BCOR 10-Q
Grayscale Bitcoin Adopters ETF (BCOR)
10-Q
2021-11-04
For: 2021-09-30
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, 2021
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.
| Large accelerated filer | ☐ | ý | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to 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 28, 2021, 48,718,718 shares of the registrant’s Common Stock were outstanding.
TABLE OF CONTENTS
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This report includes some of the trademarks, trade names, and service marks of Blucora, Inc. (referred to throughout this report as “Blucora,” the “Company,” “we,” “us,” or “our”), including Blucora, Avantax Wealth Management, Avantax Planning Partners, Avantax Retirement Plan Services, HD Vest, 1st Global, HKFS, and TaxAct. Each one of these trademarks, trade names, or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights, or (iv) a registered trademark or application for registration that we have been authorized by a third party to use.
Solely for convenience, the trademarks, service marks, and trade names included in this report are without the ®, ™ or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This report may also include additional trademarks, service marks, and trade names of others, which are the property of their respective owners. All trademarks, service marks, and trade names included in this report are, to our knowledge, the property of their respective owners.
References to our or our subsidiaries’ website addresses or the website addresses of third parties in this report do not constitute incorporation by reference of the information contained on such websites and should not be considered part of this report.
Blucora, Inc. | Q3 2021 Form 10-Q 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “will,” “would,” “could,” “should,” “estimates,” “predicts,” “potential,” “continues,” “target,” “outlook,” and similar terms and expressions, but the absence of these words does not mean that the statement is not forward-looking. Actual results may differ significantly from management’s expectations due to various risks and uncertainties including, but not limited to:
•our ability to effectively compete within our industries;
•our ability to attract and retain financial professionals, qualified employees, clients, and customers, as well as our ability to provide strong customer/client service;
•the impact of the COVID-19 pandemic on our results of operations and our business, including the impact of the resulting economic and market disruption, the extension of tax filing deadlines, and other related government actions;
•our ability to retain employees and acquired client assets following acquisitions;
•our future capital requirements and the availability of financing, if necessary;
•our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
•any downgrade of the Company’s credit ratings;
•our ability to generate strong performance for our clients and the impact of the financial markets on our clients’ portfolios;
•the impact of new or changing legislation and regulations (or interpretations thereof) on our business, including our ability to successfully address and comply with such legislation and regulations (or interpretations thereof) and increased costs, reductions of revenue, and potential fines, penalties, or disgorgement to which we may be subject as a result thereof;
•risks, burdens, and costs, including fines, penalties, or disgorgement, associated with our business being subjected to regulatory inquiries, investigations, or initiatives, including those of the Financial Industry Regulatory Authority, Inc. and the Securities and Exchange Commission (“SEC”);
•risks associated with legal proceedings, including litigation and regulatory proceedings;
•our ability to close, finance, and realize all of the anticipated benefits of acquisitions, as well as our ability to integrate the operations of recently acquired businesses, and the potential impact of such acquisitions on our existing indebtedness and leverage;
•our ability to manage leadership and employee transitions, including costs and time burdens on management and our board of directors related thereto;
•the compromising of confidentiality, availability or integrity of information, including cyberattacks;
•political and economic conditions and events that directly or indirectly impact the wealth management and tax preparation software industries;
•our ability to respond to rapid technological changes, including our ability to successfully release new products and services or improve upon existing products and services;
•our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;
•risks related to goodwill and other intangible asset impairment;
•our ability to develop, establish, and maintain strong brands;
•risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses, and computer hacking attacks;
Blucora, Inc. | Q3 2021 Form 10-Q 3
•our ability to comply with laws and regulations regarding privacy and protection of user data;
•our ability to maintain our relationships with third-party partners, providers, suppliers, vendors, distributors, contractors, financial institutions, industry associations, and licensing partners, and our expectations regarding and reliance on the products, tools, platforms, systems, and services provided by these third parties;
•the seasonality of our business;
•our assessments and estimates that determine our effective tax rate; and
•our ability to protect our intellectual property and the impact of any claim that we have infringed on the intellectual property rights of others.
Forward-looking statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as supplemented by those identified under Part II, Item 1A, “Risk Factors” and elsewhere in this Form 10-Q, as well as in our other filings with the SEC. All forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation and do not intend to update or revise any forward-looking statement to reflect new information, events, or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.
Blucora, Inc. | Q3 2021 Form 10-Q 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Cash segregated under federal or other regulations | |||||||||||
| Accounts receivable, net of allowance | |||||||||||
| Commissions and advisory fees receivable | |||||||||||
| Other receivables | |||||||||||
| Prepaid expenses and other current assets, net | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets, net | |||||||||||
| Goodwill | |||||||||||
| Other 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 | |||||||||||
| Deferred revenue—current | |||||||||||
| Lease liabilities—current | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net | |||||||||||
| Deferred tax liability, net | |||||||||||
| Deferred revenue—long-term | |||||||||||
| Lease liabilities—long-term | |||||||||||
| 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 to unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 5
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Wealth management services revenue | $ | $ | $ | $ | |||||||||||||||||||
| Tax software services revenue | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Wealth management services cost of revenue | |||||||||||||||||||||||
| Tax software services cost of revenue | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Engineering and technology | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Acquisition and integration | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of other acquired intangible assets | |||||||||||||||||||||||
| Impairment of goodwill | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ( | |||||||||||||||||||||
| Other loss, 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 | |||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive income, net of income taxes | |||||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 6
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
| Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock options, restricted stock units, and employee stock purchase plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | ( | $ | ( | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock options, restricted stock units, and employee stock purchase plan | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for stock options and restricted stock units | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 7
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Nine months ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash from operating activities: | |||||||||||
| Stock-based compensation | |||||||||||
| Depreciation and amortization of acquired intangible assets | |||||||||||
| Impairment of goodwill | |||||||||||
| Reduction of right-of-use lease assets | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Amortization of debt issuance costs | |||||||||||
| Accretion of debt discounts | |||||||||||
| Gain on the sale of a business | ( | ||||||||||
| Change in the fair value of acquisition-related contingent consideration | ( | ||||||||||
| Accretion of lease liability | |||||||||||
| Other | |||||||||||
| Cash provided (used) by changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Commissions and advisory fees receivable | ( | ||||||||||
| Other receivables | ( | ||||||||||
| 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 and equipment | ( | ( | |||||||||
| Business acquisitions, net of cash acquired | ( | ||||||||||
| Asset acquisitions, net of cash acquired | ( | ||||||||||
| Proceeds from sale of a business | |||||||||||
| Net cash used by investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from credit facilities, net of debt issuance costs and debt discounts | ( | ||||||||||
| Payments on credit facilities | ( | ( | |||||||||
| Proceeds from stock option exercises | |||||||||||
| Proceeds from issuance of stock through employee stock purchase plan | |||||||||||
| Tax payments from shares withheld for equity awards | ( | ( | |||||||||
| Acquisition-related contingent consideration payments | ( | ||||||||||
| Net cash provided (used) by financing activities | ( | ||||||||||
| Net increase 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 | $ | $ | |||||||||
| Non-cash investing activities: | |||||||||||
| Purchases of property and equipment through leasehold incentives | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
Blucora, Inc. | Q3 2021 Form 10-Q 8
BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 the leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged investing and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee based RIA and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). Our employee-based RIA model, which we refer to as “Avantax Planning Partners,” also includes Avantax Wealth Management total client assets that have been acquired from Avantax Wealth Management financial professionals.
On July 1, 2020, we acquired all of the issued and outstanding common stock of HKFS (the “HKFS Acquisition”). The operations of HKFS are included in our operating results as part of the Wealth Management segment from the date of the HKFS Acquisition. On January 4, 2021, we announced the rebranding of HKFS to Avantax Planning Partners (the “Rebranding”). The Rebranding was designed to create tighter brand alignment, bringing the Wealth Management business under one common and recognizable brand.
Tax Software
The 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, packaged tax software, and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications. We had referred to this business as the “Tax Preparation business” and “Tax Preparation segment” in previous filings.
The 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, the Tax Software segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
In March 2020 and as a result of the COVID-19 pandemic, the Internal Revenue Service (“IRS”) extended the filing deadline for federal tax returns from April 15, 2020 to July 15, 2020. This filing extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically be earned in the first and second quarters of 2020 to the third quarter of 2020.
As a result of the continued impact of the COVID-19 pandemic, the IRS delayed the start of the 2021 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021. In addition, the IRS further extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first quarter of 2021 to the second quarter of 2021.
Blucora, Inc. | Q3 2021 Form 10-Q 9
Note 2: Summary of Significant Accounting Policies
Interim financial information
Cash, cash equivalents, and restricted cash
| September 30, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Cash segregated under federal or other regulations | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
We generally invest our available cash in high-quality marketable investments. These investments include money market funds invested in 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. Such investments are reported at fair value on the condensed consolidated balance sheets.
Cash segregated under federal and other regulations is held in a separate bank account for the exclusive benefit of our Avantax Wealth Management clients and is recognized as restricted cash on the condensed consolidated balance sheets.
Asset Acquisitions
Goodwill
Blucora, Inc. | Q3 2021 Form 10-Q 10
of one or more of our reporting units is less than its carrying amount. To determine whether it is necessary to perform a goodwill impairment test, we first assess qualitative factors to evaluate whether it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. We may elect to perform a goodwill impairment test without completing a qualitative assessment.
Beginning in March 2020, the COVID-19 pandemic had a significant negative impact on the U.S. and global economy and caused substantial disruption in the U.S. and global securities markets, and as a result, negatively impacted certain key Wealth Management business drivers, such as client asset levels and interest rates. These macroeconomic and Company-specific factors, in totality, served as a triggering event that resulted in the testing of the goodwill of the Wealth Management reporting unit and the Tax Software reporting unit for potential impairment.
For the Wealth Management reporting unit, the carrying value of the reporting unit exceeded its estimated fair value by $270.6 million. Therefore, we recorded an impairment of goodwill of $270.6 million as of March 31, 2020. For the Tax Software reporting unit, the carrying value of the reporting unit was significantly below its estimated fair value, and therefore, the goodwill of the Tax Software reporting unit was not considered impaired.
While no goodwill impairment triggering events were identified during the nine months ended September 30, 2021, the Wealth Management reporting unit is considered to be at risk for a future impairment of its goodwill in the event of a further decline in general economic, market, or business conditions, or any significant unfavorable changes in our forecasted revenue, expenses, cash flows, weighted average cost of capital, and/or market valuation multiples. We will continue to monitor for events and circumstances that could negatively impact the key assumptions in determining the estimated fair value of the Wealth Management reporting unit.
Note 3: Segment Information and Revenue
We have two reportable operating segments: (1) the Wealth Management segment and (2) the Tax Software segment. Our Chief Executive Officer is the chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, acquisition and integration costs, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, or impairment of goodwill to the reportable segments. Such amounts are reflected in the table below under the heading “Corporate-level activity.” In addition, we do not allocate other loss, net, or income taxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.
Blucora, Inc. | Q3 2021 Form 10-Q 11
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Wealth Management revenue | $ | $ | $ | $ | |||||||||||||||||||
| Tax Software revenue | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||
| Wealth Management | $ | $ | $ | $ | |||||||||||||||||||
| Tax Software | ( | ||||||||||||||||||||||
| Corporate-level activity | ( | ( | ( | ( | |||||||||||||||||||
| Total operating income (loss) | ( | ( | |||||||||||||||||||||
| Other loss, net | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit (expense) | ( | ( | ( | ||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Wealth Management: | |||||||||||||||||||||||
| Advisory revenue | $ | $ | $ | $ | |||||||||||||||||||
| Commission revenue | |||||||||||||||||||||||
| Asset-based revenue | |||||||||||||||||||||||
| Transaction and fee revenue | |||||||||||||||||||||||
| Total Wealth Management revenue | $ | $ | $ | $ | |||||||||||||||||||
| Tax Software: | |||||||||||||||||||||||
| Consumer revenue | $ | $ | $ | $ | |||||||||||||||||||
| Professional revenue | |||||||||||||||||||||||
| Total Tax Software revenue | $ | $ | $ | $ | |||||||||||||||||||
Wealth Management revenue recognition
Wealth management revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue.
The timing of Wealth Management revenue recognition was as follows (in thousands):
| Three months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Advisory revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commission revenue | |||||||||||||||||||||||||||||||||||
| Asset-based revenue | |||||||||||||||||||||||||||||||||||
| Transaction and fee revenue | |||||||||||||||||||||||||||||||||||
| Total Wealth Management revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Blucora, Inc. | Q3 2021 Form 10-Q 12
| Nine months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Advisory revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commission revenue | |||||||||||||||||||||||||||||||||||
| Asset-based revenue | |||||||||||||||||||||||||||||||||||
| Transaction and fee revenue | |||||||||||||||||||||||||||||||||||
| 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.
The timing of Tax Software revenue recognition was as follows (in thousands):
| Three months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Consumer revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Professional revenue | |||||||||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Nine months ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Recognized Upon Transaction | Recognized Over Time | Total | Recognized Upon Transaction | Recognized Over Time | Total | ||||||||||||||||||||||||||||||
| Consumer revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Professional revenue | |||||||||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Note 4: Asset Acquisitions
During the nine months ended September 30, 2021, we completed several acquisitions in our Wealth Management business that met the criteria to be accounted for as asset acquisitions. We paid $3.8 million in total consideration, including acquisition costs, which was allocated to the acquired assets and assumed liabilities, and primarily consisted of customer relationship intangibles. We are subject to additional contingent consideration payments on these acquisitions in 2021 up to a maximum of $5.2 million over a four-year period that are contingent upon meeting certain revenue thresholds related to the respective asset acquisitions.
Blucora, Inc. | Q3 2021 Form 10-Q 13
Note 5: Debt
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Principal amount | Discount | Debt issuance costs | Net carrying value | Principal amount | Discount | Debt issuance costs | Net carrying value | ||||||||||||||||||||||||||||||||||||||||
Senior Secured Credit Facility | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Less: Current portion of long-term debt, net | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt, net | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
In May 2017, we entered into a credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders, which 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 (the “Senior Secured Credit Facility”). 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 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 sheet as part of the total deferred financing costs associated with the New Revolver.
As of September 30, 2021, the Senior Secured Credit Facility provided for up to $765.0 million of borrowings and consisted of a committed $90.0 million under the New Revolver and a $675.0 million Term Loan that mature on February 21, 2024 and May 22, 2024, respectively. As of September 30, 2021, we had $561.8 million in principal amount outstanding under the Term Loan and no amount outstanding under the New Revolver. Based on aggregate loan commitments as of September 30, 2021, 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 maturity date of May 22, 2024.
The interest rate on the Term Loan is variable at the London Interbank Offered Rate, plus the applicable interest rate margin of 4.0 % for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0 % for ABR Loans (as defined in the Credit Agreement). As of September 30, 2021, the applicable interest rate on the Term Loan was 5.0 %. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0 % to 2.5 % for Eurodollar Rate Loans and 1.0 % to 1.5 % for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net Leverage Ratio that ranges from 0.35 % to 0.4 %. Interest is payable at the end of each interest period.
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 HKFS Acquisition 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,
Blucora, Inc. | Q3 2021 Form 10-Q 14
2022 and ending on December 31, 2022, and (iv) 3.50 to 1.00 for the period beginning on January 1, 2023 and ending on February 21, 2024.
Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with the debt covenants of the Senior Secured Credit Facility as of September 30, 2021.
Note 6: Leases
Our leases are primarily related to office space and are classified as operating leases. Operating lease expense, net of sublease income, is recognized in our accompanying condensed consolidated statements of comprehensive income (loss) in “General and administrative” expense for net lease expense related to leases used in our operations and “Acquisition and integration” expense for net lease expense related to the unoccupied lease resulting from the acquisition of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”) in 2019 (the “1st Global Acquisition”).
Lease expense, cash paid on operating lease liabilities, and lease liabilities obtained from new right-of-use assets for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Fixed lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease expense | |||||||||||||||||||||||
| Lease expense, before sublease income | |||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||
| Total lease expense, net of sublease income | $ | $ | $ | $ | |||||||||||||||||||
| Additional lease information: | |||||||||||||||||||||||
| Cash paid on operating lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
Lease liabilities obtained from new right-of-use assets (1) | $ | $ | $ | $ | |||||||||||||||||||
__________________________
(1)Lease liabilities obtained from new right-of-use assets for the nine months ended September 30, 2020 resulted from the new corporate headquarters lease that commenced in January 2020.
As of September 30, 2021, our weighted-average remaining operating lease term was approximately 10.6 years and our weighted-average operating lease discount rate was 5.4 %.
Blucora, Inc. | Q3 2021 Form 10-Q 15
| September 30, 2021 | December 31, 2020 | ||||||||||
| Lease liabilities—current | $ | $ | |||||||||
| Lease liabilities—long-term | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Undiscounted cash flows: | |||||
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total undiscounted cash flows | |||||
| Imputed interest | ( | ||||
| Total operating lease liabilities | $ | ||||
Note 7: Balance Sheet Components
| September 30, 2021 | December 31, 2020 | ||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Other current assets | |||||||||||
| Total prepaid expenses and other current assets, net | $ | $ | |||||||||
Accrued expenses and other current liabilities consisted of the following (in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Salaries and related benefit expenses | $ | $ | |||||||||
HKFS Contingent Consideration liability (1)(2) | |||||||||||
Contingent liability from 1st Global Acquisition (2) | |||||||||||
| Accrued vendor and advertising costs | |||||||||||
| Accrued taxes | |||||||||||
| Other current liabilities | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
__________________________
(1)As of September 30, 2021, this amount represents the estimated fair value of the second contingent consideration payment related to the HKFS Acquisition which is payable in the third quarter of 2022. As of December 31, 2020, this amount represents the estimated fair value of the first contingent consideration payment related to the HKFS Acquisition which was subsequently paid in the third quarter of 2021.
(2)For more information on the Company’s contingent liabilities, see "Note 8—Commitments and Contingencies."
Note 8: Commitments and Contingencies
Contingent liability from 1st Global Acquisition
On May 6, 2019, we closed the 1st Global Acquisition. As part of the 1st Global Acquisition, we assumed a contingent liability related to a regulatory inquiry and recorded the contingent liability as part of the opening balance sheet. We evaluated a range of probable losses, resulting in a contingent liability reserve balance (including accrued interest) of $11.3 million at December 31, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 16
In the second quarter of 2021, we re-evaluated the range of probable losses as a result of our on-going discussions with the SEC. While the regulatory inquiry, which is related to certain pre-acquisition matters, is still on-going, we increased our contingent liability reserve to $16.8 million as of June 30, 2021. The $5.5 million increase to the contingent liability reserve was recognized in “Acquisition and integration” expense on the accompanying condensed consolidated statements of comprehensive income for the nine months ended September 30, 2021.
As part of the 1st Global Acquisition, we purchased representation and warranty insurance from a third party to supplement the indemnification provisions of the stock purchase agreement, dated as of March 18, 2019, by and among 1G Acquisitions, LLC, an indirect wholly owned subsidiary of the Company, 1st Global, Inc. and 1st Global Insurance Services, Inc., certain selling stockholders named therein and joinder sellers (the “1st Global Sellers”) and SAB Representative, LLC, as the Sellers’ representative, pursuant to which, the 1st Global Sellers agreed, among other things, to indemnify us from certain losses arising from breaches of representation, warranties, and covenants. At this time, we cannot yet estimate with reasonable probability the recovery related to these matters from insurance or the 1st Global Sellers, if any.
Contingent consideration liability from HKFS Acquisition
On July 1, 2020, we closed the HKFS Acquisition for an upfront cash purchase price of $104.4 million. The purchase price is subject to two post-closing earn-out payments (the “HKFS Contingent Consideration”) by us.
The amount of the HKFS Contingent Consideration is determined based on advisory asset levels and the achievement of certain performance goals (i) for the period beginning on July 1, 2020 and ending on July 1, 2021 and (ii) for the period beginning on July 1, 2021 and ending on July 1, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021) (the “HKFS Purchase Agreement”), the maximum aggregate amount that we would be required to pay for each earn-out period is $30.0 million. If the asset values on the applicable measurement date fall below certain specified thresholds, we would not be required to make any earn-out payment to the Sellers for such period.
Based on advisory asset levels and the achievement of performance goals for the first earn-out period specified in the HKFS Purchase Agreement, we made the full $30.0 million payment in the third quarter of 2021. The estimated fair value of the HKFS Contingent Consideration liability for the second earn-out period was $25.4 million as of September 30, 2021. For additional information on the valuation of the HKFS Contingent Consideration, 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 both that it is probable that a liability has been incurred and that the amount of loss can be reasonably estimated.
Aside from the contingent liability related to the 1st Global Acquisition and the HKFS Contingent Consideration liability, we are not currently party to any such matters for which we have recognized a material liability on our condensed consolidated balance sheet as of September 30, 2021.
Note 9—Fair Value Measurements
In accordance with Accounting Standards Codification 820, Fair Value Measurements and Disclosures, certain of our assets and liabilities are carried at fair value and are valued using inputs that are classified in one of the following three categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data and reflect our own assumptions.
Blucora, Inc. | Q3 2021 Form 10-Q 17
Assets and liabilities measured on a recurring basis
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| September 30, 2021 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
Cash equivalents: money market and other funds | $ | $ | $ | $ | |||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
HKFS Contingent Consideration liability | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| December 31, 2020 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||||||
Cash equivalents: money market and other funds | $ | $ | $ | $ | |||||||||||||||||||
| 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 cash equivalents utilizing quoted prices in active markets.
The HKFS Contingent Consideration liability relates to the two post-closing earn-out payments resulting from the HKFS Acquisition (see "Note 8—Commitments and Contingencies"). Based on advisory asset levels and the achievement of performance goals for the first earn-out period, we made the full $30.0 million payment in the third quarter of 2021.
The estimated fair value of the portion of the HKFS Contingent Consideration liability related to the second earn-out period (calculated in accordance with the amended HKFS Purchase Agreement and based on estimated advisory asset levels as of June 30, 2022) was $25.4 million as of September 30, 2021. The estimated fair value of the second earn-out payment was determined using a Monte Carlo simulation model in a risk neutral framework with the underlying simulated variable of advisory asset levels and the related achievement of certain advisory asset growth levels. The Monte Carlo simulation model utilized Level 3 inputs, which included forecasted advisory asset levels at July 1, 2022, a risk-adjusted discount rate (which reflects the risk in the advisory asset projection) of 12.0 %, volatility of 24.8 %, and a credit spread of 2.2 %. Significant increases to the discount rate, volatility, or credit spread inputs would have resulted in a significantly lower fair value measurement, with a similar inverse relationship existing for significant decreases to these inputs. A significant increase to the forecasted advisory assets levels would have resulted in a significantly higher fair value measurement, while a significant decrease to the forecasted advisory asset levels would have resulted in a significantly lower fair value measurement.
Blucora, Inc. | Q3 2021 Form 10-Q 18
A roll forward of the HKFS Contingent Consideration liability follows (in thousands):
| HKFS Contingent Consideration liability | |||||
Balance as of December 31, 2020 (1) | $ | ||||
| HKFS Contingent Consideration first earn-out payment | ( | ||||
Valuation change recognized as expense (2) | |||||
Balance as of September 30, 2021 (1) | $ | ||||
_________________________
(1)See “Note 7—Balance Sheet Components” for the current portion of the HKFS Contingent Consideration liability as of September 30, 2021 and December 31, 2020.
(2)The change in the fair value of the HKFS Contingent Consideration liability is recognized in “Acquisition and integration” expenses on the condensed consolidated statements of comprehensive income (loss). For the three months ended September 30, 2021, we recognized a valuation change of $1.7 million.
Fair value of financial instruments
We consider the carrying values of accounts receivable, commissions and advisory fees receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, other current liabilities, and deferred revenues to approximate their fair values primarily due to their short-term natures.
As of September 30, 2021, the Term Loan’s principal amount was $561.8 million, and the fair value of the Term Loan’s principal amount was $562.5 million. As of December 31, 2020, the Term Loan’s principal amount was $563.2 million, and the fair value of the Term Loan’s principal amount was $561.7 million. The fair value of the Term Loan’s principal amount was based on Level 2 inputs from a third-party market quotation.
Note 10: Other Loss, Net
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Interest expense | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt issuance costs | |||||||||||||||||||||||
| Accretion of debt discounts | |||||||||||||||||||||||
| Total interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | ( | ||||||||||||||||||||
Gain on sale of a business | ( | ( | |||||||||||||||||||||
| Non-capitalized debt issuance expenses | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Other loss, net | $ | $ | $ | $ | |||||||||||||||||||
Note 11: Income Taxes
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Income tax benefit (expense) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
The Company recorded income tax benefit of $0.8 million and income tax expense of $2.9 million for the three and nine months ended September 30, 2021, respectively. For 2021, the Company prepared its interim tax provision by applying a year-to-date effective tax rate to each quarter. For 2020, the Company prepared its interim
Blucora, Inc. | Q3 2021 Form 10-Q 19
tax provision by applying an estimated annual effective tax rate. We believe using the actual year-to-date effective tax rate in 2021 results in the best estimate of the annual effective tax rate.
The Company’s effective income tax rate for the nine months ended 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 currently expect to continue to release portions of valuation allowances, which were previously recorded in connection with our net operating losses, to offset future federal income tax liabilities. The majority of these net operating losses will either be utilized or expire between 2021 and 2024.
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 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 period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and the vesting of unvested restricted stock units. Dilutive potential common shares are excluded from the calculation of diluted net income (loss) per share if their effect is antidilutive.
The calculations of basic and diluted net income (loss) per share were as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding—basic | |||||||||||||||||||||||
Dilutive potential common shares (1) | |||||||||||||||||||||||
| Weighted average common shares outstanding—diluted | |||||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Anti-dilutive shares (1) | |||||||||||||||||||||||
_________________________
(1)Dilutive potential common shares were excluded from the calculation of diluted net income (loss) per share in the periods presented which have a net loss, as their effect would have been anti-dilutive due to the net loss recognized for such periods.
Blucora, Inc. | Q3 2021 Form 10-Q 20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included under Part 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, 2020.
Overview
Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) is a leading provider of integrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms in achieving better long-term outcomes via holistic, tax-advantaged solutions. Our mission is to empower people to improve their financial wellness through data and technology-driven 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 the leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged investing and wealth management services to their clients.
Avantax Planning Partners is an in-house/employee based RIA and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). Our employee-based RIA model, which we refer to as “Avantax Planning Partners,” also includes Avantax Wealth Management total client assets that have been acquired from Avantax Wealth Management financial professionals.
On July 1, 2020, we acquired all of the issued and outstanding common stock of HKFS (the “HKFS Acquisition”). The operations of HKFS are included in our operating results as part of the Wealth Management segment from the date of the HKFS Acquisition. On January 4, 2021, we announced the rebranding of HKFS to Avantax Planning Partners (the “Rebranding”). The Rebranding was designed to create tighter brand alignment, bringing the Wealth Management business under one common and recognizable brand.
As of September 30, 2021, the Wealth Management business worked with a nationwide network of 3,529 financial professionals and supported $86.6 billion of total client assets, including $39.8 billion of advisory assets.
Tax Software
The 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, packaged tax software, and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications. We had referred to this business as the “Tax Preparation business” and “Tax Preparation segment” in previous filings.
COVID-19 Pandemic
Beginning in March 2020, the COVID-19 pandemic has had a significant negative impact on the U.S. and global economy, caused substantial disruption in the U.S. and global securities markets, and as a result, negatively impacted both our Wealth Management and Tax Software businesses. In addition, the various precautionary measures and accommodations taken by many governmental authorities in the United States and around the world in order to limit the spread of COVID-19, as well as the societal response, have had, and could continue to have, an
Blucora, Inc. | Q3 2021 Form 10-Q 21
adverse effect on the U.S. and global markets and economy. The extent to which the COVID-19 pandemic may impact our results in the future will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and scope of the COVID-19 pandemic, the emergence of new variants of the virus, the likelihood of a resurgence of positive cases, the effectiveness, availability and acceptance of vaccines, global economic conditions during and after the COVID-19 pandemic and governmental actions that have been taken, or may be taken in the future, in response to the COVID-19 pandemic.
In our Wealth Management business, the amount of cash sweep revenue we generate continues to be affected by the low interest rate environment. In March 2020, the Federal Reserve lowered its target range for the federal funds rate to 0.00-0.25%. As our cash sweep revenue is based on a rate derived from the federal funds rate, cash sweep revenue in all quarters subsequent to the first quarter of 2020 has been materially reduced. We expect continued low levels of cash sweep revenue in future periods in which the federal funds rate is at reduced levels, although we may experience an increase in cash sweep revenue should the federal funds rate increase.
In our Tax Software segment, our revenue and operating income generation is highly seasonal, with a significant portion of our annual revenue typically earned in the first two quarters of our fiscal year. During the third and fourth quarters, the Tax Software segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
As a result of the COVID-19 pandemic, the Internal Revenue Service (“IRS”) extended the filing and payment deadline for tax year 2019 federal tax returns to July 15, 2020. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first and second quarters of 2020 to the third quarter of 2020. In addition, sales and marketing expenses were elevated in 2020 due to incremental investment in March 2020 to address weak performance through the first two months of the tax season, as well as increased marketing required due to the extended tax season. Further, the IRS was selected by the U.S. Congress as the vehicle for distribution of the first round of Economic Impact Payments (“EIP1”), which caused significant disruption to the 2020 tax season. As a result of the extension of the 2020 tax season and the EIP1 disruption, our results of operations for our Tax Software segment were negatively impacted in 2020 compared to prior years.
As a result of the continued impact of the COVID-19 pandemic, including disruptions associated with the distribution of the second and third rounds of Economic Impact Payments, the IRS delayed the start of the 2021 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021. In addition, the IRS extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first quarter of 2021 to the second quarter of 2021.
The typical seasonality of our Tax Software business has been affected by these changes to the tax filing deadlines to May 17, 2021 for the 2020 tax year and to July 15, 2020 for the 2019 tax year. This change in seasonality has caused significant fluctuations in our quarterly and year-to-date financial results and affected the comparability of our financial results. As a result, the results of operations for the Tax Software segment are not as comparable for the three months ended September 30, 2021 and 2020 as they would have been in previous years.
For additional information on the effects of the COVID-19 pandemic on our results of operations, see “Results of Operations” below. For more information on the risks related to the COVID-19 pandemic, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the subheading, “The current COVID-19 pandemic could have a Material Adverse Effect.”
Blucora, Inc. | Q3 2021 Form 10-Q 22
RESULTS OF OPERATIONS
Summary
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | $ | 169,135 | $ | 135,932 | $ | 33,203 | 24 | % | $ | 486,021 | $ | 396,805 | $ | 89,216 | 22 | % | |||||||||||||||||||||||||||||||
| Tax Software | 5,039 | 39,421 | (34,382) | (87) | % | 220,848 | 202,990 | 17,858 | 9 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 174,174 | $ | 175,353 | $ | (1,179) | (1) | % | $ | 706,869 | $ | 599,795 | $ | 107,074 | 18 | % | |||||||||||||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
| Wealth Management | $ | 19,564 | $ | 17,498 | $ | 2,066 | 12 | % | $ | 60,356 | $ | 51,827 | $ | 8,529 | 16 | % | |||||||||||||||||||||||||||||||
| Tax Software | (13,864) | 16,234 | (30,098) | (185) | % | 100,472 | 60,646 | 39,826 | 66 | % | |||||||||||||||||||||||||||||||||||||
| Corporate-level activity | (25,982) | (32,719) | 6,737 | 21 | % | (102,255) | (357,905) | 255,650 | 71 | % | |||||||||||||||||||||||||||||||||||||
| Operating income (loss) | (20,282) | 1,013 | (21,295) | (2,102) | % | 58,573 | (245,432) | 304,005 | 124 | % | |||||||||||||||||||||||||||||||||||||
| Other loss, net | (8,295) | (11,963) | 3,668 | 31 | % | (24,202) | (23,386) | (816) | (3) | % | |||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | (28,577) | (10,950) | (17,627) | (161) | % | 34,371 | (268,818) | 303,189 | 113 | % | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | 774 | (15,256) | 16,030 | 105 | % | (2,920) | (23,237) | 20,317 | 87 | % | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | (1,597) | (6) | % | $ | 31,451 | $ | (292,055) | 323,506 | 111 | % | ||||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, net loss decreased $1.6 million primarily due to the following factors:
•Wealth Management segment operating income increased $2.1 million primarily due to a $33.2 million increase in revenue, partially offset by a $31.1 million increase in operating expenses. Wealth Management segment results for 2020 were negatively affected by suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
•Tax Software segment operating income decreased $30.1 million primarily due to a $34.4 million decrease in revenue, mostly resulting from the earlier tax filing and payment deadlines in 2021 versus 2020. In addition, operating expenses decreased $4.3 million primarily due to reduced sales and marketing expenses.
•Expenses within corporate-level activity decreased $6.7 million primarily due to an $8.0 million decrease in acquisition and integration costs, partially offset by an increase of $1.6 million in expenses associated with other legal and consulting costs.
•Other loss, net decreased $3.7 million primarily due to the recognition of $3.7 million of non-capitalized debt issuance expenses related to the $175.0 million Term Loan increase in the three months ended September 30, 2020.
•The Company recorded income tax benefit of $0.8 million for the three months ended September 30, 2021. This compared to income tax expense of $15.3 million for the three months ended September 30, 2020.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, net income increased $323.5 million primarily due to the following factors:
•Wealth Management segment operating income increased $8.5 million primarily due to an $89.2 million increase in revenue, partially offset by an $80.7 million increase in operating expenses. Wealth Management segment operating income benefited from $7.2 million in incremental operating income resulting from the HKFS Acquisition, which was largely offset by a $6.2 million decrease in cash sweep revenue. In addition, Wealth Management segment results for 2020 were negatively affected by suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
•Tax Software segment operating income increased $39.8 million primarily due to a $22.0 million decrease in operating expenses, primarily from reduced sales and marketing expenses, and a $17.9 million increase in revenue.
Blucora, Inc. | Q3 2021 Form 10-Q 23
•Expenses within corporate-level activity decreased $255.7 million primarily due to the recognition of a $270.6 million goodwill impairment and $10.2 million in executive transition costs for the nine months ended September 30, 2020. These decreases were partially offset by an increase of $9.7 million in acquisition and integration expenses, an increase of $8.3 million in stock-based compensation expense, and a $7.3 million increase in expenses associated with contested proxy and other legal and consulting costs for the nine months ended September 30, 2021.
•The Company recorded income tax expense of $2.9 million for the nine months ended September 30, 2021, which represented the Company’s state income taxes on current period income. This compared to income tax expense of $23.2 million for the nine months ended September 30, 2020. The effective tax rate was 8.49% as of September 30, 2021 as compared to an effective tax rate of 8.64% at September 30, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 24
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, depreciation, amortization of acquired intangible assets, acquisition and integration costs, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, or impairment of goodwill to the reportable segments. Such amounts are reflected under “Corporate-level activity.” In addition, we do not allocate other loss, net, or income taxes to the reportable segments.
Wealth Management
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | ||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||||||||||||||
| Revenue | $ | 169,135 | $ | 135,932 | $ | 33,203 | 24 | % | $ | 486,021 | $ | 396,805 | $ | 89,216 | 22 | % | ||||||||||||||||||||||||||||
| Operating income | $ | 19,564 | $ | 17,498 | $ | 2,066 | 12 | % | $ | 60,356 | $ | 51,827 | $ | 8,529 | 16 | % | ||||||||||||||||||||||||||||
| Segment margin | 12 | % | 13 | % | 12 | % | 13 | % | ||||||||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, Wealth Management segment operating income increased $2.1 million primarily due to the following factors:
•Wealth Management revenue increased $33.2 million primarily due to a $20.9 million increase in advisory revenue, an $8.0 million increase in commission revenue, and a $2.9 million increase in transaction and fee revenue. Revenue increases primarily resulted from increased client asset levels and transaction activity, which were favorable compared to the suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
•Wealth Management operating expenses increased $31.1 million primarily due to a $24.5 million increase in cost of revenue resulting from increased advisory fees and commissions paid, which has been primarily driven by an increase in the number of financial professionals with higher payout levels due to improved market performance and the alignment of our payout grids, combined with an increase in sales and marketing expenses. This increase in cost of revenue has resulted in a decrease in segment margin for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, Wealth Management operating income increased $8.5 million primarily due to the following factors:
•Wealth Management revenue increased $89.2 million primarily due to a $63.5 million increase in advisory revenue, a $21.9 million increase in commission revenue, and a $6.3 million increase in transaction and fee revenue, partially offset by a $2.4 million decrease in asset-based revenue. Revenue increases primarily resulted from increased client asset levels and transaction activity, which were favorable compared to the suppressed client asset levels and transaction activity in 2020 resulting from the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020. In addition, Wealth Management revenue for the nine months ended September 30, 2021 increased due to $20.7 million of incremental revenue resulting from the HKFS Acquisition. These increases were partially offset by a $6.2 million decrease in cash sweep revenue due to a decline in interest rates at the end of the first quarter of 2020.
•Wealth Management operating expenses increased $80.7 million primarily due to a $60.8 million increase in cost of revenue as a result of increased advisory fees and commissions paid to financial professionals, as well as incremental expenses resulting from the HKFS Acquisition and increases in sales and marketing expenses in our Avantax Wealth Management business. The increase in advisory fees and commissions paid has been primarily driven by an increase in the number of financial professionals with higher payout levels due to improved market performance and the alignment of our payout grids.
Blucora, Inc. | Q3 2021 Form 10-Q 25
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 metrics was as follows:
| Three months ended | QTD | Nine months ended | YTD | ||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||||||||||
| Sources of Revenue | Primary Drivers | 2021 | 2020 | $ | 2021 | 2020 | $ | ||||||||||||||||||||||||||||||||||
| Financial professional-driven | Advisory | - Advisory asset levels | $ | 103,540 | $ | 82,612 | $ | 20,928 | $ | 291,167 | $ | 227,672 | $ | 63,495 | |||||||||||||||||||||||||||
| Commission | - Transactions - Asset levels - Product mix | 52,961 | 44,921 | 8,040 | 157,197 | 135,337 | 21,860 | ||||||||||||||||||||||||||||||||||
| Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 5,659 | 4,351 | 1,308 | 16,514 | 18,911 | (2,397) | |||||||||||||||||||||||||||||||||
| Transaction and fee | - Account activity - Number of financial professionals - Number of clients - Number of accounts | 6,975 | 4,048 | 2,927 | 21,143 | 14,885 | 6,258 | ||||||||||||||||||||||||||||||||||
| Total revenue | $ | 169,135 | $ | 135,932 | $ | 33,203 | $ | 486,021 | $ | 396,805 | $ | 89,216 | |||||||||||||||||||||||||||||
| Total recurring revenue | $ | 145,311 | $ | 117,822 | $ | 27,489 | $ | 414,966 | $ | 337,081 | $ | 77,885 | |||||||||||||||||||||||||||||
| Recurring revenue rate | 85.9 | % | 86.7 | % | 85.4 | % | 84.9 | % | |||||||||||||||||||||||||||||||||
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 despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Blucora, Inc. | Q3 2021 Form 10-Q 26
Business metrics
(In thousands, except percentages and as otherwise indicated) | September 30, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Client assets balances: | |||||||||||||||||||||||
Total client assets | $ | 86,647,743 | $ | 76,152,721 | $ | 10,495,022 | 14 | % | |||||||||||||||
Brokerage assets | $ | 46,850,354 | $ | 43,733,735 | $ | 3,116,619 | 7 | % | |||||||||||||||
Advisory assets | $ | 39,797,389 | $ | 32,418,986 | $ | 7,378,403 | 23 | % | |||||||||||||||
| Advisory assets as a percentage of total client assets | 45.9 | % | 42.6 | % | |||||||||||||||||||
| Number of financial professionals (in ones): | |||||||||||||||||||||||
Independent financial professionals (1) | 3,498 | 3,956 | (458) | (12) | % | ||||||||||||||||||
In-house/employee financial professionals (2) | 31 | 19 | 12 | 63 | % | ||||||||||||||||||
| Total number of financial professionals | 3,529 | 3,975 | (446) | (11) | % | ||||||||||||||||||
Advisory and commission revenue per financial professional (3) | $ | 44.3 | $ | 32.1 | $ | 12.2 | 38 | % | |||||||||||||||
Quarterly production retention rate: (4) | |||||||||||||||||||||||
TTM Financial professional-driven revenue (5) | $ | 585,307 | $ | 491,829 | |||||||||||||||||||
TTM Financial professional-driven revenue related to independent financial professionals who departed in the quarter (5) | $ | 12,157 | $ | 5,366 | |||||||||||||||||||
TTM Financial professional-driven revenue, less that related to independent financial professionals who departed in the quarter (5) | $ | 573,150 | $ | 486,463 | |||||||||||||||||||
Quarterly production retention rate (4) | 97.9 | % | 98.9 | % | |||||||||||||||||||
____________________________
(1)The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as licensed referring representatives at CPA firms that partner with Avantax Planning Partners.
(2)The number of in-house financial/employee financial professionals includes licensed financial planning consultants, all of which are employees of Avantax Planning Partners.
(3)Calculation based on advisory and commission revenue for the three months ended September 30, 2021 and 2020, respectively.
(4)Quarterly production retention rate is a non-GAAP financial measure. We believe quarterly production retention rate is an important measure of our quarterly retention of financial professional-driven revenue (which consists of advisory revenue and commission revenue). Management uses quarterly production retention rate to measure the impact of financial professional departures on our business. Quarterly production retention rate is calculated by dividing (x) the difference of (i) total financial professional-driven revenue for the trailing-twelve-month period then ended minus (ii) financial professional-driven revenue for the trailing-twelve-month period then ended related to independent financial professionals that departed in the quarter by (y) total financial professional-driven revenue for the trailing-twelve-month period then ended. As quarterly production retention rate is a measure of retention during a quarter, it also includes quarterly production from independent financial professionals who departed in prior quarters in the trailing-twelve-month period, and therefore does not show production retention rate over longer periods of time.
(5)For the trailing-twelve-month period then ended.
Client assets. Total client assets 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. To the extent that we provide more than one service for a client’s assets, the value of the asset is only counted once in the total amount of total client assets. Total client assets include advisory assets, non-advisory brokerage accounts, annuities, and mutual fund positions held directly with fund companies. These assets are not reported on the 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 consolidated balance sheets.
Brokerage assets represent total client assets other than advisory assets.
Total client assets increased $10.5 billion at September 30, 2021 compared to September 30, 2020 primarily due to $12.6 billion of favorable market change and reinvestment levels following the pandemic-influenced market downturn in 2020. Partially offsetting these increases were net client outflows of $2.2 billion.
Advisory assets as a percentage of total client assets increased to 45.9% at September 30, 2021 compared to 42.6% at September 30, 2020. This increase was primarily due to the HKFS Acquisition because over 90% of the
Blucora, Inc. | Q3 2021 Form 10-Q 27
client assets acquired were comprised of advisory assets. In addition, advisory assets as a percentage of total client assets increased in our Avantax Wealth Management business.
While financial markets have substantially stabilized since the pandemic-influenced financial market conditions in 2020, we cannot predict with certainty the extent of the impact of the COVID-19 pandemic and future financial market fluctuations on our client assets. However, the continued volatility in the U.S. and global economy and uncertainty in financial markets due to the pandemic may cause declines in the amount of our total client assets. For more information on the risks associated with our Wealth Management business, see the “COVID-19 Pandemic” section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Item 1A. Risk Factors” under the subheading, “The current COVID-19 pandemic could have a Material Adverse Effect.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
Financial professionals. The Wealth Management business worked with a nationwide network of 3,529 financial professionals as of September 30, 2021. The number of our financial professionals decreased by 11% at September 30, 2021 compared to September 30, 2020, with the decrease primarily due to attrition related to lower revenue-producing financial professionals. The decrease in the number of financial professionals was partially offset by our continued recruitment and onboarding of independent financial professionals and the addition of financial professionals as a result of the HKFS Acquisition, which (as of the HKFS Acquisition date) included the addition of 19 in-house financial professionals and 131 licensed referring representatives at CPA firms that partner with Avantax Planning Partners.
Advisory revenue. Advisory revenue primarily includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenue generated by Avantax Planning Partners, advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized ratably over the period in which our performance obligations were completed.
Advisory asset balances were as follows:
(In thousands, except percentages) | September 30, | Change | |||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
Advisory assets—independent financial professionals (1) | $ | 33,713,543 | $ | 27,852,099 | $ | 5,861,444 | 21 | % | |||||||||||||||
Advisory assets—in-house/employee financial professionals (2) | 4,701,444 | 3,422,173 | 1,279,271 | 37 | % | ||||||||||||||||||
Retirement advisory assets—in-house financial professionals (3) | 1,382,402 | 1,144,714 | 237,688 | 21 | % | ||||||||||||||||||
| Total advisory assets | $ | 39,797,389 | $ | 32,418,986 | $ | 7,378,403 | 23 | % | |||||||||||||||
_________________________
(1)Represents individual client and retirement advisory assets for which Avantax Wealth Management serves as the RIA.
(2)Represents individual client advisory assets for which Avantax Planning Partners serves as the RIA.
(3)Represents advisory assets for which Avantax Planning Partners provides retirement plan services and serves as the RIA.
The activity within our advisory assets was as follows:
| (In thousands, except as otherwise indicated) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Balance, beginning of the period | $ | 39,440,985 | $ | 26,555,388 | $ | 35,603,557 | $ | 27,629,164 | |||||||||||||||
| Net increase in new advisory assets | 621,205 | 125,406 | 1,853,632 | 231,382 | |||||||||||||||||||
| Inflows from acquisitions | — | 4,178,729 | — | 4,178,729 | |||||||||||||||||||
| Market impact and other | (264,801) | 1,559,463 | 2,340,200 | 379,711 | |||||||||||||||||||
| Balance, end of the period | $ | 39,797,389 | $ | 32,418,986 | $ | 39,797,389 | $ | 32,418,986 | |||||||||||||||
| Advisory revenue | $ | 103,540 | $ | 82,612 | $ | 291,167 | $ | 227,672 | |||||||||||||||
Average advisory fee rate (1) | 26 bps | 27 bps | 78 bps | 83 bps | |||||||||||||||||||
_________________________
(1)For the three months ended September 30, 2021 and September 30, 2020, 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, 2021 and September 30, 2020, average advisory fee rate equals the sum of each quarterly average advisory fee rate within the relevant year-to-date period.
Blucora, Inc. | Q3 2021 Form 10-Q 28
For the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, advisory revenue increased $20.9 million and $63.5 million, respectively, primarily due to a year-over-year increase in advisory assets. The increase in advisory assets was primarily due to favorable market change, an increase in advisory assets resulting from the HKFS Acquisition, and net client inflows. In addition, advisory revenue recognized was negatively affected because such revenue was primarily based on the value of client assets within advisory accounts as of June 30, 2020, which were substantially affected by the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
For the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, the average advisory fee rate decreased primarily due to our tiered fee structure, which has generated lower average fee rates as average client asset balances have increased. In addition, the average advisory fee rate decreased due to the lower advisory fee structure of HKFS.
For the three months ended September 30, 2021, advisory assets remained relatively constant. For the nine months ended September 30, 2021, advisory assets increased $4.2 billion, primarily due to favorable market change and client inflows.
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.
Our commission revenue, by product category and by type of commission revenue, was as follows:
| (in thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| By product category: | |||||||||||||||||||||||||||||||||||||||||||||||
| Mutual funds | $ | 22,749 | $ | 21,674 | $ | 1,075 | 5 | % | $ | 70,300 | $ | 66,886 | $ | 3,414 | 5 | % | |||||||||||||||||||||||||||||||
| Variable annuities | 18,752 | 16,168 | 2,584 | 16 | % | 55,247 | 44,522 | 10,725 | 24 | % | |||||||||||||||||||||||||||||||||||||
| Insurance | 4,414 | 4,145 | 269 | 6 | % | 14,044 | 12,209 | 1,835 | 15 | % | |||||||||||||||||||||||||||||||||||||
| General securities | 6,951 | 2,934 | 4,017 | 137 | % | 17,511 | 11,720 | 5,791 | 49 | % | |||||||||||||||||||||||||||||||||||||
| Other | 95 | — | 95 | N/A | 95 | — | 95 | N/A | |||||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 52,961 | $ | 44,921 | $ | 8,040 | 18 | % | $ | 157,197 | $ | 135,337 | $ | 21,860 | 16 | % | |||||||||||||||||||||||||||||||
| By type of commission: | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction-based | $ | 22,372 | $ | 16,884 | $ | 5,488 | 33 | % | $ | 65,815 | $ | 55,068 | $ | 10,747 | 20 | % | |||||||||||||||||||||||||||||||
| Trailing | 30,589 | 28,037 | 2,552 | 9 | % | 91,382 | 80,269 | 11,113 | 14 | % | |||||||||||||||||||||||||||||||||||||
| Total commission revenue | $ | 52,961 | $ | 44,921 | $ | 8,040 | 18 | % | $ | 157,197 | $ | 135,337 | $ | 21,860 | 16 | % | |||||||||||||||||||||||||||||||
For the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020:
•Transaction-based commission revenue increased $5.5 million and $10.7 million, respectively, primarily due to an increase in transaction activity. Transaction-based commission revenue in 2020 was negatively affected by suppressed transaction activity as a result of the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
•Trailing commission revenue increased $2.6 million and $11.1 million, respectively, primarily due to increased client asset levels. Trailing commission revenue in 2020 was negatively affected by suppressed client asset levels as a result of the COVID-19 pandemic and related financial market disruption beginning in the second quarter of 2020.
Trailing commission revenue and transaction-based commission revenue remain susceptible to being adversely affected in future periods in which pandemic-influenced economic and market factors remain present.
Blucora, Inc. | Q3 2021 Form 10-Q 29
Asset-based revenue. Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs, asset-based retirement plan service fees, and other asset-based revenues.
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, asset-based revenue increased $1.3 million primarily due to a $0.9 million increase in revenue generated from financial product manufacturer sponsorship programs, as well as a $0.3 million increase in asset-based retirement plan service fees following the HKFS Acquisition.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, asset-based revenue decreased $2.4 million primarily due to a $6.2 million decrease in cash sweep revenue as a result of lower interest rates, partially offset by a $1.9 million increase in revenue generated from financial product manufacturer sponsorship programs and a $1.7 million increase in revenue generated from asset-based retirement plan service fees following the HKFS Acquisition.
In March 2020, the Federal Reserve lowered its target range for the federal funds rate to 0.00-0.25%. As our cash sweep revenue is based on a rate derived from the federal funds rate, cash sweep revenue in all quarters subsequent to the first quarter of 2020 has been materially reduced. We expect continued low levels of cash sweep revenue in future periods in which the federal funds rate is at reduced levels, although we may experience an increase in cash sweep revenue should the federal funds rate increase.
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, 2021 compared to the three and nine months ended September 30, 2020, transaction and fee revenue increased $2.9 million and $6.3 million, respectively, primarily due to incremental revenue generated from financial professional support fees, as well as for the nine months ended September 30, 2021 incremental transaction and fee revenue as a result of the HKFS Acquisition.
Tax Software
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 5,039 | $ | 39,421 | $ | (34,382) | (87) | % | $ | 220,848 | $ | 202,990 | $ | 17,858 | 9 | % | |||||||||||||||||||||||||||||||
| Operating income (loss) | $ | (13,864) | $ | 16,234 | $ | (30,098) | (185) | % | $ | 100,472 | $ | 60,646 | $ | 39,826 | 66 | % | |||||||||||||||||||||||||||||||
| Segment margin | (275) | % | 41 | % | 45 | % | 30 | % | |||||||||||||||||||||||||||||||||||||||
Tax Software revenue and operating income for the three and nine months ended September 30, 2020 were significantly impacted by the extension of the filing and payment deadlines for federal tax returns in the 2020 tax season. For additional discussion of the COVID-19 pandemic and its effect on current and prior year Tax Software segment results, please see the “COVID-19 Pandemic” section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, Tax Software operating income decreased $30.1 million due to the following factors:
•Tax Software revenue decreased $34.4 million primarily due to a $34.0 million decrease in consumer revenue and a $0.4 million decrease in professional revenue. The decreases primarily resulted from the earlier tax filing and payment deadline in 2021 versus 2020 and, to a lesser extent, from IRS delays in the processing of 2020 tax returns and refunds.
•Tax Software operating expenses decreased $4.3 million primarily due to decreased advertising and marketing expenses. Advertising and marketing costs in our Tax Software business were elevated in the third quarter of 2020 due to the extension of the extension of the 2019 tax returns to July 15, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 30
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, Tax Software operating income increased $39.8 million due to the following factors:
•Tax Software revenue increased $17.9 million primarily due to a $17.2 million increase in consumer revenue and a $0.7 million increase in professional revenue.
•Tax Software operating expenses decreased $22.0 million primarily due to decreased advertising and marketing expenses. Advertising and marketing expenses for the nine months ended September 30, 2020 were elevated due to incremental marketing efforts to address weak performance through the first two months of the 2020 tax season, as well as increased advertising and marketing resulting from the extended tax season.
Sources of revenue
Tax 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 expert filing assistance.
We classify Tax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue represents Tax Software revenue derived from products and services sold to customers and businesses primarily for the preparation of individual or business tax returns. Professional revenue represents Tax Software revenue derived from products sold to tax return preparers who utilize our offerings to service end-user customers.
Revenue by category was as follows:
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Consumer revenue | $ | 4,479 | $ | 38,482 | $ | (34,003) | (88) | % | $ | 203,891 | $ | 186,724 | $ | 17,167 | 9 | % | |||||||||||||||||||||||||||||||
| Professional revenue | 560 | 939 | (379) | (40) | % | 16,957 | 16,266 | 691 | 4 | % | |||||||||||||||||||||||||||||||||||||
| Total Tax Software revenue | $ | 5,039 | $ | 39,421 | $ | (34,382) | (87) | % | $ | 220,848 | $ | 202,990 | $ | 17,858 | 9 | % | |||||||||||||||||||||||||||||||
Business Metrics
We measure the performance of our Tax Software business using three sets of non-financial metrics, which we consider to be important indicators of the performance of our Tax Software business and 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.
•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.
Blucora, Inc. | Q3 2021 Form 10-Q 31
| (In thousands, except percentages and as otherwise indicated) | Nine months ended | YTD | Year-to-date period ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | July 16, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Units | % | 2021 (1) | 2020 (1) | Units | % | ||||||||||||||||||||||||||||||||||||||||
Total e-files (2) | 5,492 | 5,234 | 258 | 5 | % | 5,421 | 5,149 | 272 | 5 | % | |||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||||||||
Consumer e-files (2) | 3,144 | 3,145 | (1) | — | % | 3,122 | 3,113 | 9 | — | % | |||||||||||||||||||||||||||||||||||||
| Professional: | |||||||||||||||||||||||||||||||||||||||||||||||
| Professional e-files | 2,348 | 2,089 | 259 | 12 | % | 2,299 | 2,036 | 263 | 13 | % | |||||||||||||||||||||||||||||||||||||
| Units sold (in ones) | 20,808 | 20,288 | 520 | 3 | % | 20,711 | 20,207 | 504 | 2 | % | |||||||||||||||||||||||||||||||||||||
| Professional e-files per unit sold (in ones) | 112.8 | 102.9 | 9.9 | 10 | % | 111.0 | 100.8 | 10.2 | 10 | % | |||||||||||||||||||||||||||||||||||||
(1)Tax season begins on the first day that the IRS begins accepting e-files and ends on filing deadline day plus one day. Due to the impact of the COVID-19 pandemic, the IRS extended the filing deadlines for federal tax returns relating to the 2020 and 2019 tax years to May 17, 2021 (with the filing deadline extended to June 15, 2021 for Texas, Louisiana, and Oklahoma) and July 15, 2020, respectively. In order to provide comparable tax season data, we provided the above metrics for the year-to-date periods ended July 16, 2021 and 2020 as these periods capture the activity of the entire tax season for each year.
(2)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, 2021 compared to the nine months ended September 30, 2020, and the year-to-date period ended July 16, 2021 compared to the year-to-date period ended July 16, 2020, total e-files increased 5%. This increase was primarily due to the increase in the number of professional tax software e-files, which resulted from increased market share in the professional tax software market.
For more information on the risks associated with our Tax Software business, see the “COVID-19 Pandemic” section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Item 1A. Risk Factors” under the heading, “The current COVID-19 pandemic could have a Material Adverse Effect.” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 32
Corporate-Level Activity
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, impairment of goodwill, executive transition costs, headquarters relocation costs, and contested proxy and other legal and consulting costs, is not allocated to our segments.
Corporate-level activity by category was as follows:
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Unallocated corporate-level general and administrative | $ | 6,499 | $ | 6,745 | $ | (246) | (4) | % | $ | 18,452 | $ | 19,571 | $ | (1,119) | (6) | % | |||||||||||||||||||||||||||||||
| Stock-based compensation | 4,729 | 4,517 | 212 | 5 | % | 15,499 | 7,220 | 8,279 | 115 | % | |||||||||||||||||||||||||||||||||||||
| Acquisition and integration | 2,241 | 10,276 | (8,035) | (78) | % | 28,513 | 18,782 | 9,731 | 52 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation | 3,906 | 2,620 | 1,286 | 49 | % | 11,251 | 7,452 | 3,799 | 51 | % | |||||||||||||||||||||||||||||||||||||
| Amortization of other acquired intangible assets | 7,009 | 7,746 | (737) | (10) | % | 21,247 | 22,167 | (920) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Contested proxy and other legal and consulting costs | 1,598 | — | 1,598 | N/A | 7,293 | — | 7,293 | N/A | |||||||||||||||||||||||||||||||||||||||
| Executive transition costs | — | 405 | (405) | (100) | % | — | 10,225 | (10,225) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Headquarters relocation costs | — | 410 | (410) | (100) | % | — | 1,863 | (1,863) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Impairment of goodwill | — | — | — | N/A | — | 270,625 | (270,625) | (100) | % | ||||||||||||||||||||||||||||||||||||||
| Total corporate-level activity | $ | 25,982 | $ | 32,719 | $ | (6,737) | (21) | % | $ | 102,255 | $ | 357,905 | $ | (255,650) | (71) | % | |||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, corporate-level activity decreased $6.7 million primarily due to the following factors:
•Acquisition and integration expenses decreased $8.0 million, primarily due to the following factors. For the three months ended September 30, 2021, acquisition and integration expenses were $2.2 million, which primarily related to the HKFS Acquisition. For the three months ended September 30, 2020, acquisition and integration expenses were $10.3 million, which included $5.9 million related to the acquisition of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”) in 2019 (the “1st Global Acquisition”) and $4.4 million related to the HKFS Acquisition.
•Contested proxy and other legal and consulting costs of $1.6 million were recognized in the three months ended September 30, 2021 with no comparable amount in the 2020 period.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, corporate-level activity decreased $255.7 million primarily due to the non-recurrence of the following factors:
•For the nine months ended September 30, 2020, we recognized goodwill impairment of $270.6 million related to our Wealth Management reporting unit.
•Executive transition costs of $10.2 million were recognized for the nine months ended September 30, 2020 due to the departures of certain Company executives.
Partially offsetting this decrease in corporate-level activity:
•For the nine months ended September 30, 2021, acquisition and integration expenses were $28.5 million, which included $22.6 million related to the HKFS Acquisition and $5.9 million related to the 1st Global Acquisition. For the nine months ended September 30, 2020, acquisition and integration expenses were $18.8 million, which included $10.6 million related to the 1st Global Acquisition and $8.2 million related to the HKFS Acquisition.
•Stock-based compensation expense increased $8.3 million. Stock-based compensation for the nine months ended September 30, 2020 was reduced by stock award forfeitures resulting from executive departures in 2020.
•Contested proxy and other legal and consulting costs of $7.3 million were recognized for the nine months ended September 30, 2021.
Blucora, Inc. | Q3 2021 Form 10-Q 33
OPERATING EXPENSES
Cost of Revenue
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
Wealth Management services cost of revenue | $ | 120,641 | $ | 96,122 | $ | 24,519 | 26 | % | $ | 343,174 | $ | 282,332 | $ | 60,842 | 22 | % | |||||||||||||||||||||||||||||||
Tax Software services cost of revenue | 2,323 | 2,692 | (369) | (14) | % | 12,330 | 9,759 | 2,571 | 26 | % | |||||||||||||||||||||||||||||||||||||
| Total cost of revenue | $ | 122,964 | $ | 98,814 | $ | 24,150 | 24 | % | $ | 355,504 | $ | 292,091 | $ | 63,413 | 22 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 71 | % | 56 | % | 50 | % | 49 | % | |||||||||||||||||||||||||||||||||||||||
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, 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. As the in-house/employee financial professionals are employees of Avantax Planning Partners, their compensation is reflected in “Sales and marketing” expense.
For the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, cost of revenue increased $24.2 million and $63.4 million, respectively, primarily due to an increase in advisory fees and commissions paid to financial professionals, which primarily resulted from an increase in the number of financial professionals with higher payout levels due to improved market performance and the alignment of our payout grids. The increase in cost of revenue was also the result of increased personnel costs in the Tax Software segment, as well as increased depreciation related to capitalized software costs in the Tax Software segment.
Engineering and Technology
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Engineering and technology | $ | 7,874 | $ | 6,007 | $ | 1,867 | 31 | % | $ | 22,233 | $ | 21,899 | $ | 334 | 2 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 5 | % | 3 | % | 3 | % | 4 | % | |||||||||||||||||||||||||||||||||||||||
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 condensed consolidated statements of comprehensive income (loss) as either “Cost of Revenue” or “Depreciation.” For more information, see the “Cost of Revenue” and “Depreciation and Amortization of Acquired Intangible Assets” sections contained within this discussion of “Operating Expenses.”
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, engineering and technology expenses increased $1.9 million primarily due to increases in personnel expenses and consulting fees in our Tax Software and Wealth Management businesses.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, engineering and technology expenses increased $0.3 million primarily due to an increase in personnel expenses in the Tax Software and Wealth Management segments, partially offset by decreased consulting fees in our Tax Software business.
Blucora, Inc. | Q3 2021 Form 10-Q 34
Sales and Marketing
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 28,399 | $ | 31,018 | $ | (2,619) | (8) | % | $ | 140,809 | $ | 150,785 | $ | (9,976) | (7) | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 16 | % | 18 | % | 20 | % | 25 | % | |||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses primarily consist 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 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, 2021 compared to the three months ended September 30, 2020, sales and marketing expenses decreased $2.6 million primarily due to a $6.8 million decrease in advertising and marketing costs in our Tax Software business. Advertising and marketing costs in our Tax Software business were elevated in the third quarter of 2020 due to the extension of the filing and payment deadline for tax year 2019 federal tax returns to July 15, 2020, thereby necessitating additional advertising and marketing efforts. In contrast, the filing and payment deadline in most states for tax year 2020 federal tax returns was May 17, 2021. This decrease was partially offset by a $4.2 million increase in sales and marketing expenses in our Wealth Management business due to incremental expenses following the HKFS Acquisition and increased headcount to support growth in the Wealth Management business.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, sales and marketing expenses decreased $10.0 million primarily due to a $26.7 million decrease in advertising and marketing costs in our Tax Software business. Advertising and marketing costs in our Tax Software business were elevated for the nine months ended September 30, 2020 primarily due to incremental marketing efforts in March 2020 to address weak performance through the first two months of the 2020 tax season, as well as increased marketing required due to the extended tax season. This decrease was partially offset by a $16.6 million increase in sales and marketing expenses in our Wealth Management business due to incremental expenses following the HKFS Acquisition and increased headcount to support growth in the Wealth Management business.
General and Administrative
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 23,102 | $ | 18,605 | $ | 4,497 | 24 | % | $ | 71,619 | $ | 63,533 | $ | 8,086 | 13 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 13 | % | 11 | % | 10 | % | 11 | % | |||||||||||||||||||||||||||||||||||||||
General and administrative (“G&A”) expenses primarily consist of expenses associated with personnel expenses, the cost of temporary help and contractors, professional services fees, general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, G&A expenses increased $4.5 million primarily due to the following factors:
•For the three months ended September 30, 2021, we recognized $1.6 million in expenses associated with other legal and consulting costs.
•Depreciation expense increased $1.3 million resulting from property and equipment placed into service at our new headquarters in July 2020.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, G&A expenses increased $8.1 million primarily due to the following factors:
•Stock-based compensation increased $8.3 million. Stock-based compensation for the nine months ended September 30, 2020 was reduced due to stock award forfeitures resulting from executive departures in 2020.
•For the nine months ended September 30, 2021, we recognized $7.3 million in expenses associated with contested proxy and other legal and consulting costs.
Blucora, Inc. | Q3 2021 Form 10-Q 35
•Depreciation expense increased $3.8 million resulting from property and equipment placed into service at our new headquarters in July 2020.
Partially offsetting these increases, we recognized $10.2 million of executive transition costs for the nine months ended September 30, 2020 due to the departure of certain Company executives in 2020.
Acquisition and Integration
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Employee-related expenses | $ | (36) | $ | 264 | $ | (300) | (114) | % | $ | 699 | $ | 1,326 | $ | (627) | (47) | % | |||||||||||||||||||||||||||||||
| Professional services | 377 | 4,905 | (4,528) | (92) | % | 1,620 | 11,447 | (9,827) | (86) | % | |||||||||||||||||||||||||||||||||||||
| Change in the fair value of HKFS Contingent Consideration | 1,700 | (1,000) | 2,700 | 270 | % | 19,500 | (1,000) | 20,500 | 2050 | % | |||||||||||||||||||||||||||||||||||||
| Other expenses | 200 | 6,107 | (5,907) | (97) | % | 6,694 | 7,009 | (315) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 2,241 | $ | 10,276 | $ | (8,035) | (78) | % | $ | 28,513 | $ | 18,782 | $ | 9,731 | 52 | % | |||||||||||||||||||||||||||||||
| Percentage of revenue | 1 | % | 6 | % | 4 | % | 3 | % | |||||||||||||||||||||||||||||||||||||||
Acquisition and integration expenses primarily relate to the HKFS Acquisition and the 1st Global Acquisition and consist of employee-related expenses, professional services fees, and other expenses.
For the three months ended September 30, 2021, acquisition and integration expenses of $2.2 million were primarily related to the HKFS Acquisition, which included a $1.7 million loss related to the increase in the fair value of the liability related to the two post-closing earn-out payments (the “HKFS Contingent Consideration”). For additional information on the HKFS Contingent Consideration liability and the contingent liability from the 1st Global Acquisition, see “Item 1. Financial Statements—Note 8.” For the three months ended September 30, 2020, acquisition and integration expenses included $5.9 million related to the 1st Global Acquisition and $4.4 million related to the HKFS Acquisition.
For the nine months ended September 30, 2021, acquisition and integration expenses of $28.5 million were primarily composed of $22.6 million related to the HKFS Acquisition, which included a $19.5 million loss related to the increase in the fair value of the HKFS Contingent Consideration liability. In addition, acquisition and integration expenses for the nine months ended September 30, 2021 included $5.9 million related to the 1st Global Acquisition, which included an increase of $5.5 million to the contingent liability reserve balance related to a regulatory matter assumed in the 1st Global Acquisition. For the nine months ended September 30, 2020, acquisition and integration expenses included $10.6 million related to the 1st Global Acquisition and $8.2 million related to the HKFS Acquisition.
Depreciation and Amortization of Acquired Intangible Assets
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation | $ | 2,867 | $ | 1,874 | $ | 993 | 53 | % | $ | 8,371 | $ | 5,345 | $ | 3,026 | 57 | % | |||||||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 7,009 | 7,746 | (737) | (10) | % | 21,247 | 22,167 | (920) | (4) | % | |||||||||||||||||||||||||||||||||||||
| Total | $ | 9,876 | $ | 9,620 | $ | 256 | 3 | % | $ | 29,618 | $ | 27,512 | 2,106 | 8 | % | ||||||||||||||||||||||||||||||||
| Percentage of revenue | 6 | % | 5 | % | 4 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, and leasehold improvements. 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, 2021 compared to the three and nine months ended September 30, 2020, depreciation and amortization expense increased $0.3 million and $2.1 million, respectively, primarily due to increased depreciation resulting from property and equipment put into service at our new headquarters in July 2020 and an increase in capitalized software costs.
Blucora, Inc. | Q3 2021 Form 10-Q 36
Impairment of Goodwill
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Impairment of goodwill | $ | — | $ | — | $ | — | N/A | — | $ | 270,625 | $ | (270,625) | (100) | % | |||||||||||||||||||||||||||||||||
| Percentage of revenue | — | % | — | % | — | % | 45 | % | |||||||||||||||||||||||||||||||||||||||
For the nine months ended September 30, 2020, we recognized goodwill impairment of $270.6 million related to our Wealth Management reporting unit.
OTHER LOSS, NET
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 7,304 | $ | 7,254 | $ | 50 | 1 | % | $ | 21,789 | $ | 17,410 | $ | 4,379 | 25 | % | |||||||||||||||||||||||||||||||
| Amortization of debt issuance costs | 388 | 362 | 26 | 7 | % | 1,128 | 1,006 | 122 | 12 | % | |||||||||||||||||||||||||||||||||||||
| Accretion of debt discounts | 290 | 276 | 14 | 5 | % | 851 | 414 | 437 | 106 | % | |||||||||||||||||||||||||||||||||||||
| Total interest expense | 7,982 | 7,892 | 90 | 1 | % | 23,768 | 18,830 | 4,938 | 26 | % | |||||||||||||||||||||||||||||||||||||
| Interest income | — | (2) | 2 | 100 | % | (2) | (27) | 25 | 93 | % | |||||||||||||||||||||||||||||||||||||
Gain on sale of a business | — | (349) | 349 | 100 | % | — | (349) | 349 | 100 | % | |||||||||||||||||||||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 3,687 | (3,687) | (100) | % | — | 3,687 | (3,687) | (100) | % | |||||||||||||||||||||||||||||||||||||
| Other | 313 | 735 | (422) | (57) | % | 436 | 1,245 | (809) | (65) | % | |||||||||||||||||||||||||||||||||||||
| Other loss, net | $ | 8,295 | $ | 11,963 | $ | (3,668) | (31) | % | $ | 24,202 | $ | 23,386 | $ | 816 | 3 | % | |||||||||||||||||||||||||||||||
For the three months ended September 30, 2021 compared to the three months ended September 30, 2020, other loss, net, decreased $3.7 million primarily due to the recognition of $3.7 million of non-capitalized debt-issuance expenses related to the $175.0 million increase in the Term Loan (as defined below) under the Senior Secured Credit Facility (as defined below) in the third quarter of 2020.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, other loss, net, increased $0.8 million, primarily due to a $4.9 million increase in total interest expense. This increased interest expense was primarily due to higher outstanding debt balances following the $175.0 million increase in the Term Loan (as defined below) under the Senior Secured Credit Facility (as defined below) in the third quarter of 2020, which was partially offset by $3.7 million of non-capitalized debt issuance expenses that were also related to the Term Loan increase.
The Senior Secured Credit Facility, including the Term Loan and the Revolver (as defined below) thereunder, are described in more detail under “Liquidity and Capital Resources” below.
INCOME TAXES
| (In thousands, except percentages) | Three months ended | QTD | Nine months ended | YTD | |||||||||||||||||||||||||||||||||||||||||||
| September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | $ | 774 | $ | (15,256) | $ | 16,030 | 105 | % | $ | (2,920) | $ | (23,237) | $ | 20,317 | (87) | % | |||||||||||||||||||||||||||||||
The Company recorded income tax benefit of $0.8 million and income tax expense of $2.9 million for the three and nine months ended September 30, 2021, respectively. For 2021, the Company prepared its interim tax provision by applying a year-to-date effective tax rate to each quarter. For 2020, the Company prepared its interim tax provision by applying an estimated annual effective tax rate. We believe using the actual year-to-date effective tax rate in 2021 results in the best estimate of the annual effective tax rate.
The Company’s effective income tax rate for the nine months ended September 30, 2021 differed from the 21% statutory rate primarily due to the release of valuation allowances and the effect of state income taxes. We currently expect to continue to release portions of valuation allowances, which were previously recorded in connection with our net operating losses, to offset future federal income tax liabilities. The majority of these net operating losses will either be utilized or expire between 2021 and 2024.
Blucora, Inc. | Q3 2021 Form 10-Q 37
The Company recorded income tax expense of $15.3 million and $23.2 million for the three and nine months ended September 30, 2020, respectively. The Company’s effective income tax rate for the three and nine months ended September 30, 2020 differed from the 21% statutory rate primarily due to expiring net operating loss tax benefits, an adjustment to the valuation allowance against deferred tax assets for net operating losses expected to expire in future years, and non-deductible officer compensation expense.
Blucora, Inc. | Q3 2021 Form 10-Q 38
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, other loss, net, acquisition and integration costs, impairment of goodwill, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, and income tax expense. Other loss, net primarily consists of interest expense, net and non-capitalized debt issuance expenses. Acquisition and integration costs primarily relate to the HKFS Acquisition and 1st Global Acquisition. Impairment of goodwill relates to the impairment of our Wealth Management reporting unit goodwill in the first quarter of 2020. Executive transition costs relate to the departure of certain Company executives in the first quarter of 2020. Headquarters relocation costs relate to the process of moving from our Dallas and Irving offices to our new headquarters.
We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
A reconciliation of our Adjusted EBITDA to net income (loss), which we believe to be the most comparable GAAP measure, is presented below:
| (In thousands) | Three months ended | Nine months ended | |||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
| Stock-based compensation | 4,729 | 4,517 | 15,499 | 7,220 | |||||||||||||||||||
Depreciation and amortization of acquired intangible assets | 10,915 | 10,366 | 32,498 | 29,619 | |||||||||||||||||||
| Other loss, net | 8,295 | 11,963 | 24,202 | 23,386 | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 541 | 11,276 | 9,013 | 19,782 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | 1,700 | (1,000) | 19,500 | (1,000) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 270,625 | |||||||||||||||||||
| Executive transition costs | — | 405 | — | 10,225 | |||||||||||||||||||
| Headquarters relocation costs | — | 410 | — | 1,863 | |||||||||||||||||||
| Contested proxy and other legal and consulting costs | 1,598 | — | 7,293 | — | |||||||||||||||||||
| Income tax (benefit) expense | (774) | 15,256 | 2,920 | 23,237 | |||||||||||||||||||
| Adjusted EBITDA | $ | (799) | $ | 26,987 | $ | 142,376 | $ | 92,902 | |||||||||||||||
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, gain on the sale of a business, acquisition and integration costs, impairment of goodwill, executive transition costs, headquarters relocation costs, contested proxy and other legal and consulting costs, non-capitalized debt issuance expenses, the related cash tax impact of those adjustments, and non-cash income tax (benefit) expense. We exclude the non-cash portion of income tax expense because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will be utilized or expire between 2021 and 2024. Gain on the sale of a business relates to the disposition of SimpleTax in the third quarter of 2019 and the subsequent working capital adjustment in the third quarter of 2020. Non-capitalized debt issuance expense relates to the expense recognized as a result of the Term Loan increase in the third quarter of 2020.
Blucora, Inc. | Q3 2021 Form 10-Q 39
We believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP net income (loss) and non-GAAP net income (loss) per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP net income (loss) and non-GAAP net income (loss) per share should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss) and net income (loss) per share. Other companies may calculate non-GAAP net income (loss) and non-GAAP net income (loss) per share differently, and, therefore, our non-GAAP net income (loss) and non-GAAP net income (loss) per share may not be comparable to similarly titled measures of other companies.
A reconciliation of our non-GAAP net income (loss) and non-GAAP net income (loss) per share to net income (loss) and net income (loss) per share, respectively, which we believe to be the most comparable GAAP measures, is presented below:
| (In thousands, except per share amounts) | Three months ended | Nine months ended | |||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | (27,803) | $ | (26,206) | $ | 31,451 | $ | (292,055) | |||||||||||||||
Stock-based compensation | 4,729 | 4,517 | 15,499 | 7,220 | |||||||||||||||||||
Amortization of acquired intangible assets | 7,009 | 7,746 | 21,247 | 22,167 | |||||||||||||||||||
| Gain on the sale of a business | — | (349) | — | (349) | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 541 | 11,276 | 9,013 | 19,782 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | 1,700 | (1,000) | 19,500 | (1,000) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 270,625 | |||||||||||||||||||
| Executive transition costs | — | 405 | — | 10,225 | |||||||||||||||||||
| Headquarters relocation costs | — | 410 | — | 1,863 | |||||||||||||||||||
Contested proxy and other legal and consulting costs | 1,598 | — | 7,293 | — | |||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 3,687 | — | 3,687 | |||||||||||||||||||
Cash tax impact of adjustments to GAAP net income | (331) | (418) | (1,523) | (1,413) | |||||||||||||||||||
| Non-cash income tax (benefit) expense | (197) | 14,987 | (1,160) | 22,327 | |||||||||||||||||||
| Non-GAAP net income (loss) | $ | (12,754) | $ | 15,055 | $ | 101,320 | $ | 63,079 | |||||||||||||||
Per diluted share: | |||||||||||||||||||||||
Net income (loss) (1) | $ | (0.57) | $ | (0.54) | $ | 0.64 | $ | (6.06) | |||||||||||||||
Stock-based compensation | 0.10 | 0.09 | 0.31 | 0.15 | |||||||||||||||||||
Amortization of acquired intangible assets | 0.14 | 0.16 | 0.43 | 0.46 | |||||||||||||||||||
| Gain on the sale of a business | — | (0.01) | — | (0.01) | |||||||||||||||||||
| Acquisition and integration—Excluding change in the fair value of HKFS Contingent Consideration | 0.01 | 0.23 | 0.18 | 0.41 | |||||||||||||||||||
| Acquisition and integration—Change in the fair value of HKFS Contingent Consideration | 0.03 | (0.02) | 0.39 | (0.02) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | 5.62 | |||||||||||||||||||
| Executive transition costs | — | 0.01 | — | 0.21 | |||||||||||||||||||
| Headquarters relocation costs | — | 0.01 | — | 0.04 | |||||||||||||||||||
Contested proxy and other legal and consulting costs | 0.04 | — | 0.15 | — | |||||||||||||||||||
| Non-capitalized debt issuance expenses | — | 0.08 | — | 0.08 | |||||||||||||||||||
Cash tax impact of adjustments to GAAP net income | (0.01) | (0.01) | (0.03) | (0.03) | |||||||||||||||||||
| Non-cash income tax (benefit) expense | — | 0.31 | (0.02) | 0.46 | |||||||||||||||||||
| Non-GAAP net income (loss) per diluted share | $ | (0.26) | $ | 0.31 | $ | 2.05 | $ | 1.31 | |||||||||||||||
Weighted average shares outstanding - diluted | 48,707 | 48,203 | 49,373 | 48,184 | |||||||||||||||||||
_________________________
(1)Any difference in the “per diluted share” amounts between this table and the condensed consolidated statements of comprehensive income (loss) is due to using different weighted average shares outstanding in the event that there is GAAP net loss but non-GAAP net income and vice versa.
Blucora, Inc. | Q3 2021 Form 10-Q 40
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Our principal source of liquidity is our cash and cash equivalents. As of September 30, 2021, we had cash and cash equivalents of approximately $184.9 million. 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, 2021, Avantax Wealth Management met all capital adequacy requirements to which it was subject.
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 at September 30, 2021 had minimal default risk and short-term maturities.
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, capital expenditures, business combinations that enhance our strategic position, and share repurchases under share repurchase programs. We plan to finance our operating, working capital, regulatory capital requirements at our broker-dealer subsidiary, and capital expenditure requirements for at least the next 12 months largely through cash and cash equivalents. We also expect to have up to $25.0 million of cash outlays in the next 12 months as we continue to execute on our growth strategy related to asset acquisitions in our Wealth Management business. 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 to meet our capital requirements, subject to customary terms and conditions.
Since our results of operations are sensitive to various factors, including, among others, the level of competition we face, regulatory and legal impacts, and political and economic conditions, such factors could adversely affect our liquidity and capital resources. In addition, due to the COVID-19 pandemic, we have experienced and may continue to experience near- to mid-term volatility in our results of operations that could further increase our liquidity needs. Due to this volatility, we have taken several measures to ensure proper liquidity levels and are maintaining flexibility in our cash flows. In July 2020, we increased the principal outstanding under our Term Loan to fund the HKFS Acquisition and have continued to retain a portion of these proceeds in order to provide additional working capital flexibility. In addition, in April 2021, we increased the amount available for borrowings under the Revolver from $65.0 million to $90.0 million. Overall, we believe these measures provide us with the capital flexibility to satisfy our obligations, fund our operations, and invest in our businesses.
For further discussion of the risks to our business related to liquidity, see “Item 1A. Risk Factors” under the heading “Existing cash and cash equivalents and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
We may use our cash and cash equivalents in the future to invest in our current businesses, for repayment of debt, for acquiring companies or assets, for stock buybacks, for returning capital to stockholders, or for other utilizations that we deem to be in the best interests of 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, which 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 (the “Senior Secured Credit Facility”).
On April 26, 2021, to ensure adequate liquidity and flexibility to support growth, we entered into Amendment No. 5 to the Credit Agreement (the “Credit Agreement Amendment”). Pursuant to the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing $65.0 million Revolver and add $25.0 million of additional revolving credit commitments, for an aggregate principal amount of
Blucora, Inc. | Q3 2021 Form 10-Q 41
$90.0 million in revolving credit commitments (the “New Revolver”). The New Revolver has a maturity date of February 21, 2024 (the “Maturity Date”).
As of September 30, 2021, we had $561.8 million in principal amount outstanding under the Term Loan and no amounts outstanding under the New Revolver. Based on aggregate loan commitments as of September 30, 2021, approximately $90.0 million was available for future borrowing at September 30, 2021 under the Senior Secured Credit Facility, subject to customary terms and conditions. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the Term Loan due on the maturity date of May 22, 2024.
The interest rate on the Term Loan is variable at the London Interbank Offered Rate, plus the applicable interest rate margin of 4.0% for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0% for ABR Loans (as defined in the Credit Agreement). As of September 30, 2021, the applicable interest rate on the Term Loan was 5.0%. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0% to 2.5% for Eurodollar Rate Loans and 1.0% to 1.5% for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net Leverage Ratio that ranges from 0.35% to 0.4%. Interest is payable at the end of each interest period.
By June 2023, all U.S. Dollar London Interbank Offered Rate (“LIBOR”) tenors will cease to be published and floating rate instruments that used U.S. Dollar LIBOR will need to shift to a substitute base index. To minimize disruption arising from such transition, the market has begun to shift to alternative fallback rates, such as Secured Overnight Financing Rate (“SOFR”) as a replacement benchmark for floating rate LIBOR based loans. Unless (i) such LIBOR tenors cease to be provided at an earlier date or (ii) we and the administrative agent to the Credit Agreement make an “early opt-in election” to replace the rate prior to cessation of LIBOR in accordance with the Credit Agreement, we will continue to have the option under the Credit Agreement to make drawdowns using 1-Day, 1-Month, 3-Month, and 6-Month tenor U.S. Dollar LIBOR until June 2023. The Credit Agreement Amendment provides for a process for transition to a fallback rate consistent with industry practice and permits the administrative agent to the Credit Agreement to apply certain updates to the Credit Agreement to effectuate the fallback rate, including a spread adjustment based on the historical basis between LIBOR and the fallback rate.
Obligations under the Senior Secured Credit Facility are guaranteed by certain of the Company’s subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the HKFS Acquisition and certain other material subsidiaries). The 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 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, 2021.
For additional information on the Term Loan, the New Revolver, and the Credit Agreement, see “Item 1. Financial Statements—Note 5.”
Share Repurchase Plan
On March 19, 2019, we announced that our board of directors authorized a stock repurchase plan pursuant to which we may repurchase up to $100.0 million of our common stock. Pursuant to the 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, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase
Blucora, Inc. | Q3 2021 Form 10-Q 42
any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date.
For the nine months ended September 30, 2021, we did not repurchase any shares of our common stock under the stock repurchase plan. As of September 30, 2021, there was approximately $71.7 million in remaining capacity under the stock repurchase plan. As part of our overall capital allocation strategy, we will assess future share purchases against other alternative uses of capital, which include investments in our businesses, acquiring companies or assets, repurchases of our outstanding debt, and other uses of capital that we deem to be in the best interests of stockholders.
Contractual Obligations and Commitments
As part of the HKFS Acquisition, the purchase price paid by us was subject to two post-closing earn-out payments. The amount of the HKFS Contingent Consideration is determined based on advisory asset levels and the achievement of certain performance goals (i) for the period beginning on July 1, 2020 and ending on July 1, 2021 and (ii) for the period beginning on July 1, 2021 and ending on July 1, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021), the maximum aggregate amount that we would be required to pay for each earn-out period is $30.0 million. If the asset values on the applicable measurement date fall below certain specified thresholds, we would not be required to make any earn-out payment to the Sellers for such period.
Based on advisory asset levels and the achievement of performance goals for the first earn-out period, we made the full $30.0 million payment in the third quarter of 2021. The estimated fair value of the portion of the HKFS Contingent Consideration liability related to the second earn-out period (calculated in accordance with the amended HKFS Purchase Agreement and based on estimated advisory asset levels as of June 30, 2022) was $25.4 million as of September 30, 2021. While this amount was calculated in accordance with the fair value guidance contained in Accounting Standards Codification 820, Fair Value Measurements, there are a number of assumptions and estimates factored into this fair value (including a risk-adjusted discount rate), and the actual earn-out payment could differ from the estimated fair value.
Additional information on our contractual obligations and commitments can be found in our Annual Report on Form 10-K for the year ended December 31, 2020.
Off-Balance Sheet Arrangements
The Company has future commitments for contingent consideration pursuant to certain asset purchase agreements entered into to acquire certain wealth management companies in 2020 and the first nine months of 2021 to support growth in our Wealth Management business. As of September 30, 2021, the Company had obligations up to a maximum of $7.2 million that may be payable pursuant to specific payment schedules over the next four years upon meeting certain contingencies.
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Cash Flows
Our cash flows were comprised of the following:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
| Net cash provided by operating activities | $ | 74,391 | $ | 35,314 | $ | 39,077 | |||||||||||
| Net cash used by investing activities | (25,447) | (130,787) | 105,340 | ||||||||||||||
| Net cash provided (used) by financing activities | (14,244) | 160,392 | (174,636) | ||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 34,700 | $ | 64,919 | $ | (30,219) | |||||||||||
Net cash from operating activities
Net cash provided by operating activities consists of net income (loss), offset by certain non-cash adjustments, and changes in operating assets and liabilities were as follows:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
| Net income (loss) | $ | 31,451 | $ | (292,055) | $ | 323,506 | |||||||||||
| Non-cash adjustments to net income (loss) | 73,111 | 341,466 | (268,355) | ||||||||||||||
| Operating cash flows before changes in operating assets and liabilities | 104,562 | 49,411 | 55,151 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and disposals | (30,171) | (14,097) | (16,074) | ||||||||||||||
| Net cash provided by operating activities | $ | 74,391 | $ | 35,314 | $ | 39,077 | |||||||||||
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, operating cash flows before changes in operating assets and liabilities increased $55.2 million primarily due to an increase of $39.8 million in the operating income of our Tax Software business and an increase of $8.5 million in the operating income of our Wealth Management business. We also had a net increase in operating cash flows for the nine months ended September 30, 2021 due to $3.7 million of non-capitalized debt issuance expenses in the 2020 period with no comparable amount in the 2021 period.
Changes in operating assets and liabilities for the nine months ended September 30, 2021 decreased $16.1 million primarily due to $16.8 million of the total $30.0 million HKFS Contingent Consideration earn-out payment made in the third quarter of 2021. The remainder of the $30.0 million payment is included in cash flows from financing activities. In addition, the nine months ended September 30, 2021 also included $12.9 million in payments made to financial professionals in support of ongoing growth programs.
Net cash from investing activities
Net cash from investing activities were as follows:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
| Purchases of property and equipment | $ | (21,624) | $ | (28,711) | $ | 7,087 | |||||||||||
| Business acquisitions, net of cash acquired | $ | — | $ | (102,425) | $ | 102,425 | |||||||||||
| Asset acquisitions, net of cash acquired | (3,823) | — | (3,823) | ||||||||||||||
| Proceeds from sale of a business | — | 349 | (349) | ||||||||||||||
| Net cash used by investing activities | $ | (25,447) | $ | (130,787) | $ | 105,340 | |||||||||||
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, net cash used by investing activities decreased $105.3 million primarily due to the cash outlay of $104.4 million for the HKFS Acquisition in the third quarter of 2020. During the nine months ended September 30, 2021, we paid $3.8 million, including acquisition costs, to complete several asset acquisitions in our Wealth Management business as part of our strategic growth strategy. Capital expenditures decreased $7.1 million in the nine months ended September 30, 2021 primarily due to the cash outlay in the nine months ended September 30, 2020 for leasehold improvements to our new corporate headquarters.
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Net cash from financing activities
Net cash from financing activities were as follows:
| (In thousands) | Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change ($) | |||||||||||||||
Proceeds from credit facilities, net of debt issuance costs and debt discounts (1) | $ | (502) | $ | 226,278 | $ | (226,780) | |||||||||||
| Payments on credit facilities | (1,359) | (66,078) | 64,719 | ||||||||||||||
| Proceeds from stock option exercises | 535 | 25 | 510 | ||||||||||||||
| Proceeds from issuance of stock through employee stock purchase plan | 1,845 | 1,201 | 644 | ||||||||||||||
| Tax payments from shares withheld for equity awards | (1,613) | (1,034) | (579) | ||||||||||||||
| Acquisition-related contingent consideration payment | (13,150) | — | (13,150) | ||||||||||||||
| Net cash used (provided) by financing activities | $ | (14,244) | $ | 160,392 | $ | (174,636) | |||||||||||
_________________________
(1)The Company amended its Senior Secured Credit Facility in April 2021 to increase the borrowing capacity of its revolving line of credit from $65.0 million to $90.0 million. The Company did not borrow under the New Revolver or Term Loan during the nine months ended September 30, 2021. The Company recognized $0.5 million of deferred financing costs in other long-term assets on the condensed consolidated balance sheet that were paid in connection with this amendment.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, net cash provided by financing activities decreased $174.6 million primarily due to $175.0 million of new borrowings on the Term Loan, in part to fund the HKFS Acquisition, and a net $10.0 million repayment on the Revolver in the nine months ended September 30, 2020. This activity was partially offset by $13.2 million of cash outflow in the nine months ended September 30, 2021 that was a portion of the $30.0 million HKFS Contingent Consideration payment made in the third quarter.
Critical Accounting Policies and 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 unaudited condensed 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.
The SEC has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of a company’s financial condition and results of operations and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, current conditions, and on various other assumptions that we believe to be reasonable under the circumstances and, based on information available to us at that time, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. The accounting policies that we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements involve wealth management revenue recognition, tax software revenue recognition, business combinations, and goodwill impairment. We continually update and assess the facts, circumstances, and assumptions used in making both our critical accounting estimates and judgments related to our other significant accounting matters.
There have been no material changes in our critical accounting policies as disclosed under “Critical Accounting Policies and Estimates” in Part II, Item 7A and in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the financial instruments in which we are exposed to market risk during the nine months ended September 30, 2021. As of September 30, 2021, we had $561.8 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
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“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, 2021 would result in a $15.1 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, 2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934) the effectiveness of our disclosure controls and procedures as of September 30, 2021. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e)) were effective as of September 30, 2021.
Changes in Internal Control over Financial Reporting
Our internal control environment has been impacted by work-from-home requirements for our employees. These requirements began in March 2020 and have continued through the date of this report. While modifications were made to the manner in which controls were performed, these changes did not have a material impact on our internal control over financial reporting, and there were no changes to our internal control over financial reporting during the three months ended September 30, 2021 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 on our legal proceedings.
Item 1A. Risk Factors
Our business and future operating 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 operating 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, 2020 and the risks set forth below.
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, 2020 other than as set forth below. The occurrence of one or more of the events listed below could have a material adverse effect on our business, prospects, results of operations, reputation, financial condition, cash flows, or ability to continue current operations without any direct or indirect impairment or disruption, which is referred to throughout these risk factors as a “Material Adverse Effect.”
RISKS ASSOCIATED WITH OUR BUSINESSES
Our business could be adversely affected as a result of actions of activist stockholders.
During 2021, we were the target of a proxy contest initiated by an activist stockholder, which required us to incur significant legal and consulting costs, proxy solicitation expenses, and administrative and associated costs, and required significant time and attention by our board of directors and management.
During the proxy contest, the activist stockholder targeted communications directly to our financial professionals and employees. As a result, it may be more difficult for us to pursue our strategic initiatives or attract and retain financial professionals and qualified employees and business partners, any of which could have a material adverse effect on our business, financial condition, and operating results.
We have, and may in the future, become party to litigation as a result of matters arising in connection with the proxy contest, which could serve as a distraction to our board of directors and management and could require us to incur significant additional costs.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 19, 2019, we announced that our board of directors authorized a stock repurchase plan pursuant to which we may repurchase up to $100.0 million of our common stock. Pursuant to the 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, 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.
For the nine months ended September 30, 2021, we did not repurchase any shares of our common stock under the stock repurchase plan. As of September 30, 2021, there was approximately $71.7 million in remaining capacity under the stock repurchase plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number | Filed Herewith | |||||||||||||||||||||||||||
| 2.1# | 8-K | March 19, 2019 | 2.1 | |||||||||||||||||||||||||||||
| 2.2# | 8-K | July 1, 2020 | 2.1 | |||||||||||||||||||||||||||||
| 2.3 | 8-K | July 2, 2021 | 2.1 | |||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32.1* | X | |||||||||||||||||||||||||||||||
| 32.2* | X | |||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company's Form 10-Q for the fiscal quarter ended September 30, 2021, formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Unaudited Condensed Consolidated Statements of Stockholders' Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||
____________________________
# Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Blucora, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
*The 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, as amended, 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.
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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 4, 2021 | |||||||
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