UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the fiscal year ended December 31, 20192021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the transition period from to | ||||||||
Commission File Number 000-25131
Blucora, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 91-1718107 | |||||||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.0001 per share | BCOR | NASDAQ Global Select Market | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Yes☒☐ No ☐☒
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the Common Stock held by non-affiliates of the registrant outstanding as of June 30, 2019,2021, based upon the closing price of Common Stock on June 30, 20192021 as reported on the NASDAQ Global Select Market, was $1,461.5$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.
As of February 21, 2020, 47,837,75018, 2022, 48,450,662 shares of the registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant’s 20202022 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended December 31, 2019,2021, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
TABLE OF CONTENTS
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Blucora, Inc. | 2021 Form 10-K 2
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
This report includes some of trademarks, trade names, and service marks of Blucora, Inc. (referred to throughout this report as “Blucora,” the “Company,” “we,” “us,” or “our”), including Blucora, Avantax Wealth Management, Avantax Planning Partners, Avantax Retirement Plan Services, HD Vest, 1st Global, TaxAct, Tax-Smart Investing, Capital Gains Analyzer, Tax-Loss Harvester,HKFS, and Social Security Planner.TaxAct. Each one of these trademarks, trade names, or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights, or (iv) a registered trademark or application for registration that we have been authorized by a third party to use.
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.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “will,” “should,“would,” “could,” “should,” “estimates,” “predicts,” “potential,” “continues,” “target,” “outlook,” and similar terms and expressions, but the absence of these words does not mean that the statement is not forward-looking. These forward-looking statements include,Actual results may differ significantly from management’s expectations due to various risks and uncertainties including, but are not limited to, statements regarding:to:
•our ability to effectively compete within our industry;industries;
•our ability to attract and retain financial advisors, qualifiedprofessionals, employees, clients, and customers, as well as our ability to provide strong customer/client service;
•the impact of the COVID-19 pandemic on our results of operations and our business, including the impact of the resulting economic and market disruption, the extension of tax filing deadlines, and other related government actions;
•our ability to close, finance,retain employees and realize all of the anticipated benefits of our recent or pending acquisitions, as well as our ability to integrate the operations of recently acquired businesses;client assets following acquisitions;
•our future capital requirements and the availability of financing, if necessary;
•our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
•any downgrade of the Company’s credit ratings;
•our ability to generate strong performance for our clients and the impact of the financial markets on our clients’ portfolios;
•the impact of new or changing legislation and regulations (or interpretations thereof) on our business, including our ability to successfully address and comply with such legislation and regulations (or interpretations thereof) and increased costs, reductions of revenue, and potential fines, penalties, or disgorgement to which we may be subject as a result thereof;
•risks, burdens, and costs, including fines, penalties, or disgorgement, associated with our business being subjected to regulatory inquiries, investigations, or initiatives, including those of the Financial Industry Regulatory Authority, Inc. and the Securities and Exchange Commission (“SEC”); • |
risks associated with legal proceedings, including litigation and regulatory proceedings;
•our ability to close, finance, and realize all of the anticipated benefits of acquisitions, as well as our ability to integrate the operations of recently acquired businesses, and the potential impact of such acquisitions on our existing indebtedness and leverage; •the compromising of confidentiality, availability or integrity of information, including cyberattacks; •our ability to manage leadership and employee transitions, including costs and time burdens on management and our board of directors related thereto; • |
political and economic conditions and events that directly or indirectly impact the wealth management and tax preparation software industries;
•our ability to respond to rapid technological changes, including our ability to successfully release new products and services or improve upon existing products and services;
•our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;
•risks related to goodwill and otheracquired intangible asset impairment;
•our ability to develop, establish, and maintain strong brands;
•risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses, and computer hacking attacks;
Blucora, Inc. | 2021 Form 10-K 4
•our ability to comply with laws and regulations regarding privacy and protection of user data;
•our ability to maintain our relationships with third-party partners, providers, suppliers, vendors, distributors, contractors, financial institutions, industry associations, and licensing partners, and our expectations regarding and reliance on the products, tools, platforms, systems, and services provided by these third parties;
•our assessments and estimates that determine our effective tax rate; and
•our ability to protect our intellectual property and the impact of any claim that we have infringed on the intellectual property rights of others.others; and
•the effects on our business of actions of activist stockholders.
Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under “Item 1A. Risk Factors” and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not undertake any obligation and do not intend to update or revise any forward-looking statement to reflect new information, events, or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.
Blucora, Inc. | 2021 Form 10-K 5
PART I
ITEM 1. Business
General Overview
Blucora, Inc. (the “Company,” “Blucora,“Blucora,” “we,” “our,” or “we,”“our,”or“us”us”) is a leading provider of technology-enabled, tax-smart financial solutions tointegrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial advisors,professionals, and certified public accounting (“CPA”) firms. Blucora helps people manageOur mission is to enable financial success by changing the way individuals and families plan and achieve their financial lives and optimize their taxesgoals through itstax-advantaged solutions. We conduct our operations through two primary businesses: (1) the Wealth Management business and (2) the Tax PreparationSoftware business. Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
Avantax Wealth Management provides tax-focused wealth management solutions for financial advisors,professionals, tax preparers, certified public accountingprofessionals, CPA firms, and their clientsclients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is thea 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.
As of December 31, 2019, nearly 4,000 advisors2021, the Wealth Management business worked with branch offices in all 50 states utilized our Avantax platforma nationwide network of 3,416 financial professionals and supported $70.6$89.1 billion of total client assets, including $27.6$42.2 billion of advisory assets, for approximately 480,000 clients.assets.
Business Overview
We have two reportable segments: (1) the Wealth Management segment and (2) the Tax PreparationSoftware segment.
Wealth Management Businessbusiness
As described above, the Wealth Management business consists of the operations of Avantax Wealth Management and Avantax Planning Partners, which we believe provide unique and complementary models through which tax 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 can outsource their clients’ wealth management needs to one of our employee financial professionals.
Flexible affiliation models are core to the Wealth Management business’s value proposition because they offer powerful ways for us to partner with CPAs and tax professionals of all sizes, from sole practitioners to multi-partner CPA firms.
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Avantax Wealth Management.Through its registered broker-dealer, registered investment advisor,RIA, and insurance agency subsidiaries, Avantax Wealth Management provides tax-focused wealth management solutions to financial professionals and their clients nationwide and operates the largest U.S. tax-focused independent broker-dealer, providing tax-smart wealth management solutions to financial advisors and their clients nationwide.broker-dealer.
Avantax Wealth Management works with a nationwide network of nearly 4,000 advisorsfinancial professionals that operate as independent contractors. Because Avantax provides these advisorsWealth Management primarily recruits and serves independent tax professionals, CPA firms, and financial professionals who partner with an integrated platform of technical, practice, and product support tools to assist in making each financial advisor a comprehensive financial service center for his or her clients.
We believe that tax and accounting professionals, with their existing client relationships and in-depth knowledge of their clients’ financial situations, possess a competitive advantageare well positioned to grow their wealth management practices as their tax advisory relationships provide a large base of potential wealth management clients. This competitive advantage results in an experienced and stable network of financial advisorsprofessionals who are ideallyuniquely positioned to provide tailored and comprehensive financial solutions that enable clients to meet their financial goals, including their tax and wealth management goals. In turn, our advisorsfinancial professionals have multiple revenue-generating options to diversify their earnings sources.
To help tax and accounting professionals integrate wealth management services into their practice, we offer specialized training and support 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 national sales conference, numerous localadvisor- and home-office led training events, regional meetings, and on-demand learning paths.
resources.
Once advisorsfinancial 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 advisorsfinancial professionals through its proprietary Tax-Smart Investing platform, which issoftware tools that are designed to help advisorsfinancial 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 by identifying tax savings opportunities in an advisor’sa financial professional’s client base and automating the capture of that opportunity. Our ongoing investments in technology and data analytics are designed to drive enhanced experiences for financial professionals and their end clients, and in 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 each advisor’sfinancial professional’s practice. The home office team provides marketing, practice management, 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.
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Avantax Wealth Management and Avantax Planning Partners primarily generatesgenerate 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. We regularly review the commissions and fees we charge for these products and services based on the evolving regulatory and competitive environment in which we operate and as a result of changes in client preferences and needs. 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 leading provider of digital tax preparation solutions, has leveraged its strong brand, comprehensive suite of tax preparation solutions, and proven digital lead generation capabilities to enable the filing of more than 6885 million federal consumer tax returns 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’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 Avantax,e-file concierge, as well as presentingproviding customers the optionwith a customized My Tax Plan which provides personalized guidance on ways to review and take advantage of personalizedimprove their tax and potential financial savings opportunities offered through third party product providers.situation. We believe that TaxAct’s ease of use, affordable pricing, and established brand and reputation isare attractive to customers.
TaxAct had five primary offerings for consumers for tax year 2018, which is the basis for its 2019 operating results:in 2021:
•A “free” federal and state edition that handled simple returns;
•A “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 prioritized support; and
•A “self-employed” paid offering for independent contractors and self-employed filers.filers; and
TaxAct also had offerings for small business owners and includedconsisting 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.
Our History
• |
In January 2012, InfoSpacewe acquired TaxAct. TaxAct, a provider of digital tax preparation solutions.
•In connection with this acquisition, InfoSpace changedDecember 2015, we acquired HDV Holdings, Inc. and its namesubsidiaries (“HD Vest”), a provider of wealth management and advisory solutions specifically for tax professionals, and announced our plans to Blucora, Inc. in June 2012.
•On May 6, 2019, we closed the acquisition of |
•On September 9, 2019, we announced a rebranding of our Wealth Management business that partnersto Avantax Wealth Management (the “2019 Rebranding”). In connection with the 2019 Rebranding, HD Vest (which
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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 in orderand tax professionals to provide their consumerdeliver wealth management services to clients, increase our addressable market, and small business clients with holistic planning and financial advisory services. The purchase price is expected to be paid with an incremental loan under the Senior Secured Credit Facility (as defined herein), which is anticipated to be entered into on or about the time of the closing of the HKFS Acquisition. The HKFS Acquisition is expected to close around the end of the first quarter, subject to customary closing conditions. The HKFS Acquisition was not reflected inenhance our consolidated financial statements for the year ended December 31, 2019. For additional information, see “Item 8. Financial Statements and Supplementary Data—Note 18.”growth opportunities.
•On January 6, 2020, Davinder Athwal resigned from his roles as Chief Financial Officer4, 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 Principal Financial Officer of the Company, while agreeing to stay on with the Company until January 31, 2020. In connection with Mr. Athwal’s resignation, Stacy Murray, who serves as the Company’s Principal Accounting Officer through her position as Chief Accounting Officer, assumed the duties of serving as the Company’s Principal Financial Officer in an interim capacity.
Industry Trends
In the wealth management industry, we believe that Avantax iswe are benefiting and will be the beneficiary ofcontinue to benefit from several expected positive industry trends, including growth of investable assets, driven by baby boomers’ retirement accounts, a continued migration to independent advisorfinancial professional channels, liquidity events, and a continued shift toward household use of fee-based financial advisors.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 DDIYdigital 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 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.lives.
Growth Strategy
Our 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 the wealthiest segment of wealth management clients. Through our Wealth Management and Tax PreparationSoftware businesses, are grounded in the belief that the best waywe seek to sustainably growexecute holistic, long-term tax minimization strategies for our clients and customers while expanding access to those strategies to a business is to earn loyalty based on continuously delivering ever-greater value to our customers and clients.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 for Avantax and TaxAct will result in customer, client, and advisor retention and growth beyond that of the broader markets in which we operate. These strategies include:
•In the Wealth Management business, we will accelerateaccelerating organic growth as the largest tax-focused broker-dealer by:
▪enhancing our financial professional experience with continued investment in service quality and team 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 supportprograms;
▪continuing to make them successful, includinginvest in our technology, products, and value-added services to create positive experiences for our financial professionals and their clients;
▪leveraging the rolloutsoftware development capabilities of regional support teamsTaxAct to improve the service and the introductionperformance of a comprehensive training and support program for new advisors, Avantax University.
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•In the Tax PreparationSoftware business, we will createcreating continued growth and momentum by:
▪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 market 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 our core product experience based on direct customer feedback and research to create delightfulbest-in-class user experiences for our customers.existing customers and target markets;
▪differentiating the TaxAct experience withfrom experiences on other platforms by offering unique product capabilities and features that reinforce our brand’s deep expertise in tax.tax for both consumers and tax professionals;
▪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 to improve retention.
A key element of our proprietary Tax-Smart Investing platform will provide our advisors the ability to consistently tax-optimize investor portfolios.
Underlying this learning and innovation approach is a consolidated information technology and data architecture, coupled with a focused effort on the human capital necessary to data gathering. In addition,support our first planned technology launch for 2020, which has already begun beta testing, isbusiness. As part of this overall strategy, we are investing in our patent pending Social Security Planner. While Social Security is typically a fundamental componentinfrastructure to drive higher efficiencies, speed execution, and unlock new opportunities.
We believe that if we successfully execute on the above growth strategies, we will improve performance and deliver on the key financial metrics that drive our organization. These key metrics currently include revenue growth, net income growth, adjusted EBITDA growth, and non-GAAP net income growth. Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures. For more information on these non-GAAP financial measures, including definitions of a client’s retirement plan,such measures, see the strategy options available can often be quite complex“Non-GAAP Financial Measures” section contained in “Item 7. Management’s Discussion and confusing to the average retiree. The Social Security Planner will be able to show clients a comprehensive analysisAnalysis of their Social Security benefit claiming options, thus enabling them to make informed decisions that support their retirement goals.
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Seasonality
In March 2020 and as a result of the COVID-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 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
The markets in which our businesses operatebusiness operates continue to evolve and are highly competitive. For our businessesbusiness to be successful, we must effectively compete in the wealth management and tax 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 advisorsadvisers (including CPA firms that have their own in-house registered investment advisor), asset managers, banks and insurance companies, direct distributors, larger broker-dealers, and larger broker-dealers.robo-advisors. These competitors may have greater financial, technological, and marketing resources, broader infrastructure and distribution networks, greater brand recognition, and broader product and service offerings.offerings than us and may offer services at a lower fee than we do. We and our financial advisors compete directly with these financial institutions for the provision of products and services to clients, as well as for recruitment and retention 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 createprovide tax-advantaged financial planning and advice. More specifically, we endeavor to:advice to end clients. We believe that our competitive advantage is centered on the following differentiators:
•We seek to marry 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 independent 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.
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•We offer broadtools, training, and comprehensive wealth solutions that address a client’s accumulation, income, and protection needs across their entire lives;
•Our understanding of the wealth management and their clients;
Tax Preparation CompetitionSoftware competition
The market for tax preparation products and services continues to evolve and is highly competitive. We experience significant competition and expect this competitive environment to continue. 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 DDIY consumer products and services, which currently 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. We also encounter 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 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:
•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 financialproviding direct, human assistance to a significantly greater percentage of our customers; and tax-expertise;
•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 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 advisors,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, FINRA, the Department of Labor (“DOL”), state securities and insurance regulators, and other regulatory authorities. Our Wealth Management subsidiary, Avantax Investment 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,subsidiaries, Avantax Advisory Services, Inc. and Avantax Planning Partners, Inc., isare registered with the SEC as a registered investment advisoradvisers 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 advisoradviser 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 advisor’sadviser’s registration. Investment advisoradviser 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.
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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.
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 Associated With Our Businesses”Business” in Part I, Item 1A of this Form 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
Regulatory 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 applicable 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, 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.
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 internet advertising, online behavioral tracking, mobile applications, SMS messaging, telemarketing, email communication, data hosting, data retention, financial and health information, and credit reporting. The legal framework around privacy issues is rapidly evolving, as various federal and state government bodies are considering adopting new privacy laws 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. These laws could also affect the ways we communicate with our customers, deliver products and services, and could significantly increase our compliance costs. As our business expands to new industry segments or otherwise becomes subject to rules and regulations of jurisdictions outside the United States with stricter data 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 the principles of individual consent, data subject access, and privacy-by-design, we strive 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 offers certification to organizations that have demonstrated responsible data collection and processing practices consistent with regulatory expectations and external standards for 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 standardindustry-standard data security safeguards to help protect our computer systems and the information customers give to us from loss, misuse, and unauthorized alteration. Whenever customers transmit credit card information or tax return data to us through one of our websites or products, we use industry-standard encryption as the data is transmitted to us. We work to protect our computer systems from unauthorized internal or external access using commercially-available computer security products as well as internally-developed security procedures and practices.
See the section entitled “Risks Associated With Our Businesses”Business” in Part I, Item 1A of this Form 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. See the section entitled “Risks Associated With Our Businesses”Business” in Part I, Item 1A of this Form 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.
•As of December 31, 2019,2021, we had 6901,100 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 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 Form 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.”
•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 not completecause our Wealth Management and Tax Software businesses to decline.
•Our business depends on fees generated from the pending HKFS Acquisition withindistribution of financial products and fees earned from management of advisory accounts, and changes in market values or in the time frame expectedfee structure of such products or at all, or execute the financing as anticipated, whichaccounts 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 negative effectMaterial 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, financial condition, and results of operations.business.
•“HKFS Acquisition”), the SellersThe products and JRD Seller Representative, LLC, as the Sellers’ representative, pursuant to which, at the closing, we will acquire all of the issued and outstanding common stock of HKFS for a cash purchase price of $160 million, which is subject to certain adjustments. The consummation of the HKFS Acquisition is subject to the satisfaction or waiver of certain closing conditions, as set forth in the Purchase Agreement and summarized in our January 7, 2020 Form 8-K filed with the Securities and Exchange Commission (“SEC”). A number of these conditions are outside of our control, and the satisfaction of these conditions may take longer than expected, may require us or HKFS to incur significant costs or take other steps that could negatively impact our or HKFS’s business, or may not occur at all. The failure to consummate the HKFS Acquisition, or any material delay in closing, could significantly impact the growth and strategic initiatives expected to be realizedservices offered by our Wealth Management business 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 damageresult in a Material Adverse Effect.
•If our reputation. Ifgoodwill or acquired intangible assets become impaired, we fail to satisfy certain covenants related to financing arrangements forhave been, and in the HKFS Acquisition, we wouldfuture may be, required to pay HKFSrecord a cash breakup feesignificant impairment charge, which could result in a Material Adverse Effect.
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•Future growth of $800,000. Additionally, ifour 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 are unablehave implemented to secure obtain financing at acceptable termsconfidential and personal information may be breached, which could result in ordera Material Adverse Effect.
•If our Tax Software business fails to fund the purchase price of the HKFS Acquisition,process transactions effectively or fails to adequately protect against disputed or potential fraudulent activities, it could materiallyhave 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 affectimpact our liquidity and capital resources. Any of these factors could harm our business, financial condition, and results of operations and cause the market price of our common stock to decline.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 complete the HKFS Acquisition, we have incurred,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 will continue to incur, significant transaction costs in connection with the HKFS Acquisition, including payment of certain fees and expenses incurred in connection with the HKFS Acquisition. We also have incurred fees and expenses with respect to the financing of the HKFS Acquisition. Additional unanticipated costs may arise in the future. These couldRegulatory Risks
•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 expenses and non-cash charges incurred in connection with the HKFS Acquisitioncash 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 in the future if goodwill or other intangible assets we acquire in the HKFS Acquisition become impaired;decline.
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•Actions of activist stockholders could adversely affect our business and
•We cannot assure you we will continue to finance the HKFS Acquisition, enhancingrepurchase shares of our vulnerabilitycommon stock pursuant to increased debt service requirements should interest rates rise, reducing the amountour stock repurchase plan.
•Our utilization of expected cash flow available for other purposes, including capital expendituresour federal net operating losses (“NOLs”) may be severely limited or potentially eliminated.
•Delaware law and acquisitions, and limiting our flexibility in planning for,organizational documents may impede or reactingdiscourage a takeover that would be beneficial to changes in our businesses and industries.stockholders.
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 include both local tax preparers and large chains such as H&R Block, Liberty Tax and Jackson Hewitt, 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”)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. 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 2021,2023, 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 membermembers’ support of the Free File Program and increase the likelihood that such program is terminated. 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.
In addition, from time to time, U.S. federal and state governments have considered various proposals, including mandating that we and our competitors refer qualifying customers to the Free File Program and governmental taxing authorities utilizing taxpayer information provided by employers, financial institutions, and other 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, which could result in a Material Adverse Effect. We believe that governmental encroachment at both the U.S. federal and state levels in which we operate could present a continued competitive threat to our Tax PreparationSoftware business for the foreseeable future.
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 PreparationSoftware businesses to decline.
Customer service and 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 PreparationSoftware business. Strong customer service and product performance help increase customer retention and generate sales of products and services. In contrast, poor service or poor performance of our financial or software products could impair our revenues and earnings, as well as our prospects for growth. In our Wealth Management business, clients can terminate their relationships with us or our financial advisorsprofessionals at will, and in our Tax PreparationSoftware 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 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. Particularly, for the Wealth Management business, a decline or perceived decline in 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 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 PreparationSoftware 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 costs and fee structures to remain competitive.
For the Wealth Management business, competition from other financial services firms, such as reduced commissions to attract clients 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. Clients 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 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
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clients (or clients of our advisors)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. Moreover, 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 with 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 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 to other funds tends to result in decreased purchases and increased redemptions of fund shares. In a declining stock market, the pace of redemptions could accelerate, resulting in a decline in our advisory assets, which could negatively impact our fee revenues and result in a Material Adverse Effect.
For the Tax PreparationSoftware business, competition from other tax preparation service providers, such aas free or reduced fee products to attract customers, could adversely affect our business. Customers of our Tax PreparationSoftware 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 that 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 the resulting decrease in revenues and earnings could have a Material Adverse Effect.
Our business depends on fees generated from the distribution of financial products and fees earned from management of advisory accounts.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 advisorsadvisers 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 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, as 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. In addition, thisThis 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.
In 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 first 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 could face shifting of revenue or increased costs.
Errors in 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 negatively impact the success of our tax software in 2022.
In addition, we have 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 borrowings, and we could be forced into bankruptcy or liquidation. Any inability to obtain additional liquidity as and when needed, or to maintain compliance with the instruments governing our indebtedness, would have a Material Adverse Effect.
Any of the foregoing factors could result in a Material Adverse 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 business and operations are substantially dependent on the performance of our key employees and 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. 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 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 could continue to create an unstable work environment and may have a negative effect on our ability to hire, retain, and motivate employees. 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, along with cash-based bonus programs, to recruit 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 key employees declines, we may be unsuccessful in retaining our key employees and financial professionals. We may undertake or seek stockholder approval to undertake other equity-based programs to retain key personnel, which may be viewed
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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.
Changes in economic, political and other factors could have a Material Adverse Effect on our business.
Our Wealth Management business operates in the United States with broad exposure to the global financial markets, and our Tax PreparationSoftware business offers tax filing services in the federal jurisdiction of the United States and various state jurisdictions. Accordingly, we are affected by United States and global economic and political conditions that directly and indirectly impact a number of factors in the domestic and global financial markets and economies, which may be detrimental to our operating results. In addition, as a result of the SimpleTax sale in September 2019, all of our 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 affect our business include, but are not limited to, trading levels, investing, origination activity in the securities markets, security and underlying asset valuations, the absolute and relative level and volatility of interest and currency rates, real estate values, the actual and perceived quality of issuers and borrowers, the supply of and demand for loans and deposits, United States and foreign government fiscal and tax policies, United States and foreign government ability, real or perceived, to avoid defaulting on government securities, inflation, decline and stress or recession in the United States and global economies generally, terrorism, war and armed conflicts, economic sanctions, trade wars and their collateral impacts, the impact of the United Kingdom’s pending exit from the European Union, andclimate change, natural disasters such as weather catastrophes, and widespread health emergencies.emergencies, such as the COVID-19 pandemic. 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.
In addition, the 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 have, at a macro level, recently experienced growth,increased stability in the second, third and fourth quarters of 2020, uncertainty and potential volatility remain. For instance, during August 2019, the Dow Jones Industrial Average plunged nearly 800 points during a single day before recovering over the following weeks. 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 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 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 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. 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. See “We
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“We may be negatively impacted 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 businessesbusiness 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 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 provides 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.business, including the potential adverse effects to our business if they are 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 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 products and services offered by our Wealth Management and Tax PreparationSoftware 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 advisors.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, these key relationships include, among others, our network of financial advisorsprofessionals and CPA partner firms, the provider of our clearing platform,
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and the provider our investment advisory platform, each of which we rely on to conduct many business activities and transactions with clients, advisors,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 advisors,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, advisorsfinancial 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 significant number of our key stakeholders, including advisors,financial professionals, customers, or clients, are or become dissatisfied by the different products, tools, platforms, systems and services, including related technology, processes, policies and products, that our key vendors and partners offer and they leave, use a competitor’s product or services, or seek contractual terms with us that are less favorable to our business, it could have a Material Adverse Effect.
If our goodwill or otheracquired 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.
We are required to testevaluate goodwill and acquired intangible assets for impairment at least annually or more frequently if there are indicators that the carrying amount of our goodwill and otheracquired intangible assets, which consist primarily of our advisor,financial professional, customer, and sponsor relationships, our technology and our trade names, exceed their carriedfair value. For these impairment tests, we use various valuationqualitative 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, 2019,2021, we had recorded a total of $662.4$454.8 million of goodwill and $290.2$302.3 million of otheracquired intangible
It is possible that we could have additional impairment charges for goodwill or otheracquired intangible assets in future periods if, among other things, (i) overall economic conditions in current or future years decline, (ii) business conditions or our strategies for a specific business unit or our trade names change from our current strategies or assumptions, or (iii) we suffer from an event that impacts our reputation or brand.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 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 application.applications. If our customers do not deem our website or our mobile applicationapplications 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 applicationapplications or the other upgrades we make to the technology we use in our Tax PreparationSoftware 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 PreparationSoftware and Wealth Management businesses collect, use, and retain large amounts of confidential personal and financial information from their customers. 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,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 businesses,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 and 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 suchour 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 businesses.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 or products. We could face significant losses as a result of these events, and our business interruption insurance may not be adequate to compensate us for all potential losses, which could result in a Material Adverse Effect. Our Tax PreparationSoftware 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.
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, and stolen identity refund fraud could result in negative publicity and/or impede our Tax PreparationSoftware 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 PreparationSoftware 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 there 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 PreparationSoftware business.
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The specialized and highly seasonal nature of our Tax PreparationSoftware business presents financial risks and operational challenges, which, if not satisfactorily addressed, could result in a Material Adverse Effect.
Our Tax PreparationSoftware 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.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 PreparationSoftware 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 PreparationSoftware 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 PreparationSoftware 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.
The issuance of additional Economic Impact Payments via the IRS could disrupt the tax season and cause customer confusion or diversion.
During the COVID-19 pandemic, the IRS has closed a number of 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 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 us, we could be exposed to unidentified or unanticipated risks, suffer unexpected claims or losses, experience reputational harm, and our financial condition and results of operations could be materially adversely affected.and/or cause a Material Adverse Effect.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, 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 the Companywe and itsour employees, contractors and financial advisorsprofessionals may be subject. 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 compliance 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 our risk management strategies and certain risks may exist, or develop 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 advisorsprofessionals and other parties with whom we conduct business, such as fraud, non-compliance with policies, rules or regulation,regulations, recommending transactions that are not suitable, and improperly using or disclosing confidential information. 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 our business financial condition and results of operations could be materially adversely affected.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.
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.
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 business 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 level of 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 impact the manner in which we will market products and services in our Wealth Management business, manage our Wealth Management business operations, and interact 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 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 Effect.
Avantax Wealth Management distributes its products and services through financial professionals who affiliate with us as independent contractors. Legislative, judicial, or regulatory (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 U.S. federal or state authorities or similar authorities may determine that we have misclassified certain of our financial 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 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 (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.
In addition, the risks we face with respect to complying with regulatory requirements for our Wealth Management business may be 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 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, 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 court 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. 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.
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 our reputation and deter 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 privacy expectations 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.
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 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.
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.experience a 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.
We have incurred a significant amount of indebtedness, which may materially and adversely affectimpact our financial condition and future financial results.
We are party to a senior secured credit facility, which consists of a term loan (the “Term Loan”) and revolving line of credit (the “Revolver”) for future working capital, capital expenditures and general business purposes. As of December 31, 2019,2021, we had $389.7 million and $10.0$561.3 million in principal amount of outstanding indebtedness under the term loanTerm Loan and revolving credit facility, respectively.no amounts outstanding under the 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 $65.0 million.$90.0 million, subject to customary terms and conditions.
Blucora, Inc. | 2021 Form 10-K 35
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.
Our 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, our 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.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, 2019,2021, we had $389.7$561.3 million in principal amount of outstanding indebtedness under the Term Loan and $10.0 millionno amounts outstanding under our term loan and revolving credit facility, respectively.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 PreparationSoftware 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 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. Changes in the debt and capital markets, including market disruptions, limited liquidity, an increase in interest rates, changes in our credit rating, and our financial condition and results at such time, among other potential factors, may limit our ability to obtain or increase the cost of financing, 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 other growth initiatives. If the debt and capital markets were not available or were constrained, it is not certain if adequate financing options would be available to us on terms and conditions that we would find acceptable, or if we could engage in these activities on desirable terms, which could limit or delay our capital allocation plans or result in a default on our debt obligations.
In addition, we may evaluate complementary acquisitions of businesses, products, or technologies from time to time. Any such transactions, if completed, may use a significant portion of our cash and 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.
Blucora, 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, 20182020 and December 31, 2019,2021, our closing stock price ranged from $19.17$8.82 to $40.25.$26.00. On February 21, 2020,18, 2022, the closing price of our common stock was $21.97.$19.53. Our stock price could decline or fluctuate significantly in response to many factors, including the other risks discussed in this Form 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 client activity;
•the mix of revenues generated by existing businesses or other businesses that we develop or acquire;
•changes in interest rates or 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;
Blucora, Inc. | 2021 Form 10-K 37
•litigation expenses and settlement costs;
•misconduct by employees, contractors and/or 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.
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.
Blucora, Inc. | 2021 Form 10-K 38
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 (the “Board”) 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 yearyears ended December 31, 2019,2021 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 1.3approximately 0.6 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of $28.4approximately $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 NOLs may be severely limited or potentially eliminated.
As of December 31, 2019,2021, we had federal NOLs of $391.9$105.2 million that will expire primarily between 20202022 and 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 federal cash 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 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.
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,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 requirement for supermajority approval by stockholders for certain business combinations;
•the ability of our Boardboard of directors to authorize the issuance of shares of undesignated preferred stock without a vote by stockholders;
•the ability of our Boardboard 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 Boardboard of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
meetings.
Our certificate of incorporation also restricts any person or entity from attempting to transfer our stock, without prior permission from our Board,board of directors, to the extent that such transfer would (i) create or result in an individual or entity becoming a five-percent stockholder of our stock, or (ii) increase the stock ownership percentage of any existing five-percent stockholder. This amendment provides 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.board of directors.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our principal corporate office is located in Irving,Dallas, Texas. Our Wealth Management segment primarily operates out of our IrvingDallas corporate office, and anwith additional office space located in Dallas, TexasDubuque, Iowa (obtained in connection with the 1st GlobalHKFS Acquisition). The Wealth Management segment also has smaller operational offices for its in-house financial professionals in various locations throughout the United States. The lease for the headquarters forof our Tax PreparationSoftware segment islocated in Cedar Rapids, Iowa.
Iowa, recently ended and 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. In 2019, we signed a new corporate headquarters office lease, which commenced in January 2020. The corporate headquarters building will be located in Coppell, Texas and will replace our Irving corporate office and our additional office located in Dallas. We plan to move into the new corporate headquarters in the second half of 2020.
ITEM 3. Legal Proceedings
See “Item 8. Financial Statements and Supplementary Data—Note 11”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 21, 2020,18, 2022, the last reported sale price for our common stock on the NASDAQ Global Select Market was $21.97$19.53 per share.
Holders
As of February 21, 2020,18, 2022, there were 332309 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
On March 19, 2019, we announced that our Boardboard of directors authorized thea stock repurchase ofplan 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 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 authorizationtiming and 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. Share repurchase activity for the fourth quarter of 2019 by month was as follows (in thousands, except per share data):
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs | ||||||||||
| October 1-31, 2019 | 431 | $ | 21.18 | 431 | $ | 78,203 | ||||||||
| November 1-30, 2019 | 313 | $ | 20.87 | 313 | $ | 71,671 | ||||||||
| December 1-31, 2019 | — | $ | — | — | $ | 71,671 | ||||||||
| Total | 744 | $ | 21.05 | 744 | ||||||||||
For additional information regardingthe years ended December 31, 2021 and 2020, we did not repurchase any shares of our common stock under the stock repurchase program, see “Item 8. Financial Statementsplan; however, between January 1, 2022 and Supplementary Data—Note 12.”
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]
| Years Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Consolidated Statements of Operations Data: | (1) (2) | (In thousands, except per share data) | ||||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Wealth management services revenue | $ | 507,979 | $ | 373,174 | $ | 348,620 | $ | 316,546 | $ | — | ||||||||||
| Tax preparation services revenue | 209,966 | 187,282 | 160,937 | 139,365 | 117,708 | |||||||||||||||
| Total revenue | 717,945 | 560,456 | 509,557 | 455,911 | 117,708 | |||||||||||||||
| Operating income (loss) | 9 | 67,677 | 48,037 | 37,117 | (4,807 | ) | ||||||||||||||
| Other loss, net | (16,915 | ) | (15,797 | ) | (44,551 | ) | (39,781 | ) | (12,542 | ) | ||||||||||
| Income (loss) from continuing operations before income taxes | (16,906 | ) | 51,880 | 3,486 | (2,664 | ) | (17,349 | ) | ||||||||||||
| Income tax benefit (expense) | 65,054 | (311 | ) | 25,890 | 1,285 | 4,623 | ||||||||||||||
| Income (loss) from continuing operations | 48,148 | 51,569 | 29,376 | (1,379 | ) | (12,726 | ) | |||||||||||||
| Discontinued operations, net of income taxes | (3) | — | — | — | (63,121 | ) | (27,348 | ) | ||||||||||||
| Net income (loss) | 48,148 | 51,569 | 29,376 | (64,500 | ) | (40,074 | ) | |||||||||||||
| Net income attributable to noncontrolling interests | — | (935 | ) | (2,337 | ) | (658 | ) | — | ||||||||||||
| Net income attributable to Blucora, Inc. | $ | 48,148 | $ | 50,634 | $ | 27,039 | $ | (65,158 | ) | $ | (40,074 | ) | ||||||||
| Basic net income (loss) per share attributable to Blucora, Inc.: | ||||||||||||||||||||
| Continuing operations | $ | 1.00 | $ | 0.94 | $ | 0.61 | $ | (0.05 | ) | $ | (0.31 | ) | ||||||||
| Discontinued operations | (3) | — | — | — | (1.52 | ) | (0.67 | ) | ||||||||||||
| Basic net income (loss) per share | $ | 1.00 | $ | 0.94 | $ | 0.61 | $ | (1.57 | ) | $ | (0.98 | ) | ||||||||
| Basic weighted average shares outstanding | 48,264 | 47,394 | 44,370 | 41,494 | 40,959 | |||||||||||||||
| Diluted net income (loss) per share attributable to Blucora, Inc.: | ||||||||||||||||||||
| Continuing operations | $ | 0.98 | $ | 0.90 | $ | 0.57 | $ | (0.05 | ) | $ | (0.31 | ) | ||||||||
| Discontinued operations | (3) | — | — | — | (1.52 | ) | (0.67 | ) | ||||||||||||
| Diluted net income (loss) per share | $ | 0.98 | $ | 0.90 | $ | 0.57 | $ | (1.57 | ) | $ | (0.98 | ) | ||||||||
| Diluted weighted average shares outstanding | 49,282 | 49,381 | 47,211 | 41,494 | 40,959 | |||||||||||||||
| Consolidated Balance Sheet Data: | (1) | |||||||||||||||||||
| Cash, cash equivalents, and investments | $ | 80,820 | $ | 84,524 | $ | 59,965 | $ | 58,814 | $ | 66,774 | ||||||||||
| Working capital | (3) (4) | 45,611 | 83,532 | 47,641 | 43,480 | 174,571 | ||||||||||||||
| Total assets | 1,137,572 | 997,725 | 1,001,671 | 1,022,659 | 1,299,548 | |||||||||||||||
| Total long-term liabilities | (2) (3) (4) | 400,525 | 316,905 | 390,495 | 535,577 | 656,122 | ||||||||||||||
| Total stockholders’ equity | 643,515 | 607,595 | 541,387 | 417,019 | 462,284 | |||||||||||||||
Blucora, Inc. | 2021 Form 10-K 41
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition, the following discussion and analysis compares our financial condition and results of operations for the year ended December 31, 20192021 to the year ended December 31, 2018.2020. For a discussion of the financial condition and results of operations for the year ended December 31, 20182020 compared to the year ended December 31, 2017,2019, 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, 20182020 that was filed with the Securities and Exchange Commission (the “SEC”)on March 1, 2019.February 26, 2021.
Blucora, Inc. (the “Company,” “Blucora,“Blucora,” “we,” “our,” or “we,”“our,”or“us”us”) operatesis 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 Avantax Wealth Management (“and Avantax” Planning Partners (collectively, the “Wealth Management business,”business” or the “Wealth Management segment”segment”), which.
Avantax Wealth Management provides tax-focused wealth management solutions for financial advisors,professionals, tax preparers, certified public accountingprofessionals, CPA firms, and their clients. The Tax Preparation business consists of the operations of TaxAct, Inc. (“TaxAct,” the “Tax Preparation business,” or the “Tax Preparation segment”) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com.
Tax Software
Our Tax Software business consists of the closingoperations of TaxAct, Inc. (“TaxAct,”the HKFS Acquisition. “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax 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.
Blucora, Inc. | 2021 Form 10-K 42
Business Environment
COVID-19 pandemic
The HKFS Acquisition is expected to close aroundCOVID-19 pandemic, including precautionary measures and societal response, has had a significant negative impact on the endU.S. and global economy and caused substantial disruption in the U.S. and global securities 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 subject to customary closing conditions. The HKFS Acquisition was not reflectedof 2020, which caused a corresponding decline in our consolidated financial statements for the year ended December 31, 2019. For additional information, see “Item 8. Financial Statements and Supplementary Data—Note 18.”
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.
Blucora, Inc. | 2021 Form 10-K 43
RESULTS OF OPERATIONS
Summary
| (In thousands, except percentages) | Years Ended December 31, | Change | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Revenue: | Revenue: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | $ | 507,979 | $ | 373,174 | $ | 134,805 | 36 | % | Wealth Management | $ | 658,213 | $ | 546,189 | $ | 112,024 | 20.5 | % | ||||||||||||||||||||||||||||||||
| Tax Preparation | 209,966 | 187,282 | 22,684 | 12 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Tax Software | Tax Software | 226,987 | 208,763 | 18,224 | 8.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| Total revenue | 717,945 | 560,456 | 157,489 | 28 | % | Total revenue | 885,200 | 754,952 | 130,248 | 17.3 | % | ||||||||||||||||||||||||||||||||||||||
| Operating income: | |||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income (loss): | Operating income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | 68,292 | 53,053 | 15,239 | 29 | % | Wealth Management | 82,212 | 72,195 | 10,017 | 13.9 | % | ||||||||||||||||||||||||||||||||||||||
| Tax Preparation | 96,249 | 87,249 | 9,000 | 10 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Tax Software | Tax Software | 81,879 | 49,621 | 32,258 | 65.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Corporate-level activity | (164,532 | ) | (72,625 | ) | (91,907 | ) | 127 | % | Corporate-level activity | (133,472) | (390,936) | 257,464 | 65.9 | % | |||||||||||||||||||||||||||||||||||
| Total operating income | $ | 9 | $ | 67,677 | $ | (67,668 | ) | (100 | )% | ||||||||||||||||||||||||||||||||||||||||
| Total operating income (loss) | Total operating income (loss) | 30,619 | (269,120) | 299,739 | 111.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Interest expense and other, net | Interest expense and other, net | (32,080) | (31,304) | (776) | (2.5) | % | |||||||||||||||||||||||||||||||||||||||||||
| Loss before income taxes | Loss before income taxes | (1,461) | (300,424) | 298,963 | 99.5 | % | |||||||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | Income tax benefit (expense) | 9,218 | (42,331) | 51,549 | 121.8 | % | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | 7,757 | $ | (342,755) | $ | 350,512 | 102.3 | % | ||||||||||||||||||||||||||||||||||||||||
For the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, net income increased $350.5 million primarily due to the following factors:
•Wealth Management segment operating income decreased $67.7increased $10.0 million consisting ofprimarily due to a $225.2$112.0 million increase in revenue, partially offset by a $102.0 million increase in operating expenses, partiallyexpenses. 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 $157.5$6.3 million increasedecrease in revenue.
•Tax Preparation businesses, respectively, as discussed in the following “Segment Revenue/Operating Income” section. The increase in Wealth Management revenue included approximately $114.8 million in revenue from 1st Global.
•Operating loss within corporate-level expenses, which included a $50.9activity decreased $257.5 million intangible asset impairment in connection with the Rebranding, as well as $25.8 million in acquisition and integration costs primarily due to the 1st Global Acquisition.$270.6 million Wealth Management goodwill impairment recognized in the first quarter of 2020, offset partially by a $10.9 million increase in expenses associated with contested proxy and other legal and consulting costs for the year ended December 31, 2021.
•The Company recorded an income tax benefit of $9.2 million for the year ended December 31, 2021 and income tax expense of $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 the write-off of expired capital loss carryforwards. For the year ended December 31, 2020, income tax expense was driven by the impact of the non-deductible goodwill impairment recorded in 2020, the write-off of expired federal net operating losses, and incremental valuation allowance.
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 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 PreparationSoftware segment. Segment information appearing in “Item 8. Financial Statements and Supplementary Data—Note 5” 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 segment operating results. Rather, we analyze such general and administrative costsseparately under the heading “Corporate-level activity.”
reportable segments.
Wealth Management
| (In thousands, except percentages) | Years Ended December 31, | Change | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 507,979 | $ | 373,174 | $ | 134,805 | 36 | % | Revenue | $ | 658,213 | $ | 546,189 | $ | 112,024 | 20.5 | % | ||||||||||||||||||||||||||||||||
| Operating income | $ | 68,292 | $ | 53,053 | $ | 15,239 | 29 | % | Operating income | $ | 82,212 | $ | 72,195 | $ | 10,017 | 13.9 | % | ||||||||||||||||||||||||||||||||
| Segment margin | 13 | % | 14 | % | Segment margin | 12.5 | % | 13.2 | % | ||||||||||||||||||||||||||||||||||||||||
For the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, Wealth Management segment operating income increased $15.2$10.0 million due to a $134.8$112.0 million increase in revenue partially offset by a $119.6$102.0 million increase in operating expenses.
•Wealth Management revenue increased $134.8$112.0 million primarily due to the addition of $114.8an $81.0 million increase in revenue from 1st Global, as well as $11.6 million and $7.2 million in increased advisory revenue, a $25.5 million increase in commission revenue, and a $7.1 million increase in transaction and fee revenue, partially offset by a $1.6 million decrease in asset-based revenue. These revenue respectively,increases primarily resulted from our legacy business.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 $119.6$102.0 million primarily due to incremental expenses of $104.8a $77.2 million from 1st Global. In addition, we experienced increasedincrease 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 legacy business,payout grids. The increase in sales and marketing expenses was primarily due to anincreases 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 commissionsoperating 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 advisory fees paidconference costs associated with reduced COVID-19 travel restrictions and higher payout ratios as we continue to our financial advisors.grow and scale the business.
Blucora, Inc. | 2021 Form 10-K 45
Sources of revenue
Wealth 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 is as follows:
| (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) | Years Ended December 31, | Change | ||||||||||||||
| Sources of Revenue | Primary Drivers | 2019 | 2018 | $ | % | |||||||||||
| Advisor-driven | Commission | - Transactions - Asset levels - Product mix | $ | 191,050 | $ | 164,201 | $ | 26,849 | 16 | % | ||||||
| Advisory | - Advisory asset levels | 252,367 | 164,353 | 88,014 | 54 | % | ||||||||||
| Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 48,182 | 31,456 | 16,726 | 53 | % | |||||||||
| Transaction and fee | - Account activity - Number of clients - Number of advisors - Number of accounts | 16,380 | 13,164 | 3,216 | 24 | % | ||||||||||
| Total revenue | $ | 507,979 | $ | 373,174 | $ | 134,805 | 36 | % | ||||||||
| Total recurring revenue | $ | 422,128 | $ | 303,117 | $ | 119,011 | 39 | % | ||||||||
| Recurring revenue rate | 83.1 | % | 81.2 | % | ||||||||||||
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 under the headings “Commission“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
| (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 | % | |||||||||||||||
| (In thousands, except percentages and as otherwise indicated) | Years Ended December 31, | Change | ||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| Total Client Assets | $ | 70,644,385 | $ | 42,249,055 | $ | 28,395,330 | 67 | % | ||||||
| Brokerage Assets | $ | 43,015,221 | $ | 29,693,650 | $ | 13,321,571 | 45 | % | ||||||
| Advisory Assets | $ | 27,629,164 | $ | 12,555,405 | $ | 15,073,759 | 120 | % | ||||||
| Advisory assets as a percentage of total client assets | 39.1 | % | 29.7 | % | ||||||||||
| Number of advisors (in ones) | 3,984 | 3,593 | 391 | 11 | % | |||||||||
| Advisor-driven revenue per advisor | 111.3 | 91.4 | 19.9 | 22 | % | |||||||||
(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.
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.
Brokerage assets represents the difference betweenrepresent total client assets andother than advisory assets.
Advisory assets as a result of the 1st Global Acquisition in May 2019, we obtained $20.0 billionpercentage of total client assets $11.4increased 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 substantially 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 the pandemic may cause declines in the amount of our total client assets.
Financial professionals. The number of our financial professionals decreased 9% at December 31, 2021 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, 2021 as compared to the year ended December 31, 2020. 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 | |||||||||||||||
____________________________
(1)For the years ended December 31, 2021 and approximately 800 advisors2020, 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 by $6.6 billion, including $3.9 billion from 1st Global.market growth and a $2.6 billion increase in net new advisory assets. Net new advisory assets benefited from a 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.
For the year ended December 31, 2021, the average advisory fee rate decreased primarily due to our tiered fee structure, which has generated lower average fee rates as average client asset balances have increased. In addition, the average advisory fee rate decreased due to the inclusion 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 assets.
Blucora, Inc. | 2021 Form 10-K 48
Commission revenue. The Wealth Management segment generates two types of commissions: (1) transaction-based commissions and (2) trailing commissions. Transaction-based 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 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:
| (In thousands, except percentages) | Years Ended December 31, | Change | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| By product category: | By product category: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mutual funds | $ | 90,407 | $ | 87,624 | $ | 2,783 | 3 | % | Mutual funds | $ | 92,096 | $ | 90,112 | $ | 1,984 | 2.2 | % | ||||||||||||||||||||||||||||||||||||||
| Variable annuities | 63,420 | 51,199 | 12,221 | 24 | % | Variable annuities | 74,050 | 63,014 | 11,036 | 17.5 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Insurance | 19,282 | 14,160 | 5,122 | 36 | % | Insurance | 18,763 | 16,313 | 2,450 | 15.0 | % | ||||||||||||||||||||||||||||||||||||||||||||
| General securities | 17,941 | 11,218 | 6,723 | 60 | % | General securities | 25,768 | 15,762 | 10,006 | 63.5 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 191,050 | $ | 164,201 | $ | 26,849 | 16 | % | Total commission revenue | $ | 210,677 | $ | 185,201 | $ | 25,476 | 13.8 | % | ||||||||||||||||||||||||||||||||||||||
| By type of commission: | By type of commission: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based | $ | 82,604 | $ | 67,350 | $ | 15,254 | 23 | % | Transaction-based | $ | 89,970 | $ | 74,788 | $ | 15,182 | 20.3 | % | ||||||||||||||||||||||||||||||||||||||
| Trailing | 108,446 | 96,851 | 11,595 | 12 | % | Trailing | 120,707 | 110,413 | 10,294 | 9.3 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 191,050 | $ | 164,201 | $ | 26,849 | 16 | % | Total commission revenue | $ | 210,677 | $ | 185,201 | $ | 25,476 | 13.8 | % | ||||||||||||||||||||||||||||||||||||||
For the year ended December 31, 20192021, transaction-based commission revenue and trailing commission revenue increased $15.2 million and $10.3 million, respectively, compared to the year ended December 31, 2018:
| (In thousands) | Years Ended December 31, | ||||||
| 2019 | 2018 | ||||||
| Balance, beginning of the period | $ | 12,555,405 | $ | 12,530,165 | |||
| Net increase in new advisory assets | 997,968 | 957,252 | |||||
| Inflows from the 1st Global Acquisition | 11,397,301 | — | |||||
| Market impact and other | 2,678,491 | (932,012 | ) | ||||
| Balance, end of the period | $ | 27,629,165 | $ | 12,555,405 | |||
| Advisory revenue | $ | 252,367 | $ | 164,353 | |||
| Average advisory fee rate | 118 bps | 127 bps | |||||
Asset-based 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.
For the year ended December 31, 2019 compared to the year ended December 31, 2018,2021, asset-based revenue increased $16.7decreased $1.6 million, (including approximately $9.6primarily due to a $6.3 million from 1st Global), primarily from higherdecrease in cash sweep revenues following changes in our cash sweep program, increasesrevenue 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 and higher asset balances.a $1.7 million increase in revenue generated from asset-based retirement plan service fees.
Transaction and fee 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.
For the year ended December 31, 20192021 transaction and fee revenue increased $7.1 million primarily due to 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 Software
| (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 | % | |||||||||||||||||||
For the year ended December 31, 2021 compared to the year ended December 31, 2018, transaction2020, Tax Software segment operating income increased $32.3 million due to an $18.2 million increase in revenue and feea $14.0 million decrease in operating expenses.
•Tax Software revenue increased $3.2$18.2 million (including approximately $2.3 million of revenues from 1st Global), primarily due to ana $17.5 million increase in fees chargedconsumer revenue. Consumer revenue during 2021 benefited from incremental ancillary services revenue as compared to advisors.2020.
•Tax Preparation
| (In thousands, except percentages) | Years Ended December 31, | Change | ||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| Revenue | $ | 209,966 | $ | 187,282 | $ | 22,684 | 12 | % | ||||||
| Operating income | $ | 96,249 | $ | 87,249 | $ | 9,000 | 10 | % | ||||||
| Segment margin | 46 | % | 47 | % | ||||||||||
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 PreparationSoftware revenue into two different categories: consumer revenue and professional revenue. Consumer revenue represents Tax Preparation revenueis derived from products sold directly to customers and businesses primarily for the preparation of individual orand business tax returns. Professional revenue represents Tax Preparation revenueis derived from products sold to tax return preparers who utilize our offerings to service end-userend user customers.
Revenue by category was as follows:
| (In thousands, except percentages) | Year Ended December 31, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Consumer | $ | 209,748 | $ | 192,226 | $ | 17,522 | 9.1 | % | |||||||||||||||
| Professional | 17,239 | 16,537 | 702 | 4.2 | % | ||||||||||||||||||
| Total Tax Software revenue | $ | 226,987 | $ | 208,763 | $ | 18,224 | 8.7 | % | |||||||||||||||
| (In thousands, except percentages) | Years Ended December 31, | Change | ||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| Consumer | $ | 195,004 | $ | 172,207 | $ | 22,797 | 13 | % | ||||||
| Professional | 14,962 | 15,075 | (113 | ) | (1 | )% | ||||||||
| Total revenue | $ | 209,966 | $ | 187,282 | $ | 22,684 | 12 | % | ||||||
We measure the performance of our Tax Software business using three sets of non-financial metrics, which we consider to be important indicators of the performance of our Tax Software business and are especially relevant through the end of a completed tax season. These non-financial metrics include key performance indicators for our total Tax Software business, in addition to the consumer and professional tax software portions of the Tax Software business:
•We measure our total tax software customers using the total number of accepted federal tax e-files completed by both our consumer tax software customers and our professional tax software customers.
•We measure our consumer tax preparationsoftware customers using the number of accepted federal tax e-files made through our software and digital services. We consider the volume of e-files to be an important non-financial metric in measuring the performance of the consumer side of the Tax Preparation business.
•We measure our professional tax preparersoftware customers using three metrics: (1) the number of accepted federal tax e-files made through our software, (2) the number of units sold, and (3) the number of e-files per unit sold. We consider growth in these areas to be important in measuring the performance of the professional tax preparer side of the Tax Preparation business.
Blucora, Inc. | 2021 Form 10-K 50
| (In thousands, except percentages | Year Ended December 31, | Change | |||||||||||||||||||||
| and as otherwise indicated) | 2021 | 2020 | Units | % | |||||||||||||||||||
Total e-files (1) | 5,583 | 5,319 | 264 | 5.0 | % | ||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
Consumer e-files (1) | 3,178 | 3,178 | — | — | % | ||||||||||||||||||
| Professional: | |||||||||||||||||||||||
| Professional e-files | 2,405 | 2,141 | 264 | 12.3 | % | ||||||||||||||||||
| Units sold (in ones) | 20,901 | 20,360 | 541 | 2.7 | % | ||||||||||||||||||
| Professional e-files per unit sold (in ones) | 115.1 | 105.2 | 9.9 | 9.4 | % | ||||||||||||||||||
| (In thousands, except percentages and as | Years Ended December 31, | Change | |||||||||
| otherwise indicated) | 2019 | 2018 | $ | % | |||||||
| Consumer: | |||||||||||
| Consumer e-files (1) | 3,239 | 3,896 | (657 | ) | (17 | )% | |||||
| Professional: | |||||||||||
| Professional e-files | 2,011 | 1,916 | 95 | 5 | % | ||||||
| Units sold (in ones) | 20,746 | 20,719 | 27 | — | % | ||||||
| Professional e-files per unit sold (in ones) | 96.9 | 92.5 | 4.4 | 4.8 | % | ||||||
For the year ended December 31, 20192021 compared to the year ended December 31, 2018, consumer2020, total e-files decreased 17%increased 5%. This increase was primarily due to a decreaseincreased market share in unpaid filers, while maintaining a stable number of monetized filers.the professional tax software market.
Corporate-Level Activity
Certain corporate-level activity, including certain general and administrative costs (including(such as personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, intangible asset impairment of goodwill, executive transition costs, headquarters relocation costs, and restructuring,contested proxy and other legal and consulting costs, is not allocated to our segments.
| (In thousands) | Years Ended December 31, | Change | ||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| Operating expenses | $ | (27,361 | ) | $ | (20,495 | ) | $ | (6,866 | ) | 34 | % | |||
| Stock-based compensation | (16,300 | ) | (13,253 | ) | (3,047 | ) | 23 | % | ||||||
| Acquisition and integration costs | (25,763 | ) | — | (25,763 | ) | N/A | ||||||||
| Depreciation | (6,851 | ) | (5,003 | ) | (1,848 | ) | 37 | % | ||||||
| Amortization of acquired intangible assets | (37,357 | ) | (33,586 | ) | (3,771 | ) | 11 | % | ||||||
| Impairment of intangible asset | (50,900 | ) | — | (50,900 | ) | N/A | ||||||||
| Restructuring | — | (288 | ) | 288 | (100 | )% | ||||||||
| Total corporate-level activity | $ | (164,532 | ) | $ | (72,625 | ) | $ | (91,907 | ) | 127 | % | |||
| (In thousands, except percentages) | Year Ended December 31, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Unallocated corporate-level general and administrative expenses | $ | 25,555 | $ | 26,689 | $ | (1,134) | (4.2) | % | |||||||||||||||
| Stock-based compensation | 20,754 | 10,066 | 10,688 | 106.2 | % | ||||||||||||||||||
| Acquisition and integration | 32,798 | 31,085 | 1,713 | 5.5 | % | ||||||||||||||||||
| Depreciation | 15,106 | 10,162 | 4,944 | 48.7 | % | ||||||||||||||||||
| Amortization of acquired intangible assets | 28,320 | 29,745 | (1,425) | (4.8) | % | ||||||||||||||||||
| Contested proxy and other legal and consulting costs | 10,939 | — | 10,939 | N/A | |||||||||||||||||||
| Executive transition costs | — | 10,701 | (10,701) | (100.0) | % | ||||||||||||||||||
| Headquarters relocation costs | — | 1,863 | (1,863) | (100.0) | % | ||||||||||||||||||
| Impairment of goodwill | — | 270,625 | (270,625) | (100.0) | % | ||||||||||||||||||
| Total corporate-level activity | $ | 133,472 | $ | 390,936 | $ | (257,464) | (65.9) | % | |||||||||||||||
For the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, corporate-level activity increased $91.9decreased $257.5 million primarily due to the following factors:
•Executive transition costs of strategic initiatives;
Partially offsetting this decrease in corporate-level activity:
•Stock-based compensation increased $10.7 million for the year ended December 31, 2021 as stock-based compensation in 2020 was reduced by stock award forfeitures resulting from 1st Global,executive departures.
•Contested proxy and other legal and consulting costs of $10.9 million for the year ended December 31, 2021.
Blucora, Inc. | 2021 Form 10-K 51
•Acquisition and integration expenses increased $1.7 million. Fair value increases of $14.1 million for the HKFS Contingent Consideration (as defined herein) liability were partially offset by a reductiondecline in stock-based compensationprofessional services costs incurred during the prior year for 2019 due to forfeitures as a resultthe acquisition of executive departures;Avantax Planning Partners.
OPERATING EXPENSES
Cost of Revenue
| (In thousands, except percentages) | Years Ended December 31, | Change | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||
| Wealth management services cost of revenue | $ | 352,081 | $ | 253,580 | $ | 98,501 | 39 | % | |||||||||||||||||||||||||||||
| Tax preparation services cost of revenue | 10,691 | 10,040 | 651 | 6 | % | ||||||||||||||||||||||||||||||||
| Amortization of acquired technology | — | 99 | (99 | ) | (100 | )% | |||||||||||||||||||||||||||||||
| Wealth Management | Wealth Management | $ | 464,293 | $ | 385,962 | $ | 78,331 | 20.3 | % | ||||||||||||||||||||||||||||
| Tax Software | Tax Software | 15,558 | 12,328 | 3,230 | 26.2 | % | |||||||||||||||||||||||||||||||
| Total cost of revenue | $ | 362,772 | $ | 263,719 | $ | 99,053 | 38 | % | Total cost of revenue | $ | 479,851 | $ | 398,290 | $ | 81,561 | 20.5 | % | ||||||||||||||||||||
| Percentage of revenue | 51 | % | 47 | % | Percentage of revenue | 54.2 | % | 52.8 | % | ||||||||||||||||||||||||||||
Cost of revenue consists of costs related to our Wealth Management and Tax PreparationSoftware businesses, which include commissions and advisory fees paid to independent financial advisors,professionals, payments made to CPA firms under fee sharing arrangements, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses, the cost of temporary help and contractors, professional services fees, software support and maintenance, bandwidth and hosting costs, and depreciation.depreciation (including depreciation related to software development costs in the Tax Software segment). Cost of revenue also includes the amortizationdoes not include compensation paid to in-house/employee financial professionals in our Wealth Management business. The compensation of acquired technology.our in-house/employee financial professionals is reflected in “Sales and marketing” expense.
For the year ended December 31, 20192021, compared to the year ended December 31, 2018,2020, cost of revenue increased $99.1$81.6 million primarily due to the following factors:
Engineering and Technology
| (In thousands, except percentages) | Year Ended December 31, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Engineering and technology | $ | 30,704 | $ | 27,258 | $ | 3,446 | 12.6 | % | |||||||||||||||
| Percentage of revenue | 3.5 | % | 3.6 | % | |||||||||||||||||||
| (In thousands, except percentages) | Years Ended December 31, | Change | ||||||||||||
| 2019 | 2018 | $ | % | |||||||||||
| Engineering and technology | $ | 30,931 | $ | 19,332 | $ | 11,599 | 60 | % | ||||||
| Percentage of revenue | 4 | % | 3 | % | ||||||||||
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses, the cost of temporary help and contractors, software support and maintenance, bandwidth and hosting, and professional services fees. Engineering and technology expenses do not include the costs of computer hardware and software that are capitalized, depreciated over their useful lives, and recognized on the consolidated statements of comprehensive income (loss) as either “Cost of Revenue” or “Depreciation.” For more information, see the “Cost of Revenue” and “Depreciation and Amortization of Acquired Intangible Assets” sections contained within this discussion of “Operating Expenses.”
For the year ended December 31, 20192021, compared to the year ended December 31, 2018,2020, engineering and technology expenses increased $11.6$3.4 million primarily due to higher headcountincremental personnel expenses in the Tax Software and Wealth Management segments, partially offset by decreased consulting expensesfees in our Tax Preparation business, as well as approximately $2.6 million of costs from 1st Global, partially offset by a decrease resulting from clearing firm conversion costs we recognized for 2018.Software business.
Blucora, Inc. | 2021 Form 10-K 52
Sales and Marketing
| (In thousands, except percentages) | Years Ended December 31, | Change | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||
| Sales and marketing | $ | 126,205 | $ | 111,361 | $ | 14,844 | 13 | % | Sales and marketing | $ | 173,331 | $ | 177,618 | $ | (4,287) | (2.4) | % | ||||||||||||||||||||
| Percentage of revenue | 18 | % | 20 | % | Percentage of revenue | 19.6 | % | 23.5 | % | ||||||||||||||||||||||||||||
Sales and marketing expenses primarily consist of marketing expenses associated with our Tax Software business (including expenses related to marketing agencies and media companies) and our Wealth Management business, personnel expenses, compensation paid to Avantax Planning Partners in-house/employee financial professionals, the cost of temporary help and contractors, marketing expenses associated with our Wealth Management business and Tax Preparation business, and back office processing support expenses for our Wealth Management business.
For the year ended December 31, 20192021, compared to the year ended December 31, 2018,2020, sales and marketing expenses increased $14.8decreased $4.3 million primarily due to:
General and Administrative
| (In thousands, except percentages) | Years Ended December 31, | Change | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||
| General and administrative | $ | 78,529 | $ | 60,124 | $ | 18,405 | 31 | % | General and administrative | $ | 98,671 | $ | 82,158 | $ | 16,513 | 20.1 | % | ||||||||||||||||||||
| Percentage of revenue | 11 | % | 11 | % | Percentage of revenue | 11.1 | % | 10.9 | % | ||||||||||||||||||||||||||||
General and administrative (“G&A”) expenses primarily consist of personnel expenses, the cost of temporary help and contractors, professional services fees, general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
For the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, G&A expenses increased $18.4$16.5 million primarily due to an increasethe following factors:
•Stock-based compensation increased $10.7 million. Stock-based compensation for the year ended December 31, 2020 was reduced due to stock award forfeitures resulting from executive departures.
•Contested proxy and other legal and consulting costs of $10.9 million were incurred for the year ended December 31, 2021.
•Incremental general and administrative costs of $5.6 million were incurred in 2021, primarily personnel costs related tocosts.
These increases in headcount and stock-based compensation (including $8.1 million of costs from 1st Global),were partially offset by a decrease$10.7 million of executive transition costs for the year ended December 31, 2020 due to the departure of certain Company executives, which did not recur in prior period consulting expenses primarily related to strategic initiatives.2021.
Blucora, Inc. | 2021 Form 10-K 53
Acquisition and Integration
| Year Ended | ||||||||||||||||||||||||||
| (In thousands, except percentages) | December 31, 2019 | (In thousands, except percentages) | Year Ended December 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||||||||||||
| Employee-related expenses | $ | 5,241 | Employee-related expenses | $ | 719 | $ | 1,615 | $ | (896) | (55.5) | % | |||||||||||||||
| Professional services | 17,752 | Professional services | 2,855 | 13,602 | (10,747) | (79.0) | % | |||||||||||||||||||
| Change in the fair value of HKFS Contingent Consideration | Change in the fair value of HKFS Contingent Consideration | 22,400 | 8,300 | 14,100 | 169.9 | % | ||||||||||||||||||||
| Other expenses | 2,770 | Other expenses | 6,824 | 7,568 | (744) | (9.8) | % | |||||||||||||||||||
| Total | $ | 25,763 | Total | $ | 32,798 | $ | 31,085 | $ | 1,713 | 5.5 | % | |||||||||||||||
| Percentage of revenue | 4 | % | Percentage of revenue | 3.7 | % | 4.1 | % | |||||||||||||||||||