BLUCORA, INC.
BLUCORA, INC.
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.notes.
Blucora, Inc. | Q3 2022 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 two 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. and its subsidiaries ("HD Vest"). HDV Holdings, Inc. is the parent company of theAvantax 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 and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in order to provide their consumer and owns all outstanding shares of HD Vest, Inc., which servessmall business clients with holistic financial planning and advisory services, as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), HD Vest Advisorywell as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (a registered investment advisor),(“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and HD Vest Insurance Agency, LLC (an insurance broker) (collectively referredsubsequently rebranded it in order to as the "Wealth Management business" or the "Wealth Management segment"). The create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.
Tax PreparationSoftware
Our 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 and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to asand its mobile applications.
Our Tax Software segment is highly seasonal with a significant portion of its annual revenue typically earned in the "Tax Preparation business" or the "Tax Preparation segment").
Prior to 2017, the Company also operated an internet Search and Content business and an E-Commerce business through 2016. The Search and Content business operated through the InfoSpace LLC subsidiary ("InfoSpace"), and the E-Commerce business consistedfirst two quarters of the operations of Monoprice, Inc. ("Monoprice").
On October 14, 2015,fiscal year. During the Company announced its plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxActthird and HD Vest (see "Note 3: Business Combinations") and the divestituresfourth quarters of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part offiscal year, the Strategic Transformation and "One Company"Tax Software segment typically reports losses because revenue from the segment is minimal while core operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is expected to be completed by early 2018.expenses continue.
Segments:The Company hasSegments
We have two reportable segments: (1) the Wealth Management segment and (2) the Tax PreparationSoftware segment.
Reclassification: The Company reclassified certain amounts on its consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" for additional information.
Note 2: Summary of Significant Accounting Policies
Interim financial information:Financial Information
The accompanying unaudited 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 condensed 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 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, 2016.2021. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents,Blucora, Inc. | Q3 2022 Form 10-Q 9
A summary of our significant accounting policies is included in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our significant accounting policies since December 31, 2021.
Note 3: Segment Information and restricted cash: The following table presents cash, cash equivalents,Revenue
We have two reportable segments: (1) the Wealth Management segment and restricted cash(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, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy, transaction and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.
Information on reportable segments currently presented to our chief operating decision maker and a reconciliation to consolidated net income (loss) are presented below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue: | | | | | | | |
Wealth Management | $ | 165,032 | | | $ | 169,135 | | | $ | 494,104 | | | $ | 486,021 | |
Tax Software | 6,664 | | | 5,039 | | | 242,028 | | | 220,848 | |
Total revenue | 171,696 | | | 174,174 | | | 736,132 | | | 706,869 | |
Operating income (loss): | | | | | | | |
Wealth Management | 27,626 | | | 19,564 | | | 59,920 | | | 60,356 | |
Tax Software | (12,517) | | | (13,864) | | | 99,372 | | | 100,472 | |
Corporate-level activity | (28,927) | | | (25,982) | | | (77,282) | | | (102,255) | |
Total operating income (loss) | (13,818) | | | (20,282) | | | 82,010 | | | 58,573 | |
Interest expense and other, net | (9,749) | | | (8,295) | | | (25,707) | | | (24,202) | |
Income (loss) before income taxes | (23,567) | | | (28,577) | | | 56,303 | | | 34,371 | |
Income tax benefit (expense) | 1,726 | | | 774 | | | (4,099) | | | (2,920) | |
Net income (loss) | $ | (21,841) | | | $ | (27,803) | | | $ | 52,204 | | | $ | 31,451 | |
Blucora, Inc. | Q3 2022 Form 10-Q 10
Wealth Management Revenue Recognition
Wealth management revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue.
Revenues by major category within the Wealth Management segment and the timing of Wealth Management revenue recognition was as reportedfollows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Recognized upon transaction: | | | | | | | |
Commission | $ | 17,868 | | | $ | 22,372 | | | $ | 56,373 | | | $ | 65,815 | |
Transaction and fee | 1,307 | | | 1,213 | | | 3,813 | | | 3,779 | |
Total revenue recognized upon transaction | $ | 19,175 | | | $ | 23,585 | | | $ | 60,186 | | | $ | 69,594 | |
Recognized over time: | | | | | | | |
Advisory | $ | 95,070 | | | $ | 103,540 | | | $ | 306,394 | | | $ | 291,167 | |
Commission | 23,920 | | | 30,589 | | | 75,905 | | | 91,382 | |
Asset-based | 21,147 | | | 5,659 | | | 33,774 | | | 16,514 | |
Transaction and fee | 5,720 | | | 5,762 | | | 17,845 | | | 17,364 | |
Total revenue recognized over time | $ | 145,857 | | | $ | 145,550 | | | $ | 433,918 | | | $ | 416,427 | |
Total Wealth Management revenue: | | | | | | | |
Advisory | $ | 95,070 | | | $ | 103,540 | | | $ | 306,394 | | | $ | 291,167 | |
Commission | 41,788 | | | 52,961 | | | 132,278 | | | 157,197 | |
Asset-based | 21,147 | | | 5,659 | | | 33,774 | | | 16,514 | |
Transaction and fee | 7,027 | | | 6,975 | | | 21,658 | | | 21,143 | |
Total Wealth Management revenue | $ | 165,032 | | | $ | 169,135 | | | $ | 494,104 | | | $ | 486,021 | |
Tax Software Revenue Recognition
We generate Tax Software revenue from the sale of digital tax preparation services, packaged tax preparation software, ancillary services, and multiple element arrangements that may include a combination of these items.
Revenues by major category within the Tax Software segment and the timing of Tax Software revenue recognition was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Recognized upon transaction: | | | | | | | |
Consumer | $ | 5,974 | | | $ | 4,479 | | | $ | 222,198 | | | $ | 203,891 | |
Professional | 525 | | | 370 | | | 16,473 | | | 14,626 | |
Total revenue recognized upon transaction | $ | 6,499 | | | $ | 4,849 | | | $ | 238,671 | | | $ | 218,517 | |
Recognized over time: | | | | | | | |
Consumer | $ | — | | | $ | — | | | $ | 64 | | | $ | — | |
Professional | 165 | | | 190 | | | 3,293 | | | 2,331 | |
Total revenue recognized over time | $ | 165 | | | $ | 190 | | | $ | 3,357 | | | $ | 2,331 | |
Total Tax Software revenue: | | | | | | | |
Consumer | $ | 5,974 | | | $ | 4,479 | | | $ | 222,262 | | | $ | 203,891 | |
Professional | 690 | | | 560 | | | 19,766 | | | 16,957 | |
Total Tax Software revenue | $ | 6,664 | | | $ | 5,039 | | | $ | 242,028 | | | $ | 220,848 | |
Note 4: Asset Acquisitions
During the nine months ended September 30, 2022, we completed acquisitions in our Wealth Management business that met the criteria to be accounted for as asset acquisitions. Total initial purchase consideration,
Blucora, Inc. | Q3 2022 Form 10-Q 11
including acquisition costs and fixed deferred payments, was $4.1 million. This purchase consideration was allocated to the acquired assets, primarily customer relationship intangibles. Customer relationship intangibles are amortized on thea straight-line basis over an amortization period of 15 years.
We are subject to variable contingent consideration payments related to our asset acquisitions that are not recognized as a liability on our condensed consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):
|
| | | | | | | | | | | | | | | |
| 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 segregated bank account for the exclusive benefit of the Company’s Wealth Management business customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking arrangements.
Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Cash equivalents and debt securities are classified within Level 2 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values them utilizing market observable inputs. Unrealized gains and losses are included in "Accumulated other comprehensive income (loss)" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company has a contingent consideration liability that isuntil all contingencies related to the Company's 2015 acquisitionachievement of SimpleTax Software Inc. ("SimpleTax") and is classified within Level 3 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment,future financial targets are resolved and the discount rate. The change inconsideration is payable. As of September 30, 2022, the fair value of themaximum future fixed and contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.payments associated with all prior asset acquisitions were $23.7 million, with specified payment dates from 2022 through 2026.
Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.
For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs that impact the following areas:
Revenue recognition - In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning
after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company will adopt the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this ASU as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company expects that the adoption of this ASU will not have a material impact to its consolidated financial statements, including the presentation of revenues in the statement of comprehensive income.
Leases (ASU 2016-02) - In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or less, will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
Stock-based compensation (ASU 2016-09) - In March 2016, the FASB issued an ASU on employee share-based payment accounting. The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital. In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period. Cash flows related to excess tax benefits will be included as an operating activity, and no longer classified as a financing activity, in the statement of cash flows. This guidance was effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense was effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition was effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance was effective on a retrospective or prospective basis.
The Company implemented this ASU on January 1, 2017 and recorded a cumulative-effect adjustment of $51.5 million to credit retained earnings for deferred tax assets related to net operating losses that arose from excess tax benefits, which the Company has deemed realizable. In addition to this:
At the time of adoption and on a prospective basis, the primary impact of adoption was the recognition of excess tax benefits and deficiencies, including deferred tax assets related to net operating losses that arose from excess tax benefits which the Company has deemed realizable, in the income tax provision (rather than in additional paid-in capital). This caused income taxes to differ from taxes at the statutory rates in 2017. ForDuring the three months ended September 30, 2017,2022, variable contingent consideration related to prior asset acquisitions became payable for approximately $1.5 million, which is included within the Company recognized an estimated $7.0$23.7 million increase to the income tax provision, which resulted in a $7.0 million decrease to income from continuing operationsdiscussed above. This accrued consideration is within customer relationship intangibles and net income attributable to Blucora, a $0.15 decrease to basic earnings per share, and a $0.15 decrease to diluted earnings per share. For the nine months ended September 30, 2017, the Company recognized an estimated $0.4 million increase to the income tax provision, which resulted in a $0.4 million decrease to income from continuing operations and net income attributable to Blucora, a $0.01 decrease to basic earnings per share, and a $0.01 decrease to diluted earnings per share.
The Company applied the cash flow presentation guidance on a retrospective basis, restating the consolidated statements of cash flows to present excess tax benefits as an operating activity (rather than a financing activity). For the 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. For the nine months ended September 30, 2016, this resulted 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 for 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.
The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur. The cash flow presentation requirements for payments made to tax authorities on an employee's
behalf had no impact to any periods presented, since such cash flows historically have been presented as a financing activity. The Company is not planning to change tax withholdings and will continue to estimate forfeitures in determining the amount of compensation costexpected to be recognized in each period.
Statement of cash flows and restricted cash (ASU 2016-18) - In November 2016, the FASB issued an ASU on the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that the statement of cash flows explains the changepaid during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. The guidance is effective on a retrospective basis. The Company elected to early adopt this guidance as of January 1, 2017. The reclassification was not material to the periods presented and had no impact on total cash flows, income from continuing operations, or net income attributable to Blucora for the periods presented. See the "Cash, cash equivalents, and restricted cash" section of this note for additional information.
Note 3: Business Combinations
HD Vest: On December 31, 2015 and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for $613.7 million, after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and their clients. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The Purchase Agreement dictated that the Company placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.
Note 4: Discontinued Operations
On November 17, 2016, the Company closed on an agreement with YFC-Boneagle Electric Co., Ltd. ("YFC"), under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. Of this amount, $39.5 million was received in the fourth quarter of 2016 and $1.0 million was received in the second quarter of 2017--both amounts were included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.2022.
On August 9, 2016, the Company closed on an agreement with OpenMail LLC ("OpenMail"), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment, and was included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.
Summarized financial information for discontinued operations is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| 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
The following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of corporate headquarters to Irving, Texas as part of the Strategic Transformation:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that are payable at termination dates throughout 2017, with the majority paid in the second half of 2017. Contract termination costs and fixed asset impairments were incurred in connection with the Bellevue facility's operating lease and related fixed assets, which are described further in the next two paragraphs, respectively. Stock-based compensation primarily includes the impact of equity award modifications associated with employment contracts for certain individuals impacted by the relocation, as well as forfeitures that were recorded for severed employees. Other costs include office moving costs.
The Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease. Under that sublease agreement, the Company will not recover all of its remaining lease rental obligations (including common area maintenance costs and real estate taxes) and, therefore, recognized a loss on sublease of $1.1 million. See "Note 9: Commitments and Contingencies" for additional information on the sublease. The Company also wrote-off its $1.5 million deferred rent liability (a non-cash item), related to various lease incentives that had been provided originally by the landlord, and incurred broker commissions related to the sublease agreement. All of these items were recorded as contract termination costs in the first quarter of 2017.
The Company began receiving sublease offers in the first quarter of 2017, at which point it was indicated that the remaining lease rental obligations, and the related value for the leasehold improvements and the office furniture and equipment, would not be fully recovered. As a result and given the nature of these fixed assets, the Company fully impaired the $1.9 million carrying value of those assets in the first quarter of 2017.
Note 6: Fair Value Measurements
In accordance with ASC 820, "Fair Value Measurements and Disclosures", certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| |
| 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 |
|
A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
|
| | | |
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 |
|
The contingent consideration liability is related to the Company's 2015 acquisition of SimpleTax. The full contractual obligation under the contingent consideration arrangement was accrued during the year ended December 31, 2016. Payments are contingent upon product availability and revenue performance over a three-year period ending December 31, 2018 and are expected to occur annually over that period. The first payment was made in the first quarter of 2017 and classified as a financing activity on the consolidated statements of cash flows. The remaining payments are expected through 2019. The foreign currency transaction loss was included in "Other loss, net" on the consolidated statements of comprehensive income. As of September 30, 2017, $1.3 million of the contingent consideration liability was included in "Accrued expenses and other current liabilities" and $1.4 million in "Other long-term liabilities" on the consolidated balance sheets.
The contractual maturities of the debt securities classified as available-for-sale at December 31, 2016 were less than one year.
The cost and fair value of available-for-sale investments were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Balance as of December 31, 2016 | $ | 7,102 |
| | $ | — |
| | $ | (1 | ) | | $ | 7,101 |
|
The Company had non-recurring Level 3 fair value measurements in 2017 and 2016 related to the redemption and repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.
Note 7: Debt
The Company’sOur debt consisted of the following as of the periods indicated in the table below (in thousands): | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | |
| Senior Secured Credit Facility | | | | |
Principal outstanding | $ | 525,438 | | | $ | 561,344 | | | | | |
Unamortized debt issuance costs | (2,289) | | | (3,371) | | | | | |
Unamortized debt discount | (2,055) | | | (3,027) | | | | | |
Net carrying value | $ | 521,094 | | | $ | 554,946 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
Senior secured credit facility: OnIn May 22, 2017, Blucorawe entered into ana credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders that provides for the purposesa term loan facility (the “Term Loan”) and a revolving line of refinancing the credit facility previously entered into in 2015 for the purposes of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"), redeeming its Convertible Senior Notes that were outstanding at the time (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 general business purposes (as amended, the “Senior Secured Credit Facility”). The Term Loan has a $375.0maturity date of May 22, 2024 (the “Term Loan Maturity Date”). On April 26, 2021, to ensure adequate liquidity and flexibility to support the Company’s 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 $90.0 million in revolving credit facility.commitments (the “New Revolver”). The finalNew Revolver has a maturity datesdate of February 21, 2024 (the “New Revolver Maturity Date”).
The Company capitalized approximately $0.5 million of debt issuance costs paid in connection with the Credit Agreement Amendment, which are included in other long-term assets on the Company’s condensed consolidated balance sheets as part of the revolving credit loan and term loan are May 22,total deferred financing costs associated with the New Revolver.
As of September 30, 2022, and May 22, 2024, respectively. Obligationswe had $525.4 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.
Blucora borrowed $375.0 millionno amounts outstanding under the termNew Revolver. Based on aggregate loan when it entered intocommitments as of September 30, 2022, approximately $90.0 million was available for future borrowings under the senior secured credit facility. PrincipalSenior Secured Credit Facility, subject to customary terms and conditions.
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 initialTerm Loan due on the Term Loan Maturity Date. On August 5, 2022, and as provided for within our Senior Secured Credit Facility, we voluntarily prepaid $35.0 million of principal outstanding principal. under our Term Loan. At our election, this prepayment was first applied to the remaining quarterly principal amortization payments due on the Term Loan, with the remaining amount applied to the principal amount due at the Term Loan Maturity Date. In connection with this prepayment, we recorded a $0.2 million loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and debt discount associated with the principal repaid. This loss is included within “Interest expense and other, net” of the condensed consolidated statements of operations.
Blucora, Inc. | Q3 2022 Form 10-Q 12
The interest rate on the term loanTerm Loan is variable at the London Interbank Offered Rate ("LIBOR"), subject(subject to a floor of 1.00%1.0%), plus athe applicable interest rate margin
of 3.75%, payable at4.0% for Eurodollar Rate Loans (as defined in the endCredit Agreement) and 3.0% for ABR Loans (as defined in the Credit Agreement). As of each interest period. Through September 30, 2017, Blucora has made prepayments of $25.0 million towards2022, the term loan.
Blucora may borrow under the revolving credit loan in an aggregate principal amount not less than $2.0 million or any whole multiple of $1.0 million in excess thereof. Principal payments on the revolving credit loan are payable at maturity. Theapplicable interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 3.00%Term Loan was 6.3%. Subsequent drawsDepending on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 3.00%. In each case, the applicable margin within the range depends upon Blucora's Consolidated First Lien Net Leverage Ratio (as defined in the credit agreementCredit 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 credit facility) overundrawn commitment under the previous four quarters.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. Blucora has not borrowed any amountsperiod, typically quarterly.
Obligations under the revolving credit loan.
Blucora has the right to permanently reduce and/or prepay, without premium or penalty (other than customary LIBOR breakage costs), the entire credit facility at any time or portionsSenior Secured Credit Facility are guaranteed by certain of the credit facility in an aggregate principal amount not less than $5.0 million ($2.0 millionCompany’s subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the caseacquisition of prepayments) or any whole multiple of $1.0 million in excess thereof, except for prepayments through November 22, 2017, which require a prepayment of a premium equal to 1.00% of the total principal amount prepaid. Beginning on December 31, 2018, Blucora will be required to make annual prepayments ifAvantax Planning Partners and certain levels of cash flow are achieved.
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, Blucora2022, (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 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 financial and operating covenants.
AsSenior Secured Credit Facility as of September 30, 2017,2022.
Note 6: Leases
Our leases are primarily related to office space and are classified as operating leases. Operating lease cost, net of sublease income, is recognized in “General and administrative” expense for those net costs related to leases used in our operations and within “Acquisition and integration” expense for those net costs related to an unoccupied lease assumed in a previous acquisition on the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
In connection with the refinancing, the Company performed an analysis by creditor and determined that the refinancing qualified as an extinguishment. As a result, the Company recognized a loss on debt extinguishment during the three months ended June 30, 2017, which was recorded in "Other loss, net" on thecondensed consolidated statements of comprehensiveoperations.
Operating lease cost, net of sublease income, and cash paid on operating lease liabilities for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Fixed lease cost | $ | 965 | | | $ | 1,001 | | | $ | 2,885 | | | $ | 3,254 | |
Variable lease cost | 258 | | | 462 | | | 1,023 | | | 707 | |
Operating lease cost, before sublease income | 1,223 | | | 1,463 | | | 3,908 | | | 3,961 | |
Sublease income | (235) | | | (116) | | | (703) | | | (348) | |
Total operating lease cost, net of sublease income | $ | 988 | | | $ | 1,347 | | | $ | 3,205 | | | $ | 3,613 | |
| | | | | | | |
Additional lease information: | | | | | | | |
Cash paid on operating lease liabilities | $ | 1,297 | | | $ | 602 | | | $ | 3,788 | | | $ | 1,047 | |
Lease liabilities obtained from new right-of-use assets | $ | 262 | | | $ | — | | | $ | 390 | | | $ | 93 | |
Blucora, Inc. | Q3 2022 Form 10-Q 13
Right-of-use assets and operating lease liabilities were recorded on the condensed consolidated balance sheets as follows (in thousands): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Right-of-use assets, net | $ | 19,753 | | | $ | 20,466 | |
| | | |
Current lease liabilities | $ | 5,112 | | | $ | 4,896 | |
Long-term lease liabilities | 31,176 | | | 33,267 | |
Total operating lease liabilities | $ | 36,288 | | | $ | 38,163 | |
| | | |
Weighted-average remaining lease term (in years) | 9.7 | | 10.3 |
Weighted-average discount rate | 5.4 | % | | 5.4 | % |
The maturities of our operating lease liabilities as of September 30, 2022 were as follows (in thousands): | | | | | | | | | |
| | | | | |
Undiscounted cash flows: | | | | | |
Remainder of 2022 | $ | 1,307 | | | | | |
2023 | 5,289 | | | | | |
2024 | 5,184 | | | | | |
2025 | 5,086 | | | | | |
2026 | 4,256 | | | | | |
Thereafter | 26,172 | | | | | |
Total undiscounted cash flows | 47,294 | | | | | |
Imputed interest | (11,006) | | | | | |
Present value of cash flows | $ | 36,288 | | | | | |
Note 7: Balance Sheet Components
Prepaid expenses and other current assets consisted of the following (in thousands): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Prepaid expenses | $ | 10,640 | | | $ | 13,138 | |
| | | |
| | | |
Forgivable loans | 5,670 | | | 4,316 | |
Other current assets | 3,360 | | | 1,022 | |
Total prepaid expenses and other current assets | $ | 19,670 | | | $ | 18,476 | |
|
| | | |
Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility | $ | 9,593 |
|
Loss on debt extinguishment - Convertible Senior Notes | 6,715 |
|
Total loss on debt extinguishment | $ | 16,308 |
|
The amount for the TaxAct - HD Vest 2015 credit facility included the write-offAccrued expenses and other current liabilities consisted of the remaining unamortized discount and debt issuance costs. following (in thousands): | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Salaries and related benefit expenses | $ | 20,446 | | | $ | 26,417 | |
HKFS Contingent Consideration liability (1) | — | | | 28,300 | |
| | | |
| | | |
Accrued legal costs | 996 | | | 2,871 | |
Accrued vendor and advertising costs | 4,812 | | | 3,777 | |
Accrued taxes | 2,785 | | | — | |
Accrued fixed and variable acquisition consideration | 2,414 | | | 837 | |
Other | 2,495 | | | 3,476 | |
Total accrued expenses and other current liabilities | $ | 33,948 | | | $ | 65,678 | |
__________________________(1)For the Notes, the Company allocated the cash paid first to the liability component of the Notes basedmore information on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principalCompany’s contingent liabilities, see "Note 8—Commitments and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair valueContingencies."
Blucora, Inc. | Q3 2022 Form 10-Q 14
Note 8: Commitments and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.Contingencies
TaxAct - HD Vest 2015 credit facility: The Company had repayment activity of $64.0 million and $105.0 million during the nine months ended September 30, 2017 and 2016, respectively. These repayments resulted in the acceleration of a portion of the unamortized discount and debt issuance costs, which were recorded in "Other loss, net" on the consolidated statements of comprehensive income.HKFS Contingent Consideration Liability
Convertible Senior Notes: In June 2017, the Company redeemed almost all of the outstanding Notes for cash with proceeds from the senior secured credit facility.
During the nine months ended September 30, 2016, the Company repurchased $28.4 million of the Notes for cash of $20.7 million. Similar to the analysis performed for the Notes that were redeemed in June 2017, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
The following table sets forth total interest expense, prior to the refinancing, related to the Notes (in thousands):
|
| | | | | | | | | | | | | | | |
| 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 |
|
Note payable, related party: The note payable is with the former President of HD Vest and arose in connection withOn July 1, 2020, we closed the acquisition of HD Vest. Certain membersAvantax Planning Partners, formerly “HKFS”, for an upfront cash purchase price of HD Vest management rolled over$104.4 million. The purchase price was subject to variable contingent consideration, or earn-out payments (the “HKFS Contingent Consideration”) totaling a portionmaximum of $60.0 million.
The amounts owed for the HKFS Contingent Consideration were determined based on advisory asset levels (i) for the period beginning July 1, 2020 and ending June 30, 2021 and (ii) for the period beginning July 1, 2021 and ending June 30, 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 were required to pay for each earn-out period was $30.0 million. If the asset market values on the applicable measurement date fell below certain specified thresholds, no payment of consideration was owed to the Sellers for such period.
Based on advisory asset levels for each earn-out period, we paid the full $30.0 million to the Sellers in the third quarter of 2021 for the first earn-out, and $23.0 million in the third quarter of 2022 for the second earn-out. There are no remaining contingent payments due to the Sellers as of September 30, 2022. For additional information on the valuation of the proceeds they wouldHKFS Contingent Consideration liability, see "Note 9—Fair Value Measurements."
Litigation
From time to time, we are subject to various legal proceedings, regulatory matters or fines, or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although we believe that resolving such claims, individually or in aggregate, will not have otherwise received at the acquisition's closing into sharesa material adverse impact on our financial statements, these matters are subject to inherent uncertainties.
We are not currently a party to any such matters for which we have recognized a material liability on our condensed consolidated balance sheet as of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The former President of HD Vest sold a portion of his shares to the Company in exchange for the note. The note will be paid over a three-year period, with 50% paid in year one ($3.2 million was paid in December 2016), 40% paid in year two, 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.
Note 8: Redeemable Noncontrolling Interests
A reconciliation of redeemable noncontrolling interests is as follows (in thousands):
|
| | | |
Balance as of December 31, 2016 | $ | 15,696 |
|
Net income attributable to noncontrolling interests | 466 |
|
Balance as of September 30, 2017 | $ | 16,162 |
|
The redemption amount at September 30, 2017 was $12.4 million.2022.
We have entered into indemnification agreements in the ordinary course of business with our officers and directors. Pursuant to these agreements, we may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to our obligations under these indemnification agreements and applicable Delaware law.
Note 9: Fair Value Measurements
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 2022 Form 10-Q 15
Assets and Liabilities Measured on a Recurring Basis
The fair value hierarchy of our financial assets and liabilities carried at estimated fair value and measured on a recurring basis were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair value measurements at the reporting date using |
| September 30, 2022 | | 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 | $ | 4,327 | | | $ | 4,327 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
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Deferred compensation assets | 4,292 | | | 4,292 | | | — | | | — | |
Total assets at fair value | $ | 8,619 | | | $ | 8,619 | | | $ | — | | | $ | — | |
| | | | | | | |
HKFS Contingent Consideration liability | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Deferred compensation liabilities | 4,292 | | | 4,292 | | | — | | | — | |
Total liabilities at fair value | $ | 4,292 | | | $ | 4,292 | | | $ | — | | | $ | — | |
| | | | | | | |
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| | | Fair value measurements at the reporting date using |
| December 31, 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 | $ | 28,300 | | | $ | — | | | $ | — | | | $ | 28,300 | |
Total liabilities at fair value | $ | 28,300 | | | $ | — | | | $ | — | | | $ | 28,300 | |
Cash equivalents are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets.
We offer non-qualified deferred compensation plans to our executive officers, board of directors, and certain independent financial professionals. Participants in these plans direct the investment of their accounts among the available investment options, which are generally the same as those available under our 401(k) plan. We have elected to fund these obligations through a rabbi trust which mirrors the investment elections made by participants. The assets in the rabbi trust are held for the purpose of satisfying our obligations to participants, however, remain subject to the claims of our creditors in the event we become insolvent. Our obligations and corresponding investments held under these non-qualified deferred compensation plans primarily consist of money market and mutual funds and are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets. These investments, and the corresponding deferred compensation liabilities, are included within “Other long-term assets” and “Other long-term liabilities”, respectively, on the condensed consolidated balance sheets.
The HKFS Contingent Consideration liability relates to post-closing earn-out payments resulting from the acquisition of Avantax Planning Partners, formerly “HKFS” (see “Note 8—Commitments and Contingencies
Significant events during the period covered by this Quarterly Report on Form 10-Q, outsideContingencies”). The final value of the ordinary coursesecond earn-out was $23.0 million as of the Company’s business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of $3.8 million primarily related to the sublease agreementJune 30, 2022 (the measurement date for the Bellevue facility (as discussed further in "Note 5: Restructuring"), purchase commitments with a vendor to provide cloud computation services of $11.3 million over the next four years,second earn-out payment) and a commitment to switch to a new clearing firm provider that has been selected by the Company bywas paid during the third quarter of 2018. Additional information on2022. Prior to this measurement date, the Company’s Commitmentsestimated fair value of the HKFS Contingent Consideration liability was determined using a Monte Carlo simulation model and Contingencies can be found in the Company’scertain Level 3 inputs previously disclosed within our Annual Report on Form 10-K for the year ended December 31, 2016.2021. The HKFS Contingent Consideration liability was previously included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets.
Litigation: From time to time,Blucora, Inc. | Q3 2022 Form 10-Q 16
A roll forward of the CompanyHKFS Contingent Consideration liability is subject to various legal proceedings or claims that ariseas follows (in thousands): | | | | | |
| HKFS Contingent Consideration liability |
| |
| |
| |
Balance as of December 31, 2020 | $ | 35,900 | |
Change in fair value | 22,400 | |
HKFS Contingent Consideration first earn-out payment | (30,000) | |
Balance as of December 31, 2021 | 28,300 | |
Change in fair value | (5,320) | |
HKFS Contingent Consideration second earn-out payment | (22,980) | |
Balance as of September 30, 2022 | $ | — | |
Changes in the ordinary coursefair value of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurredthis contingent consideration are reflected in “Acquisition and integration” on the condensed consolidated statements of operations.
Fair Value of Financial Instruments
We consider the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, financial professional loans, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
As of September 30, 2022, the Term Loan’s principal amount was $525.4 million, and the amount of loss can be reasonably estimated. The following is a brief descriptionfair value of the more significant legal proceedings. AlthoughTerm Loan’s principal amount was $520.2 million. As of December 31, 2021, 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.
On December 12, 2016, a shareholder derivative actionTerm Loan’s principal amount was filed by Jeffrey Tilden against$561.3 million, and the Company, as a nominal defendant, Andrew Snyder, who was a directorfair value of the Company at that time, certain companies affiliated with Mr. Snyder, a former officerTerm Loan’s principal amount was $559.9 million. The fair value of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Blucora Board of Directors, in the Superior Court of the State of California in and for the County of San Francisco. The complaint asserts claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint assertsTerm Loan’s principal amount was based on Level 2 inputs from a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserts a claim for insider trading against Mr. Snyder, a former officer of the Company, and certain companies affiliated with Mr. Snyder. The derivative action does not seek monetary damages from the Company. The complaint seeks corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.third-party market quotation.
On March 10, 2017, the Company filed a motion to dismiss for improper venue as a result of a forum selection provision in the Company’s bylaws that required the plaintiff to file his derivative fiduciary duty claims in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the Company's motion to dismiss. The case has been stayed by the Court until November 22, 2017, after which the case will be dismissed without further order of the Court.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 10: Stockholders’ EquityInterest Expense and Other, Net
Stock-based compensation: The Company included“Interest expense and other, net” on the following amounts for stock-based compensation expense, which related to stock options, restricted stock units ("RSUs"), and the Company’s employee stock purchase plan ("ESPP"), in thecondensed consolidated statements of comprehensive incomeoperations consisted of the following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest expense | $ | 8,771 | | | $ | 7,304 | | | $ | 23,166 | | | $ | 21,789 | |
Amortization of debt issuance costs | 403 | | | 388 | | | 1,191 | | | 1,128 | |
Amortization of debt discount | 302 | | | 290 | | | 893 | | | 851 | |
Total interest expense | 9,476 | | | 7,982 | | | 25,250 | | | 23,768 | |
Interest income and other | 273 | | | 313 | | | 457 | | | 434 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest expense and other, net | $ | 9,749 | | | $ | 8,295 | | | $ | 25,707 | | | $ | 24,202 | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
Note 11: Income TaxesInFor 2022, our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the second quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate does not include the effects of 2017,discrete events that may occur during the Company granted 350,000 non-qualified stock options to certain HD Vest financial advisors, who are considered non-employees. These stock options vest fully three years fromyear. The effect of these events, if any, is recorded in the datequarter in which the event occurs.
We recorded an income tax benefit of grant. The Company used the Black-Scholes-Merton valuation method to calculate stock-based compensation, using assumptions$1.7 million and income tax expense of $4.1 million for the risk-free interest rate, expected dividend yield, expected volatility, and expected life under the same methodology that is used for employee grants. Since these are non-employee grants, stock-based compensation expense will be remeasured at the end of each quarter. For the three and nine months ended September 30, 2017, stock-based compensation expense for these non-employees was $0.42022, respectively. We recorded an income tax benefit of $0.8 million and $0.5income tax expense of $2.9 million respectively,for the three and was recorded in "Cost of revenue" onnine months ended September 30, 2021, respectively.
Our effective income tax rate for the consolidated statements of comprehensive income.
Total net shares issued for stock options exercised, RSUs vested,three and shares purchased pursuantnine months ended September 30, 2022 and September 30, 2021 differed from the 21% statutory rate primarily due to the ESPP were as follows (in thousands):
|
| | | | | | | | | | | |
| 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 |
|
Note 11: Segment Information
The Company has two reportable segments: the Wealth Management segmentrelease of valuation allowances and the Tax Preparation segment.effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The former Searchmajority of these net operating losses will either be utilized or expire between 2022 and Content and E-Commerce segments are included in discontinued operations. The Company’s Chief Executive Officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
Information on reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):2024.
Blucora, Inc. | Q3 2022 Form 10-Q 17
|
| | | | | | | | | | | | | | | |
| 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 | ) |
Revenues by major category within each segment are presented below (in thousands):
|
| | | | | | | | | | | | | | | |
| 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
"“Basic net income (loss) per share"share” is computedcalculated using the weighted average number of common shares outstanding during the applicable period. "Diluted“Diluted net income (loss) per share"share” is computedcalculated using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the applicable period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and the vesting of unvested RSUs.outstanding restricted stock units using the treasury stock method. Cash-settled restricted stock units are not settled in common shares and are therefore excluded from dilutive potential common shares. Dilutive potential common shares are excluded from the computationcalculation of earningsdiluted net income (loss) per share if their effect is antidilutive. Certain of our performance-based restricted stock units are considered contingently issuable shares and are excluded from the diluted weighted average common shares outstanding computation because the related performance-based criteria were not achieved as of the end of the reporting period.
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, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income (loss) | $ | (21,841) | | | $ | (27,803) | | | $ | 52,204 | | | $ | 31,451 | |
Denominator: | | | | | | | |
Basic weighted average common shares outstanding | 47,847 | | | 48,707 | | | 47,981 | | | 48,492 | |
Dilutive potential common shares (1) | — | | | — | | | 1,172 | | | 881 | |
Diluted weighted average common shares outstanding | 47,847 | | | 48,707 | | | 49,153 | | | 49,373 | |
Net income (loss) per share: | | | | | | | |
Basic | $ | (0.46) | | | $ | (0.57) | | | $ | 1.09 | | | $ | 0.65 | |
Diluted | $ | (0.46) | | | $ | (0.57) | | | $ | 1.06 | | | $ | 0.64 | |
Shares excluded (1) | 3,384 | | | 4,616 | | | 921 | | | 2,076 | |
________________________ |
| | | | | | | | | | | | | | | |
| 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 |
|
Shares(1)Potential common shares were excluded primarily related tofrom the anti-dilutivecalculation of diluted net income (loss) per share for these periods because their effect of a net loss (forwould have been anti-dilutive. For the three months ended September 30, 20172022 and 2016)2021, all potential common shares were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive due to the net loss recognized for the periods.
Note 13: Subsequent Events
On October 31, 2022, we entered into that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among the Company, TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC (“Buyer”) and stock options withDS Admiral Bidco, LLC, pursuant to which we agreed to sell the Tax Software business to Buyer, an exercise price greater thanaffiliate of Cinven, for $720.0 million in cash (subject to adjustment as set forth in the average price duringStock Purchase Agreement), on the applicable periods.terms and subject to the conditions set forth in the Stock Purchase Agreement (the “TaxAct Sale Transaction”). The TaxAct Sale Transaction is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions and is expected to close by the end of 2022.
Blucora, Inc. | Q3 2022 Form 10-Q 18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 27Afollowing discussion provides an analysis of the Securities ActCompany’s financial condition, cash flows, and results of 1933, as amended,operations from management’s perspective and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "anticipate," "believe," "plan," "project," "expect," "future," "intend," "may," "will," "should," "could," "would,""estimate," "predict," "potential," "continue," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our "Strategic Transformation;" and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, "Risk Factors," and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
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, 2016.2021.
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. Our Business
Blucora (the "Company," "Blucora," or "we") operatesmission is to enable financial success by changing the way individuals and families plan and achieve their goals through tax-advantaged solutions. We conduct our operations through two primary businesses: a(1) the Wealth Management business and an online(2) the Tax PreparationSoftware business. Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
TheWealth Management
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 a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of brokerage, investment advisorytechnical, practice, compliance, operations, sales, and insuranceproduct support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to assisttheir clients.
Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in making eachorder to provide their consumer and small business clients with holistic financial advisor a financial service center for his/her clients. HD Vest was foundedplanning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and subsequently rebranded it in order to help taxcreate tighter brand alignment through one common 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 themrecognizable brand. Any reference to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management and other fees.Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.
The Tax PreparationSoftware
Our Tax Software 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 and ancillary services for consumers, small business owners, and tax professionals. TaxAct generates revenue primarilyprofessionals through its online service at www.TaxAct.com. The TaxAct website www.TaxAct.com and its mobile applications.
Macroeconomic Environment
Our Wealth Management business is directly and indirectly affected by macroeconomic conditions and the information contained therein or connected thereto is not intendedstate of global financial markets. Recent geopolitical uncertainty resulting, in part, from Russia’s continued invasion of Ukraine and the measures taken in response, including government sanctions, as well as rising inflation have contributed to be incorporatedsignificant volatility and decline in global financial markets during 2022 to date. In response to inflationary pressures, the Federal Reserve implemented five interest rate increases during the nine months ended September 30, 2022, including 75 basis point increases in each of the June, July, and September 2022 Federal Open Market Committee (“FOMC”) meetings. As of September 30, 2022, the target range for the federal funds rate was between 3.0% and 3.25%, however the FOMC has signaled that it expects additional rate increases in 2022 and 2023 in order to return inflation to their 2% objective. These combined factors have all led to an increased risk of economic recession and the potential for continued volatility and decline in global financial markets.
Volatility and decline in global financial markets and its impact on client asset values and transaction activity have negatively impacted Wealth Management revenues during the three and nine months ended September 30,
Blucora, Inc. | Q3 2022 Form 10-Q 19
2022. This negative impact was offset, in part, by reference into this Report.
Strategic Transformation
On October 14, 2015, we announced our plansincremental cash sweep revenue generated from an increasing interest rate environment. We expect that cash sweep revenue will continue to acquire HD Vest and focusincrease in the fourth quarter of 2022 as the full benefits of recent rate increases are fully realized. Based on the technology-enabled financial solutions market (the "Strategic Transformation"). The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest andtarget range for the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary ("InfoSpace") and our E-Commerce business that consisted offederal funds rate, the operations of Monoprice, Inc. ("Monoprice") in 2016. As part ofsignaling by the Strategic Transformation and our model of operating as "One Company", we announced on October 27, 2016 plans to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The transformation is intended to drive efficiencies and improve operational effectiveness.
In connection with the relocation of our corporate headquarters, we have incurred restructuring costs of approximately $6.6 million. These costs are recorded within corporate-level activity for segment purposes. See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this reportFederal Reserve for additional information. We alsorate increases during 2022, and current client asset values, we expect incremental cash sweep revenue should more than offset the negative impact that financial market volatility may have incurred costs that do not qualify for restructuring classification, such as recruitingon Wealth Management revenues and overlap in personnel expenses as we transition positions to Texas ("Strategic Transformation Costs"). The restructuring is now substantially complete and it is expected to be completed by early 2018.
For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-Koperating income for the year ended December 31, 2016.2022. However, if further financial market volatility results in continued decline in client asset values or if the Federal Reserve does not increase, or decreases, the federal funds rate, Wealth Management revenues and operating income would be negatively impacted.
SeasonalitySale of Tax Software Business
OurOn October 31, 2022, we entered into that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among the Company, TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC (“Buyer”) and DS Admiral Bidco, LLC, pursuant to which we agreed to sell the Tax PreparationSoftware business is highly seasonal, with a significant portionto Buyer, an affiliate of its annual revenue earnedCinven, for $720.0 million in cash (subject to adjustment as set forth in the first four monthsStock Purchase Agreement), on the terms and subject to the conditions set forth in the Stock Purchase Agreement (such sale, the “TaxAct Sale Transaction”). The TaxAct Sale Transaction is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions and is expected to close by the end of 2022.
Following the consummation of the TaxAct Sale Transaction, we plan to change our fiscal year. During the thirdname from Blucora to Avantax and fourth quarters, the Tax Preparation business typically reports losses in its operating income because revenue from the business is minimal while core operating expenses continue.
Comparability
We reclassified certain amountsfocus solely on our consolidated statementstax-focused wealth business. The TaxAct Sale Transaction is expected to yield after-tax net cash proceeds of cash flows relatedapproximately $620.0 million. We expect to use the net proceeds to pay down existing indebtedness and return excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" of the Notescapital to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.stockholders.
Blucora, Inc. | Q3 2022 Form 10-Q 20
RESULTS OF OPERATIONS
Summary | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Revenue: | | | | | | | | | | | | | | | |
Wealth Management | $ | 165,032 | | | $ | 169,135 | | | $ | (4,103) | | | (2.4) | % | | $ | 494,104 | | | $ | 486,021 | | | $ | 8,083 | | | 1.7 | % |
Tax Software | 6,664 | | | 5,039 | | | 1,625 | | | 32.2 | % | | 242,028 | | | 220,848 | | | 21,180 | | | 9.6 | % |
Total revenue | 171,696 | | | 174,174 | | | (2,478) | | | (1.4) | % | | 736,132 | | | 706,869 | | | 29,263 | | | 4.1 | % |
Operating income (loss): | | | | | | | | | | | | | | | |
Wealth Management | 27,626 | | | 19,564 | | | 8,062 | | | 41.2 | % | | 59,920 | | | 60,356 | | | (436) | | | (0.7) | % |
Tax Software | (12,517) | | | (13,864) | | | 1,347 | | | 9.7 | % | | 99,372 | | | 100,472 | | | (1,100) | | | (1.1) | % |
Corporate-level activity | (28,927) | | | (25,982) | | | (2,945) | | | (11.3) | % | | (77,282) | | | (102,255) | | | 24,973 | | | 24.4 | % |
Total operating income (loss) | (13,818) | | | (20,282) | | | 6,464 | | | 31.9 | % | | 82,010 | | | 58,573 | | | 23,437 | | | 40.0 | % |
Interest expense and other, net | (9,749) | | | (8,295) | | | (1,454) | | | (17.5) | % | | (25,707) | | | (24,202) | | | (1,505) | | | (6.2) | % |
Income (loss) before income taxes | (23,567) | | | (28,577) | | | 5,010 | | | 17.5 | % | | 56,303 | | | 34,371 | | | 21,932 | | | 63.8 | % |
Income tax benefit (expense) | 1,726 | | | 774 | | | 952 | | | 123.0 | % | | (4,099) | | | (2,920) | | | (1,179) | | | (40.4) | % |
Net income (loss) | $ | (21,841) | | | $ | (27,803) | | | $ | 5,962 | | | 21.4 | % | | $ | 52,204 | | | $ | 31,451 | | | 20,753 | | | 66.0 | % |
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(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 | % |
Three months ended September 30, 2017 compared withFor the three months ended September 30, 2016
Revenue increased approximately $6.9 million due to increases of $6.7 million and $0.2 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating loss increased approximately $0.8 million, consisting of the $6.9 million increase in revenue and offset by an $7.8 million increase in operating expenses. Key changes in operating expenses were:
$5.9 million increase in the Wealth Management segment’s operating expenses primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion2022, compared to the change in underlying commission and advisory revenues earned on client accounts.
$2.1 million increase in the Tax Preparation segment’s operating expenses primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.
$0.2 million decrease in corporate-level expense activity primarily due to changes in headcount across most functions.
Ninethree months ended September 30, 20172021, net loss decreased $6.0 million primarily due to the following factors:
•Wealth Management segment operating income increased $8.1 million primarily due to the significant increase in cash sweep revenue during the period.
•Tax Software segment operating loss decreased $1.3 million primarily due to increased consumer revenue and relatively flat operating expenses.
•Expenses within corporate-level activity increased $2.9 million primarily due to incremental depreciation expense and consulting costs. Furthermore, interest expense and other, net, increased $1.5 million, primarily due to rising interest rates.
•The Company recorded an income tax benefit of $1.7 million, or an effective tax rate of 7.3%, for the three months ended September 30, 2022, compared withto an income tax benefit of $0.8 million, or an effective tax rate of 2.7%, for the three months ended September 30, 2021.
For the nine months ended September 30, 2016
Revenue increased approximately $42.6 million due2022, compared to increases of $21.3 million and $21.3 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operatingnine months ended September 30, 2021, net income increased approximately $11.3$20.8 million consisting of the $42.6 million increase in revenue and offset by a $31.3 million increase in operating expenses. Key changes in operating expenses were:
$17.1 million increase in the Wealth Management segment’s operating expenses due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.
$10.9 million increase in the Tax Preparation segment’s operating expenses primarily due to higher spending on marketing, higher professional services fees mostly related to marketingthe following factors:
•Wealth Management segment operating income was relatively flat as incremental cash sweep revenue offset revenue headwinds caused by market volatility and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higherincremental personnel expenses resulting from overall increased headcount supporting most functions.costs.
$3.4•Tax Software segment operating income decreased $1.1 million increase in corporate-level expense activity primarily due to Strategic Transformation Costsan increase in customer care support costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costsstrategic advertising and marketing spend.
•Expenses within corporate-level activity decreased $25.0 million primarily due to fewer grants in the current yearreduced acquisition and higherintegration costs. Furthermore, interest expense recognized in the prior year related to HD Vest grants in 2016, partially offset by activity within our Tax Preparation businessand other, net, increased $1.5 million, primarily due to prior forfeitures.rising interest rates.
•The Company recorded income tax expense of $4.1 million, or an effective tax rate of 7.3%, for the nine months ended September 30, 2022, compared to income tax expense of $2.9 million, or an effective tax rate of 8.5%, for the nine months ended September 30, 2021.
Blucora, Inc. | Q3 2022 Form 10-Q 21
SEGMENT REVENUE/REVENUE & OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S.United States ("GAAP"“GAAP”) and include certain reconciling items attributable to each ofour segments. We have two reportable segments: (1) the segments.Wealth Management segment and (2) the Tax Software segment. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial
Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We have two reportable segments: Wealth Management and Tax Preparation. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, restructuring,or contested proxy, transaction and other loss,legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, andor income taxes to the reportable segments.
Wealth Management | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Revenue | $ | 165,032 | | | $ | 169,135 | | | $ | (4,103) | | | (2.4) | % | | $ | 494,104 | | | $ | 486,021 | | | $ | 8,083 | | | 1.7 | % |
Operating income | $ | 27,626 | | | $ | 19,564 | | | $ | 8,062 | | | 41.2 | % | | $ | 59,920 | | | $ | 60,356 | | | $ | (436) | | | (0.7) | % |
Segment margin | 16.7 | % | | 11.6 | % | | | | | | 12.1 | % | | 12.4 | % | | | | |
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, Wealth Management segment operating results.income increased $8.1 million primarily due to the following factors:
•Wealth Management revenue decreased $4.1 million primarily due to decreases of $11.2 million and $8.5 million in commission and advisory revenues, respectively. These revenue headwinds were primarily caused by the significant financial market volatility and decline discussed in the Macroeconomic Environment section above. These decreases were partially offset by a $15.5 million increase in asset-based revenue which benefited from incremental cash sweep revenue generated from increases in the federal funds rate.
•Wealth Management operating expenses decreased $12.2 million primarily due to a $15.1 million decline in cost of revenue associated with advisory fees and commissions paid, partially offset by $2.2 million of incremental personnel costs. Advisory fees and commissions paid trended consistently with the decrease in commission and advisory revenues discussed above. Increased personnel costs reflect our strategic investments to drive growth through enhanced sales and service capabilities that support our financial professionals.
•The significant increase in cash sweep revenue during the period was the primary driver of the 510 basis point increase in segment margin. We analyze these separately.expect for segment margin to continue to benefit from incremental cash sweep revenue for the remainder of the year.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, Wealth Management segment operating income decreased $0.4 million primarily due to the following factors:
•Wealth Management revenue increased $8.1 million primarily due to increases of $17.3 million and $15.2 million in asset-based and advisory revenues, respectively. Asset-based revenue benefited from incremental cash sweep revenue generated from increases in the federal funds rate, while the increase in advisory revenue was primarily from increased client asset levels and the timing of market movements relative to when clients are billed. These increases were partially offset by a $24.9 million decrease in commission revenue which was negatively impacted by unfavorable transaction activity and volatility in global financial markets, as discussed above.
•Wealth Management operating expenses increased $8.5 million primarily due to $11.1 million of incremental personnel costs, partially offset by a $4.3 million decrease in cost of revenue associated with advisory fees and commissions paid. Increased personnel costs reflect our strategic investments to drive growth through enhanced sales and service capabilities that support our financial professionals. Advisory fees and commissions paid trended consistently with the associated changes in revenues discussed above, while payout ratios remained relatively flat between the two periods as the financial market volatility during the first three quarters of 2022 offset previous expansion in the number of financial professionals concentrated at higher payout levels.
Blucora, Inc. | Q3 2022 Form 10-Q 22
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(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 | % | |
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•The market volatility discussed above, coupled with an increase in our fixed operating costs, has caused margin compression for the nine months ended September 30, 2022. However, the significant increase in cash sweep revenue during the three months ended September 30, 2022 predominately offset this compression, resulting in a relatively flat segment margin. For the remainder of the year, we expect for incremental cash sweep revenue to more than offset the compression discussed above, and for segment margin to increase on a year-over-year basis.Sources of Revenue
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position, and operating performance. A summary of our sources of revenue and business and financial metrics areis as follows:
Sources of revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| Sources of Revenue | Primary Drivers | 2022 | | 2021 | | $ | | | | 2022 | | 2021 | | $ | | |
Financial professional-driven | Advisory | - Advisory asset levels | $ | 95,070 | | | $ | 103,540 | | | $ | (8,470) | | | | | $ | 306,394 | | | $ | 291,167 | | | $ | 15,227 | | | |
Commission | - Transactions - Asset levels - Product mix | 41,788 | | | 52,961 | | | (11,173) | | | | | 132,278 | | | 157,197 | | | (24,919) | | | |
Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 21,147 | | | 5,659 | | | 15,488 | | | | | 33,774 | | | 16,514 | | | 17,260 | | | |
Transaction and fee | - Account activity - Number of financial professionals - Number of clients - Number of accounts | 7,027 | | | 6,975 | | | 52 | | | | | 21,658 | | | 21,143 | | | 515 | | | |
| Total revenue | $ | 165,032 | | | $ | 169,135 | | | $ | (4,103) | | | | | $ | 494,104 | | | $ | 486,021 | | | $ | 8,083 | | | |
| Total recurring revenue | $ | 144,512 | | | $ | 145,311 | | | $ | (799) | | | | | $ | 430,184 | | | $ | 414,966 | | | $ | 15,218 | | | |
| Recurring revenue rate | 87.6 | % | | 85.9 | % | | | | | | 87.1 | % | | 85.4 | % | | | | |
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(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.
Business metrics
Blucora, Inc. | Q3 2022 Form 10-Q 23
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(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 | % | |
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Number of advisors (in ones) | 4,392 |
| | 4,568 |
| | (4 | )% |
Advisor-driven revenue per advisor | $ | 17.5 |
| | $ | 15.7 |
| | 11 | % |
Business Metrics | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | September 30, | | Change |
| 2022 | | 2021 | | $ | | % |
Client assets balances: | | | | | | | |
Total client assets (1) | $ | 72,592,882 | | | $ | 86,647,743 | | | $ | (14,054,861) | | | (16.2) | % |
Brokerage assets (1) | $ | 37,150,327 | | | $ | 46,850,354 | | | $ | (9,700,027) | | | (20.7) | % |
Advisory assets (1) | $ | 35,442,555 | | | $ | 39,797,389 | | | $ | (4,354,834) | | | (10.9) | % |
Advisory assets as a percentage of total client assets | 48.8 | % | | 45.9 | % | | | | |
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Number of financial professionals (in ones): | | | | | | | |
Independent financial professionals (2) | 3,311 | | | 3,498 | | | (187) | | | (5.3) | % |
In-house/employee financial professionals (3) | 36 | | | 31 | | | 5 | | | 16.1 | % |
Total number of financial professionals | 3,347 | | | 3,529 | | | (182) | | | (5.2) | % |
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Advisory and commission revenue per financial professional (4) | $ | 40.9 | | | $ | 44.3 | | | $ | (3.4) | | | (7.7) | % |
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___________________________
(1)In connection with our ongoing integration of acquisitions, we refined the methodology by which we calculate client assets to align the methodologies within our Wealth Management segment for calculating such metrics. Specifically, such changes to the methodology include alignment to one third party data aggregator for assets not placed in custody with our clearing firm and to one consistent set of logic for all assets and transaction types. We have not recast client assets for prior periods to conform to our current presentation as we believe the changes to the calculation to be immaterial.
(2)The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as licensed referring representatives at CPA firms (approximately 171) that partner with Avantax Planning Partners.
Total(3)The number of in-house/employee financial professionals includes licensed financial planning consultants, all of which are affiliated with Avantax Planning Partners.
(4)Calculation based on advisory and commission revenue for the three months ended September 30, 2022 and 2021, respectively.
Client Assets. Historically we have calculated total client assets under administration ("AUA") includesto include 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. Beginning in the second quarter of 2022, the calculation of total client assets also includes assets for which financial professionals licensed with Avantax provide administrative services to clients. Because we did not have relationships with financial professionals that had clients for whom we did not provide administrative services prior to the second quarter of 2022, our calculation of total client assets for any prior period would not have changed under our current calculation. To the extent that we or they 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 Company’s condensed 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 basedfee-based on the value of the AUMadvisory assets for each advisory client. These assets are not reported on the Company’s condensed consolidated balance sheets.sheets.
Three months endedBrokerage assets represent total client assets other than advisory assets.
Total client assets decreased $14.1 billion as of September 30, 20172022 compared to September 30, 2021, primarily due to $14.3 billion of unfavorable market changes, partially offset by net client inflows.
Advisory assets decreased $4.4 billion as of September 30, 2022 compared to September 30, 2021, and advisory assets as a percentage of total client assets increased to 48.8% as of September 30, 2022, compared to 45.9% as of September 30, 2021. The decrease in advisory assets was primarily caused by $7.4 billion of unfavorable market changes, partially offset by net new advisory assets of $3.0 billion which contributed to the increase in advisory assets as a percentage of total client assets.
Financial Professionals. The number of our financial professionals decreased 5.2% as of September 30, 2022 compared to September 30, 2021, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. Advisory and commission revenue per financial professional decreased 7.7% for the same period, primarily due to the decreases in advisory and commission revenues discussed above. The
Blucora, Inc. | Q3 2022 Form 10-Q 24
decrease in the number of financial professionals was partially offset by our continued recruitment and onboarding of independent financial professionals.
Advisory Revenue.Advisory revenue primarily includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenue generated by Avantax Planning Partners, advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized ratably over the period in which our performance obligations were completed. Because advisory fees are based on advisory assets on the last day of each quarter, our revenues are impacted, in part, by the timing of market movements relative to when clients are billed.
Advisory asset balances were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, | | Change |
| 2022 | | 2021 | | $ | | % |
Advisory assets—independent financial professionals | $ | 29,735,365 | | | $ | 33,713,543 | | | $ | (3,978,178) | | | (11.8) | % |
Advisory assets—in-house/employee financial professionals | 4,494,178 | | | 4,701,444 | | | (207,266) | | | (4.4) | % |
Retirement advisory assets—in-house/employee financial professionals | 1,213,012 | | | 1,382,402 | | | (169,390) | | | (12.3) | % |
Total advisory assets | $ | 35,442,555 | | | $ | 39,797,389 | | | $ | (4,354,834) | | | (10.9) | % |
The activity within our advisory assets was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Balance, beginning of the period | $ | 36,746,048 | | | $ | 39,440,985 | | | $ | 42,179,051 | | | $ | 35,603,557 | |
Net new advisory assets | 514,293 | | | 621,205 | | | 2,261,923 | | | 1,853,632 | |
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Market impact and other | (1,817,786) | | | (264,801) | | | (8,998,419) | | | 2,340,200 | |
Balance, end of the period | $ | 35,442,555 | | | $ | 39,797,389 | | | $ | 35,442,555 | | | $ | 39,797,389 | |
Advisory revenue | $ | 95,070 | | | $ | 103,540 | | | $ | 306,394 | | | $ | 291,167 | |
Average advisory fee rate (1) | 26 bps | | 26 bps | | 77 bps | | 78 bps |
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(1)For the three months ended September 30, 2016
Wealth Management2022 and September 30, 2021, average advisory fee rate equals advisory revenue increased approximately $6.7 million as discussedfor the relevant quarterly period divided by each source of revenue below.
Wealth Management operating income increased approximately $0.8 million, consistingthe advisory asset balance at the beginning of the $6.7 million increase in revenue and offset by a $5.9 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion torelevant quarterly period. For the change in underlying commission and advisory revenues earned on client accounts.
Nine months ended September 30, 2017 compared with nine months ended September 30, 20162022 and September 30, 2021, average advisory fee rate equals the sum of each quarterly average advisory fee rate within the relevant year-to-date period.
Wealth Management revenue increased approximately $21.3 million as discussed by each source of revenue below.
Wealth Management operating income increased approximately $4.2 million, consisting ofFor the $21.3 million increase in revenuethree and offset by an $17.1 million increase in operating expenses. The increase in Wealth Management operating expenses wasnine months ended September 30, 2022, advisory assets declined $1.3 billion and $6.7 billion, respectively, primarily due to unfavorable market changes, partially offset by net new advisory assets. Net new advisory assets benefited from organic growth and the conversion of off platform, direct to fund assets, when appropriate for the client, to fee-based advisory platforms that include ongoing management and which generate higher commissions paid to our financial advisors, which fluctuated in proportionmargins.
For the three months ended September 30, 2022, compared to the change in underlying commission andthree months ended September 30, 2021, advisory revenues earned on client accounts, and higher net personnel expensesdecreased $8.5 million, primarily due to the decline in global markets as we continuediscussed above. Although advisory assets declined during the nine months ended September 30, 2022, due to standardize employee benefits across our businesses.the timing of market declines relative to when clients are billed, advisory revenue increased $15.2 million. The average advisory fee rates between the two periods were relatively flat.
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.
Blucora, Inc. | Q3 2022 Form 10-Q 25
Our commission revenue, by product category and by sales-basedtype of commission revenue, was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
By product category: | | | | | | | | | | | | | | | |
Mutual funds | $ | 16,339 | | | $ | 22,844 | | | $ | (6,505) | | | (28.5) | % | | $ | 53,635 | | | $ | 70,395 | | | $ | (16,760) | | | (23.8) | % |
Variable annuities | 14,892 | | | 18,752 | | | (3,860) | | | (20.6) | % | | 46,961 | | | 55,247 | | | (8,286) | | | (15.0) | % |
Insurance | 5,048 | | | 4,414 | | | 634 | | | 14.4 | % | | 13,007 | | | 14,044 | | | (1,037) | | | (7.4) | % |
General securities | 5,509 | | | 6,951 | | | (1,442) | | | (20.7) | % | | 18,675 | | | 17,511 | | | 1,164 | | | 6.6 | % |
| | | | | | | | | | | | | | | |
Total commission revenue | $ | 41,788 | | | $ | 52,961 | | | $ | (11,173) | | | (21.1) | % | | $ | 132,278 | | | $ | 157,197 | | | $ | (24,919) | | | (15.9) | % |
| | | | | | | | | | | | | | | |
By type of commission: | | | | | | | | | | | | | | | |
Transaction-based | $ | 17,868 | | | $ | 22,372 | | | $ | (4,504) | | | (20.1) | % | | $ | 56,373 | | | $ | 65,815 | | | $ | (9,442) | | | (14.3) | % |
Trailing | 23,920 | | | 30,589 | | | (6,669) | | | (21.8) | % | | 75,905 | | | 91,382 | | | (15,477) | | | (16.9) | % |
Total commission revenue | $ | 41,788 | | | $ | 52,961 | | | $ | (11,173) | | | (21.1) | % | | $ | 132,278 | | | $ | 157,197 | | | $ | (24,919) | | | (15.9) | % |
As discussed in the sections above, the declines in transaction-based and trailing was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
(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 | % |
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Sales-based commission revenue decreased approximately $1.3 millionrevenues for the periods shown in the table above were primarily due to decreasedunfavorable transaction activity and volatility in mutual funds, variable annuities, insuranceglobal financial markets during the three and general securities resulting from overall market performance and portfolio rebalancings. General securities include equities, exchange-traded funds, bonds and alternative investments.
Trailing commission revenue increased approximately $1.8 million and reflects an increase in the market value of the underlying assets and, to a lesser extent, the impact of new investments.
Nine months ended September 30, 2017 compared with nine months ended September 30, 20162022.
Sales-based commission revenue increased approximately $1.5 million primarily due to increased activity in mutual funds, insurance and general securities resulting from overall market performance, portfolio rebalancings, product availability and segment refocusing, partially offset by decreased activity in variable annuities.
Trailing commission revenue increased approximately $4.6 million and reflects an increase in the market value of the underlying assets and the impact of new investments.
Advisory revenue:Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor ("RIA") and is based on the value of AUM. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in the following three-month period. The majority of our accounts are billed in advance using values as of the last business day of the prior calendar quarter.
The activity within our AUM was as follows:
|
| | | | | | | | | | | | | | | |
(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 |
|
Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end AUM.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
The increase in advisory revenue of approximately $4.9 million is primarily due to the increase in the beginning-of-period AUM for the three months ended September 30, 2017 compared with three months ended September 30, 2016, and the conversion of AUA to fee-based AUM.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
The increase in advisory revenue of approximately $11.3 million is consistent with the increase in the beginning-of-period AUM for the nine months ended September 30, 2017 compared with nine months ended September 30, 2016, and the conversion of AUA to fee-based AUM.
Asset-based revenue:Asset-Based 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.
Three months ended September 30, 2017 compared withFor the three months ended September 30, 2016
Asset-based revenue increased $1.1 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Asset-based2022, compared to the three and nine months ended September 30, 2021, asset-based revenue increased $2.6$15.5 million and $17.3 million, respectively. These increases were primarily from higherdue to incremental cash sweep revenues followingrevenue of $16.9 million and $19.2 million during the three and nine months ended September 30, 2022, respectively, driven by increases in interest rates. In the current interestfederal funds rate. The increases in cash sweep revenue were partially offset by reduced fees from sponsorship programs. Due to the timing of rate environment,increases and through our current clearing provider, we will not benefit from any future interestthe non-linear nature of upside associated with these increases, and with expectation of additional rate increases.increases by the Federal Reserve in 2022, cash sweep revenue is expected to continue to increase for the remainder of the year.
Transaction and fee revenue:Fee Revenue.Transaction and fee revenue primarily includes support fees charged to financial professionals, fees charged for executing certain transactions in client accounts, and other fees related to services provided and other account charges as generally outlined in agreements with financial advisors,professionals, clients, financial institutions, and financial institutions.retirement plan sponsors.
ThreeFor the three and nine months ended September 30, 20172022, compared withto the three and nine months ended September 30, 2021, transaction and fee revenue remained relatively flat.
Blucora, Inc. | Q3 2022 Form 10-Q 26
Tax Software | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Revenue | $ | 6,664 | | | $ | 5,039 | | | $ | 1,625 | | | 32.2 | % | | $ | 242,028 | | | $ | 220,848 | | | $ | 21,180 | | | 9.6 | % |
Operating income (loss) | $ | (12,517) | | | $ | (13,864) | | | $ | 1,347 | | | 9.7 | % | | $ | 99,372 | | | $ | 100,472 | | | $ | (1,100) | | | (1.1) | % |
Segment margin | (187.8) | % | | (275.1) | % | | | | | | 41.1 | % | | 45.5 | % | | | | |
For the three months ended September 30, 2016
Transaction and fee revenue increased approximately $0.3 million primarily related2022, compared to advisor fee increases.
Ninethe three months ended September 30, 20172021, Tax Software operating loss decreased $1.3 million due to a $1.5 million increase in consumer revenue and relatively flat operating expenses. Consumer revenue benefited from an increase in consumer e-files associated with market share growth and the volume of customers that filed extensions when compared withto the prior year.
For the nine months ended September 30, 20162022, compared to the nine months ended September 30, 2021, Tax Software operating income decreased $1.1 million due to the following factors:
Transaction and fee•Tax Software revenue increased approximately $1.3$21.2 million due to a $18.4 million increase in consumer revenue and a $2.8 million increase in professional revenue. The growth in revenue during the nine months ended September 30, 2022 was attributable to higher average revenue per unit and growth in market share from favorable customer retention and acquisition. These increases during the period were partially offset by an increase in the volume of customers that filed extensions when compared to the prior year. We expect to continue to benefit from higher average revenue per unit for the remainder of the year as customers complete returns associated with these extensions.
•Tax Software operating expenses increased $22.3 million primarily relateddue to advisor fee increases.increased investments in seasonal customer care support and tax experts and an increase in strategic advertising and marketing spend. These incremental costs were the primary drivers of the reduction in segment margin shown in the table above.
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 | % | | |
Tax PreparationSoftware revenue is derived primarily from salesthe sale of our consumerdigital tax preparation services, ancillary services, packaged tax preparation software, and onlinemultiple element arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer, audit defense, e-file concierge services, and Xpert Assist.
We classify Tax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue is derived from products and services sold directly to customers 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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Consumer | $ | 5,974 | | | $ | 4,479 | | | $ | 1,495 | | | 33.4 | % | | $ | 222,262 | | | $ | 203,891 | | | $ | 18,371 | | | 9.0 | % |
Professional | 690 | | | 560 | | | 130 | | | 23.2 | % | | 19,766 | | | 16,957 | | | 2,809 | | | 16.6 | % |
Total Tax Software revenue | $ | 6,664 | | | $ | 5,039 | | | $ | 1,625 | | | 32.2 | % | | $ | 242,028 | | | $ | 220,848 | | | $ | 21,180 | | | 9.6 | % |
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.
Blucora, Inc. | Q3 2022 Form 10-Q 27
•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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except as otherwise indicated) | Nine Months Ended September 30, | | Change | | | | |
| 2022 | | 2021 | | Units | | % | | | | | | | | |
Total e-files (1) | 5,658 | | | 5,492 | | | 166 | | | 3.0 | % | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | |
Consumer e-files (1) | 3,232 | | | 3,144 | | | 88 | | | 2.8 | % | | | | | | | | |
Professional: | | | | | | | | | | | | | | | |
Professional e-files | 2,426 | | | 2,348 | | | 78 | | | 3.3 | % | | | | | | | | |
Units sold (in ones) | 21,051 | | | 20,808 | | | 243 | | | 1.2 | % | | | | | | | | |
Professional e-files per unit sold (in ones) | 115.2 | | | 112.8 | | | 2.4 | | | 2.1 | % | | | | | | | | |
____________________________(1)We consider growthparticipate in these areasthe Free File Alliance that is part of an IRS partnership that provides free electronic tax filing services to be important non-financial metrics in measuringtaxpayers meeting certain income-based guidelines. Free File Alliance e-files are included within total e-files and consumer e-files above.
For the performance of the professional tax preparer side of the Tax Preparation business.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Tax Preparation revenue was comparable to the prior period.
Tax Preparation operating loss increased approximately $1.9 million, consisting of the $0.2 million increase in revenue and offset by a $2.1 million increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Tax Preparation revenue2022, compared to the nine months ended September 30, 2021, e-files across each category, and professional units sold, increased approximately $21.3 million primarily due to growth in revenue earnedmarket share from online consumer usersfavorable customer retention and to a lesser extent, increased salesacquisition, both of which benefited from our professional tax preparer software. Online consumer revenue grew, despite a decreaseinvestments in e-files, due to growth in average revenue per user, primarily resulting from price increases. The decrease in e-files is consistent with our expectations as we are in the early stages of a multi-year pivot toward profitable customers. Revenue derived from professional tax preparers increased primarily due to an increase in the number of professional preparer units sold.
Tax Preparation operating income increased approximately $10.4 million, consisting of the $21.3 million increase in revenuestrategic marketing spend and offset by a $10.9 million increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.customer care support.
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, and restructuring. contested proxy, transaction and other legal and consulting costs, is not allocated to our reportable segments.
Corporate-level activity by category was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Unallocated corporate-level general and administrative expenses | $ | 7,456 | | | $ | 6,499 | | | $ | 957 | | | 14.7 | % | | $ | 22,428 | | | $ | 18,452 | | | $ | 3,976 | | | 21.5 | % |
Stock-based compensation | 5,706 | | | 4,729 | | | 977 | | | 20.7 | % | | 17,129 | | | 15,499 | | | 1,630 | | | 10.5 | % |
Acquisition and integration | 416 | | | 2,241 | | | (1,825) | | | (81.4) | % | | (4,710) | | | 28,513 | | | (33,223) | | | (116.5) | % |
Depreciation | 6,020 | | | 3,906 | | | 2,114 | | | 54.1 | % | | 15,696 | | | 11,251 | | | 4,445 | | | 39.5 | % |
Amortization of acquired intangible assets | 6,342 | | | 7,009 | | | (667) | | | (9.5) | % | | 19,435 | | | 21,247 | | | (1,812) | | | (8.5) | % |
Contested proxy, transaction and other legal and consulting costs | 2,987 | | | 1,598 | | | 1,389 | | | 86.9 | % | | 7,304 | | | 7,293 | | | 11 | | | 0.2 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total corporate-level activity | $ | 28,927 | | | $ | 25,982 | | | $ | 2,945 | | | 11.3 | % | | $ | 77,282 | | | $ | 102,255 | | | $ | (24,973) | | | (24.4) | % |
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.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Operating expenses, stock-based compensation, depreciation, amortization of acquired intangible assets and restructuring were comparable2022, compared to the prior period.
Ninethree months ended September 30, 2017 compared2021, corporate-level activity increased $2.9 million primarily due to the following factors:
•Depreciation expense increased $2.1 million primarily due to capitalized software costs for our Tax Software business.
•Contested proxy, transaction and other legal and consulting costs increased $1.4 million primarily due to incremental legal and consulting costs incurred in connection with the TaxAct Sale Transaction.
Partially offsetting this increase in corporate-level activity:
•Acquisition and integration expenses decreased $1.8 million, primarily due to the final remeasurement of the HKFS Contingent Consideration liability in the second quarter of 2022.
Blucora, Inc. | Q3 2022 Form 10-Q 28
For the nine months ended September 30, 2016
Operating expenses included in2022, compared to the nine months ended September 30, 2021, corporate-level activity increaseddecreased $25.0 million primarily due to Strategic Transformation Coststhe following factors:
•Acquisition and costs associated with leadership changes at HD Vest.
Stock-based compensationintegration expenses decreased $33.2 million, primarily due to fewer grants 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.
Acquisition-related costs include professional fees and other direct transaction costs and changesa $24.8 million decrease in the fair value of contingent consideration liabilities related to acquired companies. The SimpleTax acquisition that was completedadjustments recorded for the HKFS Contingent Consideration liability between the two periods, and an $8.4 million decrease in 2015 included contingent consideration, for which the fair value of that liability was revalued in the second quarter of 2016. The change in the fair value of the contingent consideration liability is recognized in the period in which the fair value changes.
Amortization of acquired intangible assets were comparable to the prior period.
Restructuring relates toprofessional services and other expenses incurred due to a reduction in integration activities.
Partially offsetting this decrease in corporate-level activity:
•Depreciation expense increased $4.4 million primarily due to capitalized software costs for our October 27, 2016 announcementTax Software business.
•Unallocated general and administrative expenses increased $4.0 million primarily due to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. Further detail is provided under the "Operating Expenses - Restructuring" section of the management's discussionincremental personnel and analysis of financial condition and results of operations below.insurance costs.
OPERATING EXPENSES
Cost of Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Wealth Management | $ | 105,301 | | | $ | 120,641 | | | $ | (15,340) | | | (12.7) | % | | $ | 338,819 | | | $ | 343,174 | | | $ | (4,355) | | | (1.3) | % |
Tax Software | 3,879 | | | 2,323 | | | 1,556 | | | 67.0 | % | | 20,178 | | | 12,330 | | | 7,848 | | | 63.6 | % |
| | | | | | | | | | | | | | | |
Total cost of revenue | $ | 109,180 | | | $ | 122,964 | | | $ | (13,784) | | | (11.2) | % | | $ | 358,997 | | | $ | 355,504 | | | $ | 3,493 | | | 1.0 | % |
Percentage of revenue | 63.6 | % | | 70.6 | % | | | | | | 48.8 | % | | 50.3 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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 | % | | |
We record the cost of revenue for sales of services when the related revenue is recognized. Cost of revenue consists of costs related to our Wealth Management and Tax PreparationSoftware businesses, which include commissions and advisory fees paid to independent financial advisors,professionals, payments made to CPA firms under fee sharing arrangements, amortization of forgivable loans issued to our financial professionals, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses, (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees, (which include technology project consulting fees), software support and maintenance, bandwidth and hosting costs, and depreciation.depreciation (including depreciation related to software development costs in the Tax Software segment). Cost of revenue also includesdoes not include compensation paid to in-house/employee financial professionals in our Wealth Management business. The compensation of our in-house/employee financial professionals is reflected in “Sales and marketing” expense.
For the amortization of acquired technology.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Wealth management services2022, compared to the three months ended September 30, 2021, cost of revenue increased primarily due to higher commissions paid to our financial advisors, which fluctuateddecreased $13.8 million. The reduction in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors.
Tax preparation servicesWealth Management cost of revenue was comparableprimarily due to reduced advisory fees and commissions paid, which trended consistently with the prior period.associated changes in revenue discussed within the Segment Revenue & Operating Incomesection above. This decline was partially offset by increased depreciation of capitalized software development costs within Tax Software.
Nine months ended September 30, 2017 compared withFor the nine months ended September 30, 2016
Wealth management services2022, compared to the nine months ended September 30, 2021, cost of revenue increased primarily due to an increase in commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors.
$3.5 million. Tax preparation servicesSoftware cost of revenue included incremental personnel and consulting costs and depreciation of capitalized software. Continued investments in internally developed software for the Tax Software business are expected to result in increased primarily duedepreciation in future periods. Within Wealth Management, advisory fees and commissions paid declined $6.4 million and trended consistently with the associated changes in revenue discussed within the Segment Revenue & Operating Incomesection above. This decline was partially offset by $2.4 million of incremental forgivable loans amortization.
Payout ratios to an increaseindependent financial professionals are determined based on trailing twelve-month revenues and may not immediately correlate with changes in data center costs related to software support and maintenance fees.
Amortization of acquired technology decreased due to amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangibleclient assets during 2016.periods of significant market volatility. For both periods, payout ratios to independent financial professionals remained relatively flat as the financial market volatility during the first three quarters of 2022 offset previous expansion in the number of financial professionals concentrated at higher payout levels.
Blucora, Inc. | Q3 2022 Form 10-Q 29
Engineering and Technology | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Engineering and technology | $ | 7,474 | | | $ | 7,874 | | | $ | (400) | | | (5.1) | % | | $ | 24,598 | | | $ | 22,233 | | | $ | 2,365 | | | 10.6 | % |
Percentage of revenue | 4.4 | % | | 4.5 | % | | | | | | 3.3 | % | | 3.1 | % | | | | |
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(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 consolidated statements of operations 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.”
Three months ended September 30, 2017 compared withFor the three months ended September 30, 2016
Engineering and technology expenses were comparable2022, compared to the prior period.
Ninethree months ended September 30, 2017 compared with2021, engineering and technology expenses remained relatively flat.
For the nine months ended September 30, 2016
Engineering2022, compared to the nine months ended September 30, 2021, engineering and technology expenses increased $2.4 million primarily due to an increaseincreases in professional services fees mostly related topersonnel expenses in our Tax Preparation development projects.Software segment.
Sales and Marketing
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| | | | | | | | | | | | | | | | | | | | | | | |
(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 | % |
|
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| 21 | % |
| 21 | % |
|
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($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Sales and marketing | $ | 30,485 | | | $ | 28,399 | | | $ | 2,086 | | | 7.3 | % | | $ | 162,396 | | | $ | 140,809 | | | $ | 21,587 | | | 15.3 | % |
Percentage of revenue | 17.8 | % | | 16.3 | % | | | | | | 22.1 | % | | 19.9 | % | | | | |
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/employee 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 officeback-office processing support expenses associated withfor our HD Vest business (occupancy and general office expenses, regulatory fees, and license fees).Wealth Management business.
Three months ended September 30, 2017 compared withFor the three months ended September 30, 2016
Sales2022, compared to the three months ended September 30, 2021, sales and marketing expenses increased $2.1 million, primarily due to a $0.6incremental personnel costs of $1.6 million increase in marketing expenses and a $1.0 million increase in personnel expenses. The increase in marketing expenses was driven by increased marketing and software support in our Tax Preparation business. Personnel expenses increased primarily in our Wealth Management business due to higher headcount.segment.
Nine months ended September 30, 2017 compared withFor the nine months ended September 30, 2016
Sales2022, compared to the nine months ended September 30, 2021, sales and marketing expenses increased $21.6 million, primarily due to a $5.8 million increasethe following factors:
•Personnel costs in both segments increased $11.8 million.
•Strategic advertising and marketing expenses and a $2.6 million increase in personnel expenses. The increase in marketing expenses was driven by increased marketingcosts in our Tax Preparation business. Personnel expensesSoftware segment increased primarily as$9.0 million.
For the remainder of the year, we continueexpect to standardize employee benefits acrossincur incremental travel and conference costs associated with reduced travel restrictions and the timing of our businesses, and higher headcount across our businesses.Wealth Management national conference.
General and Administrative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
General and administrative | $ | 27,778 | | | $ | 23,102 | | | $ | 4,676 | | | 20.2 | % | | $ | 83,499 | | | $ | 71,619 | | | $ | 11,880 | | | 16.6 | % |
Percentage of revenue | 16.2 | % | | 13.3 | % | | | | | | 11.3 | % | | 10.1 | % | | | | |
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(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 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.
ThreeBlucora, Inc. | Q3 2022 Form 10-Q 30
For the three and nine months ended September 30, 20172022, compared withto the three and nine months ended September 30, 2021, G&A expenses increased $4.7 million and $11.9 million, respectively, primarily due to incremental personnel costs, professional services fees, and hardware and software support and maintenance fees.
Acquisition and Integration | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Change in the fair value of HKFS Contingent Consideration | $ | — | | | $ | 1,700 | | | $ | (1,700) | | | (100.0) | % | | $ | (5,320) | | | $ | 19,500 | | | $ | (24,820) | | | (127.3) | % |
Professional services and other expenses | 416 | | | 541 | | | (125) | | | (23.1) | % | | 610 | | | 9,013 | | | (8,403) | | | (93.2) | % |
Total | $ | 416 | | | $ | 2,241 | | | $ | (1,825) | | | (81.4) | % | | $ | (4,710) | | | $ | 28,513 | | | $ | (33,223) | | | (116.5) | % |
Percentage of revenue | 0.2 | % | | 1.3 | % | | | | | | (0.6) | % | | 4.0 | % | | | | |
Acquisition and integration expenses primarily relate to costs incurred for the acquisitions of Avantax Planning Partners and 1st Global and consist of employee-related expenses, professional services fees, changes in the fair value of contingent consideration, and other expenses.
For the three months ended September 30, 2016
G&A expenses increased primarily due to a $0.8 million increase in personnel expenses, mainly related to Strategic Transformation Costs, offset by lower stock-based compensation due to fewer grants in the current year and higher expense recognized in the prior year related2022, compared to the timing of grants.
Ninethree months ended September 30, 2017 compared with2021, acquisition and integration expenses decreased $1.8 million, primarily due to the final remeasurement of the HKFS Contingent Consideration liability in the second quarter of 2022.
For the nine months ended September 30, 2016
G&A2022, compared to the nine months ended September 30, 2021, acquisition and integration expenses increaseddecreased $33.2 million, primarily due to a $5.6the following factors:
•The change in fair value of the HKFS Contingent Consideration liability decreased $24.8 million, net increase in personnel expenses, mainly related to Strategic Transformation Costs and costs associated with leadership changes at HD Vest, offset by lower stock-based compensationprimarily due to fewer grants in the current year and higher expense recognized in the prior year related to the timing of grants.fair value adjustments recorded between the two periods. This change is inclusive of a $7.0 million gain recorded during the second quarter of 2022 for the final settlement value of the liability, reflecting a decrease in the fair value of the contingent consideration due to a significant decline in advisory asset levels caused by the financial market decline discussed in the sections above.
•Professional services and other expenses declined $8.4 million due to a reduction in integration activities.
Depreciation and Amortization of Acquired Intangible Assets
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| | | | | | | | | | | | | | | | | | | | | | | |
(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) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Depreciation | $ | 3,839 | | | $ | 2,867 | | | $ | 972 | | | 33.9 | % | | $ | 9,907 | | | $ | 8,371 | | | $ | 1,536 | | | 18.3 | % |
Amortization of acquired intangible assets | 6,342 | | | 7,009 | | | (667) | | | (9.5) | % | | 19,435 | | | 21,247 | | | (1,812) | | | (8.5) | % |
Total | $ | 10,181 | | | $ | 9,876 | | | $ | 305 | | | 3.1 | % | | $ | 29,342 | | | $ | 29,618 | | | $ | (276) | | | (0.9) | % |
Percentage of revenue | 5.9 | % | | 5.7 | % | | | | | | 4.0 | % | | 4.2 | % | | | | |
Depreciation of property, equipment, and equipmentsoftware, net includes depreciation of computer equipment and software (including internally developed 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.
Restructuring
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(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 connection with the Strategic Transformation, including the relocation of our headquarters, we have incurred restructuring costs of approximately $6.6 million, which includes all costs associated with our non-cancelable operating lease. While the relocation and the related costs were substantially completed by June 2017, the Company expects some costs through early 2018, primarily related to employees who will continue to provide service through that time period.
See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Other Loss, Net
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(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 |
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Three months ended September 30, 2017 compared with three months ended September 30, 2016
In the second and third quarter of 2017 we had a loss on debt extinguishment related to prepayments of a portion of the credit facility entered into on May 22, 2017. In the first half of 2017, the third quarter of 2016 and the nine months ended September 30, 2016, we had a loss on debt extinguishment related to the credit facility previously entered into in 2015 for the purpose of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"). In 2016, we made prepayments on a portion of the TaxAct - HD Vest 2015 credit facility, which resulted in the acceleration of a portion of the unamortized debt discount and issuance costs. In connection with the refinancing through the senior secured credit facility that was entered into in May 2017, we paid-off the remaining TaxAct - HD Vest 2015 credit facility and wrote-off the remaining unamortized debt discount and issuance costs. Consequently, the TaxAct - HD Vest 2015 credit facility was terminated. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
The decrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Convertible Senior Notes (the "Notes") due to prepayments
on a portion of the TaxAct - HD Vest 2015 credit facility in 2016 and the redemption of all of the Notes in the second quarter of 2017.
Detail on the "(gain) loss on debt extinguishment" is as follows:
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(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 |
|
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Interest expense, amortization of debt issuance costs, accretion of debt discounts, and (gain) loss on debt extinguishment were affected by the same factors described above that impacted the quarterly period.
In the first quarter of 2016, we repurchased a portion of the Notes, which resulted in a net gain on debt extinguishment, consisting of a gain related to the repurchase of the Notes below par value and offset by the acceleration of a portion of the unamortized debt discount and issuance costs. In connection with the refinancing through the senior secured credit facility, we redeemed all of the Notes in the second quarter of 2017, which resulted in the write-off of the remaining unamortized debt discount and issuance costs as a loss on debt extinguishment.
Income Taxes
We recorded income tax expense of $0.2 million and $6.0 million in the three and nine months ended September 30, 2017, respectively. Income taxes differed from taxes at the statutory rates in 2017 primarily due2022, compared to the January 1, 2017 implementation of Accounting Standards Update ("ASU") 2016-09 on stock-based compensation (see "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information). We recorded income tax benefit of $8.5 million and income tax expense of $8.9 million in the three and nine months ended September 30, 2016,2021, depreciation and amortization expense did not materially change.
Blucora, Inc. | Q3 2022 Form 10-Q 31
INTEREST EXPENSE AND OTHER, NET
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($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Interest expense | $ | 8,771 | | | $ | 7,304 | | | $ | 1,467 | | | 20.1 | % | | $ | 23,166 | | | $ | 21,789 | | | $ | 1,377 | | | 6.3 | % |
Amortization of debt issuance costs | 403 | | | 388 | | | 15 | | | 3.9 | % | | 1,191 | | | 1,128 | | | 63 | | | 5.6 | % |
Amortization of debt discount | 302 | | | 290 | | | 12 | | | 4.1 | % | | 893 | | | 851 | | | 42 | | | 4.9 | % |
Total interest expense | 9,476 | | | 7,982 | | | 1,494 | | | 18.7 | % | | 25,250 | | | 23,768 | | | 1,482 | | | 6.2 | % |
Interest income and other | 273 | | | 313 | | | (40) | | | (12.8) | % | | 457 | | | 434 | | | 23 | | | 5.3 | % |
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Interest expense and other, net | $ | 9,749 | | | $ | 8,295 | | | $ | 1,454 | | | 17.5 | % | | $ | 25,707 | | | $ | 24,202 | | | $ | 1,505 | | | 6.2 | % |
For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, interest expense and other, net, increased $1.5 million and $1.5 million, respectively, primarily due to rising interest rates. The impact of rising interest rates on our interest expense was partially offset by our voluntary $35.0 million prepayment of principal outstanding under our Term Loan in August 2022. As the interest rate on our Term Loan is variable at the London Interbank Offered Rate, we expect for our interest expense to increase in future periods due to increasing interest rates.
INCOME TAXES
We recorded an income tax benefit of $1.7 million and income tax expense of $4.1 million for the three and nine months ended September 30, 2022, respectively. IncomeWe recorded an 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. The prior period interim tax provision was prepared by applying a year-to-date effective tax rate to income before income taxes. The current period interim tax provision was prepared by applying an estimated annual effective tax rate to income before income taxes and by calculating the tax effect of discrete items recognized during the quarter (if applicable).
Our effective income tax rate for the three and nine months ended September 30, 2022, and September 30, 2021 differed from taxes at the 21% statutory rates in 2016rate primarily due to the domestic manufacturing deduction, offset by non-deductible compensationrelease of valuation allowances and the effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.
Discontinued Operations, Net of Income Taxes
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(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 |
|
On October 14, 2015, we announced our Strategic Transformation, which included plans to divest the Search and Content and E-Commerce businesses. Our results of operations reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated
depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses. We completed both divestitures in 2016--specifically, Search and Content in the third quarter of 2016 and E-Commerce in the fourth quarter of 2016. See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on discontinued operations.
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,interest expense and other, loss, net, the impact of noncontrolling interests,acquisition and integration costs, contested proxy, transaction and other legal and consulting costs, and income tax (benefit) expense. Interest expense the effectsand other, net primarily consists of discontinued operations,interest expense, net. Acquisition and acquisition-related costs. Restructuringintegration costs primarily relate to the moveacquisitions of our corporate headquarters, which was announced in the fourth quarter of 2016. Acquisition-related costs include professional services feesAvantax Planning Partners and other direct transaction costs and changes in the fair value of contingent consideration liabilities related 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.1st Global.
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.
Blucora, Inc. | Q3 2022 Form 10-Q 32
A reconciliation of our Adjusted EBITDA toGAAP net income (loss) attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, to Adjusted EBITDA, is presented below: | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | (21,841) | | | $ | (27,803) | | | $ | 52,204 | | | $ | 31,451 | |
Stock-based compensation | 5,706 | | | 4,729 | | | 17,129 | | | 15,499 | |
Depreciation and amortization of acquired intangible assets | 12,362 | | | 10,915 | | | 35,131 | | | 32,498 | |
Interest expense and other, net | 9,749 | | | 8,295 | | | 25,707 | | | 24,202 | |
Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 416 | | | 541 | | | 610 | | | 9,013 | |
Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | — | | | 1,700 | | | (5,320) | | | 19,500 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contested proxy, transaction and other legal and consulting costs | 2,987 | | | 1,598 | | | 7,304 | | | 7,293 | |
Income tax (benefit) expense | (1,726) | | | (774) | | | 4,099 | | | 2,920 | |
Adjusted EBITDA | $ | 7,653 | | | $ | (799) | | | $ | 136,864 | | | $ | 142,376 | |
Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Share |
| | | | | | | | | | | | | | | |
(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 |
|
Three months ended September 30, 2017 compared with three months ended September 30, 2016
The decrease in Adjusted EBITDA was primarily due to an increase in segment operating loss of $1.9 million related to our Tax Preparation segment, an increase in segment operating income of $0.8 million related to our Wealth Management segment, and a $0.3 million decrease in corporate operating expenses not allocated to the segments primarily due to changes in headcount across most functions.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
The increase in Adjusted EBITDA was primarily due to increases in segment operating income of $10.4 million and $4.2 million related to our Tax Preparation and Wealth Management segments, respectively, offset by a $3.8 million increase in
corporate operating expenses not allocated to the segments primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs.
Non-GAAP net income (loss):We define non-GAAP net income (loss)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 discountacquisition and accelerated accretion of debt discount on the Convertible Senior Notes (the "Notes"), gain on the Notes repurchased, write-off of debt discountintegration costs, contested proxy, transaction and debt issuanceother legal and consulting 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, 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 taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will expire, if unutilized,not utilized, between 20202022 and 2024.
We believe that non-GAAP net income (loss)Non-GAAP Net Income (Loss) and non-GAAP net income (loss)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 that have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP net income (loss)Non-GAAP Net Income (Loss) and non-GAAP net income (loss)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)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 GAAP net income (loss) per share. Other companies may calculate non-GAAP net incomeNon-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share differently, and, therefore, our non-GAAP net incomethese measures may not be comparable to similarly titled measures of other companies.
Blucora, Inc. | Q3 2022 Form 10-Q 33
A reconciliation of our non-GAAPGAAP net income to(loss) and GAAP net income attributable to Blucora, Inc.,(loss) per share, which we believe to be the most comparable GAAP measure,measures, to Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share, respectively, is presented below: | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | $ | (21,841) | | | $ | (27,803) | | | $ | 52,204 | | | $ | 31,451 | |
Stock-based compensation | 5,706 | | | 4,729 | | | 17,129 | | | 15,499 | |
Amortization of acquired intangible assets | 6,342 | | | 7,009 | | | 19,435 | | | 21,247 | |
| | | | | | | |
Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 416 | | | 541 | | | 610 | | | 9,013 | |
Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | — | | | 1,700 | | | (5,320) | | | 19,500 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contested proxy, transaction and other legal and consulting costs | 2,987 | | | 1,598 | | | 7,304 | | | 7,293 | |
| | | | | | | |
Cash tax impact of adjustments to GAAP net income (loss) | (319) | | | (331) | | | (1,631) | | | (1,523) | |
Non-cash income tax (benefit) expense | (3,071) | | | (197) | | | 1,090 | | | (1,160) | |
Non-GAAP Net Income (Loss) | $ | (9,780) | | | $ | (12,754) | | | $ | 90,821 | | | $ | 101,320 | |
Per diluted share: | | | | | | | |
Net income (loss) (1) | $ | (0.46) | | | $ | (0.57) | | | $ | 1.06 | | | $ | 0.64 | |
Stock-based compensation | 0.12 | | | 0.10 | | | 0.35 | | | 0.31 | |
Amortization of acquired intangible assets | 0.14 | | | 0.14 | | | 0.40 | | | 0.43 | |
| | | | | | | |
Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 0.01 | | | 0.01 | | | 0.01 | | | 0.18 | |
Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | — | | | 0.03 | | | (0.11) | | | 0.39 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contested proxy, transaction and other legal and consulting costs | 0.06 | | | 0.04 | | | 0.15 | | | 0.15 | |
| | | | | | | |
Cash tax impact of adjustments to GAAP net income (loss) | (0.01) | | | (0.01) | | | (0.03) | | | (0.03) | |
Non-cash income tax (benefit) expense | (0.06) | | | — | | | 0.02 | | | (0.02) | |
Non-GAAP Net Income (Loss) per share — Diluted | $ | (0.20) | | | $ | (0.26) | | | $ | 1.85 | | | $ | 2.05 | |
Diluted weighted average shares outstanding | 47,847 | | | 48,707 | | | 49,153 | | | 49,373 | |
____________________________
|
| | | | | | | | | | | | | | | |
(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 |
|
Three months ended September 30, 2017 compared with three months ended September 30, 2016
The decrease(1)Any difference in non-GAAPthe “per diluted share” amounts between this table and the condensed consolidated statements of operations is due to using different diluted weighted average shares outstanding in the event that there is GAAP net loss was primarily due to an increase in segment operating loss of $1.9 million related to our Tax Preparation segmentbut Non-GAAP Net Income and an increase in segment operating income of $0.8 million related to our Wealth Management segment. Further contributing to the decrease in non-GAAP net loss was a $3.4 million decrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts, primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Notes due to pay-off of the entire TaxAct - HD Vest 2015 credit facility and redemption of all of the Notes, respectively, in the second quarter of 2017, and a $2.0 million decrease in loss on debt extinguishment related to the TaxAct - HD Vest 2015 credit facility. The decreases in non-GAAP net loss were offset by a $0.3 million decrease in corporate operating expenses not allocated to the segments primarily due to changes in headcount across most functions.vice versa.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
The increase in non-GAAP net income was primarily due to increases in segment operating income of $10.4 million and $4.2 million related to our Tax Preparation and Wealth Management segments, respectively. Further contributing to the
increase in non-GAAP net income was a $9.7 million decrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts, primarily related to lower balances in the TaxAct - HD Vest 2015 credit facility and the Notes due to pay-off of the entire credit facility and redemption of all of the Notes, respectively, in the second quarter of 2017, and a $2.3 million decrease in loss on debt extinguishment related to the TaxAct - HD Vest 2015 credit facility. The increases in non-GAAP net income were offset by a $3.8 million increase in corporate operating expenses not allocated to the segments primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs, and a $0.8 million increase in taxes due to an increase in non-GAAP income.
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, 2017,2022, we had cash and marketablecash equivalents of $91.1 million. We generally invest our excess cash in money 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 held corporations, as well as commercial paper and insured time deposits with commercial banks. Specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held as of approximately $78.6 million, consisting entirely of cashSeptember 30, 2022 had minimal default risk and cash equivalents. short-term maturities.
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 Vest2022, 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 include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held at September 30, 2017 had minimal default risk and short-term maturities.
WeHistorically, we have financed our operations primarily from cash provided by operating activities. Accordingly, we believe that theactivities and access to credit markets. Our historical uses of cash generated fromhave been funding our operations, servicing our debt obligations, capital expenditures, acquisitions that enhance our strategic position, financial professional loans, contingent consideration associated with our acquisitions, and share repurchases under share repurchase programs. For at least the next twelve months, we plan to finance these cash needs and our regulatory capital requirements at our broker-dealer
Blucora, Inc. | Q3 2022 Form 10-Q 34
subsidiary largely through our cash and cash equivalents we have on hand will be sufficientand cash provided by operating activities. Execution of our growth strategies in our Wealth Management business through strategic asset acquisitions is expected to meet our operating, workingremain a capital and capital expenditure requirements for at leastallocation priority during the next 12twelve months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate. For further discussionaccurate, and, from time to time, we may make a determination to draw on the Revolver (as defined below) or increase the principal amount of the risks to our business related to liquidity, see the Risk Factor "Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficientTerm Loan (as defined below) to meet our anticipated cash needs for servicingcapital requirements, subject to customary terms and conditions. Our future investments in our business through capital expenditures or acquisitions, prepayment of debt workingto achieve optimal leverage ratios, or our return of capital and capital expenditures" in Part II Item 8to stockholders through stock repurchases, will be determined after considering the best interests of our Annual Report on Form 10-K for the year ended December 31, 2016.stockholders.
Use of CashIndebtedness
We may use our cash, cash equivalents, and short-term investments balance in the future on investment in our current businesses, for repayment of debt, for acquiring companies or assets that complement our Wealth Management and Tax Preparation businesses, or for returning capital to shareholders.
OnIn May 22, 2017, we entered into ana credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders that 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 general business purposes (as amended, the “Senior Secured Credit Facility”). The Term Loan has a $375.0maturity date of May 22, 2024 (the “Term Loan Maturity Date”).
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 $90.0 million in revolving credit facility.commitments (the “New Revolver”). The finalNew Revolver has a maturity datesdate of February 21, 2024 (the “New Revolver Maturity Date”).
As of September 30, 2022, we had $525.4 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, 2022, approximately $90.0 million was available for future borrowing as of September 30, 2022 under the Senior Secured Credit Facility, subject to customary terms and conditions, including caps on the amount of Company share repurchases during each fiscal year based, in part, on specified Net Leverage Ratios. 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 are May 22,Term Loan due on the Term Loan Maturity Date. On August 5, 2022, and May 22, 2024, respectively. as provided for within our Senior Secured Credit Facility, we voluntarily prepaid $35.0 million of principal outstanding under our Term Loan. At our election, this prepayment was first applied to the remaining quarterly principal amortization payments due on the Term Loan, with the remaining amount applied to the principal amount due at the Term Loan Maturity Date.
The interest ratesrate on the revolving credit loanTerm Loan is variable at the London Interbank Offered Rate (subject to a floor of 1.0%), 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, 2022, the applicable interest rate on the Term Loan was 6.3%. 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, typically quarterly.
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
Blucora, Inc. | Q3 2022 Form 10-Q 35
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 acquisition of Avantax Planning Partners 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 New Revolver 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, 2017.2022.
For additional information on the Term Loan, the New Revolver, and the Credit Agreement, see “Item 1. Financial Statements—Note 5.”
TaxAct Sale Transaction
The TaxAct Sale Transaction is expected to yield after-tax net cash proceeds of approximately $620.0 million. We initially borrowed $375.0expect to use the net proceeds to pay down existing indebtedness and return excess capital to stockholders.
Stock Repurchase Plan
As of December 31, 2021, we had $100.0 million authorized under our stock repurchase plan. Pursuant to the stock repurchase plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, restrictions in our Credit Agreement, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date. Any repurchases of our stock pursuant to the stock repurchase plan may materially reduce the amount of cash we have available and may not materially enhance the long-term value of our business or our stock.
For the three months ended September 30, 2022, we did not repurchase any shares of our common stock 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.stock repurchase plan. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Related to the TaxAct - HD Vest 2015 credit facility, we had repayment activity of $64.0 million and $105.0 million during the nine months ended September 30, 20172022, we repurchased approximately 1.9 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately $35.0 million. The remaining authorized amount under the stock repurchase plan as of September 30, 2022, was approximately $65.0 million. For the three and 2016, respectively. Relatednine months ended September 30, 2021, we did not repurchase any shares of our common stock under the stock repurchase plan.
For fiscal year 2022, restrictions in our Credit Agreement capped our share repurchases at $35.0 million. Subject to the Notes,terms of our Credit Agreement, a portion of our future capital requirements during fiscal year 2023 may encompass share repurchases under this plan.
Contractual Obligations and Commitments
On July 1, 2020, we repurchased $28.4closed the acquisition of Avantax Planning Partners, formerly “HKFS”, for an upfront cash purchase price of $104.4 million. The purchase price was subject to variable contingent consideration, or earn-out payments (the “HKFS Contingent Consideration”) totaling a maximum of $60.0 million.
The amounts owed for the HKFS Contingent Consideration were determined based on advisory asset levels (i) for the period beginning July 1, 2020 and ending June 30, 2021 and (ii) for the period beginning July 1, 2021 and ending June 30, 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
Blucora, Inc. | Q3 2022 Form 10-Q 36
Agreement”), the maximum aggregate amount that we were required to pay for each earn-out period was $30.0 million. If the asset market values on the applicable measurement date fell below certain specified thresholds, no payment of consideration was owed to the Sellers for such period.
Based on advisory asset levels for each earn-out period, we paid the full $30.0 million to the Sellers in the third quarter of 2021 for the first earn-out, and $23.0 million in the third quarter of 2022 for the second earn-out. There are no remaining contingent payments due to the Sellers as of September 30, 2022.
In addition, the Company has entered into several asset purchase agreements that are accounted for as asset acquisitions. These acquisitions may include up-front cash consideration, fixed deferred cash consideration, and contingent consideration arrangements. Future fixed payments are recognized as customer relationship intangible assets on the date of acquisition. Contingent consideration arrangements encompass obligations to make future payments to the previous sellers contingent upon the achievement of future financial targets. These contingent payments are not recognized until all contingencies are resolved and the consideration is payable. As of September 30, 2022, the maximum future fixed and contingent payments associated with these asset acquisitions was $23.7 million, with specified payment dates from 2022 through 2026. During the three months ended September 30, 2022, variable contingent consideration related to prior asset acquisitions became payable for approximately $1.5 million, which is included within the $23.7 million discussed above. This accrued consideration is within customer relationship intangibles and is expected to be paid during the fourth quarter of 2022.
Cash Flows
Our cash flows were comprised of the Notes'following (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | $ Change |
Net cash provided by operating activities | $ | 61,916 | | | $ | 74,391 | | | $ | (12,475) | |
Net cash used by investing activities | (20,897) | | | (25,447) | | | 4,550 | |
Net cash used by financing activities | (84,739) | | | (14,244) | | | (70,495) | |
| | | | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (43,720) | | | $ | 34,700 | | | $ | (78,420) | |
Net Cash from Operating Activities
Net cash provided by operating activities consists of net income, offset by certain non-cash adjustments, and changes in operating assets and liabilities, which were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | $ Change |
Net income | $ | 52,204 | | | $ | 31,451 | | | $ | 20,753 | |
Non-cash adjustments to net income | 55,458 | | | 73,111 | | | (17,653) | |
Operating cash flows before changes in operating assets and liabilities | 107,662 | | | 104,562 | | | 3,100 | |
Changes in operating assets and liabilities, net of acquisitions and disposals | (45,746) | | | (30,171) | | | (15,575) | |
Net cash provided by operating activities | $ | 61,916 | | | $ | 74,391 | | | $ | (12,475) | |
Net cash provided by operating activities for cash of $20.7 million during the nine months ended September 30, 2016. For further detail, see "Note 7: Debt"2022, included $107.7 million of operating cash flows before changes in operating assets and liabilities and $45.7 million of changes in operating assets and liabilities. Non-cash adjustments to net income for the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
On July 2, 2015, TaxAct acquired SimpleTax, which included additional consideration of up to C$4.6 million (with C$ indicating Canadian dollars and amounting to approximately $3.7 million based on the acquisition-date exchange rate). The related payments are contingent upon product availability and revenue performance over a three-year period and are expected to occur annually over that period. The first payment was made in the first quarter of 2017, and the remaining payments of $2.7 million are expected through 2019. For further detail, see "Note 6: Fair Value Measurements" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Contractual Obligations and Commitments
The material events during 2017, outside of the ordinary course of our business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of $3.8 millionnine months ended September 30, 2022 primarily related to depreciation and amortization costs of $35.1 million, stock-based compensation of $17.1 million, changes in the sublease agreement forfair value of the Bellevue facility (as discussed furtherHKFS Contingent Consideration liability of $5.3 million, and $3.8 million of amortization related to payments made to financial professionals in "Note 5: Restructuring"), purchase commitments with a vendorsupport of ongoing growth programs. Changes in operating assets and liabilities were primarily impacted by $9.2 million in payments made to provide cloud computation servicesfinancial professionals in support of $11.3ongoing growth programs, $8.5 million overof the next four years, and a commitment to switch to a new clearing firm provider that has been selected by the Company bytotal $23.0 million HKFS Contingent Consideration earn-out payment made in the third quarter of 2018. Additional information2022, and the timing of settlement for our working capital accounts. The remainder of the HKFS Contingent Consideration earn-out payment is included in net cash from financing activities.
Blucora, Inc. | Q3 2022 Form 10-Q 37
Net Cash from Investing Activities
Net cash used by investing activities consists of acquisitions and purchases of property, equipment, and software, and were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | $ Change |
Purchases of property, equipment, and software | $ | (17,154) | | | $ | (21,624) | | | $ | 4,470 | |
| | | | | |
Asset acquisitions | (3,743) | | | (3,823) | | | 80 | |
| | | | | |
| | | | | |
| | | | | |
Net cash used by investing activities | $ | (20,897) | | | $ | (25,447) | | | $ | 4,550 | |
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, net cash used by investing activities decreased $4.6 million primarily due to reduced internally developed capital software expenditures.
Net Cash from Financing Activities
Net cash from financing activities primarily consists of debt issuance and repayments, common stock and stock-based awards transactions, and acquisition-related contingent consideration payments. Financing cash flows were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | $ Change |
Proceeds from credit facilities, net of debt discount and issuance costs | $ | — | | | $ | (502) | | | $ | 502 | |
Payments on credit facilities | (35,906) | | | (1,359) | | | (34,547) | |
| | | | | |
Acquisition-related contingent consideration payments | (14,548) | | | (13,150) | | | (1,398) | |
Stock repurchases | (35,000) | | | — | | | (35,000) | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from issuance of stock through employee stock purchase plan | 2,324 | | | 1,845 | | | 479 | |
Tax payments from shares withheld for equity awards | (2,090) | | | (1,613) | | | (477) | |
Proceeds from stock option exercises | 481 | | | 535 | | | (54) | |
Net cash used by financing activities | $ | (84,739) | | | $ | (14,244) | | | $ | (70,495) | |
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, we used $70.5 million more cash for financing activities, primarily due to the repurchase of approximately 1.9 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately $35.0 million, and the voluntary prepayment of $35.0 million of principal outstanding under our Term Loan.
Critical Accounting Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and the disclosures included elsewhere in this Quarterly Report on Form 10-Q are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingencies. In some cases, we could have reasonably used different accounting policies and estimates.
We have identified certain accounting estimates which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our Commitmentsfinancial condition or results of operations. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, current conditions, and Contingencies canon various other assumptions that we believe to be foundreasonable 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 critical accounting estimates which we believe to be the most critical in the preparation of our condensed consolidated financial statements involve business combinations, goodwill impairment, and income taxes. We continually update and assess the facts, circumstances, and assumptions used in making both our critical accounting estimates and judgments related to our other significant accounting matters.
There have been no material changes in our critical accounting policies as disclosed under “Critical Accounting Estimates” in Part II, Item 7 and in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating leases.
Cash Flows
Our cash flows were comprised of the following:2021.
Blucora, Inc. | Q3 2022 Form 10-Q 38
|
| | | | | | | |
(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 the operating activities of continuing operations: Net cash from the operating activities of continuing operations consists of income from continuing operations, offset by certain non-cash adjustments, and changes in our working capital.
Net cash provided by operating activities was $79.2 million and $88.5 million for the nine months ended September 30, 2017 and 2016, respectively. The activity 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 contribution primarily related to the impact of TaxAct's seasonality, HD Vest 2016 prepayments, recognition of deferred revenues in our Tax Preparation segment and restructuring activities.
The activity in the nine months ended September 30, 2016 included a $43.8 million working capital contribution and approximately $44.7 million of income from continuing operations (offset by non-cash adjustments). The working capital contribution was driven by accrued expenses and the impact of excess tax benefits from stock-based activity primarily due to utilizing net operating loss carryforwards from prior years. In addition, in connection with the acquisition of HD Vest, we had placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance, and that amount was returned to us in the first quarter of 2016 since it was not achieved (see "Note 3: Business Combinations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information).
Net cash from the investing activities of continuing operations: Net cash from the investing activities of continuing operations primarily consists of cash outlays for business acquisitions, transactions (purchases of and proceeds from sales and
maturities) related to our investments, and purchases of property and equipment. Our investing activities can fluctuate from period-to-period primarily based upon the level of acquisition activity.
Net cash provided by investing activities was $3.3 million for the nine months ended September 30, 2017 and net cash from investing activities was $2.3 million for the nine months ended September 30, 2016. The activity in the nine months ended September 30, 2017 primarily consisted of net cash inflows on our available-for-sale investments of $7.1 million offset by approximately $3.8 million in purchases of property and equipment. The activity in the nine months ended September 30, 2016 consisted of 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.
Net cash from the financing activities of continuing operations: Net cash from the financing activities of continuing operations primarily consists of transactions related to the issuance of debt and stock. Our financing activities can fluctuate from period-to-period based upon our financing needs and market conditions that present favorable financing opportunities.
Net cash used by financing activities was $58.6 million and $124.6 million for the nine months ended September 30, 2017 and 2016, respectively. The activity for the nine months ended September 30, 2017 primarily consisted of payments of $285.0 million in connection with the termination of the TaxAct - HD Vest credit facility, $172.8 million for redemption in full of the outstanding Notes, $6.7 million in tax payments from shares withheld for equity awards, and $0.9 million in contingent consideration paid related to the 2015 acquisition of SimpleTax. These cash outflows were offset by approximately $367.2 million in proceeds from the senior secured credit facility that was entered into in May 2017 and $39.7 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.
The activity for the nine months ended September 30, 2016 primarily consisted of payments of $105.0 million on the TaxAct - HD Vest credit facility, the $20.7 million repurchase of the Notes, and $1.4 million in tax payments from shares withheld for equity awards. These cash outflows were offset by approximately $2.5 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.
Critical Accounting Policies and Estimates
Our critical accounting policies, estimates, and methodologies for the nine months ended September 30, 2017 are consistent with those in Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
See "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to ourthe financial instruments for which we are exposed to market risk, as disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021, during the nine months ended September 30, 2017, other than related to borrowings2022. As of September 30, 2022, we had $525.4 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“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, 2022 would result in a $3.5$8.9 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, 2016.2021.
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, 2017.2022. 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, 2017.2022.
Changes in Internal Control over Financial Reporting
There waswere no change inchanges to our internal control over financial reporting that occurred during the third quarter of 2017nine months ended September 30, 2022 that hashave materially affected, or isare reasonably likely to materially affect, our 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 regarding legal proceedings.
Item 1A. Risk Factors
Refer toOur business and future results may be affected by a number of risks and uncertainties that should be considered carefully. In addition, this Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including the risks described in Part I, Item 1A of the Company’sour Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of risk factors relating to2021 and the Company’s business. The Company believesrisks set forth below.
Except as follows, we believe that there hashave been no material changechanges in itsour risk factors as previously disclosed in theour Annual Report on Form 10-K other than as follows:for the year ended December 31, 2021.
Increased government regulation of our business may harm our operating results.
We are subjectOur agreement to federal, state, and local laws and regulations that affect our activities, including, without limitation, areas of labor, advertising, tax, financial services, data privacy and security requirements, digital content, consumer protection, real estate, billing, promotions, quality of services, intellectual property ownership and infringement, anti-corruption, foreign exchange controls and cash repatriation restrictions, anti-competition, environmental, health, and safety. There have been significant new regulations and heightened focus by the government on many of these areas, as well as in areas such as insurance and healthcare (including, for example, the Affordable Care Act). As we complete our Strategic Transformation and expand our products and services and revise our business models, we may become subject to additional government regulation or increased regulatory scrutiny. Regulators may adopt new laws or regulations or their interpretation of existing laws or regulations may differ from ours as well as the laws of other jurisdictions in which we operate. The Trump Administration has called for a broad review of, and potentially significant changes to, U.S. fiscal and tax laws and regulations. These changes may include comprehensive tax reform as well as the rolling back or repeal of various financial regulations, including the Department of Labor (the "DOL") fiduciary rule (the "Fiduciary Rule") and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). We cannot predict whether, when or to what extent new U.S. federal laws, regulations, interpretations or rulings will be issued, nor is the impact of such changes onsell our Tax Preparation or Wealth Management businesses clear. It is possible that some policies adopted bySoftware business (or the Trump administration will negatively affect us.
These regulatory requirements could impose significant limitations, require changes to our business, require notification to customers, clients, or employees of a security breach, restrict our use of personal information, or cause changes in customer purchasing behavior thatannouncement thereof) may make our business more costly, less efficient, or impossible to conduct, and may require us to modify our current or future products or services, which may materially harm our future financial results.
The tax preparation industry continues to receive heightened attention from federal and state governments. New legislation, regulation, public policy considerations, changes in the cybersecurity environment, litigation by the government or private entities, or new interpretations of existing laws may result in greater oversight of the tax preparation industry, restrict the types of products and services that we can offer or the prices we can charge, or otherwise cause us to change the way we operate our Tax Preparation business or offer our tax preparation products and services. We may not be able to respond quickly to such regulatory, legislative and other developments, and these changes may in turn increase our cost of doing business and limit our revenue opportunities. In addition, if our practices are not consistent with new interpretations of existing laws, we may become subject to lawsuits, penalties, and other liabilities that did not previously apply. We are also required to comply with a variety of state revenue agency standards in order to successfully operate our tax preparation and electronic filing
services. Changes in state-imposed requirements by one or more of the states, including the required use of specific technologies or technology standards, may significantly increase the costs of providing those services to our customers and may prevent us from delivering a quality product to our customers in a timely manner and at an acceptable price.
Our Wealth Management business is subject to certain additional financial industry regulations and supervision, including by the Securities and Exchange Commission, the DOL, the Financial Industry Regulatory Authority, state securities and insurance regulators, and other regulatory authorities. Our failure to comply with the laws, rules, and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of the states and other jurisdictions in which we do business could result in the restriction of the ongoing conduct or growth, or even liquidation of, parts of our business and otherwise materially impact our financial condition, results of operations, and liquidity. These regulatory authorities continuously review legislative and regulatory initiatives and may adopt new or revised laws, regulations, or interpretations, and there can also be no assurance that other federal or state agencies will not attempt to further regulate our business. The Dodd-Frank Act, enacted into law in 2010, called for sweeping changes in the supervision and regulations of the wealth management industry. Regulators implementing the Dodd-Frank Act have adopted, proposed to adopt, and may in the future adopt regulations that could impact the manner in which we will market HD Vest products and services, manage HD Vest operations, and interact with regulators. As noted above, the Trump Administration has called for a broad review of, and potentially significant changes to, U.S. fiscal laws and regulations which may include the rolling back or even repeal of certain financial regulations, including but not limited to the Dodd-Frank Act. If such changes are enacted, they could have a negative impact ondisrupt our business.
In April 2016,The Stock Purchase Agreement, dated as of October 31, 2022 (the “Stock Purchase Agreement”), by and among the DOL publishedCompany, TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC (“Buyer”) and DS Admiral Bidco, LLC generally requires us to operate the Fiduciary Rule and two new administrative class exemptions fromTax Software business in the prohibited transaction exemptions, as well as amendments to previously granted exemptions under Employee Retirement Income Security Actordinary course of 1974, as amended ("ERISA"), which redefines the term "fiduciary" and who may be considered a fiduciary under ERISA, i.e., financial institutions and financial advisors, and specifies how such fiduciaries must provide investment advice to individual retirement accounts or other accounts, the assets of which are subject to section 4975business consistent with past practice pending consummation of the Internal Revenue Code (collectively, the "Covered Accounts"). Over the past several quarters, Covered Accounts made up approximately half of HD Vest's assets under administration. The new Fiduciary Rule focuses on conflicts of interest related to investment recommendations made by financial institutionstransaction and financial advisors to clients holding Covered Accounts. The rules bring virtually all of the investment products and services HD Vest currently provides to Covered Account owners within the scope of ERISA.
On February 3, 2017, President Trump issued a memorandum directing the Secretary of Labor to prepare an updated analysis of the likely impact of the Fiduciary Rule on investors’ access to retirement information and financial advice. As a result of the President’s memorandum, the DOL issued a final rule extending the applicability date of the Fiduciary Rule by 60 days,restricts us, without Buyer’s consent, from April 10, 2017 to June 9, 2017, and requiring investment advice fiduciaries relying ontaking certain prohibited transaction exemptions to adhere only to the Impartial Conduct Standards as conditions of those exemptions during a transition period from June 9, 2017 to January 1, 2018 (the "Transition Period").
On May 22, 2017, the DOL issued a temporary enforcement policy covering the Transition Period, during which the DOL will not pursue claims against investment advice fiduciaries who are working diligently and in good faith to comply with their fiduciary duties and to meet the conditions of the prohibited transaction exemptions, or otherwise treat investment advice fiduciaries as being in violation of their fiduciary duties. The Treasury Department and IRS confirmed a similar enforcement policy covering excise taxes and related reporting obligationsspecified actions with respect to transactions covered by the DOL’s enforcement policy.
On August 31, 2017,Tax Software business until the DOL issued a proposed rule to delay the effective datecompletion of the Fiduciary Rule’s transaction exemptions to July 1, 2019. The purposesale of the proposed delay isTax Software business to permitBuyer on the DOLterms and subject to complete the analysis required by the President’s memorandum. The comment period for the proposed rule closed on September 15, 2017 but the DOL had not issued a final rule as of the date of this report. In the proposed rule, the DOL solicited comments on whether this delay should be extended beyond July 1, 2019 or made contingent upon other events, such as the conclusion of any additional substantive rulemaking affecting the Fiduciary Rule or the transaction exemptions. The proposed rule would also extend the Transition Period, and continue the DOL’s previously announced temporary enforcement policy, through the pendency of any delay. The DOL also solicited comments about whether application of the enforcement policy should be made contingent on any particular factors, such as a firm’s continued good faith efforts to comply with the Fiduciary Rule. We cannot predict what the DOL’s final rule will provide on these matters.
The Fiduciary Rule, should it remain unchanged, will require HD Vest to either: (1) subject Covered Accounts to a level fee arrangement under which (a) the firm and affiliates receive a fee based on a fixed percentage of the value of assetsconditions set forth in the account and (b) no ERISA prohibited transactions are otherwise implicated; or (2) comply with one of the DOL prohibited
transaction exemptions that impose significant new and additional compliance and disclosure requirements, and restrict the manner in which HD Vest can earn revenue and pay its financial advisors.
Accordingly, it is uncertain whether the Fiduciary Rule will become applicable, when it will be applicable, and what form any final rule might take after the required review is completed. If the Fiduciary Rule is applied in its current form, it will impact how HD Vest (i) designs investment products and services for Covered Accounts, (ii) receives fees, (iii) compensates its financial advisors, and (iv) recruits and retains financial advisors. Additionally, the Fiduciary Rule will require HD Vest to change systems and implement new compliance programs and client disclosures. In addition, if HD Vest relies on the new Best Interest Contract prohibited transaction exemption, the firm will be required to adopt new "impartial conduct" policies and procedures and make contractual representations and warranties to clients that HD Vest will comply with such policies and procedures and abide by fiduciary standards.Stock Purchase Agreement (the “TaxAct Sale Transaction”). These requirements, coupled with ambiguity inherent in the Fiduciary Rule, will likely lead to increased regulatory scrutiny and litigation related to the provision of investment advice to Covered Accounts and ERISA investors. Our management has devoted and, if the Fiduciary Rule is applied in its current form, expects to continue to devote substantial time and resources to assess the new rule, implement required policies and procedures, and develop and execute a business strategy in light of the rule, diminishing the firm’s ability to focus on other initiatives. Depending on the scope of required changes, if HD Vest is not able to complete necessary modifications to its business practices and operational systems by the applicability date, its ability to process business for Covered Accounts will be negatively impacted. As a result, the Fiduciary Rule and related litigation and regulatory scrutiny could materially and adversely impact our financial condition and results of operations. In addition, investigations, claims, or other actions or proceedings by regulators or third-parties with respect to our compliance with the Fiduciary Rulerestrictions may also have a material adverse effect on our financial condition and results of operations.
Our ability to comply with all applicable laws, rules and regulations, and interpretations is largely dependent on our establishment and maintenance of compliance, audit, and reporting systems and procedures, as well asaffect our ability to attractexecute our business strategies, respond effectively to competitive pressures and retain qualified compliance, audit,industry developments and risk management personnel. While we have adopted systems, policies,attain our financial and procedures reasonably designed to comply or facilitate compliance with all applicable laws, rulesother goals, and regulations, and interpretations, these systems, policies, and procedures may not be fully effective. There can be no assurance that we will not be subject to investigations, claims, or other actions or proceedings by regulators or third-parties with respect to our past or future compliance with applicable laws, rules, and regulations, the outcome of whichrestrictions may have a material adverse effect on our financial condition, results of operations and cash flows.
Employee retention and recruitment may be challenging before the completion of the TaxAct Sale Transaction, as employees and prospective employees may experience uncertainty about their future roles. If, despite our retention and recruiting efforts, key employees depart or prospective key employees fail to accept employment with the Company because of issues relating to the uncertainty relating to the TaxAct Sale Transaction or a desire not to
Blucora, Inc. | Q3 2022 Form 10-Q 39
remain either with TaxAct or the Company, our business, financial condition and results of operations could be materially adversely affected.
The TaxAct Sale Transaction could also cause disruptions to our business or business relationships, which could have a material adverse impact on our business, financial condition and results of operations. Parties with which we have business relationships, including customers, suppliers, clients and financial professionals, may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us.
The pursuit of the TaxAct Sale Transaction may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could materially adversely affect our business, financial condition and results of operations. Furthermore, we expect to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the TaxAct Sale Transaction. A material portion of these expenses are payable by us whether or not the TaxAct Sale Transaction is completed.
HD Vest distributes itsThe TaxAct Sale Transaction may not successfully close, and, even if it does, we may fail to realize all of the anticipated benefits of the TaxAct Sale Transaction, or those benefits may take longer to realize than expected.
We cannot be certain when or if the conditions for the TaxAct Sale Transaction will be satisfied or (if permissible under applicable law) waived. The TaxAct Sale Transaction cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions. We or Buyer may terminate the Stock Purchase Agreement if the TaxAct Sale Transaction is not consummated by January 15, 2023.
In the event that the TaxAct Sale Transaction is not consummated for any reason, we will not receive any cash proceeds from the sale (except that in certain circumstances, we may be entitled to a termination fee). Additionally, if the TaxAct Sale Transaction is not consummated in a timely manner or at all, our ongoing business may be materially adversely affected, including due to negative reactions from financial markets and a decline in the price of our common stock to the extent that the current market price of our common stock reflects an assumption that the transaction will be completed, negative reactions from employees, customers, suppliers or other third parties, the diversion of management’s attention from pursuing other potential divestitures of the Tax Software business and higher than anticipated costs of pursuing the TaxAct Sale Transaction. If the TaxAct Sale Transaction is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect the price of shares of our common stock or our business, financial condition or results of operations.
Furthermore, even if the TaxAct Sale Transaction is consummated, we may fail to realize the strategic and financial benefits that management expects as a result of the transaction, including due to unforeseen difficulties in the separation of operations, services, products and personnel (including with respect to our provision of transition services throughto Buyer and Buyer’s provision of transition services to us), the diversion of management’s attention, the disruption of our business and the potential loss of key employees. Moreover, we may not realize the anticipated strategic and financial advisors who affiliatebenefits of the TaxAct Sale Transaction within the currently anticipated timeframe, including, without limitation, if the period during which we are providing transition services is extended.
In connection with the firm as independent contractors.consummation of the TaxAct Sale Transaction, we will be required to pay off our existing indebtedness under the Credit Agreement. If we are unable to secure financing on desirable terms after the consummation of the TaxAct Sale Transaction, our capital structure may include limited or no indebtedness, and we may not be able to return capital to stockholders in the amount anticipated.
Upon the closing of the TaxAct Sale Transaction, we expect to receive approximately $620.0 million of net after-tax proceeds. We intend to use these proceeds to pay off existing indebtedness and then enter into new financing arrangements and use the excess remaining cash to return capital to stockholders. The debt markets are unpredictable and subject to change. There can be no assurance that legislative, judicial, or regulatory (including tax) authoritieswe will be able to enter into new financing arrangements on desirable terms, if at all. We will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our financial advisors as independent contractors. Although we believe we have properly classified our advisors as independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities may determine that we have misclassified our advisors as independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attemptbe able to impose fines and penalties, which could have a material adverse effect on our business model, financial condition, and results of operations.
Risks Relatedreturn capital to our Financing Arrangements
We incurred debt in connection with the repayment of our credit facility used for the acquisition of HD Vest and the redemption of our convertible senior notes and may incur future debt, which may materially and adversely affect our financial condition and future financial results.
On May 22, 2017, we borrowed $375.0 millionstockholders in the form of a term loan under a Credit Agreement to whichamount anticipated until we and most of our direct and indirect domestic subsidiaries (in their capacity as guarantors), are parties. The final maturity date of the term loan is May 22, 2024. The proceeds of the term loan were used to repay in full the credit facility used for the acquisition of HD Vest and to redeem in full our convertible senior notes. We may also borrow an additional amount under this Credit Agreement of up to $50.0 million under a revolving credit arrangement.enter into acceptable financing arrangements.
This borrowing may materially and adversely affect our financial condition and future financial results by, among other things:Blucora, Inc. | Q3 2022 Form 10-Q 40
increasing our vulnerability to downturns in our businesses, to competitive pressures, and to adverse economic and industry conditions;
requiring the dedication of a portion of our expected cash from operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and complementary acquisitions;
increasing our interest payment obligations in the event that interest rates rise; and
limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.
Our Credit Agreement imposes restrictions on us, including restrictions on our ability to create liens, incur indebtedness and make investments. In addition, our Credit Agreement includes covenants, the breach of which may cause the outstanding indebtedness to be declared immediately due and payable. This borrowing, and our ability to repay it, may also negatively impact our ability to obtain additional financing in the future and may affect the terms of any such financing.
In addition, we or our subsidiaries, may incur additional debt in the future. Any additional debt may result in risks similar to those discussed above or in other risks specific to the credit agreements entered into for those debts.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.The Company has a stock repurchase plan pursuant to which we may repurchase our common stock through a variety of methods, including open market or privately negotiated transactions. As of September 30, 2022, the remaining authorized repurchases under the stock repurchase plan was $65.0 million.
The following table details our repurchases of common stock for the nine months ended September 30, 2022 (in thousands, except the average price paid per share data): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs |
January 1-31, 2022 | | 190 | | | $ | 15.73 | | | 190 | | | $ | 97,007 | |
February 1-28, 2022 | | 524 | | | $ | 18.12 | | | 524 | | | $ | 87,510 | |
March 1-31, 2022 | | 931 | | | $ | 19.39 | | | 931 | | | $ | 69,463 | |
April 1-30, 2022 | | 230 | | | $ | 19.40 | | | 230 | | | $ | 65,000 | |
May 1-31, 2022 | | — | | | $ | — | | | — | | | $ | 65,000 | |
June 1-30, 2022 | | — | | | $ | — | | | — | | | $ | 65,000 | |
July 1-31, 2022 | | — | | | $ | — | | | — | | | $ | 65,000 | |
August 1-31, 2022 | | — | | | $ | — | | | — | | | $ | 65,000 | |
September 1-30, 2022 | | — | | | $ | — | | | — | | | $ | 65,000 | |
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Total | | 1,875 | | | $ | 18.67 | | | 1,875 | | | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
The Company moved its headquarters moved to Irving, Texas from Bellevue, Washington in June 2017, and Eric M. Emans, the Company's Chief Financial Officer, has decided not to relocate with the Company. Consequently, on October 23, 2017, Mr. Emans informed the Company that he intends to resign effective 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 to the Company’sNone.
Blucora, Inc. | Q3 2022 Form 10-Q on October 27, 2016.41
In connection with this announcement, on October 25, 2017 the Company entered into a Consulting Agreement with Mr. Emans that will become effective on November 2, 2017. Pursuant to the Consulting Agreement, Mr. Emans will serve as a consultant to the Company to assist with the Chief Financial Officer transition and other matters that may be requested by the Company and will receive $50,500 per month through February 28, 2018 when the Consulting Agreement terminates. In addition, Mr. Emans will receive $550,000 upon termination or expiration of the Consulting Agreement. The Consulting Agreement also contains a customary confidentiality provision and customary covenants regarding non-competition, non-recruitment, non-solicitation and non-disparagement. The foregoing description of Mr. Emans’ Consulting Agreement does not purport to be complete and is qualified in its entirety by the Consulting Agreement, a copy of which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and is incorporated by reference herein.
Following Mr. Emans’ notice of resignation, on October 23, 2017, the Board of Directors of the Company appointed John Palmer, the Company's Vice President - Accounting, to serve as its Principal Accounting Officer and its Principal Financial Officer, effective as of Mr. Emans’ departure from the Company on November 1, 2017 and continuing until a new Chief Financial Officer has been hired. In connection with Mr. Palmer’s appointment as Principal Accounting and Financial Officer, Mr. Palmer will receive a cash bonus of $50,000 that will be paid upon the earlier of (i) the hiring of a new Chief Financial Officer or (ii) March 31, 2018. If a new Chief Financial Officer is not hired prior to March 31, 2018, Mr. Palmer will receive an additional $10,000 per month until the new Chief Financial Officer is hired.There is no family relationship between Mr. Palmer and any director, executive officer, or person chosen by the Company to become a director or executive officer. There are no transactions to which the Company or any of its subsidiaries is a party and in which Mr. Palmer has a direct or indirect material interest subject to disclosure under Item 404(a) of Regulation S-K, and there are no arrangements or understandings between Mr. Palmer and any other persons pursuant to which he was selected to serve as the Company’s Principal Accounting and Financial Officer.
.
Mr. Palmer, 51, has served as the Company’s Vice President - Accounting since February 2017. Prior to joining the Company, Mr. Palmer served as Vice President and Chief Accounting Officer at Sizmek, Inc., a global technology company that provides technology-enabled advertising services, from the time it was spun-off from Digital Generation, Inc. in February 2014 until February 2017. Mr. Palmer served as Vice President and Controller at Digital Generation, Inc. from March 2003 to February 2014. Prior to that, Mr. Palmer held a variety of controller positions for technology companies, including Entrust Technologies, Inc. and Nortel Networks, Inc. He began his career working at each of KPMG and Ernst & Young.
Item 6. Exhibits
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Exhibit Number | | Exhibit Description | | Form | | Date of First Filing | | Exhibit Number | | Filed Herewith |
| | Stock Purchase Agreement, dated as of March 18, 2019, by and among 1G Acquisitions, LLC, 1st Global, Inc., 1st Global Insurance Services, Inc., the sellers named therein and joinder sellers, SAB Representative, LLC, as the sellers’ representative, and Blucora, Inc., as guarantor | | 8-K | | March 19, 2019 | | 2.1 | | |
| | Stock Purchase Agreement, dated as of January 6, 2020, by and among Blucora, Inc., Honkamp Krueger Financial Services, Inc., the sellers named therein, and JRD Seller Representative, LLC, as the sellers’ representative, as amended by First Amendment to Stock Purchase Agreement, dated April 7, 2020 and Second Amendment to Stock Purchase Agreement, dated June 30, 2020 | | 8-K | | July 1, 2020 | | 2.1 | | |
| | Third Amendment to Stock Purchase Agreement, dated June 29, 2021, by and among Spirit Acquisitions, LLC, Honkamp Krueger Financial Services, Inc., the sellers named therein, and JRD Seller Representative, LLC, as the sellers’ representative | | 8-K | | July 2, 2021 | | 2.1 | | |
| | Stock Purchase Agreement, dated as of October 31, 2022, by and among Blucora, Inc., TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC and DS Admiral Bidco, LLC | | 8-K | | November 1, 2022 | | 2.1 | | |
| | Amended and Restated Bylaws of Blucora, Inc. dated August 14, 2022 | | 8-K | | August 18, 2022 | | 3.1 | | |
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| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exchange Act rules 13a-14(a) and 15d-14(a)) | | | | | | | | X |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exchange Act rules 13a-14(a) and 15d-14(a)) | | | | | | | | X |
| | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) | | | | | | | | X |
| | Certification of Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) | | | | | | | | X |
101 | | The following financial statements from the Company's Form 10-Q for the fiscal quarter ended September 30, 2022, formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (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 |
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____________________________
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* | | The certifications attached as Exhibits 32.1 and 32.2 are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Blucora, Inc. under the Securities Act of 1933, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. |
Blucora, Inc. | Q3 2022 Form 10-Q 42
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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.
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| BLUCORA, INC. |
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| BLUCORA, INC.By: | /s/ Marc Mehlman |
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| By: | /s/ Eric M. Emans |
| | Eric M. Emans
Marc Mehlman Chief Financial Officer (On behalf of the Registrantregistrant and as Principal Financial Officer)
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| Date: | October 26, 2017November 1, 2022 |
- 40 -Blucora, Inc. | Q3 2022 Form 10-Q 43