On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations") and the divestitures of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part of the Strategic Transformation and "One Company" operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. 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.
Segments:The Company has two reportable segments: the Wealth Management segment and the Tax Preparation 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, 2016.2022. Interim results are not necessarily indicative of results for a full year.
Cash,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, 2022. Other than below, there have been no significant changes in our significant accounting policies since December 31, 2022.
Derivative Financial Instruments
We primarily enter into derivative financial instruments as part of our strategy to manage our exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash equivalents,to the other party based on a notional amount and restricted cash:an underlying term (such as an interest rate or index) as specified in the contract. The following table presentsamount of cash cash equivalents, and restricted cash as reporteddelivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. We do not enter into derivative instruments for any purpose other than hedging interest rate risk, and none of our derivative instruments are used for trading purposes.
We recognize derivatives as assets or liabilities on our 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 gainsin accordance with ASC 815, Derivatives 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.
Hedging. The Company has a contingent consideration liability that is related to the Company's 2015 acquisition 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, and the discount rate. The changeaccounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the contingent consideration liabilitytype of hedging relationship. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Currently, we have only designated derivative instruments as cash flow hedges. We may also enter into derivative contracts that are intended to economically hedge interest rate risk, even though hedge accounting does not apply, or we elect not to apply hedge accounting.
To qualify for hedge accounting, concurrent with the execution of a derivative contract, we formally document our risk management objective and strategy for undertaking the hedging transaction, how the hedging instrument is expected to hedge the designated risk related to the hedged item, and the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.
For derivatives designated as cash flow hedging instruments, changes in fair value are initially recorded net of tax in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged transaction affects earnings. Additionally, changes in the fair value of amounts excluded from the assessment of effectiveness are recorded net of tax in accumulated other comprehensive income (loss) and recognized in "Generalearnings using a straight-line amortization method over the term of instrument. Changes in fair value for derivative contracts that do not qualify for hedge accounting (or for those that we elect to not apply hedge accounting), are immediately recognized within earnings. Realized and administrative" expense onunrealized gains and losses for derivatives are presented in the consolidated statements of comprehensive income (loss) based on the nature and use of the instrument.
We prospectively discontinue hedge accounting if it is determined that the derivative is no longer effective in offsetting the designated risk of the hedged item, the derivative is terminated prior to maturity, or the occurrence of the forecasted transaction (for a cash flow hedge) is no longer probable. When hedge accounting for a cash flow hedge is discontinued, any subsequent changes in fair value of the derivative are recognized immediately in earnings. The cumulative unrealized gain or loss related to the discontinued hedge continues to be reported in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the same manner
Avantax, Inc. | Q3 2023 Form 10-Q 11
discussed above, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period, in which the fair value changes.
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 withcase 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, beginningunrealized gain or loss is reclassified into earnings immediately.
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. For the three months ended September 30, 2017, the Company recognized an estimated $7.0 million increase to the income tax provision, which resulted in a $7.0 million decrease to income from continuing operations 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 cost 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 change during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total 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 3: Discontinued Operations
On October 31, 2022, we entered into the Purchase Agreement with the Buyer to sell our former tax software business for an aggregate purchase price of $720.0 million in cash, subject to customary purchase price adjustments set forth in the Purchase Agreement. The TaxAct Sale subsequently closed on December 19, 2022. This divestiture was considered part of our strategic shift to become a pure-play wealth management company and was determined to meet discontinued operations accounting criteria under ASC 205.
During the nine months ended September 30, 2023, we finalized our previously estimated closing date working capital balance, resulting in an incremental pre-tax gain of $2.5 million which is included within “Pre-tax gain on disposal” in the condensed consolidated statements of comprehensive income (loss).
The following table presents summarized information regarding certain components of income (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues | $ | — | | | $ | 6,664 | | | $ | — | | | $ | 242,028 | |
Operating expenses | — | | | 19,425 | | | — | | | 142,579 | |
Interest expense and other, net | — | | | (9,591) | | | — | | | (25,284) | |
Income (loss) from discontinued operations before gain on disposal and income taxes | — | | | (22,352) | | | — | | | 74,165 | |
Pre-tax gain on disposal | — | | | — | | | 2,539 | | | — | |
Income (loss) from discontinued operations before income taxes | — | | | (22,352) | | | 2,539 | | | 74,165 | |
Income tax benefit (expense) | — | | | 190 | | | (618) | | | (26,681) | |
Income (loss) from discontinued operations | $ | — | | | $ | (22,162) | | | $ | 1,921 | | | $ | 47,484 | |
Note 4: Discontinued OperationsRevenue Recognition
On November 17, 2016,Revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue.
Revenues by major category and the Company closedtiming of revenue recognition was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Recognized upon transaction: | | | | | | | |
Commission | $ | 20,448 | | | $ | 17,868 | | | $ | 57,333 | | | $ | 56,373 | |
Transaction and fee | 1,054 | | | 1,307 | | | 3,066 | | | 3,813 | |
Total revenue recognized upon transaction | $ | 21,502 | | | $ | 19,175 | | | $ | 60,399 | | | $ | 60,186 | |
Recognized over time: | | | | | | | |
Advisory | $ | 108,393 | | | $ | 95,070 | | | $ | 309,234 | | | $ | 306,394 | |
Commission | 22,903 | | | 23,920 | | | 69,329 | | | 75,905 | |
Asset-based | 33,444 | | | 21,147 | | | 100,524 | | | 33,774 | |
Transaction and fee | 6,101 | | | 5,720 | | | 17,765 | | | 17,845 | |
Total revenue recognized over time | $ | 170,841 | | | $ | 145,857 | | | $ | 496,852 | | | $ | 433,918 | |
Total revenue: | | | | | | | |
Advisory | $ | 108,393 | | | $ | 95,070 | | | $ | 309,234 | | | $ | 306,394 | |
Commission | 43,351 | | | 41,788 | | | 126,662 | | | 132,278 | |
Asset-based | 33,444 | | | 21,147 | | | 100,524 | | | 33,774 | |
Transaction and fee | 7,155 | | | 7,027 | | | 20,831 | | | 21,658 | |
Total revenue | $ | 192,343 | | | $ | 165,032 | | | $ | 557,251 | | | $ | 494,104 | |
Avantax, Inc. | Q3 2023 Form 10-Q 12
Note 5: Asset Acquisitions
During the nine months ended September 30, 2023, we completed acquisitions that met the criteria to be accounted for as asset acquisitions. Total initial purchase consideration, including acquisition costs and fixed deferred payments, was $5.2 million. This purchase consideration was allocated to client relationship intangibles. Client relationship intangibles are amortized on a 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 until all contingencies related to the achievement of future financial targets are resolved and the consideration is payable. As of September 30, 2023, the maximum future fixed and contingent payments associated with all prior asset acquisitions were $25.6 million, with specified payment dates from 2023 through 2027.
Note 6: Debt
Our debt consisted of the following as of the periods indicated in the table below (in thousands): | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | |
| Delayed Draw Term Loan Facility | | | | |
Principal outstanding | $ | 266,625 | | | $ | — | | | | | |
Unamortized debt issuance costs | (5,208) | | | — | | | | | |
Unamortized debt discount | (1,216) | | | — | | | | | |
Net carrying value | $ | 260,201 | | | $ | — | | | | | |
In May 2017, we entered into a credit agreement (as the same has been amended, the “Credit Agreement”) with YFC-Boneagle Electric Co., Ltd. ("YFC"), undera syndicate of lenders, which YFC acquired the E-Commerce businessprovided for $40.5 million, which included a term loan facility and a revolving line of credit (including a letter of credit sub-facility) for working capital, adjustment. Of thiscapital expenditures, and general business purposes. Subject to the terms of the Credit Agreement, we repaid the remaining principal amount $39.5 million was receivedoutstanding under the Credit Agreement in connection with the TaxAct Sale in the fourth quarter of 20162022.
On January 24, 2023 (the “Closing Date”), we entered into a restatement agreement (the “Amended and $1.0Restated Credit Agreement”), which amended and restated in its entirety our previous Credit Agreement. The Amended and Restated Credit Agreement provides for a new delayed draw term loan facility up to a maximum principal amount of $270.0 million was received in(the “Delayed Draw Term Loan Facility”) and a revolving credit facility with a commitment amount of $50.0 million (the “Revolving Credit Facility”). We may borrow term loans under the Delayed Draw Term Loan Facility (the “Term Loans”) until January 24, 2024. The stated maturity date of the Delayed Draw Term Loan Facility and the Revolving Credit Facility is January 24, 2028 (the “Maturity Date”). The proceeds of any Term Loans may be used to fund shareholder distributions and for general corporate purposes. The proceeds of any loans under the Revolving Credit Facility may be used to finance working capital needs and for general corporate purposes. On February 24, 2023, we borrowed $170.0 million under the Delayed Draw Term Loan Facility. During the second quarter of 2017--both amounts2023, we borrowed the remaining $100.0 million available under the Delayed Draw Term Loan Facility.
We capitalized approximately $8.5 million of debt discount and issuance costs in connection with the Amended and Restated Credit Agreement. A portion of these costs were allocated to the Revolving Credit Facility and are included in investing activities from discontinued operationsother long-term assets on the Company’s condensed consolidated balance sheets.
As of September 30, 2023, we had $266.6 million in principal amount outstanding under the Delayed Draw Term Loan Facility and no amounts outstanding under the Revolving Credit Facility. As of September 30, 2023, $50.0 million was available for future borrowings under the Revolving Credit Facility, subject to customary terms and conditions. Subject to certain conditions set forth in the consolidated statementsAmended and Restated Credit Agreement, we may borrow, prepay, and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Maturity Date.
We are required to make quarterly principal amortization payments on the Delayed Draw Term Loan Facility on the last business day of cash flows. The Company used alleach fiscal quarter, beginning with the last business day of June 2023. These payments will amortize in equal quarterly installments based on the following aggregate annual amounts (expressed as a percentage of the proceedsprincipal amount of Term Loans borrowed): 2.5% during the first year ended December 31, 2023, 5% during years two and three, 7.5% during year four, and 10% during year five. Any remaining Term Loans outstanding are due on the Maturity Date.
Avantax, Inc. | Q3 2023 Form 10-Q 13
Commencing with the first year ending December 31, 2023, we may be required to make annual prepayments on the Term Loans in an amount equal to a percentage of Excess Cash Flow (as defined in the Amended and Restated Credit Agreement). The percentage of Excess Cash Flow ranges from 0% to 50% depending on our Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We may voluntarily prepay the Term Loans in whole or in part without premium or penalty.
Subject to customary reference rate availability provisions, the borrowings under the Amended and Restated Credit Agreement will bear interest at a rate per annum equal to (i) the Term SOFR Rate (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) plus a margin ranging from 2.25% to 2.75% (which margin would be 2.75% as of the Closing Date), or (ii) a base rate based on the highest of the Wall Street Journal prime rate, the federal funds rate plus 0.50% and the Term SOFR (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) rate plus 1.00%, in each case plus a margin ranging from 1.25% to 1.75% (which margin would be 1.75% as of the Closing Date). The margin is determined based on the Company’s Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We are required to pay down debt.a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility ranging from 0.35% to 0.45%. Interest is payable at the end of each interest period, typically quarterly.
On August 9, 2016,The obligations of the Company closed on an agreement with OpenMail LLC ("OpenMail"), under which OpenMail acquiredthe Amended and Restated Credit Agreement are secured by a first-priority security interest in substantially all of the assetsexisting and assumed certain specified liabilitiesfuture personal property of the SearchCompany and Content businesscertain of its subsidiaries.
Pursuant to the Amended and Restated Credit Agreement, we shall not permit (i) the Consolidated Total Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) to exceed 4.00 to 1.00 between March 31, 2023 and June 30, 2024, or 3.75 to 1.00 between July 1, 2024 and the Maturity Date, (ii) the Consolidated Fixed Charge Coverage Ratio (as defined in the Amended and Restated Credit Agreement) to be less than 1.25 to 1.00 or (iii) Liquidity (as defined in the Amended and Restated Credit Agreement) on the last day of any fiscal quarter to be less than $50 million. The Company was in compliance with the debt covenants of the Amended and Restated Credit Agreement as of September 30, 2023.
Note 7: 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 $45.2 million, which includedthose 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 working capital adjustment, and was included in investing activities from discontinued operations inprevious acquisition on the condensed consolidated statements of comprehensive income (loss).
During the nine months ended September 30, 2023, we began subleasing portions of our corporate headquarters in Dallas, Texas. These subleases were classified as operating leases at inception, with sublease income recognized on a straight-line basis over the five-year and ten-year respective sublease terms.
Operating lease cost, net of sublease income, and cash flows. The Company used all ofpaid on operating lease liabilities for the proceeds to pay down debt.
Summarized financial information for discontinued operations isthree and nine months ended September 30, 2023 and 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Fixed lease cost | $ | 972 | | | $ | 965 | | | $ | 2,908 | | | $ | 2,885 | |
Variable lease cost | 415 | | | 258 | | | 1,163 | | | 1,023 | |
Operating lease cost, before sublease income | 1,387 | | | 1,223 | | | 4,071 | | | 3,908 | |
Sublease income | (684) | | | (235) | | | (1,642) | | | (703) | |
Total operating lease cost, net of sublease income | $ | 703 | | | $ | 988 | | | $ | 2,429 | | | $ | 3,205 | |
| | | | | | | |
Additional lease information: | | | | | | | |
Cash paid on operating lease liabilities | $ | 1,336 | | | $ | 1,297 | | | $ | 3,955 | | | $ | 3,788 | |
Lease liabilities obtained from new right-of-use assets | $ | — | | | $ | 262 | | | $ | — | | | $ | 390 | |
Avantax, Inc. | Q3 2023 Form 10-Q 14
|
| | | | | | | | | | | | | | | |
| 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 | ) |
Right-of-use assets and operating lease liabilities were recorded on the condensed consolidated balance sheets as follows (in thousands): | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Right-of-use assets, net | $ | 18,126 | | | $ | 19,361 | |
| | | |
Current lease liabilities | $ | 5,107 | | | $ | 5,139 | |
Long-term lease liabilities | 27,797 | | | 30,332 | |
Total operating lease liabilities | $ | 32,904 | | | $ | 35,471 | |
| | | |
Weighted-average remaining lease term (in years) | 8.9 | | 9.4 |
Weighted-average discount rate | 5.5 | % | | 5.5 | % |
The maturities of our operating lease liabilities as of September 30, 2023 were as follows (in thousands): | | | | | | | | | |
| | | | | |
Undiscounted cash flows: | | | | | |
Remainder of 2023 | $ | 1,329 | | | | | |
2024 | 5,174 | | | | | |
2025 | 5,086 | | | | | |
2026 | 4,256 | | | | | |
2027 | 3,858 | | | | | |
Thereafter | 22,315 | | | | | |
Total undiscounted cash flows | 42,018 | | | | | |
Imputed interest | (9,114) | | | | | |
Present value of cash flows | $ | 32,904 | | | | | |
Note 5: Restructuring8: Balance Sheet Components
ThePrepaid expenses and other current assets consisted of the following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of corporate headquarters to Irving, Texas as part: | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Prepaid expenses | $ | 9,679 | | | $ | 7,857 | |
Prepaid income taxes | 14,062 | | | — | |
Forgivable loans | 6,910 | | | 5,951 | |
Other current assets | 2,293 | | | 1,219 | |
Total prepaid expenses and other current assets | $ | 32,944 | | | $ | 15,027 | |
Accrued expenses and other current liabilities consisted of the Strategic Transformation:following (in thousands): | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Salaries and related benefit expenses | $ | 15,734 | | | $ | 17,481 | |
| | | |
| | | |
| | | |
Accrued legal costs | 5,539 | | | 1,102 | |
Accrued vendor and advertising costs | 1,650 | | | 2,726 | |
Accrued taxes | 5,444 | | | 85,965 | |
Accrued fixed and variable acquisition consideration | 3,386 | | | 897 | |
Accrued cash-settled stock-based compensation | 8,629 | | | 2,121 | |
Interest rate derivatives | 7,581 | | | — | |
Other | 1,835 | | | 920 | |
Total accrued expenses and other current liabilities | $ | 49,798 | | | $ | 111,212 | |
Avantax, Inc. | Q3 2023 Form 10-Q 15
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
Other long-term liabilities consisted of the following (in thousands): | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Deferred compensation | $ | 13,555 | | | $ | 7,974 | |
Accrued cash-settled stock-based compensation | 5,594 | | | 7,556 | |
Accrued tax positions | 4,248 | | | 3,616 | |
Interest rate derivatives | 10,291 | | | — | |
Other | 3,071 | | | 3,330 | |
Other long-term liabilities | $ | 36,759 | | | $ | 22,476 | |
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’s debt consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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: On May 22, 2017, Blucora entered into an agreement with a syndicate of lenders for the purposes 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 a letter of credit sub-facility, and a $375.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. Obligations under the credit facility are guaranteed by certain of Blucora's subsidiaries and secured by the assets of Blucora and those subsidiaries.
Blucora borrowed $375.0 million under the term loan when it entered into the senior secured credit facility. Principal payments on the term loan are payable quarterly in an amount equal to 0.25% of the initial outstanding principal. 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%, payable at the end of each interest period. Through September 30, 2017, Blucora has made prepayments of $25.0 million towards 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. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 3.00%. Subsequent draws 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 agreement for the credit facility) over the previous four quarters. Interest is payable at the end of each interest period. Blucora has not borrowed any amounts 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 portions of the credit facility in an aggregate principal amount not less than $5.0 million ($2.0 million in the case 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 if certain levels of cash flow are achieved.
The credit facility includes financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit agreement. As of September 30, 2017, Blucora was in compliance with all of the financial and operating covenants.
As of September 30, 2017, 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 the consolidated statements of comprehensive income and consisted of the following (in thousands): |
| | | |
Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility | $ | 9,593 |
|
Loss on debt extinguishment - Convertible Senior Notes | 6,715 |
|
Total loss on debt extinguishment | $ | 16,308 |
|
The amount for the TaxAct - HD Vest 2015 credit facility included the write-off of the remaining unamortized discount and debt issuance costs. For the Notes, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
TaxAct - 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.
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 with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares 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.
Note 9: Commitments and Contingencies
TaxAct Indemnification Obligations
Significant events duringIn connection with the period coveredTaxAct Sale, we have certain indemnification obligations to the Buyer, TaxAct Holdings, Inc. and their respective affiliates and representatives with respect to certain losses actually incurred or suffered as a result of any claim, action, suit, or proceeding against such indemnitees arising out of or relating to the use by this Quarterly Report on Form 10-Q, outsideus or any of our affiliates in the tax software business of website tracking and analytics technologies prior to the closing of the ordinary courseTaxAct Sale. Such indemnification obligations terminate on December 19, 2027 and may not exceed $5.4 million ($1.0 million of which is allocable to the deductible under our insurance policies). We believe that applicable insurance policies will cover all or a substantial portion of any claims made by the Buyer under such indemnification obligations. The current carrying amount of the Company’s business, include debt activity (as discussed further in "Note 7: Debt"), paymentliability for these indemnification obligations is approximately $0.9 million as 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 agreement 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,September 30, 2023 and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. Additional informationis included within “Other long-term liabilities” on the Company’s Commitments and Contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.condensed consolidated balance sheets.
Litigation: Litigation
From time to time, the Company iswe are subject to various legal proceedings, regulatory matters or fines, or claims that arise in the ordinary course of business. The Company accruesWe accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The following is a brief description of the more significant legal proceedings. Although the Company believeswe believe that resolving such claims, individually or in aggregate, will not have a material adverse impact on itsour financial statements, these matters are subject to inherent uncertainties.
On December 12, 2016,We are not currently a shareholder derivative action was filed by Jeffrey Tilden against the Company,party to any such matters for which we have recognized a material liability on our condensed consolidated balance sheet as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Blucora Board of Directors, in the 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 asserts 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.September 30, 2023.
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 hasWe have entered into indemnification agreements in the ordinary course of business with itsour officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions.directors. Pursuant to these agreements, the Companywe may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’sour obligations under these indemnification agreements and applicable Delaware law.
Note 10: Stockholders’ EquityFair Value Measurements
Stock-based compensation: The Company includedCertain of our assets and liabilities are carried at fair value and are valued using inputs that are classified in one of the following amountsthree categories:
•Level 1: Quoted market prices in active markets for stock-basedidentical 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.
Avantax, Inc. | Q3 2023 Form 10-Q 16
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, 2023 | | 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 | $ | 219 | | | $ | 219 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred compensation assets | 14,012 | | | 14,012 | | | — | | | — | |
Total assets at fair value | $ | 14,231 | | | $ | 14,231 | | | $ | — | | | $ | — | |
| | | | | | | |
Deferred compensation liabilities | $ | 14,012 | | | $ | 14,012 | | | $ | — | | | $ | — | |
Interest rate derivatives | 17,872 | | | — | | | 17,872 | | | — | |
Total liabilities at fair value | $ | 31,884 | | | $ | 14,012 | | | $ | 17,872 | | | $ | — | |
| | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair value measurements at the reporting date using |
| December 31, 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 | $ | 4,369 | | | $ | 4,369 | | | $ | — | | | $ | — | |
Deferred compensation assets | 7,974 | | | 7,974 | | | — | | | — | |
Total assets at fair value | $ | 12,343 | | | $ | 12,343 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
Deferred compensation liabilities | $ | 7,974 | | | $ | 7,974 | | | $ | — | | | $ | — | |
Total liabilities at fair value | $ | 7,974 | | | $ | 7,974 | | | $ | — | | | $ | — | |
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 expense,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 relatedare generally the same as those available under our 401(k) plan. We have elected to stock options, restricted stock units ("RSUs"),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 Company’s employee stock purchase plancorresponding deferred compensation liabilities, are primarily included within “Other long-term assets” and “Other long-term liabilities,” respectively, on the condensed consolidated balance sheets.
We utilize a third-party pricing service to estimate the fair value of our derivative financial instruments. Fair value is estimated using industry standard valuation models that primarily rely on observable market inputs, including daily simple secured overnight financing rates ("ESPP"“SOFR”), overnight index swap rate curves, SOFR swap rate curves, and volatility. Credit valuation adjustments are incorporated in the fair values to reflect nonperformance risk for both the Company and our counterparties. Although we have determined that the majority of the inputs used to value these derivative instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads. We have determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, we have classified our derivative financial instruments in Level 2 of the fair value hierarchy.
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
Avantax, Inc. | Q3 2023 Form 10-Q 17
payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
As of September 30, 2023, the principal amount outstanding for our Delayed Draw Term Loan Facility was $266.6 million. The principal amount outstanding approximated its fair value as it is a variable rate instrument, and its applicable margin is consistent with current market conditions.
Note 11: Derivative Financial Instruments
We primarily enter into derivative financial instruments as part of our strategy to manage our exposure to changes in interest rates. Our objective in using interest rate derivatives is to reduce variability in the future cash flows we earn from our cash sweep program by limiting our exposure to changes in our contractually specified rate, which is primarily tied to the federal funds rate. To accomplish this objective, we currently utilize interest rate collar and interest rate cap derivative instruments. Our interest rate collar derivatives involve the payment of variable-rate amounts if interest rates rise above the cap strike rate on the contracts and receipts of fixed-rate amounts if interest rates fall below the floor strike rate on the contracts. Our interest rate cap derivatives involve the payment of variable-rate amounts if interest rates rise above the cap strike rate on the contracts. Our interest rate collar derivatives are designated and qualify as cash flow hedges, as defined in ASC 815. Our interest rate cap derivatives do not qualify for cash flow hedge accounting and are considered economic hedges. As of September 30, 2023, the total notional value of our interest rate derivatives represented approximately 65% of the ending client cash balances in our cash sweep program.
We are exposed to credit risk in the event of nonperformance of counterparties for our derivative financial instruments. We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and actively monitoring counterparty credit ratings. We also employ master netting arrangements which allow us to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative financial instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
We recognize derivative financial instruments in the condensed consolidated financial statements at fair value regardless of the purpose or intent for holding the instruments. The following table presents the gross fair value of our derivative financial instruments as of September 30, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Derivative Assets | | Derivative Liabilities |
| | | September 30, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | |
Interest rate collars (1) | | | $ | — | | | $ | — | | | $ | 17,235 | | | $ | — | |
| | | | | | | | | |
Total derivatives designated as hedging instruments under ASC 815 | | | — | | | — | | | 17,235 | | | — | |
| | | | | | | | | |
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | |
| | | | | | | | | |
Interest rate caps (1) | | | — | | | — | | | 637 | | | — | |
Total derivatives not designated as hedging instruments under ASC 815 | | | — | | | — | | | 637 | | | — | |
Total derivatives | | | $ | — | | | $ | — | | | $ | 17,872 | | | $ | — | |
______________________(1)As of September 30, 2023, approximately $7.6 million of the fair value of these derivative financial instruments was recorded within “Accrued expenses and other current liabilities,” with the remaining balance recorded within “Other long-term liabilities” on the condensed consolidated balance sheets.
Cash Flow Hedges of Interest Rate Risk
During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple SOFR and is a combination of a purchased floor instrument with a strike rate of 2.5% and a sold cap instrument with a strike rate of 5.5%, both of which expire
Avantax, Inc. | Q3 2023 Form 10-Q 18
on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we elected to defer and will settle through monthly straight-line cash payments to the counterparties over the term of the instruments. This hedging strategy enables us to limit the downside risk of significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
We designated these derivative instruments as cash flow hedges and determined that they are highly effective at achieving offsetting changes in cash flows attributable to interest rate fluctuations associated with our cash sweep program. The changes in fair value of the effective portion of these derivative instruments are initially recorded net of tax in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. These accumulated gains or losses are reclassified into “Revenue” (where the hedged transaction is recorded) on the condensed consolidated statements of comprehensive income (in thousands):
|
| | | | | | | | | | | | | | | |
| 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 |
|
In(loss) when the second quarterhedged transaction affects earnings. We have elected to exclude the change in fair value of 2017,these derivative instruments attributable to 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 yearspassage of time from the dateassessment of grant. hedge effectiveness. Changes in the fair value of amounts excluded from the assessment of effectiveness are recorded net of tax in accumulated other comprehensive income (loss) and recognized as a reduction to “Revenue” on the condensed consolidated statements of comprehensive income (loss) using a straight-line amortization method over the term of the instruments.
The Company usedtable below presents the Black-Scholes-Merton valuation methodamount of gains and losses related to calculate stock-based compensation, using assumptionsthese derivative financial instruments and their location in the condensed consolidated statements of comprehensive income (loss) 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 expense2023 and 2022 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in OCI | | | | Gain (Loss) Recognized in Income |
Three Months Ended | | September 30, 2023 | | September 30, 2022 | | Location of Gain (Loss) Recognized in Income | | September 30, 2023 | | September 30, 2022 |
Interest rate collars, net of tax | | $ | (1,957) | | | $ | — | | | Revenue | | $ | (975) | | | $ | — | |
| | | | | | | | | | |
Nine Months Ended | | | | | | | | | | |
Interest rate collars, net of tax | | $ | (14,350) | | | $ | — | | | Revenue | | $ | (1,307) | | | $ | — | |
As of September 30, 2023, we estimate that $4.9 million of the deferred amounts recorded in accumulated other comprehensive income (loss) for these non-employees was $0.4our cash flow hedges will be reclassified into earnings within the next twelve months.
Gains and losses on our cash flow hedges are net of income tax benefit of $0.3 million and $0.5$4.2 million respectively,for the three and was recordednine months ended September 30, 2023, respectively. Cash flows from these derivative instruments are included within operating activities in "Costthe condensed consolidated statements of revenue"cash flows, as our accounting policy is to present cash flows from hedging instruments in the same category as the item being hedged.
Economic Hedges of Interest Rate Risk
We also utilize interest rate cap derivatives to manage our economic exposure to interest rate movements which do not meet the hedge accounting requirements of ASC 815. During the second quarter of 2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5%, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which were deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This hedging strategy enables us to offset a portion of the total cost of our interest rate collar derivatives by capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
These derivative instruments are not designated for hedge accounting treatment, therefore, realized and unrealized gains or losses on the instruments are immediately recognized within “Interest expense and other, net” on the condensed consolidated statements of comprehensive income.
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant 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 segment and the Tax Preparation segment. The former Search and Content and E-Commerce segmentsincome (loss). Cash flows from these derivative instruments are included within operating activities 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 purposesthe condensed consolidated statements 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):cash flows.
Avantax, Inc. | Q3 2023 Form 10-Q 19
|
| | | | | | | | | | | | | | | |
| 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 presentedThe table 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 netpresents the amount of gains and losses related to these derivative financial instruments and their location in the condensed consolidated statements of comprehensive income (loss) per share" is computed usingfor the weighted average number of common shares outstanding during the period. "Diluted net income (loss) per share" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock optionsthree and vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.
The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| 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 excluded primarily related to the anti-dilutive effect of a net loss (for the threenine months ended September 30,
20172023 and
2016)2022 (in thousands): | | | | | | | | | | | | | | | | | | |
| | | | Gain (Loss) Recognized in Income |
Three Months Ended | | Location of Gain (Loss) Recognized in Income | | September 30, 2023 | | September 30, 2022 |
Interest rate caps | | Interest expense and other, net | | $ | 336 | | | $ | — | |
| | | | | | |
Nine Months Ended | | | | | | |
Interest rate caps | | Interest expense and other, net | | $ | (506) | | | $ | — | |
Accumulated Other Comprehensive Income (Loss)
The table below presents a roll forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and stock options with an exercise price greater thannine months ended September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Interest Rate Collars | | | | Deferred Taxes | | Accumulated Other Comprehensive Income (Loss) |
Balance as of December 31, 2022 | | $ | — | | | | | $ | — | | | $ | — | |
| | | | | | | | |
Balance as of March 31, 2023 | | — | | | | | — | | | — | |
Changes in fair value | | (16,377) | | | | | 3,984 | | | (12,393) | |
Reclassification to earnings | | 439 | | | | | (107) | | | 332 | |
Balance as of June 30, 2023 | | (15,938) | | | | | 3,877 | | | (12,061) | |
Changes in fair value | | (2,585) | | | | | 628 | | | (1,957) | |
Reclassification to earnings | | 1,288 | | | | | (313) | | | 975 | |
Balance as of September 30, 2023 | | $ | (17,235) | | | | | $ | 4,192 | | | $ | (13,043) | |
There was no derivative activity to report for the average price during the applicable periods.three and nine months ended September 30, 2022.
Item 2. Management’s DiscussionNote 12: Stockholders' Equity
Capital Return Program
On January 27, 2023, we commenced a modified “Dutch Auction” tender offer (the “Tender Offer”) to purchase shares of our common stock for an aggregate purchase price of up to $250.0 million at a price per share not less than $27.00 and Analysis of Financial Conditionnot greater than $31.00. The Tender Offer was in addition to, 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 withinseparate from, the meaning of Section 27A$200.0 million stock repurchase authorization discussed below. Upon the conclusion of the SecuritiesTender Offer, we repurchased and subsequently retired approximately 8.3 million shares of our common stock at the purchase price of $30.00 per share, for aggregate cash consideration of $250.0 million. We incurred approximately $4.5 million for fees and expenses associated with the Tender Offer, including approximately $2.4 million for estimated excise taxes owed under the Inflation Reduction Act of 1933, as amended,2022, which were recorded within stockholders’ equity.
Repurchased common stock that is subsequently retired is deducted from common stock for par value 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 andadditional paid-in 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 consolidated financial statements and accompanying notes included under Part 1 Item 1 of this report, as well as with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Our Business
Blucora (the "Company," "Blucora," or "we") operates two businesses: a Wealth Management business and an online Tax Preparation business.
The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (collectively referredexcess over par value. Direct costs incurred to as "HD Vest" or the "Wealth Management Business"). HD Vest provides wealth management solutions for financial advisors and their clients. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management and other fees.
The Tax Preparation business consists of the operations of TaxAct, Inc. (collectively referred to as "TaxAct" or the "Tax Preparation business"). TaxAct provides digital do-it-yourself ("DDIY") tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com. The TaxAct website and the information contained therein or connected thereto is not intended to be incorporated by reference into this Report.
Strategic Transformation
On October 14, 2015, we announced our plans to acquire HD Vest and focus on the technology-enabled financial solutions market (the "Strategic Transformation"). The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary ("InfoSpace") and our E-Commerce business that consisted of the operations of Monoprice, Inc. ("Monoprice") in 2016. As part of 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 costsrepurchase common stock 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 report for additional information. We also have incurred costs that do not qualify for restructuring classification, such as recruiting 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-K for the year ended December 31, 2016.
Seasonality
Our Tax Preparation business is highly seasonal, with a significant portion of its annual revenue earned in the first four months of our fiscal year. During the third 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 amounts on our 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" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.
RESULTS OF OPERATIONS
Summary
|
| | | | | | | | | | | | | | | | | | | | | |
(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 with 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 proportion 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.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Revenue increased approximately $42.6 million due 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.
Operating income increased approximately $11.3 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 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.
$3.4 million increase in corporate-level expense activity primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs due to fewer grants in the current year and higher expense recognized in the prior year related to HD Vest grants in 2016, partially offset by activity within our Tax Preparation business due to prior forfeitures.
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. ("GAAP") and include certain reconciling items attributable to each of the segments. 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, depreciation, amortization of acquired intangible assets, restructuring, other loss, net, and income taxes to segment operating results. We analyze these separately.
Wealth Management
|
| | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | Percentage Change | | 2017 | | 2016 | | Percentage Change |
Revenue | $ | 86,809 |
| | $ | 80,088 |
| | 8 | % | | $ | 254,772 |
| | $ | 233,496 |
| | 9 | % |
Operating income | $ | 12,425 |
| | $ | 11,628 |
| | 7 | % | | $ | 36,684 |
| | $ | 32,458 |
| | 13 | % |
Segment margin | 14 | % | | 15 | % | | | | 14 | % | | 14 | % | |
|
|
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position and operating performance. A summary of our sources of revenue and business metrics are as follows:
Sources of revenue
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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 trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commission revenue, Advisory revenue, Asset-based revenue, and Transaction and fee revenue, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
|
| | | | | | | | | | |
(In thousands, except percentages and as otherwise indicated) | September 30, |
| 2017 | | 2016 | | Percentage Change |
Total Assets Under Administration ("AUA") | $ | 42,696,862 |
| | $ | 38,482,620 |
| | 11 | % |
Advisory Assets Under Management ("AUM") | $ | 11,984,320 |
| | $ | 10,204,448 |
| | 17 | % |
Percentage of total AUA | 28.1 | % | | 26.5 | % | |
|
Number of advisors (in ones) | 4,392 |
| | 4,568 |
| | (4 | )% |
Advisor-driven revenue per advisor | $ | 17.5 |
| | $ | 15.7 |
| | 11 | % |
Total assets under administration ("AUA") includes assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUA service for a client’s assets, the value of the asset is only counted onceincluded in the total amount of AUA. AUA assets include Advisory Assets under Management, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.
Advisory assets under management ("AUM") includes external client assets for which we provide investment advisory and management services, typically as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee based on the valuecost of the AUM for each advisory client. These assets areshares.
Stock Repurchase Authorization
On December 19, 2022, we announced that our board of directors authorized the Company to repurchase up to $200.0 million of our common stock. This repurchase authorization does not reported on the consolidated balance sheets.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Wealth Management revenue increased approximately $6.7 million as discussed by each source of revenue below.
Wealth Management operating income increased approximately $0.8 million, consisting 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 dueobligate us 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.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
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 of the $21.3 million increase in revenue and offset by an $17.1 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 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.
Commission revenue:We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment,repurchase any specific number of trading days in the reporting period,shares, may be suspended or discontinued at any time, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
(In thousands, 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 million primarily due to decreased activity in mutual funds, variable annuities, insurance 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, 2016
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 assetsdoes not 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.specified expiration date.
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 forFor the three months ended September 30, 2017 compared with three months ended September 30, 2016, and2023, we repurchased approximately 0.4 million shares of our common stock under 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 revenuestock repurchase authorization for aggregate purchase consideration of approximately $11.3 million is consistent with the increase in the beginning-of-period AUM for$9.1 million. For the nine months ended September 30, 2017 compared with nine months ended2023, we repurchased approximately 3.5 million shares of
Avantax, Inc. | Q3 2023 Form 10-Q 20
our common stock under the stock repurchase authorization for aggregate purchase consideration of approximately $85.0 million. The remaining authorized amount under the stock repurchase authorization as of September 30, 2016, and2023, was approximately $115.0 million.
For the conversion of AUA to fee-based AUM.
Asset-based revenue:Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs.
Three months ended September 30, 2017 compared with 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,2022, we willdid not benefit fromrepurchase any future interest rate increases.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Asset-based revenue increased $2.6 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.
Transaction and fee revenue:Transaction and fee revenue primarily includes fees for executing certain transactions in client accounts and fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Transaction and fee revenue increased approximately $0.3 million primarily related to advisor fee increases.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Transaction and fee revenue increased approximately $1.3 million primarily related to advisor fee increases.
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 Preparation revenue is derived primarily from salesshares of our consumer tax preparation software and online services as well as other offerings and ancillary services to consumers and small business owners. We also generate revenue through the professional tax preparer software that we sell to professional tax preparers who use it to prepare and file individual and business returns for their clients.
We measurecommon stock under our consumer tax preparation customers using the number of accepted federal tax e-files made through our software and online services. We consider growth in the number of e-files to be an important non-financial metric in measuring the performance of the consumer side of the Tax Preparation business.
We measure our professional tax preparer customers using three metrics--the number of accepted federal tax e-files made through our software, the number of units sold, and the number of e-files per unit sold. We consider growth in these areas to be important non-financial metrics in measuring 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 revenue increased approximately $21.3 million primarily due to growth in revenue earned from online consumer users and, to a lesser extent, increased sales of our professional tax preparer software. Online consumer revenue grew, despite a decrease in e-files, due to growth in average revenue per user, primarily resulting from 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 revenue 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.
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 personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, amortization of acquired intangible assets, and restructuring.previous stock repurchase plan. 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 comparable to the prior period.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Operating expenses included in corporate-level activity increased primarily due to Strategic Transformation Costs and costs associated with leadership changes at HD Vest.
Stock-based compensation decreased 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 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. 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 to expenses incurred due to our October 27, 2016 announcement 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 discussion and analysis of financial condition and results of operations below.
OPERATING EXPENSES
Cost of Revenue
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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 Preparation businesses, which include commissions paid to financial advisors, 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. Cost of revenue also includes the amortization of acquired technology.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Wealth management services cost of revenue increased primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher stock-based compensation costs related to grants to certain HD Vest financial advisors.
Tax preparation services cost of revenue was comparable to the prior period.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Wealth management services 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.
Tax preparation services cost of revenue increased primarily due to an increase 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 intangible assets during 2016.
Engineering and Technology
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Engineering and technology expenses were comparable to the prior period.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Engineering and technology expenses increased primarily due to an increase in professional services fees mostly related to Tax Preparation development projects.
Sales and Marketing
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Three months ended September 30, |
| Nine months ended September 30, |
| 2017 |
| 2016 |
| Change |
| 2017 |
| 2016 |
| Change |
Sales and marketing | $ | 13,680 |
|
| $ | 11,965 |
|
| $ | 1,715 |
|
| $ | 84,974 |
|
| $ | 75,715 |
|
| $ | 9,259 |
|
Percentage of revenue | 15 | % |
| 14 | % |
|
|
| 21 | % |
| 21 | % |
|
|
|
Sales and marketing expenses consist principally of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs) and the cost of temporary help and contractors for those engaged in marketing, selling, and sales support operations activities, marketing expenses associated with our HD Vest and TaxAct businesses (which primarily include television, radio, online, text, email, and sponsorship channels), and back office processing support expenses associated with our HD Vest business (occupancy and general office expenses, regulatory fees, and license fees).
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Sales and marketing expenses increased primarily due to a $0.6 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.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Sales and marketing expenses increased primarily due to a $5.8 million increase in marketing expenses and a $2.6 million increase in personnel expenses. The increase in marketing expenses was driven by increased marketing in our Tax Preparation business. Personnel expenses increased primarily as we continue to standardize employee benefits across our businesses, and higher headcount across our businesses.
General and Administrative
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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") expenses 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.
Three months ended September 30, 2017 compared with 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 related to the timing of grants.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
G&A expenses increased primarily due to a $5.6 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 compensation due to fewer grants in the current year and higher expense recognized in the prior year related to the timing of grants.
Depreciation and Amortization of Acquired Intangible Assets
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Depreciation | $ | 867 |
| | $ | 968 |
| | $ | (101 | ) | | $ | 2,680 |
| | $ | 2,906 |
| | $ | (226 | ) |
Amortization of acquired intangible assets | 8,615 |
| | 8,297 |
| | 318 |
| | 25,192 |
| | 24,929 |
| | 263 |
|
Total | $ | 9,482 |
| | $ | 9,265 |
| | $ | 217 |
| | $ | 27,872 |
| | $ | 27,835 |
| | $ | 37 |
|
Percentage of revenue | 11 | % | | 11 | % | | | | 7 | % | | 8 | % | | |
Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, and leasehold improvements not recognized in cost of revenue. Amortization of acquired intangible assets primarily includes the amortization of customer relationships, which are amortized over their estimated lives. Depreciation and amortization expenses were comparable to the prior periods.
Restructuring
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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 |
|
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, 2016,2022, we had a lossrepurchased approximately 1.9 million shares of our common stock under our previous stock repurchase plan for aggregate purchase consideration of approximately $35.0 million.
Note 13: Interest Expense and Other, Net
“Interest expense and other, net” on debt extinguishment related to the credit facility previously entered into in 2015 for the purposecondensed consolidated statements of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"). In 2016, we made prepayments on a portioncomprehensive income (loss) consisted of the TaxAct - HD Vest 2015 credit facility, which resulted in the acceleration of a portion of the unamortized debt discount and issuance costs. following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Interest expense | $ | 5,556 | | | $ | 52 | | | $ | 11,748 | | | $ | 133 | |
Amortization of debt issuance costs | 363 | | | — | | | 737 | | | — | |
Amortization of debt discount | 68 | | | — | | | 134 | | | — | |
Total interest expense | 5,987 | | | 52 | | | 12,619 | | | 133 | |
Interest income and other | 106 | | | 106 | | | (918) | | | 290 | |
Transition services agreement income | (642) | | | — | | | (3,288) | | | — | |
Derivative losses (gains) - interest rate caps | (336) | | | — | | | 506 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest expense and other, net | $ | 5,115 | | | $ | 158 | | | $ | 8,919 | | | $ | 423 | |
In connection with the refinancing through the senior secured credit facility that wasTaxAct Sale, we entered into in May 2017,a transition services agreement with the Buyer pursuant to which we paid-offwill provide the remaining TaxAct - HD Vest 2015 credit facility and wrote-offBuyer with certain transition services for an initial period ending on June 19, 2023. Under 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"terms of the Notesoriginal transition services agreement, this agreement was extended to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 ofand completed on September 19, 2023. The income from this report.
The decrease in interest expense, amortization of debt issuance costs, and accretion of debt discounts primarily related to lower balancesagreement is included in the TaxAct - HD Vest 2015 credit facilitytable above and largely offsets the Convertible Senior Notes (the "Notes") duecosts incurred to prepaymentsprovide these transition services, which are included within our operating expenses.
Note 14: Income Taxes
Our provision for income taxes in interim periods is based on a portion of the TaxAct - HD Vest 2015 credit facility in 2016 and the redemption of all of the Notesour estimated annual effective tax rate. We record cumulative adjustments in the second quarter of 2017.
Detail on the "(gain) loss on debt extinguishment" is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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 repurchasedin which 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 Noteschange in the second quarterestimated annual effective rate is determined. The estimated annual effective tax rate does not include the effects of 2017, which resulteddiscrete events that may occur during the year. The effect of these events, if any, is recorded in the write-off ofquarter in which the remaining unamortized debt discount and issuance costs as a loss on debt extinguishment.event occurs.
Income Taxes
We recorded income tax benefit of $1.1 million and income tax expense of $0.2$0.5 million and $6.0 million infor the three and nine months ended September 30, 2017,2023, respectively. Income taxes differed from taxes at the statutory rates in 2017 primarily due 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 recordedOur effective income tax benefit of $8.5 million and income tax expense of $8.9 million inrate for the three and nine months ended September 30, 2016, respectively. Income taxes2023 differed from taxes at the 21% statutory rates in 2016rate primarily due to non-deductible compensation and the effect of state taxes.
We recorded an income tax benefit of $1.5 million and $22.6 million for the three and nine months ended September 30, 2022, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 differed from the 21% statutory rate primarily due to the domestic manufacturing deduction, offset by non-deductible compensationrelease in our valuation allowance and the effect of state income taxes.
Discontinued Operations,
Note 15: Net of Income TaxesPer Share
|
| | | | | | | | | | | | | | | | | | | | | | | |
(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: We define Adjusted EBITDA as“Basic net income (loss) attributable to Blucora, Inc., determined in accordance with GAAP, excludingper share” is calculated using the effectsweighted average number of stock-based compensation, depreciation, amortization of acquired intangible assets (including acquired technology), restructuring, other loss, net,common shares outstanding during the impact of noncontrolling interests, income tax expense, the effects of discontinued operations, and acquisition-related costs. Restructuring costs relate to the move of our corporate headquarters, which was announced in the fourth quarter of 2016. Acquisition-related costs include professional services fees 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.
We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of our Adjusted EBITDA toapplicable period. “Diluted net income (loss) attributable to Blucora,per share” is calculated 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 outstanding RSUs 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 calculation of diluted net income (loss) per share if their effect is antidilutive, including when we report a loss from continuing operations. Performance-based RSUs are considered contingently issuable shares and are excluded from the diluted weighted
Avantax, Inc., which we believe | Q3 2023 Form 10-Q 21
average common shares outstanding computation if the related performance-based criteria are not expected to be achieved as of the most comparable GAAP measure,end of the reporting period.
The calculation of basic and diluted net income (loss) per share is presented below:as follows (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | |
Income (loss) from continuing operations | $ | (1,495) | | | $ | 321 | | | $ | 1,838 | | | $ | 4,720 | |
Income (loss) from discontinued operations | — | | | (22,162) | | | 1,921 | | | 47,484 | |
Net income (loss) | $ | (1,495) | | | $ | (21,841) | | | $ | 3,759 | | | $ | 52,204 | |
Denominator: | | | | | | | |
Basic weighted average common shares outstanding | 36,921 | | | 47,847 | | | 39,971 | | | 47,981 | |
Dilutive potential common shares (1) | — | | | 1,169 | | | 969 | | | 1,172 | |
Diluted weighted average common shares outstanding | 36,921 | | | 49,016 | | | 40,940 | | | 49,153 | |
Basic net income (loss) per share: | | | | | | | |
Continuing operations | $ | (0.04) | | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.10 | |
Discontinued operations | — | | | (0.47) | | | 0.04 | | | 0.99 |
Basic net income (loss) per share | $ | (0.04) | | | $ | (0.46) | | | $ | 0.09 | | | $ | 1.09 | |
Diluted net income (loss) per share: | | | | | | | |
Continuing operations | $ | (0.04) | | | $ | 0.01 | | | $ | 0.04 | | | $ | 0.10 | |
Discontinued operations | — | | | (0.46) | | | 0.05 | | | 0.96 |
Diluted net income (loss) per share | $ | (0.04) | | | $ | (0.45) | | | $ | 0.09 | | | $ | 1.06 | |
Shares excluded (1) | 2,647 | | | 893 | | | 387 | | | 921 | |
________________________ |
| | | | | | | | | | | | | | | |
(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(1)Potential common shares were excluded from the calculation of diluted net income per share for these periods because their effect would have been anti-dilutive. For the three months ended September 30, 2016
The decrease in Adjusted EBITDA was primarily2023, 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 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) as net income (loss) attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of discontinued operations, stock-based compensation, amortization of acquired intangible assets (including acquired technology), accretion of debt discount and accelerated accretion of debt discount on the Convertible Senior Notes (the "Notes"), gain on the Notes repurchased, write-off of debt discount and debt issuance costs on the Notes that were redeemed and the terminated TaxAct - HD Vest 2015 credit facility, acquisition-related costs (described further under Adjusted EBITDA above), restructuring costs (described further under Adjusted EBITDA above), the impact of noncontrolling interests, the related cash tax impact of those adjustments, and non-cash income taxes. The write-off of debt discount and debt issuance costs on the terminated Notes and the closed TaxAct - HD Vest 2015 credit facility relates to the debt refinancing that occurred in the second quarter of 2017. We exclude the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will expire, if unutilized, between 2020 and 2024.
We believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP net income (loss) should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate non-GAAP net income differently, and, therefore, our non-GAAP net income may not be comparable to similarly titled measures of other companies. A reconciliation of our non-GAAP net income to net income attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below:
|
| | | | | | | | | | | | | | | |
(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 in non-GAAP net loss was primarily due to an increase in segment operating loss of $1.9 million related to our Tax Preparation segment 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.
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, Cash Equivalents, and Short-Term Investments
Our principal source of liquidity is our cash, cash equivalents, and short-term investments. As of September 30, 2017, we had cash and marketable investments of approximately $78.6 million, consisting entirely of cash and cash equivalents. Our HD Vest broker-dealer subsidiary operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of September 30, 2017, HD Vest met all capital adequacy requirements to which it was subject.
We generally invest our excess cash in high quality marketable investments. These investments generally include debt 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.
We have financed our operations primarily from cash provided by operating activities. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating, working capital, and capital expenditure requirements for at least the next 12 months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate. For further discussion of the risks to our business related to liquidity, see the Risk Factor "Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures" in Part II Item 8 of our Annual Report on Form 10-Krecognized for the year ended December 31, 2016.
Use of Cash
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.
On May 22, 2017, we entered into an agreement for a new senior secured 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 a letter of credit sub-facility, and a $375.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. The interest rates on the revolving credit loan and term loan are variable. The credit facility includes financial and operating covenants with respect to certain ratios, including a net leverage ratio, which are defined further in the credit facility agreement. We were in compliance with these covenants as of September 30, 2017. We initially borrowed $375.0 million under the term loan. Through the third quarter of 2017, we have made prepayments of $25.0 million million towards the term loan. We have not borrowed any amounts under the revolving credit loan. For further detail, see "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
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, 2017 and 2016, respectively. Related to the Notes, we repurchased $28.4 million of the Notes' for cash of $20.7 million during the nine months ended September 30, 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.
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 million primarily related to the sublease agreement 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, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. Additional information on our Commitments and Contingencies can be found 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:
Avantax, Inc. | Q3 2023 Form 10-Q 22
|
| | | | | | | |
(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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides an analysis of our financial condition, cash flows, and results of operations from management’s perspective and should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included under Part I, Item 1 and the section titled “Cautionary Statement Regarding Forward-Looking Statements” in this 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 Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Overview
Avantax, Inc. (the “Company,” “Avantax,” “we,” “our,” or “us”), is a leading provider of integrated tax-intelligent wealth management services and platforms, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms. Our mission is to enable financial success by changing the way individuals and families plan and achieve their goals through tax-intelligent solutions. Our common stock is listed on the NASDAQ Global Select Market under the symbol “AVTA.” Our integrated tax-intelligent wealth management services consist of the operations of Avantax Wealth Management and Avantax Planning Partners.
Avantax Wealth Management provides tax-intelligent wealth management solutions for financial professionals, tax professionals, CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, which is a leading U.S. tax-focused independent broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries. 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-intelligent 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 small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services.
Merger Agreement
On September 9, 2023, Avantax entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aretec Group, Inc., a Delaware corporation that does business as Cetera Holdings (“Parent”), and C2023 Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Acquisition Sub”) whereby Parent will acquire all of the issued and outstanding equity of Avantax (the “Merger”) in an all-cash transaction valuing Avantax at approximately $1.2 billion, inclusive of Avantax’s net debt. On the terms and subject to the conditions of the Merger Agreement, holders of shares of Avantax common stock (other than Excluded Shares and Dissenting Shares (each, as defined in the Merger Agreement)) will receive $26.00 per share in cash, without interest and less any required tax withholdings. Upon the closing of the transactions contemplated by the Merger Agreement, Avantax will operate as a privately-held company. The closing remains subject to customary closing conditions, including approval by Avantax’s stockholders. Avantax expects the closing to occur by the end of November 2023.
Divestiture of Tax Software Business
On October 31, 2022, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with TaxAct Holdings, Inc. (f/k/a Avantax Holdings, Inc.), a Delaware corporation and a direct subsidiary of Avantax, Franklin Cedar Bidco, LLC, a Delaware limited liability company (the “Buyer”), and, solely for purposes of certain provisions thereof, DS Admiral Bidco, LLC, a Delaware limited liability company, pursuant to which we sold our former tax software business to Buyer for an aggregate purchase price of $720.0 million in cash, subject to customary purchase price adjustments set forth in the Purchase Agreement (the “TaxAct Sale”). This transaction subsequently closed on December 19, 2022.
In accordance with ASC 205, Presentation of Financial Statements, we determined that the sale of our tax software business represented a strategic shift that will have a major effect on our operations and financial results. As a result of the TaxAct Sale, the historical results of our former tax software business, and any adjustments to amounts previously reported in discontinued operations in a prior period (if applicable) have been reclassified as a
Avantax, Inc. | Q3 2023 Form 10-Q 23
discontinued operation and are excluded from continuing operations for all periods presented within the condensed consolidated financial statements.
Recent Developments
Interest Rate Hedges
During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple secured overnight financing rates (“SOFR”) and is a combination of a purchased floor instrument with a strike rate of 2.5% and a sold cap instrument with a strike rate of 5.5%, both of which expire on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we elected to defer and will settle through monthly straight-line cash payments to the counterparties over the term of the instruments. This hedging strategy enables us to limit the downside risk of significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged. We designated these derivative instruments as cash flow hedges and determined that they are highly effective at achieving offsetting changes in cash flows attributable to interest rate fluctuations associated with our cash sweep program. The changes in fair value of these derivative instruments are initially recorded net of tax in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. These accumulated gains or losses are reclassified into “Revenue” (where the hedged transaction is recorded) on the condensed consolidated statements of comprehensive income (loss) when the hedged transaction affects earnings.
In addition, during the second quarter of 2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5%, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which were deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This hedging strategy enables us to offset a portion of the total cost of our interest rate collar derivatives by capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged. These derivative instruments are not designated for hedge accounting treatment, therefore, realized and unrealized gains or losses on the instruments are immediately recognized within “Interest expense and other, net” on the condensed consolidated statements of comprehensive income (loss).
Avantax, Inc. | Q3 2023 Form 10-Q 24
RESULTS OF OPERATIONS
Summary | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Revenue | $ | 192,343 | | | $ | 165,032 | | | $ | 27,311 | | | 16.5 | % | | $ | 557,251 | | | $ | 494,104 | | | $ | 63,147 | | | 12.8 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Cost of revenue | 117,684 | | | 105,809 | | | 11,875 | | | 11.2 | % | | 336,783 | | | 341,443 | | | (4,660) | | | (1.4) | % |
Engineering and technology | 2,352 | | | 2,617 | | | (265) | | | (10.1) | % | | 7,264 | | | 6,733 | | | 531 | | | 7.9 | % |
Sales and marketing | 26,298 | | | 23,770 | | | 2,528 | | | 10.6 | % | | 79,902 | | | 70,826 | | | 9,076 | | | 12.8 | % |
General and administrative | 33,011 | | | 23,792 | | | 9,219 | | | 38.7 | % | | 91,747 | | | 69,388 | | | 22,359 | | | 32.2 | % |
Acquisition and integration | (100) | | | 416 | | | (516) | | | (124.0) | % | | (17) | | | (4,710) | | | 4,693 | | | 99.6 | % |
Depreciation | 4,142 | | | 3,343 | | | 799 | | | 23.9 | % | | 11,318 | | | 8,428 | | | 2,890 | | | 34.3 | % |
Amortization of acquired intangible assets | 6,404 | | | 6,342 | | | 62 | | | 1.0 | % | | 18,973 | | | 19,435 | | | (462) | | | (2.4) | % |
Total operating expenses | 189,791 | | | 166,089 | | | 23,702 | | | 14.3 | % | | 545,970 | | | 511,543 | | | 34,427 | | | 6.7 | % |
Operating income (loss) from continuing operations | 2,552 | | | (1,057) | | | 3,609 | | | 341.4 | % | | 11,281 | | | (17,439) | | | 28,720 | | | 164.7 | % |
Interest expense and other, net | (5,115) | | | (158) | | | (4,957) | | | (3,137.3) | % | | (8,919) | | | (423) | | | (8,496) | | | (2,008.5) | % |
Income (loss) from continuing operations before income taxes | (2,563) | | | (1,215) | | | (1,348) | | | (110.9) | % | | 2,362 | | | (17,862) | | | 20,224 | | | 113.2 | % |
Income tax benefit (expense) | 1,068 | | | 1,536 | | | (468) | | | (30.5) | % | | (524) | | | 22,582 | | | (23,106) | | | (102.3) | % |
Income (loss) from continuing operations | (1,495) | | | 321 | | | (1,816) | | | (565.7) | % | | 1,838 | | | 4,720 | | | (2,882) | | | (61.1) | % |
Discontinued operations | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations before gain on disposal and income taxes | — | | | (22,352) | | | 22,352 | | | 100.0 | % | | — | | | 74,165 | | | (74,165) | | | (100.0) | % |
Pre-tax gain on disposal | — | | | — | | | — | | | N/A | | 2,539 | | | — | | | 2,539 | | | N/A |
Income (loss) from discontinued operations before income taxes | — | | | (22,352) | | | 22,352 | | | 100.0 | % | | 2,539 | | | 74,165 | | | (71,626) | | | (96.6) | % |
Income tax benefit (expense) | — | | | 190 | | | (190) | | | (100.0) | % | | (618) | | | (26,681) | | | 26,063 | | | 97.7 | % |
Income (loss) from discontinued operations | — | | | (22,162) | | | 22,162 | | | 100.0 | % | | 1,921 | | | 47,484 | | | (45,563) | | | (96.0) | % |
Net income (loss) | $ | (1,495) | | | $ | (21,841) | | | $ | 20,346 | | | 93.2 | % | | $ | 3,759 | | | $ | 52,204 | | | $ | (48,445) | | | (92.8) | % |
For the three months ended September 30, 2023, compared to the three months ended September 30, 2022, net loss decreased $20.3 million primarily due to the following factors:
•Income from continuing operations decreased $1.8 million primarily due to the following factors:
•Revenue increased $27.3 million primarily due to incremental advisory revenue from higher asset values coupled with increased cash sweep revenue generated from a higher federal funds rate paired with the program’s structure that increases returns in a higher interest rate environment.
•Total operating expenses increased $23.7 million primarily from higher financial professional commissions within cost of revenue caused by increased advisory revenue and an increase in general and administrative expense driven by costs incurred for the Merger and reorganization related costs associated with the TaxAct Sale.
•Income tax benefit decreased $0.5 million primarily due to a reduction in our valuation allowance during the prior year associated with the utilization of net operating losses against prior period taxable income.
•Income from discontinued operations increased $22.2 million primarily due to the completion of the TaxAct Sale in the prior period.
Avantax, Inc. | Q3 2023 Form 10-Q 25
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, net income decreased $48.4 million primarily due to the following factors:
•Income from continuing operations decreased $2.9 million primarily due to the following factors:
•Revenue increased $63.1 million primarily due to incremental cash sweep and advisory revenues consistent with the discussion above, partially offset by lower commission revenue due to reduced transaction activity.
•Total operating expenses increased $34.4 million primarily from increased general and administrative and sales and marketing expenses. General and administrative expense increased due to costs associated with the TaxAct Sale, including reorganization and executive transition related costs, and costs incurred for the Merger. These increases were partially offset by decreased acquisition and integration costs due to acquisition-related contingent consideration fair value adjustments that did not reoccur in the current period and decreased financial professional commissions caused by reduced commission revenue.
•Income tax benefit decreased $23.1 million primarily due to a reduction in our valuation allowance during the prior year associated with the utilization of net operating losses against prior period taxable income.
•Income from discontinued operations decreased $45.6 million primarily due to the completion of the TaxAct Sale in the prior period. During the nine months ended September 30, 2023 we recognized an incremental pre-tax gain on disposal of $2.5 million in connection with the finalization of our closing working capital balance.
Sources of Revenue
Our revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position, and operating performance. A summary of our sources of revenue and business and financial metrics is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| Sources of Revenue | Primary Drivers | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Financial professional-driven | Advisory | - Advisory asset levels | $ | 108,393 | | | $ | 95,070 | | | $ | 13,323 | | | 14.0 | % | | $ | 309,234 | | | $ | 306,394 | | | $ | 2,840 | | | 0.9 | % |
Commission | - Transactions - Asset levels - Product mix | 43,351 | | | 41,788 | | | 1,563 | | | 3.7 | % | | 126,662 | | | 132,278 | | | (5,616) | | | (4.2) | % |
Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 33,444 | | | 21,147 | | | 12,297 | | | 58.2 | % | | 100,524 | | | 33,774 | | | 66,750 | | | 197.6 | % |
Transaction and fee | - Account activity - Number of financial professionals - Number of clients - Number of accounts | 7,155 | | | 7,027 | | | 128 | | | 1.8 | % | | 20,831 | | | 21,658 | | | (827) | | | (3.8) | % |
| Total revenue | $ | 192,343 | | | $ | 165,032 | | | $ | 27,311 | | | 16.5 | % | | $ | 557,251 | | | $ | 494,104 | | | $ | 63,147 | | | 12.8 | % |
| Total recurring revenue | $ | 169,183 | | | $ | 144,512 | | | $ | 24,671 | | | 17.1 | % | | $ | 493,342 | | | $ | 430,184 | | | $ | 63,158 | | | 14.7 | % |
| Recurring revenue rate | 88.0 | % | | 87.6 | % | | | | | | 88.5 | % | | 87.1 | % | | | | |
Recurring revenue consists of advisory fees, trailing commissions, fees from cash sweep programs, and certain transaction and fee revenue, all as described further under the headings “Advisory revenue,” “Commission revenue,” “Asset-based revenue,” and “Transaction and fee revenue,” respectively. Certain recurring revenues are associated with asset balances and fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, we believe recurring revenue is meaningful 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.
Avantax, Inc. | Q3 2023 Form 10-Q 26
Business Metrics | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | September 30, | | Change |
| 2023 | | 2022 | | $ | | % |
Client assets balances: | | | | | | | |
Total client assets | $ | 82,255,722 | | | $ | 72,592,882 | | | $ | 9,662,840 | | | 13.3 | % |
Brokerage assets | $ | 40,262,060 | | | $ | 37,150,327 | | | $ | 3,111,733 | | | 8.4 | % |
Advisory assets | $ | 41,993,662 | | | $ | 35,442,555 | | | $ | 6,551,107 | | | 18.5 | % |
Advisory assets as a percentage of total client assets | 51.1 | % | | 48.8 | % | | | | |
| | | | | | | |
Number of financial professionals (in ones): | | | | | | | |
Independent financial professionals (1) | 3,073 | | | 3,311 | | | (238) | | | (7.2) | % |
In-house/employee financial professionals (2) | 38 | | | 36 | | | 2 | | | 5.6 | % |
Total number of financial professionals | 3,111 | | | 3,347 | | | (236) | | | (7.1) | % |
| | | | | | | |
Advisory and commission revenue per financial professional (3) | $ | 48.8 | | | $ | 40.9 | | | $ | 7.9 | | | 19.3 | % |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
___________________________ (1)The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as 179 licensed referring representatives at CPA firms that partner with Avantax Planning Partners.
(2)The number of in-house/employee financial professionals includes licensed financial planning consultants, all of which are affiliated with Avantax Planning Partners.
(3)Calculation based on advisory and commission revenue for the three months ended September 30, 2023 and 2022, respectively.
Client Assets. Historically we have calculated total client assets to 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 service for a client’s assets, the value of the asset is only counted once in the total amount of total client assets. Total client assets include advisory assets, non-advisory brokerage accounts, annuities, and mutual fund positions held directly with fund companies. These assets are not reported on the Company’s consolidated balance sheets.
Advisory assets include client assets for which we provide investment advisory and management services as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee-based on the value of the advisory assets for each advisory client.
Brokerage assets represent total client assets other than advisory assets.
Total client assets increased $9.7 billion as of September 30, 2023 compared to September 30, 2022, primarily due to $7.2 billion of favorable market changes and $2.5 billion of net client inflows.
Advisory assets increased $6.6 billion as of September 30, 2023 compared to September 30, 2022, and advisory assets as a percentage of total client assets increased to 51.1% as of September 30, 2023, compared to 48.8% as of September 30, 2022. The increase in advisory assets was primarily caused by $3.6 billion of favorable market changes and net new advisory assets of $3.0 billion, both of which contributed to the increase in advisory assets as a percentage of total client assets.
Financial Professionals. The number of our financial professionals decreased 7.1% as of September 30, 2023 compared to September 30, 2022, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. Included within this attrition of lower revenue-producing financial professionals were terminations primarily in the fourth quarter of 2022 associated with certain financial professional’s failure to comply with a policy implemented to ensure regulatory compliance with certain record keeping and supervisory requirements. Advisory and commission revenue per financial professional increased 19.3% for the same period, primarily due to the attrition of lower revenue-producing financial professionals discussed above. The decrease in
Avantax, Inc. | Q3 2023 Form 10-Q 27
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 |
| 2023 | | 2022 | | $ | | % |
Advisory assets—independent financial professionals | $ | 34,188,023 | | | $ | 29,735,365 | | | $ | 4,452,658 | | | 15.0 | % |
Advisory assets—in-house/employee financial professionals | 6,323,639 | | | 4,494,178 | | | 1,829,461 | | | 40.7 | % |
Retirement advisory assets—in-house/employee financial professionals | 1,482,000 | | | 1,213,012 | | | 268,988 | | | 22.2 | % |
Total advisory assets | $ | 41,993,662 | | | $ | 35,442,555 | | | $ | 6,551,107 | | | 18.5 | % |
The activity within our advisory assets was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Balance, beginning of the period | $ | 42,649,611 | | | $ | 36,746,048 | | | $ | 38,282,333 | | | $ | 42,179,051 | |
Net new advisory assets | 706,495 | | | 514,293 | | | 2,374,116 | | | 2,261,923 | |
| | | | | | | |
Market impact and other | (1,362,444) | | | (1,817,786) | | | 1,337,213 | | | (8,998,419) | |
Balance, end of the period | $ | 41,993,662 | | | $ | 35,442,555 | | | $ | 41,993,662 | | | $ | 35,442,555 | |
Advisory revenue | $ | 108,393 | | | $ | 95,070 | | | $ | 309,234 | | | $ | 306,394 | |
Average advisory fee rate (1) | 25 bps | | 26 bps | | 76 bps | | 77 bps |
_________________________
(1)For the three months ended September 30, 2023 and September 30, 2022, average advisory fee rate equals advisory revenue for the relevant quarterly period divided by the advisory asset balance at the beginning of the relevant quarterly period. For the nine months ended September 30, 2023 and September 30, 2022, average advisory fee rate equals the sum of each quarterly average advisory fee rate within the relevant year-to-date period.
For the three months endedSeptember 30, 2023, advisory assets decreased $0.7 billion primarily due to unfavorable market changes, partially offset by net new advisory assets from organic growth and the recruitment of new assets. For the nine months ended September 30, 2023, advisory assets increased $3.7 billion driven by favorable market changes and net new advisory assets from organic growth and the recruitment of new assets.
For the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, advisory revenue increased $13.3 million and $2.8 million, respectively. These increases correspond with the year-over-year increase in advisory assets discussed above, coupled with the timing of market changes relative to when clients are billed. The average advisory fee rates between the two periods remained relatively flat.
Commission Revenue. Wegenerate two types of commissions: (1) transaction-based commissions and (2) trailing commissions. Transaction-based commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial professionals. The level of transaction-based commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, market volatility, interest rate fluctuations, and investment activity of our financial 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.
Avantax, Inc. | Q3 2023 Form 10-Q 28
Our commission revenue, by product category and by type of commission revenue, was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
By product category: | | | | | | | | | | | | | | | |
Mutual funds | $ | 15,936 | | | $ | 16,339 | | | $ | (403) | | | (2.5) | % | | $ | 47,226 | | | $ | 53,635 | | | $ | (6,409) | | | (11.9) | % |
Variable annuities | 14,437 | | | 14,892 | | | (455) | | | (3.1) | % | | 44,102 | | | 46,961 | | | (2,859) | | | (6.1) | % |
Insurance | 6,486 | | | 5,048 | | | 1,438 | | | 28.5 | % | | 19,774 | | | 13,007 | | | 6,767 | | | 52.0 | % |
General securities | 6,492 | | | 5,509 | | | 983 | | | 17.8 | % | | 15,560 | | | 18,675 | | | (3,115) | | | (16.7) | % |
| | | | | | | | | | | | | | | |
Total commission revenue | $ | 43,351 | | | $ | 41,788 | | | $ | 1,563 | | | 3.7 | % | | $ | 126,662 | | | $ | 132,278 | | | $ | (5,616) | | | (4.2) | % |
| | | | | | | | | | | | | | | |
By type of commission: | | | | | | | | | | | | | | | |
Transaction-based | $ | 20,448 | | | $ | 17,868 | | | $ | 2,580 | | | 14.4 | % | | $ | 57,333 | | | $ | 56,373 | | | $ | 960 | | | 1.7 | % |
Trailing | 22,903 | | | 23,920 | | | (1,017) | | | (4.3) | % | | 69,329 | | | 75,905 | | | (6,576) | | | (8.7) | % |
Total commission revenue | $ | 43,351 | | | $ | 41,788 | | | $ | 1,563 | | | 3.7 | % | | $ | 126,662 | | | $ | 132,278 | | | $ | (5,616) | | | (4.2) | % |
For the three months ended September 30, 2023, compared to the three months ended September 30, 2022, commission revenue increased $1.6 million. This increase was primarily due to increased transaction-based commissions for insurance and general securities, partially offset by declines in trailing commissions for variable annuities and mutual funds.
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, commission revenue decreased $5.6 million. This decrease was primarily due to declines in trailing commissions for mutual funds, variable annuities, and general securities, partially offset by increased insurance commissions. Volatility in equity markets and the impact to asset values has negatively impacted mutual funds and variable annuities trail commissions, while the current interest rate environment has led to considerable declines in transaction volume for alternate investment vehicles linked with real estate. We expect the continued growth of assets on our fee-based advisory platform to result in commission revenue headwinds in the future.
Asset-Based Revenue.Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs, asset-based retirement plan service fees, and other asset-based revenues.
For the three months ended September 30, 2023, compared to the three months ended September 30, 2022, asset-based revenue increased $12.3 million, primarily due to incremental cash sweep revenue of $12.0 million driven by increases in the federal funds rate, partially offset by declines in client cash sweep balances relative to prior year levels.
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, asset-based revenue increased $66.8 million, primarily due to incremental cash sweep revenue of $67.5 million driven by increases in the federal funds rate, partially offset by declines in client cash sweep balances relative to prior year levels. The increases in cash sweep revenue were partially offset by reduced fees from sponsorship programs.
For the three and nine months ended September 30, 2023, we recognized approximately $1.3 million and $1.7 million of deferred premium charges for our interest rate collar derivatives which are included as a reduction to our cash sweep revenue. Under the terms of our interest rate collar derivative contracts, we expect to recognize approximately $5.1 million of deferred premium charges as a reduction to our cash sweep revenue over the next twelve months. For the remainder of the year, we expect for cash sweep revenue to continue to increase relative to comparable prior year periods driven by rate increases during 2023 and as the full benefits of rate increases during the latter half of 2022 are realized for a full annual period. Currently, the target range for the federal funds rate is below the cap of our interest rate collar derivatives. However, future increases to this range above our cap strike rate will limit our incremental cash sweep revenue on the comparable notional portion of our interest rate collars derivatives.
Transaction and Fee Revenue.Transaction and fee revenue primarily includes support fees charged to financial professionals, fees charged for executing certain transactions in client accounts, and other fees related to
Avantax, Inc. | Q3 2023 Form 10-Q 29
services provided and other account charges as generally outlined in agreements with financial professionals, clients, financial institutions, and retirement plan sponsors.
For the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, transaction and fee revenue remained relatively flat.
OPERATING EXPENSES
Cost of Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Cost of revenue | $ | 117,684 | | | $ | 105,809 | | | $ | 11,875 | | | 11.2 | % | | $ | 336,783 | | | $ | 341,443 | | | $ | (4,660) | | | (1.4) | % |
Percentage of revenue | 61.2 | % | | 64.1 | % | | | | | | 60.4 | % | | 69.1 | % | | | | |
Cost of revenue includes commissions and advisory fees paid to independent financial professionals, payments made to CPA firms under fee sharing arrangements, amortization of forgivable loans issued to our financial professionals, and stock-based compensation for awards granted to our financial professionals. Cost of revenue does not include compensation paid to in-house/employee financial professionals. The compensation of our in-house/employee financial professionals is reflected in “Sales and marketing” expense.
For the three months ended September 30, 2023, compared to the three months ended September 30, 2022, cost of revenue increased $11.9 million, primarily due to an increase in commissions to financial professionals associated with the increase in advisory and commission revenues discussed above.
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, cost of revenue decreased $4.7 million. Commissions to financial professionals declined $4.1 million primarily due to reductions in commission revenue caused by the volatility in global financial markets discussed above. The remaining change was primarily due to reduced personnel costs, partially offset by incremental financial professional loan amortization.
For the three months ended September 30, 2023, payout ratios to independent financial professionals remained relatively flat. For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, payout ratios to independent financial professionals declined approximately 46 basis points. This decline was primarily caused by the timing of equity market volatility during the trailing twelve-month periods coupled with continued growth in our in-house/employee-based advisory model, which has lower payout rates as compared to our independent model. The decrease in cost of revenue as a percentage of revenue is reflective of the benefits of incremental cash sweep revenue for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022.
Engineering and Technology | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Engineering and technology | $ | 2,352 | | | $ | 2,617 | | | $ | (265) | | | (10.1) | % | | $ | 7,264 | | | $ | 6,733 | | | $ | 531 | | | 7.9 | % |
Percentage of revenue | 1.2 | % | | 1.6 | % | | | | | | 1.3 | % | | 1.4 | % | | | | |
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our platforms, which include personnel expenses (including stock-based compensation), the cost of temporary help and contractors, software support and maintenance, and professional services fees. Engineering and technology expenses do not include the costs of computer hardware and software that are capitalized, depreciated over their useful lives, and recognized on the consolidated statements of comprehensive income (loss) as “Depreciation.” For more information, see the “Depreciation and Amortization of Acquired Intangible Assets” sections contained within this discussion of “Operating Expenses.”
For the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, engineering and technology expenses did not materially change.
Avantax, Inc. | Q3 2023 Form 10-Q 30
Sales and Marketing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Sales and marketing | $ | 26,298 | | | $ | 23,770 | | | $ | 2,528 | | | 10.6 | % | | $ | 79,902 | | | $ | 70,826 | | | $ | 9,076 | | | 12.8 | % |
Percentage of revenue | 13.7 | % | | 14.4 | % | | | | | | 14.3 | % | | 14.3 | % | | | | |
Sales and marketing expenses primarily consist of the costs to support our financial professionals and drive growth. This includes personnel costs (including stock-based compensation) for operational and back-office processing support, investment and portfolio strategy support, compliance, and compensation paid to Avantax Planning Partners in-house/employee financial professionals. These costs also include business development costs related to advisor recruitment and retention, costs related to hosting certain advisor conferences that serve as training, sales and marketing events, and other costs that support advisor business growth.
For the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, sales and marketing expenses increased $2.5 million and $9.1 million, respectively, primarily due to incremental personnel costs. The increase in personnel costs is associated with higher employee benefit costs and growth in our Avantax Planning Partners business and investments to enhance our sales and service capabilities that support our financial professionals.
General and Administrative | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
General and administrative | $ | 33,011 | | | $ | 23,792 | | | $ | 9,219 | | | 38.7 | % | | $ | 91,747 | | | $ | 69,388 | | | $ | 22,359 | | | 32.2 | % |
Percentage of revenue | 17.2 | % | | 14.4 | % | | | | | | 16.5 | % | | 14.0 | % | | | | |
General and administrative (“G&A”) expenses primarily consist of personnel expenses (including stock-based compensation), the cost of temporary help and contractors, professional services fees, general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
For the three months ended September 30, 2023, compared to the three months ended September 30, 2022, G&A expenses increased $9.2 million, primarily due to the following:
•Legal, consulting, and other professional costs increased $7.1 million primarily due to costs incurred for the Merger, partially offset by lower TaxAct transaction related costs.
•Personnel costs increased $2.2 million primarily due to increased severance costs associated with our reorganization activities.
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, G&A expenses increased $22.4 million, primarily due to the following:
•Legal, consulting, and other professional costs increased $11.0 million primarily due to costs incurred for the Merger, TaxAct transaction related costs, and reorganization activities. These increases were partially offset by reduced contested proxy costs.
•Personnel costs increased $10.1 million primarily due to executive transition costs for certain executives that departed the company and other reorganization activities.
•Network and software related expenses increased approximately $1.8 million due to our obligations under the transition services agreement initiated in connection with the TaxAct Sale, partially offset by lower rent and facilities charges associated with the sublease of a portion of our corporate headquarters.
Avantax, Inc. | Q3 2023 Form 10-Q 31
Acquisition and Integration | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Professional services and other expenses | $ | (100) | | | $ | 416 | | | $ | (516) | | | (124.0) | % | | $ | (17) | | | $ | 610 | | | $ | (627) | | | (102.8) | % |
Change in the fair value of acquisition-related contingent consideration | — | | | — | | | — | | | N/A | | — | | | (5,320) | | | 5,320 | | | 100.0 | % |
Total | $ | (100) | | | $ | 416 | | | $ | (516) | | | (124.0) | % | | $ | (17) | | | $ | (4,710) | | | $ | 4,693 | | | 99.6 | % |
Percentage of revenue | (0.1) | % | | 0.3 | % | | | | | | — | % | | (1.0) | % | | | | |
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, 2023, compared to the three months ended September 30, 2022, acquisition and integration expenses did not materially change. For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, acquisition and integration expenses decreased $4.7 million, primarily due to prior period acquisition-related contingent consideration fair value adjustments.
Depreciation and Amortization of Acquired Intangible Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Depreciation | $ | 4,142 | | | $ | 3,343 | | | $ | 799 | | | 23.9 | % | | $ | 11,318 | | | $ | 8,428 | | | $ | 2,890 | | | 34.3 | % |
Amortization of acquired intangible assets | 6,404 | | | 6,342 | | | 62 | | | 1.0 | % | | 18,973 | | | 19,435 | | | (462) | | | (2.4) | % |
Total | $ | 10,546 | | | $ | 9,685 | | | $ | 861 | | | 8.9 | % | | $ | 30,291 | | | $ | 27,863 | | | $ | 2,428 | | | 8.7 | % |
Percentage of revenue | 5.5 | % | | 5.9 | % | | | | | | 5.4 | % | | 5.6 | % | | | | |
Depreciation of property, equipment, and software, net includes depreciation of computer equipment and software (including internally developed software), office equipment and furniture, and leasehold improvements. Amortization of acquired intangible assets primarily includes the amortization of financial professional, sponsor, and client relationships, which are amortized over their estimated lives.
For the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, depreciation expense increased $0.8 million and $2.9 million, respectively, primarily due to increased capital expenditures for internally developed software. Amortization expense did not materially change.
INTEREST EXPENSE AND OTHER, NET
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Interest expense | $ | 5,556 | | | $ | 52 | | | $ | 5,504 | | | 10,584.6 | % | | $ | 11,748 | | | $ | 133 | | | $ | 11,615 | | | 8,733.1 | % |
Amortization of debt issuance costs | 363 | | | — | | | 363 | | | N/A | | 737 | | | — | | | 737 | | | N/A |
Amortization of debt discount | 68 | | | — | | | 68 | | | N/A | | 134 | | | — | | | 134 | | | N/A |
Total interest expense | 5,987 | | | 52 | | | 5,935 | | | 11,413.5 | % | | 12,619 | | | 133 | | | 12,486 | | | 9,388.0 | % |
Interest income and other | 106 | | | 106 | | | — | | | — | % | | (918) | | | 290 | | | (1,208) | | | (416.6) | % |
Transition services agreement income | (642) | | | — | | | (642) | | | N/A | | (3,288) | | | — | | | (3,288) | | | N/A |
Derivative losses (gains) - interest rate caps | (336) | | | — | | | (336) | | | N/A | | 506 | | | — | | | 506 | | | N/A |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Interest expense and other, net | $ | 5,115 | | | $ | 158 | | | $ | 4,957 | | | 3,137.3 | % | | $ | 8,919 | | | $ | 423 | | | $ | 8,496 | | | 2,008.5 | % |
For the three months ended September 30, 2023, compared to the three months ended September 30, 2022, interest expense and other, net, increased $5.0 million. Total interest expense increased $5.9 million, due to borrowings on our Delayed Draw Term Loan Facility, which was partially offset by income received from the transition services agreement initiated in connection with the TaxAct Sale.
Avantax, Inc. | Q3 2023 Form 10-Q 32
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, interest expense and other, net, increased $8.5 million. Total interest expense increased $12.5 million, due to borrowings on our Delayed Draw Term Loan Facility, which was partially offset by income received from the transition services agreement initiated in connection with the TaxAct Sale, and incremental other income associated with the settlement of escrow funds from a previous acquisition.
INCOME TAXES
Our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the 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 discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.
We recorded income tax benefit of $1.1 million and income tax expense of $0.5 million for the three and nine months ended September 30, 2023, respectively. Our effective income tax rate for the three and nine months ended September 30, 2023 differed from the 21% statutory rate primarily due to non-deductible compensation and the effect of state taxes.
We recorded an income tax benefit of $1.5 million and $22.6 million for the three and nine months ended September 30, 2022, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 differed from the 21% statutory rate primarily due to the release in our valuation allowance and the effect of state income taxes.
DISCONTINUED OPERATIONS
On October 31, 2022, we entered into the Purchase Agreement with the Buyer to sell our former tax software business for an aggregate purchase price of $720.0 million in cash, subject to customary purchase price adjustments set forth in the Purchase Agreement. The TaxAct Sale subsequently closed on December 19, 2022. This divestiture was considered part of our strategic shift to become a pure-play wealth management company and was determined to meet discontinued operations accounting criteria under ASC 205.
During the nine months ended September 30, 2023, we finalized our previously estimated closing date working capital balance, resulting in an incremental pre-tax gain of $2.5 million which is included within “Pre-tax gain on disposal” in the condensed consolidated statements of comprehensive income (loss).
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), determined in accordance with GAAP, excluding the effects of discontinued operations, stock-based compensation, depreciation and amortization of acquired intangible assets, interest expense and other, net, acquisition and integration costs, contested proxy and other legal and consulting costs, executive transition costs, Merger transaction costs, TaxAct transaction related costs, reorganization costs, hedging program start-up costs, and income tax (benefit) expense. Interest expense and other, net primarily consists of interest expense, net, unrealized mark-to-market (“MTM”) derivative losses (gains) for our interest rate cap derivative instruments, and other non-operating income. It does not include the income associated with the transition services agreement signed in connection with the TaxAct Sale as this income offsets costs included within income from continuing operations, or realized income or loss associated with our interest rate cap derivative instruments. Acquisition and integration costs primarily relate to the acquisitions of Avantax Planning Partners and 1st Global. Hedging program start-up costs include consulting and accounting costs incurred for the implementation of our cash sweep interest rate hedging program. Merger transaction costs include consulting and legal costs incurred for the plan of merger with Aretec Group, Inc., an affiliate of Cetera Financial Group. Inc.
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
Avantax, Inc. | Q3 2023 Form 10-Q 33
substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
A reconciliation of GAAP net income (loss), 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, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income (loss) | $ | (1,495) | | | $ | (21,841) | | | $ | 3,759 | | | $ | 52,204 | |
Less: Income (loss) from discontinued operations, net of income taxes | — | | | (22,162) | | | 1,921 | | | 47,484 | |
Income (loss) from continuing operations, net of income taxes | (1,495) | | | 321 | | | 1,838 | | | 4,720 | |
Stock-based compensation | 6,585 | | | 4,964 | | | 17,678 | | | 14,782 | |
Depreciation and amortization of acquired intangible assets | 10,546 | | | 9,685 | | | 30,291 | | | 27,863 | |
Interest expense and other, net | 5,854 | | | 158 | | | 12,337 | | | 423 | |
Acquisition and integration—Excluding change in the fair value of acquisition-related contingent consideration | (100) | | | 416 | | | (17) | | | 610 | |
Acquisition and integration—Change in the fair value of acquisition-related contingent consideration | — | | | — | | | — | | | (5,320) | |
| | | | | | | |
Contested proxy and other legal and consulting costs | — | | | (250) | | | 694 | | | 3,865 | |
Executive transition costs | — | | | — | | | 6,412 | | | — | |
Merger transaction costs | 7,763 | | | — | | | 7,763 | | | — | |
TaxAct transaction related costs | 2,069 | | | 3,237 | | | 6,228 | | | 3,439 | |
Reorganization costs | 3,938 | | | — | | | 8,904 | | | — | |
Hedging program start-up costs | — | | | — | | | 583 | | | — | |
Income tax (benefit) expense | (1,068) | | | (1,536) | | | 524 | | | (22,582) | |
Adjusted EBITDA | $ | 34,092 | | | $ | 16,995 | | | $ | 93,235 | | | $ | 27,800 | |
Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Share
We define Non-GAAP Net Income (Loss) as net income (loss), determined in accordance with GAAP, excluding the effects of discontinued operations, amortization of acquired intangible assets, acquisition and integration costs, contested proxy and other legal and consulting costs, executive transition costs, Merger transaction costs, TaxAct transaction related costs, reorganization costs, hedging program start-up costs, unrealized MTM derivative losses (gains) for our interest rate cap derivative instruments, and the related tax impact of those adjustments. Unrealized MTM derivative losses (gains) include the unrealized portion of gains and losses that are caused by changes in the fair values of derivatives which do not qualify for hedge accounting treatment under GAAP. It does not include realized income or loss associated with these instruments. The tax impact of these adjustments is determined using the income tax rates in effect for the applicable period, adjusted for any potentially non-deductible amounts.
We believe that Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of comprehensive income (loss) 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) and Non-GAAP Net Income (Loss) per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss) and GAAP net income (loss) per share. Other companies may calculate Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share differently, and, therefore, these measures may not be comparable to similarly titled measures of other companies.
Avantax, Inc. | Q3 2023 Form 10-Q 34
A reconciliation of GAAP net income (loss) and GAAP net income (loss) per share, which we believe to be the most comparable GAAP 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, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income (loss) | $ | (1,495) | | | $ | (21,841) | | | $ | 3,759 | | | $ | 52,204 | |
Less: Income (loss) from discontinued operations, net of income taxes | — | | | (22,162) | | | 1,921 | | | 47,484 | |
Income (loss) from continuing operations, net of income taxes | (1,495) | | | 321 | | | 1,838 | | | 4,720 | |
Amortization of acquired intangible assets | 6,404 | | | 6,342 | | | 18,973 | | | 19,435 | |
Acquisition and integration—Excluding change in the fair value of acquisition-related contingent consideration | (100) | | | 416 | | | (17) | | | 610 | |
Acquisition and integration—Change in the fair value of acquisition-related contingent consideration | — | | | — | | | — | | | (5,320) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contested proxy and other legal and consulting costs | — | | | (250) | | | 694 | | | 3,865 | |
Executive transition costs | — | | | — | | | 6,412 | | | — | |
Merger transaction costs | 7,763 | | | — | | | 7,763 | | | — | |
TaxAct transaction related costs | 2,069 | | | 3,237 | | | 6,228 | | | 3,439 | |
Reorganization costs | 3,938 | | | — | | | 8,904 | | | — | |
Hedging program start-up costs | — | | | — | | | 583 | | | — | |
Unrealized MTM derivative losses (gains) | (239) | | | — | | | 637 | | | — | |
Tax impact of adjustments to GAAP net income (loss) | (4,823) | | | (2,315) | | | (11,601) | | | (5,234) | |
| | | | | | | |
Non-GAAP Net Income | $ | 13,517 | | | $ | 7,751 | | | $ | 40,414 | | | $ | 21,515 | |
Per diluted share: | | | | | | | |
Net income (loss) (1) | $ | (0.04) | | | $ | (0.45) | | | $ | 0.09 | | | $ | 1.06 | |
Less: Income (loss) from discontinued operations, net of income taxes | — | | | (0.46) | | | (0.05) | | | (0.96) | |
Income (loss) from continuing operations, net of income taxes | (0.04) | | | 0.01 | | | 0.04 | | | 0.10 | |
Amortization of acquired intangible assets | 0.18 | | | 0.13 | | | 0.46 | | | 0.40 | |
Acquisition and integration—Excluding change in the fair value of acquisition-related contingent consideration | — | | | 0.01 | | | — | | | 0.01 | |
Acquisition and integration—Change in the fair value of acquisition-related contingent consideration | — | | | — | | | — | | | (0.11) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contested proxy and other legal and consulting costs | — | | | (0.01) | | | 0.02 | | | 0.08 | |
Executive transition costs | — | | | — | | | 0.16 | | | — | |
Merger transaction costs | 0.21 | | | — | | | 0.19 | | | — | |
TaxAct transaction related costs | 0.05 | | | 0.07 | | | 0.15 | | | 0.07 | |
Reorganization costs | 0.10 | | | — | | | 0.22 | | | — | |
Hedging program start-up costs | — | | | — | | | 0.01 | | | — | |
Unrealized MTM derivative losses (gains) | (0.01) | | | — | | | 0.02 | | | — | |
Tax impact of adjustments to GAAP net income (loss) | (0.13) | | | (0.05) | | | (0.28) | | | (0.11) | |
| | | | | | | |
Non-GAAP Net Income per share — Diluted | $ | 0.36 | | | $ | 0.16 | | | $ | 0.99 | | | $ | 0.44 | |
Diluted weighted average shares outstanding | 37,791 | | | 49,016 | | | 40,940 | | | 49,153 | |
____________________________(1)Any difference in the “per diluted share” amounts between this table and the condensed consolidated statements of comprehensive income (loss) is due to using different diluted weighted average shares outstanding in the event that there is GAAP net loss but Non-GAAP Net Income and vice versa.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Our principal source of liquidity is our cash and cash equivalents. As of September 30, 2023, we had cash and cash equivalents of $106.4 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. From time-to-time, we may invest, in other vehicles, such as debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities,
Avantax, Inc. | Q3 2023 Form 10-Q 35
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 September 30, 2023 had minimal default risk and short-term maturities.
Our Avantax 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 on Avantax Wealth Management’s operations. As of September 30, 2023, Avantax Wealth Management met all capital adequacy requirements to which it was subject.
Historically, we have financed our operations primarily from cash provided by operating activities and access to credit markets. Our historical uses of cash have 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 stock repurchases. Execution of our growth strategies through strategic asset acquisitions is expected to remain a capital allocation priority during the next twelve months. For at least the next twelve months, we plan to finance these cash needs, and our regulatory capital requirements at our broker-dealer subsidiary largely through our cash and cash equivalents on hand and cash provided by operating activities, and access to capital under our Revolving Credit Facility (as defined below), subject to customary terms and conditions. Our future investments in our business through capital expenditures or acquisitions, prepayment of debt to achieve desired leverage ratios, or our return of capital to stockholders through stock repurchases, will be determined after considering the best interests of our stockholders.
Indebtedness
On January 24, 2023 (the “Closing Date”), we entered into a restatement agreement (the “Amended and Restated Credit Agreement”), which amended and restated in its entirety our previous Credit Agreement. The Amended and Restated Credit Agreement provides for a new delayed draw term loan facility up to a maximum principal amount of $270.0 million (the “Delayed Draw Term Loan Facility”) and a revolving credit facility with a commitment amount of $50.0 million (the “Revolving Credit Facility”). We may borrow term loans under the Delayed Draw Term Loan Facility (the “Term Loans”) until January 24, 2024. The stated maturity date of the Delayed Draw Term Loan Facility and the Revolving Credit Facility is January 24, 2028 (the “Maturity Date”). The proceeds of any Term Loans may be used to fund shareholder distributions and for general corporate purposes. The proceeds of any loans under the Revolving Credit Facility may be used to finance working capital needs and for general corporate purposes. On February 24, 2023, we borrowed $170.0 million under the Delayed Draw Term Loan Facility. During the second quarter of 2023, we borrowed the remaining $100.0 million available under the Delayed Draw Term Loan Facility.
As of September 30, 2023, we had $266.6 million in principal amount outstanding under the Delayed Draw Term Loan Facility and no amounts outstanding under the Revolving Credit Facility. As of September 30, 2023, $50.0 million was available for future borrowings under the Revolving Credit Facility, subject to customary terms and conditions. The obligations of the Company under the Amended and Restated Credit Agreement are secured by a first-priority security interest in substantially all of the existing and future personal property of the Company and certain of its subsidiaries.
We are required to make quarterly principal amortization payments on the Delayed Draw Term Loan Facility on the last business day of each fiscal quarter, beginning with the last business day of June 2023. These payments will amortize in equal quarterly installments based on the following aggregate annual amounts (expressed as a percentage of the principal amount of Term Loans borrowed): 2.5% during the first year ended December 31, 2023, 5% during years two and three, 7.5% during year four, and 10% during year five. Any remaining Term Loans outstanding are due on the Maturity Date.
Commencing with the first year ending December 31, 2023, we may be required to make annual prepayments on the Term Loans in an amount equal to a percentage of Excess Cash Flow (as defined in the Amended and Restated Credit Agreement). The percentage of Excess Cash Flow ranges from 0% to 50% depending on our Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We may voluntarily prepay the Term Loans in whole or in part without premium or penalty.
Subject to customary reference rate availability provisions, the borrowings under the Amended and Restated Credit Agreement will bear interest at a rate per annum equal to (i) the Term SOFR Rate (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) plus a margin ranging from 2.25% to 2.75% (which margin would be 2.75% as of the Closing Date), or (ii) a base rate based on
Avantax, Inc. | Q3 2023 Form 10-Q 36
the highest of the Wall Street Journal prime rate, the federal funds rate plus 0.50% and the Term SOFR (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) rate plus 1.00%, in each case plus a margin ranging from 1.25% to 1.75% (which margin would be 1.75% as of the Closing Date). The margin is determined based on the Company’s Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility ranging from 0.35% to 0.45%. Interest is payable at the end of each interest period, typically quarterly.
Pursuant to the Amended and Restated Credit Agreement, we shall not permit (i) the Consolidated Total Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) to exceed 4.00 to 1.00 between March 31, 2023 and June 30, 2024, or 3.75 to 1.00 between July 1, 2024 and the Maturity Date, (ii) the Consolidated Fixed Charge Coverage Ratio (as defined in the Amended and Restated Credit Agreement) to be less than 1.25 to 1.00 or (iii) Liquidity (as defined in the Amended and Restated Credit Agreement) on the last day of any fiscal quarter to be less than $50 million. The Company was in compliance with the debt covenants of the Amended and Restated Credit Agreement as of September 30, 2023.
Capital Return Program
On January 27, 2023, we commenced a modified “Dutch Auction” tender offer (the “Tender Offer”) to purchase shares of our common stock for an aggregate purchase price of up to $250.0 million at a price per share not less than $27.00 and not greater than $31.00. The Tender Offer was in addition to, and separate from, the $200.0 million stock repurchase authorization discussed below. Upon the conclusion of the Tender Offer, we repurchased and subsequently retired approximately 8.3 million shares of our common stock at the purchase price of $30.00 per share, for aggregate cash consideration of $250.0 million. We incurred approximately $4.5 million for fees and expenses associated with the Tender Offer, including approximately $2.4 million for estimated excise taxes owed under the Inflation Reduction Act of 2022, which were recorded within stockholders’ equity.
Repurchased common stock that is subsequently retired is deducted from common stock for par value and from additional paid-in capital for the excess over par value. Direct costs incurred to repurchase common stock are included in the total cost of the shares.
Stock Repurchase Authorization
On December 19, 2022, we announced that our board of directors authorized the Company to repurchase up to $200.0 million of our common stock. Our repurchase authorization 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 authorization 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, 2023, we repurchased approximately 0.4 million shares of our common stock under the stock repurchase authorization for aggregate purchase consideration of approximately $9.1 million. For the nine months ended September 30, 2023, we repurchased approximately 3.5 million shares of our common stock under the stock repurchase authorization for aggregate purchase consideration of approximately $85.0 million. The remaining authorized amount under the stock repurchase authorization as of September 30, 2023, was approximately $115.0 million.
For the three months ended September 30, 2022, we did not repurchase any shares of our common stock under our previous stock repurchase plan. For the nine months ended September 30, 2022, we repurchased approximately 1.9 million shares of our common stock under our previous stock repurchase plan for aggregate purchase consideration of approximately $35.0 million.
Contractual Obligations and Commitments
Asset Acquisitions
We have 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 client 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, 2023, the
Avantax, Inc. | Q3 2023 Form 10-Q 37
maximum future fixed and contingent payments associated with these asset acquisitions was $25.6 million, with specified payment dates from 2023 through 2027.
Interest Rate Hedges
During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple SOFR and is a combination of a purchased floor instrument with a strike rate of 2.5% and a sold cap instrument with a strike rate of 5.5%, both of which expire on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we elected to defer and will settle through monthly straight-line cash payments to the counterparties over the term of the instruments. This hedging strategy enables us to limit the downside risk of significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
In addition, during the second quarter of 2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5%, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which were deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This hedging strategy enables us to offset a portion of the total cost of our interest rate collar derivatives by capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
None of our derivative financial instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
Cash Flows
Our cash flows were comprised of the following (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 | | $ Change |
Net cash provided (used) by operating activities from continuing operations | $ | (63,561) | | | $ | 9,909 | | | $ | (73,470) | |
Net cash used by investing activities from continuing operations | (16,274) | | | (16,344) | | | 70 | |
Net cash used by financing activities from continuing operations | (79,870) | | | (84,739) | | | 4,869 | |
Net cash provided by discontinued operations | 2,212 | | | 64,956 | | | (62,744) | |
Net decrease in cash and cash equivalents | $ | (157,493) | | | $ | (26,218) | | | $ | (131,275) | |
Net Cash from Operating Activities from Continuing Operations
Net cash provided by operating activities from continuing operations consists of income from continuing operations, offset by certain non-cash adjustments, and changes in operating assets and liabilities, which were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 | | $ Change |
Net income | $ | 3,759 | | | $ | 52,204 | | | $ | (48,445) | |
Less: Income from discontinued operations, net of income taxes | 1,921 | | | 47,484 | | | (45,563) | |
Income from continuing operations | 1,838 | | | 4,720 | | | (2,882) | |
Non-cash adjustments to net income | 55,047 | | | 43,569 | | | 11,478 | |
Operating cash flows before changes in operating assets and liabilities | 56,885 | | | 48,289 | | | 8,596 | |
Changes in operating assets and liabilities, net of acquisitions and disposals | (120,446) | | | (38,380) | | | (82,066) | |
Net cash provided (used) by operating activities from continuing operations | $ | (63,561) | | | $ | 9,909 | | | $ | (73,470) | |
Net cash provided by operating activities from continuing operations for the nine months ended September 30, 2023, included $56.9 million of operating cash flows before changes in operating assets and liabilities and $120.4 million of changes in operating assets and liabilities. Non-cash adjustments to net income for the nine months ended September 30, 2023 primarily related to depreciation and amortization costs of $30.3 million, stock-based compensation of $17.7 million, and $4.5 million of amortization related to payments made to financial professionals in support of ongoing growth programs. Changes in operating assets and liabilities were primarily impacted by $100.0 million of federal and state income tax payments for prior year accrued taxes and current year estimated quarterly payments and $11.1 million in payments made to financial professionals in support of ongoing growth
Avantax, Inc. | Q3 2023 Form 10-Q 38
programs. The remaining changes in operating assets and liabilities were for normal activity within our working capital accounts.
Net Cash from Investing Activities from Continuing Operations
Net cash used by investing activities from continuing operations consists of acquisitions, purchases of property, equipment, and software, net, and were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 | | $ Change |
Purchases of property, equipment, and software | $ | (8,257) | | | $ | (12,601) | | | $ | 4,344 | |
| | | | | |
Asset acquisitions | (8,017) | | | (3,743) | | | (4,274) | |
| | | | | |
| | | | | |
| | | | | |
Net cash used by investing activities from continuing operations | $ | (16,274) | | | $ | (16,344) | | | $ | 70 | |
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, net cash used by investing activities from continuing operations did not materially change as reduced capital expenditures were offset by increased outflows for asset acquisitions.
Net Cash from Financing Activities from Continuing Operations
Net cash used by financing activities from continuing operations primarily consists of debt issuance and repayments, common stock and stock-based awards transactions, and acquisition-related contingent consideration payments. Financing cash flows from continuing operations were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 | | $ Change |
Proceeds from credit facilities, net of debt discount and issuance costs | $ | 261,543 | | | $ | — | | | $ | 261,543 | |
| | | | | |
Payments on credit facilities | (3,375) | | | (35,906) | | | 32,531 | |
Acquisition-related fixed and contingent consideration payments | (287) | | | (14,548) | | | 14,261 | |
Stock repurchases | (337,192) | | | (35,000) | | | (302,192) | |
| | | | | |
| | | | | |
| | | | | |
Proceeds from issuance of stock through employee stock purchase plan | 1,584 | | | 2,324 | | | (740) | |
Proceeds from stock option exercises | 2,203 | | | 481 | | | 1,722 | |
Tax payments from shares withheld for equity awards | (4,346) | | | (2,090) | | | (2,256) | |
Net cash used by financing activities from continuing operations | $ | (79,870) | | | $ | (84,739) | | | $ | 4,869 | |
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, we used $4.9 million less cash for financing activities. Our primary use of cash for financing activities during the nine months ended September 30, 2023 was for incremental stock repurchases associated with our Tender Offer and stock repurchase authorization, which were funded in part by net borrowings under our Amended and Restated Credit Agreement. These net cash outflows, coupled with incremental outflows associated with our stock incentive and employee stock purchase plans, were more than offset by reduced payments on credit facilities during the current period due to the voluntary prepayment of a portion our previous term loan facility in the prior period and a reduction in acquisition-related fixed and contingent consideration payments.
Net Cash Flows from Discontinued Operations
Net cash flows provided by discontinued operations were comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 | | $ Change |
Net cash provided by operating activities from discontinued operations | $ | — | | | $ | 69,508 | | | $ | (69,508) | |
Net cash provided (used) by investing activities from discontinued operations | 2,212 | | | (4,552) | | | 6,764 | |
Net cash provided by financing activities from discontinued operations | — | | | — | | | — | |
Net cash provided by discontinued operations | $ | 2,212 | | | $ | 64,956 | | | $ | (62,744) | |
For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, net cash provided by discontinued operations decreased $62.7 million. During the nine months ended September 30, 2023, we finalized our previously estimated closing date working capital balance for the TaxAct Sale, resulting in incremental purchase consideration of $2.2 million and an incremental pre-tax gain on disposal of $2.5 million. Net cash provided by discontinued operations declined compared to the prior period due to the completion of the TaxAct Sale in the prior period.
Avantax, Inc. | Q3 2023 Form 10-Q 39
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 financial condition or results of operations. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, current conditions, and on various other assumptions that we believe to be reasonable under the circumstances and, based on information available to us at that time, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. The 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, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
ThereOther than for our Amended and Restated Credit Agreement discussed in “Item 1. Financial Statements—Note 6”, and our interest rate derivative contracts discussed in “Item 1. Financial Statements—Note 11” and further below, 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, 2022, during the nine months ended September 30, 2017, other than related to borrowings2023.
As of September 30, 2023, we had $266.6 million in principal amount of debt outstanding under the senior secured credit facility entered intoDelayed Draw Term Loan Facility, which carries a degree of interest rate risk. For further information on May 22, 2017. We borrowed $375.0 millionour outstanding debt, see “Item 1. Financial Statements—Note 6” 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 LIBORthe interest rates under the Delayed Draw Term Loan Facility on September 30, 2023 would result in a $3.5$10.4 million increase based upon our September 30, 2017 principal amount, in our annual interest expense until the scheduled maturity date in 2024.2028. For additional information, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple secured overnight financing rates (“SOFR”) and is a combination of a purchased floor instrument with a strike rate of 2.5% and a sold cap instrument with a strike rate of 5.5%, both of which expire on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we elected to defer and will settle through monthly straight-line cash payments to the counterparties over the term of the instruments. This hedging strategy enables us to limit the downside risk of significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
In addition, during the second quarter of 2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5%, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which were deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This hedging strategy enables us to offset a portion of the total cost of our interest rate collar derivatives by capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
Avantax, Inc. | Q3 2023 Form 10-Q 40
We are exposed to credit risk in the event of nonperformance of counterparties for our derivative financial instruments. We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and actively monitoring counterparty credit ratings. We also employ master netting arrangements which allow us to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative financial instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
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, 2017.2023. 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, 2017.2023.
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, 2023 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 9” 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 to the Company’s business. The Company believes2022.
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, 2022.
Increased government regulationThe proposed acquisition of the Company by Cetera may disrupt or could adversely affect our business, may harm our operating results.prospects, financial condition and results of operations.
We areOn September 9, 2023, Avantax entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aretec Group, Inc., a Delaware corporation that does business as Cetera Holdings (“Parent”), and C2023 Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Acquisition Sub”) whereby Parent will acquire all of the issued and outstanding equity of Avantax (the “Merger”) in an all-cash transaction valuing Avantax at approximately $1.2 billion, inclusive of Avantax’s net debt. On the terms and subject to federal, state,the conditions of the Merger Agreement, holders of shares of Avantax common stock (other than Excluded Shares and local lawsDissenting Shares (each, as defined in the Merger Agreement)) will receive $26.00 per share in cash, without interest and regulations thatless any required tax withholdings. Upon the closing of the transactions contemplated by the Merger Agreement, Avantax will operate as a privately-held company. The closing remains subject to customary closing conditions, including approval by Avantax’s stockholders.
The announcement and pendency of the Merger could cause disruptions in and create uncertainty surrounding our business, which could have an adverse effect on our business, prospects, financial condition and results of operations, regardless of whether the Merger is completed. The Merger Agreement generally requires us to use our reasonable best efforts to operate our business in the ordinary course of business pending consummation of the Merger and restricts us, without Parent’s consent, from taking certain specified actions until the Merger is
Avantax, Inc. | Q3 2023 Form 10-Q 41
completed. These restrictions may 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 reviseability to execute our business models, we may become subjectstrategies, respond effectively 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,competitive pressures and potentially significant changes to, U.S. fiscalindustry developments and tax laws and regulations. These changes may include comprehensive tax reform as well as the rolling back or repeal of variousattain our 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 on our Tax Preparation or Wealth Management businesses clear. It is possible that some policies adopted by 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 that 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,goals, and these changesrestrictions 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 legislativecash flows.
Employee retention and regulatory initiatives andrecruitment 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 inchallenging before the supervision and regulationscompletion of the wealth management industry. Regulators implementingMerger, as employees and prospective employees may experience uncertainty about their future roles at the Dodd-Frank Act have adopted, proposedCompany. If, despite our retention and recruiting efforts, key employees depart or prospective key employees fail to adopt, and may inaccept employment with 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 reviewCompany because 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 limitedissues relating to the Dodd-Frank Act. If such changes are enacted, theyuncertainty and difficulty of integration or a desire not to remain with the combined company, our business, financial condition and results of operations could be adversely affected.
The announcement and pendency of the Merger could also cause disruptions to our business or business relationships, which could have a negativean adverse impact on our business.
In April 2016, the DOL published the Fiduciary Rule and two new administrative class exemptions from the prohibited transaction exemptions, as well as amendments to previously granted exemptions under Employee Retirement Income Security Act 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 4975 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 institutions 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, from April 10, 2017 to June 9, 2017, and requiring investment advice fiduciaries relying on 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 obligations with respect to transactions covered by the DOL’s enforcement policy.
On August 31, 2017, the DOL issued a proposed rule to delay the effective date of the Fiduciary Rule’s transaction exemptions to July 1, 2019. The purpose of the proposed delay is to permit the DOL 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 assets 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. 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,Parties with which we have business relationships, including clients, channel partners, suppliers and other business partners, may experience uncertainty as to the future of such relationships and may delay or other actionsdefer certain business decisions, seek alternative relationships with third parties or proceedings by regulators or third-partiesseek to alter their present business relationships with respectus. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties. The pursuit of the Merger and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect our compliance with the Fiduciary Rule may also have a material adverse effect on ourbusiness, financial condition and results of operations.
We could also be subject to litigation related to the Merger, which could prevent or delay the consummation of the Merger or result in significant costs and expenses. Stockholders have filed, and may continue to file, lawsuits challenging the Merger or the other transactions contemplated by the Merger Agreement, which may name us or our board of directors as defendants. We cannot assure you as to the outcome of such lawsuits, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated altogether. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and divert management’s attention and resources, which could adversely affect our business, financial condition and results of operations.
Our abilityWe have incurred and will continue to complyincur substantial transaction fees and costs in connection with all applicable laws, rulesthe Merger.
We have incurred and regulations,expect to continue to incur significant costs, expenses and interpretationsfees for professional services, such as legal, financial and accounting fees, and other transaction costs in connection with the Merger. A material portion of these expenses are payable by us whether or not the Merger is largely dependent on our establishmentcompleted and maintenance of compliance, audit, and reporting systems and procedures, as well as our abilitymay relate to attract and retain qualified compliance, audit, and risk management personnel. Whileactivities that we would not have undertaken other than to complete the Merger. If the Merger is not completed, we will have received little or no benefit from such expenses. Further, although we have adopted systems, policies,assumed that a certain amount of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These costs could adversely affect our business, financial condition and procedures reasonably designed to comply or facilitate compliance with all applicable laws, rules and regulations, and interpretations, these systems, policies, and proceduresresults of operations.
The Merger may not be fully effective.completed within the expected timeframe, or at all, and significant delay or the failure to complete the Merger could adversely affect our business and the market price of our common stock.
The consummation of the Merger is subject to customary closing conditions, including, without limitation, the adoption of the Merger Agreement by the affirmative vote of not less than 51% of the outstanding shares of the Company’s common stock entitled to vote thereon at the meeting of the Company’s stockholders held for the purpose of voting upon the adoption of the Merger Agreement, the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the grant of early termination thereof, customary regulatory approvals and the absence of any law or order enacted, issued, promulgated, enforced or entered by any governmental authority restraining, enjoining, rendering illegal or otherwise prohibiting the Merger. Parent’s obligation to consummate the Merger is also subject to the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) occurring after the date of the Merger Agreement that is continuing.
Many of the conditions to consummation of the Merger are not within our control or the control of Parent or Acquisition Sub, and we cannot predict when or if these conditions will be satisfied. There can be no assurance that weour business, our relationships or our financial condition will not be adversely affected, as compared to the condition
Avantax, Inc. | Q3 2023 Form 10-Q 42
prior to the announcement of the Merger, if the Merger is not consummated within the expected timeframe, or at all. Failure to complete the Merger within the expected timeframe, or at all, could adversely affect our business and the market price of our common stock in a number of ways, including the following:
•if the Merger is not completed within the expected timeframe, or at all, the share price of our common stock will change to the extent that the current market price of our stock reflects assumptions regarding the completion of the Merger;
•we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other costs in connection with the Merger, for which we may receive little or no benefit if the Merger is not completed. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger;
•failure to complete the Merger within the expected timeframe, or at all, may result in negative publicity and a negative impression of us in the investment community and may lead to subsequent offers to acquire the Company at a lower price or otherwise on less favorable terms to us and our stockholders than contemplated by the Merger;
•the impairment of our ability to attract, retain and motivate personnel, including our senior management;
•difficulties maintaining relationships with customers, distributors, suppliers and other business partners; and
•upon termination of the Merger Agreement by us or Parent under specified circumstances, we would be required to pay a termination fee of $32.3 million.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company or could result in a competing proposal being at a lower price than it might otherwise be.
We are subject to investigations, claims, or other actions or proceedings by regulators or third-parties with respect to our past or future compliance with applicable laws, rules, and regulations, the outcome of which may have a material adverse effectcertain restrictions on our financial conditionability to solicit alternative acquisition proposals from third parties, to provide information to third parties and resultsto enter into or continue discussions or negotiations with third parties regarding alternative acquisition proposals, subject to customary exceptions. In addition, we may be required to pay Parent a termination fee of operations.
HD Vest distributes its products and services through financial advisors who affiliate$32.3 million in specified circumstances, including if the Merger Agreement is terminated in specified circumstances following our receipt of a Competing Proposal (as defined in the Merger Agreement). These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition, including, if the Merger Agreement is terminated prior to the consummation of the Merger, after such termination of the Merger Agreement, even if it were prepared to pay a price per share higher than the price per share proposed to be paid in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in specified circumstances under the Merger Agreement, including, in certain circumstances, after a valid termination of the Merger Agreement in accordance with the firmterms thereof.
If the Merger Agreement is terminated and we decide to seek another similar transaction, we may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the Merger Agreement.
We are exposed to credit risk in the event of nonperformance of counterparties for our derivative financial instruments.
The Company recently implemented a hedging policy to mitigate and manage risks caused by yield curve, duration and interest rate fluctuations, and other macroeconomic factors upon our business and financing arrangements. The hedging policy will be managed by our Chief Financial Officer in consultation with our Chief Executive Officer and subject to oversight by our Chief Legal Officer, Chief Compliance Officer, Chief Accounting Officer, and Accounting Director as independent contractors. There can be no assurance that legislative, judicial,well as our board of directors. However, we cannot assure you of the financial stability or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classificationviability of our financial advisors as independent contractors. Althoughcounterparties and by engaging in derivative transactions, we believe we have properly classifiedare exposed to counterparty credit risk. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in the derivative. The existence of credit risk associated with 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 misclassifiedhedging policy over time could adversely affect our advisors as independent contractors for employment tax or other purposesprofitability and, as a result, seek additional taxes from us or attempt to impose fines and penalties, whichtherefore, could have a materialmaterially adverse effect on our business, model, financial condition, and results of operations.operations, and financial condition.
Risks Related 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.Avantax, Inc. | Q3 2023 Form 10-Q 43
On May 22, 2017, we borrowed $375.0 million in the form of a term loan under a Credit Agreement to which we, and most of our direct and indirect domestic subsidiaries (in their capacity as guarantors), are parties. The final maturity date of the term loan is May 22, 2024. The proceeds of the term loan were used to repay in full the credit facility used for the acquisition of HD Vest and to redeem in full our convertible senior notes. We may also borrow an additional amount under this Credit Agreement of up to $50.0 million under a revolving credit arrangement.
This borrowing may materially and adversely affect our financial condition and future financial results by, among other things:
increasing our vulnerability to downturns in our businesses, to competitive pressures, and to adverse economic and industry conditions;
requiring the dedication of a portion of our expected cash from operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and complementary acquisitions;
increasing our interest payment obligations in the event that interest rates rise; and
limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.
Our 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 following table details our repurchases of common stock for the nine months ended September 30, 2023 (in thousands, except the average price paid per share data):
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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, 2023 (1) | | 460 | | | $ | 27.20 | | | 460 | | | $ | 187,483 | |
February 1-28, 2023 (2) | | 8,333 | | | $ | 30.00 | | | — | | | $ | 187,483 | |
March 1-31, 2023 (1) | | 498 | | | $ | 24.66 | | | 498 | | | $ | 175,212 | |
April 1-30, 2023 (1) | | 484 | | | $ | 26.39 | | | 484 | | | $ | 162,446 | |
May 1-31, 2023 (1) | | 882 | | | $ | 22.15 | | | 882 | | | $ | 142,914 | |
June 1-30, 2023 (1) | | 840 | | | $ | 22.45 | | | 840 | | | $ | 124,046 | |
July 1-31, 2023 (1) | | 378 | | | $ | 24.00 | | | 378 | | | $ | 114,972 | |
August 1-31, 2023 (1) | | — | | | $ | — | | | — | | | $ | 114,972 | |
September 1-30, 2023 (1) | | — | | | $ | — | | | — | | | $ | 114,972 | |
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Total (3) | | 11,875 | | | $ | 24.01 | | | 3,542 | | | |
___________________________(1)Represents shares repurchased through the Company’s $200.0 million stock repurchase authorization, which was originally announced on December 19, 2022. This repurchase authorization 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. See “Item 1. Financial Statements—Note 12” for further information.
(2)Represents shares repurchased through the Tender Offer, which was fully subscribed. See “Item 1. Financial Statements—Note 12” for further information.
(3)“Average Price Paid per Share” represents the average price paid per share through the Company’s stock repurchase authorization from January 1, 2023 through September 30, 2023, but does not include the price paid per share pursuant to the Tender Offer discussed in note (2) above.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
TheDuring the three months ended September 30, 2023, none of our officers or directors adopted or terminated any contract, instruction, or written plan for the purchase or sale of Company moved its headquarters movedsecurities that was intended to Irving, Texas from Bellevue, Washington in June 2017, and Eric M. Emans,satisfy 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 asaffirmative defense conditions 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’sRule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Avantax, Inc. | Q3 2023 Form 10-Q on October 27, 2016.44
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 |
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| | Stock Purchase Agreement, dated as of October 31, 2022, by and among Avantax, Inc. (f/k/a Blucora, Inc.), TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC and DS Admiral Bidco, LLC | | 8-K | | November 1, 2022 | | 2.1 | | |
| | Merger Agreement, dated as of September 9, 2023, by and among Avantax, Inc., Aretec Group, Inc., and C2023 Sub Corp | | 8-K | | September 11, 2023 | | 2.1 | | |
| | Restated Certificate of Incorporation, as filed with the Secretary of the State of Delaware on August 10, 2012 | | 8-K | | August 13, 2012 | | 3.1 | | |
| | Certificate of Amendment to the Restated Certificate of Incorporation filed with the Secretary of State of Delaware on June 1, 2017 | | 8-K | | June 5, 2017 | | 3.1 | | |
| | Certificate of Amendment No. 2 to the Restated Certificate of Incorporation filed with the Secretary of State of Delaware on June 8, 2018 | | 8-K | | June 8, 2018 | | 3.1 | | |
| | Certificate of Amendment No. 3 to the Restated Certificate of Incorporation, effective January 26, 2023 | | 8-K | | January 26, 2023 | | 3.1 | | |
| | Certificate of Amendment No. 4 to the Restated Certificate of Incorporation of Avantax, Inc., effective May 4, 2023 | | 8-K | | May 5, 2023 | | 3.1 | | |
| | Amended and Restated Bylaws of Avantax, Inc. dated as of January 26, 2023 | | 8-K | | January 26, 2023 | | 3.2 | | |
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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, 2023, formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Unaudited Condensed Consolidated Statements of Stockholders' Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements | | | | | | | | X |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | X |
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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 Avantax, 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. |
** | | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules or exhibits upon request by the SEC; provided that the Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedules or exhibits so furnished. |
Avantax, Inc. | Q3 2023 Form 10-Q 45
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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.
| | | | | | | | |
| AVANTAX, INC. |
| | |
| BLUCORA, INC.By: | /s/ Marc Mehlman |
| | |
| By: | /s/ Eric M. Emans |
| | Eric M. Emans
Marc Mehlman Chief Financial Officer and Treasurer (On behalf of the Registrantregistrant and as Principal Financial Officer) |
| | |
| Date: | October 26, 2017November 6, 2023 |
- 40 -Avantax, Inc. | Q3 2023 Form 10-Q 46