Attached files
| file | filename |
|---|---|
| EX-10.5 - EXHIBIT 10.5 - BLUCORA, INC. | ex105-finkelsteinamendment.htm |
| EX-32.2 - EXHIBIT 32.2 - BLUCORA, INC. | ex-32210xqq32016.htm |
| EX-32.1 - EXHIBIT 32.1 - BLUCORA, INC. | ex-32110xqq32016.htm |
| EX-31.2 - EXHIBIT 31.2 - BLUCORA, INC. | ex-31210xqq32016.htm |
| EX-31.1 - EXHIBIT 31.1 - BLUCORA, INC. | ex-31110xqq32016.htm |
| EX-10.4 - EXHIBIT 10.4 - BLUCORA, INC. | ex104-emansamendment.htm |
| EX-10.3 - EXHIBIT 10.3 - BLUCORA, INC. | ex103-ochsaragreement.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-25131
BLUCORA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 91-1718107 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
10900 NE 8th Street, Suite 800 Bellevue, Washington | 98004 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (425) 201-6100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer | o | Accelerated filer | ý | ||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at | ||
Class | October 20, 2016 | |
Common Stock, Par Value $0.0001 | 41,719,656 | |
TABLE OF CONTENTS
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, 2016 | December 31, 2015 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 71,165 | $ | 55,473 | |||
Cash segregated under federal or other regulations | 630 | 3,557 | |||||
Available-for-sale investments | 4,492 | 11,301 | |||||
Accounts receivable, net of allowance | 7,076 | 7,884 | |||||
Commissions receivable | 15,294 | 16,328 | |||||
Other receivables | 6,827 | 24,407 | |||||
Prepaid expenses and other current assets, net | 4,059 | 10,062 | |||||
Current assets of discontinued operations | 70,432 | 211,663 | |||||
Total current assets | 179,975 | 340,675 | |||||
Long-term assets: | |||||||
Property and equipment, net | 10,711 | 11,308 | |||||
Goodwill, net | 549,582 | 548,959 | |||||
Other intangible assets, net | 370,640 | 396,295 | |||||
Other long-term assets | 3,380 | 2,311 | |||||
Total long-term assets | 934,313 | 958,873 | |||||
Total assets | $ | 1,114,288 | $ | 1,299,548 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 5,840 | $ | 4,689 | |||
Commissions and advisory fees payable | 15,382 | 16,982 | |||||
Accrued expenses and other current liabilities | 11,446 | 13,006 | |||||
Deferred revenue | 9,139 | 11,521 | |||||
Current portion of long-term debt, net | 3,200 | 31,631 | |||||
Current liabilities of discontinued operations | 37,539 | 88,275 | |||||
Total current liabilities | 82,546 | 166,104 | |||||
Long-term liabilities: | |||||||
Long-term debt, net | 283,801 | 353,850 | |||||
Convertible senior notes, net | 163,024 | 185,918 | |||||
Deferred tax liability, net | 104,236 | 103,520 | |||||
Deferred revenue | 2,479 | 1,902 | |||||
Other long-term liabilities | 11,233 | 10,932 | |||||
Total long-term liabilities | 564,773 | 656,122 | |||||
Total liabilities | 647,319 | 822,226 | |||||
Redeemable noncontrolling interests | 15,464 | 15,038 | |||||
Commitments and contingencies (Note 9) | |||||||
Stockholders’ equity: | |||||||
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares, | |||||||
41,711 and 40,954 | 4 | 4 | |||||
Additional paid-in capital | 1,525,267 | 1,490,405 | |||||
Accumulated deficit | (1,073,495 | ) | (1,027,598 | ) | |||
Accumulated other comprehensive loss | (271 | ) | (527 | ) | |||
Total stockholders’ equity | 451,505 | 462,284 | |||||
Total liabilities and stockholders’ equity | $ | 1,114,288 | $ | 1,299,548 | |||
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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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenue: | |||||||||||||||
Wealth management services revenue | $ | 80,088 | $ | — | $ | 233,496 | $ | — | |||||||
Tax preparation services revenue | 3,149 | 2,875 | 135,614 | 114,843 | |||||||||||
Total revenue | 83,237 | 2,875 | 369,110 | 114,843 | |||||||||||
Operating expenses: | |||||||||||||||
Cost of revenue: | |||||||||||||||
Wealth management services cost of revenue | 54,921 | — | 158,213 | — | |||||||||||
Tax preparation services cost of revenue | 1,319 | 1,170 | 6,549 | 4,680 | |||||||||||
Amortization of acquired technology | 49 | 1,911 | 765 | 5,636 | |||||||||||
Total cost of revenue | 56,289 | 3,081 | 165,527 | 10,316 | |||||||||||
Engineering and technology | 4,588 | 1,251 | 12,842 | 3,471 | |||||||||||
Sales and marketing | 11,965 | 2,113 | 75,715 | 42,824 | |||||||||||
General and administrative | 11,638 | 8,895 | 35,899 | 23,694 | |||||||||||
Depreciation | 968 | 394 | 2,906 | 1,101 | |||||||||||
Amortization of other acquired intangible assets | 8,297 | 3,195 | 24,929 | 9,566 | |||||||||||
Total operating expenses | 93,745 | 18,929 | 317,818 | 90,972 | |||||||||||
Operating income (loss) | (10,508 | ) | (16,054 | ) | 51,292 | 23,871 | |||||||||
Other loss, net | (11,453 | ) | (3,080 | ) | (29,883 | ) | (9,109 | ) | |||||||
Income (loss) from continuing operations before income taxes | (21,961 | ) | (19,134 | ) | 21,409 | 14,762 | |||||||||
Income tax benefit (expense) | 8,537 | 6,926 | (8,899 | ) | (5,144 | ) | |||||||||
Income (loss) from continuing operations | (13,424 | ) | (12,208 | ) | 12,510 | 9,618 | |||||||||
Discontinued operations, net of income taxes | (40,528 | ) | 1,597 | (57,981 | ) | 7,122 | |||||||||
Net income (loss) | (53,952 | ) | (10,611 | ) | (45,471 | ) | 16,740 | ||||||||
Net income attributable to noncontrolling interests | (167 | ) | — | (426 | ) | — | |||||||||
Net income (loss) attributable to Blucora, Inc. | $ | (54,119 | ) | $ | (10,611 | ) | $ | (45,897 | ) | $ | 16,740 | ||||
Net income (loss) per share attributable to Blucora, Inc. - basic: | |||||||||||||||
Continuing operations | $ | (0.33 | ) | $ | (0.30 | ) | $ | 0.29 | $ | 0.23 | |||||
Discontinued operations | (0.97 | ) | 0.04 | (1.40 | ) | 0.18 | |||||||||
Basic net income (loss) per share | $ | (1.30 | ) | $ | (0.26 | ) | $ | (1.11 | ) | $ | 0.41 | ||||
Net income (loss) per share attributable to Blucora, Inc. - diluted: | |||||||||||||||
Continuing operations | $ | (0.33 | ) | $ | (0.30 | ) | $ | 0.29 | $ | 0.23 | |||||
Discontinued operations | (0.97 | ) | 0.04 | (1.37 | ) | 0.17 | |||||||||
Diluted net income (loss) per share | $ | (1.30 | ) | $ | (0.26 | ) | $ | (1.08 | ) | $ | 0.40 | ||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 41,635 | 40,950 | 41,404 | 40,952 | |||||||||||
Diluted | 41,635 | 40,950 | 42,329 | 41,911 | |||||||||||
Other comprehensive income (loss): | |||||||||||||||
Net income (loss) | $ | (53,952 | ) | $ | (10,611 | ) | $ | (45,471 | ) | $ | 16,740 | ||||
Unrealized gain (loss) on available-for-sale investments, net of tax | — | 111 | 10 | (149 | ) | ||||||||||
Foreign currency translation adjustment | (77 | ) | (122 | ) | 246 | (122 | ) | ||||||||
Reclassification adjustment for realized (gain) loss on available-for-sale investments, net of tax, included in net income as Other loss, net | — | (68 | ) | — | 349 | ||||||||||
Reclassification adjustment for other-than-temporary impairment loss on available-for-sale investments, included in net income as Other loss, net | — | — | — | 964 | |||||||||||
Other comprehensive income (loss) | (77 | ) | (79 | ) | 256 | 1,042 | |||||||||
Comprehensive income (loss) | (54,029 | ) | (10,690 | ) | (45,215 | ) | 17,782 | ||||||||
Comprehensive income attributable to noncontrolling interests | (167 | ) | — | (426 | ) | — | |||||||||
Comprehensive income (loss) attributable to Blucora, Inc. | $ | (54,196 | ) | $ | (10,690 | ) | $ | (45,641 | ) | $ | 17,782 | ||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
Operating Activities: | |||||||
Net income (loss) | $ | (45,471 | ) | $ | 16,740 | ||
Less: Discontinued operations, net of income taxes | (57,981 | ) | 7,122 | ||||
Net income from continuing operations | 12,510 | 9,618 | |||||
Adjustments to reconcile net income from continuing operations to net cash from operating activities: | |||||||
Stock-based compensation | 10,616 | 5,974 | |||||
Depreciation and amortization of acquired intangible assets | 29,080 | 16,863 | |||||
Excess tax benefits from stock-based award activity | (21,369 | ) | (28,632 | ) | |||
Deferred income taxes | (12,484 | ) | (25,194 | ) | |||
Amortization of premium on investments, net | 164 | 1,250 | |||||
Amortization of debt issuance costs | 1,440 | 842 | |||||
Accretion of debt discounts | 3,599 | 2,873 | |||||
Gain on debt extinguishment and modification expense | (641 | ) | — | ||||
Revaluation of acquisition-related contingent consideration liability | 391 | — | |||||
Other | 18 | 60 | |||||
Cash provided (used) by changes in operating assets and liabilities: | |||||||
Cash segregated under federal or other regulations | 2,927 | — | |||||
Accounts receivable | 793 | 136 | |||||
Commissions receivable | 1,034 | — | |||||
Other receivables | 19,656 | 1,166 | |||||
Prepaid expenses and other current assets | 6,003 | 4,665 | |||||
Other long-term assets | (1,174 | ) | (63 | ) | |||
Accounts payable | 1,151 | 4,930 | |||||
Commissions and advisory fees payable | (1,600 | ) | — | ||||
Deferred revenue | (1,805 | ) | (1,691 | ) | |||
Accrued expenses and other current and long-term liabilities | 19,786 | 28,149 | |||||
Net cash provided by operating activities from continuing operations | 70,095 | 20,946 | |||||
Investing Activities: | |||||||
Business acquisition, net of cash acquired | (1,788 | ) | (1,740 | ) | |||
Purchases of property and equipment | (2,648 | ) | (866 | ) | |||
Proceeds from sales of investments | — | 16,507 | |||||
Proceeds from maturities of investments | 11,808 | 210,699 | |||||
Purchases of investments | (5,147 | ) | (209,112 | ) | |||
Net cash provided by investing activities from continuing operations | 2,225 | 15,488 | |||||
Financing Activities: | |||||||
Repurchase of convertible notes | (20,667 | ) | — | ||||
Repayment of credit facilities | (105,000 | ) | (51,940 | ) | |||
Stock repurchases | — | (7,068 | ) | ||||
Excess tax benefits from stock-based award activity | 21,369 | 28,632 | |||||
Proceeds from stock option exercises | 1,141 | 2,374 | |||||
Proceeds from issuance of stock through employee stock purchase plan | 1,402 | 1,193 | |||||
Tax payments from shares withheld for equity awards | (1,447 | ) | (1,193 | ) | |||
Net cash used by financing activities from continuing operations | (103,202 | ) | (28,002 | ) | |||
Net cash provided (used) by continuing operations | (30,882 | ) | 8,432 | ||||
Net cash provided by operating activities from discontinued operations | 10,836 | 6,138 | |||||
Net cash provided (used) by investing activities from discontinued operations | 43,230 | (206 | ) | ||||
Net cash used by financing activities from discontinued operations | (7,477 | ) | (5,020 | ) | |||
Net cash provided by discontinued operations | 46,589 | 912 | |||||
Effect of exchange rate changes on cash and cash equivalents | (15 | ) | (6 | ) | |||
Net increase in cash and cash equivalents | 15,692 | 9,338 | |||||
Cash and cash equivalents, beginning of period | 55,473 | 41,968 | |||||
Cash and cash equivalents, end of period | $ | 71,165 | $ | 51,306 | |||
Cash paid for income taxes from continuing operations | $ | 2,079 | $ | 1,229 | |||
Cash paid for interest from continuing operations | $ | 23,455 | $ | 4,667 | |||
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BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company and Basis of Presentation
Description of the business: Blucora, Inc. (the “Company” or “Blucora”) operates two primary businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (“HD Vest”), which the Company acquired on December 31, 2015. HD Vest is included in Blucora's results of operations beginning on January 1, 2016. HD Vest provides wealth management solutions for financial advisors. The Tax Preparation business consists of the operations of TaxAct, Inc. (“TaxAct”) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com.
The Company also operated an internet Search and Content business and continues to operate an E-Commerce business. The Search and Content business operated through the InfoSpace LLC subsidiary (“InfoSpace”) and provided search services to users of its owned and operated and distribution partners’ web properties, as well as online content through HowStuffWorks (“HSW”). The E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”) and sells self-branded electronics and accessories to both consumers and businesses primarily through its website www.monoprice.com.
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the “Strategic Transformation”). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations"), and the intention to divest the Search and Content and E-Commerce businesses (see "Note 4: Discontinued Operations"). Accordingly, the financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations.
On August 9, 2016, the Company closed on an agreement with OpenMail LLC (“OpenMail”), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment.
Segments: The Company has two reportable segments: the Wealth Management segment, which is the HD Vest business, and the Tax Preparation segment, which is the TaxAct business. The former Search and Content and E-Commerce segments are included in discontinued operations. Unless the context indicates otherwise, the Company uses the term “Wealth Management” to represent services sold through the HD Vest business, the term “Tax Preparation” to represent services and software sold through the TaxAct business, the term “Search and Content” to represent search and content services, and the term “E-Commerce” to represent products sold through the Monoprice business (see "Note 11: Segment Information").
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.
Correction of an immaterial error: During the third quarter of 2016, the Company identified an error in which the Company inappropriately recognized a tax benefit from the impairment of the net assets held-for-sale during the second quarter of 2016. As the impairment related to goodwill included in the disposal group (which is not deductible for income tax purposes), no tax benefit should have been recorded during the quarter. This resulted in the overstatement of net assets held-for-sale of $6.7 million as of June 30, 2016 and an understatement of the loss from discontinued operations of $6.7 million or $0.16 per share for the three months ended June 30, 2016. The Company has evaluated the quantitative and qualitative considerations of this error to both the second and third quarters of 2016 and concluded that the impacts were not material to its consolidated financial statements for either of these periods. There was no impact to the net loss attributable to Blucora, Inc. for the nine months ended September 30, 2016 since this was an interim period adjustment that was corrected in the same fiscal year. In addition, there was no impact to income (loss) from continuing operations, income (loss) per share from continuing operations, or net cash provided by continuing or discontinued operations for either period.
Reclassification: The Company reclassified certain amounts related to discontinued operations. See "Note 4: Discontinued Operations" for additional information.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingencies. Estimates include those used for impairment of goodwill and other intangible assets, useful lives of other intangible assets, acquisition accounting, valuation of investments,
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revenue recognition, the estimated allowance for sales returns and doubtful accounts, internally developed software, accrued contingencies, stock option valuation, and valuation allowance for deferred tax assets. Actual amounts may differ from estimates.
Net capital and regulatory requirements: The Company's subsidiary, HD Vest, operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of September 30, 2016, HD Vest met all capital adequacy requirements to which it was subject.
Seasonality: Blucora’s Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue earned in the first four months of the Company’s fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
Note 2: Summary of Significant Accounting Policies
Interim financial information: The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Interim results are not necessarily indicative of results for a full year.
Cash segregated under federal or other regulations: Cash segregated under federal and other regulations is held in a special bank account for the exclusive benefit of the Company’s wealth management customers.
Short-term investments: The Company principally invests its available cash in fixed-rate debt securities. Fixed-rate debt securities generally include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specific holdings can vary from period to period depending upon the Company's cash requirements. Such investments are included in "Cash and cash equivalents" and "Available-for-sale investments" on the consolidated balance sheets and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive loss” on the consolidated balance sheets. Amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company reviews its available-for-sale investments for impairment and classifies the impairment of any individual available-for-sale investment as either temporary or other-than-temporary. The differentiating factors between temporary and other-than-temporary impairments are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. An impairment classified as temporary is recognized in “Accumulated other comprehensive loss” on the consolidated balance sheets. An impairment classified as other-than-temporary is recognized in “Other loss, net” on the consolidated statements of comprehensive income.
Business combinations and intangible assets including goodwill: The Company accounts for business combinations using the acquisition method. The acquisition-date fair value of total consideration includes cash and contingent consideration. Since the Company is contractually obligated to pay contingent consideration upon the achievement of specified objectives, a contingent consideration liability is recorded at the acquisition date. The Company reviews its assumptions related to the fair value of the contingent consideration liability each reporting period and, if there are material changes, revalues the contingent consideration liability based on the revised assumptions, until such contingency is satisfied through payment upon the achievement of the specified objectives. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.
Goodwill is calculated as the excess of the acquisition-date fair value of total consideration over the acquisition-date fair value of net assets, including the amount assigned to identifiable intangible assets, and is assigned to reporting units that are
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expected to benefit from the synergies of the business combination as of the acquisition date. Reporting units are consistent with reportable segments and include the former Search and Content and E-Commerce segments. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for advisor relationships which are amortized proportional to expected revenue. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cash equivalents and debt securities are classified within Level 2 of the fair value hierarchy because the Company values its cash equivalents and debt securities utilizing market observable inputs. The contingent consideration liability is related to the Company's acquisition of SimpleTax Software Inc. (“SimpleTax”) and is classified within Level 3 of the fair value hierarchy because the Company values the liability utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations, as disclosed in the accounting policy "Business combinations and intangible assets including goodwill."
Redeemable noncontrolling interests: Noncontrolling interests that are redeemable at the option of the holder and not solely within the control of the issuer are classified outside of stockholders' equity. In connection with the acquisition of HD Vest, management of that business has retained an ownership interest. The Company is party to put and call arrangements with respect to these interests. These put and call arrangements allow HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests, respectively. The put arrangements do not meet the definition of a derivative instrument as the put agreements do not provide for net settlement. To the extent that the redemption value of these interests exceeds the value determined by adjusting the carrying value for the subsidiary's attribution of net income (loss), the value of such interests is adjusted to the redemption value with a corresponding adjustment to additional paid-in capital.
Wealth management revenue recognition: Wealth management revenue consists primarily of commission revenue, advisory revenue, asset-based revenue, and transaction and fee revenue. Revenue is recognized in the periods in which the related services are performed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibilty is reasonably assured. Payments received by the Company in advance of the performance of service are deferred and recognized as revenue when earned.
The Company considers the nature of its contractual arrangements in determining whether to recognize certain types of wealth management revenue, primarily commission revenue and advisory revenue, on the basis of the gross amount billed or net amount retained after payments are made to providers of certain services related to the product or service offering. The main factors that the Company uses to determine whether to record revenue on a gross or net basis are whether:
• | the Company is primarily responsible for the service to the financial advisor and their client; |
• | the Company has discretion in establishing fees paid by the client and fees due to the third-party service provider; and |
• | the Company is involved in the determination of product or service specifications. |
When client fees include a portion of charges that are paid to another party and the Company is primarily responsible for providing the service to the client, revenue is recognized on a gross basis in an amount equal to the fee paid by the client. The cost of revenue recognized is the amount due to the other party. In instances in which another party is primarily responsible for providing the service to the client, revenue is recognized in the net amount retained by the Company. The portion of the fees that are collected from the client by the Company and remitted to the other party are considered pass-through amounts and are not a component of revenue or cost of revenue.
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Further details of wealth management revenue are as follows:
• | Commission revenue - Commissions represent amounts generated by HD Vest's financial advisors for their clients' purchases and sales of securities and various investment products. The Company generates two types of commissions: transaction-based sales commissions that occur at the point of sale, as well as trailing commissions for which the Company provides ongoing account support to clients of its financial advisors. |
The Company records transaction-based sales commission revenue on a trade-date basis, which is when the Company's performance obligations in generating the commissions have been substantially completed. Trailing commission revenue is based on a percentage of the current market value of clients' investment holdings in trail-eligible assets and recognized over the period during which services are performed. Since trailing commission revenue is generally paid in arrears, the Company estimates it based on a number of factors, including stock market index levels and the amount of trailing commission revenues received in prior periods.
A substantial portion of commission revenue is ultimately paid to financial advisors. The Company records an estimate for transaction-based commissions payable based upon the payout rate of the financial advisor generating the accrued commission revenue. The Company records an estimate for trailing commissions payable based upon historical payout ratios. Such amounts are recorded as "Commissions and advisory fees payable" on the consolidated balance sheets and "Wealth management services cost of revenue" on the consolidated statements of comprehensive income.
• | Advisory revenue - Advisory revenue includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor (“RIA”). These fees are based on the value of assets within these advisory accounts. A substantial portion of these advisory fees are paid to the related financial advisor and these payments are classified as "Wealth management services cost of revenue" in the consolidated statements of comprehensive income. |
• | Asset-based revenue - Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs and are recognized ratably over the period in which services are provided. |
• | Transaction and fee revenue - The Company charges fees for executing certain transactions in client accounts. Transaction-related charges are recognized on a trade-date basis. Other fees relate to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions. Such fees are recognized as services are performed or as earned, as applicable. |
Foreign currency: The financial position and operating results of the Company's foreign operations are consolidated using the local currency as the functional currency. Assets and liabilities recorded in local currencies are translated at the exchange rate on the balance sheet date, while revenues and expenses are translated at the average exchange rate for the applicable period. Translation adjustments resulting from this process are recorded in "Accumulated other comprehensive loss" on the consolidated balance sheets. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, are recorded in "Other loss, net" on the consolidated statements of comprehensive income.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.
In May 2014, the FASB issued guidance codified in ASC 606, “Revenue from Contracts with Customers,” which amends the guidance in former ASC 605 “Revenue Recognition.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
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In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital), will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Earlier adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued an ASU on employee share-based payment accounting. The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital. In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period. Cash flows related to excess tax benefits will be included as an operating activity, and no longer separately classified as a financing activity, in the statement of cash flows. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. Earlier adoption is permitted. The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense is effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition is effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance is effective on a retrospective or prospective basis.
The Company expects to implement this ASU on January 1, 2017. The primary impact of adoption is expected to be the utilization of equity-based deferred tax assets (with no offset to additional paid-in capital) and the recognition of current period excess tax benefits and deficiencies in the income tax provision (rather than in additional paid-in capital). In addition, the Company expects changes related to the presentation of excess tax benefits as an operating activity (rather than a financing activity) in the statement of cash flows and expects to record a cumulative-effect adjustment to equity. The actual impact beginning on January 1, 2017 and going forward will depend upon certain variables, including the Company's stock price. Although the Company is still evaluating the impact of this ASU, we expect that it will have a material impact on our consolidated financial statements.
The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur. The cash flow presentation requirements for payments made to tax authorities on an employee's behalf will have no impact to any periods presented, since such cash flows historically have been presented as a financing activity. The Company is not planning to change tax withholdings and expects to continue to estimate forfeitures in determining the amount of compensation cost to be recognized in each period.
Note 3: Business Combinations
HD Vest: On December 31, 2015 and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for $613.7 million, including cash acquired of $38.9 million and after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and is expected to be synergistic with TaxAct as a result of cross-serving opportunities and an expanded addressable market for both HD Vest and TaxAct. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The acquisition was funded by a combination of cash on hand and the new TaxAct - HD Vest 2015 credit facility, under which the Company borrowed $400.0 million (see "Note 7: Debt").
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Valuations were as follows (in thousands):
Fair value | |||
Tangible assets acquired, including cash acquired of $38,874 | $ | 78,700 | |
Liabilities assumed | (21,976 | ) | |
Identifiable net assets acquired | $ | 56,724 | |
Fair value adjustments for intangible assets: | |||
Advisor relationships | $ | 240,300 | |
Sponsor relationships | 16,500 | ||
Curriculum | 800 | ||
Proprietary technology | 13,600 | ||
Trade name | 52,500 | ||
Fair value of intangible assets acquired | $ | 323,700 | |
Purchase price allocation: | |||
Cash paid | $ | 612,288 | |
Plus: promissory note | 6,400 | ||
Plus: noncontrolling interest | 15,038 | ||
Less: escrow receivable | (20,000 | ) | |
Purchase price | 613,726 | ||
Less: identifiable net assets acquired | (56,724 | ) | |
Less: fair value of intangible assets acquired | (323,700 | ) | |
Plus: deferred tax liability related to intangible assets | 123,484 | ||
Excess of purchase price over net assets acquired, allocated to goodwill | $ | 356,786 | |
The Company's estimates of the economic lives of the acquired intangible assets are 20 years for the advisor relationships, 18 years for the sponsor relationships, 4 years for the curriculum, 6 years for the proprietary technology, and the trade name is estimated to have an indefinite life. Goodwill consists largely of the increased cross-serving opportunities and expanded addressable markets for both HD Vest and TaxAct, neither of which apply for separate recognition, and is not expected to be deductible for income tax purposes.
The primary areas of the acquisition accounting that are not yet finalized relate to income and non-income based taxes, certain contingent liability matters, indemnification assets, and residual goodwill. In the third quarter of 2016, the Company recorded a $1.4 million increase to net assets acquired and a corresponding decrease to goodwill, predominantly related to the finalization of federal tax returns for pre-acquisition tax periods.
The promissory note is with the President of HD Vest and will be paid over a three-year period. The current portion was recorded in "Current portion of long-term debt, net," and the long-term portion was recorded in "Long-term debt, net." The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value. See "Note 7: Debt" for additional information on the "Note payable, related party."
The Purchase Agreement dictated that the Company placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.
The gross contractual amount of accounts receivable, including commissions receivable, acquired was $21.6 million and has been substantially collected as of September 30, 2016.
During the last half of 2015, the Company incurred transaction costs of $11.0 million, which were recognized in "General and administrative expense," and $21.8 million in debt discount and issuance-related costs on the new credit facility.
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Pro Forma Financial Information of the HD Vest Acquisition (unaudited):
The financial information in the table below summarizes the combined results of operations of Blucora and HD Vest on a pro forma basis, for the period in which the acquisition occurred as though the companies had been combined as of the beginning of that period. Pro forma adjustments have been made to include (a) amortization expense on the definite-lived intangible assets identified in this acquisition, debt-related expenses associated with the credit facility that was used to finance the acquisition, and estimated stock-based compensation related to Blucora share-based award grants to HD Vest employees; and to remove (b) acquisition-related transaction costs and debt-related expenses associated with HD Vest's previous debt facility, the latter of which was paid off and closed at the acquisition date. Income taxes also have been adjusted for the effect of these items. The following pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred at the beginning of the period presented (in thousands):
Three months ended September 30, 2015 | Nine months ended September 30, 2015 | ||||||
Revenue | $ | 82,852 | $ | 352,449 | |||
Income (loss) from continuing operations | $ | (12,648 | ) | $ | 2,459 | ||
SimpleTax: On July 2, 2015, TaxAct acquired all of the equity of SimpleTax, a provider of online tax preparation services for individuals in Canada, for C$2.4 million (with C$ indicating Canadian dollars and amounting to approximately $1.9 million based on the acquisition-date exchange rate) in cash and additional consideration of up to C$4.6 million ($3.7 million) that is contingent upon product availability and revenue performance over a three-year period. The estimated fair value of the contingent consideration as of the acquisition date was C$4.1 million ($3.3 million). See "Note 6: Fair Value Measurements" for additional information related to the fair value measurement of the contingent consideration.
The acquisition of SimpleTax is strategic to TaxAct and intended to expand its operations. SimpleTax is included in the Tax Preparation segment. Intangible assets acquired amounted to approximately C$1.2 million ($0.9 million), consisting of customer relationships and proprietary technology both of which have finite lives. Identifiable net liabilities assumed were not material. Goodwill amounted to C$5.6 million ($4.5 million). Pro forma results of operations have not been presented because the effects of this acquisition were not material to the Company’s consolidated results of operations.
Note 4: Discontinued Operations
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market, as more fully described in "Note 1: The Company and Basis of Presentation." The Strategic Transformation includes plans to divest the Search and Content and E-Commerce businesses. Financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses.
On August 9, 2016, the Company closed on an agreement with OpenMail, under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment. Of this amount, $44.7 million was received in the third quarter of 2016 and included in "Net cash provided (used) by investing activities from discontinued operations" in the consolidated statements of cash flows, and the remaining $0.5 million should be received in the fourth quarter of 2016. The Company used all of the proceeds to pay down debt. Under a separate agreement, the Company is subleasing to InfoSpace the office space that InfoSpace is using currently. The rent payments and September 2020 termination date are consistent with the underlying non-cancelable operating lease. See "Note 9: Commitments and Contingencies" for additional information.
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Summarized financial information for discontinued operations is as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Major classes of items in net income (loss): | |||||||||||||||
Revenues | $ | 53,721 | $ | 81,906 | $ | 209,108 | $ | 263,740 | |||||||
Operating expenses | (50,952 | ) | (79,514 | ) | (192,874 | ) | (250,390 | ) | |||||||
Other loss, net | (415 | ) | (195 | ) | (844 | ) | (2,469 | ) | |||||||
Income from discontinued operations before income taxes | 2,354 | 2,197 | 15,390 | 10,881 | |||||||||||
Loss on classification as held-for-sale before income taxes | (29,463 | ) | — | (46,463 | ) | — | |||||||||
Loss on sale of discontinued operations before income taxes | (46 | ) | — | (21,571 | ) | — | |||||||||
Discontinued operations, before income taxes | (27,155 | ) | 2,197 | (52,644 | ) | 10,881 | |||||||||
Income tax expense | (13,373 | ) | (600 | ) | (5,337 | ) | (3,759 | ) | |||||||
Discontinued operations, net of income taxes | $ | (40,528 | ) | $ | 1,597 | $ | (57,981 | ) | $ | 7,122 | |||||
September 30, 2016 | December 31, 2015 | ||||||
Major classes of assets and liabilities: | |||||||
Cash | $ | 2,282 | $ | 2,158 | |||
Accounts receivable, net of allowance | 5,423 | 26,352 | |||||
Inventories | 33,856 | 43,480 | |||||
Other current assets | 3,289 | 3,182 | |||||
Property and equipment, net | 7,479 | 9,824 | |||||
Goodwill, net | — | 67,201 | |||||
Other intangible assets, net | 17,790 | 59,006 | |||||
Other long-term assets | 313 | 460 | |||||
Total assets of discontinued operations | $ | 70,432 | $ | 211,663 | |||
Accounts payable | $ | 11,502 | $ | 33,295 | |||
Other current liabilities | 5,665 | 15,622 | |||||
Debt (net of discount and including short-term and long-term portions) | 16,000 | 25,000 | |||||
Deferred tax liability, net | 4,363 | 13,816 | |||||
Other long-term liabilities | 9 | 542 | |||||
Total liabilities of discontinued operations | $ | 37,539 | $ | 88,275 | |||
Assets and liabilities of discontinued operations are reported at the lower of carrying value or fair value less cost to sell, the latter of which results in a “loss on classification as held-for-sale.” Fair value is determined by estimating the most likely sale price with a third-party buyer, which is a significant input not observable in the market and, therefore, classified in Level 3 of the fair value hierarchy.
Debt is discussed further below in the related subsection of this note.
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Business exit costs: In conjunction with the Strategic Transformation, the Company expects to incur business exit costs of approximately $4.5 million. Of this amount, $3.6 million has been recorded through September 30, 2016, with the vast majority of these costs recorded in discontinued operations. The remaining costs are contingent upon the sale of the E-Commerce business and will be recorded at the time of sale. The following table summarizes the activity in the business exit cost liability (in thousands):
Employee-Related Costs | |||
Balance at December 31, 2015 | $ | 994 | |
Charges | 2,609 | ||
Payments | (3,136 | ) | |
Balance at September 30, 2016 | $ | 467 | |
Debt: The debt in discontinued operations consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | ||||||
Monoprice 2013 credit facility | $ | 16,000 | $ | 25,000 | |||
On November 22, 2013, Monoprice entered into an agreement with a syndicate of lenders for the purposes of post-transaction financing of the Monoprice acquisition and providing future working capital flexibility for Monoprice. The credit facility consists of a $30.0 million revolving credit loan—which includes up to $5.0 million under a letter of credit and up to $5.0 million in swingline loans—and, until repaid in full in 2015 as discussed below, also consisted of a $40.0 million term loan. The final maturity date of the credit facility is November 22, 2018 but will become immediately due and payable upon the sale of Monoprice. Monoprice’s obligations under the credit facility are guaranteed by Monoprice Holdings, Inc. and are secured by the assets of the Monoprice business.
Monoprice initially borrowed $50.0 million under the credit facility, from both the revolving credit loan and the term loan, and had net repayment activity of $9.0 million and $12.0 million during the nine months ended September 30, 2016 and 2015, respectively. Monoprice has the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $1.0 million or any whole multiple of $1.0 million in excess thereof (for swingline loans, the aggregate principal amount is not less than $0.1 million and any whole multiple of $0.1 million in excess thereof). In accordance with this provision, Monoprice repaid the outstanding amount under the term loan in full in 2015, which was included in the repayment activity for 2015 and resulted in the write-down of the remaining unamortized discount and debt issuance costs related to the term loan. Amounts remain outstanding under the revolving credit loan, which continues to be available to Monoprice through its final maturity date.
The interest rate is variable, based upon, at the election of Monoprice, either LIBOR plus a margin of between 2.75% and 3.25%, payable each interest period, or a variable rate plus a margin of between 1.75% and 2.25%, payable quarterly. In each case, the applicable margin within the range depends upon Monoprice’s ratio of leverage to EBITDA. The credit facility includes financial and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined further in the agreement. As of September 30, 2016, Monoprice was in compliance with all of the financial and operating covenants. As of September 30, 2016, the credit facility’s principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
Note 5: Goodwill and Other Intangible Assets
The following table presents goodwill by reportable segment (in thousands):
Wealth Management | Tax Preparation | Total | |||||||||
Balance at December 31, 2015 | $ | 356,386 | $ | 192,573 | $ | 548,959 | |||||
Purchase accounting adjustment | 400 | — | 400 | ||||||||
Foreign currency translation adjustment | — | 223 | 223 | ||||||||
Balance at September 30, 2016 | $ | 356,786 | $ | 192,796 | $ | 549,582 | |||||
The purchase accounting adjustment primarily related to the final working capital adjustment and the finalization of federal tax returns associated with the acquisition of HD Vest as described in "Note 3: Business Combinations."
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Intangible assets other than goodwill consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net | Gross carrying amount | Accumulated amortization | Net | ||||||||||||||||||
Definite-lived intangible assets: | |||||||||||||||||||||||
Customer relationships | $ | 101,697 | $ | (59,203 | ) | $ | 42,494 | $ | 101,681 | $ | (49,664 | ) | $ | 52,017 | |||||||||
Advisor relationships | 240,300 | (12,854 | ) | 227,446 | 240,300 | — | 240,300 | ||||||||||||||||
Sponsor relationships | 16,500 | (687 | ) | 15,813 | 16,500 | — | 16,500 | ||||||||||||||||
Curriculum | 800 | (150 | ) | 650 | 800 | — | 800 | ||||||||||||||||
Technology | 43,978 | (31,741 | ) | 12,237 | 43,948 | (29,270 | ) | 14,678 | |||||||||||||||
Total definite-lived intangible assets | 403,275 | (104,635 | ) | 298,640 | 403,229 | (78,934 | ) | 324,295 | |||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||
Trade names | 72,000 | — | 72,000 | 72,000 | — | 72,000 | |||||||||||||||||
Total | $ | 475,275 | $ | (104,635 | ) | $ | 370,640 | $ | 475,229 | $ | (78,934 | ) | $ | 396,295 | |||||||||
Amortization expense was as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Statement of comprehensive income line items: | |||||||||||||||
Cost of revenue | $ | 49 | $ | 1,911 | $ | 765 | $ | 5,636 | |||||||
Amortization of other acquired intangible assets | 8,297 | 3,195 | 24,929 | 9,566 | |||||||||||
Total | $ | 8,346 | $ | 5,106 | $ | 25,694 | $ | 15,202 | |||||||
Expected amortization of definite-lived intangible assets held as of September 30, 2016 is as follows (in thousands):
2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||||||||||||
Statement of comprehensive income line items: | |||||||||||||||||||||||||||
Cost of revenue | $ | 48 | $ | 193 | $ | 96 | $ | — | $ | — | $ | — | $ | 337 | |||||||||||||
Amortization of other acquired intangible assets | 8,309 | 33,173 | 32,863 | 32,627 | 20,274 | 171,057 | 298,303 | ||||||||||||||||||||
Total | $ | 8,357 | $ | 33,366 | $ | 32,959 | $ | 32,627 | $ | 20,274 | $ | 171,057 | $ | 298,640 | |||||||||||||
The weighted average amortization periods for definite-lived intangible assets are as follows: 40 months for customer relationships, 231 months for advisor relationships, 207 months for sponsor relationships, 39 months for curriculum, 62 months for technology, and 195 months for total definite-lived intangible assets.
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Note 6: Fair Value Measurements
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
Fair value measurements at the reporting date using | |||||||||||||||
September 30, 2016 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
Cash equivalents: | |||||||||||||||
U.S. government securities | $ | 4,306 | $ | — | $ | 4,306 | $ | — | |||||||
Money market and other funds | 5,432 | — | 5,432 | — | |||||||||||
Commercial paper | 2,500 | — | 2,500 | — | |||||||||||
Time deposits | 659 | — | 659 | — | |||||||||||
Total cash equivalents | 12,897 | — | 12,897 | — | |||||||||||
Available-for-sale investments: | |||||||||||||||
Debt securities: | |||||||||||||||
U.S. government securities | 1,998 | — | 1,998 | — | |||||||||||
Commercial paper | 1,995 | — | 1,995 | — | |||||||||||
Time deposits | 499 | — | 499 | — | |||||||||||
Total debt securities | 4,492 | — | 4,492 | — | |||||||||||
Total assets at fair value | $ | 17,389 | $ | — | $ | 17,389 | $ | — | |||||||
Acquisition-related contingent consideration liability | $ | 3,500 | $ | — | $ | — | $ | 3,500 | |||||||
Total liabilities at fair value | $ | 3,500 | $ | — | $ | — | $ | 3,500 | |||||||
Fair value measurements at the reporting date using | |||||||||||||||
December 31, 2015 | 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 | $ | 5,410 | $ | — | $ | 5,410 | $ | — | |||||||
Available-for-sale investments: | |||||||||||||||
Debt securities: | |||||||||||||||
U.S. government securities | 11,301 | — | 11,301 | — | |||||||||||
Total assets at fair value | $ | 16,711 | $ | — | $ | 16,711 | $ | — | |||||||
Acquisition-related contingent consideration liability | $ | 2,951 | $ | — | $ | — | $ | 2,951 | |||||||
Total liabilities at fair value | $ | 2,951 | $ | — | $ | — | $ | 2,951 | |||||||
The Company also had financial instruments that were not measured at fair value. See "Note 7: Debt" for details.
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A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
Acquisition-related contingent consideration liability: | |||
Balance at December 31, 2015 | $ | 2,951 | |
Revaluation | 391 | ||
Foreign currency transaction loss | 158 | ||
Balance at September 30, 2016 | $ | 3,500 | |
The contingent consideration liability is related to the Company's acquisition of SimpleTax (see "Note 3: Business Combinations"), and the related payments are expected to occur annually beginning in 2017 and continuing through 2019. As of September 30, 2016, the Company could be required to pay up to an undiscounted amount of $3.5 million. The Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment (100%), and the discount rate (9%). A decrease in estimated revenues or an increase in the discount rate would decrease the fair value of the contingent consideration liability. As of September 30, 2016, the Company recorded approximately $0.9 million in "Accrued expenses and other current liabilities" and $2.6 million in “Other long-term liabilities” on the consolidated balance sheets.
The contractual maturities of the debt securities classified as available-for-sale at September 30, 2016 and December 31, 2015 were less than one year.
The cost and fair value of available-for-sale investments were as follows (in thousands):
Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Balance at September 30, 2016 | $ | 4,491 | $ | 2 | $ | (1 | ) | $ | 4,492 | ||||||
Balance at December 31, 2015 | $ | 11,316 | $ | — | $ | (15 | ) | $ | 11,301 | ||||||
The Company had non-recurring Level 3 fair value measurements in 2016 related to the repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.
Note 7: Debt
The Company’s debt consisted of the following (in thousands):
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||||||||||
Principal amount | Discount | Debt issuance costs | Net carrying value | Principal amount | Discount | Debt issuance costs | Net carrying value | ||||||||||||||||||||||||
TaxAct - HD Vest 2015 credit facility | $ | 295,000 | $ | (8,260 | ) | $ | (6,139 | ) | $ | 280,601 | $ | 400,000 | $ | (12,000 | ) | $ | (8,919 | ) | $ | 379,081 | |||||||||||
Convertible Senior Notes | 172,859 | (7,830 | ) | (2,005 | ) | 163,024 | 201,250 | (12,207 | ) | (3,125 | ) | 185,918 | |||||||||||||||||||
Note payable, related party | 6,400 | — | — | 6,400 | 6,400 | — | — | 6,400 | |||||||||||||||||||||||
Total debt | $ | 474,259 | $ | (16,090 | ) | $ | (8,144 | ) | $ | 450,025 | $ | 607,650 | $ | (24,207 | ) | $ | (12,044 | ) | $ | 571,399 | |||||||||||
TaxAct - HD Vest 2015 credit facility: On December 31, 2015, TaxAct and HD Vest entered into an agreement with a syndicate of lenders for the purposes of financing the HD Vest acquisition and providing future working capital flexibility for TaxAct and HD Vest. The credit facility consists of a $25.0 million revolving credit loan--which includes a letter of credit and swingline loans--and a $400.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are December 31, 2020 and December 31, 2022, respectively. Obligations under the credit facility are guaranteed by TaxAct Holdings, Inc. and HD Vest Holdings, Inc. and are secured by the equity of the TaxAct and HD Vest businesses. While Blucora is not a party to the agreement, it has guaranteed the obligations of TaxAct and HD Vest under the credit facility, secured by its equity in TaxAct Holdings, Inc.
TaxAct and HD Vest initially borrowed $400.0 million under the term loan and had repayment activity of $105.0 million during the nine months ended September 30, 2016. Principal payments on the term loan are payable quarterly and will be between 0.625% and 1.875% of outstanding principal, depending upon TaxAct and HD Vest's combined net leverage of
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EBITDA ratio. The interest rate on the term loan is variable at the London Interbank Offered Rate (“LIBOR”), subject to a floor of 1.00%, plus a margin of 6.00%, payable at the end of each interest period.
TaxAct and HD Vest may borrow under the revolving credit loan in an aggregate principal amount not less than $2.0 million or any whole multiple of $1.0 million in excess thereof (for swingline loans, the aggregate principal amount is not less than $0.5 million or any whole multiple of $0.1 million in excess thereof). Principal payments on the revolving credit loan are payable at maturity. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 5.00%. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 5.00%. In each case, the applicable margin within the range depends upon TaxAct and HD Vest's combined net leverage to EBITDA ratio over the previous four quarters. Interest is payable at the end of each interest period.
TaxAct and HD Vest have the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $5.0 million or any whole multiple of $1.0 million in excess thereof, except for prepayments through December 31, 2016 which carry a premium of 1.00% of the total principal amount outstanding just prior to prepayment. In accordance with this provision, TaxAct and HD Vest prepaid a portion of the credit facility during the nine months ended September 30, 2016, which was included in the repayment activity for 2016 and resulted in the write-down of a portion of the unamortized discount and debt issuance costs. The write-down of the unamortized discount and debt issuance costs were recorded in "Other loss, net" on the consolidated statements of comprehensive income.
The credit facility includes financial and operating covenants, including a net leverage to EBITDA ratio, which are defined further in the agreement. As of September 30, 2016, TaxAct and HD Vest were in compliance with all of the financial and operating covenants.
As of September 30, 2016, the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
Convertible Senior Notes: On March 15, 2013, the Company issued $201.25 million aggregate principal amount of its Convertible Senior Notes (the “Notes”), inclusive of the underwriters’ exercise in full of their over-allotment option of $26.25 million. The Notes mature on April 1, 2019, unless earlier purchased, redeemed, or converted in accordance with the terms, and bear interest at a rate of 4.25% per year, payable semi-annually in arrears beginning on October 1, 2013. The Company received net proceeds from the offering of approximately $194.8 million after adjusting for debt issuance costs, including the underwriting discount.
The Notes were issued under an indenture dated March 15, 2013 (the “Indenture”) by and between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. There are no financial or operating covenants relating to the Notes.
Beginning July 1, 2013 and prior to the close of business on September 28, 2018, holders may convert all or a portion of the Notes at their option, in multiples of $1,000 principal amount, under the following circumstances:
• | During any fiscal quarter commencing July 1, 2013, if the last reported sale price of the Company’s common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day. As of September 30, 2016, the Notes were not convertible. |
• | During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of the Company’s common stock and the conversion rate on each trading day. |
• | If the Company calls any or all of the Notes for redemption. |
• | Upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets. |
The convertibility of the Notes is determined at the end of each reporting period. If the Notes are determined to be convertible, they remain convertible until the end of the subsequent quarter and are classified in "Current liabilities" on the balance sheet; otherwise, they are classified in "Long-term liabilities." Depending upon the price of the Company’s common
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stock or the trading price of the Notes within the reporting period, pursuant to the first two criteria listed above, the Notes could be convertible during one reporting period but not convertible during a comparable reporting period.
On or after October 1, 2018 and until the close of business on March 28, 2019, holders may convert their Notes, in multiples of $1,000 principal amount, at the option of the holder.
The conversion ratio for the Notes is initially 0.0461723, equivalent to an initial conversion price of approximately $21.66 per share of the Company’s common stock. The conversion ratio is subject to customary adjustment for certain events as described in the Indenture.
At the time the Company issued the Notes, the Company was only permitted to settle conversions with shares of its common stock. The Company received shareholder approval at its annual meeting in May 2013 to allow for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. The Company’s intention is to satisfy conversion of the Notes with cash for the principal amount of the debt and shares of common stock for any related conversion premium. The Company expects to have the liquidity to satisfy conversion of the Notes' principal for cash based upon cash on hand, net cash flows from operations, and cash available through the credit facility.
Beginning April 6, 2016, the Company may, at its option, redeem for cash all or part of the Notes plus accrued and unpaid interest. If the Company undergoes a fundamental change (as described in the Indenture), holders may require the Company to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. However, if a fundamental change occurs and a holder elects to convert the Notes, the Company will, under certain circumstances, increase the applicable conversion rate for the Notes surrendered for conversion by a number of additional shares of common stock based on the date on which the fundamental change occurs or becomes effective and the price paid per share of the Company’s common stock in the fundamental change as specified in the Indenture. The Strategic Transformation does not qualify as a fundamental change under the Indenture.
The Notes are unsecured and unsubordinated obligations of the Company and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not subordinated. The Notes are effectively junior in right of payment to any of the Company’s secured indebtedness (to the extent of the value of assets securing such indebtedness) and structurally junior to all existing and future indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries. The Indenture does not limit the amount of debt that the Company or its subsidiaries may incur.
The Notes may be settled in a combination of cash or shares of common stock given the flexible settlement option. As a result, the Notes contain liability and equity components, which were bifurcated and accounted for separately. The liability component of the Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at a 6.5% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the Notes, resulting in the initial recognition of $22.3 million as the debt discount recorded in additional paid-in capital for the Notes. The carrying amount of the Notes is being accreted to the principal amount over the remaining term to maturity, and the Company is recording corresponding interest expense. The Company incurred debt issuance costs of $6.4 million related to the Notes and allocated $5.7 million to the liability component of the Notes. These costs are being amortized to interest expense over the six-year term of the Notes or the date of conversion, if any.
During the nine months ended September 30, 2016, the Company repurchased $28.4 million of the Notes' principal for cash of $20.7 million. The Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
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The following table sets forth total interest expense related to the Notes (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Contractual interest expense (Cash) | $ | 1,836 | $ | 2,138 | $ | 5,782 | $ | 6,415 | |||||||
Amortization of debt issuance costs (Non-cash) | 231 | 249 | 704 | 735 | |||||||||||
Accretion of debt discount (Non-cash) | 901 | 975 | 2,749 | 2,873 | |||||||||||
Total interest expense | $ | 2,968 | $ | 3,362 | $ | 9,235 | $ | 10,023 | |||||||
Effective interest rate of the liability component | 7.32 | % | 7.32 | % | 7.32 | % | 7.32 | % | |||||||
The fair value of the principal amount of the Notes as of September 30, 2016 was $164.2 million, based on the last quoted active trading price, a Level 1 fair value measurement, as of that date.
Note payable, related party: The note payable is with the President of HD Vest and arose in connection with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The President of HD Vest sold a portion of his shares to the Company in exchange for the note. See "Note 3: Business Combinations" for additional information on the acquisition of HD Vest. The note will be paid over a three-year period, with 50% paid in year one, 40% paid in year two, and 10% paid in year three. The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value.
Note 8: Redeemable Noncontrolling Interests
A reconciliation of redeemable noncontrolling interests is as follows (in thousands):
Balance at December 31, 2015 | $ | 15,038 | |
Net income attributable to noncontrolling interests | 426 | ||
Balance at September 30, 2016 | $ | 15,464 | |
The redemption amount at September 30, 2016 was $10.9 million.
Note 9: Commitments and Contingencies
Except for the debt repayments and repurchases (as discussed further in "Note 7: Debt") and estimated total sublease income of $3.2 million (related to the sublease agreement with InfoSpace as discussed further in "Note 4: Discontinued Operations"), there have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, to the contractual obligations and commitments specified in "Note 9: Commitments and Contingencies" in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
On March 5, 2015, Remigius Shatas filed a shareholder derivative action against Andrew Snyder, a director of the Company, certain companies affiliated with Mr. Snyder, as well as nominal defendant Blucora, in the Superior Court of the State of Washington in and for King County. Although the Company is a nominal defendant, the plaintiff purports to bring the action on behalf of the Company and thus does not seek monetary damages from the Company. Instead, the plaintiff alleges improper use of inside information in certain sales of the Company's common stock and seeks to recover from Andrew Snyder and those companies affiliated with Mr. Snyder profits resulting from those allegedly improper sales. On May 15, 2015, the court granted the Company's motion to dismiss the Complaint based on the plaintiffs’ failure to file this matter in the proper court. Subsequently, the plaintiff moved for reconsideration of the Superior Court's decision to grant the motion to dismiss, and on June 5, 2015, that motion for reconsideration was denied. On June 30, 2015, the plaintiff filed a Notice of Appeal with the Superior Court, indicating plaintiff's intention to appeal to the Washington Court of Appeals, Division I. On September 14, 2015, the plaintiff filed a motion with the Washington Court of Appeals to add an additional plaintiff, which the court
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subsequently denied on October 19, 2015. In connection with the appeal, the Company filed a motion to dismiss the appeal on the grounds that plaintiff lacked standing at all points relevant the lawsuit. The appeal and the Company’s motion have been fully-briefed and were argued before the Washington Court of Appeals on April 11, 2016. On October 17, 2016, the Court of Appeals, in an unpublished opinion reversed the dismissal of this action and remanded it back to the trial court for further proceedings. In its order, the Court of Appeals declined to rule on a number of issues relating to the issue of proper venue and further denied the motion to dismiss relating to the plaintiff’s standing, finding that the record was not fully developed enough for the Court of Appeals to rule on these issues and noted that these issues may be litigated before the trial court on remand.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors and may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 10: Stockholders’ Equity
Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units (“RSUs”), and the Company’s employee stock purchase plan (“ESPP”), in the consolidated statements of comprehensive income (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Cost of revenue | $ | 52 | $ | 23 | $ | 117 | $ | 71 | |||||||
Engineering and technology | 434 | 112 | 1,167 | 336 | |||||||||||
Sales and marketing | 661 | 230 | 1,688 | 610 | |||||||||||
General and administrative | 2,217 | 1,709 | 7,644 | 4,957 | |||||||||||
Total in continuing operations | $ | 3,364 | $ | 2,074 | $ | 10,616 | $ | 5,974 | |||||||
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||
Stock options exercised | — | 25 | 140 | 245 | |||||||
RSUs vested | 102 | 40 | 426 | 209 | |||||||
Shares purchased pursuant to ESPP | 114 | 51 | 191 | 103 | |||||||
Total | 216 | 116 | 757 | 557 | |||||||
Stock repurchase program: In February 2013, the Company’s Board of Directors approved a stock repurchase program whereby the Company could purchase its common stock in open-market transactions. The repurchase period concluded in May 2016. Repurchased shares were retired and resumed the status of authorized but unissued shares of common stock. During the nine months ended September 30, 2016, the Company purchased no shares. During the nine months ended September 30, 2015, the Company purchased 0.5 million shares at a total cost of approximately $7.0 million and an average price of $14.46 per share, exclusive of purchase and administrative costs.
Note 11: Segment Information
The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The Wealth Management segment consists of the HD Vest business, which was acquired on December 31, 2015. HD Vest is included in Blucora's results of operations beginning on January 1, 2016. As a result of the Strategic Transformation and planned divestitures of the Search and Content and E-Commerce segments, those former segments are included in discontinued operations. The Company’s chief executive officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
The Company does not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, and amortization of acquired intangible assets to the reportable segments. Such amounts are reflected in the table under the heading "Corporate-level activity." In addition, the Company does not allocate other loss, net and income taxes to the reportable segments. The Company does not account for, and does not
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report to management, its assets or capital expenditures by segment other than goodwill and intangible assets used for impairment analysis purposes.
Information on reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenue: | |||||||||||||||
Wealth Management | $ | 80,088 | $ | — | $ | 233,496 | $ | — | |||||||
Tax Preparation | 3,149 | 2,875 | 135,614 | 114,843 | |||||||||||
Total revenue | 83,237 | 2,875 | 369,110 | 114,843 | |||||||||||
Operating income (loss): | |||||||||||||||
Wealth Management | 11,628 | — | 32,458 | — | |||||||||||
Tax Preparation | (4,382 | ) | (2,542 | ) | 72,987 | 61,493 | |||||||||
Corporate-level activity | (17,754 | ) | (13,512 | ) | (54,153 | ) | (37,622 | ) | |||||||
Total operating income (loss) | (10,508 | ) | (16,054 | ) | 51,292 | 23,871 | |||||||||
Other loss, net | (11,453 | ) | (3,080 | ) | (29,883 | ) | (9,109 | ) | |||||||
Income tax benefit (expense) | 8,537 | 6,926 | (8,899 | ) | (5,144 | ) | |||||||||
Discontinued operations, net of income taxes | (40,528 | ) | 1,597 | (57,981 | ) | 7,122 | |||||||||
Net income (loss) | $ | (53,952 | ) | $ | (10,611 | ) | $ | (45,471 | ) | $ | 16,740 | ||||
Note 12: Net Income (Loss) Per Share
“Basic net income (loss) per share” is computed using the weighted average number of common shares outstanding during the period. “Diluted net income (loss) per share” is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options, vesting of unvested RSUs, and conversion or maturity of the Notes. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.
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The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Numerator: | |||||||||||||||
Income (loss) from continuing operations | $ | (13,424 | ) | $ | (12,208 | ) | $ | 12,510 | $ | 9,618 | |||||
Net income attributable to noncontrolling interests | (167 | ) | — | (426 | ) | — | |||||||||
Income (loss) from continuing operations attributable to Blucora, Inc. | (13,591 | ) | (12,208 | ) | 12,084 | 9,618 | |||||||||
Income (loss) from discontinued operations attributable to Blucora, Inc. | (40,528 | ) | 1,597 | (57,981 | ) | 7,122 | |||||||||
Net income (loss) attributable to Blucora, Inc. | $ | (54,119 | ) | $ | (10,611 | ) | $ | (45,897 | ) | $ | 16,740 | ||||
Denominator: | |||||||||||||||
Weighted average common shares outstanding, basic | 41,635 | 40,950 | 41,404 | 40,952 | |||||||||||
Dilutive potential common shares | — | — | 925 | 959 | |||||||||||
Weighted average common shares outstanding, diluted | 41,635 | 40,950 | 42,329 | 41,911 | |||||||||||
Net income (loss) per share attributable to Blucora, Inc. - basic: | |||||||||||||||
Continuing operations | $ | (0.33 | ) | $ | (0.30 | ) | $ | 0.29 | $ | 0.23 | |||||
Discontinued operations | (0.97 | ) | 0.04 | (1.40 | ) | 0.18 | |||||||||
Basic net income (loss) per share | $ | (1.30 | ) | $ | (0.26 | ) | $ | (1.11 | ) | $ | 0.41 | ||||
Net income (loss) per share attributable to Blucora, Inc. - diluted: | |||||||||||||||
Continuing operations | $ | (0.33 | ) | $ | (0.30 | ) | $ | 0.29 | $ | 0.23 | |||||
Discontinued operations | (0.97 | ) | 0.04 | (1.37 | ) | 0.17 | |||||||||
Diluted net income (loss) per share | $ | (1.30 | ) | $ | (0.26 | ) | $ | (1.08 | ) | $ | 0.40 | ||||
Shares excluded | 10,246 | 6,195 | 6,317 | 2,950 | |||||||||||
Shares excluded primarily related to the antidilutive effect of a net loss (for the three months ended September 30, 2016 and 2015) and stock options with an exercise price greater than the average price during the applicable periods.
As more fully discussed in "Note 7: Debt," in March 2013, the Company issued the Notes, which are convertible and mature in April 2019. In May 2013, the Company received shareholder approval for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. The Company intends, upon conversion or maturity of the Notes, to settle the principal in cash and satisfy any conversion premium by issuing shares of its common stock. The Company expects to have the liquidity to satisfy conversion of the Notes' principal for cash based upon cash on hand, net cash flows from operations, and cash available through the credit facility. As a result, the Company only includes the impact of the premium feature in its dilutive potential common shares when the average stock price during the quarter exceeds the conversion price of the Notes, which did not occur during the three months ended September 30, 2016 and 2015.
Note 13: Subsequent Event
On October 27, 2016, Blucora announced plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas as part of the Strategic Transformation and “One Company” operating model. The actions to relocate corporate headquarters are intended to drive efficiencies, improve operational effectiveness, and deliver cost savings over time. The Company expects to incur restructuring charges between $7.5 million and $11.3 million, of which we estimate $1.9 million to $2.6 million are non-cash expenses. Such range primarily includes severance and costs to exit the leased facility in Bellevue, as well as loss on disposal of property and equipment, primarily driven by leasehold improvements, and other move-related expenses. In addition, the Company expects to incur costs between $3.0 million and $4.0 million associated with expenses that do not qualify for restructuring classification, such as recruiting and overlap in personnel expenses as we transition positions to Irving, Texas. We expect that the majority of these costs will be incurred over the next three quarters.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "anticipate," "believe," "plan," "project," "expect," "future," "intend," "may," "will," "should," "estimate," "predict," "potential," "continue," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our "Strategic Transformation"; and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, “Risk Factors,” and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Overview
Blucora (the “Company,” “Blucora,” or “we”) operates two primary businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (“HD Vest”), which we acquired on December 31, 2015. HD Vest is included in Blucora's results of operations as of January 1, 2016. HD Vest provides wealth management solutions for financial advisors. The Tax Preparation business consists of the operations of TaxAct, Inc. (“TaxAct”) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals.
Blucora also operated an internet Search and Content business and continues to operate an E-Commerce business. The Search and Content business operated through the InfoSpace LLC subsidiary (“InfoSpace”) and provided search services to users of our owned and operated and distribution partners' web properties, as well as online content through HowStuffWorks (“HSW”). The E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”) and sells self-branded electronics and accessories to both consumers and businesses. See further information regarding these businesses under "Strategic Transformation" below.
Strategic Transformation
On October 14, 2015, we announced our plans to focus on the technology-enabled financial solutions market (the “Strategic Transformation”). Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest, and our intention to divest our Search and Content and E-Commerce businesses. The transformation will, among other things, result in fewer support requirements and, therefore, reduced corporate operating expenses. We also expect our capital allocation priority in the near-term to be to pay down debt, which includes using all of the net divestiture proceeds from the sales of the Search and Content business and the E-Commerce business to pay down the new TaxAct - HD Vest 2015 credit facility. The elements of our Strategic Transformation are described in more detail below. For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Acquisition: On December 31, 2015, we acquired HD Vest for $613.7 million, including cash acquired of $38.9 million and after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and is expected to be synergistic with TaxAct as a result of cross-serving opportunities and an expanded addressable market for both HD Vest and TaxAct. The acquisition was funded by a combination of cash on hand and the new TaxAct - HD Vest 2015 credit facility, under which we borrowed $400.0 million. During the last half of 2015, we incurred transaction costs of $11.0 million.
See "Note 3: Business Combinations" and "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on the HD Vest acquisition and the new credit facility, respectively.
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Business divestitures and chief executive officer change: On October 14, 2015, we announced plans to divest the Search and Content and E-Commerce businesses. Accordingly, our financial condition, results of operations, and cash flows reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Unless otherwise specified, disclosures in "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflect continuing operations.
On August 9, 2016, we closed on an agreement with OpenMail LLC (“OpenMail”), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment. Of this amount, $44.7 million was received in the third quarter of 2016, and the remaining $0.5 million should be received in the fourth quarter of 2016. We used all of the proceeds to pay down debt.
We expect to incur business exit costs of approximately $4.5 million. Of this amount, $3.6 million has been recorded through September 30, 2016, with the vast majority of these costs recorded in discontinued operations. The remaining costs are contingent upon the sale of the E-Commerce business and will be recorded at the time of sale.
See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on discontinued operations.
On October 14, 2015, we also announced the departure of our former chief executive officer. His departure became effective March 31, 2016. In conjunction with such announcement, we recorded $1.8 million of separation-related costs, most of which were pursuant to the former chief executive officer's employment agreement and paid in April 2016. On March 12, 2016, our Board of Directors appointed our new chief executive officer, effective April 4, 2016.
Our Continuing Businesses
Wealth Management
The HD Vest business provides wealth management solutions for financial advisors. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory, and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management, and other fees.
HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. The company primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest's business model provides an open-architecture investment platform and technology tools to help financial advisors identify investment opportunities for their clients, while the long-standing tax advisory relationships provide a large client base of possible investment clients. This results in an experienced and stable network of financial advisors, who have multiple revenue-generating options to diversify their earnings sources.
Our Wealth Management business is subject to certain additional financial industry regulations and supervision, including by the SEC, FINRA, the DOL, state securities and insurance regulators, and other regulatory authorities. For additional information regarding the potential impact of governmental regulation on our operations and results, see the Risk Factor "Increased government regulation of our business may harm our operating results" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Tax Preparation
Our TaxAct business provides digital tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com.
We have four offerings for consumers for tax year 2015: a "free" federal and state edition that handles simple returns; a "basic" offering that contains all of the features of the free federal edition in addition to import capabilities, taxpayer phone support, and return preparation assistance tools; a "plus" offering that contains all of the basic offering features in addition to tools to maximize credits and deductions, and enhanced reporting; and a "premium" offering that contains all of the plus offering features in addition to tools for self-employed individuals to maximize credits and deductions. For the latter three offerings, state returns can be filed through the separately-sold state edition. We also have an offering for small business owners. TaxAct's offerings come with a price lock guarantee, whereby the price at the start of the tax return filing process holds until the return is filed, rather than pricing the offering at the time that the tax return is filed. In addition to these core
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offerings, TaxAct also offers ancillary services such as refund payment transfer, data archive services, audit defense, stored value cards, and other add-on services.
TaxAct’s professional tax preparer software allows professional tax preparers to file individual and business returns for their clients. TaxAct offers flexible pricing and packaging options that help tax professionals save money by paying only for what they need.
Acquisitions
On December 31, 2015, we acquired HD Vest, as described further under "Strategic Transformation" above. HD Vest is included in Blucora's results of operations as of January 1, 2016. Accordingly, the results discussed below were impacted by the timing of this acquisition, in which 2016 includes a full year of results as compared to no results in 2015.
On July 2, 2015, TaxAct acquired SimpleTax Software Inc. (“SimpleTax”), a provider of online tax preparation services for individuals in Canada through its website www.simpletax.ca, for C$2.4 million (with C$ indicating Canadian dollars and amounting to approximately $1.9 million based on the acquisition-date exchange rate) in cash and additional consideration of up to C$4.6 million ($3.7 million) that is contingent upon product availability and revenue performance over a three-year period. SimpleTax is included in our financial results beginning on July 2, 2015.
Seasonality
Our Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
Comparability
We reclassified certain amounts related to discontinued operations. See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.
RESULTS OF OPERATIONS
Summary
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
2016 | 2015 | Percentage Change | 2016 | 2015 | Percentage Change | ||||||||||||||||
Revenue | $ | 83,237 | $ | 2,875 | 2,795 | % | $ | 369,110 | $ | 114,843 | 221 | % | |||||||||
Operating income (loss) | $ | (10,508 | ) | $ | (16,054 | ) | (35 | )% | $ | 51,292 | $ | 23,871 | 115 | % | |||||||
Three months ended September 30, 2016 compared with three months ended September 30, 2015
Total revenues increased approximately $80.4 million due to increases of $80.1 million and $0.3 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively.
Operating loss decreased approximately $5.5 million, consisting of the $80.4 million increase in revenue and offset by a $74.8 million increase in operating expenses. Key changes in operating expenses were:
• | $68.5 million increase in the Wealth Management segment’s operating expenses due to the timing of the HD Vest acquisition. |
• | $2.1 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher spending on marketing, higher professional services fees mostly related to development projects, and, to a lesser extent, higher personnel expenses resulting from overall increased headcount supporting most functions. |
• | $4.2 million increase in corporate-level expense activity, primarily due to higher amortization expense related to HD Vest acquisition-related intangible assets, higher stock-based compensation mainly related to a net increase in stock award grants (including to HD Vest employees), higher depreciation expense mainly related to HD Vest fixed assets, and costs incurred as part of our Strategic Transformation, offset by lower amortization expense associated |
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with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016 and lower acquisition-related costs due to professional services fees and other direct transaction costs incurred in the prior year related to the HD Vest acquisition.
Segment results are discussed in the next section.
Nine months ended September 30, 2016 compared with nine months ended September 30, 2015
Total revenues increased approximately $254.3 million due to increases of $233.5 million and $20.8 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively.
Operating income increased approximately $27.4 million, consisting of the $254.3 million increase in revenue and offset by a $226.8 million increase in operating expenses. Key changes in operating expenses were:
• | $201.0 million increase in the Wealth Management segment’s operating expenses due to the timing of the HD Vest acquisition. |
• | $9.3 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher spending on marketing, higher personnel expenses resulting from overall increased headcount supporting most functions, higher data center costs mostly related to third-party technology fees (software support and maintenance, bandwidth and hosting, and professional services), higher third-party costs associated with additional features in the current year offerings, and an increase in professional services fees mostly related to development projects. |
• | $16.5 million increase in corporate-level expense activity, primarily due to the same factors described above that impacted the quarterly period. |
Segment results are discussed in the next section.
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. (“GAAP”) and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, amortization of acquired intangible assets, other loss, net, and income taxes to segment operating results. We analyze these separately.
Following the acquisition of HD Vest and the discontinued operations treatment of Search and Content and E-Commerce, we determined that we have two reportable segments: Wealth Management and Tax Preparation.
Wealth Management
On December 31, 2015, we acquired HD Vest, a provider of wealth management solutions for financial advisors. HD Vest is included in Blucora's results of operations as of January 1, 2016.
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||
2016 | 2016 | ||||||
Revenue | $ | 80,088 | $ | 233,496 | |||
Operating income | $ | 11,628 | $ | 32,458 | |||
Segment margin | 15 | % | 14 | % | |||
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. A summary of our sources of revenue and business metrics are as follows.
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Sources of revenue
(In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||
Sources of Revenue | Primary Drivers | 2016 | 2016 | ||||||
Advisor-driven | Commission | - Transactions - Asset levels | $ | 38,962 | $ | 111,070 | |||
Advisory | - Advisory asset levels | 32,705 | 95,759 | ||||||
Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 5,476 | 16,689 | |||||
Transaction and fee | - Account activity - Number of clients - Number of advisors - Number of accounts | 2,945 | 9,978 | ||||||
Total revenue | $ | 80,088 | $ | 233,496 | |||||
Total recurring revenue | $ | 62,543 | $ | 183,772 | |||||
Recurring revenue rate | 78.1 | % | 78.7 | % | |||||
Recurring revenue consists of trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commission revenue, Advisory revenue, Asset-based revenue, and Transaction and fee revenue, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
(In thousands, except percentages and as otherwise indicated) | September 30, 2016 | ||
Total Assets Under Administration ("AUA") | $ | 38,482,620 | |
Advisory Assets Under Management ("AUM") | $ | 10,204,448 | |
Percentage of total AUA | 26.5 | % | |
Number of advisors (in ones) | 4,568 | ||
Commission revenue: We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period to period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:
(In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||
2016 | 2016 | ||||||
By product category: | |||||||
Mutual funds | $ | 20,196 | $ | 59,021 | |||
Variable annuities | 12,395 | ||||||