Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the Common Stock held by non-affiliates of the registrant outstanding as of June 30, 2018,2021, based upon the closing price of Common Stock on June 30, 20182021 as reported on the NASDAQ Global Select Market, was $1,736.6$836.5 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 any other purposes.
Solely for convenience, the trademarks, service marks, and trade names included in this report are without the ®, ™™, or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This report may also include additional trademarks, service marks, and trade names of others, which are the property of their respective owners. All trademarks, service marks, and trade names included in this report are, to our knowledge, the property of their respective owners.
PART I
ITEM 1. Business
General Overview
Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) is a Delaware corporation that was founded in 1996, and, through organic growth and strategic acquisitions, we have become a leading provider of technology-enabled financial solutions tointegrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and tax professionals.certified public accounting (“CPA”) firms. Our productsmission is to enable financial success by changing the way individuals and services infamilies plan and achieve their goals through tax-advantaged solutions. We conduct our operations through two primary businesses: (1) the Wealth Management business and (2) the Tax Software business. Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
Our Wealth Management business consists of the operations of Avantax Wealth Management and Avantax Planning Partners (collectively, the “Wealth Management business” or the “Wealth Management segment”).
Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, CPA firms, and tax preparation are offeredtheir clients. Avantax Wealth Management offers its services through HDV Holdings, Inc. and its subsidiariesregistered broker-dealer, registered investment advisor (“HD Vest”) and TaxAct, Inc. and its subsidiary (“TaxAct”RIA”), respectively, and help consumers to manage theirinsurance agency subsidiaries and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial lives.
HD Vest provides financial advisors, who serveprofessionals that operate as independent contractors through HD Vest’s registered broker-dealer, investment adviser and/or insurance subsidiaries,contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that includes a broad varietyenable them to offer tax-advantaged investing and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee-based RIA and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-K is inclusive of brokerage, investment advisory and insurance products to assist in making each financial advisor a financial service center for his/her clients. HD Vest generates revenue primarily through securities and insurance commissions, quarterly investment advisory fees based on advisory assets, revenue sharing agreements and other agreements and fees. We regularly review the commissions and fees we charge for these products and services in light of the evolving regulatory and competitive environment in which we operate and as a result of changes in client preferences and needs. We do not offer any proprietary products. HKFS.
As of December 31, 2018, approximately 3,600 advisors2021, the Wealth Management business worked with branch offices in all 50 states utilized our HD Vest platforma nationwide network of 3,416 financial professionals and supported approximately $42.0$89.1 billion of total client assets, for almost 350,000 clients.including $42.2 billion of advisory assets.
Our Tax Software business consists of the operations of TaxAct, provides affordable digital do-it-yourselfInc. (“DDIY”TaxAct,” the “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation solutionsservices and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com. Duringwww.TaxAct.com and its mobile applications. We referred to this business as the “Tax Preparation business” and “Tax Preparation segment” in previous filings. For the year ended December 31, 2018,2021, TaxAct powered approximately 3,700,0003.2 million consumer e-files directly through end-users and another 1,800,0002.4 million professional e-files through theapproximately 21,000 tax professionals who used TaxAct to prepare and file their taxes or those of their clients. TaxAct generates revenue primarily through its digital service at www.TaxAct.com. TaxAct can be used to file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada.
Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
Our History
Blucora was formed in 1996 under the name InfoSpace, Inc. (“InfoSpace”). Over the next two decades, InfoSpace operated a number of digital businesses in search, directory, online commerce, media, and mobile infrastructure markets. In 2008, InfoSpace began principally focusing on internet search services and content (our “Search and Content” business).
In January 2012, InfoSpace acquired TaxAct. In connection with this acquisition, InfoSpace changed its name to Blucora, 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 digital tax preparation services for individuals in Canada.
For further detail on these acquisitions, see "Note 4: Business Combinations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
In 2015 we acquired HD Vest and announced our plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). 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 and our E-Commerce business in 2016. As part of the Strategic Transformation and "One Company" operating model, we relocated our corporate headquarters from Bellevue, Washington to Irving, Texas during 2017.
Business Overview
Through its registered broker-dealer, registered investment adviser, and 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 or the "Wealth Management segment"). HDV Holdings, Inc. is the parent company ofWe have two reportable segments: (1) the Wealth Management businesssegment and owns all outstanding shares of HD Vest, Inc., which serves as a 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).(2) the Tax Software segment.
The Tax PreparationWealth Management business
As described above, the Wealth Management business consists of the operations of TaxActAvantax Wealth Management and provides digitalAvantax Planning Partners, which we believe provide unique and complementary models through which tax preparation solutions for consumers, small business owners,and financial professionals can affiliate with us. These models include:
•an independent model where financial professionals can serve their clients’ wealth management needs directly or where tax professionals and CPAs can partner or affiliate with one of our independent financial professionals to provide their clients tax-advantaged financial solutions;
•an in-house/employee-based RIA model where CPAs and tax professionals through its website www.TaxAct.com (collectively referredcan outsource their clients’ wealth management needs to as the "Tax Preparation business" or the "Tax Preparation segment").one of our employee financial professionals.
We have two reportable segments:Flexible affiliation models are core to the Wealth Management segment, which is comprisedbusiness’s value proposition because they offer powerful ways for us to partner with CPAs and tax professionals of the HD Vest business,all sizes, from sole practitioners to multi-partner CPA firms.
Blucora, Inc. | 2021 Form 10-K 6
Avantax Wealth Management. Through its registered broker-dealer, RIA, and the Tax Preparation segment, which is comprised of the TaxAct business. See "Note 2: Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information on theinsurance agency subsidiaries, Avantax Wealth Management and Tax Preparation businessesprovides tax-focused wealth management solutions to financial professionals and their revenue. See "Note 3: Segment Informationclients nationwide and Revenues" ofoperates the Notes to Consolidated Financial Statements in Part II Item 8 of this report for information regarding revenue, operating income, and assets for ourlargest U.S. tax-focused independent broker-dealer.
Avantax Wealth Management and Tax Preparation businesses.
works with a nationwide network of financial professionals that operate as independent contractors. Because Avantax Wealth Management Business
HD Vest was founded to helpprimarily recruits and serves independent tax professionals, CPA firms, and accountingfinancial professionals integratewho partner with established tax practices, most Avantax Wealth Management 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 advisorsprofessionals have long-standing tax advisory relationships that anchor their wealth management businesses. This contrasts with traditional independent broker-dealers and investment advisers who are typically limited to providing investment advice to their clients.
We believe that tax and accounting professionals, with their existing client relationships and in-depth knowledge of their clients’ financial situations, haveare well positioned to grow their wealth management practices as their tax advisory relationships provide a large base of potential clients. This competitive advantage results in an experienced and stable network of financial professionals who are betteruniquely positioned than competitors to provide tailored and comprehensive financial solutions that enable clients to meet their financial goals, including their tax and wealth management goals. HD Vest primarily recruits independentIn turn, our financial professionals have multiple revenue-generating options to diversify their earnings sources.
To help tax and accounting professionals or financial advisors who partner with established tax practices and offersintegrate wealth management services into their practice, we offer 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 with a curriculum that introduces advisorsthese financial professionals to the investment business and helps them build their practices. The comprehensive training curriculum is administered through numerous outlets,a multi-medium approach, including an annual three-day national sales conference, approximately 600 specialized localnumerous advisor- and home-office led training events, held annually,regional meetings, and on-demand learning paths.resources.
HD Vest's business modelOnce financial professionals have integrated wealth management into their practices, Avantax Wealth Management provides an open-architecture investment platform and technology tools to help financial advisorsprofessionals identify investment opportunities for their clients. In addition, Avantax Wealth Management supports its financial professionals through its proprietary software tools that are designed to help financial professionals systematically capture tax-alpha (i.e., the incremental performance an investor can achieve, relative to market returns, by taking advantage of available tax-saving strategies) for clients while the long-standingby identifying tax advisory relationships providesavings opportunities in a largefinancial professional’s client base and automating the capture of possible investment clients. This resultsthat opportunity. Our ongoing investments in an experiencedtechnology and stable network ofdata analytics are designed to drive enhanced experiences for financial advisors, who have multiple revenue-generating options to diversifyprofessionals and their earnings sources,end clients, and have access to HD Vest's innovative Mentor program and Chapter meetings. HD Vestin turn, grow client assets over time.
Avantax Wealth Management also has a highly experienced home office team that is focused on developing and delivering solutions tailored to the advisor'seach financial professional’s practice. The home office team provides marketing, practice management, insurance and annuity,product support, wealth management, retirement services, compliance, business consulting, succession planning, and other support to our advisors.financial professionals.
Avantax Planning Partners. As a tax-focused captive RIA, Avantax Planning Partners’ financial professionals are our employees who partner with CPA firms across the country to provide tax-advantaged planning and financial solutions for their clients. Avantax Planning Partners recruits and builds relationships with CPA firms that desire to provide their clients with tax-advantaged wealth management solutions and financial plans but prefer to outsource that service to a trusted expert.
By the nature of the business, CPAs develop deep, long-lasting relationships with their clients and have insight into their tax and wealth management needs. The trust built in these long-standing relationships provides a solid foundation to recommend a client to a trusted Avantax Planning Partners in-house financial professional who can provide comprehensive wealth management services.
Holistic financial planning is the core offering of Avantax Planning Partners. In-house financial professionals provide guidance in asset management, retirement planning, advanced planning (including, among other things, business succession planning and estate planning), strategic tax and income planning, and insurance.
To assist affiliate CPA firms with integrating wealth management services into their practice, Avantax Planning Partners offers specialized training and support that introduces CPAs to the investment business and identifies the CPA firms’ top potential clients. CPAs then work directly with in-house financial professionals to refer clients and provide wealth management solutions.
Blucora, Inc. | 2021 Form 10-K 7
Avantax Wealth Management and Avantax Planning Partners primarily generate revenue through securities and insurance commissions, quarterly investment advisory fees based on advisory assets, product marketing service agreements, retirement plan servicing fees, and other agreements and fees. For additional information on the Wealth Management segment’s revenues, see “Item 8. Financial Statements and Supplementary Data—Note 2.”
Tax Preparation BusinessSoftware business
TaxAct, a top-threeleading provider of digital tax preparation solutions, based upon the number of e-files made in 2018, has leveraged its strong brand, comprehensive suite of tax preparation solutions, and proven digital lead generation capabilities to enable the filing of more than 6585 million federal consumer tax returns in the U.S. and Canada since 2000. TaxAct operates as thea value player in its market, with a mission to empower peoplebe the preferred tax software solution, enabling customers to navigate the complexities ofmaximize tax preparationoutcomes by providing delightful customer experiences with ease and accuracy at a fair price.our fully-featured value offering.
In addition to TaxAct'sTaxAct’s core offerings, TaxAct offers ancillary services such as Xpert Assist, where customers can get tax questions answered by a tax professional, refund payment transfer, audit defense, stored value cards, gift cards and retirement investment accounts through HD Vest,e-file concierge, as well as presentingproviding customers the optionwith a customized My Tax Plan which provides personalized guidance on ways to reviewimprove their tax situation. We believe that TaxAct’s ease of use, affordable pricing, and take advantage of personalized tax and potential financial savings opportunities offered through third party product providers. TaxAct also has an established brand and reputation that we believe isare attractive to customers.
TaxAct had five primary offerings for consumers for tax year 2017, which is the basis for its 2018 operating results:in 2021:
•A "free"“free” federal and state edition that handled simple returns;
•A "basic" offering that offered features for filers with dependents, retirement income, or college expenses;
A "plus"“deluxe” paid offering that contained all of the basicfree offering features in addition to tools to maximize credits and deductions, as well as tools for homeowners;
•A “premier” paid offering that contained all of the deluxe offering features in addition to tools for investments, rental property, and enhanced reporting;prioritized support;
•A "self-employed"“self-employed” paid offering for independent contractors and self-employed filers; and
•A "premium"“full service” paid offering for filers that contained all of the plus offering features in additionwould like our experts to toolsprepare, sign, and file taxes for self-employed individuals to maximize credits and deductions.them.
For TaxAct's offerings, state returns can be filed for free for free simple filers, or through the separately-sold state edition. TaxAct also had offerings for small business owners.owners consisting of separate offerings for sole proprietors, partnerships, C corporations, and S corporations.
TaxAct’s professional tax preparer software allowsfocuses on the unique needs of small tax offices and solo tax preparers and provides the tools for these professional tax preparers to prepare and file individual and business returns for their clients. TaxAct offers flexible pricing and packaging options that help tax professionals save money by paying only for the specific services that they need. In addition, the professional tax preparer software includes valuable features that tax professionals count on to maximize their efficiency and productivity, including the option of entering data directly into tax forms, utilizing a question-and-answer interview method to enter data, or easily toggling between the two data entry methods. TaxAct generates revenue primarily through its digital service offerings at www.TaxAct.com and its mobile applications.
Our History
We were formed in 1996 as a Delaware corporation. Significant recent events in our history include:
•In January 2012, we acquired TaxAct, a provider of digital tax preparation solutions.
•In December 2015, we acquired HDV Holdings, Inc. and its subsidiaries (“HD Vest”), a provider of wealth management and advisory solutions specifically for tax professionals, and announced our plans to focus on the technology-enabled financial solutions market.
•On May 6, 2019, we closed the acquisition of all of the issued and outstanding common stock of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”), a tax-focused wealth management company (the “1st Global Acquisition”). The 1st Global Acquisition was strategically important as it expanded our presence as a leading tax-focused independent broker-dealer while also providing the scale to compete more broadly in the wealth management market.
•On September 9, 2019, we announced a rebranding of our Wealth Management business to Avantax Wealth Management (the “2019 Rebranding”). In connection with the 2019 Rebranding, HD Vest (which
Blucora, Inc. | 2021 Form 10-K 8
comprised all of the Wealth Management business prior to the 1st Global Acquisition) was renamed Avantax Wealth Management in mid-September 2019, and 1st Global converted in late October 2019.
•On July 1, 2020, we acquired all of the issued and outstanding common stock of HKFS. The HKFS Acquisition enabled us to expand the ways we can work with CPA firms and tax professionals to deliver wealth management services to clients, increase our addressable market, and enhance our growth opportunities.
•On January 4, 2021, we announced the rebranding of HKFS to Avantax Planning Partners (the “2021 Rebranding”). The 2021 Rebranding was designed to create tighter brand alignment, bringing our Wealth Management business under one common and recognizable brand.
Industry Trends
In the wealth management industry, we believe that we are benefiting and will continue to benefit from several positive industry trends, including growth of investable assets, a continued migration to independent financial professional channels, and a continued shift toward household use of fee-based financial professionals. In addition, the captive or employee-based RIA market segment, in which Avantax Planning Partners belongs, is the fastest-growing market segment within the wealth management industry.
In the tax preparation industry, TaxAct participates in the consumer digital do-it-yourself (“DDIY”) tax preparation solutions market, which is historically the fastest growing market segment in the tax preparation industry and is bolstered by a growing population that continues to adopt technology-enabled financial solutions that drive value and ease in their everyday lives.
Growth Strategy
Our evolving growth strategy begins with our mission to enable financial success by changing the way individuals and families plan and achieve their goals through tax-advantaged solutions. Taxes are one of life’s largest expenses, yet the tax preparation industry primarily focuses consumers on maximizing a once-a-year refund. Historically, the wealth management industry has largely ignored the impacts of taxes or only executed tax-advantaged strategies for HD Vestthe wealthiest segment of wealth management clients. Through our Wealth Management and TaxAct includes participating in favorable industry trendsTax Software businesses, we seek to execute holistic, long-term tax minimization strategies for our clients and executingcustomers while expanding access to those strategies to a broader group of taxpayers. We believe this approach will drive better outcomes for our clients leading to higher customer acquisition, greater lifetime values, and overall better retention.
Our growth strategies that we believe will resultinclude:
•In the Wealth Management business, accelerating organic growth in customerthe tax-focused wealth management space by:
▪enhancing our financial professional experience with continued investment in service quality and advisorteam training to deliver a superior capability;
▪completing remaining elements of integration from acquisitions to drive efficiencies across the business and continuing to optimize our acquisition analysis and execution capabilities;
▪continuing to improve our Avantax Wealth Management to Avantax Planning Partners succession option for interested firms;
▪when in the client’s best interest, improving client asset retention and monetization through the continued shift of client assets into advisory accounts through appropriate coaching, tools, training, and programs;
▪continuing to invest in our technology, products, and value-added services to create positive experiences for our financial professionals and their clients;
▪leveraging the software development capabilities of TaxAct to improve the service and performance of products offered to our financial professionals; and
▪expanding our product and service offerings for our financial professionals utilizing best practices. This includes expanding our turn-key retirement planning solutions business to a nationwide footprint through Avantax Planning Partners.
Blucora, Inc. | 2021 Form 10-K 9
•In the Tax Software business, creating continued growth beyond that ofand momentum by:
▪implementing new and cost-effective marketing programs to drive customer acquisition;
▪expanding our tax preparation offerings with two “live-assisted” capabilities, Xpert Assist and Xpert Full Service, to provide more options for customers in how to complete their returns;
▪refining pricing strategy to enable us to win in the broader marketsmarket and drive robust growth;
▪expanding our value-generating partner ecosystem to increase our distribution capabilities and provide compelling offers for more potential customers;
▪continuing to invest in which we operate. Our approach is grounded on the belief that the best way to sustainably grow a business is to earn loyaltyour core product experience based on continuously delivering ever-greater valuedirect customer feedback and research to targetcreate best-in-class user experiences for our existing customers and clients.target markets;
Favorable Industry Trends
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• | Wealth Management Industry Trends - We believe that HD Vest is and will be the beneficiary▪increasing customer care investments to provide direct, human assistance to a significantly greater percentage 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 fee-based financial advisors.
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• | 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.
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Executing our Growth Strategiescustomers;
Accelerate Growth - There are four▪differentiating the TaxAct experience from experiences on other platforms by offering unique product capabilities and features that reinforce our brand’s deep expertise in tax for both consumers and tax professionals;
▪driving heightened awareness of our TaxAct professional software to meet the needs of solo practitioners and small tax offices;
▪innovating and testing new solutions and models that expand the DDIY category; and
▪providing ancillary services and partnerships to our customers that enhance our value and brand promise.
•Across Blucora, driving incremental growth and realizing the value of our holistic strategy by realizing synergies between Tax Software and Wealth Management, initially including:
▪converting TaxAct Professionals into Avantax Wealth Management financial professionals or affiliate partners;
▪leveraging sophisticated online marketing capabilities from the Tax Software segment to offer to financial professionals in the Wealth Management segment;
▪improving the tools needed to make our financial professionals more productive by leveraging the product and technology leadership from TaxAct; and
▪optimizing the identification and conversion of high value TaxAct DIY customers that would benefit from the tailored and comprehensive financial solutions provided by our Wealth Management business.
A key objectiveselement of our growth acceleration strategy:
The first key objective of our growth acceleration strategy is to capture organic growthcreate a culture of learning and innovation to test specific opportunities by optimizingacross our HD Vest advisor successbusiness and productivity by:
•Prioritizing recruiting, retainingscale those opportunities that show value. For example, we have approximately 21,000 tax professionals who used TaxAct to prepare and developing advisorsfile their taxes or those of their clients for tax year 2020. This base of professionals represents a significant population of potential future financial professionals or referral sources for our Wealth Management business. Additionally, TaxAct possesses significant lead generation and marketing capabilities that we seek to leverage to better support wealth management financial professionals with their marketing needs. We intend to continue to focus on these concepts in an effort to expand their value potential and scale the concepts that show the highest potential.promise.
Increasing support for our advisorsUnderlying this learning and focusing on those advisors that are in the best position to grow, some of whom have significant growth potential.
Focusing oninnovation approach is a consolidated information technology and infrastructure upgrades, including leveraging third-party technologies in areas that are not differentiated, and in many cases, are just as good or better than our current solutions.
The second key objective of our growth acceleration strategy is to enhance our technology platform through our recently-completed transition todata architecture, coupled with a new clearing firm by:
Focusing on new technological capabilities, like highly-integrated business processing, data aggregation and a new client portal. Our goal is to improve advisor efficiency and productivity, which we expect will grow total client assets.
The third key objective of our growth acceleration strategy is to improve end-client penetration by:
Focusing on opportunities to service more of our advisors’ tax clients with wealth management solutions, and increasing the investable assets of those tax clients that are being serviced by our advisors.
The fourth key objective of our growth acceleration strategy is to increase Advisory Assets:
Advisory Assets are more profitable and predictable than brokerage assets. By focusingfocused effort on the industry-wide trendhuman capital necessary to support our business. As part of shifting assets from brokeragethis overall strategy, we are investing in our infrastructure to advisory,drive higher efficiencies, speed execution, and offeringunlock new toolsopportunities.
We believe that if we successfully execute on the above growth strategies, we will improve performance and solutions todeliver on the key financial metrics that drive our advisors, we aim to help our advisors convert assets to advisory.
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• | Build Tax-Smart Leadership - A key element of our business model across both HD Vest and TaxAct is to leverage tax information to enable customers and advisors to better achieve their financial goals and uncover potential opportunities for customers by delivering technology-enabled tax-smart solutions and financial insights.
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• | Create One Blucora - A key objective of our strategy is to continue to enable efficiencies through shared services and expertise across our HD Vest and TaxAct businesses. We believe that building a high-performing organization that attracts, retains, develops and engages the strongest talent will drive a shared purpose and common culture.Blucora, Inc. | 2021 Form 10-K 10
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• | Deliver Results - Our goal is to drive continuous improvement by focusing on specific metrics that drive the organization and continue to meet our stated goals and targets.
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Seasonality
OurIn our Tax Preparation businessSoftware segment, our revenue and operating income generation is highly seasonal, with a significant portion of our annual revenue for such servicestypically earned in the first four monthstwo quarters of our fiscal year. During the third and fourth quarters, the Tax PreparationSoftware 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
In March 2020 and as a result of the business will continueCOVID-19 pandemic, the Internal Revenue Service (“IRS”) extended the filing deadline for federal tax returns from April 15, 2020 to July 15, 2020. This filing extension resulted in the foreseeable future.shifting of a significant portion of Tax Software segment revenue that is usually earned in the first and second quarters to the third quarter of 2020. In addition, sales and marketing expenses were elevated in 2020 due to incremental investment in March 2020 to address weak performance through the first two months of the tax season, as well as increased marketing required due to the extended tax season. Additionally, the IRS was selected by the U.S. Congress as the vehicle for distribution of the first round of Economic Impact Payments (“EIP1”), which caused significant disruption to the 2020 tax season. As a result of the extension of the 2020 tax season and the EIP1 disruption, our results of operations for our Tax Software segment were negatively impacted in 2020 compared to prior years.
As a result of the continued impact of the COVID-19 pandemic, including disruptions associated with the distribution of the second and third rounds of Economic Impact Payments, the IRS delayed the start of the 2021 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021. In addition, the IRS extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that is usually earned in the first quarter to the second quarter of 2021.
Competition
We face intense competition in allThe markets in which our businesses operate. Many of our competitors or potential competitors have substantially greater financial, technical,business operates continue to evolve 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.are highly competitive. For our businessesbusiness to be successful, we must be competitiveeffectively compete in the Wealth Managementwealth management and Tax Preparationtax preparation markets, as described in more detail below.
Wealth Management Competitioncompetition
The wealth management industry is a highly competitive and fragmented global industry. We and ourthe financial advisorsprofessionals with whom we partner compete directly with a variety of financial institutions, including traditional wirehouses, independent broker-dealers, registered investment advisers (including CPA firms that have their own in-house registered investment advisor), asset managers, banks and insurance companies, and direct distributors, such as 1st Global and Cetera Financial Specialists, 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 ourrobo-advisors. These competitors may have greater financial, technological, and marketing resources, broader infrastructure and deeper distribution capabilities,networks, greater brand recognition, and broader product and service offerings than us and may offer services at a more comprehensive offering of products and services.lower fee than we do. We and our financial advisors compete directly with those companiesthese financial institutions for the provision of products and services to clients, as well as for retentionrecruitment and hiringretention of financial advisors.professionals.
We believe that our competitive position in the wealth management industry is a function of providing effective, differentiated service and tools to tax professionals, while understanding the needs of these tax professionals with respect to wealth management, in order to maximize the opportunity to provide tax-advantaged financial planning and advice to end clients. We believe that our abilitycompetitive advantage is centered on the following differentiators:
•We seek to enablemarry tax planning and preparation with financial planning and advisory service for all taxpayers, not just the ultra-high net worth.
•We have the largest network of tax-focused financial professionals who partner with us through multiple affiliation models, which include:
▪an independent model where financial professionals can serve their clients’ wealth management needs directly or where tax professionals and CPAs can partner or affiliate with one of our advisorsindependent financial professionals to provide their clients tax-advantaged financial solutions;
▪an in-house/employee-based RIA model where CPAs and tax professionals can outsource their clients’ wealth management needs to one of our employee financial professionals.
Blucora, Inc. | 2021 Form 10-K 11
•We offer investment guidancetools, training, and support that are uniquely tailored to the needs of tax-focused financial professionals.
•Our understanding of the wealth management and tax businesses enables us to deliver optimal service with both businesses in the context of their clients'mind.
Tax Software competition
The market for 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;
offerpreparation products and technology solutions that are attractiveservices continues to financial advisorsevolve and their clients;
negotiateis highly competitive. We experience significant competition and expect this competitive compensation arrangements with third-parties, including vendors, suppliers, and product sponsors;
ensure the privacy and security of personal client information submittedenvironment to our financial advisors;
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 competingcontinue. We encounter direct competition from numerous other tax preparation software products and digital services. These competitors include Intuit’s TurboTax and H&R Block's and Credit Karma'sBlock’s DDIY consumer products and services, havewhich currently serve a significant percentage of the software and digital service market. Our TaxAct business mustThese competitors may have greater financial, technological, and marketing resources, broader infrastructure and distribution networks, greater brand recognition, and broader product and service offerings than us. We also compete withencounter competition from 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 Credit Karma, and itHewitt. We may also be subject tocompete against new market entrants who maycould take somea portion of our market share. Finally, our TaxActTax Software 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’sour software and services.
We believe that our competitive position in the market for tax preparation software and services is a function of our ability to differentiate our brand versus those of our competitors by the following:by:
offering competitive pricing;
•continuing to offer reliable,simple, easy-to-use, and accessible software and services that are compelling to consumers;
•providing features not offered by the competition, including:
▪ProTips — Contextually relevant insights on often overlooked or unknown tax guidelines that enable customers to save money on their taxes;
▪My Tax Plan — A personalized action plan for each TaxAct customer that provides several concrete actions they can take in the coming year to improve their tax outcome for the following year;
▪E-file Concierge — A unique add-on offering software that proactively notifies customers with a phone call when their e-filed return has been accepted by the IRS. In the case of a rejection by the IRS, the customer receives a phone call guiding them through the process of updating and resubmitting the return;
▪$100k Accuracy Guarantee — The only provider willing to not only guarantee the customer’s return is backed100% accurate, but also back that promise up to pay for any errors up to $100k;
•providing a compelling, full featured value offering;
•increasing customer care investments by true financialproviding direct, human assistance to a significantly greater percentage of our customers; and tax-expertise;
ensuring the privacy and security of user data submitted through our products;
marketing our software and services in a cost-effective way; and
•offering ancillary services that are attractive to users.users, including Xpert Assist, which provides users access to a team of CPAs and tax professionals, at no additional cost.
Governmental Regulation
Blucora is a publicly traded company that is subject to Securities and Exchange Commission (“SEC”)SEC and NASDAQ Global Select Market rules and regulations regarding public disclosure, financial reporting, internal controls, and corporate governance. Our Wealth Management and Tax PreparationSoftware 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 regulationsenhanced regulatory scrutiny and supervision,is heavily regulated by multiple agencies, including by the SEC, the Financial Industry Regulatory Authority (“FINRA”), the Department of Labor (“DOL”),FINRA, state securities and insurance regulators, and other regulatory authorities. Our Wealth Management subsidiary, HD VestAvantax Investment Securities,Services, 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 laws, rules and
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regulations covering all aspects of the securities business, includingsuch as 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.provisions and Regulation Best Interest (which requires a broker-dealer to make recommendations without putting its financial interests ahead of the interests of a retail customer). Broker-dealers and their representatives are also regulated by state securities administrators in those jurisdictions where they do business. Compliance with many of the laws, rules and regulations applicable to us involves a number of risks, because laws, 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 and filings on our operations and financial condition. Violations of laws, rules and regulations governing a broker-dealer’s actions could result in censure, penalties and fines, disgorgement of certain profits, 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 Vestsubsidiaries, Avantax Advisory Services, Inc. isand Avantax Planning Partners, Inc., are registered with the SEC as an investment adviseradvisers and isare subject to the requirements of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and the rules and 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 advisoradviser 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 and filings on our operations and financial condition.disclosures. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and other federal securities laws, ranging from fines, penalties, and censure to disgorgement of certain profits to suspension or 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, Avantax Insurance Agency LLC, Avantax Insurance Services, Inc., and Avantax Planning Partners, Inc., are insurance agencies licensed with the state licensing authority in the jurisdictions where they do business. Insurance agencies and their agents are subject to laws, rules and regulations covering all aspects of the insurance business, including sales practices, use and safekeeping of clients’ funds, recordkeeping and reporting, the conduct of directors, officers, and employees, and general anti-fraud provisions. Insurance agencies and their agents are regulated by state insurance administrators in those jurisdictions where they do business. Compliance with many of the laws, rules, and regulations applicable to us involves a number of risks, because laws, rules, and regulations frequently change and are subject to varying interpretations, among other reasons. Violations of laws, rules, and regulations governing an insurance agency’s actions could result in censure, penalties, and fines, the issuance of cease-and-desist orders, the restriction, suspension, or expulsion of the agency or its agent or its officers or employees, from the insurance industry of a jurisdiction where they do business, 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 of 1986, as amended (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), of the Code, which includes individual retirement accounts and Keogh plans) and service providers, including fiduciaries, to such plans. Section 4975 of the Code imposes excise taxes for violations of these prohibitions.
On April 18, 2018, the SEC issued draft rulemaking addressing standards of conduct for broker-dealers and disclosure requirements for broker-dealers and investment advisers. As presently drafted, the SEC’s proposed rules would impose a “best interest” standard on broker-dealers and their registered representatives, as well as a new disclosure form (Form CRS) that both broker-dealers and investment advisers would have to give clients before providing them investment advice. The SEC’s proposed rules, if adopted in their current form, would heighten the standard of care for broker-dealers when making investment recommendations and would impose disclosure and policy and procedural obligations that could impact the compensation HD Vest and its representatives receive for selling certain types of products, particularly those (such as mutual funds) that offer different compensation across different share classes. The SEC’s proposed rules would also limit our ability to use the terms “advisor” or “adviser” when referring publicly to our registered representatives who are not also advisory licensed. Based on comments by SEC Commissioners when the proposed rules were first presented, however, we believe that the SEC’s proposed rules may substantially change during the public comment process. In addition, the SEC’s final rules may not be issued for many months and, even then, could be the subject of litigation. Accordingly, we cannot predict if and when the SEC will complete any final rulemaking or what the contours of the final rules will be. However, the SEC’s final rules could result in additional compliance costs, lesser compensation, and management distraction, all of which could materially impact our business and operations.
Our Tax PreparationSoftware segment is subject to local, 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 are also required to comply with Federal Trade Commission requirements and a variety of state revenue agency and local standards. In addition, we 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 internationally, we may become subject to additional government regulation. Further, regulators may adopt new laws, rules, or regulations, or their interpretation of existing laws, rules, or regulations may differ from ours or expand to
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cover additional products and services. These increased regulatory requirements could impose 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.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law, which significantly revised the U.S. tax code. The resulting changes became effective beginning with our 2018 calendar year financial reporting period. The primary impacts to us included 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.
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 our operations.
See the section entitled "Risks“Risks Associated With our Businesses"Our Business” in Part I, Item 1A of this reportForm 10-K for additional information regarding governmental regulation of our business and risks related to such regulation.
Privacy and Security of Customer Information and Transactions
WeRegulatory activity in the areas of privacy and data protection continues to grow worldwide, driven in part by the growth of technology and related concerns about the rapid and widespread dissemination and use of information. To the extent they are also subjectapplicable to us, we must comply with various federal, state, and international laws and regulations and to financial institution and healthcare provider regulatory requirements relating to the privacy and security of the personal information of our customers and employees. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, federal and state labor and employment laws, state data breach notification laws, state privacy laws such as the California Consumer Privacy Act of 2018, the California Privacy Rights Act of 2020, the Colorado Privacy Act, the Virginia Consumer Data Privacy Act, the New York Stop Hacks and Improve Electronic Data Security (SHIELD) Act, the Gramm-Leach-Bliley Act of 1999, SEC Regulation S-P, the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID, and further potential federal and state requirements.
Many of these laws and regulations provide consumers and employees with a private right of action if a covered company suffers a data breach related to a failure to implement reasonable data security measures. In addition, we are subject to other privacy laws and regulations that apply to the Internet,internet advertising, online behavioral tracking, and advertising, mobile applications, andSMS messaging, telemarketing, email activities,communication, data hosting, anddata retention, financial and health information, and credit reporting. AdditionalThe legal framework around privacy issues is rapidly evolving, as various federal and state government bodies are considering adopting new privacy laws in all of these areas are likely to be passed in the future,and regulations, 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 other data of our customers or employees,employees. These laws could also affect the ways we communicate with our customers, and deliver products and services, or mayand could significantly increase our compliance costs. As our business expands to new industry segments or otherwise becomes subject to rules and new usesregulations of data that are regulated for privacy and security, or to countriesjurisdictions outside the United States that have strictwith stricter data protections laws,protection regimes, such as the E.U. General Data Protection Regulation, our compliance requirements and costs will increase.
Through a privacy policy framework designed to be consistent with globally recognized privacythe principles of individual consent, data subject access, and privacy-by-design, we comply with United States federal and other country guidelines and practicesstrive to help ensure that customers and employees are aware of, and can control, how we use personal information about them. The TaxAct.comTaxAct website and its digital products have been certified by TRUSTe, an independent organization that operates a websiteoffers certification to organizations that have demonstrated responsible data collection and digital productprocessing practices consistent with regulatory expectations and external standards for privacy certification program representing industry standard practices to address users’ and regulators’ concerns about online privacy.accountability. 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.security of data.
To address data security concerns, we use industry-standard data security safeguards to help protect theour computer 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 to us through one of our websites or products, we use industry standards to encryptindustry-standard encryption as the data as it is transmitted to us. We work to protect our computer systems from unauthorized internal or external access using numerous commercially availablecommercially-available computer security products as well as internally developedinternally-developed security procedures and practices.
See the section entitled "Risks“Risks Associated With our Businesses"Our Business” in Part I, Item 1A of this reportForm 10-K for additional information regarding risks related to privacy and security of customer information and transactions.
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Intellectual Property
Our success depends uponis bolstered by our technology and intellectual property rights. We seek to protect such rights and the value of our corporate brands and reputation through a variety of measures, including: domain name registrations, confidentiality and intellectual property assignment agreements with employees and third parties, protective contractual provisions, and laws regarding copyrights, trademarks, and trade secrets. We hold multiple registered trademarks in the United States and in various foreign countries, and we may apply for additional trademarks as business needs require. We may not be successful in obtaining issuance or registration for such applications or in maintaining existing trademarks. In addition, 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 "Risks“Risks Associated With our Businesses"Our Business” in Part I, Item 1A of this reportForm 10-K for additional information regarding protecting and enforcing intellectual property rights and defending third-party infringement claims.
Human Capital
We are intensely focused on our customers and our people who are our most valuable resource. We strive to attract, develop, and retain the most talented employees by usproviding programs and third parties against us.services that engage employees, help them to learn and develop, and empower them to enable our business strategies. We believe that a key component of our future success will leverage our continued ability to attract and retain qualified personnel.
Employees
•As of December 31, 2018,2021, we had 5291,100 full-time employees. There
•We offer competitive compensation and benefits that support our employees’ health, financial, and emotional well-being.
•Our employee engagement, which is significant competitionthe percentage of employees that respond to the Company’s culture survey with a positive response to certain satisfaction metrics, continues to climb, increasing 12% from 2020 to 2021.
•In 2021, more than 50% of our employees participated in development training through Udemy for qualified personnelBusiness, a digital learning platform, with an average of 7 training hours per participating employee.
Diversity, Equity, and Inclusion. Diversity serves as an integral component of our human capital objectives, and we seek to promote an inclusive work environment that represents a broad spectrum of backgrounds and cultures. As of December 31, 2021, 43% of our employee base, including 30% of our senior leadership team, was female, and 33% of our employee base was comprised of individuals with ethnically or racially diverse backgrounds. Furthermore, as of December 31, 2021, 56% of the members of our Board of Directors were female, and 22% were ethnically and racially diverse. Our Diversity and Inclusion Council (“D&I Council”), established in 2020, continues to lead our diversity, equity, and inclusion strategy and initiatives. The D&I Council is sponsored by two members of our executive leadership team and provides regular updates on diversity and inclusion initiatives to the industries in which weNominating and Governance Committee. The Council’s initiatives have led to the roll out of diversity and inclusion focused engagements and increased focus on diversity and inclusion as part of our hiring and promotions processes.
Utilization of Independent Contractors and Referring Representatives.Our Wealth Management business distributes its products and services and generates a substantial portion of its revenues through a nationwide network of 3,416 financial professionals as of December 31, 2021. Of these 3,416 financial professionals, 3,382 either: (1) partner with Avantax Wealth Management and operate particularly for software developmentas independent contractors, or (2) partner with Avantax Planning Partners and other technical staff.operate as licensed referring representatives. We believe that our future success will depend in part on our continued ability to hireattract, retain, support, and retain qualified personnel.compensate these independent financial professionals and licensed referring representatives will continue to contribute to the growth and success of our Wealth Management business and the Company overall.
Human Capital Optimization during the COVID-19 Pandemic.While the COVID-19 pandemic did impact our human capital management practices in 2021, we believe we were, and continue to be, able to effectively conduct our business while operating in a largely virtual environment. As a result of the COVID-19 pandemic, we maintain safety protocols and procedures for our essential employees who continue to work onsite. We have also continued to enhance our communication programs to create open communication at all levels of our business, enabling our employees to achieve their professional objectives while also maintaining a healthy work-from-home lifestyle. There were no employee layoffs in calendar year 2020 or 2021 that were directly related to the COVID-19 pandemic.
We believe that retaining our strong employee team and the continued evolution of our culture will accelerate our business transformation.
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Company Internet Site and Availability of SEC Filings
Our corporate website is located at www.blucora.com. We make available on that site,our website, 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 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“Investors” section of our sitewebsite and are available free of charge. Amendments to our Code of Ethics and Conduct and any grant of a waiver from a provision of the Code of Ethics and Conduct requiring disclosure under applicable Securities and Exchange CommissionSEC rules will be disclosed on our website. 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. Furthermore, on our site, we post important information, including press releases, investor presentations, and notices of upcoming events and utilize our site as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under Regulation FD. Investors may be notified of posting to the website by signing up for email alerts on the “Investors” page of our site.
ITEM 1A. Risk Factors
Our business and future results may be affected by a number of risks and uncertainties that should be considered carefully. In addition, this reportForm 10-K 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 BUSINESSESRisk Factor Summary
Below is a summary of the principal factors that make an investment in our securities speculative or risky. A more detailed discussion of the material factors that make an investment in our securities speculative or risky follows this summary.
Risks Related to Our Business
•The wealth management and tax preparation markets are very competitive, and failure to effectively compete could result in a Material Adverse Effect.
•Deficiencies in service or performance of the financial or software products we offer, competitive pressures on pricing of such services or products, or other market declines may cause our Wealth Management and Tax Software businesses to decline.
•Our business depends on fees generated from the distribution of financial products and fees earned from management of advisory accounts, and changes in market values or in the fee structure of such products or accounts could adversely affect our revenues, business, and financial condition.
•If we are unable to attract and retain productive financial professionals, including our in-house financial professionals and our independent contractor financial professionals, our financial results will be negatively impacted.
•The current COVID-19 pandemic could have a Material Adverse Effect.
•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.
•Changes in economic, political and other factors could have a Material Adverse Effect on our business.
•If we are unable to develop, manage, and maintain critical third-party business relationships for our Wealth Management and Tax Software businesses, it could result in a Material Adverse Effect.
•The products and services offered by our Wealth Management and Tax Software businesses are reliant on third-party products, tools, platforms, systems and services provided by key vendors and partners, which, if they do not operate as anticipated, could result in a Material Adverse Effect.
•If our goodwill or acquired intangible assets become impaired, we have been, and in the future may be, required to record a significant impairment charge, which could result in a Material Adverse Effect.
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•Future growth of our business and revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products and services.
•Our operating systems and network infrastructure could fail, become unavailable or otherwise be inadequate, are 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, which could result in a Material Adverse Effect.
•If our Tax Software business fails to process transactions effectively or fails to adequately protect against disputed or potential fraudulent activities, it could have a Material Adverse Effect, and stolen identity refund fraud could result in negative publicity and/or impede our Tax Software customers’ ability to timely and successfully file their tax returns and receive their tax refunds.
•The specialized and highly seasonal nature of our Tax Software business presents financial risks and operational challenges, which, if not satisfactorily addressed, could result in a Material Adverse Effect.
•Climate change may adversely impact our operations and financial results.
•The United States government’s inability to agree on a federal budget, and/or its decision to issue additional Economic Impact Payments, may adversely impact our operations and financial results.
•If our enterprise risk management and compliance frameworks, including our policies and procedures, are not effective at mitigating risk and loss to us, we could be exposed to unidentified or unanticipated risks, suffer unexpected claims or losses, experience reputational harm, and/or cause a Material Adverse Effect.
Legal and Regulatory Risks
•Our Wealth Management business is subject to extensive regulation, and failure to comply with these regulations or interpretations thereof could have a Material Adverse Effect.
•Government regulation of our business, including increased regulation or the interpretation of existing laws, rules or regulations, could have a Material Adverse Effect.
•Current and future litigation, regulatory proceedings or adverse court interpretations of the laws and regulations under which the Company operates could have a Material Adverse Effect.
•Complex and evolving U.S. and international laws and regulations regarding privacy and data protection, and concerns about the current privacy and cybersecurity environment, could have a Material Adverse Effect.
•We may be negatively impacted by any future changes in tax laws.
•If third parties claim that our services infringe upon 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.
Risks Related to Our Acquisitions
•We may fail to realize all of the anticipated benefits of acquisitions or those benefits may take longer to realize than expected.
•We may seek to acquire companies or assets that complement our Wealth Management and Tax Software businesses, and we may be unsuccessful in completing any such acquisitions on favorable terms or integrating any company acquired.
Risks Related to Our Financing Arrangements
•We have incurred a significant amount of indebtedness, which may materially and adversely impact our financial condition and future financial results.
•Existing cash and cash equivalents and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures.
Risks Related to Our Common Stock
•Our stock price has been highly volatile and such volatility may continue.
•Our financial results may fluctuate, which could cause our stock price to be volatile or decline.
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•Actions of activist stockholders could adversely affect our business and stock price and cause us to incur significant expenses.
•We cannot assure you we will continue to repurchase shares of our common stock pursuant to our stock repurchase plan.
•Our utilization of our federal net operating losses (“NOLs”) may be severely limited or potentially eliminated.
•Delaware law and our organizational documents may impede or discourage a takeover that would be beneficial to our stockholders.
Risks Related to Our Business
The Tax Preparationwealth management and Wealth Managementtax preparation markets are very competitive, and failure to effectively compete could result in a Material Adverse Effect.
The wealth management industry in which our Wealth Management business operates is highly competitive, and we may not be able to maintain our customers, financial professionals, employees (including our in-house financial professionals), 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, performance, technology, product offerings and features, price, and perceived financial strength. We and the financial professionals with whom we work compete directly with a variety of financial institutions, including traditional wirehouses, independent broker-dealers, registered investment advisers (including CPA firms that have their own in-house registered investment advisor), asset managers, banks and insurance companies, direct distributors, and larger broker-dealers. Many of these competitors have greater market share, offer a broader range of products, and have greater financial resources. We have faced significant competition in recent years from lower fees, which could have a material impact on our business. There has also been a trend toward online internet wealth management services and wealth management services that are based on mobile applications or automated processes as clients increasingly seek to manage their investment portfolios digitally. This is leading to increased utilization of “robo” advisor platforms. 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-focused investing advice and solutions. There is no guarantee that this differentiation will be meaningful to our clients and potential clients, or that another competitor will not adopt a similar strategy more effectively. In either case, our ability to compete effectively in the wealth management industry could be damaged.
Our Tax PreparationSoftware business also operates in a very competitive marketplace. There are many competing software products and digital services. Intuit’s TurboTax and H&R Block’s DDIY products and services haveserve a significant percentage of the software and digital service market. These competitors may have greater financial, technological, and marketing resources, broader infrastructure and distribution networks, greater brand recognition, and broader product and service offerings than us. Additionally, certain of our competitors have received, and may receive in the future, preferential treatment by U.S. federal or state governments. The U.S. federal government’s Child Tax Credit website currently provides direct links to certain competitors’ websites. Our Tax PreparationSoftware business must also compete with alternate methods of tax preparation, such as storefront tax preparation services, which includesinclude both local tax preparers and large chains such as H&R Block, Liberty Tax and Jackson Hewitt and Credit Karma, and itHewitt. We may also be subject tocompete against new market entrants who maycould take somea portion of our market share. As digital-do-it-yourselfDDIY tax preparation continues to be characterized by intense competition, including heavy marketing expenditures, price-based competition, and new entrants, maintaining and growing market 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 PreparationSoftware 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, which could reduce the need for TaxAct’s software and services. These or
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similar programs may be introduced or expanded in the future, which may cause us to lose customers and revenue. The Free File Program is currently the sole means by which the U.S. Internal Revenue Service (the “IRS”) offers tax software to taxpayers. The Free File Program is a partnership between the IRS and the Free File Alliance, a group of private sector tax preparation companies of which we are a member that has agreed to offer free federal electronic tax filing services to taxpayers meeting certain income-based guidelines. As part of the program, the IRS has agreed that it will not compete with Free File Alliance companies in providing free, digital tax return preparation and filing services to taxpayers. The Free File Program’s continuation depends on a number of factors, including increasing public awareness of and access to the free program, as well as continued government support. The IRS’s current agreement with the Free File Alliance has been extended and is scheduled to expire in October 2021. If2023, although it could be amended or terminated before that date. Recently, we and certain of our competitors have become the subject of legal proceedings and/or regulatory inquiries relating to the provision and marketing of the products that they offer under the Free File Program. These proceedings and/or the negative publicity associated with these proceedings may decrease the government’s or industry members’ support of the Free File Program and increase the likelihood that such program is not renewed upon expiration of the agreement or if the Free File Program is terminated, andterminated. If the IRS enters the software development and return preparation space, whether as a result of the Free File Program not being renewed upon expiration of the agreement, the Free File Program being amended or terminated, or for another reason, then the federal government would be a publicly funded direct competitor of us and the U.S. tax services industry as a whole.
The wealth management industry in whichIn addition, from time to time, U.S. federal and state governments have considered various proposals, including mandating that we and our Wealth Management business operates is also highly competitive,competitors refer qualifying customers to the Free File Program and we may not be able to maintain our customers,governmental taxing authorities utilizing taxpayer information provided by employers, 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,institutions, and other financial institutions. Many of these competitors have greater market share, offer a broader range of
payers to “pre-populate,” prepare and calculate tax returns and distribute them to taxpayers. Under this “pre-populate” approach, the taxpayer could then review and contest the return or sign and return it, reducing the need for third-party tax return preparation services and the demand for our services and 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 consolidationwhich could result in our competitors gaining greater resources,a Material Adverse Effect. We believe that governmental encroachment at both the U.S. federal and state levels in which we may experience pressures on our pricing and market share asoperate could present 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 meaningfulcontinued competitive threat 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 effectivelyTax Software business for the foreseeable future.
Deficiencies in the market could be damaged.
Poor service or performance of the financial or software products we offer, or competitive pressures on pricing of such services or products, or other market declines may cause our Wealth Management business customersand Tax Software businesses to withdraw assets on short notice.
decline.
Customer service and investment performance are important factors in the success of our Wealth Management business, while customer service, ease-of-use, and product performance and accuracy are important factors in the success of our Tax Software business. Strong customer service and investmentproduct performance help increase customer retention and generate sales of products and services. In contrast, poor service or investmentpoor performance of our financial or software products could impair our revenues and earnings, as well as our prospects for growth. CustomersIn our Wealth Management business, clients can terminate their relationships with us or our financial advisorsprofessionals at will.will, and in our Tax Software business, deficiencies in our service or product performance could lead customers to choose a competitor’s product or services. There can be no assurance as to how future investment performance of financial or software products will compare to that of our competitors, and, in the context of financial investment products, historical performance is not indicative of future returns. AParticularly, for the Wealth Management business, 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 advisory assets and reduce management fees. Poor investment performance could also adversely affect our ability to expand the distribution of our products through independent financial advisors.professionals.
In addition, the emergence of new financial or software products or services from others, or competitive pressures on pricing of such services or products, may result in the (i) loss of clients or accounts in our Wealth Management business and (ii) loss of customers in our Tax Software business. We must also monitor the pricing of our services and financial and software products in relation to competitors and periodically may need to adjust commissioncosts and fee rates, interest rates on deposits and margin loans, and other fee structures to remain competitive. Competition
For the Wealth Management business, competition from other financial services firms, such as reduced commissions to attract customersclients or trading volume, direct-to-investor online financial services, or higher deposit interest rates to attract customer cash balances, or increased recruiting bonuses to attract financial professionals, could adversely impact our business. CustomersClients of our Wealth Management business could 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’professionals’) reputation in the marketplace, changes in customer management or ownership, loss of key investment management personnel and financial market performance. Our customers
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clients (or clients of our financial professionals) can withdraw the assets we manage on short notice, making our future customer and revenue base unpredictable. A reduction in advisory assets and the resulting decrease in revenues and earnings 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 Moreover, investors in the United Statesmutual funds and global financial markets,some other pooled investment vehicles that we advise may redeem their investments in those funds at any time without prior notice, and investors in other types of pooled vehicles we advise may typically redeem their investments with fairly limited or no prior notice, thereby reducing our Tax Preparation business offers tax filing services in the federal jurisdiction of the United States, various state jurisdictions and Canada. Accordingly, we are affected by United States and global economic and political conditions that directly and indirectly impact aadvisory assets. These investors may redeem their investments for any number of factors in the domestic and globalreasons, including general financial markets and economies, which may be detrimental to our operating results. In addition, because the significant majority of our revenue is earned within the United States, economicmarket 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 or relative performance we have achieved, or their own financial condition and requirements. In a declining stock market, the pace of redemptions could accelerate. Poor performance relative levelto other funds tends to result in decreased purchases and volatilityincreased redemptions of interest and currency rates, real estate values,fund shares. In a declining stock market, the actual and perceived qualitypace 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 recessionredemptions could accelerate, resulting 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. For instance, on December 6, 2018, the Dow Jones Industrial Average plunged nearly 800 points before recovering rapidly to close the day down 79 points. A period of sustained downturns and/or volatility in the securities markets,
changes in interest rates by the Federal Reserve, 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 lossesassets, which 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 innegatively impact 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 Federal or various states' 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 “We may be negatively impacted by the recently passed Tax Cuts and Jobs Act or by any future changes in tax laws” for a discussion of additional 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 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. Designing and implementing new or modified compensation arrangements and equity structures to successfully attract and retain advisors is complicated. Changes to these arrangements could themselves cause instability within our existing investment teams and negatively impact our financial results and ability to grow.
In addition, as some of HD Vest’s advisors grow their advisory assets, they may decide to disassociate from HD Vest to establish their own registered investment advisers (“RIAs”) 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.
Rapid growth may place significant demands on our resources.
We have experienced rapid growth since the completion of our Strategic Transformation. Our anticipated future growth will place a substantial demand on our managerial, operational and financial resources due to:
the need to manage relationships with various strategic partners and other third parties;
the need to maintain levels of service expected by clients and customers;
the pressure to deliver our products and services on a timely basis;
difficulties in hiring and retaining skilled personnel necessary to support our business;
pressures for the continued development of our products and financial and information management systems; and
the possible need to create lines of businesses or departments that do not now exist, and to hire, train, motivate and manage a growing number of staff.
There can be no assurance that we will be able to effectively achieve or manage any future growth. If we have not made adequate allowances for the costs and risks associated with this expansion or if our systems, procedures, or controls are not adequate to support our operations, our business could be harmed and we could experience 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 tax preparation and wealth management industries are characterized by rapidly changing technology, evolving industry and security standards, and frequent new product introductions. Our competitors in these 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 developing 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 result in a Material Adverse Effect.
We offerFor the Tax Software business, competition from other tax preparation service providers, such as free or reduced fee products to attract customers, could adversely affect our digitalbusiness. Customers of our Tax Software business could also select another tax preparation service or software for any number of reasons, including other competitors offering additional rewards and/or bundled or unbundled products and services through our websitethat we do not currently offer, providing services or software that may provide higher levels of interaction or service, be easier to use, faster, or lower cost. A reduction in the number of customers and through our mobile app. If our customers don’t deem our website or our mobile app user friendly or if they deem our competitors’ website or mobile app more user friendly or better than ours, our market share could decline, whichthe resulting decrease in revenues and earnings could have a Material Adverse Effect. In addition, we 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 customers. If our mobile app or the other upgrades we make to the technology we use in our Tax Preparation business are not successful, it could result in wasted development costs or damage to our brands and market share, any of which could have a Material Adverse Effect. We may also encounter problems in connection with our mobile app, and we may need to devote significant resources to the creation, support, and maintenance of new user experiences.
Our business depends on fees generated from the distribution of financial products and fees earned from management of advisory accounts.accounts, and changes in market values or in the fee structure of such products or accounts could adversely affect our revenues, business, and financial condition.
A large portion of our revenues 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. Should issuers of these products leave the market or discontinue offering or paying trail compensation on some or all of their products, our revenues could be negatively impacted. The investment management fees we are paid may also decline over time due to factors such as increased competition, renegotiation of contracts and the introduction of new, lower-priced investment products and services. Changes in market values or in the fee structure of asset management accounts wouldcould adversely affect our revenues, business, and financial condition.
Asset management fees often are primarily comprised of base management and incentive fees, and investment advisers generally are experiencing advisory fee compression due to intense competition. Management fees are primarily based on advisory assets, 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, inas the total amount of our advisory assets increases as a percentage of our total client assets, our results of operations may become substantially more dependent on revenue generated from management fees. In periods of declining market values, our advisory assets may also decline, which would negatively impact our fee revenues. This risk would become further exacerbated the more dependent our business becomes on revenues from management fees, and our ability to effectively offset declining management fee revenue through commission-based revenues may be limited. In addition, because advisory fees are based on advisory assets on the last day of each quarter, our revenues may be negatively impacted by the timing of market movements relative to when clients are billed. Any of the foregoing could result in a Material Adverse Effect.
If we are unable to attract and retain productive financial professionals, including our in-house financial professionals and our independent contractor financial professionals, 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 financial professionals, including our in-house financial professionals. Our ability to attract and retain productive independent contractor and in-house financial professionals has contributed significantly to our growth and success. If we fail to attract new financial professionals or to retain and motivate our financial professionals, our business may suffer.
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The market for productive financial professionals is highly competitive, and we devote significant resources to attracting and retaining the most qualified financial professionals. In attracting and retaining financial professionals, 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 professionals. These can be important factors in a current financial professional’s decision to leave us as well as in a prospective financial professional’s decision to join us, and we may not be able to offer competing packages to successfully recruit financial professionals. We also have experienced and may continue to experience difficulty retaining financial professionals following a material acquisition or as a result of pricing or product changes.
We have faced, and may in the future face, difficulties in attracting and retaining key in-house financial professionals. If any of our in-house financial professionals leave us, clients that worked with such in-house financial professionals may be unhappy and terminate their relationships with us. Departures of our in-house financial professionals have in the past resulted, and could in the future result, in lost relationships with CPA firms and clients, which has led, and could in the future lead, to a reduction in client asset levels and a corresponding reduction in advisory revenue, as well as the loss of referrals.
In addition, our Wealth Management business has recently gone through a series of rebranding initiatives. Our financial professionals may be unhappy with the new branding or with various aspects of the rebranding process and may decide to leave us. There can be no assurance that we will be successful in our efforts to attract and retain the financial professionals needed to achieve our growth objectives.
Moreover, the costs associated with successfully attracting and retaining financial professionals could be significant, and we may not generate sufficient revenues from those financial professionals’ business to offset such costs. Designing and implementing new or modified compensation arrangements and equity structures to successfully attract and retain financial professionals is complicated. Changes to these arrangements could themselves cause instability within our existing investment teams and negatively impact our financial results and ability to grow. In addition, our compensation arrangements with our financial professionals are primarily based on client transaction and/or client asset levels, which we believe incentivizes appropriate financial professional performance and assists in attracting and retaining successful financial professionals. Our cost of revenue (which includes commissions and advisory fees paid to financial professionals) may fluctuate from quarter-to-quarter depending on the amount of commissions we are required to pay to our financial professionals, and if the amounts we are required to pay are different than our expectations, our operating results may be adversely impacted.
We have in the past issued and may in the future issue shares of common stock or other securities convertible into or exchangeable for shares of common stock to our financial professionals in order to attract and retain such individuals. In connection with the 1st Global Acquisition, we issued a substantial number of equity awards to our financial professionals and may do so for any future acquisitions. The issuance of additional shares of our common stock upon vesting or conversion of these awards may substantially dilute the ownership interests of our existing stockholders and reduce the number of shares of common stock available for issuance under our equity incentive plans.
In addition, the wealth management industry in general is experiencing a decline in the number of younger financial professionals entering the industry. We are not immune to that industry trend. If we are unable to replace financial professionals as they retire, or to assist retiring financial professionals with transitioning their practices to existing financial professionals, we could experience a decline in revenue and earnings.
In addition, as some of our financial professionals grow their advisory assets, they may decide to disassociate from us to establish their own RIAs and take customers and associated assets into those businesses. We seek to deter financial professionals from taking this route by continuously evaluating our technology, product offerings, and service, as well as our financial professional compensation, fees, and pay-out policies, to ensure that we are competitive in the market and attractive to successful financial professionals. We may not be successful in dissuading such financial professionals from forming their own RIAs, which could cause a material volume of customer assets to leave our platform, which would reduce our revenues and could cause a Material Adverse Effect. We also have entered, and may in the future enter, into agreements with Avantax Wealth Management financial professionals to induce them to join our Avantax Planning Partners’ in-house team of financial professionals. We might not be successful in consummating these transactions, and we may not realize the anticipated benefits from the transactions that we do consummate.
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The current COVID-19 pandemic could have a Material Adverse Effect.
The COVID-19 pandemic, including precautionary measures and societal response, has caused economic instability and uncertainty in the United States and globally. The various precautionary measures and accommodations taken by many governmental authorities in the United States and around the world in order to limit the spread of COVID-19, as well as the societal response, have had, and could continue to have, an adverse effect on the U.S. and global markets and economy, including on the availability of and costs associated with employees, resources, and other aspects of the global economy. The availability of key employees may be limited because of illness, death, quarantine, or caring for family members due to COVID-19 disruptions or illness. These factors have caused, and could continue to cause, significant disruptions to our business and operations and the operations of our financial professionals and increased costs and burdens associated with staffing and conducting our operations and could also increase our risk of being subject to contract performance claims or increase the risk that our counterparties fail to perform under their respective contracts or commitments, if we or they are unable to deliver according to the terms of such contracts or commitments and do not have the ability to claim force majeure. The extent to which the COVID-19 pandemic may impact our results in the future will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and scope of the COVID-19 pandemic, the emergence of new variants of the virus, the likelihood of a resurgence of positive cases, the effectiveness, availability and acceptance of vaccines, global economic conditions during and after the COVID-19 pandemic and governmental actions that have been taken, or may be taken in the future, in response to the COVID-19 pandemic.
The COVID-19 pandemic has had a material negative impact on the U.S. and global economy and caused substantial disruption in the U.S. and global securities and debt markets, and as a result, has negatively impacted both our Wealth Management and Tax Software businesses.
In our Wealth Management business, this economic and financial market disruption negatively impacted the value of some of our clients’ assets in the first quarter of 2020, which caused a corresponding decline in the amount of revenue that we derived from these client assets. Further, beginning in the first quarter of 2020, we experienced a decline in commission revenue from lower trading volumes. While positive financial market movement in the second, third and fourth quarters of 2020 and in 2021 increased advisory and brokerage asset balances, there could be additional economic and market disruption as a result of COVID-19 pandemic that could lead to additional decline in client assets. In addition, our client assets could also materially decline as a result of clients being forced to rely on their investments due to the macroeconomic effect of COVID-19. A decline in client assets would lead to a corresponding decline in revenue from client assets. Additionally, in response to this economic and market disruption, the Federal Reserve decreased the federal funds rate in 2020 and maintained a low-interest rate environment in 2021, causing a significant decline in cash sweep revenue. Although the Federal Reserve has recently signaled adjustments to monetary policy that would increase the federal funds rates, if the Federal Reserve does not increase, or further decreases the federal funds rates, cash sweep revenue would continue to be negatively impacted. Overall, we expect that revenues in our Wealth Management business will remain susceptible to being adversely affected in future periods in which pandemic-influenced market factors remain present. The COVID-19 pandemic has also affected the business of our financial professionals in many ways. For example, our financial professionals have not been able to meet with clients face-to-face at times during the pandemic, and they also had to assist clients through extended tax seasons in 2020 and 2021 and in applying for loans under the U.S. Small Business Administration’s Paycheck Protection Program. In addition, during 2020 and 2021, they have had significantly less opportunities, and have at times been unable, to attend conferences and share ideas with other financial professionals. This sustained change in business or the loss of financial professionals who are not able to continue their business during this difficult time could lead to lower revenue and could have a Material Adverse Effect.
InvestorsIn our Tax Software segment, our revenue and operating income generation is highly seasonal, with a significant portion of our annual revenue typically earned in the pooled vehiclesfirst four months of our fiscal year. During the third and fourth quarters, the Tax Software segment typically reports losses because revenue from the segment during this period is minimal while core operating expenses continue. The IRS extended the filing and payment deadline for tax year 2019 federal tax returns to July 15, 2020 as a result of the COVID-19 pandemic. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first and second quarters to the third quarter of 2020. In addition, sales and marketing expenses were elevated in 2020 due to incremental investment in March 2020 to address weak performance through the first two months of the tax season, as well as increased marketing required due to the extended tax season. Additionally, the IRS was selected by the U.S. Congress as the vehicle for distribution of the first round of Economic Impact Payments (“EIP1”), which caused significant disruption to the 2020 tax season. As a result of the extension of the
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2020 tax season and the EIP1 disruption, our results of operations for our Tax Software segment were negatively impacted in 2020 compared to prior years.
As a result of the continued impact of the COVID-19 pandemic, including disruptions associated with the distribution of the second and third rounds of Economic Impact Payments, the IRS delayed the start of the 2021 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021. In addition, the IRS extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first quarter of 2021 to the second quarter of 2021. If the IRS delays the tax filing deadline in the future, we advise can redeem their investmentscould face shifting of revenue or increased costs.
Errors in those funds at any time without prior notice,IRS communications regarding the child tax credit payments could cause a significant number of tax returns, even if otherwise completed accurately, to route to the IRS’s error resolution system, which could adversely affectnegatively impact the success of our earnings.tax software in 2022.
Investors in the mutual funds and some other pooled investment vehicles that we advise may redeem their investments in those funds at any time without prior notice, and investors in other types of pooled vehicles we advise may typically redeem their investments on fairly limited or no prior notice, thereby reducing our advisory assets. These investors may redeem their investments for any number of reasons, including general financial market conditions, the absolute or relative investment performanceIn addition, we have achieved,historically financed our operations primarily from cash provided by operating activities and access to credit markets. To the extent that COVID-19 pandemic causes a substantial reduction or change in timing of our cash provided by operating activities, we may be required to seek additional capital through issuances of debt or equity securities. We may be unable to complete any such transactions on favorable terms to us, or at all. The instruments governing our existing indebtedness require us to comply with certain restrictive covenants, and any substantial and sustained downturn in our operations due to COVID-19 or other factors may cause us to be in breach of our debt covenants or limit our ability to make interest payments on our indebtedness, which could constitute an event of default and cause our outstanding indebtedness to be declared immediately due and payable. If applicable, such acceleration of our outstanding indebtedness could cause our secured lenders to foreclose against the assets securing their own financial condition and requirements. In a declining stock market, the pace of redemptions could accelerate. Poor investment performance relative to other funds tends to result in decreased purchases and increased redemptions of fund shares.
We have had recent senior leadership transitions, and if we are not effective in managing those transitions, our business could be adversely impactedborrowings, and we could experience a Material Adverse Effect.
We have had recent senior leadership transition in connectionbe forced into bankruptcy or liquidation. Any inability to obtain additional liquidity as and when needed, or to maintain compliance with the instruments governing our Strategic Transition and otherwise and have replaced some of our executive officers and senior leadership team. While many of our executive officers have relevant industry experience, they are new to our Company. Changes in senior management 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 are often difficult due to cultural differences that may result from changes in strategy and style and the time required for new executives to gain detailed operational knowledge. These changes could also 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 we could experience a Material Adverse Effect.
Government regulation of our business, including increased regulation or the interpretation of existing laws, rules or regulations, couldindebtedness, would have a Material Adverse Effect.
We are subject to federal, state, and local 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 manyAny of the laws and regulations that affect both our Wealth Management and our Tax Preparation businesses. As we expand 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 our interpretation or the laws of other jurisdictions in which we operate. 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 on the way we conduct our business, require changes to our business, require certain notifications to customers or employees, restrict our use of personal information, cause our customers to cease utilizing our products or services, make our business more costly, less efficient, or impossible to conduct, require us to modify our current or future products or services in a manner that is detrimental to our business and result in additional compliance costs, which could have a Material Adverse Effect.
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, or 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 or gift 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. Numerous jurisdictions have passed, and may in the future pass, new laws related to the use and retention of consumer information, and this area continues to be an area of interest for U.S. federal, state and foreign governmental authorities. These laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction, and our current data protection policies and practices may not be consistent with all of those interpretations and applications. 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. Failure to comply with laws and regulations that protect user data could harm our reputation andforegoing factors could result in a Material Adverse Effect.Effect on our revenues, results of operations and financial condition. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new developments that may emerge concerning the actions to contain COVID-19 or treat its impact, among others.
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 ability to comply with all applicable laws, rulesbusiness and regulations and interpretations of such laws, rules and regulations is largelyoperations are substantially dependent on the performance of our establishmentkey employees and maintenance of compliance, audit, and reporting systems and procedures, as well asour 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. Qualified personnel with experience relevant to our business are scarce, and competition to recruit them is intense. Changes of management or key employees may disrupt operations, and if we lose the services of one or more key employees, including potential losses of key employees due to COVID-19 disruptions, illness, or death and are unable to recruit and retain a suitable successor with relevant experience or if we fail to successfully hire, retain and manage a sufficient number of highly qualified compliance, audit,employees, we may have difficulties in timely managing, supporting or expanding our business which could cause a Material Adverse Effect. Realignments of resources, reductions in workforce, or other operational decisions have created and risk management personnel. While wecould continue to create an unstable work environment and may have adopted systems, policies,a negative effect on our ability to hire, retain, and procedures reasonably designed to comply or facilitate compliance with all applicable laws, rules and regulations and interpretations of such laws, rules and regulations, these systems, policies, and procedures may not be fully effective.motivate employees. There can be no assurance that any retention program we initiate will not be subjectsuccessful at retaining employees, including key employees.
We use stock options, restricted stock units, and other equity-based awards, along with cash-based bonus programs, to investigations, claims, or other actions or proceedings by regulators or third parties withrecruit and retain senior-level employees and financial professionals. With respect to those employees or financial professionals to whom we issue such equity-based awards, we face a significant challenge in retaining them if the value of equity-based awards in the aggregate or individually is either not deemed by the employee or financial professional to be substantial enough or deemed so substantial that the employee or financial professional leaves after their equity-based awards vest. If the value of equity-based awards granted to our pastkey employees declines, we may be unsuccessful in retaining our key employees and financial professionals. We may undertake or future compliance with applicable laws, rules, and regulations, the outcome ofseek stockholder approval to undertake other equity-based programs to retain key personnel, which may have a Material Adverse Effect.be viewed
If we fail to comply with applicable laws, rules, regulations and guidance, such failure could have a Material Adverse Effect. See “Blucora, Inc. Our Wealth Management business is subject to extensive regulation, and failure to comply with these regulations could have a Material Adverse Effect| 2021 Form 10-K ”for additional information regarding the regulation of our business.23
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 Financial Industry Regulatory Authority (“FINRA”), 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 Wall Street Reform and Consumer Protection Act (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 initiated and in some cases completed a broad review of U.S. fiscal laws and regulations. If significant changes are enacted as a result of this review, they could negatively impact our Wealth Management business and cause a Material Adverse Effect.
On April 18, 2018, the SEC issued draft rulemaking addressing standards of conduct for broker-dealers and disclosure requirements for broker-dealers and investment advisers. As presently drafted, the SEC’s proposed rules would impose a “best interest” standard on broker-dealers and their registered representatives, as well as a new disclosure form (Form CRS) that both broker-dealers and investment advisers would have to give clients before providing them investment advice. The SEC’s proposed rules, if adopted in their current form, would heighten the standard of care for broker-dealers when making investment recommendations and would impose disclosure and policy and procedural obligations that could impact the compensation HD Vest and its representatives receive for selling certain types of products, particularly those (such as mutual funds) that offer different compensation across different share classes. The SEC’s proposed rules would also limit our ability to use the terms “advisor” or “adviser” when referring publiclydilutive to our registered representatives who are not also advisory licensed. Based on comments by SEC Commissioners when the proposed rules were first presented, however, we believe that the SEC’s proposed rulesexisting stockholders or may substantially change during the public comment process. In addition, the SEC’s final rules may not be issued for many months and, even then, could be the subject of litigation. Accordingly, we cannot predict if and when the SEC will complete any final rulemaking or what the contours of the final rules will be. However, the SEC’s final rules could result in additional compliance costs, lesserincrease our compensation and management distraction, all of which could have a Material Adverse Effect.
Legislatures and securities regulators in certain states in which we do business have enacted (or have considered enacting) their own standard of conduct rules for broker-dealers, insurance agents and investment advisers. To date, the States of Nevada, Connecticut, New Jersey and New York have passed legislation or proposed regulations of this sort. The requirements and scope of these state rules are not uniform. Accordingly, we may have to adopt different policies and procedures in different states, which could create added compliance, supervision and sales costs for our Wealth Management
business. Should more states enact similar legislation or regulation, it could result in material additional compliance costs and could have a Material Adverse Effect.
Our Wealth Management business distributes its products and services through financial advisors who affiliate with us as independent contractors.costs. There can be no assurance that legislative, judicial,any such programs, if approved by our stockholders, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rulesany other incentive programs, would be successful in motivating and regulations that would change, or at least challenge, the classification ofretaining our financial advisors as independent contractors. Although we believe we have properly classified our advisors as independent contractors, the IRS oremployees.
Changes in economic, political and 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, whichfactors could have a Material Adverse Effect on our business model, financial condition, 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, as amended, 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 operates in the United States with broad exposure to the global financial markets, and our Tax Software 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 controlstax filing services in place to facilitate compliance with such regulations, there can be no assurance that our interpretationthe federal jurisdiction of the regulations will be consistent withUnited States and various regulators’ interpretations,state jurisdictions. Accordingly, we are affected by United States and global economic and political conditions 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 litigationdirectly 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 haveindirectly impact 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.
During the second half of 2018, our Wealth Management business completed the conversion (the “Conversion”) of our clearing business to Fidelity Clearing & Custody Solutions (“FCCS”). The Conversion involved significant operational, technological, and logistical effort, since it required all of our Wealth Management business and customer accounts to migrate to FCCS’s clearing platform, together with all of the underlying customer data. While the conversion of client assets is complete, we continue to acclimate our advisors and customers to FCCS’s technology, product offerings, processes and procedures, which we expect will continue through the first half of 2019.
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 ensure a successful transition. Given the complexity and magnitude of the transition effort, there can be no guarantee that we will not experience unexpected costs, technological failures, incompatibility of systems or policies, or loss of employees, advisors and customers, which could have a Material Adverse Effect. In addition, during the Conversion, we experienced delays in responding to service requests from our advisors. A recurrence of those delays could result in our advisors becoming unsatisfied and leaving.
We may not realize the financial, operational, and customer-experience benefits that we project over the life of our clearing contract with FCCS. Our cash sweep program under the new clearing firm is a significant component of the anticipated financial benefits of the Conversion. The cash sweep program is subject to interest rate volatility. 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 than expected, potentially in a material amount. In addition, our customers may choose to reduce the amount of cash in their accounts, which would reduce the amount of cash in our sweep program. This would reduce our revenue from the cash sweep program, potentially in a material amount. In addition, as part of the Conversion, we plan to implement policies and pricing intended to encourage the conversion of direct-to-fund assets onto FCCS’s clearing platform, but we may not realize the level of conversion of such assets onto FCCS’s clearing platform that we anticipate. Should the
number of direct-to-fund assets that convert to FCCS’s platform overfactors in the life of our agreement with FCCS fall short of expectations, we will likely receive less economic benefit from the new clearing arrangement than we expected,domestic and global financial markets and economies, which couldmay be material.
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. If a significant number of our advisors or customers are or become dissatisfied by the different technology, systems, processes, policies and products that FCCS offers and they leave it could have a Material Adverse Effect.
In addition, our Wealth Management business is dependent on the performance, liquidity and continuity of its clearing firm. Should FCCS fail to provide clearing services at the contracted levels for any reason or suffer a liquidity event, or if FCCS significantly changes the products and services it offers, it could result in a Material Adverse Effect.
Simultaneously with the conversion to FCCS, we initiated transition to a new investment advisory platform offered by Envestnet Asset Management, Inc. (“Envestnet”). The Envestnet platform is comprehensive and its implementation will substantially change how our Wealth Management business and its Advisors conduct advisory business. Like the clearing firm conversion, implementation of the Envestnet platform was complex and entailed significant effort and commitment from our employees and contractors. While implementation of the Envestnet platform is complete, we continue to enhance the platform to conformdetrimental to our expectations and to acclimate our staff and advisors to the new platform’s workflows, capabilities and procedures. If we are unable to fully integrate the Envestnet platform with our other systems, this could have a Material Adverse Effect. Similarly, if a significant number of our advisors are or become dissatisfied by the transition to the new Envestnet platform, or by the different technology, systems, processes, and policies it offers, they could leave our Wealth Management business, which could have a Material Adverse Effect.
Our operating systems and network infrastructure are 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, login credentials and passwords, 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 or partners may have materially negative consequences for our businesses, including possible fines, penalties and damages, reduced 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 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.
results. 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 on our employees and contractors 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.
It is also possible that unauthorized access to or disclosure of customer data may occur due to inadequate use of security controls by our customers. Accounts created with weak or recycled passwords could allow cyberattackers to gain access to customer data. Unauthorized persons could gain access to customer accounts if customers do not maintain effective access controls of their systems and software. Further, our customers may choose to use the same user ID and password across multiple products and services unrelated to our products. Such customers’ login credentials may be stolen from products offered by third-party service providers unrelated to us and the stolen identity information may be used by a malicious third party to access our products, which could result in disclosure of confidential information.
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.
Concerns about the current privacy and cybersecurity environment, generally, could deter current and potential customers from adopting our products and services and damage our reputation.
The continued occurrence of cyberattacks and data breaches on governments, businesses and consumers in general, indicates that we operate in an external environment where cyberattacks and data breaches are becoming increasingly common. If the global cybersecurity environment worsens, and there are increased instances of security breaches of third-party offerings where consumers’ data and sensitive information is compromised, consumers may be less willing to use online offerings, particularly offerings like ours in which customers often share sensitive financial data. In addition, the increased availability of data obtained as a result of breachesthe SimpleTax sale in September 2019, all of third-party offeringsour revenue is now earned within the United States, and therefore, economic conditions in the United States have an even greater impact on us than companies with an international presence.
Domestic and international factors that could makeaffect our own products more vulnerable to fraudulent activity. Even if our productsbusiness include, but are not affected directly bylimited 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, war and armed conflicts, economic sanctions, trade wars and their collateral impacts, the impact of the United Kingdom’s exit from the European Union, climate change, natural disasters such incidents, they could damage our reputationas weather catastrophes, and deter currentwidespread health emergencies, such as the COVID-19 pandemic. Furthermore, changes in consumer economic variables, such as the number and potential customers from adopting our productssize of personal bankruptcy filings, the rate of unemployment, decreases in property values, certain life events, and services or lead customers to cease using onlinethe level of consumer confidence and connected software products to transact financial business altogether.consumer debt, may substantially affect consumer loan levels and credit quality.
In addition, we currently planthe COVID-19 pandemic has had a material negative impact on the U.S. and global economy as a whole, especially during the first quarter of 2020, and has caused substantial disruption in the U.S. and global securities and debt markets. While the United States and global financial markets experienced increased stability in the second, third and fourth quarters of 2020, uncertainty and potential volatility remain. A period of sustained downturns and/or volatility in the securities markets, changes in interest rates by the Federal Reserve, a return to increase our capture and useincreased credit market dislocations, reductions in the value of user data for marketing purposes. In connection with our use of user data for marketing efforts, concerns may be expressed about whether our products, services, or processes compromise the privacy of users, customers and others. Concerns about our practices with regard to the collection, use, disclosure or security of personal information or other privacy related matters, even if unfounded, could damage the reputation of our business and our brands and adversely affect our operating results.
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.
Criminals may utilize stolen information obtained through hacking, phishing,real estate, 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 fraudmarket factors could have a Material Adverse Effect on our Tax Preparation 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 Federal state,or various states’ tax code (personal and/or corporate) could cause potential new customers not to purchase or to delay purchasing of our products and foreign governmental authorities in jurisdictions in which we operateservices, 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 taken action,caused, and may take actioncould in the future cause, a significant decrease in an attempt to combat stolen identity refund fraud,the number of tax returns filed, which may require changeshave 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 systemscredit risk exposure and business practicescause delays in ways we cannot anticipate. These actions mayour recognition of revenue or future sales to these customers. The issuance of additional Economic Impact Payments via the IRS could disrupt the tax season and cause customer confusion, which could have an impact on our financial results. Any of these events could have a Material Adverse Effect on our Tax Preparation business.Effect. See
Complex and evolving U.S. and international laws and regulation regarding privacy and data protection could resultBlucora, Inc. | 2021 Form 10-K 24
“We may be negatively impacted by any future changes in claims, changes to our business practices, penalties, increased costtax laws” for a discussion of operations or otherwise harm our business.
Regulationadditional risks related to changes in the provision of online services is evolving as federal, state and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer and use of data. This includes, for example, the European Union’s new regulation, the General Data Protection Regulation, which went into effect on May 25, 2018, and the new California Consumer Protection Act, which will become effective on January 1, 2020. If we are unable to engineer products that meet these evolving requirements or help our customers meet their obligations under these or other new data regulations, we might experience reduced demand for our offerings. Further, penalties for non-compliance with these laws may be significant.tax code.
Other governmental authorities throughout the U.S. and around the world are considering similar types of legislative and regulatory proposals concerning data protection. Each of these privacy, security and data protection laws and regulationsfactors could impose significant limitations, require changes toimpact customer activity in our business require notificationand have a Material Adverse Effect. In addition, these factors may have an impact on our ability to customers or workers of a security breach, restrictachieve our use or storage of personal information, or cause changes in customer purchasing behavior, which may makestrategic objectives and to grow 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 make customers less likely to purchase our products and may harm our future financial results. Additionally, any actual or alleged noncompliance with these laws and regulations could result in negative publicity and subject us to investigations, claims or other remedies, including demands that we modify or cease existing business practices, and expose us to significant fines, penalties and other damages. We have incurred, and may continue to incur, significant expenses to comply with existing privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
business.
If we are unable to develop, manage, and maintain critical third-party business relationships for our Tax Preparation and Wealth Management and Tax Software businesses, it could result in a Material Adverse Effect.
Our Tax PreparationSoftware 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 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 distributesprovides wealth, 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, whofinancial professionals, most of which are independent contractors. Maintaining and deepening relationships with these unaffiliated distributors and advisorsfinancial professionals is an important part of our growth strategy because strong third-party distribution arrangements enhance our ability to market our products and increase our advisory assets, revenues, and profitability. There can be no assurance that the distribution and advisorfinancial professional relationships we have established will continue, or that they will continue under existing or favorable terms. Our distribution partners and advisorsfinancial professionals may cease to operate, consolidate, institute cost-cutting efforts, discontinue product sales or compensation streams, or otherwise terminate their relationship with us. Any such reduction in access to third-party distributors and advisorsfinancial professionals may have a material adverse effectMaterial 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 and custody firm that we rely on to provide clearing and custody services for our Wealth Management business, thatincluding the potential adverse effects to our business if they are discussed above.unable to provide timely service to us (or not provide service at all), or if they are unable to adapt to industry and technological changes.
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 SEC’s proposed “best interest” standard) 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 seasonalityproducts and services offered by our Wealth Management and Tax Software businesses are reliant on products, tools, platforms, systems and services provided by key vendors and partners, including in the case of our Wealth Management business, third-party CPA firms and financial professionals. If these third-party products, tools, platforms, systems and services do not operate as anticipated, our ability to conduct and grow our operations and execute our business strategy could be materially harmed and we could incur harm to our business and reputation, as well as potentially significant costs to improve or replace such products and services.
Our business is reliant upon various providers of financial, accounting, technology, marketing, and business products, tools, platforms, systems and services that we use to conduct operations relating to our Wealth Management and Tax PreparationSoftware businesses. In our Wealth Management business, requiresthese key relationships include, among others, our network of financial professionals and CPA partner firms, the provider of our clearing platform,
Blucora, Inc. | 2021 Form 10-K 25
and the provider our investment advisory platform, each of which we rely on to conduct many business activities and transactions with clients, financial professionals, vendors and other third parties.
The products, tools, platforms, systems and services provided by key vendors and partners have required, and may continue to require, significant operational, technological, and logistical efforts from our financial professionals, employees and contractors in order to effectively implement and integrate into our operations. We expect to continue to acclimate our current and future employees, financial professionals and clients to these third party’s technology, product offerings, processes, procedures, workflows and capabilities from time to time. The technology, service and product offerings of other key vendors and partners may not be accepted by key stakeholders, customers or clients at the levels we anticipate, and may not provide the level of benefits that we expect even if accepted.
If a precise developmentsignificant number of our key stakeholders, including financial professionals, customers, or clients, are or become dissatisfied by the different products, tools, platforms, systems and release scheduleservices, including related technology, processes, policies and any delaysproducts, that our key vendors and partners offer and they leave, use a competitor’s product or issuesservices, or seek contractual terms with accuracy or quality may damageus that are less favorable to our reputation andbusiness, it could result inhave a Material Adverse Effect.
Our tax preparation softwareIf our goodwill or acquired intangible assets become impaired, we have been, 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 relatedfuture may be, required to the warranty on our software and service,record a significant impairment charge, which could result in a Material Adverse Effect.
The specializedWe are required to evaluate goodwill and highly seasonal natureacquired intangible assets for impairment at least annually or more frequently if there are indicators that the carrying amount of our Tax Preparationgoodwill and acquired intangible assets, which consist primarily of our financial professional, customer, and sponsor relationships, our technology and our trade names, exceed their fair value. For these impairment tests, we use various qualitative or quantitative methods to estimate the fair value of our goodwill and acquired intangible assets. If the fair value of an asset is less than its carrying value, we would recognize an impairment charge for the difference. As of December 31, 2021, we had $454.8 million of goodwill and $302.3 million of acquired intangible assets on our consolidated balance sheets. For the year ended December 31, 2020, in connection with the Wealth Management reporting unit, we recorded a non-cash impairment charge of $270.6 million, as discussed further in “Item 8. Financial Statements and Supplementary Data—Note 5.” For the year ended December 31, 2019, we recorded a non-cash impairment charge of $50.9 million for our HD Vest indefinite-lived trade name, as discussed further in Item 8. Financial Statements and Supplementary Data—Note 5.
It is possible that we could have additional impairment charges for goodwill or acquired intangible assets in future periods if, among other things, (i) overall economic conditions in current or future years decline, (ii) business presents financial risksconditions or our strategies for a specific business unit or our trade names change from our current strategies or assumptions, (iii) we suffer from an event that impacts our reputation or brand, or (iv) we experience significant unfavorable changes in our forecasted revenue, expenses, cash flows, weighted average cost of capital, and/or market valuation multiples. If we divest or discontinue businesses or products that we previously acquired or if the value of those parts of our business become impaired, we also may need to evaluate the carrying value of our goodwill. Any such charges could negatively impact our operating results and operational challenges, which, if not satisfactorily addressed,could cause a Material Adverse Effect.
Future growth of our business and revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products and services.
The tax preparation and wealth management industries are characterized by rapidly changing technology, evolving industry and security standards, and frequent new product introductions. Our competitors in these 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 developing 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 result in a Material Adverse Effect.
We offer our digital tax preparation products and services through our website and through our mobile applications. If our customers do not deem our website or our mobile applications user friendly or if they deem our competitors’ websites or mobile applications more user friendly or better than ours, our market share could decline, which could have a Material Adverse Effect. In addition, we regularly make upgrades to the technology we use for our tax preparation products, and these upgrades are expected to provide a better user experience and help us to
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keep existing customers or attract new customers. If our mobile applications or the other upgrades we make to the technology we use in our Tax Software business are not successful, it could result in wasted development costs or damage to our brands and market share, any of which could have a Material Adverse Effect. We may also encounter problems in connection with our mobile application, and we may need to devote significant resources to the creation, support, and maintenance of new user experiences.
Our operating systems and network infrastructure, including our website, transaction management software, data center systems, or the systems of third-party co-location facilities and cloud service providers, could fail, become unavailable or otherwise be inadequate, are 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 or any unavailability, inadequacy or failure of our operating systems and network infrastructure may pose risks to the uninterrupted operation of our systems, expose us to mitigation costs, litigation, investigation, fines and penalties by authorities, claims by third parties (including persons whose information was disclosed), damage to our reputation, and/or result in a material loss of revenues and current or potential customers and have a Material Adverse Effect.
Our Tax Preparation business is highly seasonal, with a significant portionSoftware and Wealth Management businesses collect, use, and retain large amounts of confidential personal and financial information from their customers. Maintaining the integrity of our annualsystems and networks is critical to the success of our business operations, including the retention of our customers and financial professionals, and to the protection of our proprietary information and our customers’ personal information. A major breach or failure of our systems or those of our third-party service providers or partners may have materially negative consequences for our business, including possible fines, penalties and damages, reduced 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, service providers or public or private agencies that they have detected, vulnerabilities or current or potential failures in our operating systems, network infrastructure, or our software. The existence of vulnerabilities, even if they do not result in a security breach or system failure, may harm customer confidence and require substantial resources to address, and we may not be able to discover or remediate such vulnerabilities, breaches, or failures. Additionally, any system interruptions that result in the unavailability or unreliability of our websites, transaction processing systems, or network infrastructure could materially reduce our revenue forand impair our ability to properly process transactions. 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.
In addition, hackers may develop and deploy viruses, worms, and other malicious software programs that can be used to attack our or our third-party service providers’ operating systems and network infrastructure. 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 on our employees and contractors 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. It is also possible that unauthorized access to or disclosure of customer data may occur due to inadequate use of security controls by our customers. Unauthorized persons could gain access to customer accounts if customers do not maintain effective access controls of their systems and software.
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
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developments will not compromise or breach the technology or other security measures protecting the networks and systems used in connection with our business.
We rely on third-party vendors to host and store certain of our sensitive and personal information and data through co-location facilities and cloud services. We may not have the ability to effectively monitor or oversee the implementation of the security and control measures utilized by our third-party partners, 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. Additionally, our systems, operations, data centers and cloud services, and those of our third-party service providers and partners, could be susceptible to damage or disruption, including in cases of 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 disruption 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 any of our services or products are unavailable, we could 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 such services earned in the first four monthsor products. We could face significant losses as a result of these events, and our fiscal year. The concentration of our revenue-generating activity during this relatively short period presents a number of challengesbusiness interruption insurance may not be adequate to compensate us 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,all potential losses, 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.
Our Tax Software and Wealth Management businesses have business continuity plans that include secondary disaster recovery centers, but if their primary data centers fail and those disaster recovery centers do not fully restore the failed environments, our business could suffer. In particular, if such interruption occurs during the tax season, it could have a Material Adverse Effect on our Tax Software business.
If our Tax PreparationSoftware business fails to process transactions effectively or fails to adequately protect against disputed or potential fraudulent activities, it could have a Material Adverse Effect.Effect, and stolen identity refund fraud could result in negative publicity and/or impede our Tax Software customers’ ability to timely and successfully file their tax returns and receive their tax refunds.
Our Tax PreparationSoftware business processes a significant volume and dollar value of transactions on a daily basis, particularly during tax season. 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 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 PreparationSoftware 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.
Additionally, criminals may utilize 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, any stolen identity refund fraud could impede our Tax Software 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, despite having been no breach in the security of our systems. Moreover, 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. Notably, 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. As a result, stolen identity fraud, or any increased governmental regulation relating to our systems and business practices to attempt to combat that fraud, could result in a Material Adverse Effect on our Tax Software business.
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The specialized and highly seasonal nature of our Tax Software business presents financial risks and operational challenges, which, if not satisfactorily addressed, could result in a Material Adverse Effect.
Our Tax Software business is highly seasonal, with a significant portion of our annual revenue for such services typically earned in the first four months of our fiscal year, subject to the extension of tax filing deadlines as experienced in 2020 and 2021. 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 Software 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.
Additionally, due to this seasonality of our Tax Software business, a precise development and release schedule is required, and 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 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. Any delays, issues with accuracy or quality, or other 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 on our Tax Software business.
See “The current COVID-19 pandemic could have a Material Adverse Effect.” for additional information regarding the impact of COVID-19 on the seasonal nature of our Tax Software business.
Climate change may adversely impact our operations and financial results.
Climate change may cause extreme weather events that disrupt operations at one or more of our offices, which may negatively affect our ability to provide service to our clients and our financial professionals and the ability of our financial professionals to interact with their clients. Climate change may also have a negative impact on the financial condition of our clients, which may decrease revenues from those clients. New regulations or guidance relating to climate change, as well as the perspectives of shareholders, employees, and other stakeholders regarding climate change, may affect whether and on what terms and conditions we engage in certain activities or offer certain products.
The United States government’s inability to agree on a federal budget, and/or its decision to issue additional Economic Impact Payments, may adversely impact our operations and financial results.
The IRS is currently operating under an extended continuing resolution and without a confirmed budget. In the past, the failure of the United States government to timely complete its budget process has resulted in shutdowns of the federal government, including most recently a shutdown that began on December 22, 2018 and lasted until January 25, 2019.government. During these shutdowns, certain regulatory agencies, such as the Internal Revenue ServiceIRS and the United States Department of the Treasury, have had to furlough critical employees and cease certain critical activities.
During a prolonged government shutdown, the ability of the Internal Revenue ServiceIRS to timely review and process tax return filings may be significantly delayed, and representatives of the Internal Revenue ServiceIRS may be unable to answer crucial taxpayer questions. Even after the shutdown has ended, the Internal Revenue ServiceIRS may be significantly delayed in processing tax return filings as a result of accumulating a backlog of filings during the shutdown. These may be further exacerbated in years where there are significant changes to existing tax legislation, such aslegislation.
The issuance of additional Economic Impact Payments via the applicationIRS could disrupt the tax season and cause customer confusion or diversion.
During the COVID-19 pandemic, the IRS has closed a number of the Tax Legislation to tax return filings related to the 2018 tax year.its service centers. Any uncertainty surrounding the ability of the Internal Revenue ServiceIRS to process tax return filings and Economic Impact Payments and respond to taxpayer questions could cause our customers not to purchase or to delay purchasing our products and services, thereby negatively impacting our revenues and future financial results, 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/or result in a material loss of revenues and current or potential 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 we have some systems that may need updating, which could cause them to 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. Our Tax Preparation and Wealth Management businesses have business continuity plans that include secondary disaster recovery centers, but if their primary data centers fail and those disaster recovery centers do not fully restore the failed environments, our business could suffer. In particular, if such interruption occurs during the tax season, it could have a Material Adverse Effect on our Tax PreparationSoftware business.
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If our enterprise risk management and compliance frameworks, including our policies and procedures, are not effective at mitigating risk and loss to update and improve our internal information technology systems and software platforms. If we experience prolonged delays or unforeseen difficulties in updating and upgrading our systems and architecture, we may experience outages and may not be able to deliver certain offerings and develop new offerings and enhancements that we need to remain competitive. Such improvements and upgrades are often complex, costly and time consuming. In addition, such improvements can be challenging to integrate with our existing technology systems, or may uncover problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in outages, disruption in our business operations, loss of revenue or damage to our reputation.
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,us, we could 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 significantunidentified or unanticipated risks, suffer unexpected claims or losses, as a result of these events, and our business interruption insurance may not be adequate to compensate us for all potential 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 are likely to be subject to litigation in the future. In highly volatile markets, the volume of claims 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 products or services may result in additional restrictions on the offering of certain of our products or services. To the extent that any such additional restrictions or legal claims limit our ability to offer such products or services, it could result in a Material Adverse Effect.
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 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 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 with relevant experience, we may not be able to successfully and timely manage our business or achieve our business 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 significant challenge in retaining them if the value of equity-based awards in the 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 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 existing stockholders or may increase our compensation costs. There can be no assurance that any such programs, if approved by our 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. It is difficult to know at this time how our customers will view the new federal tax laws that were enacted in late 2017 because 2019 will be the first tax season where these laws are in effect. 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 revenuereputational harm, and/or the number of units sold.
Changes in state and federal 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. In addition, 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 enterprise risk management framework seeks to achieve an appropriate balance between risk and conflictsreturn, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others.
We also maintain a compliance program designed to identify, measure, assess, and report on adherence to applicable laws, policies and procedures to which we and our employees, contractors and financial professionals may be ineffectivesubject. While we seek to assess and improve our programs and policies on an ongoing basis, there can be no assurance that our risk management or leave us exposedcompliance programs and policies, along with other related controls, will effectively limit claims or losses and mitigate all risk in our business. As with any risk management or compliance framework, there are inherent limitations to unidentifiedour risk management strategies and certain risks may exist, or unanticipated risks.
Wedevelop in the future, that we have not appropriately anticipated or identified, particularly relating to conduct that is difficult to detect and deter. If these frameworks, including the internal controls and other risk-mitigating factors we employ, are not successful in identifying, monitoring and managing risks, we may be subject to the risks of errors and misconduct by our employees, contractors, financial professionals and financial advisors,other parties with whom we conduct business, such as fraud, non-compliance with policies, rules or regulations, recommending transactions that are not suitable, 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, results 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 services that are used in our businesses.business. 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. If our risk management and compliance framework prove ineffective, we could suffer unexpected claims or losses, experience reputational harm, and/or cause a Material Adverse Effect.
In our Wealth Management business, prevention and detection of wrongdoing or fraud by our advisors, whofinancial professionals, many of which 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 advisorsfinancial professionals will not lead to a Material Adverse Effect on our business.
RIAs have fiduciary obligations that require us and our advisorsfinancial professionals to act 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 conflicts of interest adequately could affect our reputation, the willingness of customers to transact business with us or give rise to litigation or regulatory actions, any of which could have a Material Adverse Effect.
Legal and Regulatory Risks
Our Wealth Management business dependsis subject to extensive regulation, and failure to comply with these regulations or interpretations thereof could have a Material Adverse Effect.
Our Wealth Management business is subject to enhanced regulatory scrutiny and is heavily regulated by multiple agencies, including the SEC, FINRA, 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. In addition, regulators may adopt new laws, rules or regulations, or their interpretation of existing laws, rules or regulations may differ from our interpretation of the laws, rules or regulations that are applicable to our business. Regulators may undertake certain initiatives or reviews of our business and may also pursue enforcement actions against us based on their initiatives or their interpretation of the laws, rules or regulations that could require or prompt us to change our strong reputationbusiness practices, increase our costs, including resulting in significant fines, penalties and disgorgement, reduce our revenue, or cause reputational harm, any of which could cause a Material Adverse Effect.
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For example, 1st Global (which is now known as Avantax Investment Services, Inc.) recently consented to a settlement with the SEC in which we agreed (without admitting or denying the findings set forth in the SEC’s Order) to pay disgorgement, interest and a penalty in the total amount of $16.9 million, as part of the SEC’s broad review of wealth management firms related to mutual fund share class selection disclosures that began in 2018. Regulators, such as the SEC or FINRA, may pursue similar initiatives in the future, and there can be no guarantee that such initiatives would not cause a Material Adverse Effect.
The regulatory environment in which our Wealth Management business operates is continually evolving, and the valuelevel of our brands,financial regulation to which we are subject has generally increased in recent years. Regulators have adopted, proposed to adopt, and may in the future adopt regulations that could be negatively impacted by poor performance.
Developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and futureimpact the manner in which we will market products and services in our Wealth Management business, manage our Wealth Management business operations, and is an important elementinteract with regulators. The Biden administration may undertake a broad review of U.S. fiscal laws and regulations. If significant changes are enacted as a result of this review, such changes could negatively impact our Wealth Management business and cause a Material Adverse Effect.
Legislatures and securities regulators in attracting new customers.certain states in which we do business have enacted (or have considered enacting) their own standard of conduct rules for broker-dealers, insurance agents, and investment advisers. The requirements and scope of these state rules are not uniform. Accordingly, we may have to adopt different policies and procedures in different states, which could create added compliance, supervision, training and sales costs for our Wealth Management business. Should more states enact similar legislation or regulations, it could result in material additional compliance costs and could have a Material Adverse publicity (whetherEffect.
Avantax Wealth Management distributes its products and services through financial professionals who affiliate with us as independent contractors. Legislative, judicial, or not justified) relating to regulatory proceedings(including tax) authorities or agencies could introduce and approve proposals or legislation or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of certain of our financial professionals as independent contractors. Although we believe we have properly classified certain of our financial professionals as independent contractors, the IRS or other eventsU.S. federal or activities attributed to our businesses, our employees, our vendors,state authorities or our partnerssimilar authorities may tarnish our reputation and reduce the valuedetermine that we have misclassified certain of our brands. Damagefinancial professionals 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 reputationbusiness model, financial condition, 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, as amended (the “Exchange Act”), 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 operate the business, repay debt, or 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 laws, rules and regulations that change frequently. Although we have controls in place to facilitate compliance with such laws, rules and 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 professionals.
brand equityIn addition, the risks we face with respect to complying with regulatory requirements for our Wealth Management business may reduce demandbe exacerbated by the effects of COVID-19, particularly with respect to risks associated with our ability to comply with new regulations. Given the unprecedented nature of the COVID-19 pandemic, it is difficult for us to predict how it will continue to impact our business and our ability to adopt new policies, procedures, and training programs and employ the personnel necessary to ensure compliance with new regulations.
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Government regulation of our business, including increased regulation or the interpretation of existing laws, rules or regulations, could have a Material Adverse Effect.
We are subject to federal, state, and local laws, rules, 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, rules, and regulations that affect both our Wealth Management and our Tax Software businesses. As we expand 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, rules, or regulations, or their interpretation of existing laws, rules, or regulations may differ from our interpretation or the laws, rules, and regulations of other jurisdictions in which we operate. If we are found to not be in compliance with certain laws, rules or regulations, it could have a materialMaterial 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, fines and disgorgement, impose significant limitations on the way we conduct our business, require changes to our business, require certain notifications to customers or employees, restrict our use of personal information, cause our customers to cease utilizing our products or services, make our business more costly, less efficient, or impossible to conduct, require us to modify our current or future products or services in a manner that is detrimental to our business and result in additional compliance costs, any of which could have a Material Adverse Effect.
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, or 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 Software 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 Software 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.
Our ability to comply with all applicable laws, rules, and regulations and interpretations of such laws, rules, and regulations 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 of such laws, rules, and regulations, 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.
Current and future litigation, regulatory proceedings or adverse effectcourt interpretations of the laws and regulations under which the Company operates could have a Material Adverse Effect.
Many aspects of our business involve substantial risks of liability and regulatory oversight. We are currently subject to certain legal and regulatory proceedings and are likely to be subject to such proceedings in the future. In highly volatile markets, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have historically increased. Any proceedings to which we are subject, such as
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regulatory proceedings (including investigations or inquiries), purported class actions, shareholder derivative lawsuits, or claims by wealth management clients, could result in substantial expenditures, generate adverse publicity and could significantly impair our business, or force us to change our business practices. Involvement in any regulatory proceeding or the 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, insurance costs, and other related costs. In addition, litigation or regulatory proceedings (including those brought by state or federal agencies) relating to our business practices may result in additional costs, such as fines, penalties and disgorgement, or otherwise restrict or limit our business practices, including the offering of certain of our products or services. To the extent that any such additional costs are incurred, or restrictions implemented that limit or restrict certain business practices, it could result in a Material Adverse Effect.
Further, as required by GAAP, we estimate loss contingencies and establish reserves based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal or regulatory proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements. See “Item 3. Legal Proceedings” along with “Item 8. Financial Statements and Supplementary Data—Note 10.” Because litigation, regulatory proceedings, and other disputes are inherently unpredictable, the results of any of these matters may have a Material Adverse Effect.
Complex and evolving U.S. and international laws and regulations regarding privacy and data protection could result in claims, changes to our business practices, penalties, increased cost of operations or otherwise harm our business, and concerns about the current privacy and cybersecurity environment, generally, could deter current and potential customers from adopting our products and services and damage our reputation.
Regulations related to data processing by online service providers is evolving as federal, state, and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer, and use of data. This includes, for example, the European Union’s General Data Protection Regulation, rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, federal and state labor and employment laws, state data breach notification laws, and state privacy laws such as the California Consumer Privacy Act of 2018, the California Privacy Rights Act of 2020, the Colorado Privacy Act, the Virginia Consumer Data Privacy Act, the New York Stop Hacks and Improve Electronic Data Security (SHIELD) Act, the Gramm-Leach-Bliley Act of 1999, SEC Regulation S-P, the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID, and further potential federal and state requirements. If we are unable to engineer products that meet these evolving requirements or help our customers meet their obligations under these or other new data regulations, we might experience reduced demand for our offerings. Further, penalties for non-compliance with these laws may be significant.
Other governmental authorities throughout the U.S. and around the world are considering similar types of legislative and regulatory proposals. Each of these privacy, security, and data protection laws and regulations could impose significant limitations, require changes to our business, require notification to customers or workers of a security breach, restrict our use or storage of personal information, or cause changes in customer purchasing behavior, 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 make customers less likely to purchase our products and may harm our future financial results. SuchAdditionally, any actual or alleged noncompliance with these laws and regulations could result in negative publicity and subject us to investigations, claims, or other remedies, including demands that we modify or cease existing business practices, and expose us to significant fines, penalties, and other damages. We have incurred, and may continue to incur, significant expenses to comply with existing privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations.
Additionally, the continued occurrence of cyberattacks and data breaches against governments, businesses individuals, indicates that we operate in an external environment where cyberattacks and data breaches are increasingly common. If the global cybersecurity environment worsens, and there are increased instances of security breaches of third-party offerings where consumers’ data and sensitive information is compromised, consumers may be less willing to use online offerings, particularly offerings like ours in which customers often share sensitive financial data. In addition, the increased availability of data unlawfully released as a result of breaches of third-party offerings could make our own products more vulnerable to fraudulent activity. Even if our products are not affected directly by such incidents, certain types of indents could damage also would require additional resources to rebuild our reputation and restoredeter current and
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potential customers from adopting our products and services or lead customers to cease using online and connected software products to transact financial business altogether.
We have begun, and currently plan to continue, increasing our volume of capture and scope of our use of user data for marketing purposes. In connection with our use of user data for marketing efforts, concerns may be expressed about whether our products, services, or processes compromise the valueprivacy expectations of users, customers and others. Concerns about our practices with regard to the brands.collection, use, disclosure or security of personal information or other privacy related matters, even if unfounded, could damage the reputation of our business and our brands and adversely affect our operating results.
We may be negatively impacted by any future changes in tax laws.
Changes in state and federal tax laws and/or filing deadlines, including changes associated with the Economic Impact Payments, have required, and may in the future require updates to our tax preparation software used in our Tax Software business. Such updates are costly and may be time consuming to ensure that they accurately reflect the new laws that are adopted. In addition, further changes in the way that state and federal governments structure their taxation regimes could also cause a Material Adverse Effect on our Tax Software 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.
If othersthird parties claim that our services infringe upon 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 industry have frequently resorted to litigation regarding intellectual property rights. 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. 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. If a successful claim of infringement were 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, our financial condition and results of operationswe 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 toexperience 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.Material Adverse Effect.
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 related to our services and technology, we rely on a combination of copyright and trademark laws, 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. 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. 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.
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Risks Related to Our Acquisitions
We may fail to realize all of the anticipated benefits of acquisitions or those benefits may take longer to realize than expected.
We completed the acquisitions of 1st Global in 2019 and HKFS in 2020. We may fail to realize all of the anticipated benefits of these acquisitions, including the expected operational, revenue, and cost synergies with our Wealth Management business and the level of revenue and profitability growth that we are expecting, or these benefits may not be achieved within the anticipated timeframe.
Additionally, as part of our business plan, we also have entered, and may in the future enter, into agreements with Avantax Wealth Management financial professionals whereby we acquire their financial services business and, following the consummation of the transaction, we serve their clients through our in-house financial professionals. We might not be successful in consummating these transactions; we may not realize the anticipated benefits from the transactions that we do consummate; and we could lose clients who may be unhappy with these acquisitions following their completion.
We may face certain integration challenges associated with these acquisitions, which could divert management’s attention from ongoing operations and opportunities. We may also face difficulties in managing the expanded operations of a significantly larger and more complex company.
Furthermore, we have incurred significant transaction costs in connection with the HKFS Acquisition, including payment of certain fees and expenses incurred in connection with the HKFS Acquisition and the financing of the HKFS Acquisition, and our future financial results could be impacted if goodwill or other intangible assets we acquired in the HKFS Acquisition become impaired.
The failure to realize the anticipated benefits of these acquisitions could cause an interruption of, or a loss of momentum in, our operations and could result in a Material Adverse Effect.
We may seek to acquire companies or assets that complement our Wealth Management and Tax PreparationSoftware businesses, and if we aremay be unsuccessful in completing any such acquisitions on favorable terms or integrating any company acquired it could result in a Material Adverse Effect.acquired.
We may seek to acquire companies or assets that complement our Wealth Management and Tax PreparationSoftware 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.businesses that we have acquired or may in the future acquire, or that these acquisitions will yield all of the positive benefits and synergies anticipated.
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, taking into account potential benefits of operational synergies. However, these new business additions and acquisitions, if any, involve a number of risks and may not achieve our expectations, and, therefore, we could be materially and adversely affectedimpacted 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 to the value of the cash and other consideration that we pay or expenses we incur.
RISKS RELATED TO OUR FINANCING ARRANGEMENTS
Risks Related to Our Financing Arrangements
We have incurred debt in connection with the repaymenta significant amount of our credit facility used for the acquisition of HD Vest and the redemption of our convertible senior notes and may incur future debt,indebtedness, which may materially and adversely affectimpact our financial condition and future financial results.
In May 2017, we entered intoWe are party to a senior secured credit agreement with a syndicatefacility, which consists of lenders in order to (a) refinance the credit facilities previously entered into in 2015 to finance the HD Vest acquisition, (b) redeem our convertible notes that were outstanding at the time, and (c) provide a term loan (the “Term Loan”) and revolving line of credit (the “Revolver”) for future working capital, capital expenditureexpenditures and general business purposes (the “Blucora senior secured credit facilities”).purposes. As of December 31, 2018,2021, we had $265.0$561.3 million in principal amount of outstanding indebtedness under the term loan,Term Loan and we had not borrowed anyno amounts outstanding under the revolving credit facility.Revolver. The final maturity date of the term loanTerm Loan and Revolver is May 22, 2024.2024 and February 21, 2024, respectively. Under the terms of the revolving credit facility,Revolver, we may borrow up to $50.0 million.$90.0 million, subject to customary terms and conditions.
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Our level of indebtedness may materially and adversely affectimpact our financial condition and future financial results by, among other things:
•increasing our vulnerability to downturns in our businesses,business, 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.
The BlucoraOur senior secured credit facilities imposefacility imposes certain restrictions on us, including restrictions on our ability to create liens, incur indebtedness and make investments. In addition, the Blucoraour senior secured credit facilities includefacility includes certain financial covenants, the breach of which may cause the outstanding indebtedness to be declared immediately due and payable. This borrowing,If we fail to comply with our financial and other restrictive covenants contained in the agreements governing our indebtedness, we may be required to refinance all or part of our debt, sell important strategic assets at unfavorable prices or borrow more money. Our borrowings under the senior secured credit facility, and our ability to repay it,such borrowings, 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 our subsidiaries, may incur additional debt in the future. Any additional debt may result in risks similar to those discussed above or in other risks specific to the credit agreements entered into for those debts.
Existing cash and cash 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, acquisition earn-out payments, 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, 2018,2021, we had $265.0$561.3 million in principal amount of outstanding indebtedness under the Term Loan and no amounts outstanding under our term loan.the Revolver. 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 the seasonality of our Tax Software segment, as well as other economic, financial, competitive, and other factors beyond our control. Our businessesbusiness 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 refinanceChanges in the debt and capital markets, including market disruptions, limited liquidity, an increase in interest rates, changes in our indebtedness will depend on the capital marketscredit rating, and our financial condition and results at such time. Wetime, among other potential factors, may not be ablelimit our ability to engage in anyobtain or increase the cost of these activitiesfinancing, as well as the risks of refinancing maturing debt. This may affect our ability to raise needed financing and reduce the amount of cash available to fund our operations, acquisitions, or engage in these activities on desirable terms, which could result in a default on our debt obligations.other growth initiatives.
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.cash equivalents. 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 affectedimpacted 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. Any sale of a substantial amount of our common stock in the public market, either in the initial issuance or in a subsequent resale, could have a material adverse effectMaterial Adverse Effect on the market price of our common stock. 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 RISKSBlucora, Inc. | 2021 Form 10-K 36
Risks Related to Our Common Stock
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, 20172020 and December 31, 2018,2021, our closing stock price ranged from $14.45$8.82 to $40.25.$26.00. On February 22, 2019,18, 2022, the closing price of our common stock was $27.02.$19.53. Our stock price could decline or fluctuate significantly in response to many factors, including the other risks discussed in this reportForm 10-K 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;
•changes in executive officers;
•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;
•effects of the COVID-19 pandemic on economies, markets, the tax season, IRS operations, trends in wealth management, and changes to interest rates;
•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 implement business plans and to meet our expectations;
•the seasonality of our Tax PreparationSoftware business and the resulting large quarterly fluctuations in our revenues;
•variable demand for our services, rapidly evolving technologies and markets, and consumer preferences;
•the level and mix of total client assets and advisory assets, which are subject to fluctuation based on market conditions and customerclient activity;
•the mix of revenues generated by existing businesses discontinued operations or other businesses that we develop or acquire;
•changes in interest rates affectingor reductions in our cash sweep revenue;
•volatility in stock markets impacting the value of our advisory assets;
•effects of the COVID-19 pandemic;
•gains or losses driven by fair value accounting;
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•litigation expenses and settlement costs;
•misconduct by employees, contractors and/or HD Vest financial advisors,professionals, 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.
Actions of activist stockholderscould adversely affect our business and stock price and cause us to incur significant expenses.
Although we strive to maintain constructive, ongoing communications with all our stockholders, and welcome their views and opinions with the goal of enhancing value for all our stockholders, certain activist stockholders may from time to time engage in proxy solicitations, advance stockholder proposals, or otherwise attempt to effect changes or acquire control over the Company. We have been the target of a proxy contest initiated by an activist stockholder in both 2021 and 2022. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as return of capital to stockholders or sales of assets or the entire company. Responding to proxy contests, proposals, and other actions by activist stockholders has required, and may in the future require, us to incur significant legal and consulting costs, proxy solicitation expenses, and administrative and associated costs. In addition, responding to proxy contests, proposals, and other actions by activist stockholders may divert the attention of our board of directors, management team and employees and disrupt our business and operations, as has occurred in the past.
Perceived uncertainties as to our future direction, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team could arise from proposals by activist stockholders or a proxy contest. Such perceived uncertainties could interfere with our ability to execute our strategic plans, be exploited by our competitors and/or other activist stockholders, result in the loss of potential business opportunities, make it more difficult to attract and retain financial professionals and qualified employees, and adversely impact our relationship with existing and potential business partners, any of which could have a material adverse effect on our business, financial condition, and operating results.
Further, actual or perceived actions of activist stockholders may cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the Company’s underlying fundamentals and prospects.
Additionally, we have, and may in the future, become party to litigation as a result of matters arising in connection with a proxy contest or other activist stockholder actions, which could serve as a distraction to our board of directors and management and could require us to incur significant additional costs.
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We cannot assure you we will continue to repurchase shares of our common stock pursuant to our stock repurchase plan.
On March 19, 2019, we announced that our board of directors authorized a stock repurchase plan pursuant to which we may repurchase up to $100.0 million of our common stock. For the year ended December 31, 2019, we repurchased 1.3 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of $28.3 million. On December 9, 2021, we announced that our board of directors authorized the Company to repurchase an additional $28.3 million of our common stock under the stock repurchase plan, bringing the total authorized repurchases under the stock repurchase plan back to $100.0 million.
Pursuant to the stock repurchase plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, our capital allocation policy, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares and may be suspended or discontinued at any time. Any repurchases of our stock pursuant to the stock repurchase plan may materially reduce the amount of cash we have available and may not materially enhance the long-term value of our business or our stock.
For the years ended December 31, 2021 and 2020, we did not repurchase any shares of our common stock under the stock repurchase plan; however, between January 1, 2022 and February 23, 2022, we repurchased approximately 0.6 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately $11.0 million. The remaining authorized amount under the stock repurchase plan as of February 23, 2022 was approximately $89.0 million.
Our utilization of our federal net operating loss carryforwards (“NOLs”)NOLs may be severely limited or potentially eliminated.
As of December 31, 2018,2021, we had federal NOLs of $454.5$105.2 million that will expire primarily between 20202022 and 2027,2037, with the majority of them expiring between 20202022 and 2024. We are currently ableIn 2021, we did not generate sufficient taxable income to offsetutilize all of our tax liabilities with our federal NOLs butthat expired in 2021, and we may not generate sufficient taxable income in future years to utilize all of our federal NOLs prior to their expiration. If our federal NOLs expire unused, their full benefit will not be achieved.realized. In addition, in years where our taxable income exceeds our federal NOLs, which we expect to begin occurring in 2022, we will be required to make additionalfederal cash 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 willwould 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 federal 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.
Delaware law and our charterorganizational documents may impede or discourage a takeover which could cause the market price ofthat would be beneficial to our shares to decline.stockholders.
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 charterorganizational documents that could have an anti-takeover effect or limit the activities of stockholders 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 supermajority 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;
Blucora, Inc. | 2021 Form 10-K 39
•limitations on the removal of directors;
•limitations on stockholders’ ability to call special stockholder meetings; and
•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; andmeetings.
certain restrictions in ourOur certificate of incorporation on transfers of our common stock designed to preserve our federal NOLs.
At our 2009 annual meeting, our stockholders approved an amendment to our certificate of incorporation thatalso restricts any person or entity from attempting to transfer our stock, without prior permission from the Boardour board of Directors,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 thatPursuant to our certificate of incorporation, any transfer that violates its provisionsthis provision 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 ofacquiring Blucora more expensive to the acquirer and could significantly delay, discourage, or prevent third parties from acquiring Blucoraus without the approval of our board of directors.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
All of our facilities are leased. We believe our properties are suitable and adequate for our present needs.
Our principal corporate office is located in Irving,Dallas, Texas. The headquarters and data center facility for our HD Vest business, which comprises ourOur Wealth Management segment areprimarily operates out of our Dallas corporate office, with additional office space located in Irving, Texas, and we have a backup data centerDubuque, Iowa (obtained in connection with the HKFS Acquisition). The Wealth Management segment also has smaller operational offices for our HD Vest businessits in-house financial professionals in Elk Grove, Illinois, as well as access to multiple disaster recovery and data centers acrossvarious locations throughout the country through a third party vendor.United States. The lease for the headquarters for our TaxAct business, which comprisesof our Tax PreparationSoftware segment islocated in Cedar Rapids, Iowa. Our TaxAct business leverages cloud computing for primaryIowa, recently ended and disaster recovery data services.our personnel are working remotely until we secure new office space in the same area. A portion of our Tax Software personnel operate out of our Dallas corporate office. All of our facilities are leased.
ITEM 3. Legal Proceedings
See "Note 11: Commitments and Contingencies" of the Notes to Consolidated“Item 8. Financial Statements in Part II Item 8 of this reportand Supplementary Data—Note 10” for information regarding legal proceedings.
ITEM 4. Mine Safety Disclosures
None.
Blucora, Inc. | 2021 Form 10-K 40
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.” On February 22, 2019,18, 2022, the last reported sale price for our common stock on the NASDAQ Global Select Market was $27.02$19.53 per share.
Holders
As of February 22, 2019,18, 2022, there were 359309 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.
Share Repurchases
There were noOn March 19, 2019, we announced that our board of directors authorized a stock repurchase plan pursuant to which we may repurchase up to $100.0 million of our common stock. For the year ended December 31, 2019, we repurchased 1.3 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of $28.3 million. On December 9, 2021, we announced that our board of directors authorized the Company to repurchase an additional $28.3 million of our common stock pursuant to the stock repurchase plan, bringing the total authorized repurchases in 2018under the stock repurchase plan back to $100.0 million.
Pursuant to the stock repurchase plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and 2017.number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date.
For the years ended December 31, 2021 and 2020, we did not repurchase any shares of our common stock under the stock repurchase plan; however, between January 1, 2022 and February 23, 2022, we repurchased approximately 0.6 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately $11.0 million. The remaining authorized amount under the stock repurchase plan as of February 23, 2022 was approximately $89.0 million.
ITEM 6. Selected Financial Data[Reserved]
The following data is derived from our audited consolidated financial statements and should be read along with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7, our consolidated financial statements and notes in Part II Item 8, and the other financial information included elsewhere in this report.
Blucora, Inc. | 2021 Form 10-K 41
|
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Consolidated Statements of Operations Data: | (1) | (In thousands, except per share data) |
Revenue: | | | | | | | | | | |
Wealth management services revenue | | $ | 373,174 |
| | $ | 348,620 |
| | $ | 316,546 |
| | $ | — |
| | $ | — |
|
Tax preparation services revenue | | 187,282 |
| | 160,937 |
| | 139,365 |
| | 117,708 |
| | 103,719 |
|
Total revenue | | 560,456 |
| | 509,557 |
| | 455,911 |
| | 117,708 |
| | 103,719 |
|
Operating income (loss) | | 67,677 |
| | 48,037 |
| | 37,117 |
| | (4,807 | ) | | 4,603 |
|
Other loss, net | | (15,797 | ) | | (44,551 | ) | | (39,781 | ) | | (12,542 | ) | | (13,489 | ) |
Income (loss) from continuing operations before income taxes | | 51,880 |
| | 3,486 |
| | (2,664 | ) | | (17,349 | ) | | (8,886 | ) |
Income tax benefit (expense) |
| (311 | ) | | 25,890 |
| | 1,285 |
| | 4,623 |
| | 3,342 |
|
Income (loss) from continuing operations | | 51,569 |
| | 29,376 |
| | (1,379 | ) | | (12,726 | ) | | (5,544 | ) |
Discontinued operations, net of income taxes | (2) | — |
| | — |
| | (63,121 | ) | | (27,348 | ) | | (30,003 | ) |
Net income (loss) | | 51,569 |
| | 29,376 |
| | (64,500 | ) | | (40,074 | ) | | (35,547 | ) |
Net income attributable to noncontrolling interests | | (935 | ) | | (2,337 | ) | | (658 | ) | | — |
| | — |
|
Net income (loss) attributable to Blucora, Inc. | | $ | 50,634 |
| | $ | 27,039 |
| | $ | (65,158 | ) | | $ | (40,074 | ) | | $ | (35,547 | ) |
Net income (loss) per share attributable to Blucora, Inc. - basic: | | | | | | | | |
Continuing operations | | $ | 0.94 |
| | $ | 0.61 |
| | $ | (0.05 | ) | | $ | (0.31 | ) | | $ | (0.13 | ) |
Discontinued operations | | — |
| | — |
| | (1.52 | ) | | (0.67 | ) | | (0.73 | ) |
Basic net income (loss) per share | | $ | 0.94 |
| | $ | 0.61 |
| | $ | (1.57 | ) | | $ | (0.98 | ) | | $ | (0.86 | ) |
Weighted average shares outstanding, basic | | 47,394 |
| | 44,370 |
| | 41,494 |
| | 40,959 |
| | 41,396 |
|
Net income (loss) per share attributable to Blucora, Inc. - diluted: | | | | | | | | |
Continuing operations | | $ | 0.90 |
| | $ | 0.57 |
| | $ | (0.05 | ) | | $ | (0.31 | ) | | $ | (0.13 | ) |
Discontinued operations | | — |
| | — |
| | (1.52 | ) | | (0.67 | ) | | (0.73 | ) |
Diluted net income (loss) per share | | $ | 0.90 |
| | $ | 0.57 |
| | $ | (1.57 | ) | | $ | (0.98 | ) | | $ | (0.86 | ) |
Weighted average shares outstanding, diluted | | 49,381 |
| | 47,211 |
| | 41,494 |
| | 40,959 |
| | 41,396 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Consolidated Balance Sheet Data: | (1) | |
Cash, cash equivalents, and investments | | $ | 84,524 |
| | $ | 59,965 |
| | $ | 58,814 |
| | $ | 66,774 |
| | $ | 293,588 |
|
Working capital | (2) (3) (4) | 82,788 |
| | 47,641 |
| | 43,480 |
| | 174,571 |
| | 299,431 |
|
Total assets | | 997,725 |
| | 1,001,671 |
| | 1,022,659 |
| | 1,299,548 |
| | 865,775 |
|
Total long-term liabilities | (2) (3) (4) | 316,905 |
| | 390,495 |
| | 535,577 |
| | 656,122 |
| | 311,692 |
|
Total stockholders’ equity | | 607,595 |
| | 541,387 |
| | 417,019 |
| | 462,284 |
| | 479,025 |
|
| |
(1)
| On December 31, 2015, we acquired HD Vest. See "Note 4: Business Combinations" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
|
| |
(2)
| On October 14, 2015, we announced plans to divest the Search and Content and E-Commerce businesses. Accordingly, the operating results of these businesses have been presented as discontinued operations for all periods presented, and the related balance sheet data has been classified in its entirety within current assets and current liabilities as of December 31, 2015 but classified within current and long-term assets and liabilities, as 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 2016 our Convertible Senior Notes were classified as a long-term liability with an outstanding balance, net of discount and issuance costs, of $164.2 million. See "Note 10: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.
|
| |
(4)
| See "Note 5: Discontinued Operations" and "Note 10: Debt" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for a discussion of debt activity.
|
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read theThe following discussion provides an analysis of the Company’s financial condition, cash flows, and analysisresults of operations from management’s perspective and should be read in conjunction with the Selected Financial Data and our consolidated financial statements and notes thereto included elsewhereunder Part II, Item 8 in this report.Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. See Part I "Cautionarythe section titled “Cautionary Statement Regarding Forward-Looking Statements"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,Form 10-K, particularly under Part I, Item 1A, in the section titled "Risk“Risk Factors."”
IntroductionIn addition, the following discussion and Company Historyanalysis compares our financial condition and results of operations for the year ended December 31, 2021 to the year ended December 31, 2020. For a discussion of the financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the year ended December 31, 2020 that was filed with the Securities and Exchange Commission (the “SEC”)on February 26, 2021.
Overview
Blucora, operatesInc. (the “Company,” “Blucora,” “we,” “our,” or “us”) is a leading provider of integrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms. Our mission is to enable financial success by changing the way individuals and families plan and achieve their goals through tax-advantaged solutions. We conduct our operations through two primary businesses: a(1) the Wealth Management business and a digital(2) the Tax PreparationSoftware business. TheOur common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
Wealth Management
Our Wealth Management business consists of the operations of HD Vest, whichAvantax Wealth Management and Avantax Planning Partners (collectively, the “Wealth Management business” or the “Wealth Management segment”).
Avantax Wealth Management provides tax-focused wealth management solutions for financial advisorsprofessionals, tax professionals, CPA firms, and their clients. The Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged investing and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee-based RIA and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-K is inclusive of HKFS.
Tax PreparationSoftware
Our Tax Software business consists of the operations of TaxAct, Inc. (“TaxAct,” the “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation solutionsservices and ancillary services for consumers, small business owners, and tax professionals.professionals through its website www.TaxAct.com and its mobile applications. We referred to this business as the “Tax Preparation business” and “Tax Preparation segment” in previous filings.
For
Blucora, Inc. | 2021 Form 10-K 42
Business Environment
COVID-19 pandemic
The COVID-19 pandemic, including precautionary measures and societal response, has had a further discussion of Blucora's businessessignificant negative impact on the U.S. and history, see "Business"global economy and caused substantial disruption in Part I Item 1 of this report.
Recent Developmentsthe U.S. and global securities markets, and as a result, has negatively impacted both our Wealth Management and Tax Software businesses.
In 2018, we commenced our new clearing services relationship with Fidelity Clearing & Custody Solutions pursuant to an agreement that we executed during the third quarter of 2017. We expect the new clearing relationship to provide tangible benefits to our advisors and customers in the form of improved technology, product offerings and service. We currently expect that this relationship could generate in excess of $120.0 million of incremental Wealth Management segment income overbusiness, this economic and financial market disruption negatively impacted the 10 years following the conversion to the new platform. In the fourth quartervalue of 2018, we received approximately $9.3 millionsome of operating cash flows from incentives from this relationship, which will benefit Wealth Management segment income over the succeeding 10 years and will offset operating expenses.
Seasonality
Our Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue earnedour clients’ assets in the first four monthsquarter of our fiscal year. During2020, which caused a corresponding decline in the amount of revenue that we derived from these client assets. Further, beginning in the first quarter of 2020, we experienced a decline in commission revenue from lower trading volumes. Positive financial market movement in the second, third, and fourth quarters of 2020 and in 2021 increased advisory and brokerage asset balances, with higher client asset balances benefiting advisory fees and trailing commissions. Additionally, in response to this economic and market disruption, the Federal Reserve decreased the federal funds rate in 2020 and maintained a low-interest rate environment in 2021, causing a significant decline in cash sweep revenue. The Federal Reserve has signaled adjustments to monetary policy that would increase the federal funds rates, which we expect would positively impact cash sweep revenue. If the Federal Reserve does not increase, or further decreases, the federal funds rates, cash sweep revenue would continue to be negatively impacted. Overall, we expect that revenues in our Wealth Management business will remain susceptible to being adversely affected in future periods in which pandemic-influenced economic and market factors remain present.
In our Tax PreparationSoftware segment, typically reports losses because revenue from the segment is minimal while core operating expenses continue. We anticipate thatInternal Revenue Service (“IRS”) extended the seasonal nature of that partfiling and payment deadline for tax year 2019 federal tax returns to July 15, 2020 as a result of the business will continueCOVID-19 pandemic. This extension resulted in elevated sales and marketing expenses in 2020. Additionally, the foreseeable future.IRS was selected by the U.S. Congress as the vehicle for distribution of the first round of Economic Impact Payments (“EIP1”), which caused significant disruption to the 2020 tax season. As a result of the extension of the 2020 tax season and the EIP1 disruption, our results of operations for our Tax Software segment were negatively impacted in 2020 compared to prior years.
For additional information on the effects of the COVID-19 pandemic on our results of operations, see “Results of Operations” below. For more information on the risks related to the COVID-19 pandemic, see Part I, Item 1A under the subheading, “The current COVID-19 pandemic could have a Material Adverse Effect.”
Blucora, Inc. | 2021 Form 10-K 43
RESULTS OF OPERATIONS
Summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Year Ended December 31, | | Change | | | | |
| 2021 | | 2020 | | $ | | % | | | | |
Revenue: | | | | | | | | | | | |
Wealth Management | $ | 658,213 | | | $ | 546,189 | | | $ | 112,024 | | | 20.5 | % | | | | |
Tax Software | 226,987 | | | 208,763 | | | 18,224 | | | 8.7 | % | | | | |
Total revenue | 885,200 | | | 754,952 | | | 130,248 | | | 17.3 | % | | | | |
Operating income (loss): | | | | | | | | | | | |
Wealth Management | 82,212 | | | 72,195 | | | 10,017 | | | 13.9 | % | | | | |
Tax Software | 81,879 | | | 49,621 | | | 32,258 | | | 65.0 | % | | | | |
Corporate-level activity | (133,472) | | | (390,936) | | | 257,464 | | | 65.9 | % | | | | |
Total operating income (loss) | 30,619 | | | (269,120) | | | 299,739 | | | 111.4 | % | | | | |
Interest expense and other, net | (32,080) | | | (31,304) | | | (776) | | | (2.5) | % | | | | |
Loss before income taxes | (1,461) | | | (300,424) | | | 298,963 | | | 99.5 | % | | | | |
Income tax benefit (expense) | 9,218 | | | (42,331) | | | 51,549 | | | 121.8 | % | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income (loss) | $ | 7,757 | | | $ | (342,755) | | | $ | 350,512 | | | 102.3 | % | | | | |
|
| | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Years ended December 31, |
| 2018 | | Change | | 2017 | | Change | | 2016 |
Revenue | $ | 560,456 |
| | 10 | % | | $ | 509,557 |
| | 12 | % | | $ | 455,911 |
|
Operating income | $ | 67,677 |
| | 41 | % | | $ | 48,037 |
| | 29 | % | | $ | 37,117 |
|
Year ended December 31, 2018 compared withFor the year ended December 31, 2017
Revenue2021 compared to the year ended December 31, 2020, net income increased approximately $50.9$350.5 million primarily due to increases of $24.6the following factors:
•Wealth Management segment operating income increased $10.0 million and $26.3primarily due to a $112.0 million increase in revenue, related to ourpartially offset by a $102.0 million increase in operating expenses. Wealth Management segment operating income included $9.6 million of incremental operating income from the inclusion of a full year of Avantax Planning Partners, which was largely offset by a $6.3 million decrease in cash sweep revenue caused by reduced interest rates. In addition, Wealth Management segment results for 2020 were negatively affected by suppressed client asset levels and transaction activity during 2020 resulting from the COVID-19 pandemic and related financial market disruption.
•Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
OperatingSoftware segment operating income increased approximately $19.6$32.3 million consisting of the $50.9primarily due to an $18.2 million increase in revenue, and a $14.0 million decrease in operating expenses. Operating income during 2020 was impacted by incremental advertising and marketing spend caused by the extension of the 2020 tax season and efforts to address weak performance during the first two months of the 2020 tax season.
•Operating loss within corporate-level activity decreased $257.5 million primarily due to the $270.6 million Wealth Management goodwill impairment recognized in the first quarter of 2020, offset partially by a $31.3$10.9 million increase in operating expenses. Key changes in operating expenses were:
$22.4 million increase in the Wealth Management segment's operating expenses, primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commissionassociated with contested proxy and advisory revenues earned on client accounts,other legal and consulting costs costs incurred in connection with our transition to our new clearing firm, and an increase in stock-based compensation expense related to stock options granted to certain HD Vest financial advisors.
$12.0 million increase infor the Tax Preparation segment’s operating expenses, primarily due to higher spend on marketing, particularly offline media and digital marketing efforts, an increase in engineering development projects, an increase in consulting expenses primarily related to strategic initiatives and an increase in personnel costs, that was primarily related to additional headcount.
$3.2 million decrease in corporate-level expense activity, primarily due to lower Strategic Transformation costs, which primarily consisted of severance and other personnel-related costs, offset by higher depreciation due to the abandonment of certain internally-developed software fixed assets and an increase in personnel costs, that was primarily related to additional headcount.
Year ended December 31, 2017 compared with year ended December 31, 20162021.
Revenue increased approximately $53.6•The Company recorded an income tax benefit of $9.2 million due to increasesfor the year ended December 31, 2021 and income tax expense of $32.1$42.3 million for the year ended December 31, 2020. For the year ended December 31, 2021, the income tax benefit primarily resulted from a reduction in our valuation allowance. This reduction included the utilization of net operating losses for current year taxable income, the write-off of expired federal net operating losses, and $21.6 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operatingwrite-off of expired capital loss carryforwards. For the year ended December 31, 2020, income increased approximately $10.9 million, consistingtax expense was driven by the impact of the $53.6 million increasenon-deductible goodwill impairment recorded in revenue2020, the write-off of expired federal net operating losses, and offset by a $42.7 million increase in operating expenses. Key changes in operating expenses were:incremental valuation allowance.
$27.5 million increase in the Wealth Management segment's operating expenses, primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continued to standardize employee benefits across our businesses.
$15.5 million increase in the Tax Preparation segment’s operating expenses, 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.
$0.3 million decrease in corporate-level expense activity, primarily due to lower stock-based compensation costs due to fewer grants in 2017 compared to 2016 and higher expense recognized in 2016 related to grants made to HD Vest employees in 2016 in connection with the HD Vest acquisition, partially offset by decreases within our Tax Preparation business due to prior forfeitures, and lower personnel costs, both offset by Strategic Transformation costs.
SEGMENT REVENUE/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.United States (“GAAP”) and include certain reconciling items attributable to our segments. We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment. Segment information appearing in "Note 3: Segment Information and Revenues" 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
Blucora, Inc. | 2021 Form 10-K 44
and overhead costs), stock-based compensation, acquisition-related costs, depreciation, amortization of acquired intangible assets, restructuring,acquisition and integration costs, executive transition costs, headquarters relocation costs, contested proxy and other loss,legal and consulting costs, or impairment of goodwill to the reportable segments. Such amounts are reflected under “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, andor income taxes to the reportable segments.
Wealth Management | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Year Ended December 31, | | Change | | | | |
| 2021 | | 2020 | | $ | | % | | | | |
Revenue | $ | 658,213 | | $ | 546,189 | | $ | 112,024 | | | 20.5 | % | | | | |
Operating income | $ | 82,212 | | $ | 72,195 | | $ | 10,017 | | | 13.9 | % | | | | |
Segment margin | 12.5 | % | | 13.2 | % | | | | | | | | |
For the year ended December 31, 2021 compared to the year ended December 31, 2020, Wealth Management segment operating results. Rather, we analyze such general and administrative costsincome increased $10.0 million due to a $112.0 million increase in revenue partially offset by a $102.0 million increase in operating expenses.
•separately under the heading "Corporate-level activity."
We have two reportable segments: Wealth Management revenue increased $112.0 million primarily due to an $81.0 million increase in advisory revenue, a $25.5 million increase in commission revenue, and Tax Preparation.
a $7.1 million increase in transaction and fee revenue, partially offset by a $1.6 million decrease in asset-based revenue. These revenue increases primarily resulted from increased client asset levels and favorable transaction activity compared to the suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption. In addition, Wealth Management revenue included $21.5 million of incremental revenue compared to 2020 from the inclusion of a full year of Avantax Planning Partners. These increases were partially offset by a $6.3 million decrease in cash sweep revenue due to a sharp decline in interest rates after the first quarter of 2020 that persisted throughout 2021.
•Wealth Management operating expenses increased $102.0 million primarily due to a $77.2 million increase in cost of revenue for advisory fees and commissions paid, and an $18.8 million increase in sales and marketing expenses. Payout ratios to financial professionals increased due to improved market performance, the exit of lower producing financial professionals who were concentrated at lower payout levels, and the alignment of our payout grids. The increase in sales and marketing expenses was primarily due to increases in travel and conference costs, and incremental personnel and support costs. Wealth Management operating expenses included $11.9 million of incremental costs from the inclusion of a full year of Avantax Planning Partners.
•Segment margin compression during the year ended December 31, 2021 was primarily due to the reduction in cash sweep revenue, coupled with the increase in operating expenses outlined above. Absent any change in the federal funds rate, we expect further margin compression in the near term due to increased travel and conference costs associated with reduced COVID-19 travel restrictions and higher payout ratios as we continue to grow and scale the business.
Blucora, Inc. | 2021 Form 10-K 45
|
| | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Years ended December 31, |
| 2018 | | Change | | 2017 | | Change | | 2016 |
Revenue | $ | 373,174 |
| | 7 | % | | $ | 348,620 |
| | 10 | % | | $ | 316,546 |
|
Operating income | $ | 53,053 |
| | 4 | % | | $ | 50,916 |
| | 10 | % | | $ | 46,296 |
|
Segment margin | 14 | % | | | | 15 | % | | | | 15 | % |
Sources of revenueWealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position, and operating performance. A summary of our sources of revenue and business and financial metrics areis as follows.follows:
Sources of revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Year Ended December 31, | | Change | | | |
| Sources of Revenue | Primary Drivers | 2021 | | 2020 | | $ | | % | | | |
Financial professional-driven | Advisory | - Advisory asset levels | $ | 395,800 | | $ | 314,751 | | $ | 81,049 | | | 25.8 | % | | | |
Commission | - Transactions - Asset levels - Product mix | 210,677 | | 185,201 | | 25,476 | | | 13.8 | % | | | |
Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 22,101 | | 23,688 | | (1,587) | | | (6.7) | % | | | |
Transaction and fee | - Account activity - Number of financial professionals - Number of clients - Number of accounts | 29,635 | | 22,549 | | 7,086 | | | 31.4 | % | | | |
| Total revenue | $ | 658,213 | | $ | 546,189 | | $ | 112,024 | | | 20.5 | % | | | |
| Total recurring revenue | $ | 559,694 | | $ | 464,944 | | $ | 94,750 | | | 20.4 | % | | | |
| Recurring revenue rate | 85.0 | % | | 85.1 | % | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Year ended December 31, |
| Sources of Revenue | Primary Drivers | 2018 | | Change | | 2017 | | Change | | 2016 |
Advisor-driven
| Commission | - Transactions - Asset levels | $ | 164,201 |
| | 2 | % | | $ | 160,241 |
| | 7 | % | | $ | 150,125 |
|
Advisory | - Advisory asset levels | 164,353 |
| | 13 | % | | 145,694 |
| | 13 | % | | 129,417 |
|
Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 31,456 |
| | 20 | % | | 26,297 |
| | 16 | % | | 22,653 |
|
Transaction and fee | - Account activity - Number of clients - Number of advisors - Number of accounts | 13,164 |
| | (20 | )% | | 16,388 |
| | 14 | % | | 14,351 |
|
| Total revenue | $ | 373,174 |
| | 7 | % | | $ | 348,620 |
| | 10 | % | | $ | 316,546 |
|
| Total recurring revenue | $ | 303,117 |
| | 9 | % | | $ | 277,546 |
| | 11 | % | | $ | 249,310 |
|
| Recurring revenue rate | 81.2 | % | | | | 79.6 | % | | | | 78.8 | % |
Recurring revenue consists of advisory fees, trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commissionunder the headings “Advisory revenue,, Advisory” “Commission revenue,, Asset-based” “Asset-based revenue,,” and Transaction“Transaction and fee revenue,,” respectively. Certain recurring revenues are associated with asset balances and fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, we believe 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.
Blucora, Inc. | 2021 Form 10-K 46
Business metrics
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(In thousands, except percentages and as otherwise indicated) | December 31, | | Change |
2021 | | 2020 | | $ | | % |
Client assets balances: | | | | | | | |
Total client assets (1) | $ | 89,086,032 | | $ | 82,961,244 | | $ | 6,124,788 | | | 7.4 | % |
Brokerage assets (1) | $ | 46,906,981 | | $ | 47,357,687 | | $ | (450,706) | | | (1.0) | % |
Advisory assets (1) | $ | 42,179,051 | | $ | 35,603,557 | | $ | 6,575,494 | | | 18.5 | % |
Advisory assets as a percentage of total client assets | 47.3 | % | | 42.9 | % | | | | |
| | | | | | | |
Number of financial professionals (in ones): | | | | | | | |
Independent financial professionals (2) | 3,382 | | 3,748 | | (366) | | | (9.8) | % |
In-house/employee financial professionals (3) | 34 | | 22 | | 12 | | | 54.5 | % |
Total number of financial professionals | 3,416 | | 3,770 | | (354) | | | (9.4) | % |
Advisory and commission revenue per financial professional (4) | $ | 177.5 | | | $ | 132.6 | | | $ | 44.9 | | | 33.9 | % |
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(In thousands, except percentages and as otherwise indicated) |
| Years ended December 31, |
| 2018 | | Change | | 2017 | | Change | | 2016 |
Total Client Assets | $ | 42,249,055 |
| | (4 | )% | | $ | 44,178,710 |
| | 14 | % | | $ | 38,663,566 |
|
Brokerage Assets | $ | 29,693,650 |
| | (4 | )% | | $ | 31,648,545 |
| | 12 | % | | $ | 28,266,495 |
|
Advisory Assets | $ | 12,555,405 |
| | — | % | | $ | 12,530,165 |
| | 21 | % | | $ | 10,397,071 |
|
Percentage of Total Client Assets | 29.7 | % | |
| | 28.4 | % | |
| | 26.9 | % |
Number of advisors (in ones) | 3,593 |
| | (10 | )% | | 3,999 |
| | (11 | )% | | 4,472 |
|
Advisor-driven revenue per advisor | 23.2 |
| | 14 | % | | 20.4 |
| | 25 | % | | 16.3 |
|
____________________________(1)In connection with our ongoing integration of acquisitions, as of December 31, 2021, we refined the methodology by which we calculate client assets to align the methodologies within our Wealth Management segment for calculating such metrics. Specifically, such changes to the methodology include alignment to one third party data aggregator for assets not placed in custody with our clearing firm and to one consistent set of logic for all assets and transaction types. We have not recast client assets for prior periods to conform to our current presentation as we believe the changes to the calculation to be immaterial.
(2)The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as licensed referring representatives at CPA firms that partner with Avantax Planning Partners.
(3)The number of in-house/employee financial professionals includes licensed financial planning consultants, all of which are affiliated with Avantax Planning Partners.
(4)Calculation based on advisory and commission revenue for the years ended December 31, 2021 and 2020, respectively.
Client assets. Total client assets ("total client assets") includesinclude assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one service for a client’s assets, the value of the asset is only counted once in the total amount of total client assets. Total client assets include advisory assets, non-advisory brokerage accounts, annuities, and mutual fund positions held directly with fund companies. These assets are not reported on the Company’s consolidated balance sheets. Total client assets were previously reported as "Assets Under Administration" or "AUA."
For the year ended December 31, 2018, total client assets includes $34.5 million of assets held at our former clearing firm for which we are broker-of-record and whose conversion was administratively delayed.
Advisory assets ("advisory assets") includes externalinclude 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 advisory assets for each advisory client. These assets are not reported on the Company’s consolidated balance sheets. Advisory assets were previously reported as "Assets Under Management" or "AUM."
Brokerage assets represents the difference betweenrepresent total client assets andother than advisory assets.
WeTotal client assets increased $6.1 billion at December 31, 2021 compared to December 31, 2020 primarily due to $8.1 billion of favorable market change and asset reinvestment following the pandemic-influenced market downturn in 2020, partially offset by net client outflows of $2.1 billion.
Advisory assets as a percentage of total client assets increased to 47.3% at December 31, 2021 compared to 42.9% at December 31, 2020. This increase was driven by net client inflows of $2.6 billion, relating in part to our focus on converting off platform, direct to fund assets when appropriate for the client, to fee based advisory platforms that include ongoing management and which incur higher margins.
While financial markets have been reducing disengaged advisors who have littlesubstantially stabilized since the pandemic-influenced financial market conditions in 2020, we cannot predict with certainty the extent of the impact of the COVID-19 pandemic and future financial market fluctuations on our client assets. However, the continued volatility in the U.S. and global economy and uncertainty in financial markets due to no assets held with us, which has resultedthe pandemic may cause declines in advisor counts trending down. As we continue to reduce disengaged advisors, the amount of our total client assets.
Financial professionals. The number of advisors could continue to decrease before stabilizing. This decrease has resulted in, and is expected to continue to improve, the growth in advisor-driven revenues per advisor.
Year endedour financial professionals decreased 9% at December 31, 20182021 as compared to December 31, 2020, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. This attrition led to a 34% increase in advisory and commission revenue per financial
Blucora, Inc. | 2021 Form 10-K 47
professional for the year ended December 31, 2017
Wealth Management revenue increased approximately $24.6 million2021 as a result of the factors discussed with each source of revenue below.
Wealth Management operating income increased approximately $2.1 million, consisting of the $24.6 million increase in revenue, offset by a $22.4 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportioncompared to the change in underlying commission and advisory revenues earned on client accounts, consulting costs and costs incurred in connection with our transition to our new clearing firm, and an increase in stock-based compensation expense related to stock options granted to certain HD Vest financial advisors.
Year ended December 31, 2017 compared with year ended December 31, 20162020. The decrease in the number of financial professionals was partially offset by our continued recruitment and onboarding of independent financial professionals.
Advisory revenue. Advisory revenue primarily includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenue generated by Avantax Planning Partners, advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized ratably over the period in which our performance obligations were completed. Because advisory fees are based on advisory assets on the last day of each quarter, our revenues are impacted, in part, by the timing of market movements relative to when clients are billed.
Advisory asset balances were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Advisory assets—independent financial professionals | $ | 35,392,307 | | | $ | 30,804,532 | | | $ | 4,587,775 | | | 14.9 | % |
Advisory assets—in-house/employee financial professionals | 5,336,541 | | | 3,553,422 | | | 1,783,119 | | | 50.2 | % |
Retirement advisory assets—in-house financial professionals | 1,450,203 | | | 1,245,603 | | | 204,600 | | | 16.4 | % |
Total advisory assets | $ | 42,179,051 | | | $ | 35,603,557 | | | $ | 6,575,494 | | | 18.5 | % |
The activity within our advisory assets was as follows:
| | | | | | | | | | | | | |
($ in thousands) | December 31, | | |
| 2021 | | 2020 | | |
Balance, beginning of the period | $ | 35,603,557 | | | $ | 27,629,164 | | | |
Net new advisory assets | 2,633,749 | | | 91,543 | | | |
Inflows from acquisitions | — | | | 4,178,729 | | | |
Market impact and other | 3,941,745 | | | 3,704,121 | | | |
Balance, end of the period | $ | 42,179,051 | | | $ | 35,603,557 | | | |
Advisory revenue | $ | 395,800 | | | $ | 314,751 | | | |
Average advisory fee rate (1) | 104 bps | | 110 bps | | |
____________________________
Wealth Management revenue(1)For the years ended December 31, 2021 and 2020, average advisory fee rate equals the sum of each quarterly average advisory fee rate within the relevant year-to-date period.
At December 31, 2021, advisory assets increased approximately $32.1 million asby $6.6 billion, including $3.9 billion from market growth and a result of the factors discussed with each source of revenue below.
Wealth Management operating income increased approximately $4.6 million, consisting of the $32.1 million$2.6 billion increase in revenue, offset bynet new advisory assets. Net new advisory assets benefited from a $27.5 million increase in operating expenses. The increase in Wealth Management operating expenses wasfocus on converting off platform, direct to fund assets when appropriate for the client, to fee based advisory platforms that include ongoing management and which incur higher margins.
For the year ended December 31, 2021, the average advisory fee rate decreased primarily due to higher commissions paid to our financial advisors,tiered fee structure, which fluctuated in proportionhas generated lower average fee rates as average client asset balances have increased. In addition, the average advisory fee rate decreased due to the change in underlying commissioninclusion of Avantax Planning Partners, which has a lower advisory fee structure, for the full year.
For the year ended December 31, 2021, advisory revenue increased $81.0 million primarily due to the inclusion of a full year of Avantax Planning Partners, stabilized market conditions compared to the volatility during 2020 from the COVID-19 pandemic, and net new advisory revenues earned on client accounts, and higher net personnel expenses as we continued to standardize employee benefits across our businesses.assets.
Blucora, Inc. | 2021 Form 10-K 48
Commission revenue:revenue. The Wealth Management segment generates two types of commissions: (1) transaction-based sales commissions and (2) trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors.professionals. 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, market volatility, interest rate fluctuations, and investment activity of our financial advisors'professionals’ 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 type of commission revenue, was as follows:
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(In thousands, except percentages) | Year Ended December 31, | | Change | | | | | | |
| 2021 | | 2020 | | $ | | % | | | | | | |
By product category: | | | | | | | | | | | | | |
Mutual funds | $ | 92,096 | | | $ | 90,112 | | | $ | 1,984 | | | 2.2 | % | | | | | | |
Variable annuities | 74,050 | | | 63,014 | | | 11,036 | | | 17.5 | % | | | | | | |
Insurance | 18,763 | | | 16,313 | | | 2,450 | | | 15.0 | % | | | | | | |
General securities | 25,768 | | | 15,762 | | | 10,006 | | | 63.5 | % | | | | | | |
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Total commission revenue | $ | 210,677 | | | $ | 185,201 | | | $ | 25,476 | | | 13.8 | % | | | | | | |
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By type of commission: | | | | | | | | | | | | | |
Transaction-based | $ | 89,970 | | | $ | 74,788 | | | $ | 15,182 | | | 20.3 | % | | | | | | |
Trailing | 120,707 | | | 110,413 | | | 10,294 | | | 9.3 | % | | | | | | |
Total commission revenue | $ | 210,677 | | | $ | 185,201 | | | $ | 25,476 | | | 13.8 | % | | | | | | |
|
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(In thousands) | Years ended December 31, |
| 2018 | | Change | | 2017 | | Change | | 2016 |
By product category: | | | | | | | | | |
Mutual funds | $ | 87,624 |
| | 4 | % | | $ | 84,159 |
| | 6 | % | | $ | 79,476 |
|
Variable annuities | 51,199 |
| | — | % | | 51,385 |
| | 8 | % | | 47,641 |
|
Insurance | 14,160 |
| | 8 | % | | 13,146 |
| | 10 | % | | 11,909 |
|
General securities | 11,218 |
| | (3 | )% | | 11,551 |
| | 4 | % | | 11,099 |
|
Total commission revenue | $ | 164,201 |
| | 2 | % | | $ | 160,241 |
| | 7 | % | | $ | 150,125 |
|
By sales-based and trailing: | | |
| | | |
| | |
Sales-based | $ | 67,350 |
| | (1 | )% | | $ | 68,199 |
| | 6 | % | | $ | 64,452 |
|
Trailing | 96,851 |
| | 5 | % | | 92,042 |
| | 7 | % | | 85,673 |
|
Total commission revenue | $ | 164,201 |
| | 2 | % | | $ | 160,241 |
| | 7 | % | | $ | 150,125 |
|
In 2018, sales-basedFor the year ended December 31, 2021, transaction-based commission revenue decreased approximately $0.8 million, primarily due to increased activity in equities, that was more than offset by decreased activity in mutual funds and alternative investments. General securities include equities, exchange-traded funds, bonds and alternative investments.
In 2018, trailing commission revenue increased approximately $4.8$15.2 million and reflects$10.3 million, respectively, compared to the year ended December 31, 2020. These increases were primarily due to an increase in the market valuetransaction activity and client asset levels, each of which was lower in 2020, as a result of the underlying assets.
In 2017, sales-based commission revenue increased approximately $3.7 million, primarily due to increased activity in mutual funds, insuranceCOVID-19 pandemic and general securities resulting from overallrelated financial 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 increased approximately $6.4 million and reflects an increase in the market value of the underlying assets and the impact of new investments.
Advisory revenue: Advisory revenue 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 advisory assets. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in the following three-month period. The majority of our accounts are billed in advance using values as of the last business day of the prior calendar quarter.
The activity within our advisory assets was as follows:
|
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(In thousands) | Year ended December 31, |
| 2018 | | 2017 | | 2016 |
Balance, beginning of the period | $ | 12,530,165 |
| | $ | 10,397,071 |
| | $ | 9,692,244 |
|
Net increase in new advisory assets | 957,252 |
| | 794,184 |
| | 150,701 |
|
Market impact and other | (932,012 | ) | | 1,338,910 |
| | 554,126 |
|
Balance, end of the period | $ | 12,555,405 |
| | $ | 12,530,165 |
| | $ | 10,397,071 |
|
Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue due to advisory fees being billed in advance. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end advisory assets.
In 2018, the increase in advisory revenue of approximately $18.7 million was primarily due to the increase in the beginning-of-period advisory assets for 2018 compared with 2017.
In 2017, the increase in advisory revenue of approximately $16.3 million was consistent with the increase in the beginning-of-period advisory assets for 2017 compared with 2016.disruption.
Asset-based revenue:revenue. Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs, asset-based retirement plan service fees, and other asset-based revenues, primarily including margin revenues.
In 2018,For the year ended December 31, 2021, asset-based revenue increased $5.2decreased $1.6 million,, primarily from increased revenuesdue to a $6.3 million decrease in cash sweep revenue caused by the decline in interest rates after the first quarter of 2020 that persisted throughout 2021. This decline was partially offset by a $2.8 million increase in revenue generated from financial product manufacturer sponsorship programs higher cash sweep revenues following increasesand a $1.7 million increase in interest rates and impactsrevenue generated from our transition to our new clearing firm in the third quarter of 2018.
In 2017, asset-based revenue increased $3.6 million, primarily from higher cash sweep revenues following increases in interest rates.retirement plan service fees.
Transaction and fee revenue:revenue. Transaction and fee revenue primarily includes support fees charged to advisors,financial professionals, fees charged for executing certain transactions in client accounts, and other fees related to services provided and other account charges as generally outlined in agreements with financial advisors,professionals, clients, financial institutions, and financial institutions.retirement plan sponsors.
In 2018, transaction and fee revenue decreased approximately $3.2 million primarily due toFor the impact of the adoption of new revenue recognition standards in the first quarter of 2018 and lower technology fees. See "Note 2: Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information concerning the impact of the new revenue recognition standards on our operating results.
In 2017,year ended December 31, 2021 transaction and fee revenue increased approximately $2.0$7.1 million primarily relateddue to advisor fee increases.incremental revenue generated from financial professional support fees, and inclusion of a full year of Avantax Planning Partners.
Blucora, Inc. | 2021 Form 10-K 49
Tax PreparationSoftware
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(In thousands, except percentages) | Year Ended December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Revenue | $ | 226,987 | | $ | 208,763 | | $ | 18,224 | | | 8.7 | % |
Operating income | $ | 81,879 | | $ | 49,621 | | $ | 32,258 | | | 65.0 | % |
Segment margin | 36.1 | % | | 23.8 | % | | | | |
|
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(In thousands, except percentages) | Years ended December 31, |
| 2018 |
| Change |
| 2017 | | Change | | 2016 |
Revenue | $ | 187,282 |
| | 16 | % | | $ | 160,937 |
| | 15 | % | | $ | 139,365 |
|
Operating income | $ | 87,249 |
| | 20 | % | | $ | 72,921 |
| | 9 | % | | $ | 66,897 |
|
Segment margin | 47 | % | | | | 45 | % | | | | 48 | % |
For the year ended December 31, 2021 compared to the year ended December 31, 2020, Tax Software segment operating income increased $32.3 million due to an $18.2 million increase in revenue and a $14.0 million decrease in operating expenses.•Tax Software revenue increased $18.2 million primarily due to a $17.5 million increase in consumer revenue. Consumer revenue during 2021 benefited from incremental ancillary services revenue as compared to 2020.
•Tax Software operating expenses decreased $14.0 million primarily due to decreased advertising and marketing expense in 2021 as compared to 2020. Advertising and marketing costs were elevated in 2020 due to the extended tax season and incremental marketing efforts to address weak performance through the first two months of the tax season. The decline in advertising and marketing costs and the increase in revenue were the primary drivers of the margin increase during the year ended December 31, 2021.
Sources of revenue
Tax PreparationSoftware revenue is derived primarily from the sale of tax preparation digital services, ancillary services, packaged tax preparation software, and arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer and audit defense.
We classify Tax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue is derived from products sold directly to customers primarily for the preparation of individual and business tax preparation support services, e-filing services, bank or reloadable pre-paid debit card services, and other value-added services, includingreturns. Professional revenue is derived from products sold to tax and wealth management services throughreturn preparers who utilize our Wealth Management business.offerings to service end user customers.
Revenue by category was as follows: | | (In thousands, except percentages) | Years ended December 31, | (In thousands, except percentages) | Year Ended December 31, | | Change |
| 2018 | | Change | | 2017 | | Change | | 2016 | | 2021 | | 2020 | | $ | | % |
Consumer | $ | 172,207 |
| | 17 | % | | $ | 147,084 |
| | 16 | % | | $ | 126,289 |
| Consumer | $ | 209,748 | | | $ | 192,226 | | | $ | 17,522 | | | 9.1 | % |
Professional | 15,075 |
| | 9 | % | | 13,853 |
| | 6 | % | | 13,076 |
| Professional | 17,239 | | | 16,537 | | | 702 | | | 4.2 | % |
Total revenue | $ | 187,282 |
| | 16 | % | | $ | 160,937 |
| | 15 | % | | $ | 139,365 |
| |
Total Tax Software revenue | | Total Tax Software revenue | $ | 226,987 | | | $ | 208,763 | | | $ | 18,224 | | | 8.7 | % |
The risk-free interest rate was based on the implied yield available on U.S. Treasury issues with an equivalent remaining term. The Company lastexpected dividend yield was zero since we have not paid a dividend insince 2008. The expected volatility was based on historical volatility of the Company’sour 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.
The tax effect of temporary differences and net operating loss carryforwards that gave rise to the Company’sour deferred tax assets and liabilities were as follows (in thousands):
The changes in the valuation allowance for deferred tax assets are shown below (in thousands):
A reconciliation of the unrecognized tax benefit balances is as follows (in thousands):
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. 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, 20182021 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 executiveChief Executive Officer and principal financial officers,Chief Financial Officer, 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 CommissionSEC rules and forms.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act RulesRule 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.
Ernst & Young LLP has audited the effectiveness of our internal control over financial reporting as of December 31, 20182021, and its report is included below.
There was no change in our internal control over financial reporting that occurred during the fourth quarter of 20182021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
To the Stockholders and the Board of Directors of Blucora, Inc.
We have audited Blucora, Inc.’s internal control over financial reporting as of December 31, 2018,2021, 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. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, 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, 20182021 and 2017,2020, 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, 2018,2021, and the related notes, and our report dated March 1, 2019February 25, 2022 expressed an unqualified opinion thereon.
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’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.
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.
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.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers, and Corporate Governance
The information required in response to this Item 10 is incorporated by reference herein to our Proxy Statement.
ITEM 11. Executive Compensation
The information required in response to this Item 11 is incorporated by reference herein to our Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required in response to this Item 13 is incorporated by reference herein to our Proxy Statement.
ITEM 14. Principal Accounting Fees and Services
The information required in response to this Item 14 is incorporated by reference herein to our Proxy Statement.
ITEM 15. Exhibits, 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.
The exhibits required by Item 601 of Regulation S-K are set forth below.
See Item 15(a) above.
ITEM 16. Form 10-K Summary
None.
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.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Davinder Athwal and Ann J. Bruder jointly and severally,as his or her attorneys-in-fact, eachattorney-in-fact, 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 ofthe said attorneys-in-fact,attorney-in-fact, or hisher 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.