| ☒ | |||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended September 30, 20172021
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
(Exact name of registrant as specified in its charter)
| Delaware | ||||
| 91-1718107 | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
3200 Olympus Blvd, Suite 100, Dallas, Texas 75019
(Address of principal executive offices) (Zip Code)
(972) 870-6400
(Registrant’s telephone number, including area code: (972) 870-6000code)
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 | ||||||||||||
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. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | ý | |||||||||||
| 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 Section13(a)Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o☐ Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 28, 2021, 48,718,718 shares of the registrant’s Common Stock were outstanding.
TABLE OF CONTENTS
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
This report includes some of the 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, HKFS, and 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.
References to our or our subsidiaries’ website addresses or the website addresses of third parties in this report do not constitute incorporation by reference of the information contained on such websites and should not be considered part of this report.
Blucora, Inc. | Q3 2021 Form 10-Q 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) 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 I, Item 2 of this Form 10-Q 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,” “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. Actual results may differ significantly from management’s expectations due to various risks and uncertainties including, but not limited to:
•our ability to effectively compete within our industries;
•our ability to attract and retain financial professionals, qualified 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 retain employees and acquired 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;
•our ability to manage leadership and employee transitions, including costs and time burdens on management and our board of directors related thereto;
•the compromising of confidentiality, availability or integrity of information, including cyberattacks;
•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 other 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. | Q3 2021 Form 10-Q 3
•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;
•the seasonality of our business;
•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.
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, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by those identified under Part II, Item 1A, “Risk Factors” and elsewhere in this Form 10-Q, as well as in our other filings with the SEC. All forward-looking statements speak only as of the date of this Form 10-Q. 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-Q or to reflect the occurrence of unanticipated events, except as required by law.
Blucora, Inc. | Q3 2021 Form 10-Q 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 184,926 | $ | 150,125 | |||||||
| Cash segregated under federal or other regulations | 536 | 637 | |||||||||
| Accounts receivable, net of allowance | 17,886 | 12,736 | |||||||||
| Commissions and advisory fees receivable | 25,003 | 26,132 | |||||||||
| Other receivables | 468 | 717 | |||||||||
| Prepaid expenses and other current assets, net | 11,119 | 10,321 | |||||||||
| Total current assets | 239,938 | 200,668 | |||||||||
| Long-term assets: | |||||||||||
| Property and equipment, net | 68,950 | 58,500 | |||||||||
| Right-of-use assets, net | 20,818 | 23,455 | |||||||||
| Goodwill | 454,821 | 454,821 | |||||||||
| Other intangible assets, net | 304,435 | 322,179 | |||||||||
| Other long-term assets | 14,519 | 4,569 | |||||||||
| Total long-term assets | 863,543 | 863,524 | |||||||||
| Total assets | $ | 1,103,481 | $ | 1,064,192 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 8,932 | $ | 9,290 | |||||||
| Commissions and advisory fees payable | 18,297 | 19,021 | |||||||||
| Accrued expenses and other current liabilities | 75,375 | 56,419 | |||||||||
| Deferred revenue—current | 5,469 | 12,298 | |||||||||
| Lease liabilities—current | 4,429 | 2,304 | |||||||||
| Current portion of long-term debt | 1,790 | 1,784 | |||||||||
| Total current liabilities | 114,292 | 101,116 | |||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net | 552,987 | 552,553 | |||||||||
| Deferred tax liability, net | 29,502 | 30,663 | |||||||||
| Deferred revenue—long-term | 5,553 | 6,247 | |||||||||
| Lease liabilities—long-term | 34,020 | 36,404 | |||||||||
| Other long-term liabilities | 7,992 | 24,919 | |||||||||
| Total long-term liabilities | 630,054 | 650,786 | |||||||||
| Total liabilities | 744,346 | 751,902 | |||||||||
| Commitments and contingencies (Note 8) | 0 | 0 | |||||||||
| Stockholders’ equity: | |||||||||||
| Common stock, par value $0.0001 per share—900,000 shares authorized; 50,025 shares issued and 48,719 shares outstanding at September 30, 2021; 49,483 shares issued and 48,177 shares outstanding at December 31, 2020 | 5 | 5 | |||||||||
| Additional paid-in capital | 1,613,624 | 1,598,230 | |||||||||
| Accumulated deficit | (1,226,095) | (1,257,546) | |||||||||
| Treasury stock, at cost—1,306 shares at September 30, 2021 and December 31, 2020 | (28,399) | (28,399) | |||||||||
| Total stockholders’ equity | 359,135 | 312,290 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,103,481 | $ | 1,064,192 | |||||||
| September 30, 2017 | December 31, 2016 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 78,558 | $ | 51,713 | |||
| Cash segregated under federal or other regulations | 313 | 2,355 | |||||
| Available-for-sale investments | — | 7,101 | |||||
| Accounts receivable, net of allowance | 6,952 | 10,209 | |||||
| Commissions receivable | 16,432 | 16,144 | |||||
| Other receivables | 592 | 4,004 | |||||
| Prepaid expenses and other current assets, net | 4,777 | 6,321 | |||||
| Total current assets | 107,624 | 97,847 | |||||
| Long-term assets: | |||||||
| Property and equipment, net | 9,552 | 10,836 | |||||
| Goodwill, net | 549,064 | 548,741 | |||||
| Other intangible assets, net | 336,872 | 362,178 | |||||
| Other long-term assets | 2,557 | 3,057 | |||||
| Total long-term assets | 898,045 | 924,812 | |||||
| Total assets | $ | 1,005,669 | $ | 1,022,659 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 3,161 | $ | 4,536 | |||
| Commissions and advisory fees payable | 16,564 | 16,587 | |||||
| Accrued expenses and other current liabilities | 18,768 | 18,528 | |||||
| Deferred revenue | 7,118 | 12,156 | |||||
| Current portion of long-term debt, net | 2,560 | 2,560 | |||||
| Total current liabilities | 48,171 | 54,367 | |||||
| Long-term liabilities: | |||||||
| Long-term debt, net | 344,232 | 248,221 | |||||
| Convertible senior notes, net | — | 164,176 | |||||
| Deferred tax liability, net | 59,118 | 111,126 | |||||
| Deferred revenue | 1,031 | 1,849 | |||||
| Other long-term liabilities | 8,530 | 10,205 | |||||
| Total long-term liabilities | 412,911 | 535,577 | |||||
| Total liabilities | 461,082 | 589,944 | |||||
| Redeemable noncontrolling interests | 16,162 | 15,696 | |||||
| Commitments and contingencies (Note 9) | |||||||
| Stockholders’ equity: | |||||||
| Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares, | |||||||
| 46,077 and 41,845 | 5 | 4 | |||||
| Additional paid-in capital | 1,552,609 | 1,510,152 | |||||
| Accumulated deficit | (1,024,222 | ) | (1,092,756 | ) | |||
| Accumulated other comprehensive income (loss) | 33 | (381 | ) | ||||
| Total stockholders’ equity | 528,425 | 417,019 | |||||
| Total liabilities and stockholders’ equity | $ | 1,005,669 | $ | 1,022,659 | |||
Blucora, Inc. | Q3 2021 Form 10-Q 5
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenue: | |||||||||||||||
| Wealth management services revenue | $ | 86,809 | $ | 80,088 | $ | 254,772 | $ | 233,496 | |||||||
| Tax preparation services revenue | 3,362 | 3,149 | 156,936 | 135,614 | |||||||||||
| Total revenue | 90,171 | 83,237 | 411,708 | 369,110 | |||||||||||
| Operating expenses: | |||||||||||||||
| Cost of revenue: | |||||||||||||||
| Wealth management services cost of revenue | 59,607 | 54,921 | 172,444 | 158,213 | |||||||||||
| Tax preparation services cost of revenue | 1,314 | 1,319 | 7,543 | 6,549 | |||||||||||
| Amortization of acquired technology | 50 | 49 | 145 | 765 | |||||||||||
| Total cost of revenue | 60,971 | 56,289 | 180,132 | 165,527 | |||||||||||
| Engineering and technology | 5,051 | 4,588 | 14,041 | 12,842 | |||||||||||
| Sales and marketing | 13,680 | 11,965 | 84,974 | 75,715 | |||||||||||
| General and administrative | 12,207 | 11,638 | 39,405 | 35,899 | |||||||||||
| Depreciation | 867 | 968 | 2,680 | 2,906 | |||||||||||
| Amortization of other acquired intangible assets | 8,615 | 8,297 | 25,192 | 24,929 | |||||||||||
| Restructuring | 106 | — | 2,726 | — | |||||||||||
| Total operating expenses | 101,497 | 93,745 | 349,150 | 317,818 | |||||||||||
| Operating income (loss) | (11,326 | ) | (10,508 | ) | 62,558 | 51,292 | |||||||||
| Other loss, net | (5,241 | ) | (11,453 | ) | (39,149 | ) | (29,883 | ) | |||||||
| Income (loss) from continuing operations before income taxes | (16,567 | ) | (21,961 | ) | 23,409 | 21,409 | |||||||||
| Income tax benefit (expense) | (166 | ) | 8,537 | (5,952 | ) | (8,899 | ) | ||||||||
| Income (loss) from continuing operations | (16,733 | ) | (13,424 | ) | 17,457 | 12,510 | |||||||||
| Discontinued operations, net of income taxes | — | (40,528 | ) | — | (57,981 | ) | |||||||||
| Net income (loss) | (16,733 | ) | (53,952 | ) | 17,457 | (45,471 | ) | ||||||||
| Net income attributable to noncontrolling interests | (164 | ) | (167 | ) | (466 | ) | (426 | ) | |||||||
| Net income (loss) attributable to Blucora, Inc. | $ | (16,897 | ) | $ | (54,119 | ) | $ | 16,991 | $ | (45,897 | ) | ||||
| Net income (loss) per share attributable to Blucora, Inc. - basic: | |||||||||||||||
| Continuing operations | $ | (0.37 | ) | $ | (0.33 | ) | $ | 0.39 | $ | 0.29 | |||||
| Discontinued operations | — | (0.97 | ) | — | (1.40 | ) | |||||||||
| Basic net income (loss) per share | $ | (0.37 | ) | $ | (1.30 | ) | $ | 0.39 | $ | (1.11 | ) | ||||
| Net income (loss) per share attributable to Blucora, Inc. - diluted: | |||||||||||||||
| Continuing operations | $ | (0.37 | ) | $ | (0.33 | ) | $ | 0.36 | $ | 0.29 | |||||
| Discontinued operations | — | (0.97 | ) | — | (1.37 | ) | |||||||||
| Diluted net income (loss) per share | $ | (0.37 | ) | $ | (1.30 | ) | $ | 0.36 | $ | (1.08 | ) | ||||
| Weighted average shares outstanding: | |||||||||||||||
| Basic | 45,459 | 41,635 | 43,749 | 41,404 | |||||||||||
| Diluted | 45,459 | 41,635 | 46,813 | 42,329 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||
| Net income (loss) | $ | (16,733 | ) | $ | (53,952 | ) | $ | 17,457 | $ | (45,471 | ) | ||||
| Unrealized gain on available-for-sale investments, net of tax | — | — | 1 | 10 | |||||||||||
| Foreign currency translation adjustment | 223 | (77 | ) | 413 | 246 | ||||||||||
| Other comprehensive income (loss) | 223 | (77 | ) | 414 | 256 | ||||||||||
| Comprehensive income (loss) | (16,510 | ) | (54,029 | ) | 17,871 | (45,215 | ) | ||||||||
| Comprehensive income attributable to noncontrolling interests | (164 | ) | (167 | ) | (466 | ) | (426 | ) | |||||||
| Comprehensive income (loss) attributable to Blucora, Inc. | $ | (16,674 | ) | $ | (54,196 | ) | $ | 17,405 | $ | (45,641 | ) | ||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Wealth management services revenue | $ | 169,135 | $ | 135,932 | $ | 486,021 | $ | 396,805 | |||||||||||||||
| Tax software services revenue | 5,039 | 39,421 | 220,848 | 202,990 | |||||||||||||||||||
| Total revenue | 174,174 | 175,353 | 706,869 | 599,795 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Wealth management services cost of revenue | 120,641 | 96,122 | 343,174 | 282,332 | |||||||||||||||||||
| Tax software services cost of revenue | 2,323 | 2,692 | 12,330 | 9,759 | |||||||||||||||||||
| Total cost of revenue | 122,964 | 98,814 | 355,504 | 292,091 | |||||||||||||||||||
| Engineering and technology | 7,874 | 6,007 | 22,233 | 21,899 | |||||||||||||||||||
| Sales and marketing | 28,399 | 31,018 | 140,809 | 150,785 | |||||||||||||||||||
| General and administrative | 23,102 | 18,605 | 71,619 | 63,533 | |||||||||||||||||||
| Acquisition and integration | 2,241 | 10,276 | 28,513 | 18,782 | |||||||||||||||||||
| Depreciation | 2,867 | 1,874 | 8,371 | 5,345 | |||||||||||||||||||
| Amortization of other acquired intangible assets | 7,009 | 7,746 | 21,247 | 22,167 | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 270,625 | |||||||||||||||||||
| Total operating expenses | 194,456 | 174,340 | 648,296 | 845,227 | |||||||||||||||||||
| Operating income (loss) | (20,282) | 1,013 | 58,573 | (245,432) | |||||||||||||||||||
| Other loss, net | (8,295) | (11,963) | (24,202) | (23,386) | |||||||||||||||||||
| Income (loss) before income taxes | (28,577) | (10,950) | 34,371 | (268,818) | |||||||||||||||||||
| Income tax benefit (expense) | 774 | (15,256) | (2,920) | (23,237) | |||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | (0.57) | $ | (0.55) | $ | 0.65 | $ | (6.09) | |||||||||||||||
| Diluted | $ | (0.57) | $ | (0.55) | $ | 0.64 | $ | (6.09) | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 48,707 | 48,039 | 48,492 | 47,936 | |||||||||||||||||||
| Diluted | 48,707 | 48,039 | 49,373 | 47,936 | |||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
| Other comprehensive income, net of income taxes | — | — | — | 272 | |||||||||||||||||||
| Comprehensive income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (291,783) | |||||||||||||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 6
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
| Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 49,483 | $ | 5 | $ | 1,598,230 | $ | (1,257,546) | $ | — | (1,306) | $ | (28,399) | $ | 312,290 | |||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | 132 | — | 63 | — | — | — | — | 63 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 5,520 | — | — | — | — | 5,520 | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | (865) | — | — | — | — | (865) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 27,646 | — | — | — | 27,646 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 49,615 | $ | 5 | $ | 1,602,948 | $ | (1,229,900) | $ | — | (1,306) | $ | (28,399) | $ | 344,654 | |||||||||||||||||||||||||||||||||
| Common stock issued for stock options, restricted stock units, and employee stock purchase plan | 347 | — | 1,989 | — | — | — | — | 1,989 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 4,720 | — | — | — | — | 4,720 | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | (464) | — | — | — | — | (464) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 31,608 | — | — | — | 31,608 | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 49,962 | $ | 5 | $ | 1,609,193 | $ | (1,198,292) | $ | — | (1,306) | $ | (28,399) | $ | 382,507 | |||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | 63 | — | 328 | — | — | — | — | 328 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 4,387 | — | — | — | — | 4,387 | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | (284) | — | — | — | — | (284) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (27,803) | — | — | — | (27,803) | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 50,025 | $ | 5 | $ | 1,613,624 | $ | (1,226,095) | $ | — | (1,306) | $ | (28,399) | $ | 359,135 | |||||||||||||||||||||||||||||||||
| Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 49,059 | $ | 5 | $ | 1,586,972 | $ | (914,791) | $ | (272) | (1,306) | $ | (28,399) | $ | 643,515 | |||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | 89 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | (1,201) | — | — | — | — | (1,201) | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | (917) | — | — | — | — | (917) | |||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | 272 | — | — | 272 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (315,494) | — | — | — | (315,494) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | 49,148 | $ | 5 | $ | 1,584,854 | $ | (1,230,285) | $ | — | (1,306) | $ | (28,399) | $ | 326,175 | |||||||||||||||||||||||||||||||||
| Common stock issued for stock options, restricted stock units, and employee stock purchase plan | 192 | — | 1,226 | — | — | — | — | 1,226 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 3,904 | — | — | — | — | 3,904 | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | (89) | — | — | — | — | (89) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 49,645 | — | — | — | 49,645 | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | 49,340 | $ | 5 | $ | 1,589,895 | $ | (1,180,640) | $ | — | (1,306) | $ | (28,399) | $ | 380,861 | |||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | 10 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 4,517 | — | — | — | — | 4,517 | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | (28) | — | — | — | — | (28) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (26,206) | — | — | — | (26,206) | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | 49,350 | $ | 5 | $ | 1,594,384 | $ | (1,206,846) | $ | — | (1,306) | $ | (28,399) | $ | 359,144 | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 7
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities: | |||||||||||
| Net income (loss) | $ | 31,451 | $ | (292,055) | |||||||
| Adjustments to reconcile net income (loss) to net cash from operating activities: | |||||||||||
| Stock-based compensation | 15,499 | 7,220 | |||||||||
| Depreciation and amortization of acquired intangible assets | 32,498 | 29,619 | |||||||||
| Impairment of goodwill | — | 270,625 | |||||||||
| Reduction of right-of-use lease assets | 2,694 | 8,335 | |||||||||
| Deferred income taxes | (1,161) | 23,199 | |||||||||
| Amortization of debt issuance costs | 1,128 | 1,006 | |||||||||
| Accretion of debt discounts | 851 | 414 | |||||||||
| Gain on the sale of a business | — | (349) | |||||||||
| Change in the fair value of acquisition-related contingent consideration | 19,500 | (1,000) | |||||||||
| Accretion of lease liability | 731 | 1,413 | |||||||||
| Other | 1,371 | 984 | |||||||||
| Cash provided (used) by changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (5,008) | 12,267 | |||||||||
| Commissions and advisory fees receivable | 1,129 | (1,480) | |||||||||
| Other receivables | 249 | (2,909) | |||||||||
| Prepaid expenses and other current assets | (798) | 2,555 | |||||||||
| Other long-term assets | (10,898) | 2,763 | |||||||||
| Accounts payable | (358) | (7,018) | |||||||||
| Commissions and advisory fees payable | (500) | (3,012) | |||||||||
| Lease liabilities | (1,047) | (3,568) | |||||||||
| Deferred revenue | (7,523) | (8,582) | |||||||||
| Accrued expenses and other current and long-term liabilities | (5,417) | (5,113) | |||||||||
| Net cash provided by operating activities | 74,391 | 35,314 | |||||||||
| Investing activities: | |||||||||||
| Purchases of property and equipment | (21,624) | (28,711) | |||||||||
| Business acquisitions, net of cash acquired | — | (102,425) | |||||||||
| Asset acquisitions, net of cash acquired | (3,823) | — | |||||||||
| Proceeds from sale of a business | — | 349 | |||||||||
| Net cash used by investing activities | (25,447) | (130,787) | |||||||||
| Financing activities: | |||||||||||
| Proceeds from credit facilities, net of debt issuance costs and debt discounts | (502) | 226,278 | |||||||||
| Payments on credit facilities | (1,359) | (66,078) | |||||||||
| Proceeds from stock option exercises | 535 | 25 | |||||||||
| Proceeds from issuance of stock through employee stock purchase plan | 1,845 | 1,201 | |||||||||
| Tax payments from shares withheld for equity awards | (1,613) | (1,034) | |||||||||
| Acquisition-related contingent consideration payments | (13,150) | — | |||||||||
| Net cash provided (used) by financing activities | (14,244) | 160,392 | |||||||||
| Net increase in cash, cash equivalents, and restricted cash | 34,700 | 64,919 | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 150,762 | 86,450 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 185,462 | $ | 151,369 | |||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for income taxes | $ | 2,864 | $ | 1,657 | |||||||
| Cash paid for interest | $ | 21,626 | $ | 16,994 | |||||||
| Non-cash investing activities: | |||||||||||
| Purchases of property and equipment through leasehold incentives | $ | — | $ | 9,726 | |||||||
| Nine months ended September 30, | |||||||
| 2017 | 2016 | ||||||
| Operating Activities: | |||||||
| Net income (loss) | $ | 17,457 | $ | (45,471 | ) | ||
| Less: Discontinued operations, net of income taxes | — | (57,981 | ) | ||||
| Net income from continuing operations | 17,457 | 12,510 | |||||
| Adjustments to reconcile net income from continuing operations to net cash from operating activities: | |||||||
| Stock-based compensation | 8,434 | 10,616 | |||||
| Depreciation and amortization of acquired intangible assets | 28,553 | 29,080 | |||||
| Restructuring (non-cash) | 1,499 | — | |||||
| Deferred income taxes | (473 | ) | (12,484 | ) | |||
| Amortization of premium on investments, net | 10 | 164 | |||||
| Amortization of debt issuance costs | 891 | 1,440 | |||||
| Accretion of debt discounts | 1,893 | 3,599 | |||||
| (Gain) loss on debt extinguishment | 19,764 | (641 | ) | ||||
| Revaluation of acquisition-related contingent consideration liability | — | 391 | |||||
| Other | — | 18 | |||||
| Cash provided (used) by changes in operating assets and liabilities: | |||||||
| Accounts receivable | 3,259 | 793 | |||||
| Commissions receivable | (288 | ) | 1,034 | ||||
| Other receivables | 2,384 | 19,656 | |||||
| Prepaid expenses and other current assets | 1,720 | 6,003 | |||||
| Other long-term assets | 432 | (1,174 | ) | ||||
| Accounts payable | (1,375 | ) | 1,151 | ||||
| Commissions and advisory fees payable | (23 | ) | (1,600 | ) | |||
| Deferred revenue | (5,856 | ) | (1,805 | ) | |||
| Accrued expenses and other current and long-term liabilities | 949 | 19,786 | |||||
| Net cash provided by operating activities from continuing operations | 79,230 | 88,537 | |||||
| Investing Activities: | |||||||
| Business acquisition, net of cash acquired | — | (1,788 | ) | ||||
| Purchases of property and equipment | (3,809 | ) | (2,648 | ) | |||
| Proceeds from sales of investments | 249 | — | |||||
| Proceeds from maturities of investments | 7,252 | 11,808 | |||||
| Purchases of investments | (409 | ) | (5,147 | ) | |||
| Net cash provided by investing activities from continuing operations | 3,283 | 2,225 | |||||
| Financing Activities: | |||||||
| Proceeds from credit facilities | 367,212 | — | |||||
| Payments on convertible notes | (172,827 | ) | (20,667 | ) | |||
| Payments on credit facilities | (285,000 | ) | (105,000 | ) | |||
| Proceeds from stock option exercises | 38,228 | 1,141 | |||||
| Proceeds from issuance of stock through employee stock purchase plan | 1,428 | 1,402 | |||||
| Tax payments from shares withheld for equity awards | (6,744 | ) | (1,447 | ) | |||
| Contingent consideration payments for business acquisition | (946 | ) | — | ||||
| Net cash used by financing activities from continuing operations | (58,649 | ) | (124,571 | ) | |||
| Net cash provided (used) by continuing operations | 23,864 | (33,809 | ) | ||||
| Net cash provided by operating activities from discontinued operations | — | 12,359 | |||||
| Net cash provided by investing activities from discontinued operations | 1,028 | 43,230 | |||||
| Net cash used by financing activities from discontinued operations | — | (9,000 | ) | ||||
| Net cash provided by discontinued operations | 1,028 | 46,589 | |||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 86 | (15 | ) | ||||
| Net increase in cash, cash equivalents, and restricted cash | 24,978 | 12,765 | |||||
| Cash, cash equivalents, and restricted cash, beginning of period | 54,868 | 59,830 | |||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 79,846 | $ | 72,595 | |||
| Cash paid for income taxes from continuing operations | $ | 1,013 | $ | 2,079 | |||
| Cash paid for interest from continuing operations | $ | 14,205 | $ | 23,455 | |||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 8
BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company and Basis of Presentation
Description of the business:Business
Blucora, Inc. (the "Company"“Company,”“Blucora,” “we,” “our,” or "Blucora"“us”) operates two2 primary businesses: athe Wealth Management business and an onlinethe digital Tax PreparationSoftware business. The
Wealth Management
Our wealth management business consists of the operations of HDV Holdings, Inc.Avantax Wealth Management and Avantax Planning Partners (collectively, the “Wealth Management business” or the “Wealth Management segment”).
Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, certified public accounting (“CPA”) firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries ("HD Vest"). HDV Holdings, Inc.and is the parent companyleading 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”). Our employee-based RIA model, which we refer to as “Avantax Planning Partners,” also includes Avantax Wealth Management total client assets that have been acquired from Avantax Wealth Management financial professionals.
On July 1, 2020, we acquired all of the issued and outstanding common stock of HKFS (the “HKFS Acquisition”). The operations of HKFS are included in our operating results as part of the Wealth Management business and owns all outstanding sharessegment from the date of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), HD Vest Advisory Services, Inc. (a registered investment advisor), and HD Vest Insurance Agency, LLC (an insurance broker) (collectively referredHKFS Acquisition. On January 4, 2021, we announced the rebranding of HKFS to as the "Wealth Management business" or the "Wealth Management segment"Avantax Planning Partners (the “Rebranding”). The Rebranding was designed to create tighter brand alignment, bringing the Wealth Management business under one common and recognizable brand.
Tax PreparationSoftware
The Tax Software business consists of the operations of TaxAct, Inc. ("TaxAct"“TaxAct,” the “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation solutionsservices, packaged tax software, and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectivelyand its mobile applications. We had referred to this business as the "“Tax Preparation business” and “Tax Preparation segment” in previous filings.
The Tax Preparation business" orSoftware segment is highly seasonal with a significant portion of its annual revenue typically earned in the "Tax Preparation segment").
In March 2020 and as a result of Monoprice, Inc.the COVID-19 pandemic, the Internal Revenue Service ("Monoprice"“IRS”).
As a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations") and the divestituresresult of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As partcontinued impact of the Strategic TransformationCOVID-19 pandemic, the IRS delayed the start of the 2021 tax season and "One Company" operating model,extended the Company announced on October 27, 2016 plansfiling and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to relocate its corporate headquarters byMay 17, 2021. In addition, the IRS further extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is15, 2021. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be completed by early 2018.earned in the first quarter of 2021 to the second quarter of 2021.
Blucora, Inc. | Q3 2021 Form 10-Q 9
Segments
We have 2 reportable segments: (1) the Wealth Management segment and (2) the Tax PreparationSoftware segment.
Note 2: Summary of Significant Accounting Policies
Interim financial information:information
The accompanying condensed consolidated financial statements have been prepared by the Companyus under the rules and regulations of the Securities and Exchange Commission (the "SEC")SEC for interim financial reporting. These condensed consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordanceconformity with United States generally accepted accounting principles generally accepted in the United States ("GAAP"“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II, Item 8 of the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016.2020. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents, and restricted cash:cash
The following table presents cash, cash equivalents, and restricted cash as reported on the condensed consolidated balance sheets that equaland the total amounts on thecondensed consolidated statements of cash flows (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 184,926 | $ | 150,125 | |||||||
| Cash segregated under federal or other regulations | 536 | 637 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 185,462 | $ | 150,762 | |||||||
| September 30, | December 31, | ||||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Cash and cash equivalents | $ | 78,558 | $ | 71,165 | $ | 51,713 | $ | 55,473 | |||||||
| Cash segregated under federal or other regulations | 313 | 630 | 2,355 | 3,557 | |||||||||||
| Restricted cash included in "Prepaid expenses and other current assets, net" | 425 | 100 | 250 | 100 | |||||||||||
| Restricted cash included in "Other long-term assets" | 550 | 700 | 550 | 700 | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | 79,846 | $ | 72,595 | $ | 54,868 | $ | 59,830 | |||||||
Cash segregated under federal and other regulations is held in a segregatedseparate bank account for the exclusive benefit of our Avantax Wealth Management clients and is recognized as restricted cash on the Company’scondensed consolidated balance sheets.
Asset Acquisitions
Acquisitions that do not meet the criteria to be accounted for as a business combination are accounted for as an asset acquisition. Using a cost accumulation model, the purchase price, including acquisition costs and any contingent consideration, if the contingencies are met for such contingent consideration at or near the acquisition date, is allocated to the acquired assets and assumed liabilities based upon their relative fair values as of the acquisition date and no goodwill is contemplated in the allocation process. Contingent consideration that is not earned at or near the acquisition date is capitalized as part of the cost of the assets acquired and is allocated to increase the eligible assets on a relative fair value basis.
We include the operations of an asset acquisition in our consolidated operating results beginning on the date of acquisition. The allocation of the purchase price to the assets acquired and liabilities assumed may require estimates, including but not limited to ones related to expected long-term revenues, future expected operating expenses, cost of capital, assumed attrition rates, and discount rates.
Goodwill
We assess goodwill for impairment at the reporting unit level, which consists of the Wealth Management reporting unit and the Tax Software reporting unit. We evaluate goodwill for impairment annually, as of November 30, or more frequently when events or circumstances indicate it is more likely than not that the estimated fair value
Blucora, Inc. | Q3 2021 Form 10-Q 10
of one or more of our reporting units is less than its carrying amount. To determine whether it is necessary to perform a goodwill impairment test, we first assess qualitative factors to evaluate whether it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. We may elect to perform a goodwill impairment test without completing a qualitative assessment.
Beginning in March 2020, the COVID-19 pandemic had a significant negative impact on the U.S. and global economy and caused substantial disruption in the U.S. and global securities markets, and as a result, negatively impacted certain key Wealth Management business customers. Restricted cash includeddrivers, such as client asset levels and interest rates. These macroeconomic and Company-specific factors, in prepaid expenses and other current assets, net and other long-term assets represents amounts pledgedtotality, served as collateral for certaina triggering event that resulted in the testing of the Company's banking arrangements.goodwill of the Wealth Management reporting unit and the Tax Software reporting unit for potential impairment.
For the market. Specifically,Wealth Management reporting unit, the Company has determined the faircarrying value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues,reporting unit exceeded its estimated fair value by $270.6 million. Therefore, we recorded an impairment of goodwill of $270.6 million as of March 31, 2020. For the probability of payment, andTax Software reporting unit, the discount rate. The change in the faircarrying value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which thereporting unit was significantly below its estimated fair value, changes.
Note 3: Segment Information and Revenue
We have 2 reportable operating segments: (1) the Wealth Management segment and (2) the Tax Software segment. Our Chief Executive Officer is the chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, acquisition and integration costs, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, or impairment of goodwill to the reportable segments. Such amounts are reflected in the table below under the heading “Corporate-level activity.” In addition, we do not allocate other loss, net, or income tax provision, which resulted intaxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.
Blucora, Inc. | Q3 2021 Form 10-Q 11
Information on reportable operating segments currently presented to our chief operating decision maker and a $0.4 million decreasereconciliation of operating income (loss) to income from continuing operations andconsolidated net income attributable to Blucora, a $0.01 decrease to basic earnings per share,(loss) are presented below (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Wealth Management revenue | $ | 169,135 | $ | 135,932 | $ | 486,021 | $ | 396,805 | |||||||||||||||
| Tax Software revenue | 5,039 | 39,421 | 220,848 | 202,990 | |||||||||||||||||||
| Total revenue | $ | 174,174 | $ | 175,353 | $ | 706,869 | $ | 599,795 | |||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Wealth Management | $ | 19,564 | $ | 17,498 | $ | 60,356 | $ | 51,827 | |||||||||||||||
| Tax Software | (13,864) | 16,234 | 100,472 | 60,646 | |||||||||||||||||||
| Corporate-level activity | (25,982) | (32,719) | (102,255) | (357,905) | |||||||||||||||||||
| Total operating income (loss) | (20,282) | 1,013 | 58,573 | (245,432) | |||||||||||||||||||
| Other loss, net | (8,295) | (11,963) | (24,202) | (23,386) | |||||||||||||||||||
| Income tax benefit (expense) | 774 | (15,256) | (2,920) | (23,237) | |||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
Revenues by major category within each segment are presented below (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Wealth Management: | |||||||||||||||||||||||
| Advisory revenue | $ | 103,540 | $ | 82,612 | $ | 291,167 | $ | 227,672 | |||||||||||||||
| Commission revenue | 52,961 | 44,921 | 157,197 | 135,337 | |||||||||||||||||||
| Asset-based revenue | 5,659 | 4,351 | 16,514 | 18,911 | |||||||||||||||||||
| Transaction and fee revenue | 6,975 | 4,048 | 21,143 | 14,885 | |||||||||||||||||||
| Total Wealth Management revenue | $ | 169,135 | $ | 135,932 | $ | 486,021 | $ | 396,805 | |||||||||||||||
| Tax Software: | |||||||||||||||||||||||
| Consumer revenue | $ | 4,479 | $ | 38,482 | $ | 203,891 | $ | 186,724 | |||||||||||||||
| Professional revenue | 560 | 939 | 16,957 | 16,266 | |||||||||||||||||||
| Total Tax Software revenue | $ | 5,039 | $ | 39,421 | $ | 220,848 | $ | 202,990 | |||||||||||||||
Wealth Management revenue recognition
Wealth management revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and a $0.01 decrease to diluted earnings per share.transaction and fee revenue.
The Company appliedtiming of Wealth Management revenue recognition was as follows (in thousands):
| Three months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Advisory revenue | $ | — | $ | 103,540 | $ | 103,540 | $ | — | $ | 82,612 | $ | 82,612 | |||||||||||||||||||||||
| Commission revenue | 22,372 | 30,589 | 52,961 | 16,884 | 28,037 | 44,921 | |||||||||||||||||||||||||||||
| Asset-based revenue | — | 5,659 | 5,659 | — | 4,351 | 4,351 | |||||||||||||||||||||||||||||
| Transaction and fee revenue | 1,213 | 5,762 | 6,975 | 1,067 | 2,981 | 4,048 | |||||||||||||||||||||||||||||
| Total Wealth Management revenue | $ | 23,585 | $ | 145,550 | $ | 169,135 | $ | 17,951 | $ | 117,981 | $ | 135,932 | |||||||||||||||||||||||
Blucora, Inc. | Q3 2021 Form 10-Q 12
| Nine months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Advisory revenue | $ | — | $ | 291,167 | $ | 291,167 | $ | — | $ | 227,672 | $ | 227,672 | |||||||||||||||||||||||
| Commission revenue | 65,815 | 91,382 | 157,197 | 55,068 | 80,269 | 135,337 | |||||||||||||||||||||||||||||
| Asset-based revenue | — | 16,514 | 16,514 | — | 18,911 | 18,911 | |||||||||||||||||||||||||||||
| Transaction and fee revenue | 3,779 | 17,364 | 21,143 | 4,063 | 10,822 | 14,885 | |||||||||||||||||||||||||||||
| Total Wealth Management revenue | $ | 69,594 | $ | 416,427 | $ | 486,021 | $ | 59,131 | $ | 337,674 | $ | 396,805 | |||||||||||||||||||||||
Tax Software revenue recognition
We generate Tax Software revenue from the cash flow presentation guidance onsale of digital tax preparation services, packaged tax preparation software, ancillary services, and multiple element arrangements that may include a retrospective basis, restating the consolidated statementscombination of cash flows to present excess tax benefitsthese items.
The timing of Tax Software revenue recognition was as an operating activity (rather than a financing activity). For the three months ended September 30, 2016, this resulted in a decrease to cash provided by operating activities from continuing operations of $5.6 million and a corresponding decrease to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. Forfollows (in thousands):
| Three months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Consumer revenue | $ | 4,479 | $ | — | $ | 4,479 | $ | 38,480 | $ | 2 | $ | 38,482 | |||||||||||||||||||||||
| Professional revenue | 370 | 190 | 560 | 641 | 298 | 939 | |||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | 4,849 | $ | 190 | $ | 5,039 | $ | 39,121 | $ | 300 | $ | 39,421 | |||||||||||||||||||||||
| Nine months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Consumer revenue | $ | 203,891 | $ | — | $ | 203,891 | $ | 186,721 | $ | 3 | $ | 186,724 | |||||||||||||||||||||||
| Professional revenue | 14,626 | 2,331 | 16,957 | 13,822 | 2,444 | 16,266 | |||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | 218,517 | $ | 2,331 | $ | 220,848 | $ | 200,543 | $ | 2,447 | $ | 202,990 | |||||||||||||||||||||||
Note 4: Asset Acquisitions
During the nine months ended September 30, 2016, this resulted2021, we completed several acquisitions in an increase to cash provided by operating activities from continuing operations of $21.4 million and a corresponding increase to cash used by financing activities from continuing operations forour Wealth Management business that met the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. The restatement had no impact on total cash flows for the period presented.
Blucora, Inc. | Q3 2021 Form 10-Q 13
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Major classes of items in net income (loss): | |||||||||||||||
| Revenues | $ | — | $ | 53,721 | $ | — | $ | 209,108 | |||||||
| Operating expenses | — | (50,952 | ) | — | (192,874 | ) | |||||||||
| Other loss, net | — | (415 | ) | — | (844 | ) | |||||||||
| Income from discontinued operations before income taxes | — | 2,354 | — | 15,390 | |||||||||||
| Loss on sale of discontinued operations before income taxes | — | (29,509 | ) | — | (68,034 | ) | |||||||||
| Discontinued operations, before income taxes | — | (27,155 | ) | — | (52,644 | ) | |||||||||
| Income tax expense | — | (13,373 | ) | — | (5,337 | ) | |||||||||
| Discontinued operations, net of income taxes | $ | — | $ | (40,528 | ) | $ | — | $ | (57,981 | ) | |||||
Note 5: Restructuring
| Employee-Related Termination Costs | Contract Termination Costs | Fixed Asset Impairments | Stock-Based Compensation | Other Costs | Total | ||||||||||||||||||
| Balance as of December 31, 2016 | $ | 4,234 | $ | — | $ | — | $ | — | $ | — | $ | 4,234 | |||||||||||
| Restructuring charges | (30 | ) | (241 | ) | 1,878 | 981 | 32 | 2,620 | |||||||||||||||
| Payments | (434 | ) | (161 | ) | — | — | (32 | ) | (627 | ) | |||||||||||||
| Non-cash | — | 1,457 | (1,878 | ) | (981 | ) | — | (1,402 | ) | ||||||||||||||
| Balance as of June 30, 2017 | 3,770 | 1,055 | — | — | — | 4,825 | |||||||||||||||||
| Restructuring charges | (3 | ) | 97 | 12 | 106 | ||||||||||||||||||
| Payments | (2,447 | ) | (256 | ) | — | — | (12 | ) | (2,715 | ) | |||||||||||||
| Non-cash | — | — | — | (97 | ) | — | (97 | ) | |||||||||||||||
| Balance as of September 30, 2017 | $ | 1,320 | $ | 799 | $ | — | $ | — | $ | — | $ | 2,119 | |||||||||||
| Fair value measurements at the reporting date using | |||||||||||||||
| September 30, 2017 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Cash equivalents: money market and other funds | $ | 10,827 | $ | — | $ | 10,827 | $ | — | |||||||
| Total assets at fair value | $ | 10,827 | $ | — | $ | 10,827 | $ | — | |||||||
| Acquisition-related contingent consideration liability | $ | 2,704 | $ | — | $ | — | $ | 2,704 | |||||||
| Total liabilities at fair value | $ | 2,704 | $ | — | $ | — | $ | 2,704 | |||||||
| Fair value measurements at the reporting date using | |||||||||||||||
| December 31, 2016 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Cash equivalents: | |||||||||||||||
| U.S government securities | $ | 2,749 | $ | — | $ | 2,749 | $ | — | |||||||
| Money market and other funds | 4,090 | — | 4,090 | — | |||||||||||
| Commercial paper | 1,999 | — | 1,999 | — | |||||||||||
| Taxable municipal bonds | 1,301 | — | 1,301 | — | |||||||||||
| Total cash equivalents | 10,139 | — | 10,139 | — | |||||||||||
| Available-for-sale investments: | |||||||||||||||
| Debt securities: | |||||||||||||||
| U.S. government securities | 2,000 | — | 2,000 | — | |||||||||||
| Commercial paper | 1,998 | — | 1,998 | — | |||||||||||
| Time deposits | 807 | — | 807 | — | |||||||||||
| Taxable municipal bonds | 2,296 | — | 2,296 | — | |||||||||||
| Total debt securities | 7,101 | — | 7,101 | — | |||||||||||
| Total assets at fair value | $ | 17,240 | $ | — | $ | 17,240 | $ | — | |||||||
| Acquisition-related contingent consideration liability | $ | 3,421 | $ | — | $ | — | $ | 3,421 | |||||||
| Total liabilities at fair value | $ | 3,421 | $ | — | $ | — | $ | 3,421 | |||||||
| Acquisition-related contingent consideration liability: | |||
| Balance as of December 31, 2016 | $ | 3,421 | |
| Payment | (946 | ) | |
| Foreign currency transaction loss | 229 | ||
| Balance as of September 30, 2017 | $ | 2,704 | |
Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| Balance as of December 31, 2016 | $ | 7,102 | $ | — | $ | (1 | ) | $ | 7,101 | ||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Principal amount | Discount | Debt issuance costs | Net carrying value | Principal amount | Discount | Debt issuance costs | Net carrying value | ||||||||||||||||||||||||||||||||||||||||
| Senior Secured Credit Facility | $ | 561,797 | $ | (3,322) | $ | (3,698) | $ | 554,777 | $ | 563,156 | $ | (4,173) | $ | (4,646) | $ | 554,337 | |||||||||||||||||||||||||||||||
| Less: Current portion of long-term debt, net | (1,790) | (1,784) | |||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt, net | $ | 552,987 | $ | 552,553 | |||||||||||||||||||||||||||||||||||||||||||
| September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
Principal amount | Discount | Debt issuance costs | Net carrying value | Principal amount | Discount | Debt issuance costs | Net carrying value | ||||||||||||||||||||||||
| Senior secured credit facility | $ | 350,000 | $ | (1,681 | ) | $ | (4,727 | ) | $ | 343,592 | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| TaxAct - HD Vest 2015 credit facility | — | — | — | — | 260,000 | (7,124 | ) | (5,295 | ) | 247,581 | |||||||||||||||||||||
| Convertible Senior Notes | — | — | — | — | 172,859 | (6,913 | ) | (1,770 | ) | 164,176 | |||||||||||||||||||||
| Note payable, related party | 3,200 | — | — | 3,200 | 3,200 | — | — | 3,200 | |||||||||||||||||||||||
| Total debt | $ | 353,200 | $ | (1,681 | ) | $ | (4,727 | ) | $ | 346,792 | $ | 436,059 | $ | (14,037 | ) | $ | (7,065 | ) | $ | 414,957 | |||||||||||
As of September 30, 2021, the Senior Secured Credit Facility provided for up to $765.0 million of borrowings and term loan are May 22, 2022consisted of a committed $90.0 million under the New Revolver and a $675.0 million Term Loan that mature on February 21, 2024 and May 22, 2024, respectively. ObligationsAs of September 30, 2021, we had $561.8 million in principal amount outstanding under the credit facility are guaranteed by certain of Blucora's subsidiariesTerm Loan and secured by the assets of Blucora and those subsidiaries.
The Company is required to make mandatory annual prepayments on the Term Loan in certain circumstances, including in the event that the Company generates Excess Cash Flow (as defined in the Credit Agreement) in a given fiscal year. The Credit Agreement permits the Company to voluntarily prepay the Term Loan without premium or penalty. In addition, the Company is required to make principal amortization payments on the term loan are payableTerm Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to 0.25%approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the initial outstanding principal. Term Loan due on the maturity date of May 22, 2024.
The interest rate on the term loanTerm Loan is variable at the London Interbank Offered Rate, ("LIBOR"), subject to a floorplus the applicable interest rate margin of 1.00%, plus a margin
Obligations under the revolving credit loan.
other material subsidiaries). The credit facilitySenior Secured Credit Facility includes financial and operating covenants including(including a consolidated total net leverage ratio,Consolidated Total Net Leverage Ratio), which are set forth in detail in the credit agreement. AsCredit Agreement.
Pursuant to the Credit Agreement Amendment, if the Company’s usage of the New Revolver exceeds 30% of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company shall not permit the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) to exceed (i) 4.75 to 1.00 for the period beginning on April 1, 2021 and ending on December 31, 2021, (ii) 4.25 to 1.00 for the period beginning on January 1, 2022 and ending on September 30, 2017, 2022, (iii) 4.00 to 1.00 for the period beginning on October 1,
Blucora, Inc. | Q3 2021 Form 10-Q 14
2022 and ending on December 31, 2022, and (iv) 3.50 to 1.00 for the period beginning on January 1, 2023 and ending on February 21, 2024.
Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with allthe debt covenants of the financialSenior Secured Credit Facility as of September 30, 2021.
Note 6: Leases
Our leases are primarily related to office space and are classified as operating covenants.leases. Operating lease expense, net of sublease income, is recognized in our accompanying condensed consolidated statements of comprehensive income (loss) in “General and administrative” expense for net lease expense related to leases used in our operations and “Acquisition and integration” expense for net lease expense related to the unoccupied lease resulting from the acquisition of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”) in 2019 (the “1st Global Acquisition”).
Lease expense, cash paid on operating lease liabilities, and lease liabilities obtained from new right-of-use assets for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Fixed lease expense | $ | 1,001 | $ | 1,566 | $ | 3,254 | $ | 5,652 | |||||||||||||||
| Variable lease expense | 462 | 191 | 707 | 778 | |||||||||||||||||||
| Lease expense, before sublease income | 1,463 | 1,757 | 3,961 | 6,430 | |||||||||||||||||||
| Sublease income | (116) | (464) | (348) | (1,119) | |||||||||||||||||||
| Total lease expense, net of sublease income | $ | 1,347 | $ | 1,293 | $ | 3,613 | $ | 5,311 | |||||||||||||||
| Additional lease information: | |||||||||||||||||||||||
| Cash paid on operating lease liabilities | $ | 602 | $ | 1,037 | $ | 1,047 | $ | 3,509 | |||||||||||||||
Lease liabilities obtained from new right-of-use assets (1) | $ | — | $ | 1,352 | $ | 93 | $ | 21,766 | |||||||||||||||
__________________________
(1)Lease liabilities obtained from new right-of-use assets for the nine months ended September 30, 2020 resulted from the new corporate headquarters lease that commenced in January 2020.
As of September 30, 2017, the credit facility's principal amount approximated its fair value as it is a variable2021, our weighted-average remaining operating lease term was approximately 10.6 years and our weighted-average operating lease discount rate instrument and the current applicable margin approximates current market conditions.was 5.4%.
Blucora, Inc. | Q3 2021 Form 10-Q 15
Operating lease liabilities on the condensed consolidated statementsbalance sheets were as follows (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Lease liabilities—current | $ | 4,429 | $ | 2,304 | |||||||
| Lease liabilities—long-term | 34,020 | 36,404 | |||||||||
| Total operating lease liabilities | $ | 38,449 | $ | 38,708 | |||||||
The scheduled maturities of comprehensive incomeour operating lease liabilities on the condensed consolidated balance sheet as of September 30, 2021 were as follows (in thousands):
| Undiscounted cash flows: | |||||||||||||||||
| Remainder of 2021 | $ | 804 | |||||||||||||||
| 2022 | 5,040 | ||||||||||||||||
| 2023 | 5,172 | ||||||||||||||||
| 2024 | 5,080 | ||||||||||||||||
| 2025 | 5,013 | ||||||||||||||||
| Thereafter | 30,324 | ||||||||||||||||
| Total undiscounted cash flows | 51,433 | ||||||||||||||||
| Imputed interest | (12,984) | ||||||||||||||||
| Total operating lease liabilities | $ | 38,449 | |||||||||||||||
Note 7: Balance Sheet Components
Prepaid expenses and other current assets, net, consisted of the following (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Prepaid expenses | $ | 7,523 | $ | 9,643 | |||||||
| Other current assets | 3,596 | 678 | |||||||||
| Total prepaid expenses and other current assets, net | $ | 11,119 | $ | 10,321 | |||||||
| Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility | $ | 9,593 | |
| Loss on debt extinguishment - Convertible Senior Notes | 6,715 | ||
| Total loss on debt extinguishment | $ | 16,308 | |
| September 30, 2021 | December 31, 2020 | ||||||||||
| Salaries and related benefit expenses | $ | 23,069 | $ | 19,317 | |||||||
HKFS Contingent Consideration liability (1)(2) | 25,400 | 17,900 | |||||||||
Contingent liability from 1st Global Acquisition (2) | 16,828 | 11,328 | |||||||||
| Accrued vendor and advertising costs | 2,254 | 2,606 | |||||||||
| Accrued taxes | 1,630 | 240 | |||||||||
| Other current liabilities | 6,194 | 5,028 | |||||||||
| Total accrued expenses and other current liabilities | $ | 75,375 | $ | 56,419 | |||||||
__________________________
(1)As of September 30, 2021, this amount represents the Notes, the Company allocated the cash paid first to the liability component of the Notes based on theestimated fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal andsecond contingent consideration payment related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity componentHKFS Acquisition which is payable in the third quarter of 2022. As of December 31, 2020, this amount represents the Notes, since theestimated fair value of the liability component exceeded the cash paid.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Contractual interest expense (Cash) | $ | — | $ | 1,836 | $ | 3,141 | $ | 5,782 | |||||||
| Amortization of debt issuance costs (Non-cash) | — | 231 | 401 | 704 | |||||||||||
| Accretion of debt discount (Non-cash) | — | 901 | 1,567 | 2,749 | |||||||||||
| Total interest expense | $ | — | $ | 2,968 | $ | 5,109 | $ | 9,235 | |||||||
(2)For more information on the Company’s contingent liabilities, see "Note 8—Commitments and 10% paid in year three. The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value.Contingencies."
| Balance as of December 31, 2016 | $ | 15,696 | |
| Net income attributable to noncontrolling interests | 466 | ||
| Balance as of September 30, 2017 | $ | 16,162 | |
Note 9:8: Commitments and Contingencies
Contingent liability from 1st Global Acquisition
Blucora, Inc. | Q3 2021 Form 10-Q 16
In the next four years,second quarter of 2021, we re-evaluated the range of probable losses as a result of our on-going discussions with the SEC. While the regulatory inquiry, which is related to certain pre-acquisition matters, is still on-going, we increased our contingent liability reserve to $16.8 million as of June 30, 2021. The $5.5 million increase to the contingent liability reserve was recognized in “Acquisition and integration” expense on the accompanying condensed consolidated statements of comprehensive income for the nine months ended September 30, 2021.
As part of the 1st Global Acquisition, we purchased representation and warranty insurance from a commitmentthird party to switch to a new clearing firm provider that has been selectedsupplement the indemnification provisions of the stock purchase agreement, dated as of March 18, 2019, by and among 1G Acquisitions, LLC, an indirect wholly owned subsidiary of the Company, 1st Global, Inc. and 1st Global Insurance Services, Inc., certain selling stockholders named therein and joinder sellers (the “1st Global Sellers”) and SAB Representative, LLC, as the Sellers’ representative, pursuant to which, the 1st Global Sellers agreed, among other things, to indemnify us from certain losses arising from breaches of representation, warranties, and covenants. At this time, we cannot yet estimate with reasonable probability the recovery related to these matters from insurance or the 1st Global Sellers, if any.
Contingent consideration liability from HKFS Acquisition
On July 1, 2020, we closed the HKFS Acquisition for an upfront cash purchase price of $104.4 million. The purchase price is subject to 2 post-closing earn-out payments (the “HKFS Contingent Consideration”) by us.
The amount of the HKFS Contingent Consideration is determined based on advisory asset levels and the achievement of certain performance goals (i) for the period beginning on July 1, 2020 and ending on July 1, 2021 and (ii) for the period beginning on July 1, 2021 and ending on July 1, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021) (the “HKFS Purchase Agreement”), the maximum aggregate amount that we would be required to pay for each earn-out period is $30.0 million. If the asset values on the applicable measurement date fall below certain specified thresholds, we would not be required to make any earn-out payment to the Sellers for such period.
Based on advisory asset levels and the achievement of performance goals for the first earn-out period specified in the HKFS Purchase Agreement, we made the full $30.0 million payment in the third quarter of 2018. Additional2021. The estimated fair value of the HKFS Contingent Consideration liability for the second earn-out period was $25.4 million as of September 30, 2021. For additional information on the Company’s Commitments and Contingencies can be found invaluation of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.HKFS Contingent Consideration, see "Note 9—Fair Value Measurements."
From time to time, the Company iswe are subject to various legal proceedings, regulatory matters or fines, or claims that arise in the ordinary course of business. The Company accruesWe accrue a liability when management believes both that it is both probable that a liability has been incurred and that the amount of loss can be reasonably estimated. The following is a brief description of
Aside from the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
Note 9—Fair Value Measurements
In accordance with Accounting Standards Codification 820, Fair Value Measurements and Monoprice. Disclosures, certain of our assets and liabilities are carried at fair value and are valued using inputs that are classified in one of the following three categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data and reflect our own assumptions.
Blucora, Inc. | Q3 2021 Form 10-Q 17
Assets and liabilities measured on a recurring basis
The complaint assertsfair value hierarchy of our financial assets and liabilities carried at estimated fair value and measured on a claim against GCA Savvian,recurring basis were as follows (in thousands):
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| September 30, 2021 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Cash equivalents: money market and other funds | $ | 4,293 | $ | 4,293 | $ | — | $ | — | |||||||||||||||
| Total assets at fair value | $ | 4,293 | $ | 4,293 | $ | — | $ | — | |||||||||||||||
| HKFS Contingent Consideration liability | $ | 25,400 | $ | — | $ | — | $ | 25,400 | |||||||||||||||
| Total liabilities at fair value | $ | 25,400 | $ | — | $ | — | $ | 25,400 | |||||||||||||||
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| December 31, 2020 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
| Cash equivalents: money market and other funds | $ | 4,290 | $ | 4,290 | $ | — | $ | — | |||||||||||||||
| Total assets at fair value | $ | 4,290 | $ | 4,290 | $ | — | $ | — | |||||||||||||||
| HKFS Contingent Consideration liability | $ | 35,900 | $ | — | $ | — | $ | 35,900 | |||||||||||||||
| Total liabilities at fair value | $ | 35,900 | $ | — | $ | — | $ | 35,900 | |||||||||||||||
Cash equivalents are classified within Level 1 of the Company’s financial advisorfair value hierarchy because we value cash equivalents utilizing quoted prices in connectionactive markets.
The HKFS Contingent Consideration liability relates to the 2 post-closing earn-out payments resulting from the HKFS Acquisition (see "Note 8—Commitments and Contingencies"). Based on advisory asset levels and the achievement of performance goals for the first earn-out period, we made the full $30.0 million payment in the third quarter of 2021.
The estimated fair value of the portion of the HKFS Contingent Consideration liability related to the second earn-out period (calculated in accordance with the HD Vest acquisition, for aidingamended HKFS Purchase Agreement and abetting breachesbased on estimated advisory asset levels as of fiduciary duty.June 30, 2022) was $25.4 million as of September 30, 2021. The complaint also asserts a claim for insider trading against Mr. Snyder, a former officerestimated fair value of the Company,second earn-out payment was determined using a Monte Carlo simulation model in a risk neutral framework with the underlying simulated variable of advisory asset levels and the related achievement of certain companies affiliated with Mr. Snyder.advisory asset growth levels. The derivative action does not seek monetary damages fromMonte Carlo simulation model utilized Level 3 inputs, which included forecasted advisory asset levels at July 1, 2022, a risk-adjusted discount rate (which reflects the Company. The complaint seeks corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.
Blucora, Inc. | Q3 2021 Form 10-Q 18
A roll forward of the Court.HKFS Contingent Consideration liability follows (in thousands):
| HKFS Contingent Consideration liability | |||||
Balance as of December 31, 2020 (1) | $ | 35,900 | |||
| HKFS Contingent Consideration first earn-out payment | (30,000) | ||||
Valuation change recognized as expense (2) | 19,500 | ||||
Balance as of September 30, 2021 (1) | $ | 25,400 | |||
_________________________
(1)See “Note 7—Balance Sheet Components” for the current portion of the HKFS Contingent Consideration liability as of September 30, 2021 and December 31, 2020.
(2)The Company has entered into indemnification agreementschange in the ordinary coursefair value of business with its officersthe HKFS Contingent Consideration liability is recognized in “Acquisition and directors, andintegration” expenses on the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Fair value of financial instruments
We consider the carrying values of accounts receivable, commissions and advisory fees receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, other current liabilities, and deferred revenues to approximate their fair values primarily due to their short-term natures.
As of September 30, 2021, the Term Loan’s principal amount was $561.8 million, and the fair value of the Term Loan’s principal amount was $562.5 million. As of December 31, 2020, the Term Loan’s principal amount was $563.2 million, and the fair value of the Term Loan’s principal amount was $561.7 million. The fair value of the Term Loan’s principal amount was based on Level 2 inputs from a third-party market quotation.
As of September 30, 2021 and December 31, 2020, we had no amounts outstanding under the Revolver.
Note 10: Other Loss, Net
“Other loss, net” on the condensed consolidated statements of comprehensive income (loss) consisted of the following (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Interest expense | $ | 7,304 | $ | 7,254 | $ | 21,789 | $ | 17,410 | |||||||||||||||
| Amortization of debt issuance costs | 388 | 362 | 1,128 | 1,006 | |||||||||||||||||||
| Accretion of debt discounts | 290 | 276 | 851 | 414 | |||||||||||||||||||
| Total interest expense | 7,982 | 7,892 | 23,768 | 18,830 | |||||||||||||||||||
| Interest income | — | (2) | (2) | (27) | |||||||||||||||||||
| Gain on sale of a business | — | (349) | — | (349) | |||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 3,687 | — | 3,687 | |||||||||||||||||||
| Other | 313 | 735 | 436 | 1,245 | |||||||||||||||||||
| Other loss, net | $ | 8,295 | $ | 11,963 | $ | 24,202 | $ | 23,386 | |||||||||||||||
Note 11: Income Taxes
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Income tax benefit (expense) | $ | 774 | $ | (15,256) | $ | (2,920) | $ | (23,237) | |||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Cost of revenue | $ | 412 | $ | 52 | $ | 546 | $ | 117 | |||||||
| Engineering and technology | 225 | 434 | 734 | 1,167 | |||||||||||
| Sales and marketing | 529 | 661 | 1,801 | 1,688 | |||||||||||
| General and administrative | 1,966 | 2,217 | 5,353 | 7,644 | |||||||||||
| Restructuring | 97 | — | 1,078 | — | |||||||||||
| Total in continuing operations | 3,229 | 3,364 | 9,512 | 10,616 | |||||||||||
| Discontinued operations | — | (727 | ) | — | 2,014 | ||||||||||
| Total | $ | 3,229 | $ | 2,637 | $ | 9,512 | $ | 12,630 | |||||||
Blucora, Inc. | Q3 2021 Form 10-Q 19
tax provision by applying an estimated annual effective tax rate. We believe using the actual year-to-date effective tax rate in 2021 results in the best estimate of the annual effective tax rate.
The Company’s effective income tax rate for these non-employees was $0.4 millionthe nine months ended September 30, 2021 differed from the 21% statutory rate primarily due to the release of valuation allowances and $0.5 million, respectively, and wasthe effect of state income taxes. We currently expect to continue to release portions of valuation allowances, which were previously recorded in "Costconnection with our net operating losses, to offset future federal income tax liabilities. The majority of revenue" on the consolidated statements of comprehensive income.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||
| Stock options exercised | 1,243 | — | 3,651 | 140 | |||||||
| RSUs vested | 91 | 102 | 442 | 426 | |||||||
| Shares purchased pursuant to ESPP | 62 | 114 | 138 | 191 | |||||||
| Total | 1,396 | 216 | 4,231 | 757 | |||||||
The Company has two reportable segments:recorded income tax expense of $15.3 million and $23.2 million for the Wealth Management segmentthree and the Tax Preparation segment. The former Search and Content and E-Commerce segments are included in discontinued operations.nine months ended September 30, 2020, respectively. The Company’s Chief Executive Officer is its chiefeffective income tax rate for the three and nine months ended September 30, 2020 differed from the 21% statutory rate primarily due to expiring net operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenue: | |||||||||||||||
| Wealth Management | $ | 86,809 | $ | 80,088 | $ | 254,772 | $ | 233,496 | |||||||
| Tax Preparation | 3,362 | 3,149 | 156,936 | 135,614 | |||||||||||
| Total revenue | 90,171 | 83,237 | 411,708 | 369,110 | |||||||||||
| Operating income (loss): | |||||||||||||||
| Wealth Management | 12,425 | 11,628 | 36,684 | 32,458 | |||||||||||
| Tax Preparation | (6,238 | ) | (4,382 | ) | 83,410 | 72,987 | |||||||||
| Corporate-level activity | (17,513 | ) | (17,754 | ) | (57,536 | ) | (54,153 | ) | |||||||
| Total operating income (loss) | (11,326 | ) | (10,508 | ) | 62,558 | 51,292 | |||||||||
| Other loss, net | (5,241 | ) | (11,453 | ) | (39,149 | ) | (29,883 | ) | |||||||
| Income tax benefit (expense) | (166 | ) | 8,537 | (5,952 | ) | (8,899 | ) | ||||||||
| Discontinued operations, net of income taxes | — | (40,528 | ) | — | (57,981 | ) | |||||||||
| Net income (loss) | $ | (16,733 | ) | $ | (53,952 | ) | $ | 17,457 | $ | (45,471 | ) | ||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Wealth Management: | |||||||||||||||
| Commission | $ | 39,432 | $ | 38,962 | $ | 117,181 | $ | 111,070 | |||||||
| Advisory | 37,588 | 32,705 | 107,078 | 95,759 | |||||||||||
| Asset-based | 6,526 | 5,476 | 19,276 | 16,689 | |||||||||||
| Transaction and fee | 3,263 | 2,945 | 11,237 | 9,978 | |||||||||||
| Total Wealth Management revenue | $ | 86,809 | $ | 80,088 | $ | 254,772 | $ | 233,496 | |||||||
| Tax Preparation: | |||||||||||||||
| Consumer | $ | 3,149 | $ | 2,950 | $ | 143,239 | $ | 122,678 | |||||||
| Professional | 213 | 199 | 13,697 | 12,936 | |||||||||||
| Total Tax Preparation revenue | $ | 3,362 | $ | 3,149 | $ | 156,936 | $ | 135,614 | |||||||
Note 12: Net Income (Loss) Per Share
The computationcalculations of basic and diluted net income (loss) per share attributable to Blucora, Inc. iswere as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding—basic | 48,707 | 48,039 | 48,492 | 47,936 | |||||||||||||||||||
Dilutive potential common shares (1) | — | — | 881 | — | |||||||||||||||||||
| Weighted average common shares outstanding—diluted | 48,707 | 48,039 | 49,373 | 47,936 | |||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | (0.57) | $ | (0.55) | $ | 0.65 | $ | (6.09) | |||||||||||||||
| Diluted | $ | (0.57) | $ | (0.55) | $ | 0.64 | $ | (6.09) | |||||||||||||||
Anti-dilutive shares (1) | 4,616 | 3,165 | 2,076 | 2,869 | |||||||||||||||||||
_________________________
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Numerator: | |||||||||||||||
| Income (loss) from continuing operations | $ | (16,733 | ) | $ | (13,424 | ) | $ | 17,457 | $ | 12,510 | |||||
| Net income attributable to noncontrolling interests | (164 | ) | (167 | ) | (466 | ) | (426 | ) | |||||||
| Income (loss) from continuing operations attributable to Blucora, Inc. | (16,897 | ) | (13,591 | ) | 16,991 | 12,084 | |||||||||
| Loss from discontinued operations attributable to Blucora, Inc. | — | (40,528 | ) | — | (57,981 | ) | |||||||||
| Net income (loss) attributable to Blucora, Inc. | $ | (16,897 | ) | $ | (54,119 | ) | $ | 16,991 | $ | (45,897 | ) | ||||
| Denominator: | |||||||||||||||
| Weighted average common shares outstanding, basic | 45,459 | 41,635 | 43,749 | 41,404 | |||||||||||
| Dilutive potential common shares | — | — | 3,064 | 925 | |||||||||||
| Weighted average common shares outstanding, diluted | 45,459 | 41,635 | 46,813 | 42,329 | |||||||||||
| Net income (loss) per share attributable to Blucora, Inc. - basic: | |||||||||||||||
| Continuing operations | $ | (0.37 | ) | $ | (0.33 | ) | $ | 0.39 | $ | 0.29 | |||||
| Discontinued operations | — | (0.97 | ) | — | (1.40 | ) | |||||||||
| Basic net income (loss) per share | $ | (0.37 | ) | $ | (1.30 | ) | $ | 0.39 | $ | (1.11 | ) | ||||
| Net income (loss) per share attributable to Blucora, Inc. - diluted: | |||||||||||||||
| Continuing operations | $ | (0.37 | ) | $ | (0.33 | ) | $ | 0.36 | $ | 0.29 | |||||
| Discontinued operations | — | (0.97 | ) | — | (1.37 | ) | |||||||||
| Diluted net income (loss) per share | $ | (0.37 | ) | $ | (1.30 | ) | $ | 0.36 | $ | (1.08 | ) | ||||
| Shares excluded | 5,798 | 10,246 | 1,160 | 6,317 | |||||||||||
Blucora, Inc. | Q3 2021 Form 10-Q 20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included under Part 1I, Item 1 ofand the section titled “Cautionary Statement Regarding Forward-Looking Statements” in this report,Form 10-Q, as well as with our consolidated financial statements, accompanying notes thereto, and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Overview
Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) is a leading provider of integrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms in achieving better long-term outcomes via holistic, tax-advantaged solutions. Our Business
Our wealth management business consists of the operations of HDV Holdings, Inc.Avantax Wealth Management and its subsidiariesAvantax Planning Partners (collectively, referred to as "HD Vest"the “Wealth Management business” or the "“Wealth Management Business"segment”). HD Vest
Avantax Wealth Management provides tax-focused wealth management solutions for financial advisorsprofessionals, tax professionals, CPA firms, and their clients. Specifically, HD VestAvantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is the 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 brokerage, investment advisorytechnical, practice, compliance, operations, sales, and insuranceproduct support tools that enable them to offer tax-advantaged investing and wealth management services to assisttheir clients.
Avantax Planning Partners is an in-house/employee based RIA and wealth management business that partners with CPA firms in making eachorder to provide their consumer and small business clients with holistic financial advisorplanning 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”). Our employee-based RIA model, which we refer to as “Avantax Planning Partners,” also includes Avantax Wealth Management total client assets that have been acquired from Avantax Wealth Management financial professionals.
On July 1, 2020, we acquired all of the issued and outstanding common stock of HKFS (the “HKFS Acquisition”). The operations of HKFS are included in our operating results as part of the Wealth Management segment from the date of the HKFS Acquisition. On January 4, 2021, we announced the rebranding of HKFS to Avantax Planning Partners (the “Rebranding”). The Rebranding was designed to create tighter brand alignment, bringing the Wealth Management business under one common and recognizable brand.
As of September 30, 2021, the Wealth Management business worked with a nationwide network of 3,529 financial service center for his/her clients. HD Vest was founded to help taxprofessionals and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investmentsupported $86.6 billion of total client assets, including $39.8 billion of advisory fees based on assets under management and other fees.assets.
Tax Software
The Tax PreparationSoftware business consists of the operations of TaxAct, Inc. (collectively referred to as "TaxAct" (“TaxAct,” the “Tax Software business,”or the "“Tax Preparation business"Software segment”). TaxAct and provides digital do-it-yourself ("DDIY") tax preparation solutionsservices, packaged tax software, and ancillary services for consumers, small business owners, and tax professionals. TaxAct generates revenue primarilyprofessionals through its online servicewebsite www.TaxAct.com and its mobile applications. We had referred to this business as the “Tax Preparation business” and “Tax Preparation segment” in previous filings.
COVID-19 Pandemic
Beginning in March 2020, the COVID-19 pandemic has had a significant negative impact on the U.S. and global economy, caused substantial disruption in the U.S. and global securities markets, and as a result, negatively impacted both our Wealth Management and Tax Software businesses. In addition, 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
Blucora, Inc. | Q3 2021 Form 10-Q 21
adverse effect on the U.S. and global markets and economy. 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.
In our Wealth Management business, the amount of cash sweep revenue we generate continues to be affected by the low interest rate environment. In March 2020, the Federal Reserve lowered its target range for the federal funds rate to 0.00-0.25%. As our cash sweep revenue is based on a rate derived from the federal funds rate, cash sweep revenue in all quarters subsequent to the first quarter of 2020 has been materially reduced. We expect continued low levels of cash sweep revenue in future periods in which the federal funds rate is at www.TaxAct.com. The TaxAct websitereduced levels, although we may experience an increase in cash sweep revenue should the federal funds rate increase.
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 two quarters of our fiscal year. During the third and fourth quarters, the Tax Software segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
As a result of the COVID-19 pandemic, the Internal Revenue Service (“IRS”) extended the filing and payment deadline for tax year 2019 federal tax returns to July 15, 2020. 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 of 2020 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. Further, 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 information contained therein or connected thereto is not intendedEIP1 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 incorporatedearned in the first quarter of 2021 to the second quarter of 2021.
The typical seasonality of our Tax Software business has been affected by reference into this Report.these changes to the tax filing deadlines to May 17, 2021 for the 2020 tax year and to July 15, 2020 for the 2019 tax year. This change in seasonality has caused significant fluctuations in our quarterly and year-to-date financial results and affected the comparability of our financial results. As a result, the results of operations for the Tax Software segment are not as comparable for the three months ended September 30, 2021 and 2020 as they would have been in previous years.
Blucora, Inc. | Q3 2021 Form 10-Q 22
RESULTS OF OPERATIONS
Summary
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | $ | 169,135 | $ | 135,932 | $ | 33,203 | 24 | % | $ | 486,021 | $ | 396,805 | $ | 89,216 | 22 | % | |||||||||||||||||||||||||||||||
| Tax Software | 5,039 | 39,421 | (34,382) | (87) | % | 220,848 | 202,990 | 17,858 | 9 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 174,174 | $ | 175,353 | $ | (1,179) | (1) | % | $ | 706,869 | $ | 599,795 | $ | 107,074 | 18 | % | |||||||||||||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | $ | 19,564 | $ | 17,498 | $ | 2,066 | 12 | % | $ | 60,356 | $ | 51,827 | $ | 8,529 | 16 | % | |||||||||||||||||||||||||||||||
| Tax Software | (13,864) | 16,234 | (30,098) | (185) | % | 100,472 | 60,646 | 39,826 | 66 | % | |||||||||||||||||||||||||||||||||||||
| Corporate-level activity | (25,982) | (32,719) | 6,737 | 21 | % | (102,255) | (357,905) | 255,650 | 71 | % | |||||||||||||||||||||||||||||||||||||
| Operating income (loss) | (20,282) | 1,013 | (21,295) | (2,102) | % | 58,573 | (245,432) | 304,005 | 124 | % | |||||||||||||||||||||||||||||||||||||
| Other loss, net | (8,295) | (11,963) | 3,668 | 31 | % | (24,202) | (23,386) | (816) | (3) | % | |||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | (28,577) | (10,950) | (17,627) | (161) | % | 34,371 | (268,818) | 303,189 | 113 | % | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | 774 | (15,256) | 16,030 | 105 | % | (2,920) | (23,237) | 20,317 | 87 | % | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | (1,597) | (6) | % | $ | 31,451 | $ | (292,055) | 323,506 | 111 | % | ||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
| 2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
| Revenue | $ | 90,171 | $ | 83,237 | 8 | % | $ | 411,708 | $ | 369,110 | 12 | % | |||||||||
| Operating income (loss) | $ | (11,326 | ) | $ | (10,508 | ) | 8 | % | $ | 62,558 | $ | 51,292 | 22 | % | |||||||
•Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
•Tax Software segment operating income decreased $30.1 million primarily due to a $34.4 million decrease in revenue, mostly resulting from the earlier tax filing and payment deadlines in 2021 versus 2020. In addition, operating expenses were:decreased $4.3 million primarily due to reduced sales and marketing expenses.
•Expenses within corporate-level activity decreased $6.7 million primarily due to an $8.0 million decrease in acquisition and integration costs, partially offset by an increase of $1.6 million in expenses associated with other legal and consulting costs.
•The Company recorded income tax benefit of $0.8 million for the three months ended September 30, 2021. This compared withto income tax expense of $15.3 million for the three months ended September 30, 2020.
For the nine months ended September 30, 2016
•Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
•Tax Software segment operating income increased $39.8 million primarily due to a $22.0 million decrease in operating expenses, were:
Blucora, Inc. | Q3 2021 Form 10-Q 23
•Expenses within corporate-level activity decreased $255.7 million primarily due to higher commissions paid to our financial advisors, which fluctuatedthe recognition of a $270.6 million goodwill impairment and $10.2 million in proportion toexecutive transition costs for the changenine months ended September 30, 2020. These decreases were partially offset by an increase of $9.7 million in underlying commissionacquisition and advisory revenues earned on client accounts,integration expenses, an increase of $8.3 million in stock-based compensation expense, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.
•The Company recorded income tax expense of $2.9 million for the nine months ended September 30, 2021, which represented the Company’s state income taxes on current period income. This compared to higher spending on marketing, higher professional services fees mostly relatedincome tax expense of $23.2 million for the nine months ended September 30, 2020. The effective tax rate was 8.49% as of September 30, 2021 as compared to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.an effective tax rate of 8.64% at September 30, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 24
SEGMENT REVENUE/REVENUE & OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S.United States ("GAAP"“GAAP”) and include certain reconciling items attributable to each ofour segments. We have two reportable segments: (1) the segments.Wealth Management segment and (2) the Tax Software segment. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial
Wealth Management
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | ||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||||||||||||||
| Revenue | $ | 169,135 | $ | 135,932 | $ | 33,203 | 24 | % | $ | 486,021 | $ | 396,805 | $ | 89,216 | 22 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 19,564 | $ | 17,498 | $ | 2,066 | 12 | % | $ | 60,356 | $ | 51,827 | $ | 8,529 | 16 | % | ||||||||||||||||||||||||||||
| Segment margin | 12 | % | 13 | % | 12 | % | 13 | % | ||||||||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, Wealth Management segment operating results. We analyze these separately.income increased $2.1 million primarily due to the following factors:
•Wealth Management revenue increased $33.2 million primarily due to a $20.9 million increase in advisory revenue, an $8.0 million increase in commission revenue, and a $2.9 million increase in transaction and fee revenue. Revenue increases primarily resulted from increased client asset levels and transaction activity, which were favorable compared to the suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
•Wealth Management operating expenses increased $31.1 million primarily due to a $24.5 million increase in cost of revenue resulting from increased advisory fees and commissions paid, which has been primarily driven by an increase in the number of financial professionals with higher payout levels due to improved market performance and the alignment of our payout grids, combined with an increase in sales and marketing expenses. This increase in cost of revenue has resulted in a decrease in segment margin for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, Wealth Management operating income increased $8.5 million primarily due to the following factors:
•Wealth Management revenue increased $89.2 million primarily due to a $63.5 million increase in advisory revenue, a $21.9 million increase in commission revenue, and a $6.3 million increase in transaction and fee revenue, partially offset by a $2.4 million decrease in asset-based revenue. Revenue increases primarily resulted from increased client asset levels and transaction activity, which were favorable compared to the suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020. In addition, Wealth Management revenue for the nine months ended September 30, 2021 increased due to $20.7 million of incremental revenue resulting from the HKFS Acquisition. These increases were partially offset by a $6.2 million decrease in cash sweep revenue due to a decline in interest rates at the end of the first quarter of 2020.
•Wealth Management operating expenses increased $80.7 million primarily due to a $60.8 million increase in cost of revenue as a result of increased advisory fees and commissions paid to financial professionals, as well as incremental expenses resulting from the HKFS Acquisition and increases in sales and marketing expenses in our Avantax Wealth Management business. The increase in advisory fees and commissions paid has been primarily driven by an increase in the number of financial professionals with higher payout levels due to improved market performance and the alignment of our payout grids.
Blucora, Inc. | Q3 2021 Form 10-Q 25
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
| 2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
| Revenue | $ | 86,809 | $ | 80,088 | 8 | % | $ | 254,772 | $ | 233,496 | 9 | % | |||||||||
| Operating income | $ | 12,425 | $ | 11,628 | 7 | % | $ | 36,684 | $ | 32,458 | 13 | % | |||||||||
| Segment margin | 14 | % | 15 | % | 14 | % | 14 | % | |||||||||||||
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 metrics arewas as follows:
| Three months ended | QTD | Nine months ended | YTD | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sources of Revenue | Primary Drivers | 2021 | 2020 | $ | 2021 | 2020 | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Financial professional-driven | Advisory | - Advisory asset levels | $ | 103,540 | $ | 82,612 | $ | 20,928 | $ | 291,167 | $ | 227,672 | $ | 63,495 | |||||||||||||||||||||||||||||||||||||||
| Commission | - Transactions - Asset levels - Product mix | 52,961 | 44,921 | 8,040 | 157,197 | 135,337 | 21,860 | ||||||||||||||||||||||||||||||||||||||||||||||
| Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 5,659 | 4,351 | 1,308 | 16,514 | 18,911 | (2,397) | |||||||||||||||||||||||||||||||||||||||||||||
| Transaction and fee | - Account activity - Number of financial professionals - Number of clients - Number of accounts | 6,975 | 4,048 | 2,927 | 21,143 | 14,885 | 6,258 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 169,135 | $ | 135,932 | $ | 33,203 | $ | 486,021 | $ | 396,805 | $ | 89,216 | |||||||||||||||||||||||||||||||||||||||||
| Total recurring revenue | $ | 145,311 | $ | 117,822 | $ | 27,489 | $ | 414,966 | $ | 337,081 | $ | 77,885 | |||||||||||||||||||||||||||||||||||||||||
| Recurring revenue rate | 85.9 | % | 86.7 | % | 85.4 | % | 84.9 | % | |||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| Sources of Revenue | Primary Drivers | 2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
Advisor-driven | Commission | - Transactions - Asset levels | $ | 39,432 | $ | 38,962 | 1 | % | $ | 117,181 | $ | 111,070 | 6 | % | |||||||||
| Advisory | - Advisory asset levels | 37,588 | 32,705 | 15 | % | 107,078 | 95,759 | 12 | % | ||||||||||||||
| Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 6,526 | 5,476 | 19 | % | 19,276 | 16,689 | 16 | % | |||||||||||||
| Transaction and fee | - Account activity - Number of clients - Number of advisors - Number of accounts | 3,263 | 2,945 | 11 | % | 11,237 | 9,978 | 13 | % | ||||||||||||||
| Total revenue | $ | 86,809 | $ | 80,088 | 8 | % | $ | 254,772 | $ | 233,496 | 9 | % | |||||||||||
| Total recurring revenue | $ | 70,539 | $ | 62,543 | 13 | % | $ | 203,417 | $ | 183,772 | 11 | % | |||||||||||
| Recurring revenue rate | 81.3 | % | 78.1 | % | 79.8 | % | 78.7 | % | |||||||||||||||
Recurring revenue consists of advisory fees, trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commissionunder the headings “Advisory revenue,, Advisory” “Commission revenue,, Asset-based” “Asset-based revenue,,” and Transaction“Transaction and fee revenue,,” respectively. Certain recurring revenues are associated with asset balances and will 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. | Q3 2021 Form 10-Q 26
Business metrics
| (In thousands, except percentages and as otherwise indicated) | September 30, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Client assets balances: | |||||||||||||||||||||||
| Total client assets | $ | 86,647,743 | $ | 76,152,721 | $ | 10,495,022 | 14 | % | |||||||||||||||
| Brokerage assets | $ | 46,850,354 | $ | 43,733,735 | $ | 3,116,619 | 7 | % | |||||||||||||||
| Advisory assets | $ | 39,797,389 | $ | 32,418,986 | $ | 7,378,403 | 23 | % | |||||||||||||||
| Advisory assets as a percentage of total client assets | 45.9 | % | 42.6 | % | |||||||||||||||||||
| Number of financial professionals (in ones): | |||||||||||||||||||||||
Independent financial professionals (1) | 3,498 | 3,956 | (458) | (12) | % | ||||||||||||||||||
In-house/employee financial professionals (2) | 31 | 19 | 12 | 63 | % | ||||||||||||||||||
| Total number of financial professionals | 3,529 | 3,975 | (446) | (11) | % | ||||||||||||||||||
Advisory and commission revenue per financial professional (3) | $ | 44.3 | $ | 32.1 | $ | 12.2 | 38 | % | |||||||||||||||
Quarterly production retention rate: (4) | |||||||||||||||||||||||
TTM Financial professional-driven revenue (5) | $ | 585,307 | $ | 491,829 | |||||||||||||||||||
TTM Financial professional-driven revenue related to independent financial professionals who departed in the quarter (5) | $ | 12,157 | $ | 5,366 | |||||||||||||||||||
TTM Financial professional-driven revenue, less that related to independent financial professionals who departed in the quarter (5) | $ | 573,150 | $ | 486,463 | |||||||||||||||||||
Quarterly production retention rate (4) | 97.9 | % | 98.9 | % | |||||||||||||||||||
____________________________
| (In thousands, except percentages and as otherwise indicated) | September 30, | |||||||||
| 2017 | 2016 | Percentage Change | ||||||||
| Total Assets Under Administration ("AUA") | $ | 42,696,862 | $ | 38,482,620 | 11 | % | ||||
| Advisory Assets Under Management ("AUM") | $ | 11,984,320 | $ | 10,204,448 | 17 | % | ||||
| Percentage of total AUA | 28.1 | % | 26.5 | % | ||||||
| Number of advisors (in ones) | 4,392 | 4,568 | (4 | )% | ||||||
| Advisor-driven revenue per advisor | $ | 17.5 | $ | 15.7 | 11 | % | ||||
(2)The number of in-house financial/employee financial professionals includes licensed financial planning consultants, all of which are employees of Avantax Planning Partners.
(3)Calculation based on advisory and commission revenue for the three months ended September 30, 2021 and 2020, respectively.
(4)Quarterly production retention rate is a non-GAAP financial measure. We believe quarterly production retention rate is an important measure of our quarterly retention of financial professional-driven revenue (which consists of advisory revenue and commission revenue). Management uses quarterly production retention rate to measure the impact of financial professional departures on our business. Quarterly production retention rate is calculated by dividing (x) the difference of (i) total financial professional-driven revenue for the trailing-twelve-month period then ended minus (ii) financial professional-driven revenue for the trailing-twelve-month period then ended related to independent financial professionals that departed in the quarter by (y) total financial professional-driven revenue for the trailing-twelve-month period then ended. As quarterly production retention rate is a measure of retention during a quarter, it also includes quarterly production from independent financial professionals who departed in prior quarters in the trailing-twelve-month period, and therefore does not show production retention rate over longer periods of time.
(5)For the trailing-twelve-month period then ended.
Client assets.Total client assets under administration ("AUA") 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 AUA service for a client’s assets, the value of the asset is only counted once in the total amount of AUA. AUAtotal client assets. Total client assets include Advisory Assets under Management,advisory assets, non-advisory brokerage accounts, annuities, and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.
Advisory assets under management ("AUM") includes 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 AUMadvisory assets for each advisory client. These assets are not reported on the consolidated balance sheets.sheets.
Total client assets increased $10.5 billion at September 30, 20172021 compared to September 30, 2020 primarily due to $12.6 billion of favorable market change and reinvestment levels following the pandemic-influenced market downturn in 2020. Partially offsetting these increases were net client outflows of $2.2 billion.
Advisory assets as a percentage of total client assets increased to 45.9% at September 30, 2021 compared to 42.6% at September 30, 2020. This increase was primarily due to the HKFS Acquisition because over 90% of the
Blucora, Inc. | Q3 2021 Form 10-Q 27
client assets acquired were comprised of advisory assets. In addition, advisory assets as a percentage of total client assets increased in our Avantax Wealth Management business.
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. For more information on the risks associated with our Wealth Management business, see the “COVID-19 Pandemic” section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Item 1A. Risk Factors” under the subheading, “The current COVID-19 pandemic could have a Material Adverse Effect.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
Financial professionals. The Wealth Management business worked with a nationwide network of 3,529 financial professionals as of September 30, 2021. The number of our financial professionals decreased by 11% at September 30, 2021 compared to September 30, 2020, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. The decrease in the number of financial professionals was partially offset by our continued recruitment and onboarding of independent financial professionals and the addition of financial professionals as a result of the HKFS Acquisition, which (as of the HKFS Acquisition date) included the addition of 19 in-house financial professionals and 131 licensed referring representatives at CPA firms that partner with Avantax Planning Partners.
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.
Advisory asset balances were as follows:
| (In thousands, except percentages) | September 30, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
Advisory assets—independent financial professionals (1) | $ | 33,713,543 | $ | 27,852,099 | $ | 5,861,444 | 21 | % | |||||||||||||||
Advisory assets—in-house/employee financial professionals (2) | 4,701,444 | 3,422,173 | 1,279,271 | 37 | % | ||||||||||||||||||
Retirement advisory assets—in-house financial professionals (3) | 1,382,402 | 1,144,714 | 237,688 | 21 | % | ||||||||||||||||||
| Total advisory assets | $ | 39,797,389 | $ | 32,418,986 | $ | 7,378,403 | 23 | % | |||||||||||||||
_________________________
(1)Represents individual client and retirement advisory assets for which Avantax Wealth Management serves as the RIA.
(2)Represents individual client advisory assets for which Avantax Planning Partners serves as the RIA.
(3)Represents advisory assets for which Avantax Planning Partners provides retirement plan services and serves as the RIA.
The activity within our advisory assets was as follows:
| (In thousands, except as otherwise indicated) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Balance, beginning of the period | $ | 39,440,985 | $ | 26,555,388 | $ | 35,603,557 | $ | 27,629,164 | |||||||||||||||
| Net increase in new advisory assets | 621,205 | 125,406 | 1,853,632 | 231,382 | |||||||||||||||||||
| Inflows from acquisitions | — | 4,178,729 | — | 4,178,729 | |||||||||||||||||||
| Market impact and other | (264,801) | 1,559,463 | 2,340,200 | 379,711 | |||||||||||||||||||
| Balance, end of the period | $ | 39,797,389 | $ | 32,418,986 | $ | 39,797,389 | $ | 32,418,986 | |||||||||||||||
| Advisory revenue | $ | 103,540 | $ | 82,612 | $ | 291,167 | $ | 227,672 | |||||||||||||||
Average advisory fee rate (1) | 26 bps | 27 bps | 78 bps | 83 bps | |||||||||||||||||||
_________________________
(1)For the three months ended September 30, 2016
Blucora, Inc. | Q3 2021 Form 10-Q 28
For the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, advisory revenue increased approximately $21.3$20.9 million as discussed by each source of revenue below.
For the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, the average advisory fee rate decreased primarily due to our financial advisors,tiered fee structure, which fluctuated in proportionhas generated lower average fee rates as average client asset balances have increased. In addition, the average advisory fee rate decreased due to the lower advisory fee structure of HKFS.
For the three months ended September 30, 2021, advisory assets remained relatively constant. For the nine months ended September 30, 2021, advisory assets increased $4.2 billion, primarily due to favorable market change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.inflows.
Commission revenue:We generaterevenue. The Wealth Management segment generates two types of commissions: (1) transaction-based sales commissions and (2) trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors.professionals. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, market volatility, interest rate fluctuations, and investment activity of our financial advisors'professionals’ clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on certain mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets.
Our commission revenue, by product category and by sales-based and trailing,type of commission revenue, was as follows:
| (in thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| By product category: | |||||||||||||||||||||||||||||||||||||||||||||||
| Mutual funds | $ | 22,749 | $ | 21,674 | $ | 1,075 | 5 | % | $ | 70,300 | $ | 66,886 | $ | 3,414 | 5 | % | |||||||||||||||||||||||||||||||
| Variable annuities | 18,752 | 16,168 | 2,584 | 16 | % | 55,247 | 44,522 | 10,725 | 24 | % | |||||||||||||||||||||||||||||||||||||
| Insurance | 4,414 | 4,145 | 269 | 6 | % | 14,044 | 12,209 | 1,835 | 15 | % | |||||||||||||||||||||||||||||||||||||
| General securities | 6,951 | 2,934 | 4,017 | 137 | % | 17,511 | 11,720 | 5,791 | 49 | % | |||||||||||||||||||||||||||||||||||||
| Other | 95 | — | 95 | N/A | 95 | — | 95 | N/A | |||||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 52,961 | $ | 44,921 | $ | 8,040 | 18 | % | $ | 157,197 | $ | 135,337 | $ | 21,860 | 16 | % | |||||||||||||||||||||||||||||||
| By type of commission: | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based | $ | 22,372 | $ | 16,884 | $ | 5,488 | 33 | % | $ | 65,815 | $ | 55,068 | $ | 10,747 | 20 | % | |||||||||||||||||||||||||||||||
| Trailing | 30,589 | 28,037 | 2,552 | 9 | % | 91,382 | 80,269 | 11,113 | 14 | % | |||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 52,961 | $ | 44,921 | $ | 8,040 | 18 | % | $ | 157,197 | $ | 135,337 | $ | 21,860 | 16 | % | |||||||||||||||||||||||||||||||
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
| 2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
| By product category: | |||||||||||||||||||||
| Mutual funds | $ | 21,128 | $ | 20,196 | 5 | % | $ | 62,371 | $ | 59,021 | 6 | % | |||||||||
| Variable annuities | 12,879 | 12,395 | 4 | % | 36,820 | 35,725 | 3 | % | |||||||||||||
| Insurance | 3,037 | 3,689 | (18 | )% | 9,715 | 8,836 | 10 | % | |||||||||||||
| General securities | 2,388 | 2,682 | (11 | )% | 8,275 | 7,488 | 11 | % | |||||||||||||
| Total commission revenue | $ | 39,432 | $ | 38,962 | 1 | % | $ | 117,181 | $ | 111,070 | 6 | % | |||||||||
| By sales-based and trailing: | |||||||||||||||||||||
| Sales-based | $ | 15,590 | $ | 16,925 | (8 | )% | $ | 49,190 | $ | 47,703 | 3 | % | |||||||||
| Trailing | 23,842 | 22,037 | 8 | % | 67,991 | 63,367 | 7 | % | |||||||||||||
| Total commission revenue | $ | 39,432 | $ | 38,962 | 1 | % | $ | 117,181 | $ | 111,070 | 6 | % | |||||||||
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Balance, beginning of the period | $ | 11,551,288 | $ | 9,814,232 | $ | 10,397,071 | $ | 9,692,244 | |||||||
| Net increase (decrease) in new advisory assets | 94,408 | 131,982 | 613,848 | (1,357 | ) | ||||||||||
| Market impact and other | 338,624 | 258,234 | 973,401 | 513,561 | |||||||||||
| Balance, end of the period | $ | 11,984,320 | $ | 10,204,448 | $ | 11,984,320 | $ | 10,204,448 | |||||||
•Trailing commission revenue increased $2.6 million and $11.1 million, respectively, primarily due to increased client asset levels. Trailing commission revenue in 2020 was negatively affected by suppressed client asset levels as a result of the nine months ended September 30, 2017 compared with nine months ended September 30, 2016,COVID-19 pandemic and related financial market disruption beginning in the conversionsecond quarter of AUA2020.
Trailing commission revenue and transaction-based commission revenue remain susceptible to fee-based AUM.being adversely affected in future periods in which pandemic-influenced economic and market factors remain present.
Blucora, Inc. | Q3 2021 Form 10-Q 29
Asset-based revenue:revenue.Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, and cash sweep programs.programs, asset-based retirement plan service fees, and other asset-based revenues.
For the nine months ended September 30, 2016
In March 2020, the Federal Reserve lowered its target range for the federal funds rate to 0.00-0.25%. As our cash sweep revenue is based on a rate derived from the federal funds rate, cash sweep revenue in interest rates. Inall quarters subsequent to the current interestfirst quarter of 2020 has been materially reduced. We expect continued low levels of cash sweep revenue in future periods in which the federal funds rate environment, and through our current clearing provider,is at reduced levels, although we will not benefit from any future interestmay experience an increase in cash sweep revenue should the federal funds rate increases.increase.
Transaction and fee revenue:revenue.Transaction and fee revenue primarily includes support fees charged to 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.
Tax Software
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 5,039 | $ | 39,421 | $ | (34,382) | (87) | % | $ | 220,848 | $ | 202,990 | $ | 17,858 | 9 | % | |||||||||||||||||||||||||||||||
| Operating income (loss) | $ | (13,864) | $ | 16,234 | $ | (30,098) | (185) | % | $ | 100,472 | $ | 60,646 | $ | 39,826 | 66 | % | |||||||||||||||||||||||||||||||
| Segment margin | (275) | % | 41 | % | 45 | % | 30 | % | |||||||||||||||||||||||||||||||||||||||
Tax Software revenue and operating income for the three and nine months ended September 30, 2020 were significantly impacted by the extension of the filing and payment deadlines for federal tax returns in the 2020 tax season. For additional discussion of the COVID-19 pandemic and its effect on current and prior year Tax Software segment results, please see the “COVID-19 Pandemic” section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For the three months ended September 30, 2016
•Tax Software revenue decreased $34.4 million primarily due to a $34.0 million decrease in consumer revenue and a $0.4 million decrease in professional revenue. The decreases primarily resulted from the earlier tax filing and payment deadline in 2021 versus 2020 and, to a lesser extent, from IRS delays in the processing of 2020 tax returns and refunds.
•Tax Software operating expenses decreased $4.3 million primarily due to decreased advertising and marketing expenses. Advertising and marketing costs in our Tax Software business were elevated in the third quarter of 2020 due to the extension of the extension of the 2019 tax returns to July 15, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 30
For the nine months ended September 30, 20162021 compared to the nine months ended September 30, 2020, Tax Software operating income increased $39.8 million due to the following factors:
•Tax Software operating expenses decreased $22.0 million primarily due to decreased advertising and marketing expenses. Advertising and marketing expenses for the nine months ended September 30, 2020 were elevated due to incremental marketing efforts to address weak performance through the first two months of the 2020 tax season, as well as increased advertising and marketing resulting from the extended tax season.
Sources of revenue
Tax Preparation
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
| 2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
| Revenue | $ | 3,362 | $ | 3,149 | 7 | % | $ | 156,936 | $ | 135,614 | 16 | % | |||||||||
| Operating income (loss) | $ | (6,238 | ) | $ | (4,382 | ) | 42 | % | $ | 83,410 | $ | 72,987 | 14 | % | |||||||
| Segment margin | (186 | )% | (139 | )% | 53 | % | 54 | % | |||||||||||||
We classify Tax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue represents Tax Software revenue derived from products and services sold to customers and businesses primarily for the preparation of individual or business tax returns. Professional revenue represents Tax Software revenue derived from products sold to tax return preparers who utilize our offerings to service end-user customers.
Revenue by category was as well as other offeringsfollows:
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Consumer revenue | $ | 4,479 | $ | 38,482 | $ | (34,003) | (88) | % | $ | 203,891 | $ | 186,724 | $ | 17,167 | 9 | % | |||||||||||||||||||||||||||||||
| Professional revenue | 560 | 939 | (379) | (40) | % | 16,957 | 16,266 | 691 | 4 | % | |||||||||||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | 5,039 | $ | 39,421 | $ | (34,382) | (87) | % | $ | 220,848 | $ | 202,990 | $ | 17,858 | 9 | % | |||||||||||||||||||||||||||||||
Business Metrics
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 ancillary services to consumers and small business owners. We also generate revenueare 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 preparer software that we sell toportions 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 preparers who use it to prepare and file individual and business returns for their clients.software customers.
•We measure our consumer tax preparationsoftware customers using the number of accepted federal tax e-files made through our software and onlinedigital services. We consider growth in the number 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--themetrics: (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
Blucora, Inc. | Q3 2021 Form 10-Q 31
| (In thousands, except percentages and as otherwise indicated) | Nine months ended | YTD | Year-to-date period ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | July 16, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Units | % | 2021 (1) | 2020 (1) | Units | % | ||||||||||||||||||||||||||||||||||||||||
Total e-files (2) | 5,492 | 5,234 | 258 | 5 | % | 5,421 | 5,149 | 272 | 5 | % | |||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||||||||
Consumer e-files (2) | 3,144 | 3,145 | (1) | — | % | 3,122 | 3,113 | 9 | — | % | |||||||||||||||||||||||||||||||||||||
| Professional: | |||||||||||||||||||||||||||||||||||||||||||||||
| Professional e-files | 2,348 | 2,089 | 259 | 12 | % | 2,299 | 2,036 | 263 | 13 | % | |||||||||||||||||||||||||||||||||||||
| Units sold (in ones) | 20,808 | 20,288 | 520 | 3 | % | 20,711 | 20,207 | 504 | 2 | % | |||||||||||||||||||||||||||||||||||||
| Professional e-files per unit sold (in ones) | 112.8 | 102.9 | 9.9 | 10 | % | 111.0 | 100.8 | 10.2 | 10 | % | |||||||||||||||||||||||||||||||||||||
(1)Tax season begins on the first day that the IRS begins accepting e-files and ends on filing deadline day plus one day. Due to be important non-financial metrics in measuring the performanceimpact of the professionalCOVID-19 pandemic, the IRS extended the filing deadlines for federal tax preparer sidereturns relating to the 2020 and 2019 tax years to May 17, 2021 (with the filing deadline extended to June 15, 2021 for Texas, Louisiana, and Oklahoma) and July 15, 2020, respectively. In order to provide comparable tax season data, we provided the above metrics for the year-to-date periods ended July 16, 2021 and 2020 as these periods capture the activity of the Tax Preparation business.entire tax season for each year.
For more information on the risks associated with our Tax Software business, see the “COVID-19 Pandemic” section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Item 1A. Risk Factors” under the heading, “The current COVID-19 pandemic could have a Material Adverse Effect.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 32
Corporate-Level Activity
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Operating expenses | $ | 4,587 | $ | 4,907 | $ | (320 | ) | $ | 17,823 | $ | 14,066 | $ | 3,757 | ||||||||||
| Stock-based compensation | 3,132 | 3,364 | (232 | ) | 8,434 | 10,616 | (2,182 | ) | |||||||||||||||
| Acquisition-related costs | — | — | — | — | 391 | (391 | ) | ||||||||||||||||
| Depreciation | 1,023 | 1,137 | (114 | ) | 3,216 | 3,386 | (170 | ) | |||||||||||||||
| Amortization of acquired intangible assets | 8,665 | 8,346 | 319 | 25,337 | 25,694 | (357 | ) | ||||||||||||||||
| Restructuring | 106 | — | 106 | 2,726 | — | 2,726 | |||||||||||||||||
| Total corporate-level activity | $ | 17,513 | $ | 17,754 | $ | (241 | ) | $ | 57,536 | $ | 54,153 | $ | 3,383 | ||||||||||
Certain corporate-level activity, is not allocated to our segments, including certain general and administrative costs (including(such as personnel and overhead costs), stock-based compensation, acquisition-relatedacquisition and integration costs, depreciation, amortization of acquired intangible assets, 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.
Corporate-level activity by category was as follows:
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Unallocated corporate-level general and administrative | $ | 6,499 | $ | 6,745 | $ | (246) | (4) | % | $ | 18,452 | $ | 19,571 | $ | (1,119) | (6) | % | |||||||||||||||||||||||||||||||
| Stock-based compensation | 4,729 | 4,517 | 212 | 5 | % | 15,499 | 7,220 | 8,279 | 115 | % | |||||||||||||||||||||||||||||||||||||
| Acquisition and integration | 2,241 | 10,276 | (8,035) | (78) | % | 28,513 | 18,782 | 9,731 | 52 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation | 3,906 | 2,620 | 1,286 | 49 | % | 11,251 | 7,452 | 3,799 | 51 | % | |||||||||||||||||||||||||||||||||||||
| Amortization of other acquired intangible assets | 7,009 | 7,746 | (737) | (10) | % | 21,247 | 22,167 | (920) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Contested proxy and other legal and consulting costs | 1,598 | — | 1,598 | N/A | 7,293 | — | 7,293 | N/A | |||||||||||||||||||||||||||||||||||||||
| Executive transition costs | — | 405 | (405) | (100) | % | — | 10,225 | (10,225) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Headquarters relocation costs | — | 410 | (410) | (100) | % | — | 1,863 | (1,863) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Impairment of goodwill | — | — | — | N/A | — | 270,625 | (270,625) | (100) | % | ||||||||||||||||||||||||||||||||||||||
| Total corporate-level activity | $ | 25,982 | $ | 32,719 | $ | (6,737) | (21) | % | $ | 102,255 | $ | 357,905 | $ | (255,650) | (71) | % | |||||||||||||||||||||||||||||||
For further detail, refer to segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
•Acquisition and integration expenses decreased $8.0 million, primarily due to the following factors. For the three months ended September 30, 2021, acquisition and integration expenses were $2.2 million, which primarily related to the HKFS Acquisition. For the three months ended September 30, 2020, acquisition and integration expenses were $10.3 million, which included $5.9 million related to the acquisition of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”) in 2019 (the “1st Global Acquisition”) and $4.4 million related to the HKFS Acquisition.
•Contested proxy and other legal and consulting costs of $1.6 million were recognized in the three months ended September 30, 2021 with no comparable amount in the 2020 period.
For the nine months ended September 30, 2016
•For the nine months ended September 30, 2020, we recognized goodwill impairment of $270.6 million related to our Wealth Management reporting unit.
•Executive transition costs of $10.2 million were recognized for the nine months ended September 30, 2020 due to the departures of certain Company executives.
Partially offsetting this decrease in corporate-level activity:
•For the nine months ended September 30, 2021, acquisition and costs associated with leadership changes at HD Vest.integration expenses were $28.5 million, which included $22.6 million related to the HKFS Acquisition and $5.9 million related to the 1st Global Acquisition. For the nine months ended September 30, 2020, acquisition and integration expenses were $18.8 million, which included $10.6 million related to the 1st Global Acquisition and $8.2 million related to the HKFS Acquisition.
•Stock-based compensation decreased primarily due to fewer grantsexpense increased $8.3 million. Stock-based compensation for the nine months ended September 30, 2020 was reduced by stock award forfeitures resulting from executive departures in the current year and higher expense recognized in the prior year related to HD Vest grants in 2016 that were made in connection with the HD Vest acquisition, partially offset by activity within our Tax Preparation business due to prior forfeitures.2020.
Blucora, Inc. | Q3 2021 Form 10-Q 33
OPERATING EXPENSES
Cost of Revenue
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Wealth Management services cost of revenue | $ | 120,641 | $ | 96,122 | $ | 24,519 | 26 | % | $ | 343,174 | $ | 282,332 | $ | 60,842 | 22 | % | |||||||||||||||||||||||||||||||
| Tax Software services cost of revenue | 2,323 | 2,692 | (369) | (14) | % | 12,330 | 9,759 | 2,571 | 26 | % | |||||||||||||||||||||||||||||||||||||
| Total cost of revenue | $ | 122,964 | $ | 98,814 | $ | 24,150 | 24 | % | $ | 355,504 | $ | 292,091 | $ | 63,413 | 22 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 71 | % | 56 | % | 50 | % | 49 | % | |||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Wealth management services cost of revenue | $ | 59,607 | $ | 54,921 | $ | 4,686 | $ | 172,444 | $ | 158,213 | $ | 14,231 | |||||||||||
| Tax preparation services cost of revenue | 1,314 | 1,319 | (5 | ) | 7,543 | 6,549 | 994 | ||||||||||||||||
| Amortization of acquired technology | 50 | 49 | 1 | 145 | 765 | (620 | ) | ||||||||||||||||
| Total cost of revenue | $ | 60,971 | $ | 56,289 | $ | 4,682 | $ | 180,132 | $ | 165,527 | $ | 14,605 | |||||||||||
| Percentage of revenue | 68 | % | 68 | % | 44 | % | 45 | % | |||||||||||||||
For the change in underlying commissionthree and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors.
Engineering and Technology
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Engineering and technology | $ | 7,874 | $ | 6,007 | $ | 1,867 | 31 | % | $ | 22,233 | $ | 21,899 | $ | 334 | 2 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 5 | % | 3 | % | 3 | % | 4 | % | |||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Engineering and technology | $ | 5,051 | $ | 4,588 | $ | 463 | $ | 14,041 | $ | 12,842 | $ | 1,199 | |||||||||||
| Percentage of revenue | 6 | % | 6 | % | 3 | % | 3 | % | |||||||||||||||
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses, (salaries, stock-based compensation, benefits, and other employee-related costs), 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 condensed 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 nine months ended September 30, 2016
Blucora, Inc. | Q3 2021 Form 10-Q 34
Sales and Marketing
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Sales and marketing | $ | 13,680 | $ | 11,965 | $ | 1,715 | $ | 84,974 | $ | 75,715 | $ | 9,259 | |||||||||||
| Percentage of revenue | 15 | % | 14 | % | 21 | % | 21 | % | |||||||||||||||
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 28,399 | $ | 31,018 | $ | (2,619) | (8) | % | $ | 140,809 | $ | 150,785 | $ | (9,976) | (7) | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 16 | % | 18 | % | 20 | % | 25 | % | |||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses primarily consist principally 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, (salaries, stock-based compensation benefits, and other employee-related costs) andpaid to Avantax Planning Partners in-house financial professionals, the cost of temporary help and contractors, for those engaged in marketing, selling, and sales support operations activities, marketing expenses associated with our HD Vest and TaxAct businesses (which primarily include television, radio, online, text, email, and sponsorship channels), and back office processing support expenses associated withfor our HD Vest business (occupancy and general office expenses, regulatory fees, and license fees).Wealth Management business.
General and Administrative
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 23,102 | $ | 18,605 | $ | 4,497 | 24 | % | $ | 71,619 | $ | 63,533 | $ | 8,086 | 13 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 13 | % | 11 | % | 10 | % | 11 | % | |||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| General and administrative | $ | 12,207 | $ | 11,638 | $ | 569 | $ | 39,405 | $ | 35,899 | $ | 3,506 | |||||||||||
| Percentage of revenue | 14 | % | 14 | % | 10 | % | 10 | % | |||||||||||||||
General and administrative ("“G&A"&A”) expenses primarily consist primarily of expenses associated with personnel expenses, (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees, (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
•For the three months ended September 30, 2021, we recognized $1.6 million in expenses associated with other legal and consulting costs.
•Depreciation expense increased $1.3 million resulting from property and equipment placed into service at our new headquarters in July 2020.
For the nine months ended September 30, 2016
2021 compared to the nine months ended September 30, 2020, G&A expenses increased $8.1 million primarily due to a $5.6the following factors:
•Stock-based compensation increased $8.3 million. Stock-based compensation for the nine months ended September 30, 2020 was reduced due to stock award forfeitures resulting from executive departures in 2020.
•For the nine months ended September 30, 2021, we recognized $7.3 million net increase in personnel expenses mainly related to Strategic Transformation Costs and costs associated with leadership changescontested proxy and other legal and consulting costs.
Blucora, Inc. | Q3 2021 Form 10-Q 35
•Depreciation expense increased $3.8 million resulting from property and equipment placed into service at HD Vest, offset by lower stock-based compensationour new headquarters in July 2020.
Partially offsetting these increases, we recognized $10.2 million of executive transition costs for the nine months ended September 30, 2020 due to fewer grantsthe departure of certain Company executives in 2020.
Acquisition and Integration
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Employee-related expenses | $ | (36) | $ | 264 | $ | (300) | (114) | % | $ | 699 | $ | 1,326 | $ | (627) | (47) | % | |||||||||||||||||||||||||||||||
| Professional services | 377 | 4,905 | (4,528) | (92) | % | 1,620 | 11,447 | (9,827) | (86) | % | |||||||||||||||||||||||||||||||||||||
| Change in the fair value of HKFS Contingent Consideration | 1,700 | (1,000) | 2,700 | 270 | % | 19,500 | (1,000) | 20,500 | 2050 | % | |||||||||||||||||||||||||||||||||||||
| Other expenses | 200 | 6,107 | (5,907) | (97) | % | 6,694 | 7,009 | (315) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 2,241 | $ | 10,276 | $ | (8,035) | (78) | % | $ | 28,513 | $ | 18,782 | $ | 9,731 | 52 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 1 | % | 6 | % | 4 | % | 3 | % | |||||||||||||||||||||||||||||||||||||||
Acquisition and integration expenses primarily relate to the current yearHKFS Acquisition and higher expense recognized in the prior year1st Global Acquisition and consist of employee-related expenses, professional services fees, and other expenses.
For the three months ended September 30, 2021, acquisition and integration expenses of $2.2 million were primarily related to the timingHKFS Acquisition, which included a $1.7 million loss related to the increase in the fair value of grants.the liability related to the two post-closing earn-out payments (the “HKFS Contingent Consideration”). For additional information on the HKFS Contingent Consideration liability and the contingent liability from the 1st Global Acquisition, see “Item 1. Financial Statements—Note 8.” For the three months ended September 30, 2020, acquisition and integration expenses included $5.9 million related to the 1st Global Acquisition and $4.4 million related to the HKFS Acquisition.
For the nine months ended September 30, 2021, acquisition and integration expenses of $28.5 million were primarily composed of $22.6 million related to the HKFS Acquisition, which included a $19.5 million loss related to the increase in the fair value of the HKFS Contingent Consideration liability. In addition, acquisition and integration expenses for the nine months ended September 30, 2021 included $5.9 million related to the 1st Global Acquisition, which included an increase of $5.5 million to the contingent liability reserve balance related to a regulatory matter assumed in the 1st Global Acquisition. For the nine months ended September 30, 2020, acquisition and integration expenses included $10.6 million related to the 1st Global Acquisition and $8.2 million related to the HKFS Acquisition.
Depreciation and Amortization of Acquired Intangible Assets
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Depreciation | $ | 867 | $ | 968 | $ | (101 | ) | $ | 2,680 | $ | 2,906 | $ | (226 | ) | |||||||||
| Amortization of acquired intangible assets | 8,615 | 8,297 | 318 | 25,192 | 24,929 | 263 | |||||||||||||||||
| Total | $ | 9,482 | $ | 9,265 | $ | 217 | $ | 27,872 | $ | 27,835 | $ | 37 | |||||||||||
| Percentage of revenue | 11 | % | 11 | % | 7 | % | 8 | % | |||||||||||||||
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation | $ | 2,867 | $ | 1,874 | $ | 993 | 53 | % | $ | 8,371 | $ | 5,345 | $ | 3,026 | 57 | % | |||||||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 7,009 | 7,746 | (737) | (10) | % | 21,247 | 22,167 | (920) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 9,876 | $ | 9,620 | $ | 256 | 3 | % | $ | 29,618 | $ | 27,512 | 2,106 | 8 | % | ||||||||||||||||||||||||||||||||
| Percentage of revenue | 6 | % | 5 | % | 4 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, and leasehold improvements not recognized in cost of revenue.improvements. Amortization of acquired intangible assets primarily includes the amortization of financial professional, sponsor, and customer relationships, which are amortized over their estimated lives. Depreciation and amortization expenses were comparable to the prior periods.
| (In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Restructuring | $ | 106 | $ | — | $ | 106 | $ | 2,726 | $ | — | $ | 2,726 | |||||||||||
| Percentage of revenue | — | % | — | % | 1 | % | — | % | |||||||||||||||
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Interest income | $ | (31 | ) | $ | (18 | ) | $ | (13 | ) | $ | (76 | ) | $ | (54 | ) | $ | (22 | ) | |||||
| Interest expense | 4,781 | 7,824 | (3,043 | ) | 16,746 | 25,396 | (8,650 | ) | |||||||||||||||
| Amortization of debt issuance costs | 177 | 413 | (236 | ) | 891 | 1,440 | (549 | ) | |||||||||||||||
| Accretion of debt discounts | 53 | 1,099 | (1,046 | ) | 1,893 | 3,599 | (1,706 | ) | |||||||||||||||
| (Gain) loss on debt extinguishment | 183 | 2,205 | (2,022 | ) | 19,764 | (641 | ) | 20,405 | |||||||||||||||
| Other | 78 | (70 | ) | 148 | (69 | ) | 143 | (212 | ) | ||||||||||||||
| Other loss, net | $ | 5,241 | $ | 11,453 | $ | (6,212 | ) | $ | 39,149 | $ | 29,883 | $ | 9,332 | ||||||||||
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Write-off of debt discount and debt issuance costs on TaxAct - HD Vest 2015 credit facility (related to closure) | $ | — | $ | — | $ | — | $ | 9,593 | $ | — | $ | 9,593 | |||||||||||
| Write-off of debt discount and debt issuance costs on the Notes (related to termination) | — | — | — | 6,715 | — | 6,715 | |||||||||||||||||
| Accelerated accretion of debt discount and amortization of debt issuance costs on credit facilities (related to prepayments) | 183 | 2,205 | (2,022 | ) | 3,456 | 5,039 | (1,583 | ) | |||||||||||||||
| Gain on the Notes repurchased | — | — | — | — | (7,724 | ) | 7,724 | ||||||||||||||||
| Accelerated accretion of debt discount on the Notes (related to repurchase) | — | — | — | — | 1,628 | (1,628 | ) | ||||||||||||||||
| Accelerated amortization of debt issuance costs on the Notes (related to repurchase) | — | — | — | — | 416 | (416 | ) | ||||||||||||||||
| Total (gain) loss on debt extinguishment | $ | 183 | $ | 2,205 | $ | (2,022 | ) | $ | 19,764 | $ | (641 | ) | $ | 20,405 | |||||||||
Blucora, Inc. | Q3 2021 Form 10-Q 36
Impairment of Goodwill
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Impairment of goodwill | $ | — | $ | — | $ | — | N/A | — | $ | 270,625 | $ | (270,625) | (100) | % | |||||||||||||||||||||||||||||||||
| Percentage of revenue | — | % | — | % | — | % | 45 | % | |||||||||||||||||||||||||||||||||||||||
For the statutory rates in 2016nine months ended September 30, 2020, we recognized goodwill impairment of $270.6 million related to our Wealth Management reporting unit.
OTHER LOSS, NET
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 7,304 | $ | 7,254 | $ | 50 | 1 | % | $ | 21,789 | $ | 17,410 | $ | 4,379 | 25 | % | |||||||||||||||||||||||||||||||
| Amortization of debt issuance costs | 388 | 362 | 26 | 7 | % | 1,128 | 1,006 | 122 | 12 | % | |||||||||||||||||||||||||||||||||||||
| Accretion of debt discounts | 290 | 276 | 14 | 5 | % | 851 | 414 | 437 | 106 | % | |||||||||||||||||||||||||||||||||||||
| Total interest expense | 7,982 | 7,892 | 90 | 1 | % | 23,768 | 18,830 | 4,938 | 26 | % | |||||||||||||||||||||||||||||||||||||
| Interest income | — | (2) | 2 | 100 | % | (2) | (27) | 25 | 93 | % | |||||||||||||||||||||||||||||||||||||
| Gain on sale of a business | — | (349) | 349 | 100 | % | — | (349) | 349 | 100 | % | |||||||||||||||||||||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 3,687 | (3,687) | (100) | % | — | 3,687 | (3,687) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Other | 313 | 735 | (422) | (57) | % | 436 | 1,245 | (809) | (65) | % | |||||||||||||||||||||||||||||||||||||
| Other loss, net | $ | 8,295 | $ | 11,963 | $ | (3,668) | (31) | % | $ | 24,202 | $ | 23,386 | $ | 816 | 3 | % | |||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, other loss, net, decreased $3.7 million primarily due to the domestic manufacturing deduction, offset by non-deductible compensation and state income taxes.
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||
| Discontinued operations, net of income taxes | $ | — | $ | (40,528 | ) | $ | 40,528 | $ | — | $ | (57,981 | ) | $ | 57,981 | |||||||||
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, other loss, net, increased $0.8 million, primarily due to a $4.9 million increase in total interest expense. This increased interest expense was primarily due to higher outstanding debt balances following the $175.0 million increase in the fourthTerm Loan (as defined below) under the Senior Secured Credit Facility (as defined below) in the third quarter of 2016. See "Note 4: Discontinued Operations"2020, which was partially offset by $3.7 million of non-capitalized debt issuance expenses that were also related to the Term Loan increase.
The Senior Secured Credit Facility, including the Term Loan and the Revolver (as defined below) thereunder, are described in more detail under “Liquidity and Capital Resources” below.
INCOME TAXES
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | $ | 774 | $ | (15,256) | $ | 16,030 | 105 | % | $ | (2,920) | $ | (23,237) | $ | 20,317 | (87) | % | |||||||||||||||||||||||||||||||
The Company recorded income tax benefit of $0.8 million and income tax expense of $2.9 million for the three and nine months ended September 30, 2021, respectively. For 2021, the Company prepared its interim tax provision by applying a year-to-date effective tax rate to each quarter. For 2020, the Company prepared its interim tax provision by applying an estimated annual effective tax rate. We believe using the actual year-to-date effective tax rate in 2021 results in the best estimate of the Notesannual effective tax rate.
The Company’s effective income tax rate for the nine months ended September 30, 2021 differed from the 21% statutory rate primarily due to Unaudited Condensed Consolidated Financial Statementsthe release of valuation allowances and the effect of state income taxes. We currently expect to continue to release portions of valuation allowances, which were previously recorded in Part I Item 1connection with our net operating losses, to offset future federal income tax liabilities. The majority of this reportthese net operating losses will either be utilized or expire between 2021 and 2024.
Blucora, Inc. | Q3 2021 Form 10-Q 37
The Company recorded income tax expense of $15.3 million and $23.2 million for additional information on discontinued operations.the three and nine months ended September 30, 2020, respectively. The Company’s effective income tax rate for the three and nine months ended September 30, 2020 differed from the 21% statutory rate primarily due to expiring net operating loss tax benefits, an adjustment to the valuation allowance against deferred tax assets for net operating losses expected to expire in future years, and non-deductible officer compensation expense.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA:EBITDA
We define Adjusted EBITDA as net income (loss) attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of stock-based compensation, depreciation and amortization of acquired intangible assets, (including acquired technology), restructuring, other loss, net, the impactacquisition and integration costs, impairment of noncontrolling interests,goodwill, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, and income tax expense. Other loss, net primarily consists of interest expense, net and non-capitalized debt issuance expenses. Acquisition and integration costs primarily relate to the effectsHKFS Acquisition and 1st Global Acquisition. Impairment of discontinued operations, and acquisition-related costs. Restructuringgoodwill relates to the impairment of our Wealth Management reporting unit goodwill in the first quarter of 2020. Executive transition costs relate to the movedeparture of our corporate headquarters, which was announcedcertain Company executives in the fourthfirst quarter of 2016. Acquisition-related2020. Headquarters relocation costs include professional services feesrelate to the process of moving from our Dallas and other direct transaction costs and changes in the fair value of contingent consideration liabilities relatedIrving offices to acquired companies. The SimpleTax acquisition that was completed in 2015 included contingent consideration, for which the fair value of that liability was revalued in the second quarter of 2016. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.our new headquarters.
We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
A reconciliation of our Adjusted EBITDA to net income (loss) attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below:
| (In thousands) | Three months ended | Nine months ended | |||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
| Stock-based compensation | 4,729 | 4,517 | 15,499 | 7,220 | |||||||||||||||||||
| Depreciation and amortization of acquired intangible assets | 10,915 | 10,366 | 32,498 | 29,619 | |||||||||||||||||||
| Other loss, net | 8,295 | 11,963 | 24,202 | 23,386 | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 541 | 11,276 | 9,013 | 19,782 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | 1,700 | (1,000) | 19,500 | (1,000) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 270,625 | |||||||||||||||||||
| Executive transition costs | — | 405 | — | 10,225 | |||||||||||||||||||
| Headquarters relocation costs | — | 410 | — | 1,863 | |||||||||||||||||||
| Contested proxy and other legal and consulting costs | 1,598 | — | 7,293 | — | |||||||||||||||||||
| Income tax (benefit) expense | (774) | 15,256 | 2,920 | 23,237 | |||||||||||||||||||
| Adjusted EBITDA | $ | (799) | $ | 26,987 | $ | 142,376 | $ | 92,902 | |||||||||||||||
| (In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net income (loss) attributable to Blucora, Inc. | $ | (16,897 | ) | $ | (54,119 | ) | $ | 16,991 | $ | (45,897 | ) | ||||
| Stock-based compensation | 3,132 | 3,364 | 8,434 | 10,616 | |||||||||||
| Depreciation and amortization of acquired intangible assets | 9,688 | 9,483 | 28,553 | 29,080 | |||||||||||
| Restructuring | 106 | — | 2,726 | — | |||||||||||
| Other loss, net | 5,241 | 11,453 | 39,149 | 29,883 | |||||||||||
| Net income attributable to noncontrolling interests | 164 | 167 | 466 | 426 | |||||||||||
| Income tax expense (benefit) | 166 | (8,537 | ) | 5,952 | 8,899 | ||||||||||
| Discontinued operations, net of income taxes | — | 40,528 | — | 57,981 | |||||||||||
| Acquisition-related costs | — | — | — | 391 | |||||||||||
| Adjusted EBITDA | $ | 1,600 | $ | 2,339 | $ | 102,271 | $ | 91,379 | |||||||
Non-GAAP net income (loss): and non-GAAP net income (loss) per share
We define non-GAAP net income (loss) as net income (loss) attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of discontinued operations, stock-based compensation, amortization of acquired intangible assets, (including acquired technology), accretion of debt discount and accelerated accretion of debt discount on the Convertible Senior Notes (the "Notes"), gain on the Notes repurchased, write-offsale of debt discounta business, acquisition and integration costs, impairment of goodwill, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, non-capitalized debt issuance costs on the Notes that were redeemed and the terminated TaxAct - HD Vest 2015 credit facility, acquisition-related costs (described further under Adjusted EBITDA above), restructuring costs (described further under Adjusted EBITDA above), the impact of noncontrolling interests,expenses, the related cash tax impact of those adjustments, and non-cash income taxes. The write-off of debt discount and debt issuance costs on the terminated Notes and the closed TaxAct - HD Vest 2015 credit facility relates to the debt refinancing that occurred in the second quarter of 2017.tax (benefit) expense. We exclude the non-cash portion of income taxestax expense because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will be utilized or expire if unutilized, between 20202021 and 2024. Gain on the sale of a business relates to the disposition of SimpleTax in the third quarter of 2019 and the subsequent working capital adjustment in the third quarter of 2020. Non-capitalized debt issuance expense relates to the expense recognized as a result of the Term Loan increase in the third quarter of 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 39
We believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP net income (loss) and non-GAAP net income (loss) per share should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). and net income (loss) per share. Other companies may calculate non-GAAP net income (loss) and non-GAAP net income (loss) per share differently, and, therefore, our non-GAAP net income (loss) and non-GAAP net income (loss) per share may not be comparable to similarly titled measures of other companies.
A reconciliation of our non-GAAP net income (loss) and non-GAAP net income (loss) per share to net income attributable to Blucora, Inc.,(loss) and net income (loss) per share, respectively, which we believe to be the most comparable GAAP measure,measures, is presented below:
| (In thousands, except per share amounts) | Three months ended | Nine months ended | |||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
| Stock-based compensation | 4,729 | 4,517 | 15,499 | 7,220 | |||||||||||||||||||
| Amortization of acquired intangible assets | 7,009 | 7,746 | 21,247 | 22,167 | |||||||||||||||||||
| Gain on the sale of a business | — | (349) | — | (349) | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 541 | 11,276 | 9,013 | 19,782 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | 1,700 | (1,000) | 19,500 | (1,000) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 270,625 | |||||||||||||||||||
| Executive transition costs | — | 405 | — | 10,225 | |||||||||||||||||||
| Headquarters relocation costs | — | 410 | — | 1,863 | |||||||||||||||||||
| Contested proxy and other legal and consulting costs | 1,598 | — | 7,293 | — | |||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 3,687 | — | 3,687 | |||||||||||||||||||
| Cash tax impact of adjustments to GAAP net income | (331) | (418) | (1,523) | (1,413) | |||||||||||||||||||
| Non-cash income tax (benefit) expense | (197) | 14,987 | (1,160) | 22,327 | |||||||||||||||||||
| Non-GAAP net income (loss) | $ | (12,754) | $ | 15,055 | $ | 101,320 | $ | 63,079 | |||||||||||||||
| Per diluted share: | |||||||||||||||||||||||
Net income (loss) (1) | $ | (0.57) | $ | (0.54) | $ | 0.64 | $ | (6.06) | |||||||||||||||
| Stock-based compensation | 0.10 | 0.09 | 0.31 | 0.15 | |||||||||||||||||||
| Amortization of acquired intangible assets | 0.14 | 0.16 | 0.43 | 0.46 | |||||||||||||||||||
| Gain on the sale of a business | — | (0.01) | — | (0.01) | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 0.01 | 0.23 | 0.18 | 0.41 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | 0.03 | (0.02) | 0.39 | (0.02) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 5.62 | |||||||||||||||||||
| Executive transition costs | — | 0.01 | — | 0.21 | |||||||||||||||||||
| Headquarters relocation costs | — | 0.01 | — | 0.04 | |||||||||||||||||||
| Contested proxy and other legal and consulting costs | 0.04 | — | 0.15 | — | |||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 0.08 | — | 0.08 | |||||||||||||||||||
| Cash tax impact of adjustments to GAAP net income | (0.01) | (0.01) | (0.03) | (0.03) | |||||||||||||||||||
| Non-cash income tax (benefit) expense | — | 0.31 | (0.02) | 0.46 | |||||||||||||||||||
| Non-GAAP net income (loss) per diluted share | $ | (0.26) | $ | 0.31 | $ | 2.05 | $ | 1.31 | |||||||||||||||
| Weighted average shares outstanding - diluted | 48,707 | 48,203 | 49,373 | 48,184 | |||||||||||||||||||
_________________________
| (In thousands, except per share amounts) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net income (loss) attributable to Blucora, Inc. | $ | (16,897 | ) | $ | (54,119 | ) | $ | 16,991 | $ | (45,897 | ) | ||||
| Discontinued operations, net of income taxes | — | 40,528 | — | 57,981 | |||||||||||
| Stock-based compensation | 3,132 | 3,364 | 8,434 | 10,616 | |||||||||||
| Amortization of acquired intangible assets | 8,665 | 8,346 | 25,337 | 25,694 | |||||||||||
| Impairment of goodwill and intangible assets | — | — | — | — | |||||||||||
| Accretion of debt discount on the Notes | — | 901 | 1,567 | 2,749 | |||||||||||
| Accelerated accretion of debt discount on the Notes repurchased | — | — | — | 1,628 | |||||||||||
| Gain on the Notes repurchased | — | — | — | (7,724 | ) | ||||||||||
| Write-off of debt discount and debt issuance costs on terminated Notes | — | — | 6,715 | — | |||||||||||
| Write-off of debt discount and debt issuance costs on terminated TaxAct - HD Vest 2015 credit facility | — | — | 9,593 | — | |||||||||||
| Acquisition-related costs | — | — | — | 391 | |||||||||||
| Restructuring | 106 | — | 2,726 | — | |||||||||||
| Impact of noncontrolling interests | 164 | 167 | 466 | 426 | |||||||||||
| Cash tax impact of adjustments to GAAP net income | (928 | ) | (17 | ) | (3,334 | ) | 244 | ||||||||
| Non-cash income tax (benefit) expense | 224 | (9,312 | ) | 6,325 | 6,460 | ||||||||||
| Non-GAAP net income (loss) | $ | (5,534 | ) | $ | (10,142 | ) | $ | 74,820 | $ | 52,568 | |||||
| Per diluted share: | |||||||||||||||
| Net income (loss) attributable to Blucora, Inc. | $ | (0.37 | ) | $ | (1.30 | ) | $ | 0.36 | $ | (1.08 | ) | ||||
| Discontinued operations, net of income taxes | — | 0.97 | — | 1.37 | |||||||||||
| Stock-based compensation | 0.07 | 0.08 | 0.18 | 0.25 | |||||||||||
| Amortization of acquired intangible assets | 0.20 | 0.21 | 0.55 | 0.60 | |||||||||||
| Accretion of debt discount on the Notes | — | 0.02 | 0.03 | 0.06 | |||||||||||
| Accelerated accretion of debt discount on the Notes repurchased | — | — | — | 0.04 | |||||||||||
| Gain on the Notes repurchased | — | — | — | (0.18 | ) | ||||||||||
| Write-off of debt discount and debt issuance costs on terminated Notes | — | — | 0.14 | — | |||||||||||
| Write-off of debt discount and debt issuance costs on closed TaxAct - HD Vest 2015 credit facility | — | — | 0.20 | — | |||||||||||
| Acquisition-related costs | — | — | — | 0.01 | |||||||||||
| Restructuring | — | — | 0.06 | — | |||||||||||
| Impact of noncontrolling interests | 0.00 | 0.00 | 0.01 | 0.01 | |||||||||||
| Cash tax impact of adjustments to GAAP net income | (0.02 | ) | (0.00 | ) | (0.07 | ) | 0.01 | ||||||||
| Non-cash income tax (benefit) expense | 0.00 | (0.22 | ) | 0.14 | 0.15 | ||||||||||
| Non-GAAP net income (loss) | $ | (0.12 | ) | $ | (0.24 | ) | $ | 1.60 | $ | 1.24 | |||||
| Weighted average shares outstanding used in computing per diluted share amounts | 45,459 | 41,635 | 46,813 | 42,329 | |||||||||||
Blucora, Inc. | Q3 2021 Form 10-Q 40
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Short-Term Investments
Our principal source of liquidity is our cash and cash equivalents, and short-term investments.equivalents. As of September 30, 2017,2021, we had cash and marketable investmentscash equivalents of approximately $78.6 million, consisting entirely of cash and cash equivalents.$184.9 million. Our HD VestAvantax Wealth Management broker-dealer subsidiary operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest'son Avantax Wealth Management operations. As of September 30, 2017, HD Vest2021, Avantax Wealth Management met all capital adequacy requirements to which it was subject.
We generally invest our excess cash in high quality marketable investments. These investments generally includemoney market funds that are made up of securities issued by agencies of the U.S. government. We may invest, from time-to-time, in other vehicles, such as debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities, and publicly-heldpublicly held corporations, as well as commercial paper and insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specificbanks. Specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held at September 30, 20172021 had minimal default risk and short-term maturities.
Since our results of operations are sensitive to various factors, including, among others, the level of competition we face, regulatory and legal impacts, and political and economic conditions, such factors could adversely affect our liquidity and capital resources. In addition, due to the COVID-19 pandemic, we have experienced and may continue to experience near- to mid-term volatility in our results of operations that could further increase our liquidity needs. Due to this volatility, we have taken several measures to ensure proper liquidity levels and are maintaining flexibility in our cash flows. In July 2020, we increased the principal outstanding under our Term Loan to fund the HKFS Acquisition and have continued to retain a portion of these proceeds in order to provide additional working capital flexibility. In addition, in April 2021, we increased the amount available for borrowings under the Revolver from $65.0 million to $90.0 million. Overall, we believe these measures provide us with the capital flexibility to satisfy our obligations, fund our operations, and invest in our businesses.
For further discussion of the risks to our business related to liquidity, see “Item 1A. Risk Factors” under the Risk Factor "Existingheading “Existing cash and cash equivalents short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures"expenditures” in Part II Item 8I of our Annual Report on Form 10-K for the year ended December 31, 2016.
We may use our cash and cash equivalents and short-term investments balance in the future on investmentto invest in our current businesses, for repayment of debt, for acquiring companies or assets, that complement our Wealth Management and Tax Preparation businesses, orfor stock buybacks, for returning capital to shareholders.stockholders, or for other utilizations that we deem to be in the best interests of stockholders.
In May 22, 2017, we entered into ana credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders, which provides for a new senior securedterm loan facility (the “Term Loan”) and a revolving line of credit facility for the purposes of refinancing the TaxAct - HD Vest 2015 credit facility, redeeming the Notes, and providing future working capital and capital expenditure flexibility. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments under the TaxAct - HD Vest revolving credit facility were terminated. The Blucora senior secured credit facility consists of a committed $50.0 million revolving credit loan, which includes(including a letter of credit sub-facility,sub-facility) (the “Revolver”) for working capital, capital expenditures, and a $375.0general business purposes (the “Senior Secured Credit Facility”).
On April 26, 2021, to ensure adequate liquidity and flexibility to support growth, we entered into Amendment No. 5 to the Credit Agreement (the “Credit Agreement Amendment”). Pursuant to the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing $65.0 million term loanRevolver and add $25.0 million of additional revolving credit commitments, for an aggregate $425.0principal amount of
Blucora, Inc. | Q3 2021 Form 10-Q 41
$90.0 million in revolving credit facility.commitments (the “New Revolver”). The finalNew Revolver has a maturity datesdate of February 21, 2024 (the “Maturity Date”).
As of September 30, 2021, we had $561.8 million in principal amount outstanding under the Term Loan and no amounts outstanding under the New Revolver. Based on aggregate loan commitments as of September 30, 2021, approximately $90.0 million was available for future borrowing at September 30, 2021 under the Senior Secured Credit Facility, subject to customary terms and conditions. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the revolving credit loan and term loan areTerm Loan due on the maturity date of May 22, 2022 and May 22, 2024, respectively. 2024.
The interest ratesrate on the revolving credit loanTerm Loan is variable at the London Interbank Offered Rate, plus the applicable interest rate margin of 4.0% for Eurodollar Rate Loans (as defined in the Credit Agreement) and term loan3.0% for ABR Loans (as defined in the Credit Agreement). As of September 30, 2021, the applicable interest rate on the Term Loan was 5.0%. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0% to 2.5% for Eurodollar Rate Loans and 1.0% to 1.5% for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net Leverage Ratio that ranges from 0.35% to 0.4%. Interest is payable at the end of each interest period.
By June 2023, all U.S. Dollar London Interbank Offered Rate (“LIBOR”) tenors will cease to be published and floating rate instruments that used U.S. Dollar LIBOR will need to shift to a substitute base index. To minimize disruption arising from such transition, the market has begun to shift to alternative fallback rates, such as Secured Overnight Financing Rate (“SOFR”) as a replacement benchmark for floating rate LIBOR based loans. Unless (i) such LIBOR tenors cease to be provided at an earlier date or (ii) we and the administrative agent to the Credit Agreement make an “early opt-in election” to replace the rate prior to cessation of LIBOR in accordance with the Credit Agreement, we will continue to have the option under the Credit Agreement to make drawdowns using 1-Day, 1-Month, 3-Month, and 6-Month tenor U.S. Dollar LIBOR until June 2023. The Credit Agreement Amendment provides for a process for transition to a fallback rate consistent with industry practice and permits the administrative agent to the Credit Agreement to apply certain updates to the Credit Agreement to effectuate the fallback rate, including a spread adjustment based on the historical basis between LIBOR and the fallback rate.
Obligations under the Senior Secured Credit Facility are variable.guaranteed by certain of the Company’s subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the HKFS Acquisition and certain other material subsidiaries). The credit facilitySenior Secured Credit Facility includes financial and operating covenants with respect to certain ratios, including(including a net leverage ratio,Consolidated Total Net Leverage Ratio), which are defined furtherset forth in detail in the credit facility agreement. We wereCredit Agreement.
Pursuant to the Credit Agreement Amendment, if the Company’s usage of the New Revolver exceeds 30% of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company shall not permit the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) to exceed (i) 4.75 to 1.00 for the period beginning on April 1, 2021 and ending on December 31, 2021, (ii) 4.25 to 1.00 for the period beginning on January 1, 2022 and ending on September 30, 2022, (iii) 4.00 to 1.00 for the period beginning on October 1, 2022 and ending on December 31, 2022, and (iv) 3.50 to 1.00 for the period beginning on January 1, 2023 and ending on the Maturity Date.
Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with thesethe debt covenants of the Senior Secured Credit Facility as of September 30, 2017. We initially borrowed $375.02021.
For additional information on the Term Loan, the New Revolver, and the Credit Agreement, see “Item 1. Financial Statements—Note 5.”
Share Repurchase Plan
On March 19, 2019, we announced that our board of directors authorized a stock repurchase plan pursuant to which we may repurchase up to $100.0 million under the term loan. Through the third quarter of 2017, we have made prepayments of $25.0 million million towards the term loan. We have not borrowed any amounts under the revolving credit loan. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Blucora, Inc. | Q3 2021 Form 10-Q 42
any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date.
For the nine months ended September 30, 2017 and 2016, respectively. Related to2021, we did not repurchase any shares of our common stock under the Notes, we repurchased $28.4 millionstock repurchase plan. As of the Notes' for cash of $20.7 million during the nine months ended September 30, 2016. For further detail, see "Note 7: Debt"2021, there was approximately $71.7 million in remaining capacity under the stock repurchase plan. As part of the Notesour overall capital allocation strategy, we will assess future share purchases against other alternative uses of capital, which include investments in our businesses, acquiring companies or assets, repurchases of our outstanding debt, and other uses of capital that we deem to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Contractual Obligations and Commitments
Based on advisory asset levels and the achievement of performance goals for the Bellevue facility (as discussed furtherfirst earn-out period, we made the full $30.0 million payment in "Note 5: Restructuring"), purchase commitments with a vendor to provide cloud computation services of $11.3 million over the next four years, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. 2021. The estimated fair value of the portion of the HKFS Contingent Consideration liability related to the second earn-out period (calculated in accordance with the amended HKFS Purchase Agreement and based on estimated advisory asset levels as of June 30, 2022) was $25.4 million as of September 30, 2021. While this amount was calculated in accordance with the fair value guidance contained in Accounting Standards Codification 820, Fair Value Measurements, there are a number of assumptions and estimates factored into this fair value (including a risk-adjusted discount rate), and the actual earn-out payment could differ from the estimated fair value.
Additional information on our Commitmentscontractual obligations and Contingenciescommitments can be found in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Blucora, Inc. | Q3 2021 Form 10-Q 43
Cash Flows
Our cash flows were comprised of the following:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
| Net cash provided by operating activities | $ | 74,391 | $ | 35,314 | $ | 39,077 | |||||||||||
| Net cash used by investing activities | (25,447) | (130,787) | 105,340 | ||||||||||||||
| Net cash provided (used) by financing activities | (14,244) | 160,392 | (174,636) | ||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 34,700 | $ | 64,919 | $ | (30,219) | |||||||||||
| (In thousands) | Nine months ended September 30, | ||||||
| 2017 | 2016 | ||||||
| Net cash provided by operating activities from continuing operations | $ | 79,230 | $ | 88,537 | |||
| Net cash provided by investing activities from continuing operations | 3,283 | 2,225 | |||||
| Net cash used by financing activities from continuing operations | (58,649 | ) | (124,571 | ) | |||
| Net cash provided (used) by continuing operations | 23,864 | (33,809 | ) | ||||
| Net cash provided by discontinued operations | 1,028 | 46,589 | |||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 86 | (15 | ) | ||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 24,978 | $ | 12,765 | |||
Net cash from theoperating activities
Net cash provided by operating activities of continuing operations: Net cash from the operating activities of continuing operations consists of net income from continuing operations,(loss), offset by certain non-cash adjustments, and changes in operating assets and liabilities were as follows:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
| Net income (loss) | $ | 31,451 | $ | (292,055) | $ | 323,506 | |||||||||||
| Non-cash adjustments to net income (loss) | 73,111 | 341,466 | (268,355) | ||||||||||||||
| Operating cash flows before changes in operating assets and liabilities | 104,562 | 49,411 | 55,151 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and disposals | (30,171) | (14,097) | (16,074) | ||||||||||||||
| Net cash provided by operating activities | $ | 74,391 | $ | 35,314 | $ | 39,077 | |||||||||||
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, operating cash flows before changes in operating assets and liabilities increased $55.2 million primarily due to an increase of $39.8 million in the operating income of our working capital.
Changes in operating assets and 2016, respectively.liabilities for the nine months ended September 30, 2021 decreased $16.1 million primarily due to $16.8 million of the total $30.0 million HKFS Contingent Consideration earn-out payment made in the third quarter of 2021. The activityremainder of the $30.0 million payment is included in cash flows from financing activities. In addition, the nine months ended September 30, 2021 also included $12.9 million in payments made to financial professionals in support of ongoing growth programs.
Net cash from investing activities
Net cash from investing activities were as follows:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
| Purchases of property and equipment | $ | (21,624) | $ | (28,711) | $ | 7,087 | |||||||||||
| Business acquisitions, net of cash acquired | $ | — | $ | (102,425) | $ | 102,425 | |||||||||||
| Asset acquisitions, net of cash acquired | (3,823) | — | (3,823) | ||||||||||||||
| Proceeds from sale of a business | — | 349 | (349) | ||||||||||||||
| Net cash used by investing activities | $ | (25,447) | $ | (130,787) | $ | 105,340 | |||||||||||
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, net cash used by investing activities decreased $105.3 million primarily due to the cash outlay of $104.4 million for the HKFS Acquisition in the third quarter of 2020. During the nine months ended September 30, 2021, we paid $3.8 million, including acquisition costs, to complete several asset acquisitions in our Wealth Management business as part of our strategic growth strategy. Capital expenditures decreased $7.1 million in the nine months ended September 30, 2017 included a $1.2 million working capital contribution and approximately $78.0 million of income from continuing operations (offset by non-cash adjustments). The working capital contribution2021 primarily relateddue to the impact of TaxAct's seasonality, HD Vest 2016 prepayments, recognition of deferred revenues in our Tax Preparation segment and restructuring activities.
Blucora, Inc. | Q3 2021 Form 10-Q 44
Net cash from the investingfinancing activities of continuing operations:
Net cash from financing activities were as follows:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
Proceeds from credit facilities, net of debt issuance costs and debt discounts (1) | $ | (502) | $ | 226,278 | $ | (226,780) | |||||||||||
| Payments on credit facilities | (1,359) | (66,078) | 64,719 | ||||||||||||||
| Proceeds from stock option exercises | 535 | 25 | 510 | ||||||||||||||
| Proceeds from issuance of stock through employee stock purchase plan | 1,845 | 1,201 | 644 | ||||||||||||||
| Tax payments from shares withheld for equity awards | (1,613) | (1,034) | (579) | ||||||||||||||
| Acquisition-related contingent consideration payment | (13,150) | — | (13,150) | ||||||||||||||
| Net cash used (provided) by financing activities | $ | (14,244) | $ | 160,392 | $ | (174,636) | |||||||||||
_________________________
(1)The Company amended its Senior Secured Credit Facility in April 2021 to increase the investing activitiesborrowing capacity of continuing operations primarily consistsits revolving line of cash outlays for business acquisitions, transactions (purchases of and proceedscredit from sales and
For the nine months ended September 30, 2016. The activity2021 compared to the nine months ended September 30, 2020, net cash provided by financing activities decreased $174.6 million primarily due to $175.0 million of new borrowings on the Term Loan, in part to fund the HKFS Acquisition, and a net $10.0 million repayment on the Revolver in the nine months ended September 30, 2017 primarily consisted of net cash inflows on our available-for-sale investments of $7.1 million2020. This activity was partially offset by approximately $3.8$13.2 million in purchases of property and equipment. The activitycash outflow in the nine months ended September 30, 2016 consisted of2021 that was a $1.8 million final working capital adjustment on the HD Vest acquisition and $2.6 million in purchases of property and equipment, offset by net cash inflows on our available-for-sale investments of $6.7 million.
Critical Accounting Policies and Estimates
The SEC has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of a company’s financial condition and results of operations and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, current conditions, and on various other assumptions that we believe to be reasonable under the circumstances and, based on information available to us at that time, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. The accounting policies that we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements involve wealth management revenue recognition, tax software revenue recognition, business combinations, and goodwill impairment. We continually update and assess the facts, circumstances, and assumptions used in making both our critical accounting estimates and methodologies for the nine months ended September 30, 2017 are consistent with thosejudgments related to our other significant accounting matters.
There have been no material changes in our critical accounting policies as disclosed under “Critical Accounting Policies and Estimates” in Part II, Item 7 of7A and in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to ourthe financial instruments in which we are exposed to market risk during the nine months ended September 30, 2017, other than related to borrowings2021. As of September 30, 2021, we had $561.8 million in principal amount of debt outstanding under the senior secured credit facility entered intoTerm Loan of our Senior Secured Credit Facility, which carries a degree of interest rate risk. This debt has a floating rate portion of its interest rate tied to LIBOR. For further information on May 22, 2017. We borrowed $375.0 millionour outstanding debt, see “Item 1. Financial Statements—Note 5” and the section “Liquidity and Capital Resources” of
Blucora, Inc. | Q3 2021 Form 10-Q 45
“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the term loan when we entered into the senior secured credit facility, and the interest rate on the term loan is variable at the London Interbank Offered Rate ("LIBOR"), subject to a floor of 1.00%, plus a margin of 3.75%.subheading “Indebtedness.” A hypothetical 100 basis point increase in LIBOR on September 30, 2021 would result in a $3.5$15.1 million increase based upon our September 30, 2017 principal amount, in our annual interest expense until the scheduled maturity date in 2024.
For additional information, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934), the effectiveness of our disclosure controls and procedures as of September 30, 2017.2021. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e)) were effective as of September 30, 2017.2021.
Changes in Internal Control over Financial Reporting
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 9: Commitments and Contingencies" of the Notes to Unaudited Condensed Consolidated“Item 1. Financial Statements in Part I Item 1 of this report.Statements—Note 8” for information on our legal proceedings.
Item 1A. Risk Factors
We believe that there hashave been no material changechanges in itsour risk factors as previously disclosed in theour Annual Report on Form 10-K for the year ended December 31, 2020 other than as follows:
RISKS ASSOCIATED WITH OUR BUSINESSES
Our abilitybusiness could be adversely affected as a result of actions of activist stockholders.
During 2021, we were the target of a proxy contest initiated by an activist stockholder, which required us to comply with all applicable laws, rulesincur significant legal and regulations,consulting costs, proxy solicitation expenses, and interpretations is largely dependent onadministrative and associated costs, and required significant time and attention by our establishmentboard of directors and maintenance of compliance, audit,management.
During the proxy contest, the activist stockholder targeted communications directly to our financial professionals and reporting systems and procedures, as well asemployees. As a result, it may be more difficult for us to pursue our ability tostrategic initiatives or attract and retain financial professionals and qualified compliance, audit,employees and risk management personnel. While we have adopted systems, policies, and procedures reasonably designed to comply or facilitate compliance with all applicable laws, rules and regulations, and interpretations, these systems, policies, and procedures may not be fully effective. There can be no assurance that we will not be subject to investigations, claims, or other actions or proceedings by regulators or third-parties with respect to our past or future compliance with applicable laws, rules, and regulations, the outcomebusiness partners, any of which may have a material adverse effect on our financial condition and results of operations.
We incurred debthave, and may in the future, become party to litigation as a result of matters arising in connection with the repaymentproxy contest, which could serve as a distraction to our board of our credit facility used for the acquisition of HD Vestdirectors and the redemption of our convertible senior notesmanagement and maycould require us to incur future debt, which may materially and adversely affect our financial condition and future financial results.significant additional costs.
Blucora, Inc. | Q3 2021 Form 10-Q 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the nine months ended September 30, 2021, we did not repurchase any shares of our common stock under the stock repurchase plan. As of September 30, 2021, there was approximately $71.7 million in remaining capacity under the stock repurchase plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Blucora, Inc. | Q3 2021 Form 10-Q 47
Item 6. Exhibits
| Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number | Filed Herewith | |||||||||||||||||||||||||||
| 2.1# | 8-K | March 19, 2019 | 2.1 | |||||||||||||||||||||||||||||
| 2.2# | 8-K | July 1, 2020 | 2.1 | |||||||||||||||||||||||||||||
| 2.3 | 8-K | July 2, 2021 | 2.1 | |||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32.1* | X | |||||||||||||||||||||||||||||||
| 32.2* | X | |||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company's Form 10-Q for the fiscal quarter ended September 30, 2021, formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Unaudited Condensed Consolidated Statements of Stockholders' Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||
____________________________
#Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Blucora, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
*The Company moved its headquarters moved to Irving, Texas from Bellevue, Washington in June 2017,certifications attached as Exhibits 32.1 and Eric M. Emans,32.2 are not deemed filed with the Company's Chief Financial Officer, has decidedSecurities and Exchange Commission and are not to relocate withbe incorporated by reference into any filing of Blucora, Inc. under the Company. Consequently, on October 23, 2017, Mr. Emans informedSecurities Act of 1933, as amended, or the Company that he intends to resign effectiveSecurities Exchange Act of 1934, as of November 1, 2017. Upon his termination of employment, Mr. Emans will receive severance compensation in accordance with his Amended and Restated Employment Agreement, which was filed as Exhibit 10.4 toamended, whether made before or after the Company’s Form 10-Q on October 27, 2016.
Blucora, Inc. | Q3 2021 Form 10-Q 48
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number | Filed Herewith | |||||
| 10.1 | 8-K | September 5, 2017 | 10.1 | |||||||
| 10.2 | X | |||||||||
| 31.1 | X | |||||||||
| 31.2 | X | |||||||||
| 32.1 | X | |||||||||
| 32.2 | X | |||||||||
| 101 | The following financial statements from the Company's 10-Q for the fiscal quarter ended September 30, 2017, formatted in XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements | X | ||||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BLUCORA, INC. | ||||||||
| /s/ Marc Mehlman | ||||||||
Marc Mehlman Chief Financial Officer (On behalf of the Principal Financial Officer) | ||||||||
| Date: | ||||||||
Blucora, Inc. | Q3 2021 Form 10-Q 49