | | | $ | 59,965 |
| | $ | 58,814 |
| | $ | 66,774 |
| | $ | 293,588 |
| | $ | 323,429 |
|
| Working capital | | (2) (3) (4) | 47,641 |
| | 43,480 |
| | 174,571 |
| | 299,431 |
| | 140,100 |
|
| Total assets | 872,714 |
| | 978,030 |
| | 585,293 |
| | 395,139 |
| | 352,720 |
| | 1,001,671 |
| | 1,022,659 |
| | 1,299,548 |
| | 865,775 |
| | 969,677 |
|
Total long-term liabilities (6) (7) (8) | 318,631 |
| | 174,587 |
| | 102,155 |
| | 837 |
| | 955 |
| |
| Total long-term liabilities | | (2) (3) (4) (5) | 390,495 |
| | 535,577 |
| | 656,122 |
| | 311,692 |
| | 171,268 |
|
| Total stockholders’ equity | 479,025 |
| | 514,070 |
| | 415,450 |
| | 355,105 |
| | 301,771 |
| | 541,387 |
| | 417,019 |
| | 462,284 |
| | 479,025 |
| | 514,070 |
|
| |
(1) | For a discussion of activity in 2012 through 2014, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7. In 2010, we recorded a $19.0 million net gain on a litigation settlement. The net gain allowed us to use a portion of our net operating loss carryforwards resulting in a net income tax expense of $6.6 million. |
| |
(2) | In 2011, we recorded a reversal of $18.9 million of the valuation allowance related to our deferred tax assets. |
| |
(3) | We completed the sale of Mercantila on June 22, 2011. The operating results of this business have been presented as discontinued operations for 2011 and 2010. |
| |
(4) | On August 22, 2013,December 31, 2015, we acquired Monoprice, which generated $54.3 million of revenue in 2013. |
| |
(5) | On January 31, 2012, we acquired TaxACT, which generated $62.1 million of revenue in 2012. |
| |
(6) | During 2014, the Notes were classified as a long-term liability with an outstanding balance, net of discount, of $185.2 million. The Notes were classified as a current liability in 2013.HD Vest. See "Note 7: Debt""Note 3: Business Combinations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. |
| |
(7)(2) | During 2013, Monoprice entered into a credit facility agreement,On October 14, 2015, we announced plans to divest the Search and TaxACT entered into a new credit facility agreement (to replaceContent and E-Commerce businesses. Accordingly, the one entered intooperating results of these businesses have been presented as discontinued operations for all periods presented, and the related balance sheet data have been classified in 2012). These arrangements had total outstanding balances, net of any discountstheir entirety within current assets and including any short-term portion, of $41.8 million and $51.9 million, respectively,current liabilities as of December 31, 20142015 but classified within current and $49.7 millionlong-term assets and $71.4 million, respectively,liabilities, as of December 31, 2013. appropriate, for prior periods. We sold the Search and Content business and the E-Commerce business on August 9, 2016 and November 17, 2016, respectively. |
| |
(3) | During 2012, TaxACT entered into2016 and 2015, the Convertible Senior Notes (the "Notes") were classified as a credit facility agreement, under which $73.9 million,long-term liability with an outstanding balance, net of discount and including the short-term portion, was outstanding asissuance costs, of December 31, 2012. $164.2 million, and $185.9 million, respectively. The Notes |
were classified as a current liability in 2013. See "Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
| |
(4) | See "Note 7: Debt""Note 4: Discontinued Operations" and "Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.report for a discussion of debt activity. |
| |
(8)(5) | During 2013, the Monoprice acquisition resulted in a $27.7 million deferred tax liability related to intangible assets. |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the Selected Consolidated Financial Data and our consolidated financial statements and notes thereto included elsewhere in this report.
The following discussion contains forward-looking statements that are subject to risks and uncertainties. See Part I "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the section titled "Risk Factors."
Introduction
Blucora operates two businesses: a portfolioWealth Management business and an online Tax Preparation business. The Wealth Management business consists of internet businesses:the operations of HD Vest, which we acquired on December 31, 2015. HD Vest is included in Blucora's results of operations beginning on January 1, 2016. HD Vest provides wealth management solutions for financial advisors and their clients. The Tax Preparation business consists of the operations of TaxAct and provides digital tax preparation solutions for consumers, small business owners, and tax professionals.
Prior to 2017, Blucora also operated an internet Search and Content business, an online Tax Preparation business and an E-Commerce business. The Search and Content business, InfoSpace, providesoperated a number of digital businesses in search, directory, online commerce, media, and mobile infrastructure markets, with operations since 2008 focusing on internet search services to users of our owned and operated and distribution partners' web properties, as well as online content. The Tax Preparation business consists of the operations of TaxACT and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. The E-Commerce business consistsconsisted of the operations of Monoprice which we acquired on August 22, 2013, and sellssold self-branded electronics and accessories to both consumers and businesses.
Strategic Transformation
Our Businesses
SearchOn October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market. Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and Content
OurHD Vest (see "Note 3: Business Combinations") and the divestitures of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part of the Strategic Transformation and "One Company" operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. In connection with this plan, we have incurred restructuring costs of approximately $7.0 million. These costs are recorded within corporate-level activity for segment (formerly knownpurposes. See "Note 5: Restructuring" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information. We also have incurred costs that were not included as our Search segment), InfoSpace, generates the majority of our revenues. The InfoSpace business provides search services to users of our owned and operated and distribution partners' web properties, as well as online content. These search services generally involve the generation and display of a set of hyperlinks to websites deemed relevant to search queries entered by users, predominantly from desktop and laptop computers. In addition to these algorithmic search results, paid listings are also generally displayed in response to search queries. Search services provided through our owned and operated properties include services through websitesrestructuring, such as Dogpile.com, WebCrawler.com, HowStuffWorks.com (acquired May 30, 2014, see below),recruiting and third party web pages thatoverlap in personnel expenses as we operate. Search services providedtransition positions to our distribution partners include servicesTexas ("Strategic Transformation Costs"). The actions to a network of approximately 100 distribution partners through the web properties of those distribution partners, which are generally private-labeledrelocate corporate headquarters were intended to drive efficiencies and customizedimprove operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is expected to address the unique requirements of each distribution partner.
The Search and Content segment's revenue primarily consists of advertising revenue generated through end-users clicking on paid listings included in the search results display, as well as from advertisements appearing on our HowStuffWorks.com website. The paid listings, as well as algorithmic search results, primarily are suppliedbe completed by Google and Yahoo!, whom we refer to as "Search Customers." Whenearly 2018. For a user submits a search query through one of our owned and operated or distribution partner sites and clicks on a paid listing displayed in response to the query, the Search Customer bills the advertiser that purchased the paid listing directly and shares a portion of its related paid listing fee with us. If the paid listing click occurred on one of our distribution partners' properties, we pay a significant share of our revenue to the distribution partner. Revenue is recognized in the period in which such clicks on paid listings occur and is based on the amounts earned by and ultimately remitted to us by our Search Customers.
We derive a significant portion of our revenue from Google, and we expect this concentration to continue in the foreseeable future at levels that are substantially similar to 2014. For the year ended December 31, 2014, search revenue from Google accounted for approximately 80% of our Search and Content segment revenue and 45% of our total revenue. For further discussion of this concentration risk,the associated risks, see the paragraphsection in our Risk Factors (Part I Item 1A1A. of this report) under the heading "Most"Risks Associated With our Business."
Acquisitions: On December 31, 2015, we acquired HD Vest for $613.7 million, including cash acquired of our search services revenue is attributable to Google,$38.9 million and after a $1.8 million final working capital adjustment in the first quarter of 2016. The acquisition was funded by a combination of cash on hand and the lossTaxAct - HD Vest 2015 credit facility, under which we borrowed $400.0 million (the "TaxAct - HD Vest 2015 credit facility"). During the last half of or a payment dispute with, Google or any other significant Search Customer would harm our business and financial results."2015, we incurred transaction costs of $11.0 million.
On May 30, 2014, InfoSpaceJuly 2, 2015, TaxAct acquired HSW,SimpleTax, a provider of online contenttax preparation services for individuals in Canada through various websites,its website www.simpletax.ca, for cash and additional consideration of up to $3.7 million that is contingent upon product availability and revenue performance over a three-year period.
See "Note 3: Business Combinations" and "Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information on the HD Vest acquisition, the SimpleTax acquisition, and the credit facility, respectively.
Business divestitures: On October 14, 2015, we announced plans to divest the Search and Content and E-Commerce businesses. Accordingly, our financial condition, results of operations, and cash flows reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Unless otherwise specified, disclosures in "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflect continuing operations.
We completed both divestitures in 2016. Specifically, on November 17, 2016, we closed on an agreement with YFC, under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. Of this amount, $39.5 million was received in the fourth quarter of 2016 and the remaining $1.0 million was received in the first half of 2017. On August 9, 2016, we closed on an agreement with OpenMail, under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment. We used all of the proceeds from these sales to pay down debt. We also incurred employee-related business exit costs of approximately $4.5 million, which primarily were recorded in discontinued operations. See "Note 4: Discontinued Operations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information on discontinued operations.
Our Continuing Businesses
Wealth Management
Our Wealth Management business provides financial advisors, who affiliate with HD Vest's registered broker-dealer investment adviser and/or insurance subsidiaries as independent contractors, an integrated, open platform that includes a broad variety of products offered through our brokerage, investment advisory, and insurance services to assist in making each financial advisor a financial service center for his/her clients. We regularly review the commissions and fees we charge for these products and services in light of the evolving regulatory and competitive environment and changes in client preferences and needs. We do not offer any proprietary products. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management, and other fees.
HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest's business model provides an open-architecture investment platform and technology tools to help financial advisors identify investment opportunities for their clients, while the long-standing tax advisory relationships provide a large client base of possible investment clients. This results in an experienced and stable network of financial advisors, who have multiple revenue-generating options to diversify their earnings sources. HD Vest also has a highly experienced home office team that is focused on solutions tailored to the advisor's practice. The home office team provides marketing, practice management, insurance and annuity, wealth management, succession planning, and other support to our advisors.
Our Wealth Management business is directly and indirectly sensitive to several macroeconomic factors and the state of financial markets, particularly in the United States. For additional information regarding the potential impact of these macroeconomic factors on our operations and results, see the Risk Factors "Changes in domestic and international economic, political and other factors could have a Material Adverse Effect on our business" in Part I Item 1A of this report.
Our Wealth Management business is subject to certain additional financial industry regulations and supervision, including www.HowStuffWorks.com.
by the SEC, FINRA, DOL, state securities and insurance regulators, and other regulatory authorities. For additional information regarding the potential impact of governmental regulation on our operations and results, see the Risk Factor "Government regulation of our business, including increased regulation or the interpretation of existing laws, rules or regulations, could have a Material Adverse Effect" and "Our Wealth Management business is subject to extensive regulation, and failure to comply with these regulations could have a Material Adverse Effect" in Part I Item 1A of this report.
Tax Preparation
Our TaxACTTax Preparation business consists of an onlineprovides DDIY tax preparation servicesolutions for individuals, taxconsumers and small business owners, and preparation software for individuals and professional tax preparers, and ancillary services. TaxACTprofessionals. TaxAct generates revenue primarily through its online service at www.taxact.com.www.TaxAct.com. The TaxACT business’s basic federal tax preparation online software service is "free for everyone," meaning that any taxpayer can use the services to e-file his or her federalCompany and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state jurisdictions and Canada.
TaxAct's offerings come with a price lock guarantee, whereby the price at the start of the tax return without paying for upgraded services and may do so for every formfiling process is the price when the return is filed, rather than pricing the offering at the time that the IRS allows to be e-filed. This free offertax return is filed. We believe this price lock guarantee ensures price transparency and differentiates TaxACT’sTaxAct from its competitors.
We had three offerings from many of its competitors who limit their free software and/or services offerings to certain categories of customers or certain forms. The TaxACT business generates revenue fromfor consumers for tax year 2016, which is the basis for TaxAct's 2017 operating results: a percentage of these "free" users who purchasefederal and state edition that handled simple returns; a state form or choose to upgrade for a fee to the Deluxe or Ultimate"plus" offering which includes additional support, tools, or state forms in the
casethat contained all of the Ultimate offering.basic offering features in addition to tools to maximize credits and deductions, and enhanced reporting; and a "premium" offering that contained all of the plus offering features in addition to tools for self-employed individuals to maximize credits and deductions. For our offerings, state returns can be filed for free for free simple filers, or through the separately-sold state edition. We also had an offering for small business owners. In addition revenue is generated from the sale ofto these core offerings, TaxAct also offers ancillary services which include, among other things,such as refund payment transfer, audit defense, stored value cards, and retirement investment accounts through HD Vest, and a marketplace for customers to take advantage of personalized tax preparation support services, data archive services, bank services (including reloadable pre-paid debit card services), and additional e-filing services. TaxACT is the recognized value player in the digital do-it-yourself space, offering comparable software and/or services at a lower cost to the end user compared to larger competitors. This, coupled with its "free for everyone" offer, provides TaxACT a valuable marketing position. TaxACT’sfinancial savings opportunities through third party product providers.
TaxAct’s professional tax preparer software allows professional tax preparers to file individual and business returns for their clients. Revenue from professionalTaxAct offers flexible pricing and packaging options that help tax preparers historically has constituted a relatively small percentage of the TaxACT business’s overall revenue and requires relatively modest incremental development costs as the professional tax preparer software is substantially similar to the consumer-facing software and online service.
On October 4, 2013, TaxACT acquired Balance Financial, a provider of web and mobile-based financial management software through its website www.balancefinancial.com.
E-Commerce
Our E-Commerce business, Monoprice, is an online retailer of self-branded electronics and accessories to both consumers and businesses. Monoprice offers its productsprofessionals save money by paying only for sale through the www.monoprice.com website, where the majority of our E-Commerce revenue is derived, and fulfills those orders from our warehouse in Rancho Cucamonga, California. We also sell our products through reseller and marketplace agreements. Monoprice has built a well-respected brand by delivering products with quality on par with well-known national brands, selling these products at prices far below the prices for those well-known brands, and providing top-tier service and rapid product delivery. The Monoprice website showcases 14 product categories and over 6,900 individual products. Monoprice has developed an efficient product cost structure that is enabled by a direct import supply chain solution that eliminates traditional layers of mark-ups imposed by intermediaries. Consumers are able to access and purchase products 24 hours a day from the convenience of a computer or a mobile device. Monoprice’s team of customer service representatives assists customers primarily by online chat or email. Nearly all sales are to customers located in the United States.
Acquisitions
HSW: On May 30, 2014, InfoSpace acquired HSW for $44.9 million in cash. HSW is included in our financial results beginning on May 30, 2014, the acquisition date.
Monoprice: On August 22, 2013, we acquired Monoprice for $182.9 million in cash. Monoprice is included in our financial results beginning on August 22, 2013, the acquisition date. Accordingly, the results discussed below were impacted by the timing of this acquisition, in that 2014 included a full year of Monoprice results as compared to a partial year of results in 2013.
TaxACT: On January 31, 2012, we acquired TaxACT for $287.5 million in cash. TaxACT is included in our financial results beginning on January 31, 2012, the acquisition date. Accordingly, the results discussed below were impacted by the timing of this acquisition, in that 2014 and 2013 included twelve months of TaxACT results while 2012 included eleven months. In addition, on October 4, 2013, TaxACT acquired Balance Financial.
what they need.
Seasonality
Our Tax Preparation segment is highly seasonal, with thea significant majorityportion of its annual revenue earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue at relatively consistent levels. Revenue from our E-Commerce segment also iscontinue. We anticipate that the seasonal with revenues historically beingnature of that part of the lowestbusiness will continue in the second quarter, a period that does not include consumer back-to-school or holiday-related spending.foreseeable future.
Comparability
We revised certain amounts for the year ended December 31, 2012 from the amounts previously reported in that period’s annual report on Form 10-K. We reclassified credit card fees previously reported in "Services cost of revenue" to "“Sales and marketing" expense. The reclassification had no effect on our reported revenues, operating income, or cash flows for the year ended December 31, 2012. Refer to "Note 1: The Company and Basis of Presentation" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
RESULTS OF OPERATIONS
Summary
|
| | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2014 | | Percentage Change | | 2013 | | Percentage Change | | 2012 |
| Services revenue | $ | 429,989 |
| | (17 | )% | | $ | 519,677 |
| | 28 | % | | $ | 406,919 |
|
| Product revenue, net | $ | 150,731 |
| | 178 | % | | $ | 54,303 |
| | 100 | % | | $ | — |
|
| Total revenues | $ | 580,720 |
| | 1 | % | | $ | 573,980 |
| | 41 | % | | $ | 406,919 |
|
| Operating income (loss) | $ | (8,441 | ) | | (111 | )% | | $ | 74,449 |
| | 68 | % | | $ | 44,205 |
|
|
| | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2017 | | Percentage Change | | 2016 | | Percentage Change | | 2015 |
| Revenue | $ | 509,557 |
| | 12 | % | | $ | 455,911 |
| | 287 | % | | $ | 117,708 |
|
| Operating income (loss) | $ | 48,037 |
| | 29 | % | | $ | 37,117 |
| | 872 | % | | $ | (4,807 | ) |
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Total revenuesRevenue increased approximately $6.7$53.6 million due to increases of $96.4$32.1 million in product revenue from the Monoprice business that we acquired in August 2013 and $12.5$21.6 million in revenue related to our Wealth Management and Tax Preparation business, offset by a decrease of $102.2 millionbusinesses, respectively, as discussed in revenue related to our Search and Content business.
the following "Segment Revenue/Operating Income" section.
Operating income decreasedincreased approximately $82.9$10.9 million, consisting of the $6.7$53.6 million increase in revenue and offset by an $89.6a $42.7 million increase in operating expenses. Key changes in operating expenses were:
$75.527.5 million decreaseincrease in the Search and Content segment’sWealth Management segment's operating expenses primarily as a result of lower revenue sharedue to higher commissions paid to our distribution partners withfinancial advisors, which fluctuated in proportion to the decreasechange in Searchunderlying commission and Content distribution revenueadvisory revenues earned on client accounts, and decreased content costs, offset by higher net personnel expenses primarily dueas we continue to overall increased headcount and higher spending onstandardize employee benefits across our online marketing.businesses.
$3.415.5 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher personnel expenses due to increased headcount and higher spending on marketing, campaigns for the current tax season.higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses.
$89.40.3 million increase in the E-Commerce segment’s operating expenses primarily due to the timing of the Monoprice acquisition.
$72.4 million increasedecrease in corporate-level expense activity primarily as a result of impairments recognized on E-Commerce goodwill and trade name, amortization expense associated with the acquisitions of Monoprice and HSW, depreciation expense on fixed assets attributable to Monoprice, higher net personnel expenses mainly due to employee-relatedlower stock-based compensation costs incurreddue to fewer grants in the current year and higher expense recognized in the prior year related to grants made to HD Vest employees in 2016 in connection with leadership changes and increased headcount to support operations,the HD Vest acquisition, partially offset by activity within our Tax Preparation business due to prior forfeitures, and lower bonus amounts consistent with company performance in 2014, and higher stock-based compensation related to the issuance of equity awards to HSW, Balance Financial, and Monoprice employees.personnel costs, both offset by Strategic Transformation Costs.
Segment results are discussed in the next section.
Year ended December 31, 20132016 compared with year ended December 31, 20122015
Total revenuesRevenue increased approximately $167.1$338.2 million due to increases of $83.7$316.5 million and $21.7 million in revenue related to our SearchWealth Management and Content business and $29.1 million in revenue related to our Tax Preparation business,businesses, respectively. Wealth Management revenue increased due to the timing of the HD Vest acquisition, and Tax Preparation revenue increased as discussed in the addition of $54.3 million in product revenue from the Monoprice business.following "Segment Revenue/Operating Income" section.
Operating income increased approximately $30.2$41.9 million,, consisting of the $167.1$338.2 million increase in revenue and offset by a $136.8$296.3 million increase in operating expenses. Key changes in operating expenses were:
$63.3270.3 million increase in the Search and Content segment’sWealth Management segment's operating expenses primarily as a resultdue to the timing of higher revenue share to our distribution partners with the increase in Search and Content distribution revenue and higher spending on our online marketing.
HD Vest acquisition.$18.611.7 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher spending on marketing, higher personnel expenses resulting from overall increased headcount supporting most functions, higher data center costs mostly related to third-party technology fees (software support and maintenance, bandwidth and hosting, and professional services), higher third-party costs associated with additional features in the timing of the TaxACT acquisition.
$49.3 millioncurrent year offerings, and an increase in the E-Commerce segment’s operating expenses dueprofessional services fees mostly related to the acquisition of Monoprice in 2013.
development projects.$5.614.3 million increase in corporate-level expense activity, primarily due to (i) higher amortization expense related to HD Vest acquisition-related intangible assets, (ii) higher stock-based compensation mainly related to a net increase in stock award grants (including to HD Vest employees), (iii) restructuring incurred in connection with the relocation of our corporate headquarters, (iv) higher depreciation expense mainly related to HD Vest fixed assets, and (v) higher personnel expenses resulting mainly from increased costs incurred as a resultpart of our Strategic Transformation, offset by (vi) lower acquisition-related costs due to professional services fees and other direct transaction costs incurred in the prior year related to the HD Vest acquisition, (vii) lower amortization expense associated with concluding the acquisitionsuseful life of Monopricecertain TaxAct acquisition-related intangible assets during 2016, and TaxACT and higher personnel expenses due to increased
headcount to support operations. This was offset by lower stock-based compensation due to $5.2 million in expense recognized in 2012 related to the modification of a warrant issued in August 2011 to purchase Blucora common stock (the “Warrant”) and the vesting of non-employee stock options upon completion of the TaxACT acquisition (for further detail on both items, see "Note 10: Stock-Based Compensation" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report).our former chief executive officer.
Segment results are discussed in the next section.
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. (“(GAAP“GAAP””) and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 11:"Note 13: Segment Information"Information" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, amortization of acquired intangible assets, impairment of goodwill and intangible assets,restructuring, other loss, net, and income taxes to segment operating results. We analyzedanalyze these separately.
Following the acquisitionsacquisition of TaxACTHD Vest and Monoprice, we determined that we have three reportable segments:the discontinued operations treatment of Search and Content and E-Commerce, we have two reportable segments: Wealth Management and Tax Preparation, and E-Commerce.Preparation.
Search and ContentWealth Management
| | | (In thousands, except percentages) | Years ended December 31, | Years ended December 31, |
| | 2014 | | Percentage Change | | 2013 | | Percentage Change | | 2012 | 2017 | | Percentage Change | | 2016 |
| Revenue | $ | 326,270 |
| | (24 | )% | | $ | 428,464 |
| | 24 | % | | $ | 344,814 |
| $ | 348,620 |
| | 10 | % | | $ | 316,546 |
|
| Operating income | $ | 55,812 |
| | (32 | )% | | $ | 82,504 |
| | 33 | % | | $ | 62,185 |
| $ | 50,916 |
| | 10 | % | | $ | 46,296 |
|
| Segment margin | 17 | % | | | | 19 | % | | | | 18 | % | 15 | % | | — | % | | 15 | % |
Search and Content revenue: Our ability to increase Search and ContentWealth Management revenue is dependent on our ability to attract and retain distribution partners and users of our owned and operated properties, which relies on providing search services that align with our Search Customers' preferences. In addition, revenue growth will be dependent upon investments that grow the audience for our owned and operated sites, including HowStuffWorks.com, as well as third party web pages that we operate, by leveraging owned and licensed content to create unique and engaging user experiences.
Search and Content operating income: Because we share revenue with our distribution partners, the Search and Content segment’s costderived from multiple sources. We track sources of revenue, will increase or decrease if search servicesprimary drivers of each revenue generated through our distribution partners’ web properties increases or decreases, respectively. The cost of revenue also can be impacted by the mix of revenue generated by our distribution partners.source, and recurring revenue. In addition, we managefocus on several business and key financial metrics in evaluating the success of our online marketing by projecting a desired return onbusiness relationships and our marketing expendituresresulting financial position and attempting to market according to that projected return.operating performance. A summary of our sources of revenue and business metrics are as follows.
The following table presents our Search and ContentSources of revenue by source and as a percentage of total Search and Content revenue:
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2014 | | Percentage of Revenue | | 2013 | | Percentage of Revenue | | 2012 | | Percentage of Revenue |
| Revenue from existing distribution partners (launched prior to the then-current year) | $ | 248,194 |
| | 76 | % | | $ | 321,954 |
| | 75 | % | | $ | 265,709 |
| | 77 | % |
| Revenue from new distribution partners (launched during the then-current year) | 9,233 |
| | 3 | % | | 34,332 |
| | 8 | % | | 38,272 |
| | 11 | % |
| Revenue from distribution partners | 257,427 |
| | 79 | % | | 356,286 |
| | 83 | % | | 303,981 |
| | 88 | % |
| Revenue from owned and operated properties | 68,843 |
| | 21 | % | | 72,178 |
| | 17 | % | | 40,833 |
| | 12 | % |
| Total Search and Content revenue | $ | 326,270 |
| | | | $ | 428,464 |
| | | | $ | 344,814 |
| | |
|
| | | | | | | | | | | | |
| (In thousands, except percentages) | Year ended December 31, |
| | Sources of Revenue | Primary Drivers | 2017 | | Percentage Change | | 2016 |
Advisor-driven
| Commission | - Transactions - Asset levels | $ | 160,241 |
| | 7 | % | | $ | 150,125 |
|
| Advisory | - Advisory asset levels | 145,694 |
| | 13 | % | | 129,417 |
|
| Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 26,297 |
| | 16 | % | | 22,653 |
|
| Transaction and fee | - Account activity
- Number of clients
- Number of advisors
- Number of accounts | 16,388 |
| | 14 | % | | 14,351 |
|
| | Total revenue | $ | 348,620 |
| | 10 | % | | $ | 316,546 |
|
| | Total recurring revenue | $ | 277,546 |
| | 11 | % | | $ | 249,310 |
|
| | Recurring revenue rate | 79.6 | % | | | | 78.8 | % |
Recurring revenue consists of trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commission revenue, Advisory revenue, Asset-based revenue, and Transaction and fee revenue, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
|
| | | | | | | | | | |
| (In thousands, except percentages and as otherwise indicated) | Years ended December 31, |
| | 2017 | | Percentage Change | | 2016 |
| Total Assets Under Administration (“AUA”) | $ | 44,178,710 |
| | 14 | % | | $ | 38,663,595 |
|
| Advisory Assets Under Management (“AUM”) | $ | 12,530,165 |
| | 21 | % | | $ | 10,397,071 |
|
| Percentage of total AUA | 28.4 | % | |
| | 26.9 | % |
| Number of advisors (in ones) | 3,999 |
| | (11 | )% | | 4,472 |
|
| Advisor-driven revenue per advisor | 20.4 |
| | 25 | % | | 16.3 |
|
TableTotal assets under administration ("AUA") includes assets that we hold directly or indirectly on behalf of Contentsclients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUA service for a client’s assets, the value of the asset is only counted once in the total amount of AUA. AUA assets include Advisory Assets under Management, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.
Advisory assets under management ("AUM") includes external client assets for which we provide investment advisory and management services, typically as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee based on the value of the AUM for each advisory client. These assets are not reported on the consolidated balance sheets.
As we reduce disengaged advisors, the number of advisors could continue to decrease before stabilizing. This decrease could improve the growth in advisor-driven revenues per advisor, prior to advisor stabilization.
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Wealth Management revenue increased approximately $32.1 million by each source of revenue discussed below.
Search and Content revenue decreased approximately $102.2 million, or 24%. Revenue from distribution partners decreased each quarter in 2014 over the prior year, for a total of $98.9 million, or 28%, driven by decreases of $73.8 million and $25.1 million in revenue from existing partners and new partners (both defined in table above), respectively. We generated 36% and 33% of our Search and Content revenue through our top five distribution partners in 2014 and 2013, respectively. The web properties of our top five distribution partners for 2014 generated 30% of our Search and Content revenue in 2013.
The decrease in distribution revenue in 2014 was driven by the removal of advertisements for our mobile search services as a result of our new agreement with Google, a technology change, loss of certain distribution partner traffic due to increased competition, difficulty in adding new distribution partners, changes in interpretation and enforcement of our Search Customers' policies and requirements, and our own compliance efforts. In addition to the year-over-year decline in distribution revenue, it also decreased sequentially each quarter in 2014. The sequential decreases in the second half of 2014 primarily were due to changes in interpretation and enforcement of our Search Customers' policies and requirements and our own compliance efforts as well as continued effects of increased competition. As we have previously disclosed, our Search Customers have broad discretion to unilaterally revise their policies and requirements, and their interpretations of those policies and requirements may differ from ours. Recent changes in the interpretation and enforcement of policies and requirements by our Search Customers have significantly impacted the operations of some of our larger and more tenured distribution partners. These changes generally impact models that have historically been permitted by our Search Customers, but we believe our Search Customers now wish to deemphasize these models in their networks. The most significant changes take the form of restrictions on marketing, traffic acquisition, distribution methodologies by certain partners, restrictions on certain content displayed by partners, and changes in categorization of certain traffic, all of which have resulted in decreased revenue and impacted our ability to bring new partners into our network. If our Search Customers continue to revise their interpretation and enforcement of their requirements and policies, our Search and Content business will continue to experience volatility.
Revenue generated by our owned and operated properties (which includes HSW) decreased $3.3 million, or 5%, primarily due to lower returns on online marketing in 2014 as compared to 2013. This decrease was offset partially by the revenue contribution from HSW. The lower returns on online marketing were attributable originally to a technology change implemented in the first quarter of 2014. The issues of the technology change were substantially addressed in the second quarter of 2014; however, we have been unable to increase our rate of return in the second half of 2014 to the rate previously experienced prior to such technology change and consistent with rates of return achieved in 2013. Our inability to consistently and profitably scale our online marketing expenditures was due to a decrease in the revenue earned for this traffic without a corresponding decrease in cost to acquire traffic, which we believe was related to volatility with respect to the quality scores that are applied by our Search Customers to certain of our sites. We have limited visibility into the factors impacting these scores or how these scores impact revenue and cost, since these elements are proprietary to our Search Customers. To the extent that we experience continued volatility in quality scores, we could be challenged going forward in our ability to increase marketing expenditures while maintaining our desired rate of return.
Search and ContentWealth Management operating income decreasedincreased approximately $26.7$4.6 million, consisting of the $102.2$32.1 million decreaseincrease in revenue, offset by a decrease of $75.5$27.5 million increase in operating expenses. The decreaseincrease in Search and ContentWealth Management operating expenses primarily was due to an $81.7 million, or 29%, decrease in Search and Content services cost of revenue, which was mainly driven by the decrease in distribution revenue and the resulting revenue share to our distribution partners as well as decreased content costs, and a $1.0 million decrease in data center expenses related to the migration of the data center to the cloud in 2013. These decreases were offset by a $3.6 million increase in personnel expenses primarily due to overall increased headcount, mainly as a result ofhigher commissions paid to our financial advisors, which fluctuated in proportion to the HSW acquisition,change in underlying commission and employee separation costs, a $2.2 million increase in spendingadvisory revenues earned on our online marketing,client accounts, and a $0.8 million increase in professional services associated with development projects and HSW content creation. Segment margin decreased primarily due to increasedhigher net personnel expenses and flat non-personnel operating expenses on declining revenues, as well as a lower return onwe continue to standardize employee benefits across our online marketing expenditures.businesses.
As noted above, we have experienced factors that have caused significant volatility, due in part to changes in interpretation and enforcement of our Search Customers' requirements and policies, resulting in decreased revenue and margin compression. If our Search Customers continue to revise their interpretation and enforcement of their requirements and policies, our Search and Content business will continue to experience volatility and its financial performance will continue to decline. See "Risks Related to our Search and Content Business" in Part I Item 1A. of this report. We have taken steps to redeploy resources toward initiatives that we believe will better align with our Search Customers' preferences, which should drive longer-term and more sustainable segment income. These initiatives will be driven by leadership that we recently brought to this business with the intention to provide product and service diversification to stabilize revenue. We expect further downward pressure on quarterly revenues through at least the first half of 2015 due to the time needed to develop and scale the
above initiatives as well as the removal of a distribution partner who accounted for 8% and 11% of fourth quarter and full year 2014 Search and Content revenue, respectively.
Year ended December 31, 20132016 compared with year ended December 31, 20122015
On December 31, 2015, we acquired HD Vest., which is included in Blucora's results of operations as of January 1, 2016.
SearchCommission revenue: We generate two types of commissions: transaction-based sales commissions and Contenttrailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on certain mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:
|
| | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2017 | | Percentage Change | | 2016 |
| By product category: | | | | | |
| Mutual funds | $ | 84,159 |
| | 6 | % | | $ | 79,476 |
|
| Variable annuities | 51,385 |
| | 8 | % | | 47,641 |
|
| Insurance | 13,146 |
| | 10 | % | | 11,909 |
|
| General securities | 11,551 |
| | 4 | % | | 11,099 |
|
| Total commission revenue | $ | 160,241 |
| | 7 | % | | $ | 150,125 |
|
| By sales-based and trailing: | | |
| | |
| Sales-based | $ | 68,199 |
| | 6 | % | | $ | 64,452 |
|
| Trailing | 92,042 |
| | 7 | % | | 85,673 |
|
| Total commission revenue | $ | 160,241 |
| | 7 | % | | $ | 150,125 |
|
In 2017, sales-based commission revenue increased approximately $83.7$3.7 million or 24%, primarily due to increased activity in mutual funds, insurance and general securities resulting from overall market performance, portfolio rebalancings, product availability and segment refocusing. General securities include equities, exchange-traded funds, bonds and alternative investments.
In 2017, trailing commission revenue generated by our distribution partners which increased by $52.3approximately $6.4 million or 17%, driven by a $56.2 millionand reflects an increase in the market value of the underlying assets and the impact of new investments.
Advisory revenue: Advisory revenue from existing partners.primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Adviser (“RIA”) and is based on the value of AUM. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The increasevalue of the assets in revenue from existing partners was offset by a $3.9 million decreasean advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in revenue from new partners. We generated 33% and 47%the following three-month period. The majority of our Search and Content revenue throughaccounts are billed in advance using values as of the last business day of the prior calendar quarter.
The activity within our top five distribution partnersAUM was as follows:
|
| | | | | | | |
| (In thousands) | Year ended December 31, |
| | 2017 | | 2016 |
| Balance, beginning of the period | $ | 10,397,071 |
| | $ | 9,692,244 |
|
| Net increase in new advisory assets | 794,184 |
| | 150,701 |
|
| Market impact and other | 1,338,910 |
| | 554,126 |
|
| Balance, end of the period | $ | 12,530,165 |
| | $ | 10,397,071 |
|
Increases or decreases in 2013 and 2012, respectively. The web properties of our top five distribution partners for 2013 generated 42% of our Search and Contentadvisory assets have a limited impact on advisory fee revenue in 2012. Further contributing to the increase wasperiod in which they occur. Rather, increases or decreases in advisory assets are a $31.3 million, or 77%, increase inprimary driver of future advisory fee revenue. Advisory revenue generated from our owned and operated properties. The increase was primarily due to continued investment in online marketing to drive end users to our owned and operated properties.
Search and Content operating income increased approximately $20.3 million, consisting of the $83.7 million increase in revenue, offset by an increase of $63.3 million in operating expenses. The increase in Search and Content operating expenses primarily was due tofor a $35.7 million, or 15%, increase in Search and Content services cost of revenue, which was mainlyparticular quarter is predominately driven by the prior quarter-end AUM.
In 2017, the increase in distributionadvisory revenue andof approximately $16.3 million is consistent with the resulting revenue share to our distribution partners. The remaining increase in Searchthe beginning-of-period AUM for 2017 compared with 2016.
Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and Content operating expenses wascash sweep programs.
In 2017, asset-based revenue increased $3.6 million, primarily duefrom higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases. We expect the 2018 transition of our clearing business to a $26.7 million increasenew clearing firm to provide growth opportunities in spending on our online marketing, a $0.9 million increaseasset-based revenues.
Transaction and fee revenue: Transaction and fee revenue primarily includes fees for executing certain transactions in data center expensesclient accounts and fees related to the migration of the data centerservices provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.
In 2017, transaction and fee revenue increased approximately $2.0 million primarily related to the cloud, and a $0.7 million increase in sales and marketing personnel expenses in support of our continued marketing initiatives.
advisor fee increases.
Tax Preparation
| | | (In thousands, except percentages) | Years ended December 31, | Years ended December 31, |
| | 2014 |
| Percentage Change |
| 2013 | | Percentage
Change | | 2012 | 2017 |
| Percentage Change |
| 2016 | | Percentage
Change | | 2015 |
| Revenue | $ | 103,719 |
| | 14 | % | | $ | 91,213 |
| | 47 | % | | $ | 62,105 |
| $ | 160,937 |
| | 15 | % | | $ | 139,365 |
| | 18 | % | | $ | 117,708 |
|
| Operating income | $ | 49,696 |
| | 22 | % | | $ | 40,599 |
| | 35 | % | | $ | 30,052 |
| $ | 72,921 |
| | 9 | % | | $ | 66,897 |
| | 17 | % | | $ | 56,984 |
|
| Segment margin | 48 | % | | | | 45 | % | | | | 48 | % | 45 | % | | | | 48 | % | | | | 48 | % |
Our ability to generate tax preparationTax Preparation revenue largely is driven by our ability to effectively marketderived primarily from sales of our consumer tax preparation software and online services and our ability to sell the related Deluxe or Ultimateas well as other offerings and ancillary services to our customers.consumers and small business owners. We also generate revenue through the professional tax preparer software that we sell to professional tax preparers who use it to prepare and file individual and business returns for their clients.
Revenue from the professionalby category was as follows: |
| | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2017 | | Percentage Change | | 2016 | | Percentage Change | | 2015 |
| Consumer | $ | 147,084 |
| | 16 | % | | $ | 126,289 |
| | 20 | % | | $ | 105,367 |
|
| Professional | 13,853 |
| | 6 | % | | 13,076 |
| | 6 | % | | 12,341 |
|
| Total revenue | $ | 160,937 |
| | 15 | % | | $ | 139,365 |
| | 18 | % | | $ | 117,708 |
|
We measure our consumer tax preparation software is derived in two ways: from per-unit licensing fees forcustomers using the number of accepted federal tax e-files made through our software and from amounts that we chargeonline services. We consider growth in the number of e-files to e-file throughbe the software. Revenue from professional tax preparers historically has constituted a relatively small percentagemost important non-financial metric in measuring the performance of the overall revenue for the TaxACT business.
Consumer tax preparation revenue is largely driven by our ability to acquire new usersconsumer side of the service, retain existing users, and upsell users to paid offerings and services. Overall revenue is driven more by growth in e-files than by growth in revenue per user, which historically has grown modestly, because we have not made significant pricing adjustments. Because we acquired the TaxACT business during the course of the 2012 tax season, we believe that presenting e-fileTax Preparation business. E-file metrics covering the same 2012 time period as the financial results presented would not accurately reflect segment results of operations. Accordingly, we are presenting these metrics for the entire 2012 tax season and calendar yearwere as follows:
|
| | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2014 | | Percentage Change | | 2013 | | Percentage Change | | 2012 |
| TaxACT desktop e-files | 258 |
| | (9 | )% | | 282 |
| | 6 | % | | 267 |
|
| TaxACT online e-files | 5,262 |
| | 4 | % | | 5,037 |
| | 8 | % | | 4,661 |
|
| TaxACT sub-total e-files | 5,520 |
| | 4 | % | | 5,319 |
| | 8 | % | | 4,928 |
|
TaxACT Free File Alliance e-files (1) | 222 |
| | 43 | % | | 155 |
| | (7 | )% | | 167 |
|
TaxACT total e-files (2) | 5,742 |
| | 5 | % | | 5,474 |
| | 7 | % | | 5,095 |
|
|
| | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2017 | | Percentage Change | | 2016 | | Percentage Change | | 2015 |
| Online e-files | 4,097 |
| | (14 | )% | | 4,759 |
| | (9 | )% | | 5,235 |
|
| Desktop e-files | 193 |
| | (21 | )% | | 244 |
| | (11 | )% | | 273 |
|
| Sub-total e-files | 4,290 |
| | (14 | )% | | 5,003 |
| | (9 | )% | | 5,508 |
|
Free File Alliance e-files (1) | 176 |
| | 5 | % | | 167 |
| | (8 | )% | | 181 |
|
| Total e-files | 4,466 |
| | (14 | )% | | 5,170 |
| | (9 | )% | | 5,689 |
|
| |
(1) | Free File Alliance e-files are provided as part of an IRS partnership that provides free electronic tax filing services to taxpayers meeting certain income-based guidelines. |
We measure our professional tax preparer customers using three metrics--the number of accepted federal tax e-files made through our software, the number of units sold, and the number of e-files per unit sold. We consider growth in these areas to be the most important non-financial metrics in measuring the performance of the professional tax preparer side of the Tax Preparation business. Those metrics were as follows:
| |
(2) | We redefined e-files in our Form 10-Q for the quarter ended March 31, 2013 to exclude e-filed extensions as we believe this is a more accurate metric in evaluating performance of the Tax Preparation segment. The figures set forth above for 2014, 2013, and 2012 reflect this change. |
|
| | | | | | | | | | | | | | |
| (In thousands, except percentages and as | Years ended December 31, |
| otherwise indicated) | 2017 | | Percentage
Change | | 2016 | | Percentage
Change | | 2015 |
| E-files | 1,774 |
| | 1 | % | | 1,755 |
| | 10 | % | | 1,590 |
|
| Units sold (in ones) | 20,694 |
| | 2 | % | | 20,290 |
| | 5 | % | | 19,355 |
|
| E-files per unit sold (in ones) | 85.7 |
| | (1 | )% | | 86.5 |
| | 5 | % | | 82.2 |
|
Year ended December 31, 20142017 compared with year ended December 31, 2013
2016
Tax Preparation revenue increased approximately $12.5$21.6 million primarily due to growth in revenue earned from online consumer users and, to a 4% increaselesser extent, increased sales of our professional tax preparer software. Online consumer revenue grew, despite a decrease in consumer e-files, due to growth in average revenue per user, increased salesprimarily resulting from price increases, which are expected to continue to be the primary driver of bank servicesgrowth in the current year, and increasing payments overnear future. The decrease in e-files is consistent with our expectations as we are in the past couple years related to data archive services that are recognized as revenue over the related contractual term.early stages of a multi-year pivot toward profitable customers. Revenue derived from professional tax preparers also contributedincreased primarily due to the increase, with a 12% increase in preparer e-files coupled with an increase in the number of professional preparer units sold.
Tax Preparation operating income increased approximately $6.0 million, consisting of the $21.6 million increase in revenue and offset by a $15.5 million increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses.
Year ended December 31, 2016 compared with year ended December 31, 2015
Tax Preparation revenue increased approximately $21.7 million primarily due to growth in revenue earned from online consumer users, increased sales of ancillary services, and increased sales of our professional tax preparer software. Online consumer revenue grew, despite a decrease in e-files, due to growth in average revenue per user, primarily resulting from the re-packaging of our offerings and related price increases for tax year 2015. Revenue derived from professional tax preparers increased, primarily due to an increase in the number of professional preparer units sold.
Tax Preparation operating income increased approximately $9.1$9.9 million, due toconsisting of the $12.5$21.7 million increase in revenue and offset by an $11.7 million increase of $3.4 million in operating expenses. The increase in Tax Preparation segment operating expenses primarily was due to increased spending on marketing, an increase in personnel expenses mainly due toresulting from overall higher headcount supporting allmost functions, increased data center costs mostly related to third-party technology fees (software support and to a lesser extent,maintenance, bandwidth and hosting, and professional services), increased spending on marketing campaigns forthird-party costs associated with additional features in the current tax season.
Year ended December 31, 2013 compared with year ended December 31, 2012
Tax Preparation revenue increased approximately $29.1 million primarily due to the timing of the TaxACT acquisition. In addition, consumer tax preparation revenue increased due toofferings, and an increase in e-filings for the year.
Tax Preparation operating income increased approximately $10.5 million primarily due to the $29.1 million increase in revenue, offset by an increase of $18.6 million in operating expenses that primarily wereprofessional services fees mostly related to the timing of the TaxACT acquisition. The increase in operating expenses was amplified further by the fact that a relatively high percentage of tax season advertising occurs in January, a month that was included in 2013 results but not in 2012 results due to the timing of the TaxACT acquisition. In addition, personnel expenses increased mainly due to higher headcount supporting sales and marketing and general and administrative functions, while data center expenses grew primarily to support our online service offerings. These operating expense increases were offset by a $2.4 million decrease in Tax Preparation services cost of revenue primarily related to decreased bank service fees on our bank card services and royalties.
E-Commerce
The E-Commerce segment was new in 2013 due to our acquisition of Monoprice. Unless otherwise indicated, figures for the year ended December 31, 2013 reflect the results from August 22, 2013, the acquisition date, through December 31, 2013.
|
| | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2014 | | Percentage
Change | | 2013 |
| Revenue | $ | 150,731 |
| | 178 | % | | $ | 54,303 |
|
| Operating income | $ | 12,043 |
| | 142 | % | | $ | 4,967 |
|
| Segment margin | 8 | % | | | | 9 | % |
Monoprice is an online retailer of self-branded electronics and accessories to both consumers and businesses. Monoprice offers its products for sale through the www.monoprice.com website, where the majority of our E-Commerce revenue is derived, and fulfills those orders from our warehouse in Rancho Cucamonga, California. We also sell our products through reseller and marketplace agreements. E-Commerce revenue growth largely is driven by our ability to increase the number of Monoprice.com orders and extend our sales channels. Because we acquired the Monoprice business during the course of 2013, we believe that presenting the percentage change in the number of orders covering the same 2013 time period as the financial results presented (and comparable period) would not accurately reflect segment results of operations. Accordingly, we are presenting this metric for the entire 2013 calendar year and the comparable prior period. While order growth slowed for the current period as compared to the prior period, it was offset by an increase in the average order value. The decrease in the number of orders was driven by increased activity through the reseller channel, which also increased the average order value, as well as the impacts of inventory challenges due to port slowdowns. Order numbers changed as follows:
|
| | | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Order numbers | (5 | )% | | 15 | % | | 13 | % |
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Operating expenses | $ | 22,907 |
| | $ | 3,908 |
| | $ | 18,999 |
| | $ | 1,249 |
| | $ | 17,750 |
|
| Stock-based compensation | 11,653 |
| | (2,475 | ) | | 14,128 |
| | 5,434 |
| | 8,694 |
|
| Acquisition-related costs | — |
| | (391 | ) | | 391 |
| | (10,597 | ) | | 10,988 |
|
| CEO separation-related costs | — |
| | — |
| | — |
| | (1,769 | ) | | 1,769 |
|
| Depreciation | 4,137 |
| | (408 | ) | | 4,545 |
| | 2,258 |
| | 2,287 |
|
| Amortization of acquired intangible assets | 34,002 |
| | (141 | ) | | 34,143 |
| | 13,840 |
| | 20,303 |
|
| Restructuring | 3,101 |
| | (769 | ) | | 3,870 |
| | 3,870 |
| | — |
|
| Total corporate-level activity | $ | 75,800 |
| | $ | (276 | ) | | $ | 76,076 |
| | $ | 14,285 |
| | $ | 61,791 |
|
E-Commerce revenue and operating income increased approximately $96.4 million and $7.1 million, respectively, primarily due to the timing of the Monoprice acquisition. In addition, E-Commerce segment operating expenses included a $1.2 million charge triggered by the resignation of Ajay Kumar, the President of Monoprice. On June 24, 2014, the Company accepted the resignation of Mr. Kumar, and, under the circumstances of that resignation, Mr. Kumar was entitled to receive payment under the terms of the Restricted Cash Agreement that was entered into in connection with our acquisition of Monoprice. The amount that Mr. Kumar was entitled to under the Restricted Cash Agreement was the deferred amount that he otherwise would have been entitled to receive at the time of the 2013 sale of Monoprice to Blucora. Refer to our Current Report on Form 8-K dated June 24, 2014 for additional information.
As noted above, we have experienced inventory challenges as a result of port slowdowns. See "Risks Related to our E-Commerce Business" in Part I Item 1A. of this report. The port slowdowns have continued into the first quarter of 2015. Until these slowdowns are resolved, the availability of our products will be negatively impacted. As a result, we expect downward pressure on our quarterly revenues through at least the first quarter of 2015.
Corporate-Level Activity
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2014 | | Change | | 2013 | | Change | | 2012 |
| Operating expenses | $ | 14,616 |
| | $ | 787 |
| | $ | 13,829 |
| | $ | 2,031 |
| | $ | 11,798 |
|
| Stock-based compensation | 11,884 |
| | 357 |
| | 11,527 |
| | (1,696 | ) | | 13,223 |
|
| Depreciation | 5,581 |
| | 1,105 |
| | 4,476 |
| | 664 |
| | 3,812 |
|
| Amortization of intangible assets | 31,094 |
| | 7,305 |
| | 23,789 |
| | 4,590 |
| | 19,199 |
|
| Impairment of goodwill and intangible assets | 62,817 |
| | 62,817 |
| | — |
| | — |
| | — |
|
| Total corporate-level activity | $ | 125,992 |
| | $ | 72,371 |
| | $ | 53,621 |
| | $ | 5,589 |
| | $ | 48,032 |
|
Certain corporate-level activity is not allocated to our segments, including certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, separation-related costs related to the departure of our CEO in 2016, depreciation, amortization of acquired intangible assets, and impairment of goodwill and intangible assets.restructuring. For further detail, refer to segment information appearing in "Note 11:"Note 13: Segment Information"Information" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Operating expenses included in corporate-level activity increased primarily due to Strategic Transformation Costs and costs associated with leadership changes at HD Vest. Strategic Transformation Costs primarily related to the relocation cost of our corporate headquarters and are not classified as restructuring. These costs are associated with transitioning of roles such as overlap in staffing and recruiting search fees.
Stock-based compensation decreased primarily due to fewer grants in the current year and higher expense recognized in the prior year related to grants made to HD Vest employees in 2016 that were made in connection with the HD Vest acquisition, partially offset by activity within our Tax Preparation business due to prior forfeitures.
Acquisition-related costs, depreciation and amortization of acquired intangible assets were comparable to the prior period.
Restructuring relates to expenses incurred in connection with the relocation of our corporate headquarters in 2017. Further detail is provided under the "Operating Expenses - Restructuring" section of the management's discussion and analysis of financial condition and results of operations below.
Year ended December 31, 2016 compared with year ended December 31, 2015
Operating expenses included in corporate-level activity increased primarily due to a $1.1$1.3 million net increase in personnel expenses, and a $0.5 million increase in corporate business insurance expenses as a result of the Monoprice acquisition. The net increase in personnel expensesmainly due to Strategic Transformation costs, which primarily consisted of an increase in headcount to support operations, an increase in employee separation and related costs incurredrecruiting fees in connection with leadership changes,the move of our headquarters, offset by lower bonus amounts consistent with company performance in 2014. These increases were offset by a $0.9 million increase in capitalized internally developed software primarily due to the timing of the Monoprice acquisition. Internally developed software expense is recorded within our segments with the related cost capitalization benefit recorded within corporate-level activity.headcount.
Stock-based compensation increased primarily due to a net increase in stock award grants (including to HD Vest employees in connection with the issuanceHD Vest acquisition).
Acquisition-related costs include professional services fees and other direct transaction costs and changes in the fair value of equity awardscontingent consideration liabilities related to Balance Financialacquired companies. The decrease relates to professional services fees and Monoprice employees.other direct transaction costs incurred in 2016 related to the HD Vest acquisition, offset by changes in the fair value of the SimpleTax contingent consideration liability, which was revalued in the second quarter of 2016.
On October 14, 2015, we announced the departure of our former chief executive officer. His departure became effective March 31, 2016. In conjunction with that 2015 announcement, we recorded $1.8 million of separation-related costs in 2015, most of which were pursuant to his employment agreement and were paid in April 2016.
Depreciation increased primarily due to depreciation expense on HD Vest fixed assets attributable to Monoprice.assets.
Amortization of acquired intangible assets increased primarily due to amortization expense relatedon HD Vest acquisition-related intangible assets, offset by lower amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Restructuring relates to intangibles acquired as partexpenses incurred in connection with the relocation of our corporate headquarters in 2017. Further detail is provided under the "Operating Expenses - Restructuring" section of the Monopricemanagement's discussion and HSW acquisitions.analysis of financial condition and results of operations below.
Impairment of goodwill and intangible assets increased primarily due to impairments recognized in the fourth quarter of 2014 on E-Commerce goodwill and trade name. For further detail, see "Note 4: Goodwill and Other Intangible Assets" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Year ended December 31, 2013 compared with year ended December 31, 2012
Operating expenses included in corporate-level activity increased primarily due to a $1.5 million increase in personnel expenses mainly related to increased headcount to support operations.
Stock-based compensation decreased primarily due to $5.2 million in expense recognized in 2012 related to the modification of the Warrant and the vesting of non-employee stock options upon completion of the TaxACT acquisition, offset by expense of $0.5 million in 2013 related to stock options that vested upon completion of the Monoprice acquisition (for further detail on both items, see "Note 10: Stock-Based Compensation" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) as well as higher expense in 2013 related to increased equity award activity, including the issuance of equity awards to Monoprice employees.
Depreciation increased due to depreciation expense on fixed assets attributable to Monoprice.
Amortization of intangible assets increased primarily due to amortization expense related to intangibles acquired as part of the Monoprice acquisition and, to a lesser extent, amortization expense related to TaxACT intangibles due to the timing of the TaxACT acquisition.
OPERATING EXPENSES
Cost of RevenuesRevenue
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2014 |
| Change |
| 2013 |
| Change |
| 2012 |
| Services cost of revenue | $ | 218,153 |
| | $ | (84,126 | ) | | $ | 302,279 |
| | $ | 36,334 |
| | $ | 265,945 |
|
| Product cost of revenue | 102,344 |
| | 64,163 |
| | 38,181 |
| | 38,181 |
| | — |
|
| Total cost of revenues | $ | 320,497 |
| | $ | (19,963 | ) | | $ | 340,460 |
| | $ | 74,515 |
| | $ | 265,945 |
|
| Percentage of revenues | 55 | % | | | | 59 | % | | | | 65 | % |
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2017 |
| Change |
| 2016 |
| Change |
| 2015 |
| Wealth management services cost of revenue | $ | 235,859 |
| | $ | 21,863 |
| | $ | 213,996 |
| | $ | 213,996 |
| | $ | — |
|
| Tax preparation services cost of revenue | 10,018 |
| | 1,650 |
| | 8,368 |
| | 2,201 |
| | 6,167 |
|
| Amortization of acquired technology | 195 |
| | (617 | ) | | 812 |
| | (6,734 | ) | | 7,546 |
|
| Total cost of revenue | $ | 246,072 |
| | $ | 22,896 |
| | $ | 223,176 |
| | $ | 209,463 |
| | $ | 13,713 |
|
| Percentage of revenue | 48 | % | | | | 49 | % | | | | 12 | % |
We record the cost of revenuesrevenue for sales of services and products when the related revenue is recognized. Services cost of revenue consists of costs related to our Search and ContentWealth Management and Tax Preparation businesses, which include revenue sharing arrangements with our distribution partners, usage-based content fees, royalties, bank product service fees,commissions to financial advisors, third-party costs, and amortization of intangibles. It also consists of costs associated with the technical support team and the operation of theour data centers that serve our Search and Content and Tax Preparation businesses, whichcenters. Data center costs include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include technology project consulting fees), software support and maintenance, bandwidth and hosting costs, and depreciation. Product costCost of revenue consistsalso includes the amortization of costs related to our E-Commerce business, which include product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence.
acquired technology.
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Services cost of revenue decreased primarily due to decreased Search and ContentWealth management services cost of revenue of $81.7 million, driven by the decrease in revenue generated from distribution partners and the resulting revenue share to our distribution partners as well as decreased content costs, and a $1.3 million decrease in data center expenses primarily related to the migration of the Search data center to the cloud in 2013.
Product cost of revenue increased primarily due to an increase in commissions paid to our financial advisors, which fluctuated in proportion to the timing of the Monoprice acquisition.change in underlying commission and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors made during 2017.
Year ended December 31, 2013 compared with year ended December 31, 2012
ServicesTax preparation services cost of revenue increased primarily due to increased Searchan increase in data center costs related to software support and Contentmaintenance fees.
Amortization of acquired technology decreased due to amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Year ended December 31, 2016 compared with year ended December 31, 2015
Wealth management services cost of revenue of $35.7 million driven by the increase in revenue generated from distribution partners and the resulting revenue share to our distribution partners, a $2.8 million increase in data center operations primarilyincreased due to the timing of the TaxACT acquisition and higher personnel expenses from increased headcount to support our online service offering, and, to a lesser extent, increased data center expenses related to the migration of the Search data center to the cloud in 2013. These increases were offset by a $2.4 million decrease in HD Vest acquisition.
Tax Preparationpreparation services cost of revenue increased primarily due to higher data center costs mostly related to third-party technology fees (software support and maintenance, bandwidth and hosting, and professional services) and higher third-party costs associated with additional features in the current year offerings.
Amortization of acquired technology decreased bank service fees on our bank card services and royalties.due to amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Product cost of revenue represents costs related to Monoprice.
Engineering and Technology
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2014 |
| Change |
| 2013 |
| Change |
| 2012 |
| Engineering and technology | $ | 20,670 |
| | $ | 8,988 |
| | $ | 11,682 |
| | $ | 1,713 |
| | $ | 9,969 |
|
| Percentage of revenues | 4 | % | | | | 2 | % | | | | 3 | % |
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2017 |
| Change |
| 2016 |
| Change |
| 2015 |
| Engineering and technology | $ | 19,614 |
| | $ | 1,834 |
| | $ | 17,780 |
| | $ | 12,673 |
| | $ | 5,107 |
|
| Percentage of revenue | 4 | % | | | | 4 | % | | | | 4 | % |
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, includingwhich include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, to augment our staffing, software support and maintenance, bandwidth and hosting, and professional services fees.
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Engineering and technology expenses increased primarily due to an increase in consulting and professional services fees, mostly related to Tax Preparation development projects.
Year ended December 31, 2016 compared with year ended December 31, 2015
Engineering and technology expenses increased, and $8.7 million of which $4.3 millionthis increase was attributable to MonopriceHD Vest (excluding stock-based compensation) and primarily related to the timing of the MonopriceHD Vest acquisition. The remaining increase primarily was due to a $4.0$3.1 million increase in personnel expenses, as well as a $1.2 million increase in professional services associated with development projects and HSW content creation. Personnel expenses increased mainly duerelated to higher headcount in our Search and Content and Tax Preparation businesses. Thebusiness and higher headcountstock-based compensation due to an increase in our Searchstock award grants (including to HD Vest employees), and, Content business primarilyto a lesser extent, an increase in professional services fees mostly related to the HSW acquisition. These increases in expenses were offset by a $0.9 million increase in capitalized internally developed software primarily due to the timing of the Monoprice acquisition.
Year ended December 31, 2013 compared with year ended December 31, 2012
Engineering and technology expenses increased, of which $1.4 million was attributable to Monoprice, the majority of which was personnel-related.
Tax Preparation development projects.
Sales and Marketing
| | | (In thousands, except percentages) | Years ended December 31, | Years ended December 31, |
| | 2014 | | Change | | 2013 | | Change | | 2012 | 2017 | | Change | | 2016 | | Change | | 2015 |
| Sales and marketing | $ | 118,124 |
| | $ | 19,442 |
| | $ | 98,682 |
| | $ | 53,038 |
| | $ | 45,644 |
| $ | 102,798 |
| | $ | 13,438 |
| | $ | 89,360 |
| | $ | 43,506 |
| | $ | 45,854 |
|
| Percentage of revenues | 20 | % | | | | 17 | % | | | | 11 | % | |
| Percentage of revenue | | 20 | % | | | | 20 | % | | | | 39 | % |
Sales and marketing expenses consist principally of marketing expenses associated with our TaxACT and Monoprice websites (which include television, radio, online, text, and email channels), our owned and operated web search properties (which consist of traffic acquisition, including our online marketing fees paid to search engines to drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs) for personnel engaged in marketing and selling activities, and fulfillment expenses primarily associated with our E-Commerce business. Fulfillment expenses include direct operating expenses (including personnel costs) related to our purchasing, customer and technical support, receiving, inspection and warehouse functions, the cost of temporary help and contractors to augmentfor those engaged in marketing, selling, and sales support operations activities, marketing expenses associated with our staffing,HD Vest and credit cardTaxAct businesses (which primarily include television, radio, online, text, email, and sponsorship channels), and back office processing fees.
support expenses associated with our HD Vest business (occupancy and general office expenses, regulatory fees, and license fees).
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Sales and marketing expenses increased of which $16.0 million was attributable to Monoprice (excluding stock-based compensation) and primarily related to the timing of the Monoprice acquisition. The remaining increase primarily was due to a $2.6$7.8 million increase in marketing expenses in our Search and Content and Tax Preparation businesses and a $0.2$3.8 million net increase in personnel expenses. The increase in marketing expenses was driven by increased online marketing by our Search and Content segment and, to a lesser extent, increased marketing campaign activity for the current tax season byin our Tax Preparation segment.business. Personnel expenses increased primarily due to higher headcount inthe standardization of employee benefits across our Tax Preparation business, offset by lower bonus amounts consistent with company performance in 2014.
businesses.
Year ended December 31, 20132016 compared with year ended December 31, 2012
2015
Sales and marketing expenses increased, and $34.9 million of this increase was attributable to HD Vest (excluding stock-based compensation) and related to the timing of the HD Vest acquisition. The remaining increase primarily was due to a $44.3$5.6 million increase in marketing expenses and a $6.0$2.8 million increase in personnel expenses, and a $2.2 million increase in credit card processing fees.expenses. The increase in marketing expenses was driven by increased online marketing byin our Search and Content segment, the timing of the TaxACT acquisition further amplified by the fact that a relatively high percentage of tax season marketing occurs in January, a month that was included in 2013 results but not in 2012 results, and, to a lesser extent, the sales and marketing expense of Monoprice.Tax Preparation business. Personnel expenses increased primarily due to Monopricehigher stock-based compensation with an increase in stock award grants (including to HD Vest employees) and to a lesser extent, increasedhigher headcount in support of our Search and Content and Tax Preparation businesses. Lastly, the increase in credit card processing fees was primarily attributable to Monoprice and, to a lesser extent, the timing of the TaxACT acquisition.business.
General and Administrative
| | | (In thousands, except percentages) | Years ended December 31, | Years ended December 31, |
| | 2014 | | Change | | 2013 | | Change | | 2012 | 2017 | | Change | | 2016 | | Change | | 2015 |
| General and administrative | $ | 39,120 |
| | $ | 9,273 |
| | $ | 29,847 |
| | $ | 2,429 |
| | $ | 27,418 |
| $ | 52,668 |
| | $ | 5,272 |
| | $ | 47,396 |
| | $ | 3,833 |
| | $ | 43,563 |
|
| Percentage of revenues | 7 | % | | | | 5 | % | | | | 7 | % | |
| Percentage of revenue | | 10 | % | | | | 10 | % | | | | 37 | % |
General and administrative (“(“G&A&A””) expenses consist primarily of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, to augment our staffing, professional services fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
Year ended December 31, 20142017 compared with year ended December 31, 2013
G&A expenses increased, of which $4.9 million was attributable to Monoprice (excluding stock-based compensation) and included a $1.2 million charge related to the Restricted Cash Agreement of Mr. Kumar and the impact of the timing of the Monoprice acquisition. The remaining increase primarily was due to a $3.6 million net increase in personnel expenses and a $0.5 million increase in corporate business insurance expenses as a result of the Monoprice acquisition. The increase in personnel expenses consisted of an increase in salaries, benefits, and other employee-related costs attributable to increased headcount to support operations and an increase in employee separation and related costs incurred in connection with leadership changes, offset by lower bonus amounts consistent with company performance in 2014.
Year ended December 31, 2013 compared with year ended December 31, 2012
2016
G&A expenses increased primarily due to a $0.5$4.9 million net increase in personnel expenses, consisting of a $2.9 million increase in salaries, benefits,mainly related to Strategic Transformation Costs and other employee-related costs attributable to increased corporate and TaxACT headcount to support operations as well as increased headcountassociated with the Monoprice acquisition,leadership changes at HD Vest, offset by a $2.4 million net decrease in stock-based compensation. The $2.4 million net decrease inlower stock-based compensation included $5.2 milliondue to fewer grants in the current year and higher expense recognized in 2012the prior year related to the modificationtiming of the Warrantgrants.
Year ended December 31, 2016 compared with year ended December 31, 2015
G&A expenses increased, and the vesting of non-employee stock options upon completion of the TaxACT acquisition, offset by expense of $0.5$12.7 million in 2013 related to stock options that vested upon completion of the Monoprice acquisition (for further detail on both items, see "Note 10: Stock-Based Compensation" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) as well as higher expense in 2013 related to increased equity award activity, including the issuance of equity awards to Monoprice employees. The remaining increase in G&A expenses related to non-personnel expenseswas attributable to Monoprice, increases in professional services fees,HD Vest (excluding stock-based compensation) and to a lesser extent, non-personnel expenses attributable to TaxACT duerelated to the timing of the TaxACTHD Vest acquisition.
There also was a $1.6 million net increase in personnel expenses. This net increase in personnel expenses included higher stock-based compensation, mainly related to a net increase in stock award grants (including to HD Vest employees), and costs incurred as part of our Strategic Transformation, which primarily consisted of recruiting fees, offset by $1.8 million of separation-related costs incurred in the prior year in connection with the departure of our former chief executive officer and lower headcount. These increases were offset by a $0.4 million net decrease in acquisition-related costs due to professional services fees and other direct transaction costs incurred in the prior year related to the HD Vest acquisition, offset by changes in the fair value of the SimpleTax contingent consideration liability, which was revalued in the second quarter of 2016.
Depreciation and Amortization of Intangible Assets, and Impairment of Goodwill andAcquired Intangible Assets
| | | (In thousands, except percentages) | Years ended December 31, | Years ended December 31, |
| | 2014 | | Change | | 2013 | | Change | | 2012 | 2017 | | Change | | 2016 | | Change | | 2015 |
| Depreciation | $ | 4,352 |
| | $ | 1,613 |
| | $ | 2,739 |
| | $ | 620 |
| | $ | 2,119 |
| $ | 3,460 |
| | $ | (421 | ) | | $ | 3,881 |
| | $ | 2,360 |
| | $ | 1,521 |
|
| Amortization of intangible assets | 23,581 |
| | 7,460 |
| | 16,121 |
| | 4,502 |
| | 11,619 |
| |
| Impairment of goodwill and intangible assets | 62,817 |
| | 62,817 |
| | — |
| | — |
| | — |
| |
| Amortization of acquired intangible assets | | 33,807 |
| | 476 |
| | 33,331 |
| | 20,574 |
| | 12,757 |
|
| Total | $ | 90,750 |
| | $ | 71,890 |
| | $ | 18,860 |
| | $ | 5,122 |
| | $ | 13,738 |
| $ | 37,267 |
| | $ | 55 |
| | $ | 37,212 |
| | $ | 22,934 |
| | $ | 14,278 |
|
| Percentage of revenues | 16 | % | | | | 3 | % | | | | 3 | % | |
| Percentage of revenue | | 7 | % | | | | 8 | % | | | | 12 | % |
Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, heavy equipment, and leasehold improvements not recognized in cost of revenues.revenue. Amortization of acquired intangible assets primarily includes the amortization of customer relationships, which are amortized over their estimated lives. Impairment of goodwill and intangible assets relates to those acquired in a business combination.
Year ended December 31, 20142017 compared with year ended December 31, 20132016
Depreciation and amortization of acquired intangible assets were comparable to the prior year.
Year ended December 31, 2016 compared with year ended December 31, 2015
Depreciation increased primarily due to depreciation expense on HD Vest fixed assets attributable to Monoprice.
assets.
Amortization of acquired intangible assets increased primarily due to amortization expense on HD Vest acquisition-related intangible assets.
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | Years ended December 31, |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Restructuring | $ | 3,101 |
| | $ | (769 | ) | | $ | 3,870 |
| | $ | 3,870 |
| | $ | — |
|
| Percentage of revenue | 1 | % | | | | 1 | % | | | | — | % |
In connection with the Strategic Transformation, including the relocation of our headquarters, we have incurred restructuring costs of approximately $7.0 million, which includes all costs associated with our non-cancelable operating lease. While the relocation and the related costs were substantially completed by June 2017, the Company expects some costs through early 2018, primarily related to intangibles acquired as part of the Monoprice and HSW acquisitions.
Impairment of goodwill and intangible assets increased primarily dueemployees who will continue to impairments recognized in the fourth quarter of 2014 on E-Commerce goodwill and trade name. For further detail, seeprovide service through that time period.
See "Note 4: Goodwill and Other Intangible Assets"5: Restructuring" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.report for additional information on restructuring.
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Interest income | $ | (110 | ) | | $ | (29 | ) | | $ | (81 | ) | | $ | 528 |
| | $ | (609 | ) |
| Interest expense | 21,211 |
| | (11,213 | ) | | 32,424 |
| | 23,380 |
| | 9,044 |
|
| Amortization of debt issuance costs | 1,089 |
| | (751 | ) | | 1,840 |
| | 707 |
| | 1,133 |
|
| Accretion of debt discounts | 1,947 |
| | (2,743 | ) | | 4,690 |
| | 824 |
| | 3,866 |
|
| Loss on debt extinguishment and modification expense | 20,445 |
| | 19,409 |
| | 1,036 |
| | 638 |
| | 398 |
|
| Gain on third party bankruptcy settlement | (116 | ) | | 56 |
| | (172 | ) | | 956 |
| | (1,128 | ) |
| Other | 85 |
| | 41 |
| | 44 |
| | 206 |
| | (162 | ) |
| Other loss, net | $ | 44,551 |
| | $ | 4,770 |
| | $ | 39,781 |
| | $ | 27,239 |
| | $ | 12,542 |
|
Year ended December 31, 20132017 compared with year ended December 31, 20122016
Depreciation increasedThe decrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Notes due to depreciationprepayments on a portion of the TaxAct - HD Vest 2015 credit facility in 2017 and 2016 and the redemption of all of the Notes in the second quarter of 2017. In 2017, the applicable interest rate margin of the Blucora senior secured credit facilities was repriced and lowered to 3.0% for Eurodollar Rate loans and 2.0% for ABR loans. This repricing should decrease future annual interest expense by approximately $2.0 million per year.
The gain on fixed assets attributable to Monoprice.
Amortization of intangible assets increased primarily due to amortization expensethird party bankruptcy settlement related to intangibles acquired as partamounts received in connection with ongoing distributions from the Lehman Brothers estate, of which we are a creditor.
See "Note 9: Debt" of the Monoprice acquisitionNotes to Consolidated Financial Statements in Part II Item 8 of this report for additional information on the "Loss on debt extinguishment and to a lesser extent, amortization expense related to TaxACT intangibles due to the timing of the TaxACT acquisition.
Other Loss, Net
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2014 | | Change | | 2013 | | Change | | 2012 |
| Interest income | $ | (352 | ) | | $ | (52 | ) | | $ | (300 | ) | | $ | (169 | ) | | $ | (131 | ) |
| Interest expense | 11,202 |
| | 1,739 |
| | 9,463 |
| | 5,941 |
| | 3,522 |
|
| Amortization of debt issuance costs | 1,143 |
| | 35 |
| | 1,108 |
| | 288 |
| | 820 |
|
| Accretion of debt discounts | 3,691 |
| | 853 |
| | 2,838 |
| | 2,513 |
| | 325 |
|
| Loss on debt extinguishment and modification expense | — |
| | (1,593 | ) | | 1,593 |
| | 1,593 |
| | — |
|
| Loss on derivative instrument | — |
| | (11,652 | ) | | 11,652 |
| | 9,306 |
| | 2,346 |
|
| Impairment of equity investment in privately-held company | — |
| | (3,711 | ) | | 3,711 |
| | 3,711 |
| | — |
|
| Decrease in pre-acquisition liability | (665 | ) | | (665 | ) | | — |
| | — |
| | — |
|
| Decrease in fair value of earn-out contingent liability | (15 | ) | | 285 |
| | (300 | ) | | (300 | ) | | — |
|
| Other | (238 | ) | | (96 | ) | | (142 | ) | | 63 |
| | (205 | ) |
| Other loss, net | $ | 14,766 |
| | $ | (14,857 | ) | | $ | 29,623 |
| | $ | 22,946 |
| | $ | 6,677 |
|
modification expense."
Year ended December 31, 20142016 compared with year ended December 31, 20132015
The increasesincrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts primarily related to the Convertible Senior Notes issued in March 2013 and the MonopriceTaxAct - HD Vest 2015 credit facility, which was entered into in November 2013,December 2015, offset by decreases ina lower balance on the same categories due toNotes, a portion of which were repurchased during the TaxACT credit facility refinancing in August 2013 and paymentsfirst quarter of the related principal balance in 2014.2016.
LossThe loss on debt extinguishment and modification expense related to the TaxACTprepayment of a portion of the TaxAct - HD Vest 2015 credit facility refinancing in August 2013. Refer2016, which resulted in the write-down of a portion of the unamortized debt discount and issuance costs. This was offset by a gain on debt extinguishment and modification expense related to the repurchase of a portion of the Notes below par value during the first quarter of 2016. Further detail is above.
Income Taxes
During 2017, we recorded an income tax benefit of $25.9 million. Income tax differed from taxes at the statutory rates primarily due to the January 1, 2017 implementation of Accounting Standards Update ("ASU") 2016-09 on stock-based compensation (see "Note 7: Debt"2: Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.report for additional information) and the impact of "H.R. 1", formerly known as the Tax Cuts and Jobs Act (the "Tax Legislation"), which President Donald Trump signed into law on December 22, 2017.
On November 21, 2013,The Tax Legislation, which was effective January 1, 2018, significantly revised the WarrantU.S. tax code by, among other things, lowering the corporate income tax rate from 35% to purchase 1.0 million shares21%. As a result of Blucora common stock issued in August 2011 was exercised in full. The changethe reduction in the fair valuecorporate income tax rate, we re-valued our net deferred tax liabilities during the year ended December 31, 2017. The re-measurement of the Warrant, driven by the changeour deferred tax assets and liabilities resulted in a reduction in the value of our common stock, resultednet deferred tax liabilities of approximately $21.4 million, which is recorded as additional income tax benefit in an $11.7 million loss on derivative instrument during 2013. Refer2017. For 2018, we expect our GAAP effective tax rate to "Note 2: Summarybe in the range of Significant Accounting Policies" and "Note 9: Stockholders’ Equity"5 to 10 percent, primarily driven by the release of the Notescurrent portion of valuation allowances.
The Tax Legislation also repealed corporate alternative minimum tax ("AMT") for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. We have approximately $10.9 million of AMT credit carryovers that are expected to Consolidated Financial Statements in Part II Item 8 of this report.
In 2013, in connection with a review of our equity method investments for other-than-temporary impairment, we determined that our equity investment in a privately-held company had experienced an other-than-temporary decline in value, due to recurring losses from operations, significant personnel reductions, and abe fully refunded by 2022. Additionally, the change in the underlying business model. Accordingly, we wrote down the $3.7 million carrying value of the investmenttax law affected changes to zero, resulting in a loss.
The sellers of Monoprice are entitled to federal and state tax refunds related to pre-acquisition tax periods pursuant to the purchase agreement. During 2014, we adjusted the refunds due to the sellers after finalizing Monoprice's 2013 federal and state tax returns. As a result, we recorded a $0.7 million gain.
Year ended December 31, 2013 compared with year ended December 31, 2012
The increases in interest expense, amortization of debt issuance costs, and accretion of debt discounts primarilystatutes under I.R.C. 162(m) related to the Monoprice credit facility entered intodeduction of compensation of officers, which may limit the total amount benefited by the Company in November 2013future years.
The impact of the Tax Legislation on our 2018 effective tax rate will depend on numerous factors and assumptions. Based on preliminary information, given the Convertible Senior Notesnumerous net operating losses available and small international footprint, the change in tax law is not expected to significantly impact our income tax provision. The foregoing is based on information available as of the date of this report and is subject to change due to a variety of factors, including, among other things, (i) management’s further assessment of the Tax Legislation and related regulatory guidance, (ii) guidance that may be issued, in March 2013, offset by slight decreases inand (iii) actions that we may take as a result of the same categoriesTax Legislation. For further discussion of the risks related to the TaxACT credit facilities.
Loss on debt extinguishment and modification expense related toTax Legislation, see the TaxACT credit facility refinancingparagraph in August 2013.
The loss on derivative instrument related toour Risk Factors (Part I Item IA of this report) under the increase in the fair value of the Warrant, drivenheading "We may be negatively impacted by the changerecently passed Tax Cuts and Jobs Act or by any future changes in the value of our common stock.
In 2013, we wrote down the $3.7 million carrying value of our equity investment in a privately-held company to zero, resulting in a loss.
Income Taxes
tax laws."
During 2014,2016, we recorded an income tax expensebenefit of $12.3$1.3 million. Income tax differed from taxes at the statutory rates primarily due to the impairment ofdomestic manufacturing deduction, offset by non-deductible goodwill.
compensation and state income taxes.
During 2013,2015, we recorded an income tax expensebenefit of $20.4$4.6 million. Income tax differed from taxes at the statutory rates primarily due to the non-deductible loss on the Warrant derivative (see "Note 9: Stockholders’ Equity" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) and an increase in the valuation allowance against deferred tax assets that were capital in nature.
During 2012, we recorded income tax expense of $15.0 million. Income tax differed from taxes at the statutory rates primarily due to the non-deductible loss on the Warrant derivative and non-deductible stock-based compensation.
acquisition-related transaction costs.
At December 31, 2014,2017, we had gross temporary differences representing future tax deductions of $637.1$684.1 million, which represented deferred tax assets primarily comprised of $570.4$520.3 million of federal net operating loss carryforwards. We have applied a valuation allowance against the net operating loss carryforwards and certain other deferred tax assets. If in the future, we determine that any additional portion of the deferred tax assets is more likely than not to be realized, we will record a benefit to the income statement orstatement. We currently estimate that approximately $273.8 million and $144.6 million of federal net operating loss carryforwards will expire in 2020 and 2021, respectively.
Discontinued Operations, Net of Income Taxes
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2017 | | Change | | 2016 | | Change | | 2015 |
| Discontinued operations, net of income taxes | $ | — |
| | $ | 63,121 |
| | $ | (63,121 | ) | | $ | (35,773 | ) | | $ | (27,348 | ) |
On October 14, 2015, we announced our Strategic Transformation, which included plans to divest the Search and Content and E-Commerce businesses. Our results of operations reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses. We completed both divestitures in 2016:
On November 17, 2016, we closed on an agreement with YFC, under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. As a result, we recognized a $52.2 million loss on sale of discontinued operations.
On August 9, 2016, we closed on an agreement with OpenMail, under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment. As a result, we recognized a $21.6 million loss on sale of discontinued operations.
In the fourth quarter of 2015, we recorded goodwill impairments of $15.1 million and $33.8 million related to the Search and Content and E-Commerce reporting units, respectively, and trade name impairments of $5.9 million and $4.2 million related to the HSW and Monoprice trade names, respectively.
See "Note 4: Discontinued Operations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional paid-in-capital, as appropriate.information on discontinued operations.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA: We define Adjusted EBITDA differently for this report than we have defined it in the past, due to the impairment of goodwill and intangible assets recorded in the fourth quarter of 2014. We define Adjusted EBITDA as net income (loss) attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of income taxes,stock-based compensation, depreciation, amortization of acquired intangible assets impairment of goodwill and intangible assets, stock-based compensation, and(including acquired technology), restructuring, other loss, net, (which primarily includes items such as interestthe impact of noncontrolling interests, income interesttax expense amortization(benefit), the effects of debt issuancediscontinued operations, acquisition-related costs accretionand CEO separation-related costs. Restructuring costs relate to the move of debt discounts, loss on debt extinguishmentour corporate headquarters, which was announced in the fourth quarter of 2016. Acquisition-related costs include professional services fees and modification expense, loss on derivative instrument, other-than-temporary impairment loss on equity investments,other direct transaction costs and adjustments tochanges in the fair value of contingent consideration liabilities related to business combinations).acquired companies. The SimpleTax acquisition that was completed in 2015 included contingent consideration, for which the fair value of that liability was revalued in the second quarter of 2016. For further detail, see "Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of our Adjusted EBITDA to net income (loss) attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below:
|
| | | | | | | | | | | |
| (in thousands) | Years ended December 31, |
| | 2014 |
| 2013 |
| 2012 |
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
|
| Stock-based compensation | 11,884 |
| | 11,527 |
| | 13,223 |
|
| Depreciation and amortization of intangible assets | 36,675 |
| | 28,265 |
| | 23,011 |
|
| Impairment of goodwill and intangible assets | 62,817 |
| | — |
| | — |
|
| Other loss, net | 14,766 |
| | 29,623 |
| | 6,677 |
|
| Income tax expense | 12,340 |
| | 20,427 |
| | 15,002 |
|
| Adjusted EBITDA | $ | 102,935 |
| | $ | 114,241 |
| | $ | 80,439 |
|
|
| | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2017 |
| 2016 |
| 2015 |
| Net income (loss) attributable to Blucora, Inc. | $ | 27,039 |
| | $ | (65,158 | ) | | $ | (40,074 | ) |
| Stock-based compensation | 11,653 |
| | 14,128 |
| | 8,694 |
|
| Depreciation and amortization of acquired intangible assets | 38,139 |
| | 38,688 |
| | 22,590 |
|
| Restructuring | 3,101 |
| | 3,870 |
| | — |
|
| Other loss, net | 44,551 |
| | 39,781 |
| | 12,542 |
|
| Net income attributable to noncontrolling interests | 2,337 |
| | 658 |
| | — |
|
| Income tax expense (benefit) | (25,890 | ) | | (1,285 | ) | | (4,623 | ) |
| Discontinued operations, net of income taxes | — |
| | 63,121 |
| | 27,348 |
|
| Acquisition-related costs | — |
| | 391 |
| | 10,988 |
|
| CEO separation-related costs | — |
| | — |
| | 1,769 |
|
| Adjusted EBITDA | $ | 100,930 |
| | $ | 94,194 |
| | $ | 39,234 |
|
Year ended December 31, 20142017 compared with year ended December 31, 20132016
The decreaseincrease in Adjusted EBITDA primarily was due to a decrease in segment operating income of $26.7 million related to our Search and Content segment, offset by increases in segment operating income of $9.1$4.6 million and $6.0 million related to growth in our Wealth Management and Tax Preparation segment and $7.1 million from our E-Commerce segment primarily related tosegments, respectively. Offsetting the timing of the Monoprice acquisition. Also contributing to the net decreaseincrease in segment operating incomeAdjusted
EBITDA was a $0.8$3.9 million increase in corporate operating expenses not allocated to the segments mainlyprimarily related to increased personnelcosts incurred as part of our Strategic Transformation, which related to the relocation cost of our corporate headquarters, and business insurance expenses.
costs associated with transitioning of roles such as overlap in staffing and recruiting search fees.
Year ended December 31, 20132016 compared with year ended December 31, 2012
2015
The increase in Adjusted EBITDA primarily was due to increases in segment operating income of $20.3$46.3 million and $10.5$9.9 million related to our Search and ContentWealth Management and Tax Preparation segments, respectively, driven by growth in the Search and Content segment and the timing of the TaxACT acquisition, as well as segment operating income of $5.0 million for our E-Commerce segment which was new in 2013 due to the Monoprice acquisition.respectively. Offsetting the increasesincrease in segment operating incomeAdjusted EBITDA was a $1.5$1.2 million increase in corporate personneloperating expenses not allocated to the segments mainlyprimarily related to increased headcount to support operations.
costs incurred as part of our Strategic Transformation, which mainly consisted of recruiting fees.
Non-GAAP net income:We define non-GAAP net income differently for this report than we have defined it in the past, due to the impairment of goodwill and intangible assets recorded in the fourth quarter of 2014 and adjustments recorded in other loss, net that resulted from finalizing Monoprice's 2013 federal and state tax returns in the third quarter of 2014. For this report, we define non-GAAP net income(loss) as net income (loss) attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of discontinued operations, stock-based compensation, amortization of acquired intangible assets impairment(including acquired technology), accretion of goodwilldebt discount and intangible assets,accelerated accretion of debt discount on the Convertible Senior Notes, lossgain on the Notes repurchased, write-off of debt extinguishmentdiscount and modification expense, lossdebt issuance costs on derivative instrument, other-than-temporary impairment loss on equity investments, changes in non-cash pre-acquisition liabilities,the Notes that were redeemed and the terminated TaxAct - HD Vest 2015 credit facility, acquisition-related costs (described further under Adjusted EBITDA above), restructuring costs (described further under Adjusted EBITDA above), the impact of noncontrolling interests, the related cash tax impact of those adjustments, and non-cash income taxes. The write-off of debt discount and debt issuance costs on the terminated Notes and the closed TaxAct - HD Vest 2015 credit facility relates to the debt refinancing that occurred in the second quarter of 2017. We exclude the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these deferred tax assetsnet operating losses will expire, if unutilized, between 2020 and 2024.
We believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP net income (loss) should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as
a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate non-GAAP net income differently, and, therefore, our non-GAAP net income may not be comparable to similarly titled measures of other companies. A reconciliation of our non-GAAP net income to net income (loss)attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below: |
| | | | | | | | | | | |
| (in thousands, except per share amounts) | Years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
|
| Stock-based compensation | 11,884 |
| | 11,527 |
| | 13,223 |
|
| Amortization of acquired intangible assets | 31,094 |
| | 23,789 |
| | 19,199 |
|
| Impairment of goodwill and intangible assets | 62,817 |
| | — |
| | — |
|
| Accretion of debt discount on Convertible Senior Notes | 3,594 |
| | 2,674 |
| | — |
|
| Loss on debt extinguishment and modification expense | — |
| | 1,593 |
| | — |
|
| Loss on derivative instrument | — |
| | 11,652 |
| | 2,346 |
|
| Impairment of equity investment in privately-held company | — |
| | 3,711 |
| | — |
|
| Decrease in non-cash pre-acquisition liability | (665 | ) | | — |
| | — |
|
| Cash tax impact of adjustments to GAAP net income | (298 | ) | | (189 | ) | | (93 | ) |
| Non-cash income tax expense | 9,545 |
| | 18,538 |
| | 13,559 |
|
| Non-GAAP net income | $ | 82,424 |
| | $ | 97,694 |
| | $ | 70,760 |
|
|
| | | | | | | | | | | |
| Per diluted share: | | | | | |
| Net income (loss) | $ | (0.83 | ) | | $ | 0.56 |
| | $ | 0.54 |
|
| Stock-based compensation | 0.28 |
| | 0.26 |
| | 0.32 |
|
| Amortization of acquired intangible assets | 0.73 |
| | 0.55 |
| | 0.46 |
|
| Impairment of goodwill and intangible assets | 1.46 |
| | — |
| | — |
|
| Accretion of debt discount on Convertible Senior Notes | 0.08 |
| | 0.06 |
| | — |
|
| Loss on debt extinguishment and modification expense | — |
| | 0.03 |
| | — |
|
| Loss on derivative instrument | — |
| | 0.27 |
| | 0.06 |
|
| Impairment of equity investment in privately-held company | — |
| | 0.09 |
| | — |
|
| Decrease in non-cash pre-acquisition liability | (0.01 | ) | | — |
| | — |
|
| Cash tax impact of adjustments to GAAP net income | (0.01 | ) | | (0.00 | ) | | (0.00 | ) |
| Non-cash income tax expense | 0.22 |
| | 0.43 |
| | 0.32 |
|
| Non-GAAP net income per share | $ | 1.92 |
| | $ | 2.25 |
| | $ | 1.70 |
|
| Weighted average shares outstanding used in computing non-GAAP diluted net income per share and its components, including the "Net income (loss)" component | 42,946 |
| | 43,480 |
| | 41,672 |
|
|
| | | | | | | | | | | |
| (In thousands, except per share amounts) | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) attributable to Blucora, Inc. | $ | 27,039 |
| | $ | (65,158 | ) | | $ | (40,074 | ) |
| Discontinued operations, net of income taxes | — |
| | 63,121 |
| | 27,348 |
|
| Stock-based compensation | 11,653 |
| | 14,128 |
| | 8,694 |
|
| Amortization of acquired intangible assets | 34,002 |
| | 34,143 |
| | 20,303 |
|
| Accretion of debt discount on Convertible Senior Notes | 1,567 |
| | 3,666 |
| | 3,866 |
|
| Accelerated accretion of debt discount on Convertible Senior Notes | — |
| | 1,628 |
| | — |
|
| Gain on the Notes repurchased | — |
| | (7,724 | ) | | — |
|
| Write-off of debt issuance costs on closed TaxAct 2013 credit facility | — |
| | — |
| | 398 |
|
| Write-off of debt discount and debt issuance costs on terminated Convertible Senior Notes | 6,715 |
| | — |
| | — |
|
| Write-off of debt discount and debt issuance costs on closed TaxAct - HD Vest 2015 credit facility | 9,593 |
| | — |
| | — |
|
| Acquisition-related costs | — |
| | 391 |
| | 10,988 |
|
| CEO separation-related costs | — |
| | — |
| | 1,769 |
|
| Restructuring | 3,101 |
| | 3,870 |
| | — |
|
| Impact of noncontrolling interests | 2,337 |
| | 658 |
| | — |
|
| Cash tax impact of adjustments to GAAP net income | (6 | ) | | 175 |
| | (236 | ) |
| Non-cash income tax benefit | (26,853 | ) | | (3,802 | ) | | (4,857 | ) |
| Non-GAAP net income | $ | 69,148 |
| | $ | 45,096 |
| | $ | 28,199 |
|
|
| | | | | | | | | | | |
| Per diluted share: | | | | | |
Net loss attributable to Blucora, Inc. (1) | $ | 0.57 |
| | $ | (1.53 | ) | | $ | (0.98 | ) |
| Discontinued operations, net of income taxes | — |
| | 1.48 |
| | 0.68 |
|
| Stock-based compensation | 0.25 |
| | 0.33 |
| | 0.21 |
|
| Amortization of acquired intangible assets | 0.72 |
| | 0.80 |
| | 0.50 |
|
| Accretion of debt discount on Convertible Senior Notes | 0.03 |
| | 0.09 |
| | 0.09 |
|
| Accelerated accretion of debt discount on Convertible Senior Notes | — |
| | 0.04 |
| | — |
|
| Gain on Convertible Senior Notes repurchased | — |
| | (0.18 | ) | | — |
|
| Write-off of debt discount and debt issuance costs on terminated Convertible Senior Notes | 0.14 |
| | — |
| | — |
|
| Write-off of debt discount and debt issuance costs on closed TaxAct - HD Vest 2015 credit facility | 0.20 |
| | — |
| | — |
|
| Acquisition-related costs | — |
| | 0.01 |
| | 0.27 |
|
| CEO separation-related costs | — |
| | — |
| | 0.04 |
|
| Restructuring | 0.07 |
| | 0.09 |
| | — |
|
| Impact of noncontrolling interests | 0.05 |
| | 0.02 |
| | — |
|
| Cash tax impact of adjustments to GAAP net income | 0.00 |
| | 0.00 |
| | (0.01 | ) |
| Non-cash income tax benefit | (0.57 | ) | | (0.09 | ) | | (0.12 | ) |
| Non-GAAP net income | $ | 1.46 |
| | $ | 1.06 |
| | $ | 0.69 |
|
| Weighted average shares outstanding used in computing per diluted share amounts | 47,211 |
| | 42,686 |
| | 40,959 |
|
(1) Any difference in "per diluted share" between this table and the consolidated statements of comprehensive income is due to using different weighted average shares outstanding in the event that there is GAAP net loss but non-GAAP net income and vice versa. |
Year ended December 31, 20142017 compared with year ended December 31, 20132016
The decreaseincrease in non-GAAP net income primarily was due to a decrease in segment operating income of $26.7 million related to our Search and Content segment, offset by increases in segment operating income of $9.1$4.6 million and $6.0 million related to growth in our Wealth Management and Tax Preparation segmentsegments, respectively. The increase in non-GAAP net income was also due to (i) a $12.6 million decrease in interest expense, amortization of debt issuance costs, and $7.1 million from our E-Commerce segment primarilyaccretion of debt discounts, mainly related to the timingTaxAct - HD Vest 2015 credit facility, which was entered into in December 2015 and terminated in the second quarter of the Monoprice acquisition. Also contributing to the net decrease in segment operating income were2017, (ii) a $1.7$3.0 million increase in interestloss on debt extinguishment and modification expense, mainly related to the Convertible Senior Notes issued in March 2013 andprepayment of a portion of the MonopriceTaxAct - HD Vest 2015 credit facility entered into in November 2013, offset by decreased interest expense on the TaxACT credit facility refinancing in August 2013 and payments of the related principal balance in 2014,2016, (iii) a $1.1$0.4 million increasedecrease in depreciation expense, primarily duemainly related to depreciation expense on HD Vest fixed assets, attributable to Monoprice,and (iv) a $1.0$1.4 million increasedecrease in cash income tax expense, primarily duemainly related to additional state taxes attributable to Monoprice and HSW, andthe addition of HD Vest. These increases were offset by a $0.8$3.9 million increase in corporate operating expenses not allocated to the segments mainlyprimarily related to increased personnelcosts incurred as part of our Strategic Transformation, which related to the relocation cost of our corporate headquarters, and business insurance expenses.
Year ended December 31, 20132016 compared with year ended December 31, 2012
2015
The increase in non-GAAP net income primarily was due to a $20.3 million and $10.5 million increase in Search and Content and Tax Preparation segment operating income, respectively, driven by growth in the Search and Content segment and the timing of the TaxACT acquisition, as well as $5.0 million in segment operating income for our new E-Commerce segment due to the Monoprice acquisition. Offsetting the increases in segment operating income wereof $4.6 million and $6.0 million related to our Wealth Management and Tax Preparation segments, respectively. This was offset by (i) a $5.9$12.6 million increasedecrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts, mainly related to the Convertible Senior Notes issued in March 2013 and the MonopriceTaxAct - HD Vest 2015 credit facility, which was entered into in November 2013, partially offset by decreased interestDecember 2015, (ii) a $3.0 million loss on debt extinguishment and modification expense, mainly related to the prepayment of a portion of the TaxAct - HD Vest 2015 credit facility in 2016, (iii) a $0.4 million decrease in depreciation expense, mainly related to depreciation expense on TaxACT’s credit facilities, andHD Vest fixed assets, (iv) a $1.5$1.4 million decrease in cash income tax expense, mainly related to the addition of HD Vest, (v) a $3.9 million increase in corporate personneloperating expenses not allocated to the segments mainlyprimarily related to increased headcount to support operations.costs incurred as part of our Strategic Transformation, which mainly consisted of recruiting fees, and (vi) a $0.1 million decrease in gain on third party bankruptcy settlement.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Short-Term Investments
Our principal source of liquidity is our cash and cash equivalents, and short-term investments.equivalents. As of December 31, 2014,2017, we had cash and marketable investments of $301.3 million, consisting of cash and cash equivalents of $46.4 million$60.0 million. Our HD Vest broker-dealer subsidiary operates in a highly regulated industry and available-for-sale investmentsis subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of $254.9 million. December 31, 2017, HD Vest met all capital adequacy requirements to which it was subject.
We generally invest our excess cash in high quality marketable investments. These investments generally include debt securitiesinstruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., and equity securities. A significant portion ofalthough specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held at December 31, 20142017 had minimal default risk and short-term maturities.
We have financed our operations primarily from cash provided by operating activities. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating, working capital, regulatory capital requirements at our broker-dealer subsidiary, and capital expenditure requirements for at least the next 12 months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate. For further discussion of the risks to our business related to liquidity, see the paragraph in our Risk Factors (Part I Item 1A of this report) under the heading "Existing"Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures.expenditures."
Use of Cash
We may use our cash and cash equivalents and short-term investments balance in the future on investment in our current businesses, in acquiring new businesses or assets, for repayment of debt, for acquiring companies or assets that complement our Wealth Management and Tax Preparation businesses, or for stock repurchases. Such businesses or assets may not be relatedreturning capital to Search and Content, Tax Preparation, or E-Commerce, and such acquisitions will result in further transaction-related costs. We currently are focused on the following areas: enhancing the search and content services and tax preparation services and software offered to our end users, maintaining and adding search distribution partners and tax preparation and Monoprice.com customers, expanding and diversifying the offerings of our three businesses, extending our e-commerce sales channels through geographic and other means, and building our e-commerce brand recognition.
On May 30, 2014, InfoSpace acquired HSW for $44.9 million in cash, which was funded from our available cash.shareholders.
On AugustMay 22, 2013,2017, we acquired Monoprice for $182.9 million in cash. The acquisition of Monoprice was funded from our available cash. On November 22, 2013, Monoprice entered into a $70.0 millioncredit agreement with a syndicate of lenders in order to (a) refinance the TaxAct - HD Vest 2015 credit facility, agreement(b) redeem our Notes that were outstanding at the time, and (c) provide a term loan and revolving line of credit for the purposes of post-transaction financing of the Monoprice acquisition and providing future working capital, flexibility for Monoprice.capital expenditure and general business purposes. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments thereunder were terminated. The Blucora senior secured credit facilities in the aggregate committed amount of $425.0 million consist of a committed $50.0 million revolving credit facility (including a letter of credit sub-facility), and a $375.0 million term loan facility. The final maturity datedates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. Obligations under the Blucora senior secured credit facility is November 22, 2018. The interest rate is variable, based upon choices from which Monoprice elects. are guaranteed by certain of Blucora's subsidiaries and secured by the assets of Blucora and those subsidiaries.
The credit facility includes financial and operating covenants with respect to certain ratios, including a net leverage ratio, which are defined further in the credit facility agreement. We were in compliance with these covenants as of December 31, 2017. We initially borrowed $375.0 million under the term loan and fixed charge coveragehave made prepayments of $30.0 million towards the term loan. We have not borrowed any amounts under the revolving credit loan and do not have any other debt outstanding. For further detail, see "Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Related to the TaxAct - HD Vest 2015 credit facility, we had repayment activity of $64.0 million and $140.0 million during the years ended December 31, 2017 and 2016, respectively. Related to the Notes, we repurchased $28.4 million of the Notes for cash of $20.7 million during 2016. For further detail, see "Note 9: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part II Item 8 of this report.
On July 2, 2015, TaxAct acquired SimpleTax, which included additional consideration of up to C$4.6 million (with C$ indicating Canadian dollars and amounting to approximately $3.7 million based on the acquisition-date exchange rate). The related payments are contingent upon product availability and revenue performance over a three-year period and are expected to occur annually over that period. The first payment was made in the first quarter of 2017, and the remaining payments of $2.7 million are expected through 2019. For further detail, see "Note 7: Fair Value Measurements" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
On October 14, 2015, we announced our Strategic Transformation, which refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest, the divestitures of our Search and Content and E-Commerce businesses, and the relocation of corporate headquarters from Bellevue, Washington to Irving, Texas. See the "Strategic Transformation" subsection above for additional detail regarding the related use of cash.
Related to the acquisition of HD Vest, we paid $613.7 million (after a $1.8 million working capital adjustment in the first quarter of 2016) in cash, which was funded by a combination of cash on hand and the TaxAct - HD Vest 2015 credit facility. The credit facility consisted of a $25.0 million revolving credit loan and a $400.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan were December 31, 2020 and December 31, 2022, respectively. The interest rates on the revolving credit loan and term loan were variable. The credit facility includes financial and operating covenants with respect to certain ratios, including a net leverage to EBITDA ratio, which are defined further in the agreement. We were in compliance with these covenants as of December 31, 2014. Monoprice2017. TaxAct and HD Vest initially borrowed $50.0$400.0 million under the credit facility, receiving net proceedsterm loan and had repayment activity of approximately $49.3 million. Monoprice repaid $8.0$260.0 million on the credit facility in 2014.2017. For further detail, see "Note 7: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
On March 15, 2013, we issued $201.25 million principal amount of 4.25% Convertible Senior Notes (the “"NotesNote 3: Business Combinations”). The Notes are due April 1, 2019, unless earlier purchased, redeemed, or converted in accordance with their terms. The Notes bear interest at a rate of 4.25% per year, payable semi-annually in arrears beginning on October 1, 2013. We received net proceeds from the offering of approximately $194.8 million. There are no financial or operating covenants relating to the Notes. As of May 2013, we are permitted to settle any conversion obligation under the Notes in cash, shares of our common stock, or a combination of cash" and shares of our common stock, at our election. We intend to satisfy any conversion premium by issuing shares of our common stock. For further detail, see "Note 7: Debt""Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
On January 31, 2012, we acquired TaxACT for $287.5 million in cash. The TaxACT acquisition was funded from our cash reserves and from the net proceeds of borrowings under a $105.0 million credit facility. TaxACT initially borrowed $100.0 million under this 2012 credit facility, receiving net proceeds of approximately $96.7 million. We repaid $25.5 million in 2012, $10.0 million in April 2013, and the remaining $64.5 million in August 2013, the latter amount in connection with the refinancing of this credit agreement. On August 30, 2013, TaxACTTaxAct entered into an agreement to refinance thisa 2012 credit facility on more favorable terms. The new 2013TaxAct had net repayment activity of $51.9 million in 2015. This credit facility consistswas repaid in full in the second quarter of a revolving credit commitment that reduced to $90.0 million on August 30, 2014 and will reduce to $80.0 million on August 30, 2015 and $70.0 million on August 30, 2016. The final maturity datesubsequently closed.
In the third quarter of 2018 we expect to commence our new clearing services relationship with Fidelity Clearing & Custody Solutions, pursuant to the 2013 credit facility is August 30, 2018. The interest rate is variable, based upon choices from which TaxACT elects. The 2013 credit facility includes financialagreement we executed during 2017. We expect the new clearing relationship to provide tangible benefits to our advisors and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined furthercustomers in the agreement.form of improved technology, product offerings and service. We werecurrently expect that this relationship will generate between approximately $60.0 and $100.0 million of incremental Wealth Management segment income over the ten years following the commencement of this relationship in compliance with these covenantslate 2018.
Contractual Obligations and Commitments
Our contractual obligations and commitments are as offollows for years ending December 31, 2014. TaxACT borrowed approximately $71.4 million under the 2013 credit facility, of which $65.4 million was used to pay off the 2012 credit facility and $6.0 million was an additional draw in October 2013. In 2014, we borrowed an additional $36.6 million and repaid $56.0 million. 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Operating lease commitments: | | | | | | | | | | | | | |
| Operating lease obligations | $ | 4,201 |
| | $ | 4,281 |
| | $ | 3,946 |
| | $ | 2,493 |
| | $ | 1,979 |
| | $ | 1,678 |
| | $ | 18,578 |
|
| Sublease income | (1,265 | ) | | (1,288 | ) | | (991 | ) | | — |
| | — |
| | — |
| | (3,544 | ) |
| Net operating lease commitments | 2,936 |
| | 2,993 |
| | 2,955 |
| | 2,493 |
| | 1,979 |
| | 1,678 |
| | 15,034 |
|
| Purchase commitments | 5,528 |
| | 3,600 |
| | 3,600 |
| | 2,100 |
| | 600 |
| | 3,400 |
| | 18,828 |
|
| Debt commitments | — |
| | 2,000 |
| | 3,500 |
| | 3,500 |
| | 3,500 |
| | 332,500 |
| | 345,000 |
|
| Interest payable | 15,172 |
| | 15,157 |
| | 15,068 |
| | 14,872 |
| | 14,719 |
| | 20,584 |
| | 95,572 |
|
| Acquisition-related contingent consideration liability | 1,304 |
| | 1,385 |
| | — |
| | — |
| | — |
| | — |
| | 2,689 |
|
| Total | $ | 24,940 |
| | $ | 25,135 |
| | $ | 25,123 |
| | $ | 22,965 |
| | $ | 20,798 |
| | $ | 358,162 |
| | $ | 477,123 |
|
For further detail see "Note 7: Debt""Note 10: Commitments and Contingencies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Off-balance Sheet Arrangements
Our Board of Directors approved a stock repurchase program whereby we may purchase our common stock in open-market transactions. In May 2014, our Board of Directors increased the repurchase authorization, such that we may repurchase up to $85.0 million of our common stock, and extended the repurchase period through May 2016. During the year ended December 31, 2014, we purchased 2.3 million shares in open-market transactions at a total costWe have no off-balance sheet arrangements other than operating leases.
Unrecognized Tax Benefits
The above table does not reflect unrecognized tax benefits of approximately $38.6$4.2 million, and an average pricethe timing of $16.85 per share, exclusive of purchase and administrative costs. During the year ended December 31, 2013, we purchased 0.4 million shares in open-market transactions at a total cost of approximately $10.0 million and an average price of $23.95 per share, exclusive of purchase and administrative costs. As of December 31, 2014, we may repurchase up to anwhich is uncertain. For additional $36.5 million of our common stock under the repurchase program. For further detail,discussion on unrecognized tax benefits see "Note 9: Stockholders’ Equity""Note 16: Income Taxes" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Contractual Obligations and Commitments
Our contractual obligations and commitments are as follows for years ending December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
| Operating lease commitments | $ | 3,154 |
| | $ | 3,213 |
| | $ | 2,916 |
| | $ | 2,455 |
| | $ | 2,502 |
| | $ | 3,105 |
| | $ | 17,345 |
|
| Purchase commitments | 437 |
| | 92 |
| | 62 |
| | — |
| | — |
| | — |
| | 591 |
|
| Debt commitments | 8,000 |
| | 8,000 |
| | 8,000 |
| | 69,940 |
| | 201,250 |
| | — |
| | 295,190 |
|
| Interest on Notes | 8,553 |
| | 8,553 |
| | 8,553 |
| | 8,553 |
| | 4,277 |
| | — |
| | 38,489 |
|
| Escrow for acquisition-related indemnifications | 735 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 735 |
|
| Total | $ | 20,879 |
| | $ | 19,858 |
| | $ | 19,531 |
| | $ | 80,948 |
| | $ | 208,029 |
| | $ | 3,105 |
| | $ | 352,350 |
|
For further detail see "Note 8: Commitments and Contingencies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating leases.
Unrecognized Tax Benefits
The above table does not reflect unrecognized tax benefits of approximately $0.5 million, the timing of which is uncertain. For additional discussion on unrecognized tax benefits see "Note 13: Income Taxes" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Cash Flows
Our cash flows were comprised of the following (in thousands):following:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Net cash provided by operating activities | $ | 55,734 |
| | $ | 95,056 |
| | $ | 48,831 |
|
| Net cash used by investing activities | (101,936 | ) | | (303,693 | ) | | (165,073 | ) |
| Net cash provided (used) by financing activities | (37,579 | ) | | 270,584 |
| | 102,623 |
|
| Net increase (decrease) in cash and cash equivalents | $ | (83,781 | ) | | $ | 61,947 |
| | $ | (13,619 | ) |
|
| | | | | | | | | | | |
| (In thousands) | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net cash provided by operating activities from continuing operations | $ | 72,846 |
| | $ | 85,970 |
| | $ | 24,308 |
|
| Net cash provided (used) by investing activities from continuing operations | 2,053 |
| | (1,560 | ) | | (332,517 | ) |
| Net cash provided (used) by financing activities from continuing operations | (68,562 | ) | | (162,001 | ) | | 320,652 |
|
| Net cash provided (used) by continuing operations | 6,337 |
| | (77,591 | ) | | 12,443 |
|
| Net cash provided by discontinued operations | 1,028 |
| | 72,655 |
| | 4,586 |
|
| Effect of exchange rate changes on cash and cash equivalents | 78 |
| | (26 | ) | | (17 | ) |
| Net increase (decrease) in cash and cash equivalents | $ | 7,443 |
| | $ | (4,962 | ) | | $ | 17,012 |
|
Net cash from the operating activities:activities of continuing operations: Net cash from the operating activities of continuing operations consists of net income (loss), from continuing operations, offset by certain non-cash adjustments, and changes in our working capital.
Net cash provided by operating activities was $55.7$72.8 million, $95.1$86.0 million, and $48.8$24.3 million for the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, respectively. The activity in 20142017 included a $(15.3) million working capital contribution and approximately $47.6$88.1 million of net income from continuing operations (offset by non-cash adjustments). The working capital contribution was driven by accrued expenses, including accrued interest, and $8.1the expected realization (through 2022) of $10.9 million of repealed corporate AMT credit carryovers, and restructuring activities.
The activity in 2016 included an $44.8 million working capital contribution.contribution and approximately $41.2 million of non-cash adjustments and a loss from continuing operations. The working capital contribution continued to be driven by accrued expenses and the impact of excess tax benefits from stock-based activity primarily due to utilizing equity net operating loss carryforwards from prior years, offset by reduced accrual balances relatedyears. In addition, we had placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance, and that amount was returned to us in the Search and Content business's online marketing spending andfirst quarter of 2016 since it was not achieved (see "Note 3: Business Combinations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information). Lastly, the timing of TaxACT'sTaxAct's spending on marketing campaigns for the currentupcoming tax season. Accounts receivable and accounts payable reflected lower Search and Content distribution revenueseason and the resulting revenue share to our distribution partners.
addition of HD Vest provided further working capital contribution during the period.
The activity in 20132015 included a $11.2 million working capital contribution and approximately $48.3$13.1 million of net income (offset by non-cash adjustments)adjustments and $46.7 million of working capital contribution.a loss from continuing operations. The working capital contribution was driven by accrued expenses and the impact of excess tax benefits from stock-based activity. The contribution from deferred revenue was attributable to TaxACT revenue arrangements. The amounts from accounts receivableactivity, and accounts payable reflected balances assumedalso included separation-related costs accrued in connection with the Monoprice acquisition and higher Search distribution revenue and the resulting revenue share toupcoming departure of our distribution partners.
The activitychief executive officer that occurred in 2012 included approximately $30.3 million of net income (offset by non-cash adjustments) and $18.5 million of working capital contribution. The working capital contribution was driven by accrued expenses and the impact of excess tax benefits from stock-based activity. The contribution from deferred revenue was attributable mainly to TaxACT revenue arrangements. While amounts from accounts receivable and accounts payable were influenced by higher Search distribution revenue and the resulting revenue share to our distribution partners, these were offset by balances assumed in the TaxACT acquisition.
2016.
Net cash from the investing activities:activities of continuing operations: Net cash from the investing activities of continuing operations primarily consists of cash outlays for business acquisitions, transactions (purchases as well asof and proceeds from sales and maturities) related to our investments, and purchases of property and equipment. Our investing activities tend to fluctuate from period to period primarily based upon the level of acquisition activity.
Net cash used by investing activities was $101.9$2.1 million, $303.7$1.6 million, and $165.1$332.5 million for the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, respectively. The activity in 20142017 primarily consisted of net cash outlaysinflows on our available-for-sale investments of $51.8$7.1 million the acquisition of HSW for $44.9 million, and $5.2 offset by approximately offset by $5.0 million in purchases of property and equipment. The activity in 20132016 primarily consisted of $3.8 million in purchases of property and equipment and payment of the $1.8 million final working capital adjustment on the HD Vest acquisition, offset by net cash inflows on our available-for-sale investments of $4.0 million. The activity in 2015 primarily consisted of the acquisitions of MonopriceHD Vest and Balance FinancialSimpleTax for a combined $185.0 million (net of cash acquired of $2.8 million), net cash outlays on our available-for-sale investments of $112.5$573.4 million and $4.7 million in purchases of property and equipment. The activity in 2012 primarily consisted of the acquisition of TaxACT for $279.4 million (net of cash acquired of $8.1 million) and $3.8$1.5 million in purchases of property and equipment, offset by net cash inflows on our available-for-sale investments of $117.8$238.7 million.
Net cash from the financing activities:activities of continuing operations: Net cash from the financing activities of continuing operations primarily consists of transactions related to the issuance of debt and stock. Our financing activities tend to fluctuate from period to periodperiod-to-period based upon our financing needs due to the level of acquisition activity and market conditions that present favorable financing opportunities.
Net cash used by financing activities was $37.6$68.6 million for the year ended December 31, 2014,2017. The activity in 2017 primarily consisted of payments of $290.0 million in connection with the termination of the TaxAct - HD Vest credit facility, $172.8 million for redemption in full of the outstanding Notes, $9.1 million in tax payments from shares withheld for equity awards, payment of $3.2 million on the note payable with related party, and net$0.9 million in contingent consideration paid related to the 2015 acquisition of SimpleTax. These cash outflows were offset by approximately $365.8 million in proceeds from the Blucora senior secured credit facility that was entered into in May 2017 and $41.7 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.
Net cash provided by financing activities was $270.6 million and $102.6$162.0 million for the yearsyear ended December 31, 2013 and 2012, respectively.2016. The activity in 20142016 primarily consisted of combined payments of $64.0$140.0 million on the MonopriceTaxAct - HD Vest 2015 credit facility, the $20.7 million repurchase of the Notes, payment of $3.2 million on the note payable with related party, and TaxACT 2013 credit facilities, stock repurchases of $38.7 million, and $2.9$1.8 million in tax payments from shares withheld upon vesting of restricted stock units.for equity awards. These cash outflows were offset by $36.6 million in proceeds from the TaxACT 2013 credit facility, $23.3approximately $16.0 million in excess tax
benefits from stock-based award activity primarily due to utilizing equity net operating loss carryforwards from prior years and $8.1$3.6 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.
Net cash used by financing activities was $320.7 million for the year ended December 31, 2015. The activity for 2013in 2015 primarily consisted of $250.1$378.3 million in combined net proceeds from the Notes, MonopriceTaxAct - HD Vest 2015 credit facility and TaxACT 2013 credit facility, $29.4that was entered into on December 31, 2015, $8.0 million in excess tax benefits from stock-based activity primarily due to utilizing equity net operating loss carryforwards from prior years, and $13.5 million in combined proceeds from the issuance of common stock related to stock option exercises, the employee stock purchase plan, and the Warrant exercise. These cash inflows were offset by a $10.0 million payment on the TaxACT 2012 credit facility, stock repurchases of $10.0 million, and $2.4 million in tax payments from shares withheld upon vesting of restricted stock units.
The activity for 2012 consisted of $96.7 million in net proceeds from the TaxACT 2012 credit facility, $23.0 million in excess tax benefits from stock-based activity primarily due to utilizing equity net operating loss carryforwards from prior years, and $9.7$3.6 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan. These cash inflows were offset by a $25.5payments of $51.9 million payment on the TaxACT 2012TaxAct 2013 credit facility, stock repurchases of $7.7 million, and $1.3$1.5 million in tax payments from shares withheld upon vesting of restricted stock units.for equity awards.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations as well asand the disclosures included elsewhere in this Annual Report on Form 10-K isare based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosuresdisclosure of contingencies. In some cases, we could have reasonably used different accounting policies and estimates.
The SEC has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of the company’s financial condition and results of operations and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, current conditions, and on various other assumptions that we believe to be reasonable under the circumstances and, based on information available to us at that time, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We also have other accounting policies that involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see "Note"Note 2: Summary of Significant Accounting Policies"Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Search servicesWealth management revenue recognition: recognitionThe majority: Wealth management revenue consists primarily of our revenues consists of advertisingcommission revenue, generated through end-users clicking on paid listings included in the search results display, as well as from advertisements appearing on our HowStuffWorks.com website. The paid listings, as well as algorithmic search results, primarily are supplied by Googleadvisory revenue, asset-based revenue, and Yahoo!, whom we refer to as "Search Customers." When a user submits a search query through one of our ownedtransaction and operated or distribution partner sites and clicks on a paid listing displayed in response to the query, the Search Customer bills the advertiser that purchased the paid listing directly and shares a portion of its related paid listing fee with us. If the paid listing click occurred on one of our distribution partners' properties, we pay a significant share of our revenue to the distribution partner.revenue. Revenue is recognized in the periodperiods in which such clicksthe related services are performed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibility is reasonably assured. Payments received in advance of the performance of service are deferred and recognized as revenue when earned. Of Wealth management revenues, commissions revenue contains subjective judgments and the use of estimates.
Commissions represent amounts generated by HD Vest's financial advisors for their clients' purchases and sales of securities and various investment products. We generate two types of commissions: transaction-based sales commissions that occur at the point of sale, as well as trailing commissions for which we provide ongoing account support to clients of our financial advisors.
Transaction-based sales commission revenue is recorded on paid listings occur anda trade-date basis, which is when our performance obligations in generating the commissions have been substantially completed. Trailing commission revenue is based on a percentage of the amounts earned bycurrent market value of clients' investment holdings in trail-eligible assets and ultimately remitted to us. Thisrecognized over the period during which services are performed. Since trailing commission revenue is recordedgenerally paid in the Search and Content segment.
Under our agreements with our Search Customers and our distribution partners,arrears, we are the primary obligor (i.e., are responsible to the Search Customers for providing the search services in accordance with the applicable agreements and remediating any service issues) and separately negotiate each revenue or unit pricing contract independent of any revenue sharing arrangements. For search services, we determine the paid search results, content, and information directed to our owned and operated websites and our distribution partners’ web properties. Consequently, we record search services revenueestimate it based on a gross basis.number of factors, including market levels and the amount of trailing commission revenues received in prior periods, and also considers historical payout ratios. These estimates are primarily based on historical information and there is not significant judgment involved.
A substantial portion of commission revenue is ultimately paid to financial advisors. Such amounts are recorded as "Commissions and advisory fees payable" on the consolidated balance sheets and "Wealth management services cost of revenue" on the consolidated statements of comprehensive income.
Tax preparation revenue recognition: We derive service revenue from the sale of tax preparation online services, ancillary service offerings,services, packaged tax preparation software, and multiple element arrangements that may include a combination of these items. Ancillary service offeringsservices primarily include tax preparation support services, data archive services, bank or reloadable pre-paid debit card services, e-filing services, and other value-added services. This revenue is recorded in the Tax Preparation segment.
Our Tax Preparation segment revenue consists primarily of hosted tax preparation online services, tax preparation support services, data archive services and e-filing services. We recognize revenue from these services as the services are performed and the four revenue recognition criteria as described in "Note 2: Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report are met.
We recognizeThe Company recognizes revenue from the sale of ourits packaged software when legal title transfers. This is generally when ourits customers download the software from the Internet or, to a lesser extent, when the software ships.
Of Tax Preparation revenues, revenues from bank or reloadable prepaid debit card services, and software and/or services that consist of multiple elements contain subjective judgments and the use of estimates.
The bank or reloadable prepaid debit card services are offered to taxpayers as an option to receive their tax refunds in the form of a prepaid bank card or to have the fees for the software and/or services purchased by the customers deducted from their refunds. Other value-added service revenue consists of revenue from revenue sharing and royalty arrangements with third party partners. Revenue for these transactions is recognized when the four revenue recognition criteria described above are met; for some arrangements that is upon filing and for other arrangements that is upon our determination of when collectabilitycollectibility is probable.
For software and/or services that consist of multiple elements, we must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of vendor-specific objective evidence (“(VSOE“VSOE””) of fair value if available, third-party evidence (“(TPE“TPE””) of fair value if VSOE is not available, and estimated selling price (“(ESP“ESP””) if neither VSOE nor TPE is available; and (3) allocate the total price among the various elements based on the relative selling price method. Once we have allocated the total price among the various elements, we recognize revenue when the revenue recognition criteria described above are met for each element.
VSOE generally exists when we sell the deliverable separately. When VSOE cannot be established, we attempt to establish a selling price for each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. When we are unable to establish selling price using VSOE or TPE, we use ESP in our allocation of arrangement consideration. ESP is the estimated price at which we would sell the software or service if it were sold on a stand-alone basis. We determine ESP for the software or service by considering multiple factors including, but not limited to, historical stand-alone sales, pricing practices, market conditions, competitive landscape, internal costs, and gross margin objectives.
In some situations, we receive advance payments from our customers. We defer However, the impact of multiple element arrangements are not material and primarily impact the timing of revenue associated with these advance payments and recognize the consideration for each element when we ship the software or perform the services, as appropriate. Advance payments related to data archive services are deferred and recognizedrecognition over the related contractual term.
E-Commerce revenue recognition: We derive product revenue from online sales of self-branded electronics and accessories to both consumers and businesses. We recognize product revenue from product sales when all four revenue recognition criteria, as outlined in "Note 2: Summary of Significant Accounting Policies"tax filing season, which is concentrated within the first two quarters of the Notes to Consolidated Financial Statements in Part II Item 8 of this report, have been met. Because we either (i) have a general practice of refunding customer losses for products damaged while in-transit despite selling terms indicating title transfers at the point of shipment or (ii) have FOB-destination shipping terms specifically set out in certain arrangements, delivery is deemed to occur at the point in time when the product is received by the customer. All amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been classified as "Product revenue." Costs related to such shipping and handling billings are classified as "Product cost of revenue."
We provide our customers with a thirty-day right of return. Return allowances, which reduce revenue, are estimated using historical experience.
Cost of revenues: We record the cost of revenues for sales of products and services when the related revenue is recognized. "Services cost of revenue" consists of costs related to the Search and Content and Tax Preparation businesses, which include revenue sharing arrangements with our distribution partners, usage-based content fees, royalties, bank product service fees, and amortization of intangible assets. It also consists of costs associated with the operation of the data centers that serve our Search and Content and Tax Preparation businesses, which include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), depreciation, and bandwidth costs. "Product cost of revenue" consists of costs related to our E-Commerce business, which include product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence. Shipping charges to receive products from our suppliers are included in inventory and recognized as product cost of revenue upon sale of products to customers.
Sales and marketing expenses: Sales and marketing expenses consist principally of marketing expenses associated with our TaxACT and Monoprice websites (which include television, radio, online, text, and email channels), our owned and operated web search properties (which consist of traffic acquisition, including our online marketing fees paid to search engines
to drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel costs (salaries, stock-based compensation, benefits, and other employee-related costs) for personnel engaged in marketing and selling activities, and fulfillment expenses primarily associated with our E-Commerce business. Fulfillment expenses include direct operating expenses (including personnel costs) related to our purchasing, customer and technical support, receiving, inspection and warehouse functions, the cost of temporary help and contractors to augment staffing, and credit card processing fees.
Stock-based compensation: We measure stock-based compensation at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award using the straight-line method. We recognize stock-based compensation over the vesting period for each separately vesting portion of a share-based award as if they were individual share-based awards. We estimate forfeitures at the time of grant and revise those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Calculating stock-based compensation relies upon certain assumptions, including the expected term of the stock-based awards, expected stock price volatility, expected interest rate, number and types of stock-based awards, and the pre-vesting forfeiture rate. If we use different assumptions due to changes in our business or other factors, our stock-based compensation could vary materially in the future.
filing period.
Income taxes: We account for income taxes under the asset and liability method, under which deferred tax assets, including net operating loss carryforwards, and liabilities are determined based on temporary differences between the book and tax bases of assets and liabilities. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of the deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of the deferred tax assets, including expectations of future taxable income, recent cumulative earnings experience by taxing jurisdiction, and other relevant factors. There is a wide range of possible judgments relating to the valuation of our deferred tax assets.
We record liabilities to address uncertain tax positions that have been taken in previously filed tax returns or that are expected to be taken in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that the tax position, based on technical merits, will be sustained upon examination. The tax benefit to be recognized in the financial statements from such a position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.
For additional information about the realization of our deferred tax assets and our valuation allowance, see "Note 13:"Note 16: Income Taxes"Taxes" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. For additional information about our net operating loss carryforwards, see the Risk Factor "If there is a change in"Our utilization of our ownership within the meaning of Section 382 of the Internal Revenue Code, our ability to use our NOLsnet operating loss carryforwards (“NOLs”) may be severely limited or potentially eliminated"eliminated" in Part I Item 1A of this report. For additional information about expectations
Recent Accounting Pronouncements
See "Note 2: Summary of future taxable income, see the Risk Factor "Our financial results may fluctuate, which could cause our stock price to be volatile or decline" in Part I Item 1A of this report.
InventoriesSignificant Accounting Policies: Inventories, consisting of merchandise available for sale in the E-Commerce business, are accounted for using the first-in-first-out (“FIFO”) method of accounting and are valued at the lower of cost or market and include the related shipping and handling costs. Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.
Business combinations and intangible assets including goodwill: We account for business combinations using the acquisition method, and, accordingly, the identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. Goodwill is calculated as the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets, and is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Reporting units are consistent with reportable segments. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for the installed code base technology which is amortized proportional to expected revenue. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Goodwill and intangible assets impairment: We evaluate goodwill and indefinite-lived intangible assets for impairment annually, as of November 30, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit (for goodwill) or an indefinite-lived intangible asset is less than its carrying value, or if we elect to bypass the qualitative assessment, we then would proceed with the quantitative impairment test.
The goodwill quantitative impairment test is a two-step process that first compares the carrying values of reporting units to their fair values. If the carrying value of a reporting unit exceeds the fair value, a second step is performed to compute the amount of impairment. This second step determines the current fair values of all assets and liabilities of a reporting unit and then compares the implied fair value of the reporting unit's goodwill to the carrying value of that goodwill. If the carrying
value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
The indefinite-lived intangible asset quantitative impairment test compares the carrying value of the intangible asset to its fair value. If the carrying value of the intangible asset exceeds the fair value, an impairment loss is recognized in an amount equal to the excess.
Fair value typically is estimated using the present value of future discounted cash flows, an income approach. The significant estimates in the discounted cash flow model include the weighted-average cost of capital, long-term rates of revenue growth and/or profitability of our businesses, and working capital effects. The weighted-average cost of capital considers the relevant risk associated with business-specific characteristics and the uncertainty related to each business's ability to achieve the projected cash flows. To validate the reasonableness of the reporting unit fair values, we reconcile the aggregate fair values of our reporting units to the aggregate market value of our common stock on the date of valuation, while considering a reasonable acquisition premium. These estimates and the resulting valuations require significant judgment.
Definite-lived intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. The determination of recoverability is based on an estimate of pre-tax undiscounted future cash flows, using our best estimates of future net sales and operating expenses, expected to result from the use and eventual disposition of the asset or group of assets over the remaining economic life of the primary asset in the asset group. We measure the amount of the impairment as the excess of the asset's carrying value over its fair value.
In 2014, we performed quantitative assessments of goodwill and indefinite-lived intangible assets for impairment for each of our reporting units as of November 30. As a result of these quantitative assessments, we recorded an impairment of goodwill and intangible assets of $62.8 million in the fourth quarter of 2014 primarily related to our E-Commerce business. The affected intangible asset was the trade name. Our E-Commerce business had operating results, projected revenue growth rates, and projected profitability below our initial expectations, which led to the impairment of its goodwill and trade name. We also determined that the adverse changes and impairments related to the E-Commerce reporting unit were indicators requiring the review of E-Commerce long-lived assets for recoverability. The results of this review indicated that their carrying values were recoverable.
For additional information about our goodwill and intangible assets, see "Note 4: Goodwill and Other Intangibles Assets" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
In the dynamic search and content, tax preparation and e-commerce industries, there is significant uncertainty about the future. Unforeseen events such as market disruptions and deterioration of the macroeconomic environment, or internal challenges such as reorganizations, employee and management turnover, operational cash flows, and other trends that could have material negative impacts on our key assumptions in determining fair values, could lead to a decision to impair goodwill and/or intangible assets in future periods.
Equity method investments: We currently hold equity securities and warrants to purchase equity securities in companies whose securities are not publicly-traded. The equity method is used to account for investments in these companies, if the investment provides us with the ability to exercise significant influence over operating and financial policies of the investees. We record our proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investment may have experienced a decline in value. See "Note 12: Other Loss, Net"" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Debt issuance costs and debt discounts: Debt issuance costs and debt discounts are deferred and amortized as interest expense under the effective interest method over the contractual term of the related debt, adjusted for prepayments in the case of our credit facilities.
Debt issuance costs related to the Convertible Senior Notes issued in 2013 were allocated to the liability and equity components of the instrument. The debt issuance costs allocated to the liability component are amortized to interest expense through the earlier of the maturity date of the Notes or the date of conversion, if any. The debt issuance costs allocated to the equity component of the Notes were recorded as an offset to "Additional paid-in capital."
Derivative instruments and hedging: We recognized derivative instruments as either assets or liabilities at their fair value. We recorded changes in the fair value of the derivative instruments as gains or losses either in "Other loss, net" on the
consolidated statements of comprehensive income, for those not designated as a hedging instrument (the Warrant - see "Note 9: Stockholders' Equity" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report), or in "Accumulated other comprehensive loss" on the consolidated balance sheets, for those used in a hedging relationship (the interest rate swap - see "Note 7: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report). The Warrant and interest rate swap were settled in the last half of 2013. We had no derivatives outstanding as of December 31, 2014.
Recent Accounting Pronouncements
See "Note 2: Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
Quarterly Results of Operations (Unaudited)
The following table presents a summary of our unaudited consolidated results of operations for the eight quarters ended December 31, 2014.2017. The information for each of these quarters has been prepared on a basis consistent with our annual audited consolidated financial statements. You should read this information in conjunction with our consolidated financial statements and notes thereto in Part II Item 8. The operating results for any quarter are not necessarily indicative of results for any future period.
| | | | March 31, 2013 | | June 30, 2013 | | September 30, 2013 | | December 31, 2013 | | March 31, 2014 | | June 30, 2014 | | September 30, 2014 | | December 31, 2014 | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| | (in thousands except per share data) | (In thousands except per share data and percentages) (1) |
| Revenues: | | | | | | | | | | | | | | | | |
| Services revenue | $ | 165,338 |
| | $ | 117,181 |
| | $ | 109,491 |
| | $ | 127,667 |
| | $ | 179,044 |
| | $ | 106,270 |
| | $ | 76,885 |
| | $ | 67,790 |
| |
| Product revenue, net | — |
| | — |
| | 14,630 |
| | 39,673 |
| | 37,139 |
| | 35,299 |
| | 37,970 |
| | 40,323 |
| |
| Total revenues | 165,338 |
| | 117,181 |
|
| 124,121 |
|
| 167,340 |
|
| 216,183 |
|
| 141,569 |
|
| 114,855 |
|
| 108,113 |
| |
| Revenue: | | | | | | | | | | | | | | | | |
| Wealth management services revenue | | $ | 77,291 |
| | $ | 76,117 |
| | $ | 80,088 |
| | $ | 83,050 |
| | $ | 82,667 |
| | $ | 85,296 |
| | $ | 86,809 |
| | $ | 93,848 |
|
| Tax preparation services revenue | | 88,474 |
| | 43,991 |
| | 3,149 |
| | 3,751 |
| | 99,708 |
| | 53,866 |
| | 3,362 |
| | 4,001 |
|
| Total revenue | | 165,765 |
| | 120,108 |
|
| 83,237 |
|
| 86,801 |
|
| 182,375 |
|
| 139,162 |
|
| 90,171 |
|
| 97,849 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues: | | | | | | | | | | | | | | | | |
| Services cost of revenue | 76,987 |
| | 69,352 |
| | 72,935 |
| | 83,005 |
| | 71,293 |
| | 56,233 |
| | 49,754 |
| | 40,873 |
| |
| Product cost of revenue | — |
| | — |
| | 10,622 |
| | 27,559 |
| | 25,029 |
| | 23,137 |
| | 25,605 |
| | 28,573 |
| |
| Total cost of revenues | 76,987 |
| | 69,352 |
|
| 83,557 |
|
| 110,564 |
|
| 96,322 |
|
| 79,370 |
|
| 75,359 |
|
| 69,446 |
| |
| Cost of revenue: | | | | | | | | | | | | | | | | |
| Wealth management services cost of revenue | | 52,269 |
| | 51,023 |
| | 54,921 |
| | 55,783 |
| | 55,874 |
| | 56,963 |
| | 59,607 |
| | 63,415 |
|
| Tax preparation services cost of revenue | | 3,207 |
| | 2,023 |
| | 1,319 |
| | 1,819 |
| | 3,818 |
| | 2,411 |
| | 1,314 |
| | 2,475 |
|
| Amortization of acquired technology | | 667 |
| | 49 |
| | 49 |
| | 47 |
| | 48 |
| | 47 |
| | 50 |
| | 50 |
|
| Total cost of revenue | | 56,143 |
| | 53,095 |
|
| 56,289 |
|
| 57,649 |
|
| 59,740 |
|
| 59,421 |
|
| 60,971 |
|
| 65,940 |
|
| Engineering and technology | 2,538 |
| | 2,508 |
| | 2,905 |
| | 3,731 |
| | 4,135 |
| | 4,817 |
| | 5,970 |
| | 5,748 |
| 4,295 |
| | 3,959 |
| | 4,588 |
| | 4,938 |
| | 4,748 |
| | 4,242 |
| | 5,051 |
| | 5,573 |
|
| Sales and marketing | 38,484 |
| | 14,695 |
| | 18,230 |
| | 27,273 |
| | 55,836 |
| | 22,287 |
| | 18,152 |
| | 21,849 |
| 43,837 |
| | 19,913 |
| | 11,965 |
| | 13,645 |
| | 48,998 |
| | 22,296 |
| | 13,680 |
| | 17,824 |
|
| General and administrative | 6,384 |
| | 6,557 |
| | 8,421 |
| | 8,485 |
| | 8,632 |
| | 10,425 |
| | 9,495 |
| | 10,568 |
| 12,753 |
| | 11,508 |
| | 11,638 |
| | 11,497 |
| | 13,483 |
| | 13,715 |
| | 12,207 |
| | 13,263 |
|
| Depreciation | 517 |
| | 524 |
| | 697 |
| | 1,001 |
| | 1,058 |
| | 1,135 |
| | 1,085 |
| | 1,074 |
| 975 |
| | 963 |
| | 968 |
| | 975 |
| | 940 |
| | 873 |
| | 867 |
| | 780 |
|
| Amortization of intangible assets | 3,169 |
| | 3,168 |
| | 4,184 |
| | 5,600 |
| | 5,584 |
| | 5,761 |
| | 6,118 |
| | 6,118 |
| |
| Impairment of goodwill and intangible assets | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 62,817 |
| |
| Amortization of other acquired intangible assets | | 8,316 |
| | 8,316 |
| | 8,297 |
| | 8,402 |
| | 8,288 |
| | 8,289 |
| | 8,615 |
| | 8,615 |
|
Restructuring (2) | | — |
| | — |
| | — |
| | 3,870 |
| | 2,289 |
| | 331 |
| | 106 |
| | 375 |
|
| Total operating expenses | 128,079 |
| | 96,804 |
|
| 117,994 |
|
| 156,654 |
|
| 171,567 |
|
| 123,795 |
|
| 116,179 |
|
| 177,620 |
| 126,319 |
| | 97,754 |
|
| 93,745 |
|
| 100,976 |
|
| 138,486 |
|
| 109,167 |
|
| 101,497 |
|
| 112,370 |
|
| Operating income (loss) | 37,259 |
| | 20,377 |
|
| 6,127 |
|
| 10,686 |
|
| 44,616 |
|
| 17,774 |
|
| (1,324 | ) |
| (69,507 | ) | 39,446 |
| | 22,354 |
|
| (10,508 | ) |
| (14,175 | ) |
| 43,889 |
|
| 29,995 |
|
| (11,326 | ) |
| (14,521 | ) |
| Other loss, net | (1,005 | ) | | (6,304 | ) | | (13,118 | ) | | (9,196 | ) | | (4,069 | ) | | (3,724 | ) | | (3,208 | ) | | (3,765 | ) | (7,514 | ) | | (10,916 | ) | | (11,453 | ) | | (9,898 | ) | | (9,708 | ) | | (24,200 | ) | | (5,241 | ) | | (5,402 | ) |
| Income (loss) before income taxes | 36,254 |
| | 14,073 |
|
| (6,991 | ) |
| 1,490 |
|
| 40,547 |
|
| 14,050 |
|
| (4,532 | ) |
| (73,272 | ) | |
| Income (loss) from continuing operations before income taxes | | 31,932 |
| | 11,438 |
|
| (21,961 | ) |
| (24,073 | ) |
| 34,181 |
|
| 5,795 |
|
| (16,567 | ) |
| (19,923 | ) |
| Income tax benefit (expense) | (12,646 | ) | | (5,667 | ) | | 510 |
| | (2,624 | ) | | (14,560 | ) | | (5,313 | ) | | 2,294 |
| | 5,239 |
| (11,643 | ) | | (5,793 | ) | | 8,537 |
| | 10,184 |
| | (3,471 | ) | | (2,315 | ) | | (166 | ) | | 31,842 |
|
| Income (loss) from continuing operations | | 20,289 |
| | 5,645 |
| | (13,424 | ) | | (13,889 | ) | | 30,710 |
| | 3,480 |
| | (16,733 | ) | | 11,919 |
|
Discontinued operations, net of income taxes (3) | | 2,522 |
| | (19,975 | ) | | (40,528 | ) | | (5,140 | ) | | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | 23,608 |
| | $ | 8,406 |
|
| $ | (6,481 | ) |
| $ | (1,134 | ) |
| $ | 25,987 |
|
| $ | 8,737 |
|
| $ | (2,238 | ) |
| $ | (68,033 | ) | 22,811 |
| | (14,330 | ) |
| (53,952 | ) |
| (19,029 | ) |
| 30,710 |
|
| 3,480 |
|
| (16,733 | ) |
| 11,919 |
|
| Net income (loss) per share: |
| |
| |
| |
| |
| |
| |
| |
| |
| Net income attributable to noncontrolling interests | | (144 | ) | | (115 | ) | | (167 | ) | | (232 | ) | | (126 | ) | | (176 | ) | | (164 | ) | | (1,871 | ) |
| Net income (loss) attributable to Blucora, Inc. | | $ | 22,667 |
| | $ | (14,445 | ) | | $ | (54,119 | ) | | $ | (19,261 | ) | | $ | 30,584 |
| | $ | 3,304 |
| | $ | (16,897 | ) | | $ | 10,048 |
|
| Net income (loss) per share attributable to Blucora, Inc. - basic: | | Net income (loss) per share attributable to Blucora, Inc. - basic: | | | | | | | | | | |
| Continuing operations | | $ | 0.49 |
| | $ | 0.13 |
| | $ | (0.33 | ) | | $ | (0.34 | ) | | $ | 0.73 |
| | $ | 0.08 |
| | $ | (0.37 | ) | | $ | 0.22 |
|
| Discontinued operations | | 0.06 |
| | (0.48 | ) | | (0.97 | ) | | (0.12 | ) | | — |
| | — |
| | — |
| | — |
|
| Basic net income (loss) per share | | $ | 0.55 |
| | $ | (0.35 | ) | | $ | (1.30 | ) | | $ | (0.46 | ) | | $ | 0.73 |
| | $ | 0.08 |
| | $ | (0.37 | ) | | $ | 0.22 |
|
| Net income (loss) per share attributable to Blucora, Inc. - diluted: | | Net income (loss) per share attributable to Blucora, Inc. - diluted: | | | | | | | | | | |
| Continuing operations | | $ | 0.48 |
| | $ | 0.13 |
| | $ | (0.33 | ) | | $ | (0.34 | ) | | $ | 0.67 |
| | $ | 0.07 |
| | $ | (0.37 | ) | | $ | 0.21 |
|
| Discontinued operations | | 0.06 |
| | (0.47 | ) | | (0.97 | ) | | (0.12 | ) | | — |
| | — |
| | — |
| | — |
|
| Diluted net income (loss) per share | | $ | 0.54 |
| | $ | (0.34 | ) | | $ | (1.30 | ) | | $ | (0.46 | ) | | $ | 0.67 |
| | $ | 0.07 |
| | $ | (0.37 | ) | | $ | 0.21 |
|
| Weighted average shares outstanding: | | Weighted average shares outstanding: | | | | | | | | | | | | | | |
| Basic | $ | 0.58 |
| | $ | 0.20 |
| | $ | (0.16 | ) | | $ | (0.03 | ) | | $ | 0.62 |
| | $ | 0.21 |
| | $ | (0.05 | ) | | $ | (1.67 | ) | 41,171 |
| | 41,405 |
| | 41,635 |
| | 41,766 |
| | 42,145 |
| | 43,644 |
| | 45,459 |
| | 46,231 |
|
| Diluted | $ | 0.53 |
| | $ | 0.20 |
| | $ | (0.16 | ) | | $ | (0.03 | ) | | $ | 0.58 |
| | $ | 0.20 |
| | $ | (0.05 | ) | | $ | (1.67 | ) | 41,610 |
| | 42,298 |
| | 41,635 |
| | 41,766 |
| | 45,428 |
| | 46,937 |
| | 45,459 |
| | 48,406 |
|
| Weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | 40,911 |
| | 41,050 |
| | 41,088 |
| | 41,566 |
| | 42,162 |
| | 41,570 |
| | 41,034 |
| | 40,820 |
| |
| Diluted | 44,294 |
| | 42,724 |
| | 41,088 |
| | 41,566 |
| | 44,521 |
| | 43,084 |
| | 41,034 |
| | 40,820 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2013 | | June 30, 2013 | | September 30, 2013 | | December 31, 2013 | | March 31, 2014 | | June 30, 2014 | | September 30, 2014 | | December 31, 2014 |
| Revenues: | | | | | | | | | | | | | | | |
| Services revenue | 100.0 | % | | 100.0 | % | | 88.2 | % | | 76.3 | % | | 82.8 | % | | 75.1 | % | | 66.9 | % | | 62.7 | % |
| Product revenue, net | — |
| | — |
| | 11.8 |
| | 23.7 |
| | 17.2 |
| | 24.9 |
| | 33.1 |
| | 37.3 |
|
| Total revenues | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
| Operating expenses: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Cost of revenues (1): |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Services cost of revenue | 46.6 |
| | 59.2 |
| | 66.6 |
| | 65.0 |
| | 39.8 |
| | 52.9 |
| | 64.7 |
| | 60.3 |
|
| Product cost of revenue | — |
| | — |
| | 72.6 |
| | 69.5 |
| | 67.4 |
| | 65.5 |
| | 67.4 |
| | 70.9 |
|
| Total cost of revenues | 46.6 |
| | 59.2 |
| | 67.3 |
| | 66.1 |
| | 44.6 |
| | 56.1 |
| | 65.6 |
| | 64.2 |
|
| Engineering and technology | 1.5 |
| | 2.1 |
| | 2.3 |
| | 2.2 |
| | 1.9 |
| | 3.4 |
| | 5.2 |
| | 5.3 |
|
| Sales and marketing | 23.3 |
| | 12.6 |
| | 14.7 |
| | 16.3 |
| | 25.8 |
| | 15.7 |
| | 15.8 |
| | 20.2 |
|
| General and administrative | 3.9 |
| | 5.6 |
| | 6.8 |
| | 5.1 |
| | 4.0 |
| | 7.4 |
| | 8.3 |
| | 9.8 |
|
| Depreciation | 0.3 |
| | 0.4 |
| | 0.6 |
| | 0.6 |
| | 0.5 |
| | 0.8 |
| | 0.9 |
| | 1.0 |
|
| Amortization of intangible assets | 1.9 |
| | 2.7 |
| | 3.4 |
| | 3.3 |
| | 2.6 |
| | 4.1 |
| | 5.3 |
| | 5.7 |
|
| Impairment of goodwill and intangible assets | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 58.1 |
|
| Total operating expenses | 77.5 |
| | 82.6 |
| | 95.1 |
| | 93.6 |
| | 79.4 |
| | 87.5 |
| | 101.1 |
| | 164.3 |
|
| Operating income (loss) | 22.5 |
| | 17.4 |
| | 4.9 |
| | 6.4 |
| | 20.6 |
| | 12.5 |
| | (1.1 | ) | | (64.3 | ) |
| Other loss, net | (0.6 | ) | | (5.4 | ) | | (10.5 | ) | | (5.5 | ) | | (1.9 | ) | | (2.6 | ) | | (2.8 | ) | | (3.5 | ) |
| Income (loss) before income taxes | 21.9 |
| | 12.0 |
| | (5.6 | ) | | 0.9 |
| | 18.7 |
| | 9.9 |
| | (3.9 | ) | | (67.8 | ) |
| Income tax benefit (expense) | (7.6 | ) | | (4.8 | ) | | 0.4 |
| | (1.6 | ) | | (6.7 | ) | | (3.8 | ) | | 2.0 |
| | 4.8 |
|
| Net income (loss) | 14.3 | % | | 7.2 | % | | (5.2 | )% | | (0.7 | )% | | 12.0 | % | | 6.1 | % | | (1.9 | )% | | (63.0 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| Revenue: | | | | | | | | | | | | | | | |
| Wealth management services revenue | 46.6 | % | | 63.4 | % | | 96.2 | % | | 95.7 | % | | 45.3 | % | | 61.3 | % | | 96.3 | % | | 95.9 | % |
| Tax preparation services revenue | 53.4 |
| | 36.6 |
| | 3.8 |
| | 4.3 |
| | 54.7 |
| | 38.7 |
| | 3.7 |
| | 4.1 |
|
| Total revenue | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
| Operating expenses: | | | | | | | | | | | | | | | |
Cost of revenue (4): | | | | | | | | | | | | | | | |
| Wealth management services cost of revenue | 67.6 |
| | 67.0 |
| | 68.6 |
| | 67.2 |
| | 67.6 |
| | 66.8 |
| | 68.7 |
| | 67.6 |
|
| Tax preparation services cost of revenue | 3.6 |
| | 4.6 |
| | 41.9 |
| | 48.5 |
| | 3.8 |
| | 4.5 |
| | 39.1 |
| | 61.9 |
|
| Amortization of acquired technology | 0.4 |
| | 0.0 |
| | 0.1 |
| | 0.1 |
| | 0.0 |
| | 0.0 |
| | 0.1 |
| | 0.1 |
|
| Total cost of revenue | 33.9 |
| | 44.2 |
| | 67.6 |
| | 66.4 |
| | 32.8 |
| | 42.7 |
| | 67.6 |
| | 67.4 |
|
| Engineering and technology | 2.6 |
| | 3.3 |
| | 5.5 |
| | 5.7 |
| | 2.6 |
| | 3.0 |
| | 5.6 |
| | 5.7 |
|
| Sales and marketing | 26.4 |
| | 16.6 |
| | 14.4 |
| | 15.7 |
| | 26.9 |
| | 16.0 |
| | 15.2 |
| | 18.2 |
|
| General and administrative | 7.7 |
| | 9.6 |
| | 14.0 |
| | 13.2 |
| | 7.4 |
| | 9.9 |
| | 13.5 |
| | 13.6 |
|
| Depreciation | 0.6 |
| | 0.8 |
| | 1.2 |
| | 1.1 |
| | 0.5 |
| | 0.6 |
| | 1.0 |
| | 0.8 |
|
| Amortization of other acquired intangible assets | 5.0 |
| | 6.9 |
| | 10.0 |
| | 9.7 |
| | 4.5 |
| | 6.0 |
| | 9.6 |
| | 8.8 |
|
| Restructuring | — |
| | — |
| | — |
| | 4.5 |
| | 1.3 |
| | 0.2 |
| | 0.1 |
| | 0.4 |
|
| Total operating expenses | 76.2 |
| | 81.4 |
| | 112.7 |
| | 116.3 |
| | 76.0 |
| | 78.4 |
| | 112.6 |
| | 114.9 |
|
| Operating income (loss) | 23.8 |
| | 18.6 |
| | (12.7 | ) | | (16.3 | ) | | 24.0 |
| | 21.6 |
| | (12.6 | ) | | (14.9 | ) |
| Other loss, net | (4.5 | ) | | (9.1 | ) | | (13.8 | ) | | (11.4 | ) | | (5.3 | ) | | (17.4 | ) | | (5.8 | ) | | (5.5 | ) |
| Income (loss) from continuing operations before income taxes | 19.3 |
| | 9.5 |
| | (26.5 | ) | | (27.7 | ) | | 18.7 |
| | 4.2 |
| | (18.4 | ) | | (20.4 | ) |
| Income tax benefit (expense) | (7.0 | ) | | (4.8 | ) | | 10.3 |
| | 11.7 |
| | (1.9 | ) | | (1.7 | ) | | (0.2 | ) | | 32.5 |
|
| Income (loss) from continuing operations | 12.3 |
| | 4.7 |
| | (16.2 | ) | | (16.0 | ) | | 16.8 |
| | 2.5 |
| | (18.6 | ) | | 12.1 |
|
| Discontinued operations, net of income taxes | 1.5 |
| | (16.6 | ) | | (48.7 | ) | | (5.9 | ) | | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | 13.8 |
| | (11.9 | ) | | (64.9 | ) | | (21.9 | ) | | 16.8 |
| | 2.5 |
| | (18.6 | ) | | 12.1 |
|
| Net income attributable to noncontrolling interests | (0.1 | ) | | (0.1 | ) | | (0.2 | ) | | (0.3 | ) | | (0.1 | ) | | (0.1 | ) | | (0.2 | ) | | (1.9 | ) |
| Net income (loss) attributable to Blucora, Inc. | 13.7 | % | | (12.0 | )% | | (65.1 | )% | | (22.2 | )% | | 16.7 | % | | 2.4 | % | | (18.8 | )% | | 10.2 | % |
| |
(1) | On December 31, 2015, we acquired HD Vest. See "ServicesNote 3: Business Combinations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. |
| |
(2) | On October 27, 2016, we announced plans to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. In connection with this plan, we incurred restructuring costs. See "Note 5: Restructuring" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for more information. |
| |
(3) | We sold the Search and Content business and the E-Commerce business on August 9, 2016 and November 17, 2016, respectively. See "Note 4: Discontinued Operations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for more information. |
| |
(4) | "Wealthmanagement services cost of revenue" and "Product"Tax preparation services cost of revenue" are calculated based on their respective revenue bases of "Services"Wealth management services revenue" and "Product"Tax Preparation services revenue, net," respectively. "Total cost of revenues"revenue" is calculated based on "Total revenues.revenue." |
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, including changes in the market values of our marketable debt and equity securities and interest rates.
Financial market risk: We do not invest in financial instruments or their derivatives for trading or speculative purposes. By policy, we limit our credit exposure to any one issuer, other than securities issued by the U.S. federal government and its agencies, and do not have any derivative instruments in our investment portfolio. The three primary goals that guide our investment decisions, with the first being the most important, are: preserve capital, maintain ease of conversion into immediate liquidity, and achieve a rate of return over a pre-determined benchmark. As of December 31, 2014,2017, we principally invest in marketable fixed-income debt and equity securities. Fixed-income debt securities include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as insured time deposits with commercial banks and money market funds invested in securities issued by agencies of the U.S., with minimal default risk and maturity dates of less than one year from the end of any of our quarterly accounting periods. Equity securities include common stock in a publicly-traded company.fund securities. We consider the market value, default, and liquidity risks of our investments generally to be low at December 31, 2014.2017.
Interest rate risk: As of December 31, 2014, all of the debt securities that we held were fixed-rate earning instruments that carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to
changes in interest rates. At December 31, 2014,2017, our cash equivalent balance of $14.5$10.9 million was primarily held in money market funds, taxable municipal bonds, and time deposits, and our short-term investment balance of $251.6 million was primarily held in U.S. government securities, taxable municipal bonds, time deposits, and commercial paper.funds. We consider the interest rate risk for our cash equivalent and fixed-income debt securities held at December 31, 20142017 to be low. For further detail on our cash equivalents, and fixed-income debt securities, see "Note 5:"Note 7: Fair Value Measurements"Measurements" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
In addition, as of December 31, 2014,2017, we have $93.9$345.0 million of debt outstanding under the Monoprice and TaxACT 2013Blucora senior secured credit facilities, which carries a degree of interest rate risk. These debts haveThis debt has a floating portion of theirits interest ratesrate tied to the London Interbank Offered Rate (“LIBOR”). For further information on our outstanding debt, see "Note 7: Debt""Note 9: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. A hypothetical 100 basis point increase in LIBOR on December 31, 20142017 would result in a $3.0$22.0 million increase in our interest expense until the scheduled maturity datesdate in 2018.2024.
The following table provides information about our cash equivalent and fixed-income debt securities as of December 31, 2014,2017, including principal cash flows for 20152018 and thereafter and the related weighted average interest rates. The change in fair values during 2014 was less than $0.1 million2017 for our cash equivalent and fixed-income debt securities was not material and was recorded in other comprehensive income. Principal amounts and weighted average interest rates by expected year of maturity are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | 2015 |
| Thereafter |
| Total |
| Fair Value |
| U.S. government securities | $ | 100,517 |
| | 0.20 | % | | $ | — |
| | — | % | | $ | 100,517 |
| | 0.20 | % | | $ | 100,818 |
|
| International government securities | 6,412 |
| | 0.22 | % | | — |
| | — | % | | 6,412 |
| | 0.22 | % | | 6,560 |
|
| Money market and other funds | 8,490 |
| | 0.00 | % | | — |
| | — | % | | 8,490 |
| | 0.00 | % | | 8,490 |
|
| Commercial paper | 24,600 |
| | 0.18 | % | | — |
| | — | % | | 24,600 |
| | 0.18 | % | | 24,589 |
|
| Time deposits | 31,994 |
| | 0.31 | % | | — |
| | — | % | | 31,994 |
| | 0.31 | % | | 32,001 |
|
| Corporate bonds | 1,525 |
| | 0.40 | % | | — |
| | — | % | | 1,525 |
| | 0.40 | % | | 1,528 |
|
| Taxable municipal bonds | 91,596 |
| | 0.37 | % | | — |
| | — | % | | 91,596 |
| | 0.37 | % | | 92,120 |
|
| Cash equivalents and marketable fixed-income securities | $ | 265,134 |
| | | | $ | — |
| | | | $ | 265,134 |
| | | | $ | 266,106 |
|
Equity price risk: As part of the acquisition of HSW in the second quarter of 2014, we acquired marketable equity securities. Market prices for equity securities are subject to fluctuation, and consequently, the amount realized in the subsequent sale of an investment may significantly differ from the current market value. Fluctuation in the market price of an equity security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, and general market conditions.
The following table summarizes our equity securities and equity price risk as of December 31, 2014, including the effects of a hypothetical 30% increase and a 30% decrease in market prices as of that date. The selected 30% hypothetical changes do not reflect what could be considered the best or worst case scenarios. Results could be far worse due to, among other things, the underlying economic characteristics of the investee and the nature of equity markets. |
| | | |
| (In thousands, except percentages) | December 31, 2014 |
| Fair value of equity securities | $ | 3,234 |
|
| | |
| Hypothetical price increase | 30 | % |
| Estimated fair value after hypothetical price increase | $ | 4,204 |
|
| Hypothetical percentage increase in stockholders' equity | 0.20 | % |
| | |
| Hypothetical price decrease | (30 | )% |
| Estimated fair value after hypothetical price decrease | $ | 2,264 |
|
| Hypothetical percentage decrease in stockholders' equity | (0.20 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentages) | 2018 |
| Thereafter |
| Total |
| Fair Value |
| Money market and other funds | 10,857 |
| | 1.00 | % | | — |
| | — | % | | 10,857 |
| | 1.00 | % | | 10,857 |
|
| Cash equivalents | $ | 10,857 |
| | | | $ | — |
| | | | $ | 10,857 |
| | | | $ | 10,857 |
|
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and the Board of Directors and Stockholders
of Blucora, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Blucora, Inc. (the Company) as of December 31, 20142017 and 2013, and2016, the related consolidated statements of comprehensive income stockholders’(loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. These2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blucora, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
We also have audited, in accordance withserved as the standards of the Public Company Accounting Oversight Board (United States), Blucora, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.Company’s auditor since 2012.
Dallas, Texas
/s/ ERNST & YOUNG LLPMarch 1, 2018
Seattle, Washington
February 26, 2015
BLUCORA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 59,965 |
| | $ | 51,713 |
|
| Cash segregated under federal or other regulations | 1,371 |
| | 2,355 |
|
| Available-for-sale investments | — |
| | 7,101 |
|
| Accounts receivable, net of allowance | 10,694 |
| | 10,209 |
|
| Commissions receivable | 16,822 |
| | 16,144 |
|
| Other receivables | 3,180 |
| | 4,004 |
|
| Prepaid expenses and other current assets, net | 7,365 |
| | 6,321 |
|
| Total current assets | 99,397 |
| | 97,847 |
|
| Long-term assets: | | | |
| Property and equipment, net | 9,831 |
| | 10,836 |
|
| Goodwill, net | 549,037 |
| | 548,741 |
|
| Other intangible assets, net | 328,205 |
| | 362,178 |
|
| Other long-term assets | 15,201 |
| | 3,057 |
|
| Total long-term assets | 902,274 |
| | 924,812 |
|
| Total assets | $ | 1,001,671 |
| | $ | 1,022,659 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 4,413 |
| | $ | 4,536 |
|
| Commissions and advisory fees payable | 17,813 |
| | 16,587 |
|
| Accrued expenses and other current liabilities | 19,577 |
| | 18,528 |
|
| Deferred revenue | 9,953 |
| | 12,156 |
|
| Current portion of long-term debt, net | — |
| | 2,560 |
|
| Total current liabilities | 51,756 |
| | 54,367 |
|
| Long-term liabilities: | | | |
| Long-term debt, net | 338,081 |
| | 248,221 |
|
| Convertible senior notes, net | — |
| | 164,176 |
|
| Deferred tax liability, net | 43,433 |
| | 111,126 |
|
| Deferred revenue | 804 |
| | 1,849 |
|
| Other long-term liabilities | 8,177 |
| | 10,205 |
|
| Total long-term liabilities | 390,495 |
| | 535,577 |
|
| Total liabilities | 442,251 |
| | 589,944 |
|
| | | | |
| Redeemable noncontrolling interests | 18,033 |
| | 15,696 |
|
| | | | |
| Commitments and contingencies (Note 10) |
| |
|
| Stockholders’ equity: | | | |
| Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares, | | | |
| 46,366 and 41,845 | 5 |
| | 4 |
|
| Additional paid-in capital | 1,555,560 |
| | 1,510,152 |
|
| Accumulated deficit | (1,014,174 | ) | | (1,092,756 | ) |
| Accumulated other comprehensive loss | (4 | ) | | (381 | ) |
| Total stockholders’ equity | 541,387 |
| | 417,019 |
|
| Total liabilities and stockholders’ equity | $ | 1,001,671 |
| | $ | 1,022,659 |
|
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 46,444 |
| | $ | 130,225 |
|
| Available-for-sale investments | 254,854 |
| | 203,480 |
|
| Accounts receivable, net of allowance of $67 and $62 | 30,988 |
| | 48,081 |
|
| Other receivables | 3,295 |
| | 8,292 |
|
| Inventories | 29,246 |
| | 28,826 |
|
| Prepaid expenses and other current assets, net | 13,477 |
| | 9,774 |
|
| Total current assets | 378,304 |
| | 428,678 |
|
| Property and equipment, net | 15,942 |
| | 16,108 |
|
| Goodwill, net | 304,658 |
| | 348,957 |
|
| Other intangible assets, net | 168,919 |
| | 178,064 |
|
| Other long-term assets | 4,891 |
| | 6,223 |
|
| Total assets | $ | 872,714 |
| | $ | 978,030 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 37,755 |
| | $ | 61,268 |
|
| Accrued expenses and other current liabilities | 21,505 |
| | 31,109 |
|
| Deferred revenue | 7,884 |
| | 7,510 |
|
| Short-term portion of long-term debt, net | 7,914 |
| | 7,903 |
|
| Convertible senior notes, net | — |
| | 181,583 |
|
| Total current liabilities | 75,058 |
| | 289,373 |
|
| Long-term liabilities: | | | |
| Long-term debt, net | 85,835 |
| | 113,193 |
|
| Convertible senior notes, net | 185,177 |
| | — |
|
| Deferred tax liability, net | 42,963 |
| | 56,861 |
|
| Deferred revenue | 1,915 |
| | 1,814 |
|
| Other long-term liabilities | 2,741 |
| | 2,719 |
|
| Total long-term liabilities | 318,631 |
| | 174,587 |
|
| Total liabilities | 393,689 |
| | 463,960 |
|
| Commitments and contingencies (Note 8) |
| |
|
| Stockholders’ equity: | | | |
| Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares, | | | |
| 40,882 and 42,083 | 4 |
| | 4 |
|
| Additional paid-in capital | 1,467,658 |
| | 1,466,043 |
|
| Accumulated deficit | (987,524 | ) | | (951,977 | ) |
| Accumulated other comprehensive loss | (1,113 | ) | | — |
|
| Total stockholders’ equity | 479,025 |
| | 514,070 |
|
| Total liabilities and stockholders’ equity | $ | 872,714 |
| | $ | 978,030 |
|
See notes to consolidated financial statements.
BLUCORA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | | |
| Services revenue | $ | 429,989 |
| | $ | 519,677 |
| | $ | 406,919 |
| |
| Product revenue, net | 150,731 |
| | 54,303 |
| | — |
| |
| Total revenues | 580,720 |
| | 573,980 |
| | 406,919 |
| |
| Revenue: | | | | | | |
| Wealth management services revenue | | $ | 348,620 |
| | $ | 316,546 |
| | $ | — |
|
| Tax preparation services revenue | | 160,937 |
| | 139,365 |
| | 117,708 |
|
| Total revenue | | 509,557 |
| | 455,911 |
| | 117,708 |
|
| Operating expenses: | | | | | | | | | | |
| Cost of revenues: | | | | | | |
| Services cost of revenue | 218,153 |
| | 302,279 |
| | 265,945 |
| |
| Product cost of revenue | 102,344 |
| | 38,181 |
| | — |
| |
| Total cost of revenues | 320,497 |
| | 340,460 |
| | 265,945 |
| |
| Cost of revenue: | | | | | | |
| Wealth management services cost of revenue | | 235,859 |
| | 213,996 |
| | — |
|
| Tax preparation services cost of revenue | | 10,018 |
| | 8,368 |
| | 6,167 |
|
| Amortization of acquired technology | | 195 |
| | 812 |
| | 7,546 |
|
| Total cost of revenue | | 246,072 |
| | 223,176 |
| | 13,713 |
|
| Engineering and technology | 20,670 |
| | 11,682 |
| | 9,969 |
| 19,614 |
| | 17,780 |
| | 5,107 |
|
| Sales and marketing | 118,124 |
| | 98,682 |
| | 45,644 |
| 102,798 |
| | 89,360 |
| | 45,854 |
|
| General and administrative | 39,120 |
| | 29,847 |
| | 27,418 |
| 52,668 |
| | 47,396 |
| | 43,563 |
|
| Depreciation | 4,352 |
| | 2,739 |
| | 2,119 |
| 3,460 |
| | 3,881 |
| | 1,521 |
|
| Amortization of intangible assets | 23,581 |
| | 16,121 |
| | 11,619 |
| |
| Impairment of goodwill and intangible assets | 62,817 |
| | — |
| | — |
| |
| Amortization of other acquired intangible assets | | 33,807 |
| | 33,331 |
| | 12,757 |
|
| Restructuring | | 3,101 |
| | 3,870 |
| | — |
|
| Total operating expenses | 589,161 |
| | 499,531 |
| | 362,714 |
| 461,520 |
| | 418,794 |
| | 122,515 |
|
| Operating income (loss) | (8,441 | ) | | 74,449 |
| | 44,205 |
| 48,037 |
| | 37,117 |
| | (4,807 | ) |
| Other loss, net | (14,766 | ) | | (29,623 | ) | | (6,677 | ) | (44,551 | ) | | (39,781 | ) | | (12,542 | ) |
| Income (loss) before income taxes | (23,207 | ) | | 44,826 |
| | 37,528 |
| |
| Income tax expense | (12,340 | ) | | (20,427 | ) | | (15,002 | ) | |
| Income (loss) from continuing operations before income taxes | | 3,486 |
| | (2,664 | ) | | (17,349 | ) |
| Income tax benefit | | 25,890 |
| | 1,285 |
| | 4,623 |
|
| Income (loss) from continuing operations | | 29,376 |
| | (1,379 | ) | | (12,726 | ) |
| Discontinued operations, net of income taxes | | — |
| | (63,121 | ) | | (27,348 | ) |
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
| 29,376 |
| | (64,500 | ) | | (40,074 | ) |
| Net income (loss) per share: | | | | | | |
| Basic | $ | (0.86 | ) | | $ | 0.59 |
| | $ | 0.56 |
| |
| Diluted | $ | (0.86 | ) | | $ | 0.56 |
| | $ | 0.54 |
| |
| Net income attributable to noncontrolling interests | | (2,337 | ) | | (658 | ) | | — |
|
| Net income (loss) attributable to Blucora, Inc. | | $ | 27,039 |
| | $ | (65,158 | ) | | $ | (40,074 | ) |
| Net income (loss) per share attributable to Blucora, Inc. - basic: | | | | | | |
| Continuing operations | | $ | 0.61 |
| | $ | (0.05 | ) | | $ | (0.31 | ) |
| Discontinued operations | | — |
| | (1.52 | ) | | (0.67 | ) |
| Basic net income (loss) per share | | $ | 0.61 |
| | $ | (1.57 | ) | | $ | (0.98 | ) |
| Net income (loss) per share attributable to Blucora, Inc. - diluted: | | | | | | |
| Continuing operations | | $ | 0.57 |
| | $ | (0.05 | ) | | $ | (0.31 | ) |
| Discontinued operations | | — |
| | (1.52 | ) | | (0.67 | ) |
| Diluted net income (loss) per share | | $ | 0.57 |
| | $ | (1.57 | ) | | $ | (0.98 | ) |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | 41,396 |
| | 41,201 |
| | 40,279 |
| 44,370 |
| | 41,494 |
| | 40,959 |
|
| Diluted | 41,396 |
| | 43,480 |
| | 41,672 |
| 47,211 |
| | 41,494 |
| | 40,959 |
|
| Other comprehensive income (loss): | | | | | | |
| Other comprehensive income: | | | | | | |
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
| $ | 29,376 |
| | $ | (64,500 | ) | | $ | (40,074 | ) |
| Unrealized gain (loss) on available-for-sale investments, net of tax | (1,119 | ) | | 11 |
| | (16 | ) | 1 |
| | 9 |
| | (236 | ) |
| Unrealized gain (loss) on derivative instrument, net of tax | — |
| | 266 |
| | (266 | ) | |
| Reclassification adjustment for realized (gains) losses on available-for-sale investments, net of tax, included in net income | 6 |
| | (1 | ) | | (26 | ) | |
| Other comprehensive income (loss) | (1,113 | ) | | 276 |
| | (308 | ) | |
| Foreign currency translation adjustment | | 376 |
| | 137 |
| | (517 | ) |
| Reclassification adjustment for realized loss on available-for-sale investments, net of tax, included in net income as Other loss, net | | — |
| | — |
| | 375 |
|
| Reclassification adjustment for other-than-temporary impairment loss on available-for-sale investments, included in net income as discontinued operations | | — |
| | — |
| | 964 |
|
| Other comprehensive income | | 377 |
| | 146 |
| | 586 |
|
| Comprehensive income (loss) | $ | (36,660 | ) | | $ | 24,675 |
| | $ | 22,218 |
| 29,753 |
| | (64,354 | ) | | (39,488 | ) |
| Comprehensive income attributable to noncontrolling interests | | (2,337 | ) | | (658 | ) | | — |
|
| Comprehensive income (loss) attributable to Blucora, Inc. | | $ | 27,416 |
| | $ | (65,012 | ) | | $ | (39,488 | ) |
See notes to consolidated financial statements.
BLUCORA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | Accumulated other comprehensive income (loss) | | | Redeemable Noncontrolling Interests | | | | Additional- paid-in capital | | Accumulated deficit | | Accumulated other comprehensive income (loss) | | |
| | Common stock | | Additional- paid-in capital | | Accumulated deficit | | | Common stock | | |
| | Shares | | Amount | | Accumulated other comprehensive income (loss) | Shares | | Amount | | Total |
| Balance as of December 31, 2011 | 39,534 |
| | $ | 4 |
| | $ | 1,353,971 |
| | $ | (998,902 | ) | | $ | 32 |
| | |
| Balance as of December 31, 2014 | | $ | — |
| | 40,882 |
| | $ | 4 |
| | $ | 1,467,658 |
| | $ | (987,524 | ) | | $ | (1,113 | ) | | $ | 479,025 |
|
| Common stock issued for stock options and restricted stock units | 1,236 |
| | — |
| | 9,025 |
| | — |
| | — |
| | 9,025 |
| — |
| | 520 |
| | — |
| | 2,409 |
| | — |
| | — |
| | 2,409 |
|
| Common stock issued for employee stock purchase plan | 62 |
| | — |
| | 601 |
| | — |
| | — |
| | 601 |
| — |
| | 103 |
| | — |
| | 1,193 |
| | — |
| | — |
| | 1,193 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (308 | ) | | (308 | ) | |
| Stock-based compensation | — |
| | — |
| | 13,344 |
| | — |
| | — |
| | 13,344 |
| |
| Tax effect of equity compensation | — |
| | — |
| | 22,693 |
| | — |
| | — |
| | 22,693 |
| |
| Taxes paid on stock issued for equity awards | — |
| | — |
| | (1,318 | ) | | — |
| | — |
| | (1,318 | ) | |
| Reclassification of equity award to liability award | — |
| | — |
| | (6,218 | ) | | — |
| | — |
| | (6,218 | ) | |
| Net income | — |
| | — |
| | — |
| | 22,526 |
| | — |
| | 22,526 |
| |
| Balance as of December 31, 2012 | 40,832 |
| | 4 |
| | 1,392,098 |
| | (976,376 | ) | | (276 | ) | | 415,450 |
| |
| Common stock issued for stock options and restricted stock units | 584 |
| | — |
| | 2,841 |
| | — |
| | — |
| | 2,841 |
| |
| Common stock issued for employee stock purchase plan | 85 |
| | — |
| | 1,065 |
| | — |
| | — |
| | 1,065 |
| |
| Common stock issued upon Warrant exercise | 1,000 |
| | — |
| | 9,620 |
| | — |
| | — |
| | 9,620 |
| |
| Stock repurchases | (418 | ) | | — |
| | (10,006 | ) | | — |
| | — |
| | (10,006 | ) | — |
| | (551 | ) | | — |
| | (7,735 | ) | | — |
| | — |
| | (7,735 | ) |
| Convertible senior notes, net of issuance costs of $714 and tax effect of $7,785 | — |
| | — |
| | 13,842 |
| | — |
| | — |
| | 13,842 |
| |
| Settlement of derivative instrument (Warrant) | — |
| | — |
| | 20,217 |
| | — |
| | — |
| | 20,217 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 276 |
| | 276 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 586 |
| | 586 |
|
| Stock-based compensation | — |
| | — |
| | 11,642 |
| | — |
| | — |
| | 11,642 |
| — |
| | — |
| | — |
| | 13,047 |
| | — |
| | — |
| | 13,047 |
|
| Tax effect of equity compensation | — |
| | — |
| | 27,224 |
| | — |
| | — |
| | 27,224 |
| — |
| | — |
| | — |
| | 15,378 |
| | — |
| | — |
| | 15,378 |
|
| Taxes paid on stock issued for equity awards | — |
| | — |
| | (2,500 | ) | | — |
| | — |
| | (2,500 | ) | |
| Net income | — |
| | — |
| | — |
| | 24,399 |
| | — |
| | 24,399 |
| |
| Balance as of December 31, 2013 | 42,083 |
| | 4 |
| | 1,466,043 |
| | (951,977 | ) | | — |
| | 514,070 |
| |
| Tax payments from shares withheld for equity awards | | — |
| | — |
| | — |
| | (1,545 | ) | | — |
| | — |
| | (1,545 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | (40,074 | ) | | — |
| | (40,074 | ) |
| Purchase of redeemable non-controlling interests | | 15,038 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance as of December 31, 2015 | | 15,038 |
| | 40,954 |
| | 4 |
| | 1,490,405 |
| | (1,027,598 | ) | | (527 | ) | | 462,284 |
|
| Common stock issued for stock options and restricted stock units | 1,003 |
| | — |
| | 6,715 |
| | — |
| | — |
| | 6,715 |
| — |
| | 700 |
| | — |
| | 2,216 |
| | — |
| | — |
| | 2,216 |
|
| Common stock issued for employee stock purchase plan | 85 |
| | — |
| | 1,376 |
| | — |
| | — |
| | 1,376 |
| — |
| | 191 |
| | — |
| | 1,402 |
| | — |
| | — |
| | 1,402 |
|
| Stock repurchases | (2,289 | ) | | — |
| | (38,650 | ) | | — |
| | — |
| | (38,650 | ) | |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1,113 | ) | | (1,113 | ) | |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 146 |
| | 146 |
|
| Stock-based compensation | — |
| | — |
| | 11,990 |
| | — |
| | — |
| | 11,990 |
| — |
| | — |
| | — |
| | 15,235 |
| | — |
| | — |
| | 15,235 |
|
| Tax effect of equity compensation | — |
| | — |
| | 22,962 |
| | — |
| | — |
| | 22,962 |
| — |
| | — |
| | — |
| | 2,461 |
| | — |
| | — |
| | 2,461 |
|
| Taxes paid on stock issued for equity awards | — |
| | — |
| | (2,778 | ) | | — |
| | — |
| | (2,778 | ) | |
| Net loss | — |
| | — |
| | — |
| | (35,547 | ) | | — |
| | (35,547 | ) | |
| Balance as of December 31, 2014 | 40,882 |
| | $ | 4 |
| | $ | 1,467,658 |
| | $ | (987,524 | ) | | $ | (1,113 | ) | | $ | 479,025 |
| |
| Tax payments from shares withheld for equity awards | | — |
| | — |
| | — |
| | (1,752 | ) | | — |
| | — |
| | (1,752 | ) |
| Reclassification of equity award to liability award | | — |
| | — |
| | — |
| | 185 |
| | — |
| | | | 185 |
|
| Net income (loss) | | 658 |
| | — |
| | — |
| | — |
| | (65,158 | ) | | — |
| | (65,158 | ) |
| Balance as of December 31, 2016 | | 15,696 |
| | 41,845 |
| | 4 |
| | 1,510,152 |
| | (1,092,756 | ) | | (381 | ) | | 417,019 |
|
| Common stock issued for stock options and restricted stock units | | — |
| | 4,382 |
| | 1 |
| | 40,271 |
| | — |
| | — |
| | 40,272 |
|
| Common stock issued for employee stock purchase plan | | — |
| | 139 |
| | — |
| | 1,429 |
| | — |
| | — |
| | 1,429 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 377 |
| | 377 |
|
| Stock-based compensation and impact of recent ASU | | — |
| | — |
| | — |
| | 12,801 |
| | 51,543 |
| | — |
| | 64,344 |
|
| Tax payments from shares withheld for equity awards | | — |
| | — |
| | — |
| | (9,095 | ) | | — |
| | — |
| | (9,095 | ) |
| Other | | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Net income | | 2,337 |
| | — |
| | — |
| | — |
| | 27,039 |
| | — |
| | 27,039 |
|
| Balance as of December 31, 2017 | | $ | 18,033 |
| | 46,366 |
| | $ | 5 |
| | $ | 1,555,560 |
| | $ | (1,014,174 | ) | | $ | (4 | ) | | $ | 541,387 |
|
See notes to consolidated financial statements.
BLUCORA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | 29,376 |
| | $ | (64,500 | ) | | $ | (40,074 | ) |
| Less: Discontinued operations, net of income taxes | — |
| | (63,121 | ) | | (27,348 | ) |
| Net income (loss) from continuing operations | 29,376 |
| | (1,379 | ) | | (12,726 | ) |
| Adjustments to reconcile net income (loss) from continuing operations to net cash from operating activities: | | | | | |
| Stock-based compensation | 11,653 |
| | 14,128 |
| | 8,694 |
|
| Depreciation and amortization of acquired intangible assets | 38,139 |
| | 38,688 |
| | 22,590 |
|
| Restructuring (non-cash) | 1,569 |
| | (364 | ) | | — |
|
| Deferred income taxes | (16,159 | ) | | (18,055 | ) | | (12,607 | ) |
| Amortization of premium on investments, net | 10 |
| | 174 |
| | 1,589 |
|
| Amortization of debt issuance costs | 1,089 |
| | 1,840 |
| | 1,133 |
|
| Accretion of debt discounts | 1,947 |
| | 4,690 |
| | 3,866 |
|
| Loss on debt extinguishment and modification expense | 20,445 |
| | 1,036 |
| | 398 |
|
| Revaluation of acquisition-related contingent consideration liability | — |
| | 391 |
| | — |
|
| Other | 30 |
| | 19 |
| | 203 |
|
| Cash provided (used) by changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (483 | ) | | (2,340 | ) | | (1,862 | ) |
| Commissions receivable | (678 | ) | | 184 |
| | — |
|
| Other receivables | (204 | ) | | 22,875 |
| | 651 |
|
| Prepaid expenses and other current assets | (869 | ) | | 3,741 |
| | (493 | ) |
| Other long-term assets | (12,281 | ) | | (887 | ) | | (15 | ) |
| Accounts payable | (123 | ) | | (153 | ) | | 369 |
|
| Commissions and advisory fees payable | 1,226 |
| | (395 | ) | | — |
|
| Deferred revenue | (3,248 | ) | | 582 |
| | 1,875 |
|
| Accrued expenses and other current and long-term liabilities | 1,407 |
| | 21,195 |
| | 10,643 |
|
| Net cash provided by operating activities from continuing operations | 72,846 |
| | 85,970 |
| | 24,308 |
|
| Investing Activities: | | | | | |
| Business acquisitions, net of cash acquired | — |
| | (1,788 | ) | | (569,709 | ) |
| Purchases of property and equipment | (5,039 | ) | | (3,812 | ) | | (1,512 | ) |
| Proceeds from sales of investments | 249 |
| | — |
| | 156,506 |
|
| Proceeds from maturities of investments | 7,252 |
| | 12,807 |
| | 296,455 |
|
| Purchases of investments | (409 | ) | | (8,767 | ) | | (214,257 | ) |
| Net cash provided (used) by investing activities from continuing operations | 2,053 |
| | (1,560 | ) | | (332,517 | ) |
| Financing Activities: | | | | | |
| Proceeds from credit facility, net of debt issuance costs and debt discount of $5,913 and $1,875 in 2017 and $9,730 and $12,000 in 2015, respectively | 365,836 |
| | — |
| | 378,270 |
|
| Repurchase of convertible notes | (172,827 | ) | | (20,667 | ) | | — |
|
| Repayment of credit facility | (290,000 | ) | | (140,000 | ) | | (51,940 | ) |
| Repayment of note payable with related party | (3,200 | ) | | (3,200 | ) | | — |
|
| Stock repurchases | — |
| | — |
| | (7,735 | ) |
| Proceeds from stock option exercises | 40,271 |
| | 2,216 |
| | 2,409 |
|
| Proceeds from issuance of stock through employee stock purchase plan | 1,429 |
| | 1,402 |
| | 1,193 |
|
| Tax payments from shares withheld for equity awards | (9,095 | ) | | (1,752 | ) | | (1,545 | ) |
| Contingent consideration payments for business acquisition | (946 | ) | | — |
| | — |
|
| Other | (30 | ) | | — |
| | — |
|
| Net cash provided (used) by financing activities from continuing operations | (68,562 | ) | | (162,001 | ) | | 320,652 |
|
| Net cash provided (used) by continuing operations | 6,337 |
| | (77,591 | ) | | 12,443 |
|
| | | | | | |
| Net cash provided by operating activities from discontinued operations | — |
| | 14,047 |
| | 22,126 |
|
| Net cash provided (used) by investing activities from discontinued operations | 1,028 |
| | 83,608 |
| | (540 | ) |
| Net cash used in financing activities from discontinued operations | — |
| | (25,000 | ) | | (17,000 | ) |
| Net cash provided by discontinued operations | 1,028 |
| | 72,655 |
| | 4,586 |
|
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | 78 |
| | (26 | ) | | (17 | ) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 7,443 |
| | (4,962 | ) | | 17,012 |
|
| Cash and cash equivalents, beginning of period | 54,868 |
| | 59,830 |
| | 42,818 |
|
| Cash and cash equivalents, end of period | $ | 62,311 |
| | $ | 54,868 |
| | $ | 59,830 |
|
| Non-cash investing and financing activities from continuing operations: | | | | | |
| Cash paid for income taxes from continuing operations | $ | 1,267 |
| | $ | 2,012 |
| | $ | 614 |
|
| Cash paid for interest from continuing operations | $ | 23,316 |
| | $ | 32,377 |
| | $ | 8,994 |
|
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
|
| Adjustments to reconcile net income (loss) to net cash from operating activities: | | | | | |
| Stock-based compensation | 11,884 |
| | 11,527 |
| | 8,937 |
|
| Warrant-related stock-based compensation | — |
| | — |
| | 4,286 |
|
| Depreciation and amortization of intangible assets | 36,675 |
| | 28,265 |
| | 23,011 |
|
| Impairment of goodwill and intangible assets | 62,817 |
| | — |
| | — |
|
| Excess tax benefits from stock-based award activity | (23,284 | ) | | (29,400 | ) | | (23,041 | ) |
| Deferred income taxes | (13,667 | ) | | (10,849 | ) | | (8,738 | ) |
| Amortization of premium (accretion of discount) on investments, net | 3,772 |
| | 3,007 |
| | (194 | ) |
| Amortization of debt issuance costs | 1,143 |
| | 1,108 |
| | 820 |
|
| Accretion of debt discounts | 3,691 |
| | 2,838 |
| | 325 |
|
| Loss on debt extinguishment and modification expense | — |
| | 1,593 |
| | — |
|
| Loss on derivative instrument | — |
| | 11,652 |
| | 2,346 |
|
| Impairment loss on equity investment in privately-held company | — |
| | 3,711 |
| | — |
|
| Earn-out contingent liability adjustments | (15 | ) | | (300 | ) | | — |
|
| Other | 128 |
| | 767 |
| | 31 |
|
| Cash provided (used) by changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 17,001 |
| | (9,911 | ) | | (597 | ) |
| Other receivables | 4,983 |
| | 1,741 |
| | (665 | ) |
| Inventories | (420 | ) | | (1,349 | ) | | — |
|
| Prepaid expenses and other current assets | (4,125 | ) | | 2,511 |
| | (5,862 | ) |
| Other long-term assets | 116 |
| | 256 |
| | 1,981 |
|
| Accounts payable | (23,513 | ) | | 12,275 |
| | (1,600 | ) |
| Deferred revenue | 475 |
| | 3,527 |
| | 4,170 |
|
| Accrued expenses and other current and long-term liabilities | 13,620 |
| | 37,688 |
| | 21,095 |
|
| Net cash provided by operating activities | 55,734 |
| | 95,056 |
| | 48,831 |
|
| Investing Activities: | | | | | |
| Business acquisitions, net of cash acquired | (44,927 | ) | | (184,982 | ) | | (279,386 | ) |
| Equity investment in privately-held company | — |
| | (4,000 | ) | | — |
|
| Purchases of property and equipment | (5,213 | ) | | (4,747 | ) | | (3,752 | ) |
| Change in restricted cash | — |
| | 2,491 |
| | 252 |
|
| Proceeds from sales of investments | 28,705 |
| | 25,812 |
| | 203,493 |
|
| Proceeds from maturities of investments | 255,994 |
| | 213,616 |
| | 36,753 |
|
| Purchases of investments | (336,495 | ) | | (351,883 | ) | | (122,433 | ) |
| Net cash used by investing activities | (101,936 | ) | | (303,693 | ) | | (165,073 | ) |
| Financing Activities: | | | | | |
| Proceeds from issuance of convertible notes, net of debt issuance costs of $6,432 | — |
| | 194,818 |
| | — |
|
| Proceeds from credit facilities, net of debt issuance costs and debt discount of $406 and $300 in 2013 and $2,343 and $953 in 2012 | 36,556 |
| | 55,294 |
| | 96,704 |
|
| Repayment of credit facilities | (64,000 | ) | | (10,000 | ) | | (25,504 | ) |
| Debt issuance costs on credit facility | — |
| | (28 | ) | | — |
|
| Stock repurchases | (38,650 | ) | | (10,006 | ) | | — |
|
| Excess tax benefits from stock-based award activity | 23,284 |
| | 29,400 |
| | 23,041 |
|
| Proceeds from stock option exercises | 6,730 |
| | 2,826 |
| | 9,099 |
|
| Proceeds from issuance of stock through employee stock purchase plan | 1,376 |
| | 1,065 |
| | 601 |
|
| Proceeds from issuance of stock upon warrant exercise | — |
| | 9,620 |
| | — |
|
| Tax payments from shares withheld upon vesting of restricted stock units | (2,875 | ) | | (2,405 | ) | | (1,318 | ) |
| Net cash provided (used) by financing activities | (37,579 | ) | | 270,584 |
| | 102,623 |
|
| Net increase (decrease) in cash and cash equivalents | (83,781 | ) | | 61,947 |
| | (13,619 | ) |
| Cash and cash equivalents, beginning of period | 130,225 |
| | 68,278 |
| | 81,897 |
|
| Cash and cash equivalents, end of period | $ | 46,444 |
| | $ | 130,225 |
| | $ | 68,278 |
|
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Purchases of property and equipment through leasehold incentives (investing) | $ | 120 |
| | $ | 1,006 |
| | $ | 841 |
|
| Contingent earn-out consideration from acquisition (financing) | $ | 15 |
| | $ | 300 |
| | $ | — |
|
| Cash paid for income taxes | $ | 2,729 |
| | $ | 2,528 |
| | $ | 3,071 |
|
| Cash paid for interest | $ | 11,206 |
| | $ | 7,138 |
| | $ | 3,527 |
|
See notes to consolidated financial statements.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Note 1: The Company and Basis of Presentation
Description of the business: |
|
| Note 1: Description of the Business |
Blucora, Inc. (the “Company“Company”” or “Blucora“Blucora””) operates three primarytwo businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries ("HD Vest"). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), H.D. Vest Advisory Services, Inc. (a registered investment adviser), and H.D. Vest Insurance Agency, LLC (an insurance broker) (collectively referred to as the "Wealth Management business" or the "Wealth Management segment"). The Tax Preparation business consists of the operations of TaxAct, Inc. and its subsidiary ("TaxAct") and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the "Tax Preparation business" or the "Tax Preparation segment").
Prior to 2017, the Company also operated an internet Search and Content business, an online Tax Preparation business and an E-Commerce business. The Search and Content business operatesoperated through ourthe InfoSpace LLC subsidiary (“InfoSpace”) and providesprovided search services to users of its owned and operated and distribution partners’ web properties, as well as online content. The Tax Preparation business consists of the operations of TaxACT, Inc. (“content through HowStuffWorks (TaxACT“HSW””) and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services through its website, www.taxact.com.. The E-Commerce business consistsconsisted of the operations of Monoprice, Inc. (“(Monoprice“Monoprice””) and sellssold self-branded electronics and accessories to both consumers and businesses primarily through its website, www.monoprice.com.website.
On May 30, 2014, InfoSpaceThe Company completed both divestitures in 2016. Specifically, on November 17, 2016, the Company closed on an agreement with YFC-Boneagle Electric Co., Ltd (“YFC”), under which YFC acquired the assets of HowStuffWorks (“HSW”), which constituted aE-Commerce business pursuant to the terms of the Asset Purchase Agreement dated April 18, 2014. HSW provides online content through various websites, including www.HowStuffWorks.com. HSW generates revenue primarily through advertisements appearing on its website.
for $40.5 million. On August 22, 2013,9, 2016, the Company closed on an agreement with OpenMail LLC (“OpenMail”), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million.
The financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Except for disclosures related to equity of Monoprice pursuantand unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations.
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). Strategic Transformation refers to the termsCompany's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of the Stock Purchase Agreement dated asSearch and Content and E-Commerce businesses in 2016. As part of July 31, 2013.
On January 31, 2012,the Strategic Transformation and "One Company" operating model, the Company acquired all of the equity of TaxACT. Further,announced on October 4, 2013, TaxACT acquired all of the equity of Balance Financial, Inc. (“Balance Financial”), a provider of web27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and mobile-based financial management software through its website www.balancefinancial.com.improve operational effectiveness. The restructuring is now substantially complete and it is expected to be completed by early 2018.
Segments: The Company has threetwo reportable segments: Search and Content (formerly known as Search), Tax Preparation, and E-Commerce. The Search and Contentthe Wealth Management segment, which is the InfoSpaceHD Vest business, which now includes HSW,and the Tax Preparation segment, which is the TaxACT business, and the E-Commerce segment is the MonopriceTaxAct business. Unless the context indicates otherwise, the Company uses the term “Search and Content“Wealth Management”” to represent search and content services sold through the HD Vest business, the term ““Tax PreparationPreparation”” to represent services and software sold through the TaxACTTaxAct business, the term “Search and Content” to represent search and content services, and the term “E-Commerce“E-Commerce”” to represent products sold through the Monoprice business (seebusiness.
Reclassification: The Company reclassified certain amounts on its consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 11: Segment Information").2: Summary of Significant Accounting Policies" for additional information.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.
Reclassification: As a result of the Monoprice acquisition in August 2013, the Company reclassified credit card fees previously reported in "Services cost of revenue" to "Sales and marketing" for the year ended December 31, 2012 to conform with the 2013 presentation. The Company assessed the related materiality of the reclassification and concluded that it was immaterial to any of its previously issued financial statements. The reclassification had no effect on reported revenues, operating income, or cash flows for the periods presented.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingencies. Estimates include those used for impairment
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
of goodwill and other intangible assets, useful lives of other intangible assets, acquisition accounting, valuation of investments, valuation of the Warrant and interest rate swap derivatives, revenue recognition, the estimated allowance for sales returns and doubtful accounts, the estimated allowance for obsolete, slow moving, and nonsalable inventory, internally developed software, accrued contingencies, stock option valuation, and valuation allowance for deferred tax assets. Actual amounts may differ from estimates.
Net capital and regulatory requirements: The Company's HD Vest broker-dealer subsidiary operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of December 31, 2017, HD Vest met all capital adequacy requirements to which it was subject.
Seasonality: Blucora’s Tax Preparation segment is highly seasonal, with thea significant majorityportion of its annual revenue earned in the first four months of the Company’s fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue at relatively consistent levels. Revenue from the E-Commerce segment also is seasonal, with revenues historically being the lowest in the second quarter, a period that does not include consumer back-to-school or holiday-related spending.continue.
Note 2: Summary of Significant Accounting Policies
|
|
| Note 2: Summary of Significant Accounting Policies |
Cash equivalents: The Company considers all highly liquid debt instruments with an original maturity of ninety days or less at date of acquisition to be cash equivalents.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
the Company’s wealth management customers.
Short-termAvailable-for-sale investments: The Company principally invests its available cash in fixed incomefixed-rate debt and marketable equity securities. Fixed incomeFixed-rate debt securities generally include investment-grade income securities, AAA-rated money market funds,debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks. Equitybanks, and money market funds invested in securities include common stock in a publicly-traded company.issued by agencies of the U.S., although specific holdings can vary from period to period depending upon the Company's cash requirements. Such investments are included in "Cash and cash equivalents" and "Available-for-sale investments" on the consolidated balance sheets and reported at fair value with unrealized gains and losses included in "Accumulated other comprehensive loss" on the consolidated balance sheets.
The Company reviews its available-for-sale investments for impairment and classifies the impairment of any individual available-for-sale investment as either temporary or other-than-temporary. The differentiating factors between temporary and other-than-temporary impairments are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. An impairment classified as temporary is recognized in "Accumulated other comprehensive loss" on the consolidated balance sheets. An impairment classified as other-than-temporary is recognized in "Other loss, net" on the consolidated statements of comprehensive income.
Accounts receivable: Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts.
Inventories: Inventories, consisting of merchandise available for sale in the E-Commerce business, are accounted for using the first-in-first-out (“FIFO”) method of accountingaccounts, which was not material at December 31, 2017 and are valued at the lower of cost or market and include the related inbound shipping and handling costs. Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.2016, respectively.
Property and equipment: Property and equipment are stated at cost. Depreciation is computed under the straight-line method over the following estimated useful lives:
|
| |
| Computer equipment and software | 3 years |
| Data center servers | 3 years |
| Internally-developed software | 3 years |
| Office equipment | 7 years |
| Office furniture | 7 years |
Heavy equipment | 10 years |
| Leasehold improvements | Shorter of lease term or economic life |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
The Company capitalizes certain internal-use software development costs, consisting primarily of contractor costs and employee salaries and benefits allocated on a project or product basis. The Company capitalized $2.4$3.5 million, $1.2$1.0 million, and $1.0$0.3 million of internal-use software costs in the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, respectively.
Business combinations and intangible assets including goodwill: The Company accounts for business combinations using the acquisition method,method. The acquisition-date fair value of total consideration includes cash and accordingly,contingent consideration. Since the identifiable assets acquired and liabilities assumed areCompany is contractually obligated to pay contingent consideration upon the achievement of specified objectives, a contingent consideration liability is recorded at theirthe acquisition datedate. The Company reviews its assumptions related to the fair values. value of the contingent consideration liability each reporting period and, if there are material changes, revalues the contingent consideration liability based on the revised assumptions, until such contingency is satisfied through payment upon the achievement of the specified objectives. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.
Goodwill is calculated as the excess of the purchase priceacquisition-date fair value of total consideration over the acquisition-date fair value of net assets, including the amount assigned to identifiable intangible assets, and is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Reporting units are consistent with reportable segments and included the former Search and Content and E-Commerce segments. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for the installed code base technologyadvisor relationships which isare amortized proportional to expected revenue. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Goodwill and intangible assets impairment: The Company evaluates goodwill and indefinite-lived intangible assets for impairment annually, as of November 30, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit (for goodwill) or an
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
indefinite-lived intangible asset is less than its carrying value, or if the Company elects to bypass the qualitative assessment, the Company then would proceed with the quantitative impairment test.
The goodwill quantitative impairment test isCompany performed a two-step processqualitative assessment as of November 30, 2017, and determined that first compares the carrying values of reporting units to their fair values. If the carrying value of a reporting unit exceeds the fair value, a second step is performed to compute the amount of impairment. This second step determines the current fair values of all assets and liabilities of the reporting unit and then compares the implied fair value of the reporting unit'sno conditions existed that would make it more likely than not that goodwill to the carrying value of that goodwill. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
The indefinite-lived intangible asset quantitative impairment test compares the carrying value of the intangible asset to its fair value. If the carrying value of the intangible asset exceeds the fair value, an impairment loss is recognized in an amount equal to the excess.
Fair value typically is estimated using the present value of future discounted cash flows, an income approach. The significant estimates in the discounted cash flow model include the weighted-average cost of capital, long-term rates of revenue growth and/or profitability of our businesses, and working capital effects. The weighted-average cost of capital considers the relevant risk associated with business-specific characteristics and the uncertainty related to each business's ability to achieve the projected cash flows. To validate the reasonableness of the reporting unit fair values used in the goodwill impairment test, the Company reconciles the aggregate fair values of its reporting units to the aggregate market value of its common stock on the date of valuation, while considering a reasonable acquisition premium. These estimates and the resulting valuations require significant judgment.
indefinite-lived assets were impaired. Therefore, no further quantitative assessment was required.
Definite-lived intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. The determination of recoverability is based on an estimate of pre-tax undiscounted future cash flows, using the Company's best estimates of future net sales and operating expenses, expected to result from the use and eventual disposition of the asset or group of assets over the remaining economic life of the primary asset in the asset group. The Company measures the amount of the impairment as the excess of the asset's carrying value over its fair value.
See "Note"Note 4: Goodwill and Other Intangible Assets"Discontinued Operations" for discussion of impairment of goodwill and intangible assets in the fourth quarter of 2014.
Equity method investments: 2015.The Company currently holds equity securities and warrants to purchase equity securities, for business and strategic purposes, in companies whose securities are not publicly traded. The equity method is used to account for investments in these companies, if the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the investees. The Company records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investments may have experienced a decline in value (see "Note 12: Other Loss, Net"). The Company’s equity investments were carried at a fair value of $0 at December 31, 2014 and 2013.
Debt issuance costs and debt discounts: Debt issuance costs and debt discounts are deferred and amortized as interest expense under the effective interest method over the contractual term of the related debt, adjusted for prepayments in the case of the Company’s credit facilities (see "Note 7: Debt").
Debt issuance costs related to the Company’s Convertible Senior Notes (the “Notes”) issued in 2013 were allocated to the liability and equity components of the instrument. The debt issuance costs allocated to the liability component are amortized to interest expense through the earlier of the maturity date of the Notes or the date of conversion, if any. The debt issuance costs allocated to the equity component of the Notes were recorded as an offset to "Additional paid-in capital" (See "Note 7: Debt").
Derivative instruments and hedging: The Company recognized derivative instruments as either assets or liabilities at their fair value. The Company recorded changes in the fair value of the derivative instruments as gains or losses either in "Other loss, net" on the consolidated statements of comprehensive income, for those not designated as a hedging instrument (the Warrant - see "Note 9: Stockholders' Equity"), or in "Accumulated other comprehensive loss" on the consolidated balance
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
sheets, for those used in a hedging relationship (the interest rate swap - see "Note 7: Debt"). The Warrant and interest rate swap were settled in the last half of 2013.
The change in the fair value of the Warrant resulted in losses of $11.7 million and $2.3 million for the years ended December 31, 2013 and 2012, respectively.
The interest rate swap agreement was used for the purpose of minimizing exposure to changes in interest rates and was accounted for as a cash flow hedge. The hedge was perfectly effective through termination, and no ineffectiveness was recorded in the consolidated statements of comprehensive income. The Company had no other swap agreements outstanding at December 31, 2014.
Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and derivative instrumentscontingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, inventories, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Marketable equity securities are classified within Level 1 of the fair value hierarchy because the Company values its marketable equity securities using quoted prices in active markets for identical securities. Cash equivalents and debt securities are classified within Level 2 (see "Note 7: Fair Value Measurements") of the fair value hierarchy because the Company values its cash equivalents and debt securitiesthem utilizing market observable inputs. Unrealized gains and losses are included in "Accumulated other comprehensive income (loss)" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
The Company classified its interest rate swap derivative within Level 2 ashas a contingent consideration liability that is related to the valuation inputs were based on quoted pricesCompany's 2015 acquisition of SimpleTax Software Inc. ("SimpleTax") and market observable data of similar instruments. As previously discussed, the interest rate swap was terminated in 2013. The Companyis classified the Warrant derivative within Level 3 (see "Note 7: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing inputs not observable in the market. The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations.
Redeemable noncontrolling interests: Noncontrolling interests that are redeemable at the option of the holder and not solely within the control of the issuer are classified outside of stockholders' equity. In connection with the acquisition of HD Vest, management of that business has retained an ownership interest. The Company is party to put and call arrangements with respect to these interests. These put and call arrangements allow HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests, respectively. The put arrangements do not meet the definition of a derivative instrument as the put agreements do not provide for net settlement. To the extent that the redemption value of these interests exceeds the value determined by adjusting the carrying value for the subsidiary's attribution of net income (loss), the value of such interests is adjusted to the redemption value with a corresponding adjustment to additional paid-in capital. The redemption amount at December 31, 2017 and December 31, 2016 was valued using the Black-Scholes-Merton valuation model, which has significant unobservable inputs related to historical stock price volatility. This unobservable input reflected the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. This valuation required significant judgment. As previously discussed, the Warrant was settled in 2013.
$12.4 million and $11.6 million, respectively.
Revenue recognition:recognition, general: The Company recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, the Company has delivered the product or performed the service, the fee is fixed or determinable, and collectabilitycollectibility is probable. Determining whether and when these criteria have been satisfied involves exercising judgment, and using estimates and assumptions that can have an impact on the timing and amount of revenue that the Company recognizes.
Revenue is recognized net of allowances, which are management's estimates of fees to be paid to a third party service provider for fulfillment of the Company's audit defense services. These fees are not material and generally include an estimate of audit defense fees to be paid, based on an analysis of historical data and contractual terms, and are recorded when revenue is recognized. The Company believes that it can reasonably and reliably estimate fees to the third party service provider in a timely manner.
The Company evaluates whether revenue should be presented on a gross basis, which is the amount that a customer pays for the service or product, or on a net basis, which is the customer payment less amounts the Company pays to suppliers. In making that evaluation, the Company primarily considers indicators such as whether the Company is the primary obligor in the arrangement and assumes the risks and rewards as a principal in the customer transaction. The evaluation
Wealth management revenue recognition: Wealth management revenue consists primarily of these factors, which at times can be contradictory, are subject to significant judgmentcommission revenue, advisory revenue, asset-based revenue, and subjectivity.
Search services revenue recognition: The majority of the Company’s revenues are generated from its search services. Search services revenue primarily consists of advertising revenue generated through end-users clicking on paid listings included in the search results display, as well as from advertisements appearing on the Company's HowStuffWorks.com website. The paid listings, as well as algorithmic search results, primarily are supplied by Googletransaction and Yahoo!, referred to as "Search Customers." When a user submits a search query through one of the Company's owned and operated or distribution partner sites and clicks on a paid listing displayed in response to the query, the Search Customer bills the advertiser that purchased the paid listing directly and shares a portion of its related paid listing fee with the Company. If the paid listing click occurred on one of its distribution partners' properties, the Company pays a significant share of its revenue to the distribution partner.revenue. Revenue is recognized in the periodperiods in which such clicksthe related services are performed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibility is reasonably assured. Payments received by the Company in advance of the performance of service are deferred and recognized as revenue when earned. Of Wealth management revenues, commissions revenue contains subjective judgments and the use of estimates.
Commissions represent amounts generated by HD Vest's financial advisors for their clients' purchases and sales of securities and various investment products. The Company generates two types of commissions: transaction-based sales commissions that occur at the point of sale, as well as trailing commissions for which the Company provides ongoing account support to clients of its financial advisors.
The Company records transaction-based sales commission revenue on paid listings occur anda trade-date basis, which is when the Company's performance obligations in generating the commissions have been substantially completed. Trailing commission revenue is based on a percentage of the amounts earned bycurrent market value of clients' investment holdings in trail-eligible assets and ultimately remitted torecognized over the Company. Thisperiod during which services are performed. Since trailing commission revenue is recordedgenerally paid in the Search and Content segment.
Under the Company’s agreements with its Search Customers and its distribution partners,arrears, the Company estimates it based on a number of factors, including stock market index levels and the amount of trailing commission revenues received in prior periods, and also considers historical payout ratios. These estimates are primarily based on historical information and there is not significant judgment involved.
A substantial portion of commission revenue is ultimately paid to financial advisors. The Company records an estimate for transaction-based commissions payable based upon the primary obligor (i.e., is responsible topayout rate of the Search Customersfinancial advisor generating the accrued commission revenue. The Company records an estimate for providing the search services in accordance with the applicable agreements and remediating any service issues) and separately negotiates each revenue or unit pricing contract independent of any revenue sharing arrangements. For search services, the Company determines the paid search results, content, and
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
information directed to its ownedSuch amounts are recorded as "Commissions and operated websitesadvisory fees payable" on the consolidated balance sheets and its distribution partners’ web properties. Consequently,"Wealth management services cost of revenue" on the Company records search services revenue on a gross basis.
consolidated statements of comprehensive income.
Tax preparation revenue recognition: The Company derives service revenue from the sale of tax preparation online services, ancillary service offerings,services, packaged tax preparation software, and multiple element arrangements that may include a combination of these items. Ancillary service offeringsservices primarily include tax preparation support services, data archive services, bank or reloadable pre-paid debit card services, e-filing services, and other value-added services. This revenue is recorded in the Tax Preparation segment.
The Company’s Tax Preparation segment revenue consists primarily of hosted tax preparation online services, tax preparation support services, data archive services and e-filing services. The Company recognizes revenue from these services as the services are performed and the four revenue recognition criteria described above are met.
The Company recognizes revenue from the sale of its packaged software when legal title transfers. This is generally when its customers download the software from the Internet or, to a lesser extent, when the software ships.
This revenue is recorded in the Tax Preparation segment. Of Tax Preparation revenues, revenues from bank or reloadable prepaid debit card services, and software and/or services that consist of multiple elements contain subjective judgments and the use of estimates.
The bank or reloadable prepaid debit card services are offered to taxpayers as an option to receive their tax refunds in the form of a prepaid bank card or to have the fees for the software and/or services purchased by the customers deducted from their refunds. Other value-added service revenue consists of revenue from revenue sharing and royalty arrangements with third party partners. Revenue for these transactions is recognized when the four revenue recognition criteria described above are met; for some arrangements that is upon filing and for other arrangements that is upon the Company’s determination of when collectabilitycollectibility is probable.
For software and/or services that consist of multiple elements, the Company must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of vendor-specific objective evidence (“(VSOE“VSOE””) of fair value if available, third-party evidence (“(TPE“TPE””) of fair value if VSOE is not available, and estimated selling price (“(ESP“ESP””) if neither VSOE nor TPE is available; and (3) allocate the total price among the various elements based on the relative selling price method. Once the Company has allocated the total price among the various elements, it recognizes revenue when the revenue recognition criteria described above are met for each element.
VSOE generally exists when the Company sells the deliverable separately. When VSOE cannot be established, the Company attempts to establish a selling price for each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. When the Company is unable to establish selling price using VSOE or TPE, it uses ESP in its allocation of arrangement consideration. ESP is the estimated price at which the Company would sell the software or service if it were sold on a stand-alone basis. The Company determines ESP for the software or service by considering multiple factors including, but not limited to, historical stand-alone sales, pricing practices, market conditions, competitive landscape, internal costs, and gross margin objectives.
In some situations, However, the Company receives advance payments from its customers. The Company defersimpact of multiple element arrangements are not material and primarily impact the timing of revenue associated with these advance payments and recognizes the consideration for each element when the Company ships the software or performs the services, as appropriate. Advance payments related to data archive services are deferred and recognizedrecognition over the related contractual term.
E-Commerce revenue recognition: The Company derives product revenue from online sales of self-branded electronics and accessories to both consumers and businesses. The Company recognizes product revenue from product sales when all four revenue recognition criteria, as outlined above, have been met. Becausetax filing season, which is concentrated within the Company either (i) has a general practice of refunding customer losses for products damaged while in-transit despite selling terms indicating title transfers at the point of shipment or (ii) has FOB-destination shipping terms specifically set out in certain arrangements, delivery is deemed to occur at the point in time when the product is received by the customer. All amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been classified as "Product revenue." Costs related to such shipping and handling billings are classified as "Product cost of revenue."
The Company provides its customers with a thirty-day right of return. Return allowances, which reduce revenue, are estimated using historical experience.
Cost of revenues: The Company records the cost of revenues for sales of products and services when the related revenue is recognized. "Services cost of revenue" consists of costs related to the Search and Content and Tax Preparation businesses,
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
which include revenue sharing arrangements with our distribution partners, usage-based content fees, royalties, bank product services fees, and amortization of intangible assets. It also consists of costs associated with the operationfirst two quarters of the data centers that serve the Company’s Search and Content and Tax Preparation businesses, which include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), depreciation, and bandwidth costs. "Product cost of revenue" consists of costs related to the E-Commerce business, which include product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence. Shipping charges to receive products from the Company’s suppliers are included in inventory and recognized as product cost of revenue upon sale of products to customers.
filing period.
Engineering and technologyAdvertising expenses: Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of the Company’s offerings, including personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors to augment staffing, software support and maintenance, bandwidth and hosting, and professional services fees. Research and development expenses were $8.9 million, $7.3 million, and $6.1 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Sales and marketing expenses: Sales and marketing expenses consist principally of marketing expenses associated with the Company’s TaxACT and Monoprice websites (which include television, radio, online, text, and email channels), the Company’s owned and operated web search properties (which consist of traffic acquisition, including the Company’s online marketing fees paid to search engines to drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel costs (salaries, stock-based compensation, benefits, and other employee-related costs) for personnel engaged in marketing and selling activities, and fulfillment expenses primarily associated with the Company’s E-Commerce business. Fulfillment expenses include direct operating expenses (including personnel costs) related to the Company’s purchasing, customer and technical support, receiving, inspection and warehouse functions, the cost of temporary help and contractors to augment staffing, and credit card processing fees.
Costs for advertising are recorded as expense, and classified within "Sales and marketing" on the consolidated statements of comprehensive income, when the advertisement appears or electronic impressions are recorded.appears. Advertising expense totaled $81.8$51.7 million $75.9, $44.0 million, and $31.8$35.5 million for the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, respectively. Prepaid advertising costs were $3.6$0.3 million and $0.8$0.6 million at December 31, 20142017 and 2013,2016, respectively.
General and administrative expenses: General and administrative expenses consist primarily of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors to augment staffing, professional services fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
Stock-based compensation: The Company measures stock-based compensation at the grant date based on the fair value of the award and recognizes it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award using the straight-line method. The Company recognizes stock-based compensation over the vesting period for each separately vesting portion of a share-based award as if they were individual share-based awards. The Company estimates forfeitures at the time of grant and revises those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Employee benefit plan: The Company has a 401(k) savings plan covering its employees. Eligible employees may contribute through payroll deductions. The Company may match the employees’ 401(k) contributions at the discretion of the Company’s Board of Directors. Pursuant to a continuing resolution, the Company has matched a portion of the 401(k) contributions made by its employees. The amount contributed by the Company is equal to a maximum of 50% of employee contributions up to a maximum of 3% of an employee’s salary. For the years ended December 31, 2014, 2013, and 2012, the Company contributed $0.9 million, $0.6 million, and $0.4 million, respectively, for employees. The amount contributed has been increasing with higher headcount mainly from acquired businesses.
Leases: The Company leases office space, and these leases are classified as operating leases.
Income taxes: The Company accounts for income taxes under the asset and liability method, under which deferred tax assets, including net operating loss carryforwards, and liabilities are determined based on temporary differences between the book and tax bases of assets and liabilities. The Company periodically evaluates the likelihood of the realization of deferred tax assets and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent the Company believes a
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including expectations of future taxable income, recent cumulative earnings experience by taxing jurisdiction, and other relevant factors. There is a wide range of possible judgments relating to the valuation of the Company's deferred tax assets.
Other comprehensive income: Comprehensive income includes net income plus itemsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
The Company records liabilities to address uncertain tax positions that have been taken in previously filed tax returns or that are recorded directlyexpected to stockholders’ equity, includingbe taken in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that the net change in unrealized gains and lossestax position, based on cash equivalents and available-for-sale investments and certain derivative instruments. Includedtechnical merits, will be sustained upon examination. The tax benefit to be recognized in the net changefinancial statements from such a position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded. The Company recognizes interest and penalties related to uncertain tax positions in unrealized gainsinterest expense and lossesgeneral and administrative expense, respectively.
Foreign currency: The financial position and operating results of the Company's foreign operations are realized gains or losses includedconsolidated using the local currency as the functional currency. Assets and liabilities recorded in local currencies are translated at the determination of net incomeexchange rate on the balance sheet date, while revenues and expenses are translated at the average exchange rate for the applicable period. Translation adjustments resulting from this process are recorded in the period realized. Amounts reclassified out of"Accumulated other comprehensive income into net income were determinedloss" on the basisconsolidated balance sheets. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, are recorded in "Other loss, net" on the consolidated statements of specific identification.comprehensive income.
Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and trade receivables.commissions receivable. These instruments are generally unsecured and uninsured. The Company places a significant amount of its
For cash equivalents, short-term investments, and investmentscommissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions. institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of industries and geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
The Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions which are expected to be able to fully perform under the termsGeographic revenue information: Almost all of the agreement.
Supplier concentration risk: A material part of Monoprice’s business is dependent on two vendors. These unrelated vendors accountedCompany's revenue for 17% of Monoprice's inventory purchases during the year ended December 31, 20142017, 2016, and 19% of Monoprice’s inventory purchases during the period2015 was generated from August 22, 2013 (the date which Monoprice was acquired) to December 31, 2013. As of December 31, 2014 and 2013, these unrelated vendors accounted for 21% and 20% of Monoprice’s related accounts payable, respectively.
Revenue concentration: The Company derives a significant portion of its revenues from two Search Customers. Revenues from the top two Search Customers represented 55%, 74%, and 84% of revenuescustomers located in the years ended December 31, 2014, 2013, and 2012, respectively, and each of those two Search Customers represented at least 10% of 2014 revenues. At December 31, 2014 and 2013, two Search Customers accounted for more than 80% of the Company’s accounts receivable balance.United States.
Geographic revenue information, as determined by the location of the customer, is presented below (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| United States | $ | 556,466 |
| | $ | 558,601 |
| | $ | 402,656 |
|
| International | 24,254 |
| | 15,379 |
| | 4,263 |
|
| Total | $ | 580,720 |
| | $ | 573,980 |
| | $ | 406,919 |
|
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board (“(FASB“FASB””) in the form of accounting standards updates (“(ASUs“ASUs””) to the FASB’s Accounting Standards Codification (“(ASC“ASC””). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is considering ASUs that impact the following areas:
Revenue recognition - In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. Earlier adoption is not permitted. 2017.
The Company currently is evaluatingwill adopt the impactrequirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize a $1.8 million cumulative effect of adopting this guidanceASU as an adjustment to the opening balance of retained earnings, and will recognize approximately $2.0 million of certain licensing fees as a reduction to both revenues and operating expenses on itsthe consolidated financial statements.
BLUCORA, INC.Leases - In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or less, will be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
In July 2013, the FASB issued guidancerecognized on the presentation of unrecognized tax benefits whenbalance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists atmodified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting date.periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this guidance in the first quarter of 2014, andexpects that the adoption didof this ASU will not have a material impact to its consolidated financial statements and related disclosures, and it will adopt this ASU on January 1, 2019.
Stock-based compensation - In March 2016, the FASB issued an ASU on employee share-based payment accounting. The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital. In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period. Cash flows related to excess tax benefits will be included as an operating activity, and no longer classified as a financing activity, in the statement of cash flows. This guidance was effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense was effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition was effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance was effective on a retrospective or prospective basis.
The Company implemented this ASU on January 1, 2017 and recorded a cumulative-effect adjustment of $51.5 million to credit retained earnings for deferred tax assets related to net operating losses that arose from excess tax benefits, which the Company has deemed realizable. In addition to this:
At the time of adoption and on a prospective basis, the primary impact of adoption was the recognition of excess tax benefits and deficiencies, including deferred tax assets related to net operating losses that arose from excess tax benefits which the Company has deemed realizable, in the income tax provision (rather than in additional paid-in capital). This caused income taxes to differ from taxes at the statutory rates in 2017. For the year ended December 31, 2017, the Company recognized an estimated $20.1 million decrease to the income tax provision, which resulted in a $20.1 million increase to income from continuing operations and net income attributable to Blucora, a $0.45 increase to basic earnings per share, and a $0.43 increase to diluted earnings per share.
The Company applied the cash flow presentation guidance on a retrospective basis, restating the consolidated statements of cash flows to present excess tax benefits as an operating activity (rather than a financing activity). For the year ended December 31, 2016, this resulted in an increase to cash provided by operating activities from continuing operations of $16.0 million and a corresponding decrease to cash used by financing activities from continuing operations. The restatement had no impact on total cash flows for the period presented.
The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur. The cash flow presentation requirements for payments made to tax authorities on an employee's behalf had no impact to any periods presented, since such cash flows historically have been presented as a financing activity. The Company is not planning to change tax withholdings and will continue to estimate forfeitures in determining the amount of compensation cost to be recognized in each period.
Measurement of Credit Losses - In June 2016, the FASB issued an ASU which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including those interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
Statement of cash flows and restricted cash - In November 2016, the FASB issued an ASU on the Company’s consolidated financial statements.classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
amounts on the statement of cash flows. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. The guidance is effective on a retrospective basis. The Company elected to early adopt this guidance as of January 1, 2017. The reclassification was not material to the periods presented and had no impact on total cash flows, income from continuing operations, or net income attributable to Blucora for the periods presented.
|
|
| Note 3: Business Combinations |
HSW:HD Vest: On May 30, 2014, InfoSpace acquired HSW, a provider of online content (see "Note 1: The CompanyDecember 31, 2015 and Basis of Presentation"), for $44.9 million in cash, which was funded from available cash. The acquisition of HSW is strategic to InfoSpace and intended to expand its operations. HSW is included in the Search and Content segment. The identifiable net assets acquired amounted to approximately $4.5 million, consisting primarily of marketable equity securities, and intangible assets acquired amounted to approximately $25.4 million, consisting of $18.2 million in content, $1.3 million in proprietary technology, and $5.9 million in trade names. The Company estimates the economic lives of the content and proprietary technology to be 10 years and 4 years, respectively, and the trade names are estimated to have indefinite lives. Goodwill amounted to $15.1 million and is expected to be deductible for income tax purposes. Goodwill consists largely of the ability to attract new customers through utilization of current content and to develop new content post-acquisition, neither of which qualify for separate recognition. Pro forma results of operations have not been presented because the effects of this acquisition were not materialpursuant to the Company’s consolidated results of operations.
Balance Financial: OnPurchase Agreement dated October 4, 2013, TaxACT acquired all of the equity of Balance Financial, a provider of web and mobile-based financial management software, for $4.9 million in cash which includes a $0.7 million escrow amount recorded in "Accrued expenses and other current liabilities" for indemnifications related to general representations and warranties. The escrow period expires on April 4,14, 2015, at which time the amount, net of any indemnifiable losses, will be released. The acquisition of the Balance Financial business is strategic to TaxACT and was funded from the revolving credit loan under the TaxACT 2013 credit facility (see "Note 7: Debt"). Balance Financial is included in the Tax Preparation segment. The identifiable net assets acquired amounted to $1.0 million, consisting primarily of deferred tax assets, and intangible assets acquired amounted to $0.8 million, consisting primarily of internally-developed software and customer relationships both of which have finite lives. Goodwill amounted to $3.1 million. Pro forma results of operations have not been presented because the effects of this acquisition were not material to the Company’s consolidated results of operations.
Monoprice: On August 22, 2013, the Company acquired allHD Vest for $613.7 million, including cash acquired of the outstanding stock of Monoprice, an online retailer of self-branded electronics$38.9 million and accessories for both consumers and businesses (see "Note 1: The Company and Basis of Presentation"). The Company paid $182.9 million, which was funded from available cash, after a $0.4$1.8 million final working capital adjustment in the fourthfirst quarter of 2013. 2016. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% non-controlling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The acquisition is intended to diversifywas funded by a combination of cash on hand and the Company’s business model and expand its operations.TaxAct - HD Vest 2015 credit facility, under which the Company borrowed $400.0 million (see "
Note 9: Debt").
Valuations were as follows (in thousands):
|
| | | |
| | Fair Value |
| Tangible assets acquired | $ | 49,714 |
|
| Liabilities assumed | (23,623 | ) |
| Identifiable net assets acquired | $ | 26,091 |
|
| Fair value adjustments to intangible assets: | |
| Customer relationships | $ | 30,900 |
|
| Trade name | 38,000 |
|
| Fair value of intangible assets acquired | $ | 68,900 |
|
| Purchase price: | |
| Cash paid | $ | 182,909 |
|
| Less identifiable net assets acquired | (26,091 | ) |
| Plus deferred tax liability related to intangible assets | 27,683 |
|
| Less fair value of intangible assets acquired | (68,900 | ) |
| Excess of purchase price over net assets acquired, allocated to goodwill | $ | 115,601 |
|
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
The Company incurred acquisition costs of $0.7 million in 2013, which were recognized in "General and administrative expense." The Company did not assume any equity awards or plans from Monoprice. Following the completion of the acquisition, the Company issued 27,152 options and 126,259 restricted stock units (“RSUs”), which are at levels consistent with other awards to Blucora subsidiary employees, and 243,750 performance-based RSUs to Monoprice’s employees (see "Note 10: Stock-Based Compensation"). In addition, the sellers of Monoprice are entitled to federal and state tax refunds related to pre-acquisition tax periods pursuant to the purchase agreement (see "Note 6: Balance Sheet Components"). During the year ended December 31, 2014, the Company adjusted the refunds due to the sellers after finalizing Monoprice's 2013 federal and state tax returns. As a result, the Company recorded a $0.7 million gain within "Other loss, net" (see "Note 12: Other Loss, Net").
|
| | | |
| | Fair value |
| Tangible assets acquired, including cash acquired of $38,874 | $ | 78,681 |
|
| Liabilities assumed | (21,212 | ) |
| Identifiable net assets acquired | $ | 57,469 |
|
| Fair value adjustments for intangible assets: | |
| Advisor relationships | $ | 240,300 |
|
| Sponsor relationships | 16,500 |
|
| Curriculum | 800 |
|
| Proprietary technology | 13,600 |
|
| Trade name | 52,500 |
|
| Fair value of intangible assets acquired | $ | 323,700 |
|
| Purchase price allocation: | |
| Cash paid | $ | 612,288 |
|
| Plus: promissory note | 6,400 |
|
| Plus: noncontrolling interest | 15,038 |
|
| Less: escrow receivable | (20,000 | ) |
| Purchase price | 613,726 |
|
| Less: identifiable net assets acquired | (57,469 | ) |
| Less: fair value of intangible assets acquired | (323,700 | ) |
| Plus: deferred tax liability related to intangible assets | 123,484 |
|
| Excess of purchase price over net assets acquired, allocated to goodwill | $ | 356,041 |
|
The Company’sCompany's estimates, at the time of acquisition, of the economic lives of the acquired intangible assets are 220 years for the business-to-consumer customeradvisor relationships, 718 years for the business-to-business customersponsor relationships, approximately4 years for the curriculum, 6 years for the personal property assets,proprietary technology, and the trade name is estimated to have an indefinite life. Goodwill consists largely of the ability to attract new customersincreased cross-serving opportunities and develop new technologies post-acquisition,expanded addressable markets for both HD Vest and TaxAct, neither of which do not qualifyapply for separate recognition. The Company doesrecognition, and is not expect that any of this goodwill willexpected to be deductible for income tax purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
The primary areas of the acquisition accounting that were not yet finalized at the time of the acquisition related to income and non-income based taxes, certain contingent liability matters, indemnification assets, and residual goodwill. In the third and fourth quarters of 2016, the Company recorded impairments on Monopricea combined $2.1 million increase to net assets acquired and a corresponding decrease to goodwill, predominantly related to the finalization of federal and intangible assetsstate tax returns and associated analyses for pre-acquisition tax periods. Acquisition accounting is now considered closed.
The promissory note was with the President of HD Vest and was scheduled to be paid over a three-year period. In December 2017, the Company fully repaid the remaining $3.2 million outstanding. The note bore interest at a rate of 5% per year.
The Purchase Agreement dictated that the Company place into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was recorded as a receivable as of December 31, 2015 and paid to the Company in 2014. See "Note 4: Goodwill and Other Intangible Assets" for details.
the first quarter of 2016.
The gross contractual amount of trade accounts receivable, including commissions receivable, acquired was $3.2$21.6 million, all of which the Company has substantially collected. The
During 2015, the Company recorded deferred revenue at a fair valueincurred transaction costs of $1.3$11.0 million, as of the acquisition date. Prior to the acquisition, Monoprice had recorded deferred revenue at $2.0 million.
For the period from the acquisition date to December 31, 2013, the Company’s total revenues included $54.3which were recognized in "General and administrative expense," and $21.8 million in revenuedebt discount and a $5.0 million operating income contribution fromissuance-related costs on the Monoprice business.
new credit facility.
Pro Forma Financial Information of Monopricethe HD Vest Acquisition (unaudited)
:
The financial information in the table below summarizes the combined results of operations of Blucora and MonopriceHD Vest on a pro forma basis, for the period in which the acquisition occurred and the prior reporting period (when applicable) as though the companies had been combined as of the beginning of each period presented. ThisPro forma adjustments have been made to include (a) amortization expense on the definite-lived intangible assets identified in this acquisition, debt-related expenses associated with the credit facility that was used to finance the acquisition, and estimated stock-based compensation related to Blucora share-based award grants to HD Vest employees; and to remove (b) acquisition-related transaction costs and debt-related expenses associated with HD Vest's previous debt facility, the latter of which was paid off and closed at the acquisition date. Income taxes also have been adjusted for the effect of these items. The following pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred at the beginning of each period presented. The pro forma condensed combined statement of operations for the year ended December 31, 2013 combines the historical results of operations of the Company and Monoprice for the year ended December 31, 2013 with the results of Monoprice for the period from January 1, 2013 to the acquisition date. The following amounts are in thousands:presented (in thousands):
|
| | | | | | | |
| | Years ended December 31, |
| | 2013 | | 2012 |
| Revenues | $ | 663,900 |
| | $ | 525,027 |
|
| Net income | $ | 25,637 |
| | $ | 22,874 |
|
|
| | | |
| | Year ended |
| | December 31, 2015 |
| Revenue | $ | 437,447 |
|
| Loss from continuing operations | $ | (12,793 | ) |
TaxACT: SimpleTax:On January 31, 2012, the CompanyJuly 2, 2015, TaxAct acquired all of the outstanding stockequity of TaxACT, which operates the TaxACTSimpleTax, a provider of online tax preparation online service and software business (see "Note 1: The Company and Basis of Presentation"). The Company paid $287.5services for individuals in Canada, for approximately $1.9 million in cash less certain transaction expenses.and additional consideration of up to $3.7 million that is contingent upon product availability and revenue performance over a three-year period. The TaxACTestimated fair value of the contingent consideration as of the acquisition date was funded from$3.3 million. See "Note 7: Fair Value Measurements" for additional information related to the Company's cash reservesfair value measurement of the contingent consideration.
The acquisition of SimpleTax is strategic to TaxAct and fromintended to expand its operations. SimpleTax is included in the TaxACT 2012 credit facility,Tax Preparation segment. Intangible assets acquired amounted to approximately $0.9 million, consisting of customer relationships and proprietary technology both of which $100.0 million was drawn athave finite lives. Identifiable net liabilities assumed were not material. Goodwill amounted to $4.5 million. Pro forma results of operations have not been presented because the transaction's close (see "Note 7: Debt"). Theeffects of this acquisition is intendedwere not material to diversify the Company's business model and expand itsCompany’s consolidated results of operations.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Valuations |
|
| Note 4: Discontinued Operations |
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market, as more fully described in "Note 1: Description of the Business." The Strategic Transformation included plans to divest the Search and Content and E-Commerce businesses. Financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses.
On November 17, 2016, the Company closed on an agreement with YFC, under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. Of this amount, $39.5 million was received in the fourth quarter of 2016 and the remaining $1.0 million was received in the first half of 2017. The Company used all of the proceeds to pay down debt and recognized a loss on sale of the E-Commerce business of approximately $52.2 million.
On August 9, 2016, the Company closed on an agreement with OpenMail, under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million. The Company used all of the proceeds to pay down debt and recognized a loss on sale of the Search and Content business of approximately $21.6 million. Under a separate agreement, the Company is subleasing to InfoSpace the office space that InfoSpace is using currently. The rent payments and September 2020 termination date are consistent with the underlying non-cancelable operating lease.
Summarized financial information for discontinued operations is as follows (in thousands):
|
| | | |
| | Fair Value |
| Tangible assets acquired | $ | 22,465 |
|
| Liabilities assumed | (17,759 | ) |
| Identifiable net assets acquired | $ | 4,706 |
|
| Fair value adjustments to intangible assets: |
|
| Customer relationships | $ | 101,400 |
|
| Proprietary technology | 29,800 |
|
| Trade name | 19,499 |
|
| Fair value of intangible assets acquired | $ | 150,699 |
|
| Purchase price: |
|
| Cash paid | $ | 287,500 |
|
| Less identifiable net assets acquired | (4,706 | ) |
| Plus deferred tax liability related to intangible assets | 53,380 |
|
| Less fair value of intangible assets acquired | (150,699 | ) |
| Excess of purchase price over net assets acquired, allocated to goodwill | $ | 185,475 |
|
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Major classes of items in net income (loss): | | | | | |
| Revenues | $ | — |
| | $ | 227,989 |
| | $ | 352,077 |
|
| Operating expenses | — |
| | (211,395 | ) | | (391,702 | ) |
| Other income (loss), net | — |
| | (719 | ) | | (2,673 | ) |
| Income (loss) from discontinued operations before income taxes | — |
| | 15,875 |
| | (42,298 | ) |
| Loss on sale of discontinued operations before income taxes | — |
| | (73,800 | ) | | — |
|
| Discontinued operations, before income taxes | — |
| | (57,925 | ) | | (42,298 | ) |
| Income tax benefit (expense) | — |
| | (5,196 | ) | | 14,950 |
|
| Discontinued operations, net of income taxes | $ | — |
| | $ | (63,121 | ) | | $ | (27,348 | ) |
The Company recorded acquisition costs of $1.1 million in 2012, which were recognized in "General and administrative expense." The Company incurred $2.3 million of debt origination costs related to the credit facility used to fund the acquisition, a portion of which was recorded as loss on debt extinguishment and modification expense in "Other loss, net" and the remainder of which is being amortized to interest expense over the term of the credit facility. The Company did not assume any equity awards or plans from TaxACT. Following the completion of the acquisition, the Company issued 380,000 options and 167,000 RSUs to TaxACT’s employees as an incentive for future services and at levels consistent with other employee awards (see "Note 10: Stock-Based Compensation"). In addition, the sellers of TaxACT are entitled to certain federal tax refunds related to pre-acquisition tax periods pursuant to the purchase agreement (see "Note 6: Balance Sheet Components").
The Company’s estimates of the economic lives of the acquired assets are 8 years for the customer relationships, 4 years for the proprietary technology, approximately 3 years for the personal property assets, and the trade name is estimated to have an indefinite life. Goodwill consists largely of the ability to attract new customers and develop new technologies post acquisition, which do not qualify for separate recognition. The Company determined that no portion of the goodwill arising from the TaxACT acquisition will be deductible for income tax purposes.
The gross contractual amount of trade accounts receivable acquired was $9.4 million, all of which has been collected. The Company recorded deferred revenue associated with the TaxACT business’s data storage and retrieval service at a fair value of $0.3 million as of the acquisition date. Prior to the acquisition, TaxACT had recorded deferred revenue at $5.1 million.
For the period from the acquisition date to December 31, 2012, the Company’s total revenues included $62.1 million in revenue and a $30.1 million operating income contribution from the TaxACT business.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Pro Forma Financial InformationBusiness exit costs: In conjunction with the Strategic Transformation, the Company incurred business exit costs of TaxACT Acquisition (unaudited)
The financial informationapproximately $4.5 million, which primarily were recorded in discontinued operations in the fourth quarter of 2015 and the first quarter of 2016. The following table below summarizes the combined results of operations of Blucora and TaxACT on a pro forma basis, foractivity in the period in which the acquisition occurred and the prior reporting period (when applicable) as though the companies had been combined as of the beginning of the period presented. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred at the beginning of each period presented. The pro forma condensed combined statement of operations for the year ended December 31, 2012 combines the historical results of the Company for the year ended December 31, 2012 with the results of TaxACT for the month ended January 31, 2012. The following amounts are in thousands:business exit cost liability (in thousands):
|
| | | |
| | Year ended December 31, 2012 |
| Revenues | $ | 427,809 |
|
| Net income | $ | 26,819 |
|
|
| | | |
| | Employee-Related Termination Costs |
| Balance as of December 31, 2015 | $ | 994 |
|
| Charges | 3,552 |
|
| Payments | (4,396 | ) |
| Balance as of December 31, 2016 | 150 |
|
| Charges | — |
|
| Payments | — |
|
| Balance as of December 31, 2017 | $ | 150 |
|
Goodwill and other intangible assets: The Company tested the goodwill and trade names related to Search and Content and E-Commerce for impairment as of October 31, 2015, due to the Company's October 2015 announcement of its plans to divest these businesses and their resulting classification as held for sale. In the fourth quarter of 2015, the Company recorded goodwill impairments of $15.1 million and $33.8 million related to these reporting units, respectively. In addition, in the fourth quarter of 2015, the Company recorded trade name impairments of $5.9 million and $4.2 million related to the HSW and Monoprice trade names, respectively.
The impairments of goodwill and intangible assets were recorded in discontinued operations. The Company classified the fair value of its reporting units, goodwill, and trade names within Level 3 because they were valued using discounted cash flows, which have significant unobservable inputs related to the weighted-average cost of capital and forecasts of future cash flows.
The Company determined that the impairments related to Search and Content and E-Commerce were indicators requiring the review of the Search and Content and E-Commerce long-lived assets for recoverability. The results of this review indicated that the carrying values of the Search and Content and E-Commerce long-lived assets were recoverable.
Debt: On November 22, 2013, Monoprice entered into a credit facility agreement, which consisted of a $30.0 million revolving credit loan and a $40.0 million term loan, both of which have since been settled. The final maturity date of the credit facility was November 22, 2018 but became immediately due and payable upon the sale of Monoprice in November 2016.
Monoprice initially borrowed $50.0 million under the credit facility, from both the revolving credit loan and the term loan, and had net repayment activity of $25.0 million in 2016 and no repayment activity in 2017 as Monoprice was no longer owned by the Company. Monoprice had the right to permanently reduce, without premium or penalty, the credit facility at any time. In accordance with this provision, Monoprice repaid the outstanding amount under the term loan in full in 2015, which was included in the net repayment activity for 2015 and resulted in the write-down of the remaining unamortized discount and debt issuance costs related to the term loan.
On October 27, 2016, the Company announced plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. In connection with this plan, the Company has incurred restructuring costs of approximately $7.0 million. These costs will primarily be recorded in "Restructuring" on the consolidated statements of comprehensive income and within corporate-level activity for segment purposes. The Company has also incurred costs that were not included as restructuring, such as recruiting and overlap in personnel expenses as it transitions positions to Texas ("Strategic Transformation Costs"). The restructuring is now substantially complete and it is expected to be completed by early 2018.
The following table summarizes the activity in the restructuring liability (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Employee-Related Termination Costs | | Contract Termination Costs | | Fixed Asset Impairments | | Stock-Based Compensation | | Other Costs | | Total |
| Balance as of December 31, 2015 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring charges | 4,234 |
| | — |
| | — |
| | (364 | ) | | — |
| | 3,870 |
|
| Non-cash | — |
| | — |
| | — |
| | 364 |
| | — |
| | 364 |
|
| Balance as of December 31, 2016 | $ | 4,234 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,234 |
|
| Restructuring charges | 261 |
| | (241 | ) | | 1,878 |
| | 1,148 |
| | 55 |
| | 3,101 |
|
| Payments | (3,293 | ) | | (535 | ) | | — |
| | — |
| | (55 | ) | | (3,883 | ) |
| Non-cash | — |
| | 1,457 |
| | (1,878 | ) | | (1,148 | ) | | — |
| | (1,569 | ) |
| Balance as of December 31, 2017 | $ | 1,202 |
| | $ | 681 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,883 |
|
Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that were paid at termination dates throughout 2017, with the majority paid in the second half of 2017. Contract termination costs and fixed asset impairments were incurred in connection with the Bellevue facility's operating lease and related fixed assets, which are described further in the next two paragraphs, respectively. Stock-based compensation primarily includes the impact of equity award modifications associated with employment contracts for certain individuals impacted by the relocation, as well as forfeitures that were recorded for severed employees. Other costs include office relocation costs.
The Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease. Under that sublease agreement, the Company will not recover all of its remaining lease rental obligations (including common area maintenance costs and real estate taxes) and, therefore, recognized a net loss on sublease of $0.4 million.
The Company fully impaired the $1.9 million carrying value of the leasehold improvements and the office furniture and equipment that would not be fully recovered in connection with this lease.
All of these items were recorded in the first quarter of 2017.
Note 4: Goodwill and Other Intangible Assets
|
|
| Note 6: Goodwill and Other Intangible Assets |
The following table presents goodwill by reportable segment (in thousands):
|
| | | | | | | | | | | |
| | Wealth Management | | Tax Preparation | | Total |
| Balance as of December 31, 2015 | $ | 356,386 |
| | $ | 192,573 |
| | $ | 548,959 |
|
| Purchase accounting adjustments | (345 | ) | | — |
| | (345 | ) |
| Foreign currency translation adjustment | — |
| | 127 |
| | 127 |
|
| Balance as of December 31, 2016 | 356,041 |
| | 192,700 |
| | 548,741 |
|
| Foreign currency translation adjustment | — |
| | 296 |
| | 296 |
|
| Balance as of December 31, 2017 | $ | 356,041 |
| | $ | 192,996 |
| | $ | 549,037 |
|
|
| | | | | | | | | | | | | | | |
| | Search and Content | | Tax Preparation | | E-Commerce | | Total |
| Goodwill, gross: | | | | | | | |
| Balance as of December 31, 2012 | $ | 44,815 |
| | $ | 185,475 |
| | $ | — |
| | $ | 230,290 |
|
| Additions | — |
| | 3,066 |
| | 115,601 |
| | 118,667 |
|
| Balance as of December 31, 2013 | 44,815 |
| | 188,541 |
| | 115,601 |
| | 348,957 |
|
| Additions | 15,097 |
| | — |
| | — |
| | 15,097 |
|
| Balance as of December 31, 2014 | $ | 59,912 |
| | $ | 188,541 |
| | $ | 115,601 |
| | $ | 364,054 |
|
| Accumulated impairment: | | | | | | | |
| Balance as of December 31, 2012 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Impairments | — |
| | — |
| | — |
| | — |
|
| Balance as of December 31, 2013 | — |
| | — |
| | — |
| | — |
|
| Impairments | — |
| | — |
| | (59,396 | ) | | (59,396 | ) |
| Balance as of December 31, 2014 | $ | — |
| | $ | — |
| | $ | (59,396 | ) | | $ | (59,396 | ) |
| Goodwill, net: | | | | | | | |
| Balance as of December 31, 2013 | $ | 44,815 |
| | $ | 188,541 |
| | $ | 115,601 |
| | $ | 348,957 |
|
| Balance as of December 31, 2014 | $ | 59,912 |
| | $ | 188,541 |
| | $ | 56,205 |
| | $ | 304,658 |
|
The goodwill additionpurchase accounting adjustment in 20142016 primarily related to the final working capital adjustment and the finalization of federal and state tax returns associated with the acquisition of HSW and the additions in 2013 related to the acquisitions of Monoprice (E-Commerce segment) and Balance Financial (Tax Preparation segment), all asHD Vest. The 2016 activity is described in "Note"Note 3: Business Combinations.Combinations." The goodwill impairment in 2014 related to Monoprice and was recorded in "Impairment of goodwill and intangible assets" on the consolidated statements of comprehensive income in the fourth quarter and is discussed further below.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Intangible assets other than goodwill consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | Gross carrying amount | | Accumulated amortization | | Net | | Gross carrying amount | | Accumulated amortization | | Net |
| Definite-lived intangible assets: | | | | | | | | | | | |
| Customer relationships | $ | 132,500 |
| | $ | (50,075 | ) | | $ | 82,425 |
| | $ | 132,500 |
| | $ | (27,740 | ) | | $ | 104,760 |
|
| Technology | 44,805 |
| | (35,649 | ) | | 9,156 |
| | 43,535 |
| | (27,951 | ) | | 15,584 |
|
| Content | 18,200 |
| | (1,061 | ) | | 17,139 |
| | — |
| | — |
| | — |
|
| Other | 6,667 |
| | (6,667 | ) | | — |
| | 6,705 |
| | (6,667 | ) | | 38 |
|
| Total definite-lived intangible assets | 202,172 |
| | (93,452 | ) | | 108,720 |
| | 182,740 |
| | (62,358 | ) | | 120,382 |
|
| Indefinite-lived intangible assets: | | | | | | | | | | | |
| Trade names | 60,199 |
| | — |
| | 60,199 |
| | 57,499 |
| | — |
| | 57,499 |
|
| Other | — |
| | — |
| | — |
| | 183 |
| | — |
| | 183 |
|
| Total indefinite-lived intangible assets | 60,199 |
| | — |
| | 60,199 |
| | 57,682 |
| | — |
| | 57,682 |
|
| Total | $ | 262,371 |
| | $ | (93,452 | ) | | $ | 168,919 |
| | $ | 240,422 |
| | $ | (62,358 | ) | | $ | 178,064 |
|
There were technology, content, and trade name additions in 2014 related to the acquisition of HSW (Search and Content segment) as described in "Note 3: Business Combinations." In addition, the Company recorded an impairment of $3.2 million on trade names in the fourth quarter of 2014 related to Monoprice (E-Commerce segment), which adjusted the carrying value of the Monoprice trade name to $34.8 million. The impairment amount was recorded in "Impairment of goodwill and intangible assets" on the consolidated statements of comprehensive income and is discussed further below.
During the annual goodwill impairment evaluation, the Company performed the first step of the goodwill quantitative impairment test in which it determined that the carrying value of the E-Commerce reporting unit exceeded its fair value, primarily due to operating results, projected revenue growth rates, and projected profitability below management's initial expectations. As a result, the Company then performed the second step of the impairment test for the E-Commerce reporting unit, which resulted in an impairment equal to the excess of the goodwill's carrying value over its implied fair value as disclosed in the first table above. Refer to "Note 2: Summary of Significant Accounting Policies" for a description of the Company's reporting units and the method used to determine the fair values of those reporting units and the amount of goodwill impairment. In addition, the Company reviewed its trade names during the annual impairment evaluation and determined that the Monoprice trade name's carrying value exceeded its fair value, which resulted in an impairment equal to that excess as disclosed in the second table above. The Company classified the fair value of its reporting units, goodwill, and trade names within Level 3 because they were valued using discounted cash flows, which have significant unobservable inputs related to the weighted-average cost of capital and forecasts of future cash flows. The Company also determined that the adverse changes and impairments related to the E-Commerce reporting unit were indicators requiring the review of E-Commerce long-lived assets for recoverability. The results of this review indicated that the carrying values of the E-Commerce long-lived assets were recoverable.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| | Weighted Average Amortization Period (months) | Gross carrying amount | | Accumulated amortization | | Net | | Gross carrying amount | | Accumulated amortization | | Net |
| Definite-lived intangible assets: | | | | | | | | | | | | |
| Customer relationships | 25 | $ | 101,711 |
| | $ | (75,105 | ) | | $ | 26,606 |
| | $ | 101,690 |
| | $ | (62,381 | ) | | $ | 39,309 |
|
| Advisor relationships | 216 | 240,300 |
| | (34,211 | ) | | 206,089 |
| | 240,300 |
| | (17,138 | ) | | 223,162 |
|
| Sponsor relationships | 192 | 16,500 |
| | (1,833 | ) | | 14,667 |
| | 16,500 |
| | (917 | ) | | 15,583 |
|
| Curriculum | 24 | 800 |
| | (400 | ) | | 400 |
| | 800 |
| | (200 | ) | | 600 |
|
| Technology | 47 | 43,895 |
| | (35,452 | ) | | 8,443 |
| | 43,855 |
| | (32,331 | ) | | 11,524 |
|
| Total definite-lived intangible assets | 189 | 403,206 |
| | (147,001 | ) | | 256,205 |
| | 403,145 |
| | (112,967 | ) | | 290,178 |
|
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Trade names | | 72,000 |
| | — |
| | 72,000 |
| | 72,000 |
| | — |
| | 72,000 |
|
| Total | | $ | 475,206 |
| | $ | (147,001 | ) | | $ | 328,205 |
| | $ | 475,145 |
| | $ | (112,967 | ) | | $ | 362,178 |
|
Amortization expense was as follows (in thousands):
| | | | Years ended December 31. | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Statement of comprehensive income line item: | | | | | | | | | | |
| Services cost of revenue | $ | 7,513 |
| | $ | 7,668 |
| | $ | 7,580 |
| |
| Amortization of intangible assets | 23,581 |
| | 16,121 |
| | 11,619 |
| |
| Cost of revenue | | $ | 195 |
| | $ | 812 |
| | $ | 7,546 |
|
| Amortization of other acquired intangible assets | | 33,807 |
| | 33,331 |
| | 12,757 |
|
| Total | $ | 31,094 |
| | $ | 23,789 |
| | $ | 19,199 |
| $ | 34,002 |
| | $ | 34,143 |
| | $ | 20,303 |
|
Expected amortization of definite-lived intangible assets held as of December 31, 2017 is as follows (in thousands):
Table of Contents |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Statement of comprehensive income (loss) line item: | | | | | | | | | | | | |
| Cost of revenue | $ | 101 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 101 |
|
| Amortization of other acquired intangible assets | 33,061 |
| | 32,321 |
| �� | 19,969 |
| | 17,138 |
| | 14,843 |
| | 138,772 |
| | 256,104 |
|
| Total | $ | 33,162 |
| | $ | 32,321 |
| | $ | 19,969 |
| | $ | 17,138 |
| | $ | 14,843 |
| | $ | 138,772 |
| | $ | 256,205 |
|
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Expected amortization of definite-lived intangible assets held as of December 31, 2014 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
| Statement of comprehensive income line item: | | | | | | | | | | | | | |
| Services cost of revenues | $ | 7,450 |
| | $ | 621 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,071 |
|
| Amortization of intangible assets | 21,880 |
| | 17,206 |
| | 17,155 |
| | 16,970 |
| | 16,838 |
| | 10,600 |
| | 100,649 |
|
| Total | $ | 29,330 |
| | $ | 17,827 |
| | $ | 17,155 |
| | $ | 16,970 |
| | $ | 16,838 |
| | $ | 10,600 |
| | $ | 108,720 |
|
The weighted average amortization periods for definite-lived intangible assets are as follows: 59 months for customer relationships, 16 months for technology, 113 months for content, and 64 months for total definite-lived intangible assets.
|
|
| Note 7: Fair Value Measurements |
Note 5: FairIn accordance with ASC 820, "Fair Value Measurements and Disclosures," certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The fair value hierarchy of the Company's financial assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | December 31, 2014 | | Fair value measurements at the reporting date using |
| | Quoted prices in active markets using identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| Cash equivalents: | | | | | | | |
| Money market and other funds | $ | 8,490 |
| | $ | — |
| | $ | 8,490 |
| | $ | — |
|
| Time deposits | 1,242 |
| | — |
| | 1,242 |
| | — |
|
| Taxable municipal bonds | 4,754 |
| | — |
| | 4,754 |
| | — |
|
| Total cash equivalents | 14,486 |
| | — |
| | 14,486 |
| | — |
|
| Available-for-sale investments: | | | | | | | |
| Debt securities: | | | | | | | |
| U.S. government securities | 100,818 |
| | — |
| | 100,818 |
| | — |
|
| International government securities | 6,560 |
| | — |
| | 6,560 |
| | — |
|
| Commercial paper | 24,589 |
| | — |
| | 24,589 |
| | — |
|
| Time deposits | 30,759 |
| | — |
| | 30,759 |
| | — |
|
| Corporate bonds | 1,528 |
| | — |
| | 1,528 |
| | — |
|
| Taxable municipal bonds | 87,366 |
| | — |
| | 87,366 |
| | — |
|
| Total debt securities | 251,620 |
| | — |
| | 251,620 |
| | ��� |
|
| Equity securities | 3,234 |
| | 3,234 |
| | — |
| | — |
|
| Total available-for-sale investments | 254,854 |
| | 3,234 |
| | 251,620 |
| | — |
|
| Total assets at fair value | $ | 269,340 |
| | $ | 3,234 |
| | $ | 266,106 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | Fair value measurements at the reporting date using |
| | Quoted prices in active markets using identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| Cash equivalents: money market and other funds | $ | 10,857 |
| | $ | — |
| | $ | 10,857 |
| | $ | — |
|
| Total assets at fair value | $ | 10,857 |
| | $ | — |
| | $ | 10,857 |
| | $ | — |
|
| Acquisition-related contingent consideration liability | $ | 2,689 |
| | $ | — |
| | $ | — |
| | $ | 2,689 |
|
| Total liabilities at fair value | $ | 2,689 |
| | $ | — |
| | $ | — |
| | $ | 2,689 |
|
Table of Contents |
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | Fair value measurements at the reporting date using |
| | Quoted prices in active markets using identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| Cash equivalents: | | | | | | | |
| U.S. government securities | $ | 2,749 |
| | $ | — |
| | $ | 2,749 |
| | $ | — |
|
| Money market and other funds | 4,090 |
| | — |
| | 4,090 |
| | — |
|
| Commercial paper | 1,999 |
| | — |
| | 1,999 |
| | — |
|
| Taxable municipal bonds | 1,301 |
| | — |
| | 1,301 |
| | — |
|
| Total cash equivalents | 10,139 |
| | — |
| | 10,139 |
| | — |
|
| Available-for-sale investments: | | | | | | | |
| Debt securities: | | | | | | | |
| U.S. government securities | 2,000 |
| | — |
| | 2,000 |
| | — |
|
| Commercial paper | 1,998 |
| | — |
| | 1,998 |
| | — |
|
| Time deposits | 807 |
| | — |
| | 807 |
| | — |
|
| Taxable municipal bonds | 2,296 |
| | — |
| | 2,296 |
| | — |
|
| Total debt securities | 7,101 |
| | — |
| | 7,101 |
| | — |
|
| Total assets at fair value | $ | 17,240 |
| | $ | — |
| | $ | 17,240 |
| | $ | — |
|
| | | | | | | | |
| Acquisition-related contingent consideration liability | $ | 3,421 |
| | $ | — |
| | $ | — |
| | $ | 3,421 |
|
| Total liabilities at fair value | $ | 3,421 |
| | $ | — |
| | $ | — |
| | $ | 3,421 |
|
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
|
| | | | | | | | | | | | | | | |
| | December 31, 2013 | | Fair value measurements at the reporting date using |
| | Quoted prices in active markets using identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| Cash equivalents: | | | | | | | |
| U.S. government securities | $ | 6,400 |
| | $ | — |
| | $ | 6,400 |
| | $ | — |
|
| Money market and other funds | 9,391 |
| | — |
| | 9,391 |
| | — |
|
| Commercial paper | 17,999 |
| | — |
| | 17,999 |
| | — |
|
| Time deposits | 499 |
| | — |
| | 499 |
| | — |
|
| Taxable municipal bonds | 21,215 |
| | — |
| | 21,215 |
| | — |
|
| Total cash equivalents | 55,504 |
| | — |
| | 55,504 |
| | — |
|
| Available-for-sale investments: | | | | | | | |
| U.S. government securities | 58,114 |
| | — |
| | 58,114 |
| | — |
|
| Commercial paper | 14,496 |
| | — |
| | 14,496 |
| | — |
|
| Time deposits | 9,880 |
| | — |
| | 9,880 |
| | — |
|
| Taxable municipal bonds | 120,990 |
| | — |
| | 120,990 |
| | — |
|
| Total available-for-sale investments | 203,480 |
| | — |
| | 203,480 |
| | — |
|
| Total assets at fair value | $ | 258,984 |
| | $ | — |
| | $ | 258,984 |
| | $ | — |
|
The Company also had financial instruments that were notA reconciliation of Level 3 items measured at fair value. See "Note 7: Debt" for details.value on a recurring basis was as follows (in thousands):
|
| | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Acquisition-related contingent consideration liability: | | | |
| Balance at beginning of year | $ | 3,421 |
| | $ | 2,951 |
|
| Payment | (946 | ) | | — |
|
| Revaluation | — |
| | 391 |
|
| Foreign currency transaction loss | 214 |
| | 79 |
|
| Balance at end of year | $ | 2,689 |
| | $ | 3,421 |
|
The contingent consideration liability is related to the Company's acquisition of SimpleTax (see "Note 3: Business Combinations"), and the related payments that began in 2017 and are expected to continue annually through 2019.As of December 31, 2017, the Company could be required to pay up to an undiscounted amount of $2.7 million. This liability is included within Level 3 of the fair value hierarchy because the Company values it utilizing inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment (100%), and the discount rate (9%). A decrease in estimated revenues or an increase in the discount rate would decrease the fair value of the contingent consideration liability. As of December 31, 2017, the Company recorded approximately $1.3 million in "Accrued expenses and other current liabilities" and $1.4 million in "Other long-term liabilities" on the consolidated balance sheets.
In 2016, the Company had non-recurring Level 3 fair value measurements in 2014related to the repurchase of its Notes. See "Note 9: Debt" for details. In 2015, the Company had non-recurring Level 3 fair value measurements related to its reporting units and various intangible assets as part of goodwill and intangible asset impairment reviews. See "Note"Note 4: Goodwill and Other Intangible Assets"Discontinued Operations" for details.
The contractual maturities of the debt securities classified as available-for-sale at December 31, 2014 and 20132016 were less than one year. Available-for-sale investments as of December 31, 2013 included only debt securities.
The cost and fair value of available-for-sale investments were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| Balance as of December 31, 2014 |
|
| |
|
| |
|
| |
|
|
| Debt securities | $ | 251,673 |
| | $ | 16 |
| | $ | (69 | ) | | $ | 251,620 |
|
| Equity securities | 4,312 |
| | — |
| | (1,078 | ) | | 3,234 |
|
| Total | $ | 255,985 |
| | $ | 16 |
| | $ | (1,147 | ) | | $ | 254,854 |
|
| Balance as of December 31, 2013 | $ | 203,479 |
| | $ | 24 |
| | $ | (23 | ) | | $ | 203,480 |
|
|
| | | | | | | | | | | | | | | |
| | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| Balance as of December 31, 2016 | $ | 7,102 |
| | $ | — |
| | $ | (1 | ) | | $ | 7,101 |
|
As of December 31, 2014, the Company's equity securities, which consist of a single holding in a publicly-traded company, were in an unrealized loss position for less than 12 months. The Company has determined that such position is temporary.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
Note 6: Balance Sheet Components
|
|
| Note 8: Balance Sheet Components |
Prepaid expenses and other current assets, net consisted of the following (in thousands):
| | | | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Prepaid expenses | $ | 8,676 |
| | $ | 4,370 |
| $ | 6,972 |
| | $ | 5,990 |
|
| Other current assets, net | 4,801 |
| | 5,404 |
| 393 |
| | 331 |
|
| Total prepaid expenses and other current assets, net | $ | 13,477 |
| | $ | 9,774 |
| $ | 7,365 |
| | $ | 6,321 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
Property and equipment, net consisted of the following (in thousands):
| | | | December 31, | December 31, |
| 2014 |
| 2013 | 2017 |
| 2016 |
| Computer equipment and data center | $ | 10,392 |
|
| $ | 10,792 |
| $ | 7,121 |
|
| $ | 6,884 |
|
| Purchased software | 6,721 |
|
| 6,153 |
| 4,200 |
|
| 4,420 |
|
| Internally-developed software | 9,045 |
|
| 7,166 |
| 2,728 |
|
| 2,478 |
|
| Office equipment | 488 |
|
| 421 |
| 557 |
|
| 745 |
|
| Office furniture | 2,467 |
|
| 2,061 |
| 801 |
|
| 1,532 |
|
| Heavy equipment | 3,084 |
|
| 2,944 |
| |
| Leasehold improvements and other | 4,122 |
|
| 3,553 |
| 3,244 |
|
| 6,246 |
|
| 36,319 |
|
| 33,090 |
| 18,651 |
|
| 22,305 |
|
| Accumulated depreciation | (21,279 | ) |
| (17,985 | ) | (12,081 | ) |
| (12,269 | ) |
| 15,040 |
|
| 15,105 |
| 6,570 |
|
| 10,036 |
|
| Capital projects in progress | 902 |
|
| 1,003 |
| 3,261 |
|
| 800 |
|
| Total property and equipment, net | $ | 15,942 |
|
| $ | 16,108 |
| $ | 9,831 |
|
| $ | 10,836 |
|
Total depreciation expense was $5.6$4.1 million, $4.5 million, and $3.8$2.3 million for the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, respectively.
Unamortized internally-developed software, which excludes software projects in progress that are included in capital projects in progress above, was $4.1 million and $3.2$1.7 million at December 31, 20142017 and 2013,2016, respectively. The Company recorded depreciationamortization expense for internally-developed software of $1.6 million for the year ended December 31, 2014 and $0.9 million, $1.0 million, and $0.3 million for each of the years ended December 31, 20132017, 2016, and 2012.2015, respectively.
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Salaries and related expenses | $ | 12,451 |
| | $ | 12,506 |
|
| Accrued interest on Notes (see Note 9) | — |
| | 1,837 |
|
| Other | 7,126 |
| | 4,185 |
|
| Total accrued expenses and other current liabilities | $ | 19,577 |
| | $ | 18,528 |
|
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Salaries and related expenses | $ | 5,463 |
| | $ | 7,708 |
|
| Accrued content costs | 4,077 |
| | 4,132 |
|
| Accrued advertising | 3,292 |
| | 6,155 |
|
| Accrued interest on Notes (see Note 7) | 2,138 |
| | 2,138 |
|
| Tax refunds payable to sellers (see Note 3) | 792 |
| | 6,814 |
|
| Other | 5,743 |
| | 4,162 |
|
| Total accrued expenses and other current liabilities | $ | 21,505 |
| | $ | 31,109 |
|
The Company’s debt consisted of the following (in thousands):
76 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | | | Unamortized | | | | | | Unamortized | | |
| | Principal amount | | Discount | | Debt issuance costs | | Net carrying value | | Principal amount | | Discount | | Debt issuance costs | | Net carrying value |
| Senior secured credit facility | $ | 345,000 |
| | $ | (1,455 | ) | | $ | (5,464 | ) | | $ | 338,081 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| TaxAct - HD Vest 2015 credit facility | — |
| | — |
| | — |
| | — |
| | 260,000 |
| | (7,124 | ) | | (5,295 | ) | | 247,581 |
|
| Convertible Senior Notes | — |
| | — |
| | — |
| | — |
| | 172,859 |
| | (6,913 | ) | | (1,770 | ) | | 164,176 |
|
| Note payable, related party | — |
| | — |
| | — |
| | — |
| | 3,200 |
| | — |
| | — |
| | 3,200 |
|
| Total debt | $ | 345,000 |
| | $ | (1,455 | ) | | $ | (5,464 | ) | | $ | 338,081 |
| | $ | 436,059 |
| | $ | (14,037 | ) | | $ | (7,065 | ) | | $ | 414,957 |
|
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Note 7: Debt
The Company’s debt consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | Principal amount | | Unamortized discount | | Net carrying value | | Principal amount | | Unamortized discount | | Net carrying value |
| Monoprice 2013 credit facility | $ | 42,000 |
| | $ | (191 | ) | | $ | 41,809 |
| | $ | 50,000 |
| | $ | (288 | ) | | $ | 49,712 |
|
| TaxACT 2013 credit facility | 51,940 |
| | — |
| | 51,940 |
| | 71,384 |
| | — |
| | 71,384 |
|
| Convertible Senior Notes | 201,250 |
| | (16,073 | ) | | 185,177 |
| | 201,250 |
| | (19,667 | ) | | 181,583 |
|
| Total debt | $ | 295,190 |
| | $ | (16,264 | ) | | $ | 278,926 |
| | $ | 322,634 |
| | $ | (19,955 | ) | | $ | 302,679 |
|
Monoprice 2013Senior secured credit facility: On November 22, 2013, MonopriceIn May 2017, Blucora entered into ana credit agreement with a syndicate of lenders forin order to (a) refinance the purposescredit facilities previously entered into in 2015 to finance the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"), (b) redeem its Notes that were outstanding at the time, and (c) provide a term loan and revolving line of post-transaction financing of the Monoprice acquisition and providingcredit for future working capital, flexibility for Monoprice. The Monopricecapital expenditure and general business purposes (the "Blucora senior secured credit facilities"). Consequently, the TaxAct - HD Vest 2015 credit facility consistswas repaid in full and the commitments thereunder were terminated. The Blucora senior secured credit facilities in the aggregate amount of $425.0 million consist of a $30.0committed $50.0 million revolving credit loan—which includes up to $5.0 million underfacility (including a letter of credit and up to $5.0 million in swingline loans—sub-facility), and a $40.0$375.0 million term loan for an aggregate $70.0 million credit facility. The final maturity date of the credit facility, is November 22, 2018. Monoprice’s obligationsand mature in May 2022 and May 2024, respectively. Obligations under the Blucora senior secured credit facilityfacilities are guaranteed by Monoprice Holdings, Inc.certain of Blucora's subsidiaries and are secured by the assets of the Monoprice business.
Monoprice borrowed $50.0 million under the credit facility, which was used to pay a dividend to Blucora and to pay certain expenses and fees related to thethose subsidiaries. The Blucora senior secured credit facility. Monoprice repaid $8.0 million on the credit facility in 2014. Monoprice has the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $1.0 million or any whole multiple of $1.0 million in excess thereof (for swingline loans, the aggregate principal amount is not less than $0.1 million and any whole multiple of $0.1 million in excess thereof). The interest rate on amounts borrowed under the credit facility is variable, based upon, at the election of Monoprice, either LIBOR plus a margin of between 2.75% and 3.25%, payable as of the end of each interest period, or a variable rate plus a margin of between 1.75% and 2.25%, payable quarterly in arrears. In each case, the applicable margin within the range depends upon Monoprice’s ratio of leverage to EBITDA over the previous four quarters. The credit facility includesfacilities include financial and operating covenants, with respect to certain ratios, including a consolidated total net leverage ratio and fixed charge coverage ratio, which are defined furtherset forth in detail in the credit agreement. As of December 31, 2014, Monoprice2017, Blucora was in compliance with all of the financial and operating covenants.
Principal payments on the term loan are payable quarterly in an amount equal to 0.25% of the initial outstanding principal. Under the initial term loan, the applicable interest rate margin was 3.75% for Eurodollar Rate loans and 2.75% for ABR loans. In November 2017, the Blucora senior secured credit facilities agreement was amended in order to refinance and reprice the initial term loan, such that the applicable interest rate margin is 3.0% for Eurodollar Rate loans and 2.0% for ABR loans. Through December 31, 2017, Blucora has made prepayments of $30.0 million towards the term loan.
Depending on Blucora’s Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement), the applicable interest rate margin on the revolving credit facility is from 2.75% to 3.00% for Eurodollar Rate loans and 1.75% to 2.00% for ABR loans. Interest is payable at the end of each interest period. Blucora has not borrowed any amounts under the revolving credit facility.
Blucora also has the right to prepay the term loan or outstanding amounts under the revolving credit facility without any premium or penalty (other than customary Eurodollar breakage costs). Prepayments of the term loan are subject to certain prepayment minimums. Beginning with the fiscal year ending December 31, 2018, Blucora will be required to make annual prepayments of the term loan in an amount equal to a percentage of excess cash flow of Blucora during the applicable fiscal year from 0% to 50.0%, depending on the Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement) for such fiscal year.
As of December 31, 2014,2017, the credit facility’sfacility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
In connection with the refinancing, the Company performed an analysis by creditor and determined that the refinancing qualified as an extinguishment of the TaxAct - HD Vest 2015 credit facilities and the Notes. As a result, the Company recognized a loss on debt extinguishment during the three months ended June 30, 2017, which was recorded in "Other loss, net" on the consolidated statements of comprehensive income and consisted of the following (in thousands):
|
| | | |
| Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility | $ | 9,593 |
|
| Loss on debt extinguishment - Convertible Senior Notes | 6,715 |
|
| Total loss on debt extinguishment | $ | 16,308 |
|
The amount for the TaxAct - HD Vest 2015 credit facility included the write-off of the remaining unamortized discount and debt issuance costs. For the Notes, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
TaxACT 2013TaxAct - HD Vest 2015 credit facility:On August 30, 2013, TaxACTDecember 31, 2015, TaxAct and HD Vest entered into an agreement with a syndicate of lenders to refinance a 2012for the purposes of financing the HD Vest acquisition and providing future working capital flexibility for TaxAct and HD Vest. The credit facility on more favorable terms. Under that 2012 credit facility, TaxACT borrowed $100.0consisted of a $25.0 million of which $25.5 million was repaid in 2012, $10.0 million in April 2013, and the remaining $64.5 million in August 2013, the latter amount in connection with the refinancing of this credit agreement. The interest rate on amounts borrowed under the 2012 credit facility was variable. The Company hedged a portion of the interest rate risk through an interest rate swap, which was terminated at break-even on September 10, 2013.
The 2013 credit facility consists of revolving credit loans, up to $10.0 million in swingline loans, and up to $5.0 million underloan--which included a letter of credit which in the aggregate represented a $100.0 million revolving credit commitment that reduced to $90.0 million on August 30, 2014 and will reduce to $80.0 million on August 30, 2015 and $70.0 million on August 30, 2016. The final maturity date of the credit facility is August 30, 2018. TaxACT’s obligations under the credit facility are guaranteed by TaxACT Holdings, Inc. and are secured by the assets of the TaxACT business.
TaxACT borrowed approximately $71.4 million under the 2013 credit facility, of which $65.4 million was used to pay off the 2012 credit facility, accrued interest, and certain expenses and fees related to the refinancing and an additional $6.0 million was borrowed in October 2013. TaxACT had net repayment activity of $19.4 million in 2014. TaxACT has the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $3.0 million or any whole multiple of $1.0 million in excess thereof. The interest rate on amounts borrowed under the credit facility is variable, based upon, at the election of TaxACT, either LIBOR plus a margin of between 1.75% and 2.5%, or a Base Rate plus a margin of between 0.75% and 1.5%, and payable as of the end of each interest period. In each case, the applicable margin within the range depends upon TaxACT’s ratio of leverage to EBITDA over the previous four quarters. The credit facility includes financial and operating covenants with respect to certain ratios,
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
swingline loans--and a $400.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan were December 31, 2020 and December 31, 2022, respectively. Obligations under the credit facility were guaranteed by TaxAct Holdings, Inc. and HD Vest Holdings, Inc. and were secured by the equity of the TaxAct and HD Vest businesses. While Blucora was not a party to the agreement, it had guaranteed the obligations of TaxAct and HD Vest under the credit facility, secured by its equity in TaxAct Holdings, Inc.
includingTaxAct and HD Vest borrowed $400.0 million under the term loan and had net repayment activity of $140.0 million in 2016. Principal payments on the term loan were payable quarterly and were between 0.625% and 1.875% of outstanding principal, depending upon TaxAct and HD Vest's combined net leverage ratioof EBITDA ratio. The interest rate on the term loan was variable at the London Interbank Offered Rate (“LIBOR”), subject to a floor of 1.00%, plus a margin of 6.00%, payable at the end of each interest period.
The Company had repayment activity of $64.0 million and fixed charge coverage ratio, which are defined further$140.0 million during 2017 and 2016, respectively. These repayments resulted in the agreement. Asacceleration of December 31, 2014, the Company was in compliance with alla portion of the financialunamortized discount and operating covenants. Asdebt issuance costs, which were recorded in "Other loss, net" on the consolidated statements of December 31, 2014, thecomprehensive income.
TaxAct 2013 credit facility’s principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
facility: On August 30, 2013, TaxAct entered into an agreement to refinance a 2012 credit facility on more favorable terms. TaxAct had net repayment activity of $51.9 million in 2015. This credit facility was repaid in full in the Company performed an analysis by creditor to determine whethersecond quarter of 2015 and subsequently closed, at which point the refinancing would be recorded as an extinguishment or a modification of debt and, as a result of this analysis, recognized a loss on partial extinguishment of debt comprised of the following (in thousands):
|
| | | |
| Refinancing fees paid to creditors, including arrangement fee, classified as extinguishment | $ | 567 |
|
| Deferred financing costs on extinguished debt | 726 |
|
| Debt discount on extinguished debt | 300 |
|
| Total | $ | 1,593 |
|
In connection with amounts classified as an extinguishment, the Company recorded deferredremaining debt issuance costs which are being amortized as an adjustment to interest expense over the termwere written off. The write-off of the new credit facility using the effective interest method. The remaining portion of the refinancingdebt issuance costs was a modification, and the Company determined a new effective interest rate basedrecorded in "Other loss, net" on the carrying amountconsolidated statements of the original debt and the revised cash flows. Deferred financing costs and unamortized debt discount related to the prior credit agreement are being amortized as an adjustment to interest expense over the term of the new credit facility using the effective interest method. Similarly, additional creditor-related fees related to the modification are being amortized over the term of the new credit facility using the effective interest method. In total, approximately $0.7 million is being amortized over the term of the new credit facility using the effective interest method.
comprehensive income (see "Note 14: Other Loss, Net" for details).
Convertible Senior Notes: On March 15, 2013, the Company issued $201.25$201.3 million aggregate principal amount of its Convertible Senior Notes, (the “Notes”), inclusive of the underwriters’ exercise in full of their over-allotment option of $26.25$26.3 million. TheIn June 2017, the Company redeemed almost all of the outstanding Notes mature on April 1, 2019, unless earlier purchased, redeemed, or converted in accordancefor cash with proceeds from the terms, and bear interest at a rate of 4.25% per year, payable semi-annually in arrears beginning on October 1, 2013.senior secured credit facility. The Company received net proceeds from the offering of approximately $194.8 million after adjusting for debt issuance costs, including the underwriting discount.
The Notes were issued under an indenture dated March 15, 2013 (the “Indenture“Indenture””) by and between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. There arewere no financial or operating covenants relating to the Notes.
Beginning July 1, 2013 and priorDuring 2016, the Company repurchased $28.4 million of the Notes' principal for cash of $20.7 million. The Company allocated the cash paid first to the closeliability component of businessthe Notes based on September 28, 2018, holders may convert all orthe fair value of the repurchased Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income (see "Note 14: Other Loss, Net" for details). No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid. The repurchase also resulted in the write-down of a portion of the Notes at their option,unamortized discount and debt issuance costs, which was also recorded in multiples of $1,000 principal amount, under the following circumstances:
During any fiscal quarter commencing July 1, 2013, if the last reported sale price of the Company’s common stock for at least 20 trading days during a period of 30 consecutive trading days ending"Other loss, net" on the last trading dayconsolidated statements of the immediately preceding calendar quarter is greater than or equalcomprehensive income.
The following table sets forth total interest expense related to130% of the conversion price on each applicable trading day. As of December 31, 2014, the Notes were not convertible. As of(in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Contractual interest expense (Cash) | $ | 3,141 |
| | $ | 7,619 |
| | $ | 8,553 |
|
| Amortization of debt issuance costs (Non-cash) | 401 |
| | 939 |
| | 989 |
|
| Accretion of debt discount (Non-cash) | 1,567 |
| | 3,666 |
| | 3,866 |
|
| Total interest expense | $ | 5,109 |
| | $ | 12,224 |
| | $ | 13,408 |
|
| Effective interest rate of the liability component | 7.32 | % | | 7.32 | % | | 7.32 | % |
Note payable, related party: In December 31, 2013, the Notes were convertible.
During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of the Company’s common stock and the conversion rate on each trading day.
If2017, the Company calls any or allfully repaid $3.2 million of a note payable with the Notes for redemption.
Uponformer President of HD Vest that arose in connection with the occurrenceacquisition of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets.
HD Vest. The convertibility of the Notes is determined at the end of each reporting period. If the Notes are determinednote was scheduled to be convertible, they remain convertible until the end of the subsequent quarter and are classified in "Current liabilities" on the balance sheet; otherwise, they are classified in "Long-term liabilities." Depending upon the price of the Company’s common stock or the trading price of the Notes within the reporting period, pursuant to the first two criteria listed above, the Notes could be convertible during one reporting period but not convertible duringpaid over a comparable reporting period.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
On or after October 1, 2018year period, with 50% paid in year one ($3.2 million paid in December 2016), 40% to be paid in 2017, and until10% to be paid in 2018. Certain members of HD Vest management rolled over a portion of the close of business on March 28, 2019, holders may convert their Notes, in multiples of $1,000 principal amount,proceeds they would have otherwise received at the optionacquisition's closing into shares of the holder.
acquisition subsidiary through which the Company consummated the purchase of HD Vest. The conversion ratioformer President of HD Vest sold a portion of his shares to the Company in exchange for the Notes is initially 0.0461723, equivalent to an initial conversion price of approximately $21.66 per share of the Company’s common stock.note. The conversion ratio is subject to customary adjustment for certain events as described in the Indenture.
At the time the Company issued the Notes, the Company was only permitted to settle conversions with shares of its common stock. The Company received shareholder approval at its annual meeting in May 2013 to allow for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. The Company’s intention is to satisfy conversion of the Notes with cash for the principal amount of the debt and shares of common stock for any related conversion premium.
Beginning April 6, 2016, the Company may, at its option, redeem for cash all or part of the Notes plus accrued and unpaid interest. If the Company undergoes a fundamental change (as described in the Indenture), holders may require the Company to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. However, if a fundamental change occurs and a holder elects to convert the Notes, the Company will, under certain circumstances, increase the applicable conversion rate for the Notes surrendered for conversion by a number of additional shares of common stock based on the date on which the fundamental change occurs or becomes effective and the price paid per share of the Company’s common stock in the fundamental change as specified in the Indenture.
The Notes are unsecured and unsubordinated obligations of the Company and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not subordinated. The Notes are effectively junior in right of payment to any of the Company’s secured indebtedness (to the extent of the value of assets securing such indebtedness) and structurally junior to all existing and future indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries. The Indenture does not limit the amount of debt that the Company or its subsidiaries may incur.
The Notes may be settled in combination of cash or shares of common stock given the flexible settlement option. As a result, the Notes contain liability and equity components, which were bifurcated and accounted for separately. The liability component of the Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issuednote bore interest at a 6.5% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the Notes, resulting in the initial recognition of $22.3 million as the debt discount recorded in additional paid-in capital for the Notes. The carrying amount of the Notes is being accreted to the principal amount over the remaining term to maturity, and the Company is recording corresponding interest expense. The Company incurred debt issuance costs of $6.4 million related to the Notes and allocated $5.7 million to the liability component of the Notes. These costs are being amortized to interest expense over the six-year term of the Notes or the date of conversion, if any.5% per year.
The following table sets forth total interest expense for the years ended December 31, 2014 and 2013 related to the Notes (in thousands): |
| | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 |
| Contractual interest expense (Cash) | $ | 8,553 |
| | $ | 6,795 |
|
| Amortization of debt issuance costs (Non-cash) | 920 |
| | 684 |
|
| Accretion of debt discount (Non-cash) | 3,594 |
| | 2,674 |
|
| Total interest expense | $ | 13,067 |
| | $ | 10,153 |
|
| Effective interest rate of the liability component | 7.32 | % | | 7.32 | % |
The fair value of the principal amount of the Notes as of December 31, 2014 was $190.6 million, based on the last quoted active trading price, a Level 1 fair value measurement, as of that date.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
Note 8: Commitments and Contingencies
|
|
| Note 10: Commitments and Contingencies |
The Company's contractual commitments are as follows for years ending December 31 (in thousands):
| | | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Operating lease commitments | $ | 3,154 |
| | $ | 3,213 |
| | $ | 2,916 |
| | $ | 2,455 |
| | $ | 2,502 |
| | $ | 3,105 |
| | $ | 17,345 |
| |
| Operating lease commitments: | | | | | | | | | | | | | | |
| Operating lease obligations | | $ | 4,201 |
| | $ | 4,281 |
| | $ | 3,946 |
| | $ | 2,493 |
| | $ | 1,979 |
| | $ | 1,678 |
| | $ | 18,578 |
|
| Sublease income | | (1,265 | ) | | (1,288 | ) | | (991 | ) | | — |
| | — |
| | — |
| | (3,544 | ) |
| Net operating lease commitments | | 2,936 |
| | 2,993 |
| | 2,955 |
| | 2,493 |
| | 1,979 |
| | 1,678 |
| | 15,034 |
|
| Purchase commitments | 437 |
| | 92 |
| | 62 |
| | — |
| | — |
| | — |
| | 591 |
| 5,528 |
| | 3,600 |
| | 3,600 |
| | 2,100 |
| | 600 |
| | 3,400 |
| | 18,828 |
|
| Debt commitments | 8,000 |
| | 8,000 |
| | 8,000 |
| | 69,940 |
| | 201,250 |
| | — |
| | 295,190 |
| — |
| | 2,000 |
| | 3,500 |
| | 3,500 |
| | 3,500 |
| | 332,500 |
| | 345,000 |
|
| Interest on Notes | 8,553 |
| | 8,553 |
| | 8,553 |
| | 8,553 |
| | 4,277 |
| | — |
| | 38,489 |
| |
| Escrow for acquisition-related indemnifications | 735 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 735 |
| |
| Interest payable | | 15,172 |
| | 15,157 |
| | 15,068 |
| | 14,872 |
| | 14,719 |
| | 20,584 |
| | 95,572 |
|
| Acquisition-related contingent consideration liability | | 1,304 |
| | 1,385 |
| | — |
| | — |
| | — |
| | — |
| | 2,689 |
|
| Total | $ | 20,879 |
| | $ | 19,858 |
| | $ | 19,531 |
| | $ | 80,948 |
| | $ | 208,029 |
| | $ | 3,105 |
| | $ | 352,350 |
| $ | 24,940 |
| | $ | 25,135 |
| | $ | 25,123 |
| | $ | 22,965 |
| | $ | 20,798 |
| | $ | 358,162 |
| | $ | 477,123 |
|
Operating lease commitments: As discussed in "Note 5: Restructuring", the Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease.
The Company has non-cancelableleases office space, and these leases are classified as operating leases. Net rent expense under those operating leases for its facilities. The leases run through 2022. Rent expense under operating leases totaled $3.0 million, $2.0 million, and $1.8 million for the years ended December 31, 2014, 2013, and 2012, respectively.was as follows (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Rent expense | $ | 2,972 |
| | $ | 3,793 |
| | $ | 1,237 |
|
| Less: sublease rent income | (594 | ) | | (342 | ) | | — |
|
| Net rent expense | $ | 2,378 |
| | $ | 3,451 |
| | $ | 1,237 |
|
Purchase commitments: The Company's purchase commitments consist primarily of non-cancelable service agreements for its data centers.centers, a sponsorship marketing agreement, commitments with a vendor to provide cloud computation services of $10.1 million over the next four years, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018.
Debt commitments and interest on Notes: The Company’s debt commitments are based upon contractual payment terms and consist of the outstanding principal related to the MonopriceBlucora senior secured credit facility, the TaxACT credit facility, and the Notes. The Company may repay the amounts outstanding under the Monoprice and TaxACT credit facilities before their terms are complete, depending upon the cash generated by the respective businesses, and under the Notes based upon holders exercising their conversion option.facility. For further detail regarding the credit facilitiesfacility, see "Note 9: Debt."
Acquisition-related contingent consideration liability: The contingent consideration liability is related to the Company's acquisition of SimpleTax (see "Note 3: Business Combinations" and "Note 7: Fair Value Measurements"), and the Notes, see "Note 7: Debt."related payments that began in 2017 and are expected to continue annually through 2019.
Escrow for acquisition-related indemnifications: The Company holds escrow for acquisition-related indemnifications around general representationsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and warranties in connection with the Balance Financial acquisition. See "Note 3: Business Combinations" for further discussion of the escrow.2015
Collateral pledged: The Company has pledged a portion of its cash as collateral for certain of its property lease-related banking arrangements. At December 31, 2014,2017, the total amount of collateral pledged under these standby letters of credit was $0.9$0.7 million.
Off-balance sheet arrangements: The Company has no off-balance sheet arrangements other than operating leases.
Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. Following is a brief description of the more significant legal proceedings. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, against it, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
On MayDecember 12, 2014,2016, a putative classshareholder derivative action complaint was filed by Jeffrey Tilden against the Company, as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Blucora Board of Directors, in the U.S. DistrictSuperior Court of the State of California in and for the Western DistrictCounty of WashingtonSan Francisco. The complaint asserted claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint asserted a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserted a claim for insider trading against Mr. Snyder, a former director of the Company, and certain of its officers.companies affiliated with Mr. Snyder. The derivative action did not seek monetary damages from the Company. The complaint asserted claims under Sections 10(b)sought corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and 20(a) ofprejudgment interest.
On March 10, 2017, the Securities Exchange Act of 1934,Company filed a motion to dismiss for improper venue as amended, and Rule 10b-5 promulgated thereunder, and purported to be brought on behalfa result of a class of persons who purchasedforum selection provision in the Company’s common stock during the period between November 5, 2013 and February 20, 2014. Prior to filing the amended consolidated complaint,bylaws that required the plaintiff agreed to voluntarily dismiss this case without prejudice, andfile his derivative fiduciary duty claims in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the order dismissingCompany's motion to dismiss. The case was stayed by the Court until November 22, 2017 so that Tilden could file a complaint in Delaware, after which the case was dismissed without further order of the Court.
On November 21, 2017, Tilden filed a shareholder derivative action in the Delaware Court of Chancery asserting the same claims against the same defendants and seeking the same relief as the San Francisco Superior Court lawsuit. On January 31, 2018, Blucora filed a motion to dismiss the Delaware complaint and the court has not yet ruled on November 4, 2014.this motion.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 9: Stockholders’ Equity
|
|
| Note 11: Stockholders' Equity |
Stock incentive plan: The Company may grant incentive or non-qualified stock options, stock, restricted stock, RSUs, and stock appreciation rights and performance shares or performance units to employees, non-employee directors, and consultants.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
The Company granted options and RSUs during 2014, 2013,2017 and 20122016 under the Company’sits 2015 Incentive Plan (as amended and restated), as well as options and RSUs during 2016 under its 2016 Inducement Plan. The Company granted options and RSUs during 2015 under its Restated 1996 Flexible Stock Incentive Plan. Options and RSUs generally vest over a period of three years, with one-third vesting one year from the date of grant and the remainder vesting ratably thereafter on a semi-annual basis, and expire seven years from the date of grant. There are a few exceptions to this vesting schedule, which provide for vesting at different rates or based on achievement of performance or market targets.
The Company issues new shares upon the exercise of options and upon the vesting of RSUs. If an option or RSU is surrendered or otherwise unused, the related shares will continue to be available.
Warrant: On August 23, 2011, the Company issued a warrant to purchase 1.0 million shares of Blucora common stock, exercisable at a price of $9.62 per share (the “Warrant”). The Warrant originally was considered stock-based compensation and was scheduled to expire on August 23, 2014, but the completion of the TaxACT acquisition on January 31, 2012 was an event under the Warrant’s terms that extended the expiration date to the earlier of August 23, 2017 or the effective date of a change of control of Blucora. Subsequent to the extension, the Company treated the award as a derivative instrument (see "Note 2: Summary of Significant Accounting Policies"). The modification date fair value previously recognized in "Additional paid-in capital" of $6.2 million was classified as a current liability, and the Warrant’s fair value was determined each reporting period with gains or losses related to the change in fair value recorded in "Other loss, net" in the amounts of $11.7 million and $2.3 million for the years endedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 20132017, 2016, and 2012, respectively.2015
Employee Stock Purchase Plan: The Company recorded $6.6 million in total expense relating to the modification and subsequent change in fair value for the Warrant for the year ended December 31, 2012. On November 21, 2013, the Warrant was exercised and 1.0 million shares of Blucora common stock were purchased for an aggregate exercise price of $9.6 million. The related derivative instrument liability balance of $20.2 million was settled through "Additional paid-in capital."
19982016 Employee Stock Purchase Plan (“ESPP(”):“ESPP” The ESPP) permits eligible employees to contribute up to 15% of their base earnings toward the twice-yearly purchase of Company common stock, subject to an annual maximum dollar amount. The purchase price is the lesser of 85% of the fair market value of common stock on the first day or on the last day of an offering period. An aggregate of 1.41.0 million shares of common stock are authorized for issuance under the ESPP. Of this amount, 0.30.9 million shares were available for issuance.issuance as of December 31, 2017. The Company issues new shares upon purchase through the ESPP.
Stock repurchase program: In February 2013, the Company’s Board of Directors approved a stock repurchase program whereby the Company maycould purchase its common stock in open-market transactions. In May 2014, the Board of Directors increased the repurchase authorization, such that the Company may repurchase up to $85.0 million of its common stock, and extended theThe repurchase period throughconcluded in May 2016. Repurchased shares will bewere retired and resumeresumed the status of authorized but unissued shares of common stock. DuringThe Company had the year ended December 31, 2014, the Company purchased 2.3 million shares infollowing open-market transactions at a total cost of approximately $38.6 million and an average price of $16.85 per share purchase activity, exclusive of purchase and administrative costs. During the year ended December 31, 2013, the Company purchased 0.4 million shares in open-market transactions at a total cost of approximately $10.0 million and an average price of $23.95costs (in thousands, except per share exclusive of purchase and administrative costs. As of December 31, 2014, the Company may repurchase up to an additional $36.5 million of its common stock under the repurchase program.data):
|
| | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Cost |
| Year ended December 31, 2017 | — |
| | $ | — |
| | $ | — |
|
| Year ended December 31, 2016 | — |
| | $ | — |
| | $ | — |
|
| Year ended December 31, 2015 | 551 |
| | $ | 14.01 |
| | $ | 7,713 |
|
Other comprehensive income: The following table provides information about activity in other comprehensive income (in thousands):
|
| | | | | | | | | | | |
| | Unrealized gain (loss) on investments | | Unrealized gain (loss) on derivative instrument | | Total |
| Balance as of December 31, 2011 | $ | 32 |
| | $ | — |
| | $ | 32 |
|
| Other comprehensive loss | (42 | ) | | (266 | ) | | (308 | ) |
| Balance as of December 31, 2012 | (10 | ) | | (266 | ) | | (276 | ) |
| Other comprehensive income | 10 |
| | 266 |
| | 276 |
|
| Balance as of December 31, 2013 | — |
| | — |
| | — |
|
| Other comprehensive loss | (1,113 | ) | | — |
| | (1,113 | ) |
| Balance as of December 31, 2014 | $ | (1,113 | ) | | $ | — |
| | $ | (1,113 | ) |
|
| | | | | | | | | | | |
| | Unrealized gain (loss) on investments | | Foreign currency translation adjustment | | Total |
| Balance as of December 31, 2014 | $ | (1,113 | ) | | $ | — |
| | $ | (1,113 | ) |
| Other comprehensive income (loss) | 1,103 |
| | (517 | ) | | 586 |
|
| Balance as of December 31, 2015 | (10 | ) | | (517 | ) | | (527 | ) |
| Other comprehensive income | 9 |
| | 137 |
| | 146 |
|
| Balance as of December 31, 2016 | (1 | ) | | (380 | ) | | (381 | ) |
| Other comprehensive income | 1 |
| | 376 |
| | 377 |
|
| Balance as of December 31, 2017 | $ | — |
| | $ | (4 | ) | | $ | (4 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
Note 10: |
|
| Note 12: Stock-Based Compensation |
A summary of the general terms of stock options and RSUs at December 31, 20142017 was as follows:
|
| | |
| Number of shares authorized for awards | 7,671,47911,333,964 |
|
| Options and RSUs outstanding | 5,097,2474,720,099 |
|
| Options and RSUs expected to vest | 4,701,0504,347,251 |
|
| Options and RSUs available for grant | 2,574,2325,160,506 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
The following activity occurred under the Company’s stock incentive plans:
| |
| Options |
| Weighted average exercise price |
| Intrinsic value (in thousands) |
| Weighted average remaining contractual term (in years) | Options |
| Weighted average exercise price |
| Intrinsic value
(in thousands) |
| Weighted average remaining contractual term (in years) |
| Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding December 31, 2013 | 3,786,561 |
| | $ | 11.57 |
| |
| |
| |
| Outstanding December 31, 2016 | | 8,635,815 |
| | $ | 11.21 |
| |
| |
|
| Granted | 1,483,486 |
| | $ | 19.95 |
| |
| |
| 1,474,266 |
| | $ | 16.87 |
| |
| |
|
| Forfeited | (179,678 | ) | | $ | 19.87 |
| |
| |
| (1,233,344 | ) | | $ | 9.94 |
| |
| |
|
| Expired | (72,592 | ) | | $ | 19.15 |
| |
| |
| (197,957 | ) | | $ | 19.71 |
| |
| |
|
| Exercised | (673,952 | ) | | $ | 9.96 |
| |
| |
| (4,872,858 | ) | | $ | 11.41 |
| |
| |
|
| Outstanding December 31, 2014 | 4,343,825 |
| | $ | 14.21 |
| | $ | 9,131 |
| | 4.6 | |
| Exercisable December 31, 2014 | 2,529,778 |
| | $ | 10.85 |
| | $ | 8,985 |
| | 3.6 | |
| Expected to vest after December 31, 2014 | 4,062,243 |
| | $ | 13.93 |
| | $ | 9,115 |
| | 4.5 | |
| Outstanding December 31, 2017 | | 3,805,922 |
| | $ | 13.13 |
| | $ | 35,855 |
| | 5.2 |
| Exercisable December 31, 2017 | | 1,225,062 |
| | $ | 13.37 |
| | $ | 12,389 |
| | 4.1 |
| Vested and expected to vest after December 31, 2017 | | 3,538,301 |
| | $ | 13.17 |
| | $ | 33,301 |
| | 5.2 |
| |
| Stock units |
| Weighted average grant date fair value |
| Intrinsic value (in thousands) |
| Weighted average remaining contractual term (in years) | Stock units |
| Weighted average grant date fair value |
| Intrinsic value
(in thousands) |
| Weighted average remaining contractual term (in years) |
| RSUs: |
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding December 31, 2013 | 1,078,481 |
| | $ | 17.07 |
| |
| |
| |
| Outstanding December 31, 2016 | | 1,473,797 |
| | $ | 8.45 |
| |
| |
|
| Granted | 536,964 |
| | $ | 18.44 |
| |
| |
| 373,529 |
| | $ | 18.39 |
| |
| |
|
| Forfeited | (430,782 | ) | | $ | 19.23 |
| |
| |
| (169,202 | ) | | $ | 10.34 |
| |
| |
|
| Vested | (431,241 | ) | | $ | 15.21 |
| |
| |
| (763,947 | ) | | $ | 8.43 |
| |
| |
|
| Outstanding December 31, 2014 | 753,422 |
| | $ | 17.88 |
| | $ | 10,435 |
| | 1.1 | |
| Expected to vest after December 31, 2014 | 638,807 |
| | $ | 17.88 |
| | $ | 8,847 |
| | 1.0 | |
| Outstanding December 31, 2017 | | 914,177 |
| | $ | 12.10 |
| | $ | 20,205 |
| | 0.8 |
| Expected to vest after December 31, 2017 | | 808,950 |
| | $ | 12.00 |
| | $ | 17,878 |
| | 0.8 |
Supplemental information is presented below:
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Stock options: | | | | | | | | | | |
| Weighted average grant date fair value per share granted | $ | 5.67 |
| | $ | 5.05 |
| | $ | 3.84 |
| $ | 6.25 |
| | $ | 2.46 |
| | $ | 3.65 |
|
| Total intrinsic value of options exercised (in thousands) | $ | 3,600 |
| | $ | 2,626 |
| | $ | 3,886 |
| $ | 44,405 |
| | $ | 437 |
| | $ | 1,072 |
|
| Total fair value of options vested (in thousands) | $ | 4,000 |
| | $ | 2,410 |
| | $ | 2,288 |
| $ | 5,566 |
| | $ | 7,064 |
| | $ | 4,416 |
|
| RSUs: | | | | | | | | | | |
| Weighted average grant date fair value per unit granted | $ | 18.44 |
| | $ | 18.86 |
| | $ | 13.19 |
| $ | 18.39 |
| | $ | 7.82 |
| | $ | 13.67 |
|
| Total intrinsic value of units vested (in thousands) | $ | 8,315 |
| | $ | 7,986 |
| | $ | 4,663 |
| $ | 14,642 |
| | $ | 5,755 |
| | $ | 5,437 |
|
| Total fair value of units vested (in thousands) | $ | 6,560 |
| | $ | 5,163 |
| | $ | 3,049 |
| $ | 6,469 |
| | $ | 8,981 |
| | $ | 6,742 |
|
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
The Company included the following amounts for stock-based compensation expense, which related to stock options, RSUs, and the ESPP, in the consolidated statements of comprehensive income (in thousands):
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Cost of revenues | $ | 477 |
| | $ | 662 |
| | $ | 558 |
| |
| Cost of revenue | | $ | 774 |
| | $ | 166 |
| | $ | 96 |
|
| Engineering and technology | 1,569 |
| | 1,351 |
| | 1,180 |
| 984 |
| | 1,640 |
| | 484 |
|
| Sales and marketing | 2,047 |
| | 2,335 |
| | 1,909 |
| 2,376 |
| | 2,548 |
| | 771 |
|
| General and administrative | 7,791 |
| | 7,179 |
| | 9,576 |
| 7,519 |
| | 9,774 |
| | 7,343 |
|
| Restructuring | | 1,148 |
| | (364 | ) | | — |
|
| Total in continuing operations | | 12,801 |
| | 13,764 |
| | 8,694 |
|
| Discontinued operations | | — |
| | 1,471 |
| | 4,402 |
|
| Total | $ | 11,884 |
| | $ | 11,527 |
| | $ | 13,223 |
| $ | 12,801 |
| | $ | 15,235 |
| | $ | 13,096 |
|
| Excluded and capitalized as part of internal-use software | $ | 106 |
| | $ | 115 |
| | $ | 121 |
| |
| Total excluded and capitalized as part of internal-use software | | $ | — |
| | $ | — |
| | $ | 135 |
|
In May 2012,the fourth quarter of 2016, the Company granted 190,000 stock options to certain employees who perform acquisition-related activities. The awards' vestings were predicated on completing “qualified acquisitions” under the terms of the awards. The completions of the HSW acquisition on May 30, 2014 and the Monoprice acquisition on August 22, 2013 constituted qualified acquisitions under the terms of the awards. The vestings of the awards resulted in charges of $0.3 million and $0.5 million torecorded stock-based compensation expense in 2014 and 2013, respectively, both of which were classified in "General and administrative expense.connection with the corporate headquarters relocation announcement. See "Note 5: Restructuring" No expense was recognized in 2012, as a qualified acquisition did not occur.for additional information.
In October 2011, the Company granted 200,000 stock options to a non-employee consultant who performed acquisition-related activities. The award’s vesting was predicated on completing a “qualified acquisition” under the terms of the award. The completion of the TaxACT acquisition on January 31, 2012 constituted a qualified acquisition under the terms of the award. The vesting of the award resulted in a charge of $0.9 million to stock-based compensation expense in 2012, which was classified in "General and administrative expense."
As discussed in "Note 9: Stockholders’ Equity," the acquisition of the TaxACT business on January 31, 2012 fulfilled the Warrant agreement's remaining performance condition and extended the Warrant’s expiration date. The extension of the Warrant’s term was a modification that resulted in a $4.3 million charge to stock-based compensation expense, equal to the increase in the Warrant’s fair value, and was recognized in "General and administrative expense" in the first quarter of 2012. Subsequent to the modification, the Company treated the Warrant as a derivative instrument.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
To estimate stock-based compensation expense, the Company used the Black-Scholes-Merton valuation method with the following assumptions for equity awardsstock options granted:
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Stock option grants: | | | | | | |
| Risk-free interest rate | 0.11% - 1.31% |
| | 0.25% - 1.06% |
| | 0.26% - 1.57% |
| 1.2% - 1.94% |
| | 0.83% - 1.59% |
| | 0.21% - 1.33% |
|
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 35% - 43% |
| | 40% - 46% |
| | 40% - 48% |
| 39% - 45% |
| | 35% - 45% |
| | 34% - 40% |
|
| Expected life | 3.0 years |
| | 3.2 years |
| | 3.3 years |
| 3.8 |
| | 3.4 |
| | 3.0 |
|
| Non-employee stock option grant: | | | | | | |
| Risk-free interest rate | — |
| | — |
| | 0.26 | % | |
| Expected dividend yield | — |
| | — |
| | 0 | % | |
| Expected volatility | — |
| | — |
| | 38% - 41% |
| |
| Expected life | — |
| | — |
| | 1.6 - 2.2 years |
| |
| Warrant grant: | | | | | | |
| Risk-free interest rate | — |
| | — |
| | 0.95 | % | |
| Expected dividend yield | — |
| | — |
| | 0 | % | |
| Expected volatility | — |
| | — |
| | 46 | % | |
| Expected life | — |
| | — |
| | 5.6 years |
| |
The risk-free interest rate was based on the implied yield available on U.S. Treasury issues with an equivalent remaining term. The Company last paid a dividend in 2008 but does not expect to pay recurring dividends.2008. The expected volatility was based on historical volatility of the Company’s stock for the related expected life of the award. The expected life of the award was based on historical experience, including historical post-vesting termination behavior.
As of December 31, 2014,2017, total unrecognized stock-based compensation expense related to unvested stock awards is as follows:
|
| | | | | |
| | Expense (in thousands) | | Weighted average period over which to be recognized (in years) |
| Stock options | $ | 5,569 |
| | 1.9 |
| RSUs | 4,016 |
| | 1.2 |
| Total for continuing operations | $ | 9,585 |
| | 1.6 |
|
| | | | | |
| | Expense (in thousands) | | Weighted average period over which to be recognized (in years) |
| Stock options | $ | 4,058 |
| | 1.5 |
| RSUs | 5,297 |
| | 1.3 |
| Total | $ | 9,355 |
| | 1.4 |
Note 11: Segment Information
|
|
| Note 13: Segment Information |
The Company changed itshas two reportable segments: the Wealth Management segment reporting structure asand the Tax Preparation segment. The Wealth Management segment consists of the HD Vest business, which was acquired on December 31, 2015. HD Vest is included in Blucora's results of operations beginning on January 1, 2016. The Tax Preparation segment consists of the TaxAct business. As a result of the TaxACT acquisition on January 31, 2012Strategic Transformation and again as a resultthe 2016 divestitures of the Monoprice acquisition on August 22, 2013. The Search and Content segment (formerly known as the Search segment) is the InfoSpace business, which now includes HSW, the Tax Preparation segment is the TaxACT business, and the E-Commerce segment is the Monoprice business. segments, those former segments are included in discontinued operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
The Company’s chief executive officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
The Company does not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, and amortization of intangible assets, and impairment of goodwill and intangible assets to the reportable segments. Such amounts are reflected in the table under the heading "Corporate-level activity." In addition, the Company does not allocate other loss, net and income taxes to the reportable segments. The Company does not account for, and does not report to management, its assets or capital expenditures by segment other than goodwill and intangible assets used for impairment analysis purposes.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013, and 2012
Information on the reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 |
| 2013 | | 2012 | 2017 |
| 2016 | | 2015 |
| Revenues: |
|
|
|
|
| |
| Search and Content | $ | 326,270 |
| | $ | 428,464 |
| | $ | 344,814 |
| |
| Revenue: | |
|
|
|
|
|
| Wealth Management | | $ | 348,620 |
| | $ | 316,546 |
| | $ | — |
|
| Tax Preparation | 103,719 |
| | 91,213 |
| | 62,105 |
| 160,937 |
| | 139,365 |
| | 117,708 |
|
| E-Commerce | 150,731 |
| | 54,303 |
| | — |
| |
| Total revenues | 580,720 |
| | 573,980 |
| | 406,919 |
| |
| Total revenue | | 509,557 |
| | 455,911 |
| | 117,708 |
|
| Operating income (loss): |
| |
| |
| | | | | |
| Search and Content | 55,812 |
| | 82,504 |
| | 62,185 |
| |
| Wealth Management | | 50,916 |
| | 46,296 |
| | — |
|
| Tax Preparation | 49,696 |
| | 40,599 |
| | 30,052 |
| 72,921 |
| | 66,897 |
| | 56,984 |
|
| E-Commerce | 12,043 |
| | 4,967 |
| | — |
| |
| Corporate-level activity | (125,992 | ) | | (53,621 | ) | | (48,032 | ) | (75,800 | ) | | (76,076 | ) | | (61,791 | ) |
| Total operating income (loss) | (8,441 | ) | | 74,449 |
| | 44,205 |
| 48,037 |
| | 37,117 |
| | (4,807 | ) |
| Other loss, net | (14,766 | ) | | (29,623 | ) | | (6,677 | ) | (44,551 | ) | | (39,781 | ) | | (12,542 | ) |
| Income tax expense | (12,340 | ) | | (20,427 | ) | | (15,002 | ) | |
| Income tax benefit | | 25,890 |
| | 1,285 |
| | 4,623 |
|
| Discontinued operations, net of income taxes | | — |
| | (63,121 | ) | | (27,348 | ) |
| Net income (loss) | $ | (35,547 | ) | | $ | 24,399 |
| | $ | 22,526 |
| $ | 29,376 |
| | $ | (64,500 | ) | | $ | (40,074 | ) |
"Corporate-level activity" in 2014 included impairment of goodwill and intangible assets, as discussed further in "Note 4: Goodwill and Other Intangible Assets."
Note 12: Other Loss, Net
"Other loss, net" consisted of the followingRevenues by major category within each segment are presented below (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Interest income | $ | (352 | ) | | $ | (300 | ) | | $ | (131 | ) |
| Interest expense (see Note 7) | 11,202 |
| | 9,463 |
| | 3,522 |
|
| Amortization of debt issuance costs (see Note 7) | 1,143 |
| | 1,108 |
| | 820 |
|
| Accretion of debt discounts (see Note 7) | 3,691 |
| | 2,838 |
| | 325 |
|
| Loss on debt extinguishment and modification expense (see Note 7) | — |
| | 1,593 |
| | — |
|
| Loss on derivative instrument (see Notes 2 and 9) | — |
| | 11,652 |
| | 2,346 |
|
| Impairment of equity investment in privately-held company | — |
| | 3,711 |
| | — |
|
| Decrease in pre-acquisition liability (see Note 3) | (665 | ) | | — |
| | — |
|
| Decrease in fair value of earn-out contingent liability | (15 | ) | | (300 | ) | | — |
|
| Other | (238 | ) | | (142 | ) | | (205 | ) |
| Other loss, net | $ | 14,766 |
| | $ | 29,623 |
| | $ | 6,677 |
|
In 2013, in connection with the Company’s review of its equity method investments for other-than-temporary impairment, the Company determined that its equity investment in a privately-held company had experienced an other-than-temporary decline in value, due to recurring losses from operations, significant personnel reductions, and a change in the underlying business model. Accordingly, the Company wrote down the $3.7 million carrying value of the investment to zero, resulting in a loss. |
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Wealth Management: | | | | | |
| Commission | $ | 160,241 |
| | $ | 150,125 |
| | $ | — |
|
| Advisory | 145,694 |
| | 129,417 |
| | — |
|
| Asset-based | 26,297 |
| | 22,653 |
| | — |
|
| Transaction and fee | 16,388 |
| | 14,351 |
| | — |
|
| Total Wealth Management revenue | $ | 348,620 |
| | $ | 316,546 |
| | $ | — |
|
| Tax Preparation: | | | | | |
| Consumer | $ | 147,084 |
| | $ | 126,289 |
| | $ | 105,367 |
|
| Professional | 13,853 |
| | 13,076 |
| | 12,341 |
|
| Total Tax Preparation revenue | $ | 160,937 |
| | $ | 139,365 |
| | $ | 117,708 |
|
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
Note 13: Income Taxes
Income tax expense"Other loss, net" consisted of the following (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2014 |
| 2013 |
| 2012 |
| Current: | | | | | |
| U.S. federal | $ | 23,921 |
| | $ | 30,452 |
| | $ | 23,303 |
|
| State | 2,086 |
| | 642 |
| | 437 |
|
| Total current expense | 26,007 |
| | 31,094 |
| | 23,740 |
|
| Deferred: | | | | | |
| U.S. federal | (12,621 | ) | | (10,430 | ) | | (8,234 | ) |
| State | (1,046 | ) | | (237 | ) | | (504 | ) |
| Total deferred benefit | (13,667 | ) | | (10,667 | ) | | (8,738 | ) |
| Income tax expense, net | $ | 12,340 |
| | $ | 20,427 |
| | $ | 15,002 |
|
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Interest income | $ | (110 | ) | | $ | (81 | ) | | $ | (609 | ) |
| Interest expense | 21,211 |
| | 32,424 |
| | 9,044 |
|
| Amortization of debt issuance costs | 1,089 |
| | 1,840 |
| | 1,133 |
|
| Accretion of debt discounts | 1,947 |
| | 4,690 |
| | 3,866 |
|
| Loss on debt extinguishment and modification expense (see Note 9 and next table) | 20,445 |
| | 1,036 |
| | 398 |
|
| Gain on third party bankruptcy settlement | (116 | ) | | (172 | ) | | (1,128 | ) |
| Other | 85 |
| | 44 |
| | (162 | ) |
| Other loss, net | $ | 44,551 |
| | $ | 39,781 |
| | $ | 12,542 |
|
The gain on third party bankruptcy settlement related to amounts received in connection with ongoing distributions from the Lehman Brothers estate, of which the Company is a creditor.
As discussed in Note 9: Debt, the Company repurchased some of the Notes and prepaid a portion of the TaxAct - HD Vest 2015 credit facility in 2016. In addition, the Company repaid the TaxAct 2013 credit facility in full in 2015 and subsequently closed it. This activity resulted in the following amounts recorded to loss on debt extinguishment and modification expense (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Write-off of debt discount and debt issuance costs on TaxAct - HD Vest 2015 credit facility (related to closure) | $ | 9,593 |
| | $ | — |
| | $ | — |
|
| Write-off of debt discount and debt issuance costs on the Notes (related to termination) | 6,715 |
| | — |
| | — |
|
| Accelerated accretion of debt discount and amortization of debt issuance costs on credit facilities (related to prepayments) | 2,990 |
| | 6,716 |
| | — |
|
| Gain on the Notes repurchased | — |
| | (7,724 | ) | | — |
|
| Accelerated accretion of debt discount on the Notes (related to repurchase) | — |
| | 1,628 |
| | — |
|
| Accelerated amortization of debt issuance costs on the Notes (related to repurchase) | 1,147 |
| | 416 |
| | 398 |
|
| Total loss on debt extinguishment | $ | 20,445 |
| | $ | 1,036 |
| | $ | 398 |
|
Note 15: 401(k) Plan
The Company has a 401(k) savings plan covering its employees. Eligible employees may contribute through payroll deductions. The Company may match the employees’ 401(k) contributions at the discretion of the Company’s Board of Directors. Pursuant to a continuing resolution, the Company has matched a portion of the 401(k) contributions made by its employees. The amount contributed by the Company ranges from 1% to 4% of an employee's salary, depending upon the percentage contributed by the employee. For the years ended December 31, 2017, 2016, and 2015, the Company contributed $1.6 million, $1.4 million, and $0.6 million, respectively, for employees, with the increase in 2016 due to the acquisition of HD Vest on December 31, 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2017, 2016, and 2015
Income tax expense (benefit)benefit consisted of the following (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 |
| 2016 |
| 2015 |
| Current: | | | | | |
| U.S. federal | $ | 123 |
| | $ | 14,695 |
| | $ | 7,470 |
|
| State | 962 |
| | 2,048 |
| | 514 |
|
| Foreign | 122 |
| | 27 |
| | — |
|
| Total current expense | 1,207 |
| | 16,770 |
| | 7,984 |
|
| Deferred: | | | | | |
| U.S. federal | (26,012 | ) | | (16,608 | ) | | (12,004 | ) |
| State | (1,022 | ) | | (1,421 | ) | | (538 | ) |
| Foreign | (63 | ) | | (26 | ) | | (65 | ) |
| Total deferred benefit | (27,097 | ) | | (18,055 | ) | | (12,607 | ) |
| Income tax benefit | $ | (25,890 | ) | | $ | (1,285 | ) | | $ | (4,623 | ) |
Income tax benefit differed from the amount computed by applying the statutory federal income tax rate of 35% as follows (in thousands):
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 |
| 2013 | | 2012 | 2017 |
| 2016 | | 2015 |
| Income tax expense (benefit) at federal statutory rate of 35% | $ | (8,122 | ) | | $ | 15,689 |
| | $ | 13,135 |
| |
| Income tax expense (benefit) at the statutory federal income tax rate | | $ | 1,220 |
| | $ | (930 | ) | | $ | (6,072 | ) |
| State income taxes, net of federal benefit | 657 |
| | 320 |
| | (89 | ) | 582 |
| | 454 |
| | (15 | ) |
| Deductible domestic manufacturing costs | | — |
| | (1,225 | ) | | (787 | ) |
| Non-deductible compensation | 569 |
| | 221 |
| | 1,621 |
| 283 |
| | 249 |
| | 27 |
|
| Deductible domestic manufacturing costs | (1,080 | ) | | (949 | ) | | (804 | ) | |
| Non-deductible impairment of goodwill (see Note 4) | 20,789 |
| | — |
| | — |
| |
| Non-deductible loss on derivative instrument (the Warrant, see Note 9) | — |
| | 4,078 |
| | 821 |
| |
| Non-deductible acquisition-related transaction costs | | — |
| | 37 |
| | 2,524 |
|
| Tax Legislation impact | | (21,430 | ) | | — |
| | — |
|
| Excess tax benefit due to stock-based compensation | | (11,558 | ) | | — |
| | — |
|
| Change in liabilities for uncertain tax positions | (72 | ) | | (201 | ) | | (75 | ) | (321 | ) | | (86 | ) | | — |
|
| Change in valuation allowance on unrealized capital losses | (117 | ) | | 1,108 |
| | — |
| |
| Change in valuation allowance | | 4,974 |
| | 15 |
| | (223 | ) |
| Other | (284 | ) | | 161 |
| | 393 |
| 360 |
| | 201 |
| | (77 | ) |
| Income tax expense, net | $ | 12,340 |
| | $ | 20,427 |
| | $ | 15,002 |
| |
| Income tax benefit | | $ | (25,890 | ) | | $ | (1,285 | ) | | $ | (4,623 | ) |
As discussed further in "Note 4: Goodwill and Other Intangible Assets," the Company recorded an impairment of goodwill in 2014.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
The tax effect of temporary differences and net operating loss carryforwards that gave rise to the Company’s deferred tax assets and liabilities were as follows (in thousands):
| | | | December 31, | December 31, |
| | 2014 |
| 2013 | 2017 |
| 2016 |
| Deferred tax assets: | | | | | | |
| Current: | | | | |
| Net operating loss carryforwards | $ | 19,964 |
| | $ | 34,167 |
| $ | 111,416 |
| | $ | 176,722 |
|
| Accrued compensation | 1,318 |
| | 1,605 |
| 4,586 |
| | 12,069 |
|
| Deferred revenue | 2,594 |
| | 2,385 |
| 1,638 |
| | 3,740 |
|
| Inventory | 1,462 |
| | 800 |
| |
| Tax credit carryforwards | | — |
| | 10,925 |
|
| Stock-based compensation | | 3,592 |
| | 9,689 |
|
| Capital loss | | 22,579 |
| | 37,680 |
|
| Other, net | 2,149 |
| | 1,903 |
| 3,466 |
| | 5,798 |
|
| Total current deferred tax assets | 27,487 |
| | 40,860 |
| |
| Non-current: | | | | |
| Net operating loss carryforwards | 179,671 |
| | 190,974 |
| |
| Tax credit carryforwards | 10,370 |
| | 9,259 |
| |
| Depreciation and amortization | 6,388 |
| | 7,696 |
| |
| Stock-based compensation | 5,941 |
| | 5,318 |
| |
| Other, net | 4,977 |
| | 4,204 |
| |
| Total non-current deferred tax assets | 207,347 |
| | 217,451 |
| |
| Total gross deferred tax assets | 234,834 |
| | 258,311 |
| 147,277 |
| | 256,623 |
|
| Valuation allowance | (211,865 | ) | | (235,730 | ) | (109,242 | ) | | (226,813 | ) |
| Deferred tax assets, net of valuation allowance | 22,969 |
| | 22,581 |
| 38,035 |
| | 29,810 |
|
| Deferred tax liabilities: | | | | | | |
| Current: | | | | |
| Other, net | (133 | ) | | (253 | ) | |
| Total current deferred tax liabilities | (133 | ) | | (253 | ) | |
| Non-current: | | | | |
| Depreciation and amortization | (57,158 | ) | | (68,888 | ) | (81,182 | ) | | (138,034 | ) |
| Discount on Notes | (5,816 | ) | | (6,977 | ) | — |
| | (2,385 | ) |
| Other, net | — |
| | (5 | ) | (286 | ) | | (517 | ) |
| Total non-current deferred tax liabilities | (62,974 | ) | | (75,870 | ) | |
| Total gross deferred tax liabilities | (63,107 | ) | | (76,123 | ) | (81,468 | ) | | (140,936 | ) |
| Net deferred tax liabilities | $ | (40,138 | ) | | $ | (53,542 | ) | $ | (43,433 | ) | | $ | (111,126 | ) |
At December 31, 2014,2017, the Company evaluated the need for a valuation allowance for certain deferred tax assets based upon its assessment of whether it is more likely than not that the Company will generate sufficient future taxable income necessary to realize the deferred tax benefits. The Company does not forecast capital gains and, therefore, maintains a valuation allowance against its capital loss deferred tax assets. The Company has deferred tax assets that are capital in nature to the extent that it is more likely than not that the related deferred tax benefit will not be realized. The Company also has a deferred tax asset related to the net operating losses ("NOLs") that arose from excessit believes are more likely than not to expire before utilization. If assumptions change and the Company determines it will be able to realize these NOLs, the tax benefits for stock-based compensation and minimum tax credits that arose frombenefit relating to any reversal of the corresponding alternative minimum tax paid for those excess tax benefits. The Company must apply a valuation allowance against these equity-basedon deferred tax assets untilas of December 31, 2017 will be recognized as a reduction of income tax expense.
On December 22, 2017, President Donald Trump signed into law "H.R. 1", formerly known as the Tax Cuts and Jobs Act (the "Tax Legislation"). The Tax Legislation, which was effective January 1, 2018, significantly revised the U.S. tax code by, among other things, lowering the corporate income tax rate from 35% to 21%. At December 31, 2017, the Company utilizeshas not completed its accounting for the tax effects of the Tax Legislation; however, in certain cases, as described below, we have made a reasonable estimate of the effects on the Company’s existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which the Company was able to determine a reasonable estimate, the Company recognized a provisional amount of approximately $21.4 million, which is recorded as additional income tax benefit in 2017. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law.
Provisional amounts: The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reduce taxes payable. Accordingly,reverse in the future, which is generally 21%. However, the Company does not consideris still analyzing certain aspects of the Tax Legislation and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax assets when evaluating changes inamounts. The provisional amounts recorded related to the valuation allowance.remeasurement of the Company’s net deferred tax liabilities was approximately $21.4 million.
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
The changes in the valuation allowance for deferred tax assets are shown below (in thousands):
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Balance at beginning of year | $ | 235,730 |
| | $ | 262,353 |
| $ | 226,813 |
| | $ | 217,452 |
|
| Net changes to deferred tax assets, subject to a valuation allowance | (23,865 | ) | | (26,623 | ) | |
| Increase (decrease) in valuation allowance - capital items | | (15,980 | ) | | 14,926 |
|
| Decrease in valuation allowance - utilization of equity-based deferred tax assets | | (101,830 | ) | | (5,684 | ) |
| Increase in valuation allowance - other | | 239 |
| | 119 |
|
| Balance at end of year | $ | 211,865 |
| | $ | 235,730 |
| $ | 109,242 |
| | $ | 226,813 |
|
For the yearsyear ended December 31, 2014 and 2013,2017, the decrease in valuation allowance increased approximately $0.3 million and $1.1 million, respectively, for changescapital items related primarily to the enactment of a change in unrealized capital loss deferredthe federal tax assets. For therate from 35% to 21% for tax years endedbeginning after December 31, 2014 and 2013, the remaining2017. The decrease in the valuation allowance pertained tofor utilization of equity-based deferred tax assets usedrelated primarily to the enactment of a change in the federal tax rate from 35% to 21% for tax years beginning after December 31, 2017, a $50.2 million decrease related to the adoption of ASU 2016-09, which required a cumulative-effect adjustment for historical equity net operation losses (see Note 2: Summary of Significant Accounting Policies for additional details) and a $0.4 million adjustment related to the future taxable income expected to be available to partially utilize the carryforwards, offset by a $5.6 million increase related to the current year generation of NOLs.
For the year ended December 31, 2016, the valuation allowance change included an increase of $14.9 million for increases in deferred tax assets that were capital in nature, and a decrease of $5.7 million for the utilization of equity-based deferred tax assets to reduce taxes payable in the amounts of $24.1 million and $27.7 million, respectively. payable.
As of December 31, 2014, $209.0 million of the valuation allowance pertained to equity-based deferred tax assets. The consolidated balance sheets reflect an increase in equity upon the release of this valuation allowance. Accordingly, income tax expense does not reflect a benefit for the release of the valuation allowance.
As of December 31, 2014,2017, the Company’s U.S. federal and state net operating loss carryforwards for income tax purposes were $570.4$520.3 million and $24.5$32.7 million, respectively, which primarily related to excess tax benefits for stock-based compensation. WhenPrior to January 1, 2017, when the net operating loss carryforwards related to stock-based compensation arewere recognized, the income tax benefit of those losses iswas accounted for as a credit to stockholders’ equity on the consolidated balance sheets rather thansheets. Beginning on January 1, 2017, we recognized such income tax benefit on the consolidated financial statements, as further described in the Recent accounting pronouncements section of comprehensive income."Note 2: Summary of Significant Accounting Policies." If not utilized, the Company’s federal net operating loss carryforwards will expire between 2020 and 2031,2037, with the majority of them expiring between 2020 and 2024. Additionally, changes in ownership, as defined by Section 382 of the Internal Revenue Code, may limit the amount of net operating loss carryforwards used in any one year.
A reconciliation of the unrecognized tax benefit balances is as follows (in thousands):
| | | Balance as of December 31, 2011 | $ | 18,267 |
| |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | | $ | 22,919 |
| | $ | 21,741 |
| | $ | 18,403 |
|
| Gross increases for tax positions of prior years | 1,208 |
| 93 |
| | 331 |
| | 2,708 |
|
| Gross decreases for tax positions of prior years | (216 | ) | (31 | ) | | (93 | ) | | (9 | ) |
| Lapse of statute of limitations | (171 | ) | |
| Balance as of December 31, 2012 | 19,088 |
| |
| Gross increases for tax positions of prior years | 219 |
| |
| Gross decreases for tax positions of prior years | (101 | ) | |
| Gross increases for tax positions of current year | | — |
| | 997 |
| | 751 |
|
| Settlements | (562 | ) | (66 | ) | | (57 | ) | | (112 | ) |
| Lapse of statute of limitations | (107 | ) | (290 | ) | | — |
| | — |
|
| Balance as of December 31, 2013 | 18,537 |
| |
| Gross increases for tax positions of prior years | 126 |
| |
| Gross decreases for tax positions of prior years | (199 | ) | |
| Settlements | (61 | ) | |
| Lapse of statute of limitations | — |
| |
| Balance as of December 31, 2014 | $ | 18,403 |
| |
| Balance at end of year | | $ | 22,625 |
| | $ | 22,919 |
| | $ | 21,741 |
|
The total amount of unrecognized tax benefits that wouldcould affect the Company’s effective tax rate if recognized was $0.5$4.2 million and $0.6$4.5 million as of December 31, 20142017 and 2013,2016, respectively. The remaining $17.9$18.4 million has not been recognized on the consolidated balance sheets as of December 31, 20142017 and 2013,2016, if recognized, would create a deferred tax asset subject to a valuation allowance. The Company and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state jurisdictions. In previous years, the Company also filed in various foreign jurisdictions.jurisdictions, and Canada. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011,2013, although net operating lossNOL carryforwards and tax credit carryforwards from any year are subject to examination and adjustment for at least three years
BLUCORA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 2014, 2013,2017, 2016, and 20122015
following the year in which they are fully utilized. As of December 31, 2014,2017, no significant adjustments have been proposed relative to the Company’s tax positions.
The Company recognizes interest and penalties related to uncertain tax positions in interest expense and general and administrative expenses, respectively. During the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, the Company recognized less than $0.1$0.2 million of interest and penalties related to uncertain tax positions upon expiration of the statute of limitations on assessments.positions. The Company had approximately $0.3$1.1 million and $1.0 million accrued for the payment of interest and penalties as of December 31, 20142017 and 2013.2016, respectively.
Note 14: Net Income (Loss) Per Share
|
| |
| Note 17: | Net Income (Loss) Per Share |
"Basic net income (loss) per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income (loss) per share" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options, vesting of unvested RSUs, exercise of the Warrant (for 2013 and 2012), and conversion or maturity of the Notes. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.
Weighted average shares wereThe computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | | |
| Income (loss) from continuing operations | | $ | 29,376 |
| | $ | (1,379 | ) | | $ | (12,726 | ) |
| Net income attributable to noncontrolling interests | | (2,337 | ) | | (658 | ) | | — |
|
| Income (loss) from continuing operations attributable to Blucora, Inc. | | 27,039 |
| | (2,037 | ) | | (12,726 | ) |
| Income (loss) from discontinued operations attributable to Blucora, Inc. | | — |
| | (63,121 | ) | | (27,348 | ) |
| Net income (loss) attributable to Blucora, Inc. | | $ | 27,039 |
| | $ | (65,158 | ) | | $ | (40,074 | ) |
| Denominator: | | | | | | |
| Weighted average common shares outstanding, basic | 41,396 |
| | 41,201 |
| | 40,279 |
| 44,370 |
| | 41,494 |
| | 40,959 |
|
| Dilutive potential common shares | — |
| | 2,279 |
| | 1,393 |
| 2,841 |
| | — |
| | — |
|
| Weighted average common shares outstanding, diluted | 41,396 |
| | 43,480 |
| | 41,672 |
| 47,211 |
| | 41,494 |
| | 40,959 |
|
| Net income (loss) per share attributable to Blucora, Inc. - basic: | | | | | | |
| Continuing operations | | $ | 0.61 |
| | $ | (0.05 | ) | | $ | (0.31 | ) |
| Discontinued operations | | — |
| | (1.52 | ) | | (0.67 | ) |
| Basic net income (loss) per share | | $ | 0.61 |
| | $ | (1.57 | ) | | $ | (0.98 | ) |
| Net income (loss) per share attributable to Blucora, Inc. - diluted: | | | | | | |
| Continuing operations | | $ | 0.57 |
| | $ | (0.05 | ) | | $ | (0.31 | ) |
| Discontinued operations | | — |
| | (1.52 | ) | | (0.67 | ) |
| Diluted net income (loss) per share | | $ | 0.57 |
| | $ | (1.57 | ) | | $ | (0.98 | ) |
| Shares excluded | 5,468 |
| | 381 |
| | 1,172 |
| 1,058 |
| | 9,774 |
| | 5,975 |
|
Shares were excluded primarily related to shares excluded due tofrom the antidilutivecomputation of diluted earnings per common share for these periods because their effect of a net loss (in 2014), stock options with an exercise price greater than the average price during the applicable periods, and awards with performance conditions not completed during the applicable periods.would have been anti-dilutive.
As more fully discussed in "Note 9: Stockholders’ Equity," on November 21, 2013, the Warrant was exercised and 1.0 million shares of the Company’s common stock were issued accordingly. The weighted average of these shares was included in "Weighted average common shares outstanding, basic" starting in November 2013. Prior to that, the weighted average of the incremental common shares issuable upon the exercise of the Warrant were included in the dilutive potential common shares.
As more fully discussed in "Note 7: Debt," in March 2013, the Company issued the Notes, which are convertible and mature in April 2019. In May 2013, the Company received shareholder approval for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. The Company intends, upon conversion or maturity of the Notes, to settle the principal in cash and satisfy any conversion premium by issuing shares of its common stock. As a result, the Company only includes the impact of the premium feature in its dilutive potential common shares when the average stock price for the reporting period exceeds the conversion price of the Notes, which occurred only in the fourth quarter of 2013.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 20142017 to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013 framework) issued by the Committee of the Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under the framework in Internal Control – Integrated Framework (2013 framework), our management concluded that our internal control over financial reporting was effective as of December 31, 2014.2017.
Ernst & Young LLP has audited the effectiveness of our internal control over financial reporting as of December 31, 20142017 and its report is included below.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of 20142017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and the Board of Directors and Stockholders
of Blucora, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Blucora, Inc.’s internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Blucora, Inc.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Blucora, Inc. as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Blucora, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Blucora, Inc. as of December 31, 2014 and 2013 and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 of Blucora, Inc. and our report dated February 26, 2015 expressed an unqualified opinion thereon.
/s/ ERNSTErnst & YOUNGYoung LLP
Seattle, WashingtonDallas, Texas
February 26, 2015March 1, 2018
ITEM 9B. Other Information
None.
Not applicable.
PART III
As permitted by the rules of the Securities and Exchange Commission, we have omitted certain information from Part III of this Annual Report on Form 10-K. We intend to file a definitive Proxy Statement with the Securities and Exchange Commission relating to our annual meeting of stockholders not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and such information is incorporated by reference herein.
ITEM 10. Directors, Executive Officers and Corporate Governance
Certain information concerning our directors required by this Item is incorporated by reference to our Proxy Statement under the heading "Information Regarding the Board Of Directors and Committees.of Directors."
Certain information regarding our executive officers required by this Item is incorporated by reference to our Proxy Statement under the heading "Information Regarding Executive Officers."
Other information concerning our officers and directors required by this Item is incorporated by reference to our Proxy Statement under the heading "Beneficial Ownership."
ITEM 11. Executive Compensation
The information required by this Item is incorporated by reference to our Proxy Statement under the headings "Compensation Committee Report," "Compensation Committee Interlocks and Insider Participation," "Compensation Discussion and Analysis," and "Compensation of Named Executive Officers."
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to our Proxy Statement under the headings "Beneficial Ownership" and "Equity Compensation Plans."
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to our Proxy Statement under the headings "Information Regarding the Board of Directors" and "Audit Committee Report."
ITEM 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to our Proxy Statement under the heading "Audit Committee Report."
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a)
1. Consolidated Financial Statements
See Index to Consolidated Financial Statements at Item 8 of this report.
2. Financial Statement Schedules
All financial statement schedules required by Item 15(a)(2) have been omitted because they are not applicable or the required information is presented in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibitsrequired by Item 601 of Regulation S-K are filed or incorporated by reference as part of this report.
set forth below.
(b) Exhibits
See Item 15(a) above.
INDEX TO EXHIBITS
|
| | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | Filed Herewith |
| | Stock Purchase Agreement by an among HDV Holdings, LLC, Blucora, Inc., Project Baseball Sub, Inc. and HDV Holdings, Inc., dated October 14, 2015 | | 8-K | | October 14, 2015 | | 10.1 |
| | |
| | Asset Purchase Agreement between Blucora, Inc., Infospace LLC, OpenMail LLC and InfoSpace Holdings LLC dated July 1, 2016 | | 8-K | | July 5, 2016 | | 2.1 |
| | |
| | Stock Purchase Agreement between Blucora, Inc., Monoprice Holdings, Inc. and YFC-Boneagle Electric Co., LTD, dated November 14, 2016 | | 8-K | | November 15, 2016 | | 2.1 |
| | |
| | Restated Certificate of Incorporation, as filed with the Secretary of the State of Delaware on August 10, 2012 | | 8-K (No. 000-25131) | | August 13, 2012 | | 3.1 |
| | |
| | Certificate of Amendment to the Restated Certificate of Incorporation of Blucora, Inc. filed with the Secretary of State of Delaware on June 1, 2017 | | 8-K | | June 5, 2017 | | 3.1 |
| | |
| | Amended and Restated Bylaws of Blucora, Inc. | | 8-K | | February 28, 2017 | | 3.2 |
| | |
| | Restated 1996 Flexible Stock Incentive Plan, as amended and restated effective as of June 5, 2012 | | S-8 (No. 333-198645) | | September 8, 2014 | | 99.1 |
| | |
| | Blucora, Inc. 2015 Incentive Plan, as Amended and Restated | | DEF 14A | | April 25, 2016 | | App-endix A |
| | |
| | Form of Blucora, Inc. 2015 Incentive Plan Nonqualified Stock Option Grant Notice | | 10-Q | | July 30, 2015 | | 10.2 |
| | |
| | Form of Blucora, Inc. 2015 Incentive Plan Restricted Stock Unit Grant Notice | | 10-Q | | July 30, 2015 | | 10.3 |
| | |
| | Form of Nonqualified Stock Option Agreement for Executive Officers under the Blucora, Inc. 2015 Incentive Plan, as amended and restated | | 8-K | | February 23, 2018 | | 10.2 |
| | |
| | Form of Time-Based Restricted Stock Unit Agreement for Executive Officers under the Blucora, Inc. 2015 Incentive Plan, as amended and restated | | 8-K | | February 23, 2018 | | 10.3 |
| | |
| | Form of Performance-Based Restricted Stock Unit Agreement for Executive Officers under the Blucora, Inc. 2015 Incentive Plan, as amended and restated | | 8-K | | February 23, 2018 | | 10.4 |
| | |
| | Form of Nonqualified Stock Option Grant Notice and Agreement for Nonemployee Directors | | 10-Q | | April 28, 2016 | | 10.3 |
| | |
| | Form of Nonqualified Stock Option Grant Notice and Agreement for Nonemployee Chairman of the Board | | 10-Q | | April 28, 2016 | | 10.4 |
| | |
| | Form of Director Restricted Stock Unit Grant Notice and Award Agreement for Initial Grants to New Directors under the Amended and Restated Blucora, Inc. 2015 Incentive Plan | | 10-Q | | July 27, 2017 | | 10.3 |
| | |
| | Form of Director Restricted Stock Unit Grant Notice and Award Agreement for Annual Grants to Directors under the Amended and Restated Blucora, Inc. 2015 Incentive Plan | | 10-Q | | July 27, 2017 | | 10.4 |
| | |
| | Blucora, Inc. 2016 Equity Inducement Plan | | S-8 | | January 29, 2016 | | 99.1 |
| | |
| | Amendment No. 1 to Blucora, Inc. 2016 Inducement Plan | | S-8 | | October 14, 2016 | | 99.1 |
| | |
| | Form of Blucora, Inc. 2016 Inducement Plan Nonqualified Stock Option Grant Notice | | 10-K | | February 24, 2016 | | 10.41 |
| | |
| | Form of Blucora, Inc. 2016 Inducement Plan Restricted Stock Unit Grant Notice | | 10-K | | February 24, 2016 | | 10.42 |
| | |
|
| | | | | | | | | | | |
| | Blucora, Inc. 2017 Executive Bonus Plan | | 8-K | | February 8, 2017 | | 10.1 |
| | |
| | Blucora, Inc. 2018 Annual Incentive Plan | | 8-K | | February 23, 2018 | | 10.1 |
| | |
| | Employment Agreement between Blucora, Inc. and John S. Clendening dated March 12, 2016 | | 8-K | | March 15, 2016 | | 10.1 |
| | |
| | First Amendment to Employment Agreement dated September 5, 2017 between Blucora, Inc. and John S. Clendening | | 8-K | | September 5, 2017 | | 10.1 |
| | |
| | Employment Agreement by and between Blucora, Inc. and Sanjay Baskaran dated January 12, 2017 | | 8-K/A | | January 13, 2017 | | 10.1 |
| | |
| | Employment Agreement by and between Blucora, Inc., HD Vest, Inc., and Robert D. Oros dated January 22, 2017 | | 8-K | | January 23, 2017 | | 10.1 |
| | |
| | Employment Agreement by and between Blucora, Inc. and Ann Bruder dated June 19, 2017 | | 10-Q | | July 27, 2017 | | 10.2 |
| | |
| | Employment Agreement by and between Blucora, Inc. and Davinder Athwal dated February 14, 2018 | | 8-K | | February 15, 2018 | | 10.1 |
| | |
| | Second Amended and Restated Employment Agreement dated August 9, 2016, by and between Project Baseball Sub, Inc. and Roger Ochs | | 10-Q | | October 27, 2016 | | 10.3 |
| | |
| | Transition and Separation Agreement by and between H. D. Vest, Inc. and Roger C. Ochs dated January 22, 2017 | | 8-K | | January 23, 2017 | | 10.2 |
| | |
| | Amended and Restated Employment Agreement, amended and restated effective January 6, 2015 between Blucora, Inc. and Eric M. Emans | | 8-K | | January 22, 2015 | | 10.1 |
| | |
| | Amendment No. 1 to Amended and Restated Employment Agreement by and between Blucora, Inc. and Eric M. Emans dated January 22, 2016 | | 8-K | | January 22, 2016 | | 10.1 |
| | |
| | Amendment No. 2 to Amended and Restated Employment Agreement by and between Blucora, Inc. and Eric M. Emans dated January 6, 2015, as amended | | 10-Q | | October 27, 2016 | | 10.4 |
| | |
| | Consulting Agreement, dated October 25, 2017, between Blucora, Inc. and Eric M. Emans | | 10-Q | | October 26, 2017 | | 10.2 |
| | |
| | Employment Agreement between Blucora, Inc. and Mark Finkelstein, dated September 30, 2014 | | 10-Q | | November 5, 2014 | | 10.3 |
| | |
| | Amendment No. 1 to Employment Agreement between Blucora, Inc. and Mark A. Finkelstein dated September 30, 2014 | | 8-K | | January 22, 2016 | | 10.2 |
| | |
| | Amendment No. 2 to Employment Agreement by and between Blucora, Inc., and Mark. A. Finkelstein dated September 30, 2014, as amended January 22, 2016 | | 10-Q | | October 27, 2016 | | 10.5 |
| | |
| | Credit Agreement, dated May 22, 2017, among Blucora, Inc., as borrower, and most of its direct and indirect domestic subsidiaries, as guarantors, and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and each lender from time to time a party to the Credit Agreement | | 8-K | | May 23, 2017 | | 10.1 |
| | |
| | First Amendment, dated November 28, 2017, among Blucora, Inc., as borrower, and most of its direct and indirect domestic subsidiaries, as guarantors, and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and each lender party to the First Amendment | | 8-K | | November 29, 2017 | | 10.1 |
| | |
| | Office Lease between Blucora, Inc. and Plaza Center Property LLC dated July 19, 2012 | | 10-Q (No. 000-25131) | | November 1, 2012 | | 10.2 |
| | |
|
| | | | | | | | | | | |
| | First Amendment to Office Lease between Blucora, Inc. and Plaza Center Property LLC dated November 5, 2013 | | 10-K | | February 27, 2014 | | 10.8 |
| | |
| | Sublease dated April 13, 2017, by and between Blucora, Inc. and Xevo, Inc. related to that certain Office Lease dated July 13, 2012 by and between Blucora, Inc. and KBS SOR Plaza Bellevue, LLC (as successor to Plaza Property Center LLC) | | 10-Q | | May 4, 2017 | | 10.5 |
| | |
| | Lease Agreement, dated January 28, 2008, by and between 2nd Story Software, Inc., PBI Properties, Larry Kane Investments, L.C., and Swati Dandekar for office space located at 1425 60th Street NE, Suite 300, Cedar Rapids, Iowa | | 10-K (No. 000-25131) | | March 9, 2012 | | 10.13 |
| | |
| | Amendment to Lease Agreement by and between 2nd Story Software, Inc., PBI Properties, Larry Kane Investments, L.C., and Swati Dandekar for office space located at 1425 60th Street NE, Suite 300, Cedar Rapids, Iowa, dated March 14, 2013 | | 10-Q | | May 2, 2013 | | 10.5 |
| | |
| | Blucora, Inc., 2016 Employee Stock Purchase Plan | | DEF 14A | | April 25, 2016 | | App-endix B |
| | |
| | Blucora, Inc. Non-Employee Director Compensation Policy | | 8-K | | June 5, 2017 | | 10.1 |
| | |
| | Subsidiaries of the registrant | | | | | | | | X |
| | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | | | | | | | | X |
| | Power of Attorney (contained on the signature page hereto) | | | | | | | | X |
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 101 | | The following financial statements from the Company’s 10-K for the fiscal year ended December 31, 2017, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements | | | | | | | | X |
|
| | |
| * | | Indicates a management contract or compensatory plan or arrangement. |
| # | | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Blucora, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. |
| | |
(c) Financial Statements and Schedules
See Item 15(a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | BLUCORA, INC. |
| | | |
| | By: | /s/ William J. RuckelshausJohn S. Clendening |
| | | William J. RuckelshausJohn S. Clendening
President and Chief Executive Officer and President
|
| | | |
| | Date: | February 26, 2015March 1, 2018 |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eric M. EmansDavinder Athwal and Nathan W. Garnett,Ann J. Bruder, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities to execute any amendments to this Annual Report on Form 10-K, and to file the same, exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
|
| | | |
| Signature | | Title | Date |
| | | | |
/s/ William J. RuckelshausJohn S. Clendening | | President, Chief Executive Officer, and Director (Principal Executive Officer) | February 26, 2015March 1, 2018 |
William J. RuckelshausJohn S. Clendening | | |
| | | | |
/s/ Eric M. EmansDavinder Athwal | | Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | February 26, 2015March 1, 2018 |
Eric M. EmansDavinder Athwal | | |
| | | | |
/s/ John E. Cunningham, IVPalmer | | Vice President - Accounting (Principal Accounting Officer) | March 1, 2018 |
| John Palmer | | |
| | | |
| /s/ William L. Atwell | | Chairman and Director | February 26, 2015March 1, 2018 |
John E. Cunningham, IVWilliam L. Atwell | | | |
| | | | |
/s/ David H. S. ChungSteven Aldrich | | Director | February 26, 2015March 1, 2018 |
David H. S. ChungSteven Aldrich | | | |
| | | | |
| /s/ Lance G. Dunn | | Director | February 26, 2015March 1, 2018 |
| Lance G. Dunn | | | |
| | | | |
/s/ Steven W. HooperH. McIntyre Gardner | | Director | February 26, 2015March 1, 2018 |
Steven W. HooperH. McIntyre Gardner | | | |
| | | | |
/s/ Elizabeth J. HuebnerGeorganne C. Proctor | | Director | February 26, 2015March 1, 2018 |
Elizabeth J. Huebner | | | |
| | | |
/s/ Andrew M. Snyder | | Director | February 26, 2015 |
Andrew M. SnyderGeorganne C. Proctor | | | |
| | | | |
| /s/ Christopher W. Walters | | Director | February 26, 2015March 1, 2018 |
| Christopher W. Walters | | | |
| | | |
| /s/ Mary S. Zappone | | Director | March 1, 2018 |
| Mary S. Zappone | | | |
INDEX TO EXHIBITS
|
| | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herewith |
| 2.1 | | Stock Purchase Agreement between Blucora, Inc., Monoprice, Inc., and the Shareholders, dated as of July 31, 2013 | | 8-K | | August 1, 2013 | | 2.1 |
| | |
| 3.1 | | Restated Certificate of Incorporation, as filed with the Secretary of the State of Delaware on August 10, 2012 | | 8-K | | August 13, 2012 | | 3.1 |
| | |
| 3.2 | | Amended and Restated Bylaws of Blucora, Inc., dated August 8, 2013 | | 8-K | | August 14, 2013 | | 3.1 |
| | |
| 4.1 | | Indenture dated as of March 15, 2013 by and between Blucora, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee | | 8-K | | March 15, 2013 | | 4.1 |
| | |
| 4.2 | | Form of 4.25% Convertible Senior Note due 2019 (included in Exhibit 4.1) | | 8-K | | March 15, 2013 | | 4.2 |
| | |
| 10.1* | | 1998 Employee Stock Purchase Plan | | S-1 (No. 333-62323), as amended | | August 27, 1998 | | 10.3 |
| | |
| 10.2* | | Restated 1996 Flexible Stock Incentive Plan, as amended and restated effective as of June 5, 2012 | | S-8 (No. 333-198645) | | September 8, 2014 | | 99.1 |
| | |
| 10.3* | | Form of Restated 1996 Flexible Stock Incentive Plan Nonqualified Stock Option Letter Agreement for Nonemployee Directors | | S-8 (No. 333-169691) | | September 30, 2010 | | 4.5 |
| | |
| 10.4* | | Form of Restated 1996 Flexible Stock Incentive Plan Nonqualified Stock Option Letter Agreement for Vice Presidents and Above | | S-8 (No. 333-169691) | | September 30, 2010 | | 4.6 |
| | |
| 10.5* | | Form of Restated 1996 Flexible Stock Incentive Plan Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement for Nonemployee Directors | | S-8 (No. 333-169691) | | September 30, 2010 | | 4.8 |
| | |
| 10.6* | | Form of Restated 1996 Flexible Stock Incentive Plan Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement for Vice Presidents and Above | | S-8 (No. 333-169691) | | September 30, 2010 | | 4.9 |
| | |
| 10.7 | | Office Lease between Blucora, Inc. and Plaza Center Property LLC dated July 19, 2012 | | 10-Q | | November 1, 2012 | | 10.2 |
| | |
| 10.8 | | First Amendment to Office Lease between Blucora, Inc. and Plaza Center Property LLC dated November 5, 2013 | | 10-K | | February 27, 2014 | | 10.8 |
| | |
| 10.9 | | Lease Agreement, dated January 28, 2008, by and between 2nd Story Software, Inc., PBI Properties, Larry Kane Investments, L.C., and Swati Dandekar for office space located at 1425 60th Street NE, Suite 300, Cedar Rapids, Iowa | | 10-K | | March 9, 2012 | | 10.13 |
| | |
| 10.10 | | Amendment to Lease Agreement by and between 2nd Story Software, Inc., PBI Properties, Larry Kane Investments, L.C., and Swati Dandekar for office space located at 1425 60th Street NE, Suite 300, Cedar Rapids, Iowa, dated March 14, 2013 | | 10-Q | | May 2, 2013 | | 10.5 |
| | |
| 10.11* | | Form of Indemnification Agreement between the registrant and each of its directors and executive officers | | 8-K | | April 13, 2011 | | 10.1 |
| | |
| 10.12* | | Blucora 2014 Executive Bonus Plan | | 8-K | | February 12, 2014 | | 10.1 |
| | |
| 10.13* | | Blucora 2015 Executive Bonus Plan | | 8-K | | February 25, 2014 | | 10.1 |
| | |
| 10.14* | | Amended and Restated Employment Agreement, amended and restated effective as of January 6, 2015, between Company and Eric M. Emans | | 8-K | | January 22, 2015 | | 10.1 |
| | |
|
| | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herewith |
| 10.15* | | Employment Agreement dated between Blucora, Inc., Monoprice, Inc., and Bernard Luthi dated July 14, 2014 | | 10-Q | | November 5, 2014 | | 10.1 |
| | |
| 10.16* | | Employment Agreement between Blucora, Inc. and Nathan Garnett dated September 7, 2014 | | 10-Q | | November 5, 2014 | | 10.2 |
| | |
| 10.17* | | Employment Agreement between Blucora, Inc. and Mark Finkelstein, dated September 30, 2014 | | 10-Q | | November 5, 2014 | | 10.3 |
| | |
| 10.18* | | Employment Agreement between Blucora, Inc., InfoSpace LLC, and Peter Mansour, dated October 6, 2014 | | 10-Q | | November 5, 2014 | | 10.4 |
| | |
| 10.19* | | Amended and Restated Employment Agreement between William J. Ruckelshaus and Company December 31, 2012 | | 10-K | | March 8, 2013 | | 10.19 |
| | |
| 10.20* | | Employment Agreement between JoAnn Kintzel, TaxACT, Inc., and Company dated January 31, 2015 | | 8-K | | February 4, 2015 | | 10.10 |
| | |
| 10.21* | | Employment Agreement, effective as of May 3, 2012, between the Company and George Allen | | 10-Q | | August 1, 2012 | | 10.1 |
| | |
| 10.22† | | Google Services Agreement and Order Form by and between Google Inc. and InfoSpace Sales LLC dated April 1, 2014 | | 8-K/A | | August 27, 2014 | | 10.1 |
| | |
| 10.23† | | Amendment Number One to Amended and Restated Google Inc. Services Agreement between Infospace LLC and Google, Inc. dated April 1, 2014 | | 10-Q | | August 7, 2014 | | 10.1 |
| | |
| 10.24† | | Amendment Number Two to Amended and Restated Google Inc. Services Agreement between Infospace LLC and Google, Inc. dated October 1, 2014 | | | | | | | | X |
| 10.25† | | Yahoo Publisher Network Contract #1-23975446 dated January 31, 2011 by and between Yahoo! Inc. and its subsidiary Yahoo! Sarl and InfoSpace Sales LLC | | 10-Q/A | | August 30, 2011 | | 10.2 |
| | |
| 10.26 | | Amendment No. 1 to the Yahoo Publisher Network Contract #1-23975446 dated January 14, 2013 | | 10-K | | March 8, 2013 | | 10.1 |
| | |
| 10.27 | | Securities Purchase Agreement between Company and Cambridge Information Group I LLC, dated August 23, 2011 | | 8-K | | August 23, 2011 | | 10.1 |
| | |
| 10.28 | | Stockholder Agreement between Company and Cambridge Information Group I LLC, dated August 23, 2011 | | 8-K | | August 23, 2011 | | 10.3 |
| | |
| 10.29 | | Credit Agreement among TaxACT, Inc., as Borrower, TaxACT Holdings, Inc., as a Guarantor, and Wells Fargo Bank, N.A., as administrative agent and a lender, BMO Harris Bank, N.A., Silicon Valley Bank, Bank of America, N.A., and RBS Citizens, N.A., each as lenders, dated August 30, 2013 | | 8-K | | September 6, 2013
| | 10.1 |
| | |
| 10.30 | | Credit Agreement among Monoprice, Inc., as Borrower, Monoprice Holdings, Inc., as a Guarantor, and Bank of Montreal, as administrative agent and a lender, Bank of America, N.A., and Wells Fargo Bank, N.A., each as lenders, dated November 22, 2013 | | 8-K | | November 27, 2013
| | 10.1 |
| | |
| 10.31 | | First Amendment to Credit Agreement among Monoprice, Inc., as Borrower, Monoprice Holdings, Inc., as a Guarantor, and Bank of Montreal, as administrative agent and a lender, Bank of America, N.A., and Wells Fargo Bank, N.A., each as lenders, dated December 9, 2014 | | | | | | | | X |
| 10.32 | | Lease Agreement between Monoprice, Inc. and Sixth and Rochester, LLC, dated June 2, 2009 | | 10-Q | | November 5, 2013 | | 10.3 |
| | |
|
| | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herewith |
| 10.33 | | First Amendment to Lease Agreement between Monoprice, Inc. and Sixth and Rochester, LLC, dated August 25, 2009 | | 10-Q | | November 5, 2013 | | 10.4 |
| | |
| 10.34 | | Second Amendment to Lease Agreement between Monoprice, Inc. and Sixth and Rochester, LLC, dated September 23, 2009 | | 10-Q | | November 5, 2013 | | 10.5 |
| | |
| 10.35 | | Third Amendment to Lease Agreement between Monoprice, Inc. and Sixth and Rochester, LLC, dated October 16, 2009 | | 10-Q | | November 5, 2013 | | 10.6 |
| | |
| 10.36 | | Fourth Amendment to Lease Agreement between Monoprice, Inc. and Sixth and Rochester, LLC, dated November 20, 2014 | | | | | | | | X |
| 10.37* | | Nonemployee Director Compensation Policy, effective as of January 1, 2014 | | 10-K | | February 27, 2014 | | 10.42 |
| | |
| 14.1 | | Code of Business Conduct and Ethics, as amended on August 14, 2014 | | 8-K | | August 15, 2014 | | 14.1 |
| | |
| 21.1 | | Subsidiaries of the registrant | | | | | | | | X |
| 23.1 | | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | | | | | | | | X |
| 24.1 | | Power of Attorney (contained on the signature page hereto) | | | | | | | | X |
| 31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 32.1 | | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 32.2 | | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 101 | | The following financial statements from the Company’s 10-K for the fiscal year ended December 31, 2014, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements | | | | | | | | X |
* Indicates a management contract or compensatory plan or arrangement.98
† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from these exhibits to this Annual Report on Form 10-K and submitted separately to the Securities and Exchange Commission.