BCOR 10-Q
Grayscale Bitcoin Adopters ETF (BCOR)
10-Q
2022-11-01
For: 2022-09-30
View Original
Added on
August 12, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 000-25131
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices) (Zip Code)
(972 ) 870-6400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
ý | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 25, 2022, 47,884,243 shares of the registrant’s Common Stock were outstanding.
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
Condensed Consolidated Balance Sheets (Unaudited) | ||||||||
Condensed Consolidated Statements of Operations (Unaudited) | ||||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
This report includes some of the trademarks, trade names, and service marks of Blucora, Inc. (referred to throughout this report as “Blucora,” the “Company,” “we,” “us,” or “our”), including Blucora, Avantax Wealth Management, Avantax Planning Partners, Avantax Retirement Plan Services, HD Vest, 1st Global, HKFS, and TaxAct. Each one of these trademarks, trade names, or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights, or (iv) a registered trademark or application for registration that we have been authorized by a third party to use.
Solely for convenience, the trademarks, service marks, and trade names included in this report are without the ®, ™ or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This report may also include additional trademarks, service marks, and trade names of others, which are the property of their respective owners. All trademarks, service marks, and trade names included in this report are, to our knowledge, the property of their respective owners.
References to our or our subsidiaries’ website addresses or the website addresses of third parties in this report do not constitute incorporation by reference of the information contained on such websites and should not be considered part of this report.
Blucora, Inc. | Q3 2022 Form 10-Q 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “will,” “would,” “could,” “should,” “estimates,” “predicts,” “potential,” “continues,” “target,” “outlook,” and similar terms and expressions, but the absence of these words does not mean that the statement is not forward-looking. Actual results may differ significantly from management’s expectations due to various risks and uncertainties including, but not limited to:
•our ability to effectively compete within our industries;
•our ability to generate strong performance for our clients and the impact of the financial markets on our clients’ portfolios;
•our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;
•our ability to attract and retain financial professionals, employees, clients, and customers, as well as our ability to provide strong customer/client service;
•our future capital requirements and the availability of financing, if necessary;
•our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
•any downgrade of the Company’s credit ratings;
•the impact of new or changing legislation and regulations (or interpretations thereof) on our business, including our ability to successfully address and comply with such legislation and regulations (or interpretations thereof) and increased costs, reductions of revenue, and potential fines, penalties, or disgorgement to which we may be subject as a result thereof;
•risks, burdens, and costs, including fines, penalties, or disgorgement, associated with our business being subjected to regulatory inquiries, investigations, or initiatives, including those of the Financial Industry Regulatory Authority, Inc. and the Securities and Exchange Commission (the “SEC”);
•risks associated with legal proceedings, including litigation and regulatory proceedings;
•our ability to close, finance, and realize all of the anticipated benefits of acquisitions, as well as our ability to integrate the operations of recently acquired businesses, and the potential impact of such acquisitions on our existing indebtedness and leverage;
•our ability to retain employees and acquired client assets following acquisitions;
•any compromise of confidentiality, availability or integrity of information, including cyberattacks;
•our ability to manage leadership and employee transitions, including costs and time burdens on management and our board of directors related thereto;
•political and economic conditions and events that directly or indirectly impact the wealth management and tax software industries;
•the impact of the continuing COVID-19 pandemic on our results of operations and our business, including the impact of the resulting economic and market disruption, the extension of tax filing deadlines and other related government actions, and changes in customer behavior related to the foregoing;
•our ability to maintain our relationships with third-party partners, providers, suppliers, vendors, distributors, contractors, financial institutions, industry associations, and licensing partners, and our expectations regarding and reliance on the products, tools, platforms, systems, and services provided by these third parties;
•our ability to respond to rapid technological changes, including our ability to successfully release new products and services or improve upon existing products and services;
•risks related to goodwill and acquired intangible asset impairment;
Blucora, Inc. | Q3 2022 Form 10-Q 3
•our ability to develop, establish, and maintain strong brands;
•risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses, and computer hacking attacks;
•our ability to comply with laws and regulations regarding privacy and protection of user data;
•the seasonality of our business;
•our assessments and estimates that determine our effective tax rate;
•our ability to protect our intellectual property and the impact of any claim that we infringed on the intellectual property rights of others;
•disruptions to our business and operations resulting from our agreement to sell our Tax Software business (or the announcement thereof);
•our inability to successfully close the sale of our Tax Software business;
•our failure to realize the expected benefits of the transaction if it does close;
•if we are unable to secure financing on desirable terms after the consummation of the sale of our Tax Software business, our capital structure may include limited or no indebtedness and we may not be able to return capital to stockholders in the amount anticipated; and
•the effects on our business of actions of activist stockholders.
Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as in our other filings with the SEC. All forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation and do not intend to update or revise any forward-looking statement to reflect new information, events, or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.
Blucora, Inc. | Q3 2022 Form 10-Q 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Commissions and advisory fees receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Property, equipment, and software, net | |||||||||||
| Right-of-use assets, net | |||||||||||
| Goodwill, net | |||||||||||
| Acquired intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Commissions and advisory fees payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current deferred revenue | |||||||||||
| Current lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net | |||||||||||
| Long-term lease liabilities | |||||||||||
| Deferred tax liabilities, net | |||||||||||
| Long-term deferred revenue | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
Treasury stock, at cost— | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes.
Blucora, Inc. | Q3 2022 Form 10-Q 5
BLUCORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Wealth Management | $ | $ | $ | $ | |||||||||||||||||||
| Tax Software | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Wealth Management | |||||||||||||||||||||||
| Tax Software | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Engineering and technology | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Acquisition and integration | ( | ||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of acquired intangible assets | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ( | |||||||||||||||||||||
| Interest expense and other, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes.
Blucora, Inc. | Q3 2022 Form 10-Q 6
BLUCORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) (In thousands)
| Common stock | Additional paid-in capital | Accumulated deficit | Treasury stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated deficit | Treasury stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
See accompanying notes.
Blucora, Inc. | Q3 2022 Form 10-Q 7
BLUCORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization of acquired intangible assets | |||||||||||
| Stock-based compensation | |||||||||||
| Change in the fair value of acquisition-related contingent consideration | ( | ||||||||||
| Reduction of right-of-use lease assets | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Accretion of lease liabilities | |||||||||||
| Other non-cash items | |||||||||||
| Changes in operating assets and liabilities, net of acquisitions and disposals: | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Commissions and advisory fees receivable | |||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other long-term assets | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Commissions and advisory fees payable | ( | ( | |||||||||
| Lease liabilities | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Accrued expenses and other current and long-term liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Purchases of property, equipment, and software | ( | ( | |||||||||
| Asset acquisitions | ( | ( | |||||||||
| Net cash used by investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from credit facilities, net of debt discount and issuance costs | ( | ||||||||||
| Payments on credit facilities | ( | ( | |||||||||
| Acquisition-related contingent consideration payments | ( | ( | |||||||||
| Stock repurchases | ( | ||||||||||
| Proceeds from issuance of stock through employee stock purchase plan | |||||||||||
| Tax payments from shares withheld for equity awards | ( | ( | |||||||||
| Proceeds from stock option exercises | |||||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
See accompanying notes.
Blucora, Inc. | Q3 2022 Form 10-Q 8
BLUCORA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Description of the Business
Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) operates two primary businesses: the Wealth Management business and the digital Tax Software business.
Wealth Management
Our Wealth Management business consists of the operations of Avantax Wealth Management and Avantax Planning Partners (collectively, the “Wealth Management business” or the “Wealth Management segment”).
Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, certified public accounting (“CPA”) firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.
Tax Software
Our Tax Software business consists of the operations of TaxAct, Inc. (“TaxAct,” the “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications.
Our Tax Software segment is highly seasonal with a significant portion of its annual revenue typically earned in the first two quarters of the fiscal year. During the third and fourth quarters of the fiscal year, the Tax Software segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
Segments
Note 2: Summary of Significant Accounting Policies
Interim Financial Information
Blucora, Inc. | Q3 2022 Form 10-Q 9
Note 3: Segment Information and Revenue
We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment. Our Chief Executive Officer is the chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy, transaction and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Wealth Management | $ | $ | $ | $ | |||||||||||||||||||
| Tax Software | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Wealth Management | |||||||||||||||||||||||
| Tax Software | ( | ( | |||||||||||||||||||||
| Corporate-level activity | ( | ( | ( | ( | |||||||||||||||||||
| Total operating income (loss) | ( | ( | |||||||||||||||||||||
| Interest expense and other, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | |||||||||||||||||
Blucora, Inc. | Q3 2022 Form 10-Q 10
Wealth Management Revenue Recognition
Wealth management revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Recognized upon transaction: | |||||||||||||||||||||||
| Commission | $ | $ | $ | $ | |||||||||||||||||||
| Transaction and fee | |||||||||||||||||||||||
| Total revenue recognized upon transaction | $ | $ | $ | $ | |||||||||||||||||||
| Recognized over time: | |||||||||||||||||||||||
| Advisory | $ | $ | $ | $ | |||||||||||||||||||
| Commission | |||||||||||||||||||||||
| Asset-based | |||||||||||||||||||||||
| Transaction and fee | |||||||||||||||||||||||
| Total revenue recognized over time | $ | $ | $ | $ | |||||||||||||||||||
| Total Wealth Management revenue: | |||||||||||||||||||||||
| Advisory | $ | $ | $ | $ | |||||||||||||||||||
| Commission | |||||||||||||||||||||||
| Asset-based | |||||||||||||||||||||||
| Transaction and fee | |||||||||||||||||||||||
| Total Wealth Management revenue | $ | $ | $ | $ | |||||||||||||||||||
Tax Software Revenue Recognition
We generate Tax Software revenue from the sale of digital tax preparation services, packaged tax preparation software, ancillary services, and multiple element arrangements that may include a combination of these items.
Revenues by major category within the Tax Software segment and the timing of Tax Software revenue recognition was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Recognized upon transaction: | |||||||||||||||||||||||
| Consumer | $ | $ | $ | $ | |||||||||||||||||||
| Professional | |||||||||||||||||||||||
| Total revenue recognized upon transaction | $ | $ | $ | $ | |||||||||||||||||||
| Recognized over time: | |||||||||||||||||||||||
| Consumer | $ | $ | $ | $ | |||||||||||||||||||
| Professional | |||||||||||||||||||||||
| Total revenue recognized over time | $ | $ | $ | $ | |||||||||||||||||||
| Total Tax Software revenue: | |||||||||||||||||||||||
| Consumer | $ | $ | $ | $ | |||||||||||||||||||
| Professional | |||||||||||||||||||||||
| Total Tax Software revenue | $ | $ | $ | $ | |||||||||||||||||||
Note 4: Asset Acquisitions
During the nine months ended September 30, 2022, we completed acquisitions in our Wealth Management business that met the criteria to be accounted for as asset acquisitions. Total initial purchase consideration,
Blucora, Inc. | Q3 2022 Form 10-Q 11
including acquisition costs and fixed deferred payments, was $4.1 million. This purchase consideration was allocated to the acquired assets, primarily customer relationship intangibles. Customer relationship intangibles are amortized on 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, 2022, the maximum future fixed and contingent payments associated with all prior asset acquisitions were $23.7 million, with specified payment dates from 2022 through 2026.
During the three months ended September 30, 2022, variable contingent consideration related to prior asset acquisitions became payable for approximately $1.5 million, which is included within the $23.7 million discussed above. This accrued consideration is within customer relationship intangibles and is expected to be paid during the fourth quarter of 2022.
Note 5: Debt
| September 30, 2022 | December 31, 2021 | ||||||||||
| Senior Secured Credit Facility | |||||||||||
| Principal outstanding | $ | $ | |||||||||
| Unamortized debt issuance costs | ( | ( | |||||||||
| Unamortized debt discount | ( | ( | |||||||||
| Net carrying value | $ | $ | |||||||||
In May 2017, we entered into a credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders that provides for a term loan facility (the “Term Loan”) and a revolving line of credit (including a letter of credit sub-facility) (the “Revolver”) for working capital, capital expenditures, and general business purposes (as amended, the “Senior Secured Credit Facility”). The Term Loan has a maturity date of May 22, 2024 (the “Term Loan Maturity Date”). On April 26, 2021, to ensure adequate liquidity and flexibility to support the Company’s growth, we entered into Amendment No. 5 to the Credit Agreement (the “Credit Agreement Amendment”). Pursuant to the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing $65.0 million Revolver and add $25.0 million of additional revolving credit commitments, for an aggregate principal amount of $90.0 million in revolving credit commitments (the “New Revolver”). The New Revolver has a maturity date of February 21, 2024 (the “New Revolver Maturity Date”).
The Company capitalized approximately $0.5 million of debt issuance costs paid in connection with the Credit Agreement Amendment, which are included in other long-term assets on the Company’s condensed consolidated balance sheets as part of the total deferred financing costs associated with the New Revolver.
As of September 30, 2022, we had $525.4 million in principal amount outstanding under the Term Loan and no amounts outstanding under the New Revolver. Based on aggregate loan commitments as of September 30, 2022, approximately $90.0 million was available for future borrowings under the Senior Secured Credit Facility, subject to customary terms and conditions.
The Company is required to make mandatory annual prepayments on the Term Loan in certain circumstances, including in the event that the Company generates Excess Cash Flow (as defined in the Credit Agreement) in a given fiscal year. The Credit Agreement permits the Company to voluntarily prepay the Term Loan without premium or penalty. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the Term Loan due on the Term Loan Maturity Date. On August 5, 2022, and as provided for within our Senior Secured Credit Facility, we voluntarily prepaid $35.0 million of principal outstanding under our Term Loan. At our election, this prepayment was first applied to the remaining quarterly principal amortization payments due on the Term Loan, with the remaining amount applied to the principal amount due at the Term Loan Maturity Date. In connection with this prepayment, we recorded a $0.2 million loss on extinguishment of debt for the proportionate amount of unamortized debt issuance costs and debt discount associated with the principal repaid. This loss is included within “Interest expense and other, net” of the condensed consolidated statements of operations.
Blucora, Inc. | Q3 2022 Form 10-Q 12
The interest rate on the Term Loan is variable at the London Interbank Offered Rate (subject to a floor of 1.0 %), plus the applicable interest rate margin of 4.0 % for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0 % for ABR Loans (as defined in the Credit Agreement). As of September 30, 2022, the applicable interest rate on the Term Loan was 6.3 %. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0 % to 2.5 % for Eurodollar Rate Loans and 1.0 % to 1.5 % for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net Leverage Ratio that ranges from 0.35 % to 0.4 %. Interest is payable at the end of each interest period, typically quarterly.
Obligations under the Senior Secured Credit Facility are guaranteed by certain of the Company’s subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the acquisition of Avantax Planning Partners and certain other material subsidiaries). The Senior Secured Credit Facility includes financial and operating covenants (including a Consolidated Total Net Leverage Ratio), which are set forth in detail in the Credit Agreement.
Pursuant to the Credit Agreement Amendment, if the Company’s usage of the New Revolver exceeds 30 % of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company shall not permit the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) to exceed (i) 4.75 to 1.00 for the period beginning on April 1, 2021 and ending on December 31, 2021, (ii) 4.25 to 1.00 for the period beginning on January 1, 2022 and ending on September 30, 2022, (iii) 4.00 to 1.00 for the period beginning on October 1, 2022 and ending on December 31, 2022, and (iv) 3.50 to 1.00 for the period beginning on January 1, 2023 and ending on February 21, 2024.
Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with the debt covenants of the Senior Secured Credit Facility as of September 30, 2022.
Note 6: Leases
Our leases are primarily related to office space and are classified as operating leases. Operating lease cost, net of sublease income, is recognized in “General and administrative” expense for those net costs related to leases used in our operations and within “Acquisition and integration” expense for those net costs related to an unoccupied lease assumed in a previous acquisition on the condensed consolidated statements of operations.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Fixed lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Operating lease cost, before sublease income | |||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||
| Total operating lease cost, net of sublease income | $ | $ | $ | $ | |||||||||||||||||||
| Additional lease information: | |||||||||||||||||||||||
| Cash paid on operating lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Lease liabilities obtained from new right-of-use assets | $ | $ | $ | $ | |||||||||||||||||||
Blucora, Inc. | Q3 2022 Form 10-Q 13
| September 30, 2022 | December 31, 2021 | ||||||||||
| Right-of-use assets, net | $ | $ | |||||||||
| Current lease liabilities | $ | $ | |||||||||
| Long-term lease liabilities | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Weighted-average remaining lease term (in years) | |||||||||||
| Weighted-average discount rate | % | % | |||||||||
| Undiscounted cash flows: | |||||
| Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total undiscounted cash flows | |||||
| Imputed interest | ( | ||||
| Present value of cash flows | $ | ||||
Note 7: Balance Sheet Components
| September 30, 2022 | December 31, 2021 | ||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Forgivable loans | |||||||||||
| Other current assets | |||||||||||
| Total prepaid expenses and other current assets | $ | $ | |||||||||
Accrued expenses and other current liabilities consisted of the following (in thousands):
__________________________
| September 30, 2022 | December 31, 2021 | ||||||||||
| Salaries and related benefit expenses | $ | $ | |||||||||
HKFS Contingent Consideration liability (1) | |||||||||||
| Accrued legal costs | |||||||||||
| Accrued vendor and advertising costs | |||||||||||
| Accrued taxes | |||||||||||
| Accrued fixed and variable acquisition consideration | |||||||||||
| Other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
(1)For more information on the Company’s contingent liabilities, see "Note 8—Commitments and Contingencies."
Blucora, Inc. | Q3 2022 Form 10-Q 14
Note 8: Commitments and Contingencies
HKFS Contingent Consideration Liability
On July 1, 2020, we closed the acquisition of Avantax Planning Partners, formerly “HKFS”, for an upfront cash purchase price of $104.4 million. The purchase price was subject to variable contingent consideration, or earn-out payments (the “HKFS Contingent Consideration”) totaling a maximum of $60.0 million.
The amounts owed for the HKFS Contingent Consideration were determined based on advisory asset levels (i) for the period beginning July 1, 2020 and ending June 30, 2021 and (ii) for the period beginning July 1, 2021 and ending June 30, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021) (the “HKFS Purchase Agreement”), the maximum aggregate amount that we were required to pay for each earn-out period was $30.0 million. If the asset market values on the applicable measurement date fell below certain specified thresholds, no payment of consideration was owed to the Sellers for such period.
Based on advisory asset levels for each earn-out period, we paid the full $30.0 million to the Sellers in the third quarter of 2021 for the first earn-out, and $23.0 million in the third quarter of 2022 for the second earn-out. There are no remaining contingent payments due to the Sellers as of September 30, 2022. For additional information on the valuation of the HKFS Contingent Consideration liability, see "Note 9—Fair Value Measurements."
Litigation
From time to time, we are subject to various legal proceedings, regulatory matters or fines, or claims that arise in the ordinary course of business. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although we believe that resolving such claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties.
We are not currently a party to any such matters for which we have recognized a material liability on our condensed consolidated balance sheet as of September 30, 2022.
We have entered into indemnification agreements in the ordinary course of business with our officers and directors. Pursuant to these agreements, we may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to our obligations under these indemnification agreements and applicable Delaware law.
Note 9: Fair Value Measurements
Certain of our assets and liabilities are carried at fair value and are valued using inputs that are classified in one of the following three categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data and reflect our own assumptions.
Blucora, Inc. | Q3 2022 Form 10-Q 15
Assets and Liabilities Measured on a Recurring Basis
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| September 30, 2022 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
Cash equivalents: money market and other funds | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation assets | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
HKFS Contingent Consideration liability | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation liabilities | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| December 31, 2021 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
Cash equivalents: money market and other funds | $ | $ | $ | $ | |||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | — | ||||||||||||||||||
HKFS Contingent Consideration liability | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
Cash equivalents are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets.
We offer non-qualified deferred compensation plans to our executive officers, board of directors, and certain independent financial professionals. Participants in these plans direct the investment of their accounts among the available investment options, which are generally the same as those available under our 401(k) plan. We have elected to fund these obligations through a rabbi trust which mirrors the investment elections made by participants. The assets in the rabbi trust are held for the purpose of satisfying our obligations to participants, however, remain subject to the claims of our creditors in the event we become insolvent. Our obligations and corresponding investments held under these non-qualified deferred compensation plans primarily consist of money market and mutual funds and are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets. These investments, and the corresponding deferred compensation liabilities, are included within “Other long-term assets” and “Other long-term liabilities”, respectively, on the condensed consolidated balance sheets.
The HKFS Contingent Consideration liability relates to post-closing earn-out payments resulting from the acquisition of Avantax Planning Partners, formerly “HKFS” (see “Note 8—Commitments and Contingencies”). The final value of the second earn-out was $23.0 million as of June 30, 2022 (the measurement date for the second earn-out payment) and was paid during the third quarter of 2022. Prior to this measurement date, the estimated fair value of the HKFS Contingent Consideration liability was determined using a Monte Carlo simulation model and certain Level 3 inputs previously disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021. The HKFS Contingent Consideration liability was previously included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets.
Blucora, Inc. | Q3 2022 Form 10-Q 16
| HKFS Contingent Consideration liability | |||||
| Balance as of December 31, 2020 | $ | ||||
| Change in fair value | |||||
| HKFS Contingent Consideration first earn-out payment | ( | ||||
Balance as of December 31, 2021 | |||||
| Change in fair value | ( | ||||
| HKFS Contingent Consideration second earn-out payment | ( | ||||
Balance as of September 30, 2022 | $ | ||||
Changes in the fair value of this contingent consideration are reflected in “Acquisition and integration” on the condensed consolidated statements of operations.
Fair Value of Financial Instruments
We consider the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, financial professional loans, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
As of September 30, 2022, the Term Loan’s principal amount was $525.4 million, and the fair value of the Term Loan’s principal amount was $520.2 million. As of December 31, 2021, the Term Loan’s principal amount was $561.3 million, and the fair value of the Term Loan’s principal amount was $559.9 million. The fair value of the Term Loan’s principal amount was based on Level 2 inputs from a third-party market quotation.
Note 10: Interest Expense and Other, Net
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest expense | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt issuance costs | |||||||||||||||||||||||
| Amortization of debt discount | |||||||||||||||||||||||
| Total interest expense | |||||||||||||||||||||||
| Interest income and other | |||||||||||||||||||||||
| Interest expense and other, net | $ | $ | $ | $ | |||||||||||||||||||
Note 11: Income Taxes
For 2022, 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 an income tax benefit of $1.7 million and income tax expense of $4.1 million for the three and nine months ended September 30, 2022, respectively. We recorded an income tax benefit of $0.8 million and income tax expense of $2.9 million for the three and nine months ended September 30, 2021, respectively.
Our effective income tax rate for the three and nine months ended September 30, 2022 and September 30, 2021 differed from the 21% statutory rate primarily due to the release of valuation allowances and the effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.
Blucora, Inc. | Q3 2022 Form 10-Q 17
Note 12: Net Income (Loss) Per Share
“Basic net income (loss) per share” is calculated using the weighted average number of common shares outstanding during the applicable period. “Diluted net income (loss) 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 restricted stock units using the treasury stock method. Cash-settled restricted stock units are not settled in common shares and are therefore excluded from dilutive potential common shares. Dilutive potential common shares are excluded from the calculation of diluted net income (loss) per share if their effect is antidilutive. Certain of our performance-based restricted stock units are considered contingently issuable shares and are excluded from the diluted weighted average common shares outstanding computation because the related performance-based criteria were not achieved as of the end of the reporting period.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
Dilutive potential common shares (1) | |||||||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | $ | |||||||||||||||||
Shares excluded (1) | |||||||||||||||||||||||
Note 13: Subsequent Events
On October 31, 2022, we entered into that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among the Company, TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC (“Buyer”) and DS Admiral Bidco, LLC, pursuant to which we agreed to sell the Tax Software business to Buyer, an affiliate of Cinven, for $720.0 million in cash (subject to adjustment as set forth in the Stock Purchase Agreement), on the terms and subject to the conditions set forth in the Stock Purchase Agreement (the “TaxAct Sale Transaction”). The TaxAct Sale Transaction is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions and is expected to close by the end of 2022.
Blucora, Inc. | Q3 2022 Form 10-Q 18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides an analysis of the Company’s 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, 2021.
Overview
Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) is a leading provider of integrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms. Our mission is to enable financial success by changing the way individuals and families plan and achieve their goals through tax-advantaged solutions. We conduct our operations through two primary businesses: (1) the Wealth Management business and (2) the Tax Software business. Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”
Wealth Management
Our Wealth Management business consists of the operations of Avantax Wealth Management and Avantax Planning Partners (collectively, the “Wealth Management business” or the “Wealth Management segment”).
Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.
Tax Software
Our Tax Software business consists of the operations of TaxAct, Inc. (“TaxAct,” the “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications.
Macroeconomic Environment
Our Wealth Management business is directly and indirectly affected by macroeconomic conditions and the state of global financial markets. Recent geopolitical uncertainty resulting, in part, from Russia’s continued invasion of Ukraine and the measures taken in response, including government sanctions, as well as rising inflation have contributed to significant volatility and decline in global financial markets during 2022 to date. In response to inflationary pressures, the Federal Reserve implemented five interest rate increases during the nine months ended September 30, 2022, including 75 basis point increases in each of the June, July, and September 2022 Federal Open Market Committee (“FOMC”) meetings. As of September 30, 2022, the target range for the federal funds rate was between 3.0% and 3.25%, however the FOMC has signaled that it expects additional rate increases in 2022 and 2023 in order to return inflation to their 2% objective. These combined factors have all led to an increased risk of economic recession and the potential for continued volatility and decline in global financial markets.
Volatility and decline in global financial markets and its impact on client asset values and transaction activity have negatively impacted Wealth Management revenues during the three and nine months ended September 30,
Blucora, Inc. | Q3 2022 Form 10-Q 19
2022. This negative impact was offset, in part, by incremental cash sweep revenue generated from an increasing interest rate environment. We expect that cash sweep revenue will continue to increase in the fourth quarter of 2022 as the full benefits of recent rate increases are fully realized. Based on the target range for the federal funds rate, the signaling by the Federal Reserve for additional rate increases during 2022, and current client asset values, we expect incremental cash sweep revenue should more than offset the negative impact that financial market volatility may have on Wealth Management revenues and operating income for the year ended December 31, 2022. However, if further financial market volatility results in continued decline in client asset values or if the Federal Reserve does not increase, or decreases, the federal funds rate, Wealth Management revenues and operating income would be negatively impacted.
Sale of Tax Software Business
On October 31, 2022, we entered into that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among the Company, TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC (“Buyer”) and DS Admiral Bidco, LLC, pursuant to which we agreed to sell the Tax Software business to Buyer, an affiliate of Cinven, for $720.0 million in cash (subject to adjustment as set forth in the Stock Purchase Agreement), on the terms and subject to the conditions set forth in the Stock Purchase Agreement (such sale, the “TaxAct Sale Transaction”). The TaxAct Sale Transaction is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions and is expected to close by the end of 2022.
Following the consummation of the TaxAct Sale Transaction, we plan to change our name from Blucora to Avantax and focus solely on our tax-focused wealth business. The TaxAct Sale Transaction is expected to yield after-tax net cash proceeds of approximately $620.0 million. We expect to use the net proceeds to pay down existing indebtedness and return excess capital to stockholders.
Blucora, Inc. | Q3 2022 Form 10-Q 20
RESULTS OF OPERATIONS
Summary
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | $ | 165,032 | $ | 169,135 | $ | (4,103) | (2.4) | % | $ | 494,104 | $ | 486,021 | $ | 8,083 | 1.7 | % | |||||||||||||||||||||||||||||||
| Tax Software | 6,664 | 5,039 | 1,625 | 32.2 | % | 242,028 | 220,848 | 21,180 | 9.6 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | 171,696 | 174,174 | (2,478) | (1.4) | % | 736,132 | 706,869 | 29,263 | 4.1 | % | |||||||||||||||||||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | 27,626 | 19,564 | 8,062 | 41.2 | % | 59,920 | 60,356 | (436) | (0.7) | % | |||||||||||||||||||||||||||||||||||||
| Tax Software | (12,517) | (13,864) | 1,347 | 9.7 | % | 99,372 | 100,472 | (1,100) | (1.1) | % | |||||||||||||||||||||||||||||||||||||
| Corporate-level activity | (28,927) | (25,982) | (2,945) | (11.3) | % | (77,282) | (102,255) | 24,973 | 24.4 | % | |||||||||||||||||||||||||||||||||||||
| Total operating income (loss) | (13,818) | (20,282) | 6,464 | 31.9 | % | 82,010 | 58,573 | 23,437 | 40.0 | % | |||||||||||||||||||||||||||||||||||||
| Interest expense and other, net | (9,749) | (8,295) | (1,454) | (17.5) | % | (25,707) | (24,202) | (1,505) | (6.2) | % | |||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | (23,567) | (28,577) | 5,010 | 17.5 | % | 56,303 | 34,371 | 21,932 | 63.8 | % | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | 1,726 | 774 | 952 | 123.0 | % | (4,099) | (2,920) | (1,179) | (40.4) | % | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (21,841) | $ | (27,803) | $ | 5,962 | 21.4 | % | $ | 52,204 | $ | 31,451 | 20,753 | 66.0 | % | ||||||||||||||||||||||||||||||||
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, net loss decreased $6.0 million primarily due to the following factors:
•Wealth Management segment operating income increased $8.1 million primarily due to the significant increase in cash sweep revenue during the period.
•Tax Software segment operating loss decreased $1.3 million primarily due to increased consumer revenue and relatively flat operating expenses.
•Expenses within corporate-level activity increased $2.9 million primarily due to incremental depreciation expense and consulting costs. Furthermore, interest expense and other, net, increased $1.5 million, primarily due to rising interest rates.
•The Company recorded an income tax benefit of $1.7 million, or an effective tax rate of 7.3%, for the three months ended September 30, 2022, compared to an income tax benefit of $0.8 million, or an effective tax rate of 2.7%, for the three months ended September 30, 2021.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, net income increased $20.8 million primarily due to the following factors:
•Wealth Management segment operating income was relatively flat as incremental cash sweep revenue offset revenue headwinds caused by market volatility and incremental personnel costs.
•Tax Software segment operating income decreased $1.1 million primarily due to an increase in customer care support costs and strategic advertising and marketing spend.
•Expenses within corporate-level activity decreased $25.0 million primarily due to reduced acquisition and integration costs. Furthermore, interest expense and other, net, increased $1.5 million, primarily due to rising interest rates.
•The Company recorded income tax expense of $4.1 million, or an effective tax rate of 7.3%, for the nine months ended September 30, 2022, compared to income tax expense of $2.9 million, or an effective tax rate of 8.5%, for the nine months ended September 30, 2021.
Blucora, Inc. | Q3 2022 Form 10-Q 21
SEGMENT REVENUE & OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the United States (“GAAP”) and include certain reconciling items attributable to our segments. We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment. Segment information is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy, transaction and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments.
Wealth Management
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 165,032 | $ | 169,135 | $ | (4,103) | (2.4) | % | $ | 494,104 | $ | 486,021 | $ | 8,083 | 1.7 | % | |||||||||||||||||||||||||||||||
| Operating income | $ | 27,626 | $ | 19,564 | $ | 8,062 | 41.2 | % | $ | 59,920 | $ | 60,356 | $ | (436) | (0.7) | % | |||||||||||||||||||||||||||||||
| Segment margin | 16.7 | % | 11.6 | % | 12.1 | % | 12.4 | % | |||||||||||||||||||||||||||||||||||||||
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, Wealth Management segment operating income increased $8.1 million primarily due to the following factors:
•Wealth Management revenue decreased $4.1 million primarily due to decreases of $11.2 million and $8.5 million in commission and advisory revenues, respectively. These revenue headwinds were primarily caused by the significant financial market volatility and decline discussed in the Macroeconomic Environment section above. These decreases were partially offset by a $15.5 million increase in asset-based revenue which benefited from incremental cash sweep revenue generated from increases in the federal funds rate.
•Wealth Management operating expenses decreased $12.2 million primarily due to a $15.1 million decline in cost of revenue associated with advisory fees and commissions paid, partially offset by $2.2 million of incremental personnel costs. Advisory fees and commissions paid trended consistently with the decrease in commission and advisory revenues discussed above. Increased personnel costs reflect our strategic investments to drive growth through enhanced sales and service capabilities that support our financial professionals.
•The significant increase in cash sweep revenue during the period was the primary driver of the 510 basis point increase in segment margin. We expect for segment margin to continue to benefit from incremental cash sweep revenue for the remainder of the year.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, Wealth Management segment operating income decreased $0.4 million primarily due to the following factors:
•Wealth Management revenue increased $8.1 million primarily due to increases of $17.3 million and $15.2 million in asset-based and advisory revenues, respectively. Asset-based revenue benefited from incremental cash sweep revenue generated from increases in the federal funds rate, while the increase in advisory revenue was primarily from increased client asset levels and the timing of market movements relative to when clients are billed. These increases were partially offset by a $24.9 million decrease in commission revenue which was negatively impacted by unfavorable transaction activity and volatility in global financial markets, as discussed above.
•Wealth Management operating expenses increased $8.5 million primarily due to $11.1 million of incremental personnel costs, partially offset by a $4.3 million decrease in cost of revenue associated with advisory fees and commissions paid. Increased personnel costs reflect our strategic investments to drive growth through enhanced sales and service capabilities that support our financial professionals. Advisory fees and commissions paid trended consistently with the associated changes in revenues discussed above, while payout ratios remained relatively flat between the two periods as the financial market volatility during the first three quarters of 2022 offset previous expansion in the number of financial professionals concentrated at higher payout levels.
Blucora, Inc. | Q3 2022 Form 10-Q 22
•The market volatility discussed above, coupled with an increase in our fixed operating costs, has caused margin compression for the nine months ended September 30, 2022. However, the significant increase in cash sweep revenue during the three months ended September 30, 2022 predominately offset this compression, resulting in a relatively flat segment margin. For the remainder of the year, we expect for incremental cash sweep revenue to more than offset the compression discussed above, and for segment margin to increase on a year-over-year basis.
Sources of Revenue
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position, and operating performance. A summary of our sources of revenue and business and financial metrics is as follows:
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||
| Sources of Revenue | Primary Drivers | 2022 | 2021 | $ | 2022 | 2021 | $ | ||||||||||||||||||||||||||||||||||
| Financial professional-driven | Advisory | - Advisory asset levels | $ | 95,070 | $ | 103,540 | $ | (8,470) | $ | 306,394 | $ | 291,167 | $ | 15,227 | |||||||||||||||||||||||||||
| Commission | - Transactions - Asset levels - Product mix | 41,788 | 52,961 | (11,173) | 132,278 | 157,197 | (24,919) | ||||||||||||||||||||||||||||||||||
| Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 21,147 | 5,659 | 15,488 | 33,774 | 16,514 | 17,260 | |||||||||||||||||||||||||||||||||
| Transaction and fee | - Account activity - Number of financial professionals - Number of clients - Number of accounts | 7,027 | 6,975 | 52 | 21,658 | 21,143 | 515 | ||||||||||||||||||||||||||||||||||
| Total revenue | $ | 165,032 | $ | 169,135 | $ | (4,103) | $ | 494,104 | $ | 486,021 | $ | 8,083 | |||||||||||||||||||||||||||||
| Total recurring revenue | $ | 144,512 | $ | 145,311 | $ | (799) | $ | 430,184 | $ | 414,966 | $ | 15,218 | |||||||||||||||||||||||||||||
| Recurring revenue rate | 87.6 | % | 85.9 | % | 87.1 | % | 85.4 | % | |||||||||||||||||||||||||||||||||
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.
Blucora, Inc. | Q3 2022 Form 10-Q 23
Business Metrics
___________________________
($ in thousands) | September 30, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Client assets balances: | |||||||||||||||||||||||
Total client assets (1) | $ | 72,592,882 | $ | 86,647,743 | $ | (14,054,861) | (16.2) | % | |||||||||||||||
Brokerage assets (1) | $ | 37,150,327 | $ | 46,850,354 | $ | (9,700,027) | (20.7) | % | |||||||||||||||
Advisory assets (1) | $ | 35,442,555 | $ | 39,797,389 | $ | (4,354,834) | (10.9) | % | |||||||||||||||
| Advisory assets as a percentage of total client assets | 48.8 | % | 45.9 | % | |||||||||||||||||||
| Number of financial professionals (in ones): | |||||||||||||||||||||||
Independent financial professionals (2) | 3,311 | 3,498 | (187) | (5.3) | % | ||||||||||||||||||
In-house/employee financial professionals (3) | 36 | 31 | 5 | 16.1 | % | ||||||||||||||||||
| Total number of financial professionals | 3,347 | 3,529 | (182) | (5.2) | % | ||||||||||||||||||
Advisory and commission revenue per financial professional (4) | $ | 40.9 | $ | 44.3 | $ | (3.4) | (7.7) | % | |||||||||||||||
(1)In connection with our ongoing integration of acquisitions, we refined the methodology by which we calculate client assets to align the methodologies within our Wealth Management segment for calculating such metrics. Specifically, such changes to the methodology include alignment to one third party data aggregator for assets not placed in custody with our clearing firm and to one consistent set of logic for all assets and transaction types. We have not recast client assets for prior periods to conform to our current presentation as we believe the changes to the calculation to be immaterial.
(2)The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as licensed referring representatives at CPA firms (approximately 171) that partner with Avantax Planning Partners.
(3)The number of in-house/employee financial professionals includes licensed financial planning consultants, all of which are affiliated with Avantax Planning Partners.
(4)Calculation based on advisory and commission revenue for the three months ended September 30, 2022 and 2021, respectively.
Client Assets. Historically we have calculated total client assets 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 condensed 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. These assets are not reported on the Company’s condensed consolidated balance sheets.
Brokerage assets represent total client assets other than advisory assets.
Total client assets decreased $14.1 billion as of September 30, 2022 compared to September 30, 2021, primarily due to $14.3 billion of unfavorable market changes, partially offset by net client inflows.
Advisory assets decreased $4.4 billion as of September 30, 2022 compared to September 30, 2021, and advisory assets as a percentage of total client assets increased to 48.8% as of September 30, 2022, compared to 45.9% as of September 30, 2021. The decrease in advisory assets was primarily caused by $7.4 billion of unfavorable market changes, partially offset by net new advisory assets of $3.0 billion which contributed to the increase in advisory assets as a percentage of total client assets.
Financial Professionals. The number of our financial professionals decreased 5.2% as of September 30, 2022 compared to September 30, 2021, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. Advisory and commission revenue per financial professional decreased 7.7% for the same period, primarily due to the decreases in advisory and commission revenues discussed above. The
Blucora, Inc. | Q3 2022 Form 10-Q 24
decrease in the number of financial professionals was partially offset by our continued recruitment and onboarding of independent financial professionals.
Advisory Revenue. Advisory revenue primarily includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenue generated by Avantax Planning Partners, advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized ratably over the period in which our performance obligations were completed. Because advisory fees are based on advisory assets on the last day of each quarter, our revenues are impacted, in part, by the timing of market movements relative to when clients are billed.
Advisory asset balances were as follows (in thousands):
| September 30, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
Advisory assets—independent financial professionals | $ | 29,735,365 | $ | 33,713,543 | $ | (3,978,178) | (11.8) | % | |||||||||||||||
Advisory assets—in-house/employee financial professionals | 4,494,178 | 4,701,444 | (207,266) | (4.4) | % | ||||||||||||||||||
Retirement advisory assets—in-house/employee financial professionals | 1,213,012 | 1,382,402 | (169,390) | (12.3) | % | ||||||||||||||||||
| Total advisory assets | $ | 35,442,555 | $ | 39,797,389 | $ | (4,354,834) | (10.9) | % | |||||||||||||||
The activity within our advisory assets was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Balance, beginning of the period | $ | 36,746,048 | $ | 39,440,985 | $ | 42,179,051 | $ | 35,603,557 | |||||||||||||||
| Net new advisory assets | 514,293 | 621,205 | 2,261,923 | 1,853,632 | |||||||||||||||||||
| Market impact and other | (1,817,786) | (264,801) | (8,998,419) | 2,340,200 | |||||||||||||||||||
| Balance, end of the period | $ | 35,442,555 | $ | 39,797,389 | $ | 35,442,555 | $ | 39,797,389 | |||||||||||||||
| Advisory revenue | $ | 95,070 | $ | 103,540 | $ | 306,394 | $ | 291,167 | |||||||||||||||
Average advisory fee rate (1) | 26 bps | 26 bps | 77 bps | 78 bps | |||||||||||||||||||
_________________________
(1)For the three months ended September 30, 2022 and September 30, 2021, 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, 2022 and September 30, 2021, average advisory fee rate equals the sum of each quarterly average advisory fee rate within the relevant year-to-date period.
For the three and nine months ended September 30, 2022, advisory assets declined $1.3 billion and $6.7 billion, respectively, primarily due to unfavorable market changes, partially offset by net new advisory assets. Net new advisory assets benefited from organic growth and the conversion of off platform, direct to fund assets, when appropriate for the client, to fee-based advisory platforms that include ongoing management and which generate higher margins.
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, advisory revenues decreased $8.5 million, primarily due to the decline in global markets as discussed above. Although advisory assets declined during the nine months ended September 30, 2022, due to the timing of market declines relative to when clients are billed, advisory revenue increased $15.2 million. The average advisory fee rates between the two periods were relatively flat.
Commission Revenue. The Wealth Management segment generates two types of commissions: (1) transaction-based commissions and (2) trailing commissions. Transaction-based commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial 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.
Blucora, Inc. | Q3 2022 Form 10-Q 25
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 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| By product category: | |||||||||||||||||||||||||||||||||||||||||||||||
| Mutual funds | $ | 16,339 | $ | 22,844 | $ | (6,505) | (28.5) | % | $ | 53,635 | $ | 70,395 | $ | (16,760) | (23.8) | % | |||||||||||||||||||||||||||||||
| Variable annuities | 14,892 | 18,752 | (3,860) | (20.6) | % | 46,961 | 55,247 | (8,286) | (15.0) | % | |||||||||||||||||||||||||||||||||||||
| Insurance | 5,048 | 4,414 | 634 | 14.4 | % | 13,007 | 14,044 | (1,037) | (7.4) | % | |||||||||||||||||||||||||||||||||||||
| General securities | 5,509 | 6,951 | (1,442) | (20.7) | % | 18,675 | 17,511 | 1,164 | 6.6 | % | |||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 41,788 | $ | 52,961 | $ | (11,173) | (21.1) | % | $ | 132,278 | $ | 157,197 | $ | (24,919) | (15.9) | % | |||||||||||||||||||||||||||||||
| By type of commission: | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based | $ | 17,868 | $ | 22,372 | $ | (4,504) | (20.1) | % | $ | 56,373 | $ | 65,815 | $ | (9,442) | (14.3) | % | |||||||||||||||||||||||||||||||
| Trailing | 23,920 | 30,589 | (6,669) | (21.8) | % | 75,905 | 91,382 | (15,477) | (16.9) | % | |||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 41,788 | $ | 52,961 | $ | (11,173) | (21.1) | % | $ | 132,278 | $ | 157,197 | $ | (24,919) | (15.9) | % | |||||||||||||||||||||||||||||||
As discussed in the sections above, the declines in transaction-based and trailing commission revenues for the periods shown in the table above were primarily due to unfavorable transaction activity and volatility in global financial markets during the three and nine months ended September 30, 2022.
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 and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, asset-based revenue increased $15.5 million and $17.3 million, respectively. These increases were primarily due to incremental cash sweep revenue of $16.9 million and $19.2 million during the three and nine months ended September 30, 2022, respectively, driven by increases in the federal funds rate. The increases in cash sweep revenue were partially offset by reduced fees from sponsorship programs. Due to the timing of rate increases and the non-linear nature of upside associated with these increases, and with expectation of additional rate increases by the Federal Reserve in 2022, cash sweep revenue is expected to continue to increase for the remainder of the year.
Transaction and Fee Revenue. Transaction and fee revenue primarily includes support fees charged to financial professionals, fees charged for executing certain transactions in client accounts, and other fees related to services provided and other account charges as generally outlined in agreements with financial professionals, clients, financial institutions, and retirement plan sponsors.
For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, transaction and fee revenue remained relatively flat.
Blucora, Inc. | Q3 2022 Form 10-Q 26
Tax Software
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 6,664 | $ | 5,039 | $ | 1,625 | 32.2 | % | $ | 242,028 | $ | 220,848 | $ | 21,180 | 9.6 | % | |||||||||||||||||||||||||||||||
| Operating income (loss) | $ | (12,517) | $ | (13,864) | $ | 1,347 | 9.7 | % | $ | 99,372 | $ | 100,472 | $ | (1,100) | (1.1) | % | |||||||||||||||||||||||||||||||
| Segment margin | (187.8) | % | (275.1) | % | 41.1 | % | 45.5 | % | |||||||||||||||||||||||||||||||||||||||
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, Tax Software operating loss decreased $1.3 million due to a $1.5 million increase in consumer revenue and relatively flat operating expenses. Consumer revenue benefited from an increase in consumer e-files associated with market share growth and the volume of customers that filed extensions when compared to the prior year.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, Tax Software operating income decreased $1.1 million due to the following factors:
•Tax Software revenue increased $21.2 million due to a $18.4 million increase in consumer revenue and a $2.8 million increase in professional revenue. The growth in revenue during the nine months ended September 30, 2022 was attributable to higher average revenue per unit and growth in market share from favorable customer retention and acquisition. These increases during the period were partially offset by an increase in the volume of customers that filed extensions when compared to the prior year. We expect to continue to benefit from higher average revenue per unit for the remainder of the year as customers complete returns associated with these extensions.
•Tax Software operating expenses increased $22.3 million primarily due to increased investments in seasonal customer care support and tax experts and an increase in strategic advertising and marketing spend. These incremental costs were the primary drivers of the reduction in segment margin shown in the table above.
Sources of Revenue
Tax Software revenue is derived primarily from the sale of digital tax preparation services, ancillary services, packaged tax preparation software, and multiple element arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer, audit defense, e-file concierge services, and Xpert Assist.
We classify Tax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue is derived from products and services sold directly to customers primarily for the preparation of individual or business tax returns. Professional revenue represents Tax Software revenue derived from products sold to tax return preparers who utilize our offerings to service end-user customers.
Revenue by category was as follows (in thousands):
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Consumer | $ | 5,974 | $ | 4,479 | $ | 1,495 | 33.4 | % | $ | 222,262 | $ | 203,891 | $ | 18,371 | 9.0 | % | |||||||||||||||||||||||||||||||
| Professional | 690 | 560 | 130 | 23.2 | % | 19,766 | 16,957 | 2,809 | 16.6 | % | |||||||||||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | 6,664 | $ | 5,039 | $ | 1,625 | 32.2 | % | $ | 242,028 | $ | 220,848 | $ | 21,180 | 9.6 | % | |||||||||||||||||||||||||||||||
Business Metrics
We measure the performance of our Tax Software business using three sets of non-financial metrics, which we consider to be important indicators of the performance of our Tax Software business and are especially relevant through the end of a completed tax season. These non-financial metrics include key performance indicators for our total Tax Software business, in addition to the consumer and professional tax software portions of the Tax Software business:
•We measure our total tax software customers using the total number of accepted federal tax e-files completed by both our consumer tax software customers and our professional tax software customers.
•We measure our consumer tax software customers using the number of accepted federal tax e-files made through our software and digital services.
Blucora, Inc. | Q3 2022 Form 10-Q 27
•We measure our professional tax software customers using three metrics: (1) the number of accepted federal tax e-files made through our software, (2) the number of units sold, and (3) the number of e-files per unit sold.
| (In thousands, except as otherwise indicated) | Nine Months Ended September 30, | Change | |||||||||||||||||||||
| 2022 | 2021 | Units | % | ||||||||||||||||||||
Total e-files (1) | 5,658 | 5,492 | 166 | 3.0 | % | ||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
Consumer e-files (1) | 3,232 | 3,144 | 88 | 2.8 | % | ||||||||||||||||||
| Professional: | |||||||||||||||||||||||
| Professional e-files | 2,426 | 2,348 | 78 | 3.3 | % | ||||||||||||||||||
| Units sold (in ones) | 21,051 | 20,808 | 243 | 1.2 | % | ||||||||||||||||||
| Professional e-files per unit sold (in ones) | 115.2 | 112.8 | 2.4 | 2.1 | % | ||||||||||||||||||
(1)We participate in the Free File Alliance that is part of an IRS partnership that provides free electronic tax filing services to taxpayers meeting certain income-based guidelines. Free File Alliance e-files are included within total e-files and consumer e-files above.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, e-files across each category, and professional units sold, increased primarily due to growth in market share from favorable customer retention and acquisition, both of which benefited from our investments in strategic marketing spend and customer care support.
Corporate-Level Activity
Certain corporate-level activity, including certain general and administrative costs (such as personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, and contested proxy, transaction and other legal and consulting costs, is not allocated to our reportable segments.
Corporate-level activity by category was as follows (in thousands):
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Unallocated corporate-level general and administrative expenses | $ | 7,456 | $ | 6,499 | $ | 957 | 14.7 | % | $ | 22,428 | $ | 18,452 | $ | 3,976 | 21.5 | % | |||||||||||||||||||||||||||||||
| Stock-based compensation | 5,706 | 4,729 | 977 | 20.7 | % | 17,129 | 15,499 | 1,630 | 10.5 | % | |||||||||||||||||||||||||||||||||||||
| Acquisition and integration | 416 | 2,241 | (1,825) | (81.4) | % | (4,710) | 28,513 | (33,223) | (116.5) | % | |||||||||||||||||||||||||||||||||||||
| Depreciation | 6,020 | 3,906 | 2,114 | 54.1 | % | 15,696 | 11,251 | 4,445 | 39.5 | % | |||||||||||||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 6,342 | 7,009 | (667) | (9.5) | % | 19,435 | 21,247 | (1,812) | (8.5) | % | |||||||||||||||||||||||||||||||||||||
| Contested proxy, transaction and other legal and consulting costs | 2,987 | 1,598 | 1,389 | 86.9 | % | 7,304 | 7,293 | 11 | 0.2 | % | |||||||||||||||||||||||||||||||||||||
| Total corporate-level activity | $ | 28,927 | $ | 25,982 | $ | 2,945 | 11.3 | % | $ | 77,282 | $ | 102,255 | $ | (24,973) | (24.4) | % | |||||||||||||||||||||||||||||||
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, corporate-level activity increased $2.9 million primarily due to the following factors:
•Depreciation expense increased $2.1 million primarily due to capitalized software costs for our Tax Software business.
•Contested proxy, transaction and other legal and consulting costs increased $1.4 million primarily due to incremental legal and consulting costs incurred in connection with the TaxAct Sale Transaction.
Partially offsetting this increase in corporate-level activity:
•Acquisition and integration expenses decreased $1.8 million, primarily due to the final remeasurement of the HKFS Contingent Consideration liability in the second quarter of 2022.
Blucora, Inc. | Q3 2022 Form 10-Q 28
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, corporate-level activity decreased $25.0 million primarily due to the following factors:
•Acquisition and integration expenses decreased $33.2 million, primarily due to a $24.8 million decrease in the fair value adjustments recorded for the HKFS Contingent Consideration liability between the two periods, and an $8.4 million decrease in professional services and other expenses due to a reduction in integration activities.
Partially offsetting this decrease in corporate-level activity:
•Depreciation expense increased $4.4 million primarily due to capitalized software costs for our Tax Software business.
•Unallocated general and administrative expenses increased $4.0 million primarily due to incremental personnel and insurance costs.
OPERATING EXPENSES
Cost of Revenue
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
Wealth Management | $ | 105,301 | $ | 120,641 | $ | (15,340) | (12.7) | % | $ | 338,819 | $ | 343,174 | $ | (4,355) | (1.3) | % | |||||||||||||||||||||||||||||||
Tax Software | 3,879 | 2,323 | 1,556 | 67.0 | % | 20,178 | 12,330 | 7,848 | 63.6 | % | |||||||||||||||||||||||||||||||||||||
| Total cost of revenue | $ | 109,180 | $ | 122,964 | $ | (13,784) | (11.2) | % | $ | 358,997 | $ | 355,504 | $ | 3,493 | 1.0 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 63.6 | % | 70.6 | % | 48.8 | % | 50.3 | % | |||||||||||||||||||||||||||||||||||||||
Cost of revenue consists of costs related to our Wealth Management and Tax Software businesses, which include 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, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses, the cost of temporary help and contractors, professional services fees, software support and maintenance, bandwidth and hosting costs, and depreciation (including depreciation related to software development costs in the Tax Software segment). Cost of revenue does not include compensation paid to in-house/employee financial professionals in our Wealth Management business. The compensation of our in-house/employee financial professionals is reflected in “Sales and marketing” expense.
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, cost of revenue decreased $13.8 million. The reduction in Wealth Management cost of revenue was primarily due to reduced advisory fees and commissions paid, which trended consistently with the associated changes in revenue discussed within the Segment Revenue & Operating Income section above. This decline was partially offset by increased depreciation of capitalized software development costs within Tax Software.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, cost of revenue increased $3.5 million. Tax Software cost of revenue included incremental personnel and consulting costs and depreciation of capitalized software. Continued investments in internally developed software for the Tax Software business are expected to result in increased depreciation in future periods. Within Wealth Management, advisory fees and commissions paid declined $6.4 million and trended consistently with the associated changes in revenue discussed within the Segment Revenue & Operating Income section above. This decline was partially offset by $2.4 million of incremental forgivable loans amortization.
Payout ratios to independent financial professionals are determined based on trailing twelve-month revenues and may not immediately correlate with changes in client assets during periods of significant market volatility. For both periods, payout ratios to independent financial professionals remained relatively flat as the financial market volatility during the first three quarters of 2022 offset previous expansion in the number of financial professionals concentrated at higher payout levels.
Blucora, Inc. | Q3 2022 Form 10-Q 29
Engineering and Technology
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Engineering and technology | $ | 7,474 | $ | 7,874 | $ | (400) | (5.1) | % | $ | 24,598 | $ | 22,233 | $ | 2,365 | 10.6 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 4.4 | % | 4.5 | % | 3.3 | % | 3.1 | % | |||||||||||||||||||||||||||||||||||||||
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses, the cost of temporary help and contractors, software support and maintenance, bandwidth and hosting, and professional services fees. Engineering and technology expenses do not include the costs of computer hardware and software that are capitalized, depreciated over their useful lives, and recognized on the consolidated statements of operations as either “Cost of Revenue” or “Depreciation.” For more information, see the “Cost of Revenue” and “Depreciation and Amortization of Acquired Intangible Assets” sections contained within this discussion of “Operating Expenses.”
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, engineering and technology expenses remained relatively flat.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, engineering and technology expenses increased $2.4 million primarily due to increases in personnel expenses in our Tax Software segment.
Sales and Marketing
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 30,485 | $ | 28,399 | $ | 2,086 | 7.3 | % | $ | 162,396 | $ | 140,809 | $ | 21,587 | 15.3 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 17.8 | % | 16.3 | % | 22.1 | % | 19.9 | % | |||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses primarily consist of marketing expenses associated with our Tax Software business (including expenses related to marketing agencies and media companies) and our Wealth Management business, personnel expenses, compensation paid to Avantax Planning Partners in-house/employee financial professionals, the cost of temporary help and contractors, and back-office processing support expenses for our Wealth Management business.
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, sales and marketing expenses increased $2.1 million, primarily due to incremental personnel costs of $1.6 million in our Wealth Management segment.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, sales and marketing expenses increased $21.6 million, primarily due to the following factors:
•Personnel costs in both segments increased $11.8 million.
•Strategic advertising and marketing costs in our Tax Software segment increased $9.0 million.
For the remainder of the year, we expect to incur incremental travel and conference costs associated with reduced travel restrictions and the timing of our Wealth Management national conference.
General and Administrative
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 27,778 | $ | 23,102 | $ | 4,676 | 20.2 | % | $ | 83,499 | $ | 71,619 | $ | 11,880 | 16.6 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 16.2 | % | 13.3 | % | 11.3 | % | 10.1 | % | |||||||||||||||||||||||||||||||||||||||
General and administrative (“G&A”) expenses primarily consist of personnel expenses, the cost of temporary help and contractors, professional services fees, general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
Blucora, Inc. | Q3 2022 Form 10-Q 30
For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, G&A expenses increased $4.7 million and $11.9 million, respectively, primarily due to incremental personnel costs, professional services fees, and hardware and software support and maintenance fees.
Acquisition and Integration
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Change in the fair value of HKFS Contingent Consideration | $ | — | $ | 1,700 | $ | (1,700) | (100.0) | % | $ | (5,320) | $ | 19,500 | $ | (24,820) | (127.3) | % | |||||||||||||||||||||||||||||||
| Professional services and other expenses | 416 | 541 | (125) | (23.1) | % | 610 | 9,013 | (8,403) | (93.2) | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 416 | $ | 2,241 | $ | (1,825) | (81.4) | % | $ | (4,710) | $ | 28,513 | $ | (33,223) | (116.5) | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 0.2 | % | 1.3 | % | (0.6) | % | 4.0 | % | |||||||||||||||||||||||||||||||||||||||
Acquisition and integration expenses primarily relate to costs incurred for the acquisitions of Avantax Planning Partners and 1st Global and consist of employee-related expenses, professional services fees, changes in the fair value of contingent consideration, and other expenses.
For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, acquisition and integration expenses decreased $1.8 million, primarily due to the final remeasurement of the HKFS Contingent Consideration liability in the second quarter of 2022.
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, acquisition and integration expenses decreased $33.2 million, primarily due to the following factors:
•The change in fair value of the HKFS Contingent Consideration liability decreased $24.8 million, primarily due to the timing of fair value adjustments recorded between the two periods. This change is inclusive of a $7.0 million gain recorded during the second quarter of 2022 for the final settlement value of the liability, reflecting a decrease in the fair value of the contingent consideration due to a significant decline in advisory asset levels caused by the financial market decline discussed in the sections above.
•Professional services and other expenses declined $8.4 million due to a reduction in integration activities.
Depreciation and Amortization of Acquired Intangible Assets
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation | $ | 3,839 | $ | 2,867 | $ | 972 | 33.9 | % | $ | 9,907 | $ | 8,371 | $ | 1,536 | 18.3 | % | |||||||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 6,342 | 7,009 | (667) | (9.5) | % | 19,435 | 21,247 | (1,812) | (8.5) | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 10,181 | $ | 9,876 | $ | 305 | 3.1 | % | $ | 29,342 | $ | 29,618 | $ | (276) | (0.9) | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 5.9 | % | 5.7 | % | 4.0 | % | 4.2 | % | |||||||||||||||||||||||||||||||||||||||
Depreciation of property, equipment, and 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 customer relationships, which are amortized over their estimated lives.
For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, depreciation and amortization expense did not materially change.
Blucora, Inc. | Q3 2022 Form 10-Q 31
INTEREST EXPENSE AND OTHER, NET
| ($ in thousands) | Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 8,771 | $ | 7,304 | $ | 1,467 | 20.1 | % | $ | 23,166 | $ | 21,789 | $ | 1,377 | 6.3 | % | |||||||||||||||||||||||||||||||
| Amortization of debt issuance costs | 403 | 388 | 15 | 3.9 | % | 1,191 | 1,128 | 63 | 5.6 | % | |||||||||||||||||||||||||||||||||||||
| Amortization of debt discount | 302 | 290 | 12 | 4.1 | % | 893 | 851 | 42 | 4.9 | % | |||||||||||||||||||||||||||||||||||||
| Total interest expense | 9,476 | 7,982 | 1,494 | 18.7 | % | 25,250 | 23,768 | 1,482 | 6.2 | % | |||||||||||||||||||||||||||||||||||||
| Interest income and other | 273 | 313 | (40) | (12.8) | % | 457 | 434 | 23 | 5.3 | % | |||||||||||||||||||||||||||||||||||||
| Interest expense and other, net | $ | 9,749 | $ | 8,295 | $ | 1,454 | 17.5 | % | $ | 25,707 | $ | 24,202 | $ | 1,505 | 6.2 | % | |||||||||||||||||||||||||||||||
For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, interest expense and other, net, increased $1.5 million and $1.5 million, respectively, primarily due to rising interest rates. The impact of rising interest rates on our interest expense was partially offset by our voluntary $35.0 million prepayment of principal outstanding under our Term Loan in August 2022. As the interest rate on our Term Loan is variable at the London Interbank Offered Rate, we expect for our interest expense to increase in future periods due to increasing interest rates.
INCOME TAXES
We recorded an income tax benefit of $1.7 million and income tax expense of $4.1 million for the three and nine months ended September 30, 2022, respectively. We recorded an income tax benefit of $0.8 million and income tax expense of $2.9 million for the three and nine months ended September 30, 2021, respectively. The prior period interim tax provision was prepared by applying a year-to-date effective tax rate to income before income taxes. The current period interim tax provision was prepared by applying an estimated annual effective tax rate to income before income taxes and by calculating the tax effect of discrete items recognized during the quarter (if applicable).
Our effective income tax rate for the three and nine months ended September 30, 2022, and September 30, 2021 differed from the 21% statutory rate primarily due to the release of valuation allowances and the effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), determined in accordance with GAAP, excluding the effects of stock-based compensation, depreciation and amortization of acquired intangible assets, interest expense and other, net, acquisition and integration costs, contested proxy, transaction and other legal and consulting costs, and income tax (benefit) expense. Interest expense and other, net primarily consists of interest expense, net. Acquisition and integration costs primarily relate to the acquisitions of Avantax Planning Partners and 1st Global.
We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Blucora, Inc. | Q3 2022 Form 10-Q 32
A reconciliation of 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, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (loss) | $ | (21,841) | $ | (27,803) | $ | 52,204 | $ | 31,451 | |||||||||||||||
| Stock-based compensation | 5,706 | 4,729 | 17,129 | 15,499 | |||||||||||||||||||
Depreciation and amortization of acquired intangible assets | 12,362 | 10,915 | 35,131 | 32,498 | |||||||||||||||||||
| Interest expense and other, net | 9,749 | 8,295 | 25,707 | 24,202 | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 416 | 541 | 610 | 9,013 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | — | 1,700 | (5,320) | 19,500 | |||||||||||||||||||
| Contested proxy, transaction and other legal and consulting costs | 2,987 | 1,598 | 7,304 | 7,293 | |||||||||||||||||||
| Income tax (benefit) expense | (1,726) | (774) | 4,099 | 2,920 | |||||||||||||||||||
| Adjusted EBITDA | $ | 7,653 | $ | (799) | $ | 136,864 | $ | 142,376 | |||||||||||||||
Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Share
We define Non-GAAP Net Income (Loss) as net income (loss), determined in accordance with GAAP, excluding the effects of stock-based compensation, amortization of acquired intangible assets, acquisition and integration costs, contested proxy, transaction and other legal and consulting costs, the related cash tax impact of those adjustments, and non-cash income tax (benefit) expense. We exclude the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will expire, if not utilized, between 2022 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 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.
Blucora, Inc. | Q3 2022 Form 10-Q 33
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, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (loss) | $ | (21,841) | $ | (27,803) | $ | 52,204 | $ | 31,451 | |||||||||||||||
Stock-based compensation | 5,706 | 4,729 | 17,129 | 15,499 | |||||||||||||||||||
Amortization of acquired intangible assets | 6,342 | 7,009 | 19,435 | 21,247 | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 416 | 541 | 610 | 9,013 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | — | 1,700 | (5,320) | 19,500 | |||||||||||||||||||
Contested proxy, transaction and other legal and consulting costs | 2,987 | 1,598 | 7,304 | 7,293 | |||||||||||||||||||
Cash tax impact of adjustments to GAAP net income (loss) | (319) | (331) | (1,631) | (1,523) | |||||||||||||||||||
| Non-cash income tax (benefit) expense | (3,071) | (197) | 1,090 | (1,160) | |||||||||||||||||||
| Non-GAAP Net Income (Loss) | $ | (9,780) | $ | (12,754) | $ | 90,821 | $ | 101,320 | |||||||||||||||
Per diluted share: | |||||||||||||||||||||||
Net income (loss) (1) | $ | (0.46) | $ | (0.57) | $ | 1.06 | $ | 0.64 | |||||||||||||||
Stock-based compensation | 0.12 | 0.10 | 0.35 | 0.31 | |||||||||||||||||||
Amortization of acquired intangible assets | 0.14 | 0.14 | 0.40 | 0.43 | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 0.01 | 0.01 | 0.01 | 0.18 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | — | 0.03 | (0.11) | 0.39 | |||||||||||||||||||
Contested proxy, transaction and other legal and consulting costs | 0.06 | 0.04 | 0.15 | 0.15 | |||||||||||||||||||
Cash tax impact of adjustments to GAAP net income (loss) | (0.01) | (0.01) | (0.03) | (0.03) | |||||||||||||||||||
| Non-cash income tax (benefit) expense | (0.06) | — | 0.02 | (0.02) | |||||||||||||||||||
| Non-GAAP Net Income (Loss) per share — Diluted | $ | (0.20) | $ | (0.26) | $ | 1.85 | $ | 2.05 | |||||||||||||||
Diluted weighted average shares outstanding | 47,847 | 48,707 | 49,153 | 49,373 | |||||||||||||||||||
____________________________
(1)Any difference in the “per diluted share” amounts between this table and the condensed consolidated statements of operations is due to using different diluted weighted average shares outstanding in the event that there is GAAP net loss 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, 2022, we had cash and cash equivalents of $91.1 million. We generally invest our excess cash in money market funds that are made up of securities issued by agencies of the U.S. government. We may invest, from time-to-time, in other vehicles, such as debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities, and publicly held corporations, as well as commercial paper and insured time deposits with commercial banks. Specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held as of September 30, 2022 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 operations. As of September 30, 2022, 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 share repurchases under share repurchase programs. For at least the next twelve months, we plan to finance these cash needs and our regulatory capital requirements at our broker-dealer
Blucora, Inc. | Q3 2022 Form 10-Q 34
subsidiary largely through our cash and cash equivalents on hand and cash provided by operating activities. Execution of our growth strategies in our Wealth Management business through strategic asset acquisitions is expected to remain a capital allocation priority during the next twelve months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate, and, from time to time, we may make a determination to draw on the Revolver (as defined below) or increase the principal amount of the Term Loan (as defined below) to meet our capital requirements, subject to customary terms and conditions. Our future investments in our business through capital expenditures or acquisitions, prepayment of debt to achieve optimal leverage ratios, or our return of capital to stockholders through stock repurchases, will be determined after considering the best interests of our stockholders.
Indebtedness
In May 2017, we entered into a credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders that provides for a term loan facility (the “Term Loan”) and a revolving line of credit (including a letter of credit sub-facility) (the “Revolver”) for working capital, capital expenditures, and general business purposes (as amended, the “Senior Secured Credit Facility”). The Term Loan has a maturity date of May 22, 2024 (the “Term Loan Maturity Date”).
On April 26, 2021, to ensure adequate liquidity and flexibility to support growth, we entered into Amendment No. 5 to the Credit Agreement (the “Credit Agreement Amendment”). Pursuant to the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing $65.0 million Revolver and add $25.0 million of additional revolving credit commitments, for an aggregate principal amount of $90.0 million in revolving credit commitments (the “New Revolver”). The New Revolver has a maturity date of February 21, 2024 (the “New Revolver Maturity Date”).
As of September 30, 2022, we had $525.4 million in principal amount outstanding under the Term Loan and no amounts outstanding under the New Revolver. Based on aggregate loan commitments as of September 30, 2022, approximately $90.0 million was available for future borrowing as of September 30, 2022 under the Senior Secured Credit Facility, subject to customary terms and conditions, including caps on the amount of Company share repurchases during each fiscal year based, in part, on specified Net Leverage Ratios. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the Term Loan due on the Term Loan Maturity Date. On August 5, 2022, and as provided for within our Senior Secured Credit Facility, we voluntarily prepaid $35.0 million of principal outstanding under our Term Loan. At our election, this prepayment was first applied to the remaining quarterly principal amortization payments due on the Term Loan, with the remaining amount applied to the principal amount due at the Term Loan Maturity Date.
The interest rate on the Term Loan is variable at the London Interbank Offered Rate (subject to a floor of 1.0%), plus the applicable interest rate margin of 4.0% for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0% for ABR Loans (as defined in the Credit Agreement). As of September 30, 2022, the applicable interest rate on the Term Loan was 6.3%. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0% to 2.5% for Eurodollar Rate Loans and 1.0% to 1.5% for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net Leverage Ratio that ranges from 0.35% to 0.4%. Interest is payable at the end of each interest period, typically quarterly.
By June 2023, all U.S. Dollar London Interbank Offered Rate (“LIBOR”) tenors will cease to be published and floating rate instruments that used U.S. Dollar LIBOR will need to shift to a substitute base index. To minimize disruption arising from such transition, the market has begun to shift to alternative fallback rates, such as Secured Overnight Financing Rate (“SOFR”) as a replacement benchmark for floating rate LIBOR based loans. Unless (i) such LIBOR tenors cease to be provided at an earlier date or (ii) we and the administrative agent to the Credit Agreement make an “early opt-in election” to replace the rate prior to cessation of LIBOR in accordance with the Credit Agreement, we will continue to have the option under the Credit Agreement to make drawdowns using 1-Day, 1-Month, 3-Month, and 6-Month tenor U.S. Dollar LIBOR until June 2023. The Credit Agreement Amendment provides for a process for transition to a fallback rate consistent with industry practice and permits the administrative
Blucora, Inc. | Q3 2022 Form 10-Q 35
agent to the Credit Agreement to apply certain updates to the Credit Agreement to effectuate the fallback rate, including a spread adjustment based on the historical basis between LIBOR and the fallback rate.
Obligations under the Senior Secured Credit Facility are guaranteed by certain of the Company’s subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the acquisition of Avantax Planning Partners and certain other material subsidiaries). The Senior Secured Credit Facility includes financial and operating covenants (including a Consolidated Total Net Leverage Ratio), which are set forth in detail in the Credit Agreement.
Pursuant to the Credit Agreement Amendment, if the Company’s usage of the New Revolver exceeds 30% of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company shall not permit the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) to exceed (i) 4.75 to 1.00 for the period beginning on April 1, 2021 and ending on December 31, 2021, (ii) 4.25 to 1.00 for the period beginning on January 1, 2022 and ending on September 30, 2022, (iii) 4.00 to 1.00 for the period beginning on October 1, 2022 and ending on December 31, 2022, and (iv) 3.50 to 1.00 for the period beginning on January 1, 2023 and ending on the New Revolver Maturity Date.
Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with the debt covenants of the Senior Secured Credit Facility as of September 30, 2022.
For additional information on the Term Loan, the New Revolver, and the Credit Agreement, see “Item 1. Financial Statements—Note 5.”
TaxAct Sale Transaction
The TaxAct Sale Transaction is expected to yield after-tax net cash proceeds of approximately $620.0 million. We expect to use the net proceeds to pay down existing indebtedness and return excess capital to stockholders.
Stock Repurchase Plan
As of December 31, 2021, we had $100.0 million authorized under our stock repurchase plan. Pursuant to the stock repurchase plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, restrictions in our Credit Agreement, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date. Any repurchases of our stock pursuant to the stock repurchase plan may materially reduce the amount of cash we have available and may not materially enhance the long-term value of our business or our stock.
For the three months ended September 30, 2022, we did not repurchase any shares of our common stock under the stock repurchase plan. For the nine months ended September 30, 2022, we repurchased approximately 1.9 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately $35.0 million. The remaining authorized amount under the stock repurchase plan as of September 30, 2022, was approximately $65.0 million. For the three and nine months ended September 30, 2021, we did not repurchase any shares of our common stock under the stock repurchase plan.
For fiscal year 2022, restrictions in our Credit Agreement capped our share repurchases at $35.0 million. Subject to the terms of our Credit Agreement, a portion of our future capital requirements during fiscal year 2023 may encompass share repurchases under this plan.
Contractual Obligations and Commitments
On July 1, 2020, we closed the acquisition of Avantax Planning Partners, formerly “HKFS”, for an upfront cash purchase price of $104.4 million. The purchase price was subject to variable contingent consideration, or earn-out payments (the “HKFS Contingent Consideration”) totaling a maximum of $60.0 million.
The amounts owed for the HKFS Contingent Consideration were determined based on advisory asset levels (i) for the period beginning July 1, 2020 and ending June 30, 2021 and (ii) for the period beginning July 1, 2021 and ending June 30, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021) (the “HKFS Purchase
Blucora, Inc. | Q3 2022 Form 10-Q 36
Agreement”), the maximum aggregate amount that we were required to pay for each earn-out period was $30.0 million. If the asset market values on the applicable measurement date fell below certain specified thresholds, no payment of consideration was owed to the Sellers for such period.
Based on advisory asset levels for each earn-out period, we paid the full $30.0 million to the Sellers in the third quarter of 2021 for the first earn-out, and $23.0 million in the third quarter of 2022 for the second earn-out. There are no remaining contingent payments due to the Sellers as of September 30, 2022.
In addition, the Company has entered into several asset purchase agreements that are accounted for as asset acquisitions. These acquisitions may include up-front cash consideration, fixed deferred cash consideration, and contingent consideration arrangements. Future fixed payments are recognized as customer relationship intangible assets on the date of acquisition. Contingent consideration arrangements encompass obligations to make future payments to the previous sellers contingent upon the achievement of future financial targets. These contingent payments are not recognized until all contingencies are resolved and the consideration is payable. As of September 30, 2022, the maximum future fixed and contingent payments associated with these asset acquisitions was $23.7 million, with specified payment dates from 2022 through 2026. During the three months ended September 30, 2022, variable contingent consideration related to prior asset acquisitions became payable for approximately $1.5 million, which is included within the $23.7 million discussed above. This accrued consideration is within customer relationship intangibles and is expected to be paid during the fourth quarter of 2022.
Cash Flows
Our cash flows were comprised of the following (in thousands):
| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | $ Change | |||||||||||||||
| Net cash provided by operating activities | $ | 61,916 | $ | 74,391 | $ | (12,475) | |||||||||||
| Net cash used by investing activities | (20,897) | (25,447) | 4,550 | ||||||||||||||
| Net cash used by financing activities | (84,739) | (14,244) | (70,495) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (43,720) | $ | 34,700 | $ | (78,420) | |||||||||||
Net Cash from Operating Activities
Net cash provided by operating activities consists of net income, offset by certain non-cash adjustments, and changes in operating assets and liabilities, which were as follows (in thousands):
| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | $ Change | |||||||||||||||
| Net income | $ | 52,204 | $ | 31,451 | $ | 20,753 | |||||||||||
| Non-cash adjustments to net income | 55,458 | 73,111 | (17,653) | ||||||||||||||
| Operating cash flows before changes in operating assets and liabilities | 107,662 | 104,562 | 3,100 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and disposals | (45,746) | (30,171) | (15,575) | ||||||||||||||
| Net cash provided by operating activities | $ | 61,916 | $ | 74,391 | $ | (12,475) | |||||||||||
Net cash provided by operating activities for the nine months ended September 30, 2022, included $107.7 million of operating cash flows before changes in operating assets and liabilities and $45.7 million of changes in operating assets and liabilities. Non-cash adjustments to net income for the nine months ended September 30, 2022 primarily related to depreciation and amortization costs of $35.1 million, stock-based compensation of $17.1 million, changes in the fair value of the HKFS Contingent Consideration liability of $5.3 million, and $3.8 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 $9.2 million in payments made to financial professionals in support of ongoing growth programs, $8.5 million of the total $23.0 million HKFS Contingent Consideration earn-out payment made in the third quarter of 2022, and the timing of settlement for our working capital accounts. The remainder of the HKFS Contingent Consideration earn-out payment is included in net cash from financing activities.
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Net Cash from Investing Activities
Net cash used by investing activities consists of acquisitions and purchases of property, equipment, and software, and were as follows (in thousands):
| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | $ Change | |||||||||||||||
| Purchases of property, equipment, and software | $ | (17,154) | $ | (21,624) | $ | 4,470 | |||||||||||
| Asset acquisitions | (3,743) | (3,823) | 80 | ||||||||||||||
| Net cash used by investing activities | $ | (20,897) | $ | (25,447) | $ | 4,550 | |||||||||||
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, net cash used by investing activities decreased $4.6 million primarily due to reduced internally developed capital software expenditures.
Net Cash from Financing Activities
Net cash from financing activities primarily consists of debt issuance and repayments, common stock and stock-based awards transactions, and acquisition-related contingent consideration payments. Financing cash flows were as follows (in thousands):
| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | $ Change | |||||||||||||||
| Proceeds from credit facilities, net of debt discount and issuance costs | $ | — | $ | (502) | $ | 502 | |||||||||||
| Payments on credit facilities | (35,906) | (1,359) | (34,547) | ||||||||||||||
| Acquisition-related contingent consideration payments | (14,548) | (13,150) | (1,398) | ||||||||||||||
| Stock repurchases | (35,000) | — | (35,000) | ||||||||||||||
| Proceeds from issuance of stock through employee stock purchase plan | 2,324 | 1,845 | 479 | ||||||||||||||
| Tax payments from shares withheld for equity awards | (2,090) | (1,613) | (477) | ||||||||||||||
| Proceeds from stock option exercises | 481 | 535 | (54) | ||||||||||||||
| Net cash used by financing activities | $ | (84,739) | $ | (14,244) | $ | (70,495) | |||||||||||
For the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, we used $70.5 million more cash for financing activities, primarily due to the repurchase of approximately 1.9 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately $35.0 million, and the voluntary prepayment of $35.0 million of principal outstanding under our Term Loan.
Critical Accounting Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and the disclosures included elsewhere in this Quarterly Report on Form 10-Q are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingencies. In some cases, we could have reasonably used different accounting policies and estimates.
We have identified certain accounting estimates which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our 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, 2021.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the financial instruments for which we are exposed to market risk, as disclosed within our Annual Report on Form 10-K for the year ended December 31, 2021, during the nine months ended September 30, 2022. As of September 30, 2022, we had $525.4 million in principal amount of debt outstanding under the Term Loan of our Senior Secured Credit Facility, which carries a degree of interest rate risk. This debt has a floating rate portion of its interest rate tied to LIBOR. For further information on our outstanding debt, see “Item 1. Financial Statements—Note 5” and the section “Liquidity and Capital Resources” of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the subheading “Indebtedness.” A hypothetical 100 basis point increase in LIBOR on September 30, 2022 would result in a $8.9 million increase in our interest expense until the scheduled maturity date in 2024. For additional information, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934) the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e)) were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the nine months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
See “Item 1. Financial Statements—Note 8” for information regarding legal proceedings.
Item 1A. Risk Factors
Our business and future results may be affected by a number of risks and uncertainties that should be considered carefully. In addition, this Form 10-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 our Annual Report on Form 10-K for the year ended December 31, 2021 and the risks set forth below.
Except as follows, we believe that there have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our agreement to sell our Tax Software business (or the announcement thereof) may disrupt our business.
The Stock Purchase Agreement, dated as of October 31, 2022 (the “Stock Purchase Agreement”), by and among the Company, TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC (“Buyer”) and DS Admiral Bidco, LLC generally requires us to operate the Tax Software business in the ordinary course of business consistent with past practice pending consummation of the transaction and restricts us, without Buyer’s consent, from taking certain specified actions with respect to the Tax Software business until the completion of the sale of the Tax Software business to Buyer on the terms and subject to the conditions set forth in the Stock Purchase Agreement (the “TaxAct Sale Transaction”). These restrictions may affect our ability to execute our business strategies, respond effectively to competitive pressures and industry developments and attain our financial and other goals, and these restrictions may have a material adverse effect on our financial condition, results of operations and cash flows.
Employee retention and recruitment may be challenging before the completion of the TaxAct Sale Transaction, as employees and prospective employees may experience uncertainty about their future roles. If, despite our retention and recruiting efforts, key employees depart or prospective key employees fail to accept employment with the Company because of issues relating to the uncertainty relating to the TaxAct Sale Transaction or a desire not to
Blucora, Inc. | Q3 2022 Form 10-Q 39
remain either with TaxAct or the Company, our business, financial condition and results of operations could be materially adversely affected.
The TaxAct Sale Transaction could also cause disruptions to our business or business relationships, which could have a material adverse impact on our business, financial condition and results of operations. Parties with which we have business relationships, including customers, suppliers, clients and financial professionals, may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us.
The pursuit of the TaxAct Sale Transaction may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could materially adversely affect our business, financial condition and results of operations. Furthermore, we expect to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the TaxAct Sale Transaction. A material portion of these expenses are payable by us whether or not the TaxAct Sale Transaction is completed.
The TaxAct Sale Transaction may not successfully close, and, even if it does, we may fail to realize all of the anticipated benefits of the TaxAct Sale Transaction, or those benefits may take longer to realize than expected.
We cannot be certain when or if the conditions for the TaxAct Sale Transaction will be satisfied or (if permissible under applicable law) waived. The TaxAct Sale Transaction cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions. We or Buyer may terminate the Stock Purchase Agreement if the TaxAct Sale Transaction is not consummated by January 15, 2023.
In the event that the TaxAct Sale Transaction is not consummated for any reason, we will not receive any cash proceeds from the sale (except that in certain circumstances, we may be entitled to a termination fee). Additionally, if the TaxAct Sale Transaction is not consummated in a timely manner or at all, our ongoing business may be materially adversely affected, including due to negative reactions from financial markets and a decline in the price of our common stock to the extent that the current market price of our common stock reflects an assumption that the transaction will be completed, negative reactions from employees, customers, suppliers or other third parties, the diversion of management’s attention from pursuing other potential divestitures of the Tax Software business and higher than anticipated costs of pursuing the TaxAct Sale Transaction. If the TaxAct Sale Transaction is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect the price of shares of our common stock or our business, financial condition or results of operations.
Furthermore, even if the TaxAct Sale Transaction is consummated, we may fail to realize the strategic and financial benefits that management expects as a result of the transaction, including due to unforeseen difficulties in the separation of operations, services, products and personnel (including with respect to our provision of transition services to Buyer and Buyer’s provision of transition services to us), the diversion of management’s attention, the disruption of our business and the potential loss of key employees. Moreover, we may not realize the anticipated strategic and financial benefits of the TaxAct Sale Transaction within the currently anticipated timeframe, including, without limitation, if the period during which we are providing transition services is extended.
In connection with the consummation of the TaxAct Sale Transaction, we will be required to pay off our existing indebtedness under the Credit Agreement. If we are unable to secure financing on desirable terms after the consummation of the TaxAct Sale Transaction, our capital structure may include limited or no indebtedness, and we may not be able to return capital to stockholders in the amount anticipated.
Upon the closing of the TaxAct Sale Transaction, we expect to receive approximately $620.0 million of net after-tax proceeds. We intend to use these proceeds to pay off existing indebtedness and then enter into new financing arrangements and use the excess remaining cash to return capital to stockholders. The debt markets are unpredictable and subject to change. There can be no assurance that we will be able to enter into new financing arrangements on desirable terms, if at all. We will not be able to return capital to stockholders in the amount anticipated until we enter into acceptable financing arrangements.
Blucora, Inc. | Q3 2022 Form 10-Q 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company has a stock repurchase plan pursuant to which we may repurchase our common stock through a variety of methods, including open market or privately negotiated transactions. As of September 30, 2022, the remaining authorized repurchases under the stock repurchase plan was $65.0 million.
The following table details our repurchases of common stock for the nine months ended September 30, 2022 (in thousands, except the average price paid per share data):
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs | ||||||||||||||||||||||
| January 1-31, 2022 | 190 | $ | 15.73 | 190 | $ | 97,007 | ||||||||||||||||||||
| February 1-28, 2022 | 524 | $ | 18.12 | 524 | $ | 87,510 | ||||||||||||||||||||
| March 1-31, 2022 | 931 | $ | 19.39 | 931 | $ | 69,463 | ||||||||||||||||||||
| April 1-30, 2022 | 230 | $ | 19.40 | 230 | $ | 65,000 | ||||||||||||||||||||
| May 1-31, 2022 | — | $ | — | — | $ | 65,000 | ||||||||||||||||||||
| June 1-30, 2022 | — | $ | — | — | $ | 65,000 | ||||||||||||||||||||
| July 1-31, 2022 | — | $ | — | — | $ | 65,000 | ||||||||||||||||||||
| August 1-31, 2022 | — | $ | — | — | $ | 65,000 | ||||||||||||||||||||
| September 1-30, 2022 | — | $ | — | — | $ | 65,000 | ||||||||||||||||||||
| Total | 1,875 | $ | 18.67 | 1,875 | ||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Blucora, Inc. | Q3 2022 Form 10-Q 41
Item 6. Exhibits
| Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number | Filed Herewith | |||||||||||||||||||||||||||
| Stock Purchase Agreement, dated as of March 18, 2019, by and among 1G Acquisitions, LLC, 1st Global, Inc., 1st Global Insurance Services, Inc., the sellers named therein and joinder sellers, SAB Representative, LLC, as the sellers’ representative, and Blucora, Inc., as guarantor | 8-K | March 19, 2019 | 2.1 | |||||||||||||||||||||||||||||
| Stock Purchase Agreement, dated as of January 6, 2020, by and among Blucora, Inc., Honkamp Krueger Financial Services, Inc., the sellers named therein, and JRD Seller Representative, LLC, as the sellers’ representative, as amended by First Amendment to Stock Purchase Agreement, dated April 7, 2020 and Second Amendment to Stock Purchase Agreement, dated June 30, 2020 | 8-K | July 1, 2020 | 2.1 | |||||||||||||||||||||||||||||
| Third Amendment to Stock Purchase Agreement, dated June 29, 2021, by and among Spirit Acquisitions, LLC, Honkamp Krueger Financial Services, Inc., the sellers named therein, and JRD Seller Representative, LLC, as the sellers’ representative | 8-K | July 2, 2021 | 2.1 | |||||||||||||||||||||||||||||
| Stock Purchase Agreement, dated as of October 31, 2022, by and among Blucora, Inc., TaxAct Holdings, Inc., Franklin Cedar Bidco, LLC and DS Admiral Bidco, LLC | 8-K | November 1, 2022 | 2.1 | |||||||||||||||||||||||||||||
| Amended and Restated Bylaws of Blucora, Inc. dated August 14, 2022 | 8-K | August 18, 2022 | 3.1 | |||||||||||||||||||||||||||||
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exchange Act rules 13a-14(a) and 15d-14(a)) | X | |||||||||||||||||||||||||||||||
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exchange Act rules 13a-14(a) and 15d-14(a)) | X | |||||||||||||||||||||||||||||||
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) | X | |||||||||||||||||||||||||||||||
Certification of Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350) | X | |||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company's Form 10-Q for the fiscal quarter ended September 30, 2022, formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Stockholders' Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||
____________________________
| * | The certifications attached as Exhibits 32.1 and 32.2 are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Blucora, Inc. under the Securities Act of 1933, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. | ||||||||||
Blucora, Inc. | Q3 2022 Form 10-Q 42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BLUCORA, INC. | ||||||||
| By: | /s/ Marc Mehlman | |||||||
| Marc Mehlman Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) | ||||||||
| Date: | November 1, 2022 | |||||||
Blucora, Inc. | Q3 2022 Form 10-Q 43