BLUCORA, INC. - FORM 10-Q - October 26, 2017

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UNITED STATES
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
For the quarterly period ended September 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                     
Commission File Number: 000-25131
 
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.)
6333 State Hwy 161, 6th Floor, Irving, Texas
75038
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (972) 870-6000
 
 
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
ý
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. 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 19, 2017
Common Stock, Par Value $0.0001
46,125,990
 


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,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
78,558

 
$
51,713

Cash segregated under federal or other regulations
313

 
2,355

Available-for-sale investments
—

 
7,101

Accounts receivable, net of allowance
6,952

 
10,209

Commissions receivable
16,432

 
16,144

Other receivables
592

 
4,004

Prepaid expenses and other current assets, net
4,777

 
6,321

Total current assets
107,624

 
97,847

Long-term assets:
 
 
 
Property and equipment, net
9,552

 
10,836

Goodwill, net
549,064

 
548,741

Other intangible assets, net
336,872

 
362,178

Other long-term assets
2,557

 
3,057

Total long-term assets
898,045

 
924,812

Total assets
$
1,005,669

 
$
1,022,659

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,161

 
$
4,536

Commissions and advisory fees payable
16,564

 
16,587

Accrued expenses and other current liabilities
18,768

 
18,528

Deferred revenue
7,118

 
12,156

Current portion of long-term debt, net
2,560

 
2,560

Total current liabilities
48,171

 
54,367

Long-term liabilities:
 
 
 
Long-term debt, net
344,232

 
248,221

Convertible senior notes, net
—

 
164,176

Deferred tax liability, net
59,118

 
111,126

Deferred revenue
1,031

 
1,849

Other long-term liabilities
8,530

 
10,205

Total long-term liabilities
412,911

 
535,577

Total liabilities
461,082

 
589,944

 
 
 
 
Redeemable noncontrolling interests
16,162

 
15,696

 
 
 
 
Commitments and contingencies (Note 9)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
 
 
 
46,077 and 41,845
5

 
4

Additional paid-in capital
1,552,609

 
1,510,152

Accumulated deficit
(1,024,222
)
 
(1,092,756
)
Accumulated other comprehensive income (loss)
33

 
(381
)
Total stockholders’ equity
528,425

 
417,019

Total liabilities and stockholders’ equity
$
1,005,669

 
$
1,022,659

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

- 3 -

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,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Wealth management services revenue
$
86,809

 
$
80,088

 
$
254,772

 
$
233,496

Tax preparation services revenue
3,362

 
3,149

 
156,936

 
135,614

Total revenue
90,171

 
83,237

 
411,708

 
369,110

Operating expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Wealth management services cost of revenue
59,607

 
54,921

 
172,444

 
158,213

Tax preparation services cost of revenue
1,314

 
1,319

 
7,543

 
6,549

Amortization of acquired technology
50

 
49

 
145

 
765

Total cost of revenue
60,971

 
56,289

 
180,132

 
165,527

Engineering and technology
5,051

 
4,588

 
14,041

 
12,842

Sales and marketing
13,680

 
11,965

 
84,974

 
75,715

General and administrative
12,207

 
11,638

 
39,405

 
35,899

Depreciation
867

 
968

 
2,680

 
2,906

Amortization of other acquired intangible assets
8,615

 
8,297

 
25,192

 
24,929

Restructuring
106

 
—

 
2,726

 
—

Total operating expenses
101,497

 
93,745

 
349,150

 
317,818

Operating income (loss)
(11,326
)
 
(10,508
)
 
62,558

 
51,292

Other loss, net
(5,241
)
 
(11,453
)
 
(39,149
)
 
(29,883
)
Income (loss) from continuing operations before income taxes
(16,567
)
 
(21,961
)
 
23,409

 
21,409

Income tax benefit (expense)
(166
)
 
8,537

 
(5,952
)
 
(8,899
)
Income (loss) from continuing operations
(16,733
)
 
(13,424
)
 
17,457

 
12,510

Discontinued operations, net of income taxes
—

 
(40,528
)
 
—

 
(57,981
)
Net income (loss)
(16,733
)
 
(53,952
)
 
17,457

 
(45,471
)
Net income attributable to noncontrolling interests
(164
)
 
(167
)
 
(466
)
 
(426
)
Net income (loss) attributable to Blucora, Inc.
$
(16,897
)
 
$
(54,119
)
 
$
16,991

 
$
(45,897
)
Net income (loss) per share attributable to Blucora, Inc. - basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.37
)
 
$
(0.33
)
 
$
0.39

 
$
0.29

Discontinued operations
—

 
(0.97
)
 
—

 
(1.40
)
Basic net income (loss) per share
$
(0.37
)
 
$
(1.30
)
 
$
0.39

 
$
(1.11
)
Net income (loss) per share attributable to Blucora, Inc. - diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.37
)
 
$
(0.33
)
 
$
0.36

 
$
0.29

Discontinued operations
—

 
(0.97
)
 
—

 
(1.37
)
Diluted net income (loss) per share
$
(0.37
)
 
$
(1.30
)
 
$
0.36

 
$
(1.08
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
45,459

 
41,635

 
43,749

 
41,404

Diluted
45,459

 
41,635

 
46,813

 
42,329

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(16,733
)
 
$
(53,952
)
 
$
17,457

 
$
(45,471
)
Unrealized gain on available-for-sale investments, net of tax
—

 
—

 
1

 
10

Foreign currency translation adjustment
223

 
(77
)
 
413

 
246

Other comprehensive income (loss)
223

 
(77
)
 
414

 
256

Comprehensive income (loss)
(16,510
)
 
(54,029
)
 
17,871

 
(45,215
)
Comprehensive income attributable to noncontrolling interests
(164
)
 
(167
)
 
(466
)
 
(426
)
Comprehensive income (loss) attributable to Blucora, Inc.
$
(16,674
)
 
$
(54,196
)
 
$
17,405

 
$
(45,641
)
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,
 
2017
 
2016
Operating Activities:
 
 
 
Net income (loss)
$
17,457

 
$
(45,471
)
Less: Discontinued operations, net of income taxes
—

 
(57,981
)
Net income from continuing operations
17,457

 
12,510

Adjustments to reconcile net income from continuing operations to net cash from operating activities:
 
 
 
Stock-based compensation
8,434

 
10,616

Depreciation and amortization of acquired intangible assets
28,553

 
29,080

Restructuring (non-cash)
1,499

 
—

Deferred income taxes
(473
)
 
(12,484
)
Amortization of premium on investments, net
10

 
164

Amortization of debt issuance costs
891

 
1,440

Accretion of debt discounts
1,893

 
3,599

(Gain) loss on debt extinguishment
19,764

 
(641
)
Revaluation of acquisition-related contingent consideration liability
—

 
391

Other
—

 
18

Cash provided (used) by changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,259

 
793

Commissions receivable
(288
)
 
1,034

Other receivables
2,384

 
19,656

Prepaid expenses and other current assets
1,720

 
6,003

Other long-term assets
432

 
(1,174
)
Accounts payable
(1,375
)
 
1,151

Commissions and advisory fees payable
(23
)
 
(1,600
)
Deferred revenue
(5,856
)
 
(1,805
)
Accrued expenses and other current and long-term liabilities
949

 
19,786

Net cash provided by operating activities from continuing operations
79,230

 
88,537

Investing Activities:
 
 
 
Business acquisition, net of cash acquired
—

 
(1,788
)
Purchases of property and equipment
(3,809
)
 
(2,648
)
Proceeds from sales of investments
249

 
—

Proceeds from maturities of investments
7,252

 
11,808

Purchases of investments
(409
)
 
(5,147
)
Net cash provided by investing activities from continuing operations
3,283

 
2,225

Financing Activities:
 
 
 
Proceeds from credit facilities
367,212

 
—

Payments on convertible notes
(172,827
)
 
(20,667
)
Payments on credit facilities
(285,000
)
 
(105,000
)
Proceeds from stock option exercises
38,228

 
1,141

Proceeds from issuance of stock through employee stock purchase plan
1,428

 
1,402

Tax payments from shares withheld for equity awards
(6,744
)
 
(1,447
)
Contingent consideration payments for business acquisition
(946
)
 
—

Net cash used by financing activities from continuing operations
(58,649
)
 
(124,571
)
Net cash provided (used) by continuing operations
23,864

 
(33,809
)
 
 
 
 
Net cash provided by operating activities from discontinued operations
—

 
12,359

Net cash provided by investing activities from discontinued operations
1,028

 
43,230

Net cash used by financing activities from discontinued operations
—

 
(9,000
)
Net cash provided by discontinued operations
1,028

 
46,589

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
86

 
(15
)
Net increase in cash, cash equivalents, and restricted cash
24,978

 
12,765

Cash, cash equivalents, and restricted cash, beginning of period
54,868

 
59,830

Cash, cash equivalents, and restricted cash, end of period
$
79,846

 
$
72,595

 
 
 
 
Cash paid for income taxes from continuing operations
$
1,013

 
$
2,079

Cash paid for interest from continuing operations
$
14,205

 
$
23,455

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

- 5 -

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 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"). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), HD Vest Advisory Services, Inc. (a registered investment advisor), and HD Vest Insurance Agency, LLC (an insurance broker) (collectively referred to as the "Wealth Management business" or the "Wealth Management segment"). 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 (collectively referred to as the "Tax Preparation business" or the "Tax Preparation segment").
Prior to 2017, the Company also operated an internet Search and Content business and an E-Commerce business through 2016. The Search and Content business operated through the InfoSpace LLC subsidiary ("InfoSpace"), and the E-Commerce business consisted of the operations of Monoprice, Inc. ("Monoprice").
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations") and the divestitures of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part of the Strategic Transformation and "One Company" operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is expected to be completed by early 2018.
Segments: The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment.
Reclassification: The Company reclassified certain amounts on its consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" for additional information.
Note 2: Summary of Significant Accounting Policies
Interim financial information: 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 accounting principles generally accepted in the United States ("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, 2016. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents, and restricted cash: The following table presents cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):

- 6 -

 
September 30,
 
December 31,
 
2017
 
2016
 
2016
 
2015
Cash and cash equivalents
$
78,558

 
$
71,165

 
$
51,713

 
$
55,473

Cash segregated under federal or other regulations
313

 
630

 
2,355

 
3,557

Restricted cash included in "Prepaid expenses and other current assets, net"
425

 
100

 
250

 
100

Restricted cash included in "Other long-term assets"
550

 
700

 
550

 
700

Total cash, cash equivalents, and restricted cash
$
79,846

 
$
72,595

 
$
54,868

 
$
59,830

Cash segregated under federal and other regulations is held in a segregated bank account for the exclusive benefit of the Company’s Wealth Management business customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking arrangements.
Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Cash equivalents and debt securities are classified within Level 2 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values them utilizing market observable inputs. Unrealized gains and losses are included in "Accumulated other comprehensive income (loss)" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company has a contingent consideration liability that is related to the Company's 2015 acquisition of SimpleTax Software Inc. ("SimpleTax") and is classified within Level 3 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The 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.
Concentration of credit risk:  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.
For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs that impact the following areas:
Revenue recognition - In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning

- 7 -

after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The Company will adopt the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this ASU as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company expects that the adoption of this ASU will not have a material impact to its consolidated financial statements, including the presentation of revenues in the statement of comprehensive income.
Leases (ASU 2016-02) - In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or less, will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
Stock-based compensation (ASU 2016-09) - In March 2016, the FASB issued an ASU on employee share-based payment accounting.  The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital.  In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period.  Cash flows related to excess tax benefits will be included as an operating activity, and no longer classified as a financing activity, in the statement of cash flows.  This guidance was effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016.  The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense was effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition was effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted.  The cash flow presentation guidance was effective on a retrospective or prospective basis.
The Company implemented this ASU on January 1, 2017 and recorded a cumulative-effect adjustment of $51.5 million to credit retained earnings for deferred tax assets related to net operating losses that arose from excess tax benefits, which the Company has deemed realizable.  In addition to this:
•
At the time of adoption and on a prospective basis, the primary impact of adoption was the recognition of excess tax benefits and deficiencies, including deferred tax assets related to net operating losses that arose from excess tax benefits which the Company has deemed realizable, in the income tax provision (rather than in additional paid-in capital). This caused income taxes to differ from taxes at the statutory rates in 2017. For the three months ended September 30, 2017, the Company recognized an estimated $7.0 million increase to the income tax provision, which resulted in a $7.0 million decrease to income from continuing operations and net income attributable to Blucora, a $0.15 decrease to basic earnings per share, and a $0.15 decrease to diluted earnings per share. For the nine months ended September 30, 2017, the Company recognized an estimated $0.4 million increase to the income tax provision, which resulted in a $0.4 million decrease to income from continuing operations and net income attributable to Blucora, a $0.01 decrease to basic earnings per share, and a $0.01 decrease to diluted earnings per share.
•
The Company applied the cash flow presentation guidance on a retrospective basis, restating the consolidated statements of cash flows to present excess tax benefits as an operating activity (rather than a financing activity). For the three months ended September 30, 2016, this resulted in a decrease to cash provided by operating activities from continuing operations of $5.6 million and a corresponding decrease to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. For the nine months ended September 30, 2016, this resulted in an increase to cash provided by operating activities from continuing operations of $21.4 million and a corresponding increase to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. The restatement had no impact on total cash flows for the period presented.
The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur.  The cash flow presentation requirements for payments made to tax authorities on an employee's

- 8 -

behalf had no impact to any periods presented, since such cash flows historically have been presented as a financing activity.  The Company is not planning to change tax withholdings and will continue to estimate forfeitures in determining the amount of compensation cost to be recognized in each period.
Statement of cash flows and restricted cash (ASU 2016-18) - In November 2016, the FASB issued an ASU on the classification and presentation of changes in restricted cash on the statement of cash flows.  The ASU requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows.  This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017.  Early adoption is permitted. The guidance is effective on a retrospective basis. The Company elected to early adopt this guidance as of January 1, 2017. The reclassification was not material to the periods presented and had no impact on total cash flows, income from continuing operations, or net income attributable to Blucora for the periods presented. See the "Cash, cash equivalents, and restricted cash" section of this note for additional information.
Note 3: Business Combinations
HD Vest: On December 31, 2015 and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for $613.7 million, after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and their clients. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The Purchase Agreement dictated that the Company placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.
Note 4: Discontinued Operations
On November 17, 2016, the Company closed on an agreement with YFC-Boneagle Electric Co., Ltd. ("YFC"), under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. Of this amount, $39.5 million was received in the fourth quarter of 2016 and $1.0 million was received in the second quarter of 2017--both amounts were included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.
On August 9, 2016, the Company closed on an agreement with OpenMail LLC ("OpenMail"), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment, and was included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt.

- 9 -

Summarized financial information for discontinued operations is as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Major classes of items in net income (loss):
 
 
 
 
 
 
 
Revenues
$
—

 
$
53,721

 
$
—

 
$
209,108

Operating expenses
—

 
(50,952
)
 
—

 
(192,874
)
Other loss, net
—

 
(415
)
 
—

 
(844
)
Income from discontinued operations before income taxes
—

 
2,354

 
—

 
15,390

Loss on sale of discontinued operations before income taxes
—

 
(29,509
)
 
—

 
(68,034
)
Discontinued operations, before income taxes
—

 
(27,155
)
 
—

 
(52,644
)
Income tax expense
—

 
(13,373
)
 
—

 
(5,337
)
Discontinued operations, net of income taxes
$
—

 
$
(40,528
)
 
$
—

 
$
(57,981
)
Note 5: Restructuring
The following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of corporate headquarters to Irving, Texas as part of the Strategic Transformation:
 
Employee-Related Termination Costs
 
Contract Termination Costs
 
Fixed Asset Impairments
 
Stock-Based Compensation
 
Other Costs
 
Total
Balance as of December 31, 2016
$
4,234

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4,234

Restructuring charges
(30
)
 
(241
)
 
1,878

 
981

 
32

 
2,620

Payments
(434
)
 
(161
)
 
—

 
—

 
(32
)
 
(627
)
Non-cash
—

 
1,457

 
(1,878
)
 
(981
)
 
—

 
(1,402
)
Balance as of June 30, 2017
3,770

 
1,055

 
—

 
—

 
—

 
4,825

Restructuring charges
(3
)
 
 
 
 
 
97

 
12

 
106

Payments
(2,447
)
 
(256
)
 
—

 
—

 
(12
)
 
(2,715
)
Non-cash
—

 
—

 
—

 
(97
)
 
—

 
(97
)
Balance as of September 30, 2017
$
1,320

 
$
799

 
$
—

 
$
—

 
$
—

 
$
2,119

Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that are payable at termination dates throughout 2017, with the majority paid in the second half of 2017. Contract termination costs and fixed asset impairments were incurred in connection with the Bellevue facility's operating lease and related fixed assets, which are described further in the next two paragraphs, respectively. Stock-based compensation primarily includes the impact of equity award modifications associated with employment contracts for certain individuals impacted by the relocation, as well as forfeitures that were recorded for severed employees. Other costs include office moving costs.
 The Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease. Under that sublease agreement, the Company will not recover all of its remaining lease rental obligations (including common area maintenance costs and real estate taxes) and, therefore, recognized a loss on sublease of $1.1 million. See "Note 9: Commitments and Contingencies" for additional information on the sublease. The Company also wrote-off its $1.5 million deferred rent liability (a non-cash item), related to various lease incentives that had been provided originally by the landlord, and incurred broker commissions related to the sublease agreement. All of these items were recorded as contract termination costs in the first quarter of 2017.
The Company began receiving sublease offers in the first quarter of 2017, at which point it was indicated that the remaining lease rental obligations, and the related value for the leasehold improvements and the office furniture and equipment, would not be fully recovered. As a result and given the nature of these fixed assets, the Company fully impaired the $1.9 million carrying value of those assets in the first quarter of 2017.

- 10 -

Note 6: Fair Value Measurements
In accordance with ASC 820, "Fair Value Measurements and Disclosures", certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
 
 

Fair value measurements at the reporting date using
 
September 30, 2017

Quoted prices in
active markets
using identical 
assets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)
Cash equivalents: money market and other funds
$
10,827


$
—


$
10,827


$
—

Total assets at fair value
$
10,827


$
—


$
10,827


$
—

Acquisition-related contingent consideration liability
$
2,704

 
$
—

 
$
—

 
$
2,704

Total liabilities at fair value
$
2,704

 
$
—

 
$
—

 
$
2,704

 
 
 
Fair value measurements at the reporting date using
 
December 31, 2016
 
Quoted prices in
active markets
using identical 
assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
U.S government securities
$
2,749

 
$
—

 
$
2,749

 
$
—

Money market and other funds
4,090

 
—

 
4,090

 
—

Commercial paper
1,999

 
—

 
1,999

 
—

Taxable municipal bonds
1,301

 
—

 
1,301

 
—

Total cash equivalents
10,139

 
—

 
10,139

 
—

Available-for-sale investments:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. government securities
2,000

 
—

 
2,000

 
—

Commercial paper
1,998

 
—

 
1,998

 
—

Time deposits
807

 
—

 
807

 
—

Taxable municipal bonds
2,296

 
—

 
2,296

 
—

Total debt securities
7,101

 
—

 
7,101

 
—

Total assets at fair value
$
17,240

 
$
—

 
$
17,240

 
$
—

 
 
 
 
 
 
 
 
Acquisition-related contingent consideration liability
$
3,421

 
$
—

 
$
—

 
$
3,421

Total liabilities at fair value
$
3,421

 
$
—

 
$
—

 
$
3,421


- 11 -

A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
Acquisition-related contingent consideration liability:
 
Balance as of December 31, 2016
$
3,421

Payment
(946
)
Foreign currency transaction loss
229

Balance as of September 30, 2017
$
2,704

The contingent consideration liability is related to the Company's 2015 acquisition of SimpleTax. The full contractual obligation under the contingent consideration arrangement was accrued during the year ended December 31, 2016. Payments are contingent upon product availability and revenue performance over a three-year period ending December 31, 2018 and are expected to occur annually over that period. The first payment was made in the first quarter of 2017 and classified as a financing activity on the consolidated statements of cash flows. The remaining payments are expected through 2019. The foreign currency transaction loss was included in "Other loss, net" on the consolidated statements of comprehensive income. As of September 30, 2017, $1.3 million of the contingent consideration liability was included in "Accrued expenses and other current liabilities" and $1.4 million in "Other long-term liabilities" on the consolidated balance sheets.
The contractual maturities of the debt securities classified as available-for-sale at December 31, 2016 were less than one year.
The cost and fair value of available-for-sale investments were as follows (in thousands):
 
Amortized
cost
 
Gross unrealized
gains
 
Gross unrealized
losses
 
Fair
value
Balance as of December 31, 2016
$
7,102

 
$
—

 
$
(1
)
 
$
7,101

The Company had non-recurring Level 3 fair value measurements in 2017 and 2016 related to the redemption and repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.
Note 7: Debt
The Company’s debt consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
Senior secured credit facility
$
350,000

 
$
(1,681
)
 
$
(4,727
)
 
$
343,592

 
$
—

 
$
—

 
$
—

 
$
—

TaxAct - HD Vest 2015 credit facility
—

 
—

 
—

 
—

 
260,000

 
(7,124
)
 
(5,295
)
 
247,581

Convertible Senior Notes
—

 
—

 
—

 
—

 
172,859

 
(6,913
)
 
(1,770
)
 
164,176

Note payable, related party
3,200

 
—

 
—

 
3,200

 
3,200

 
—

 
—

 
3,200

Total debt
$
353,200

 
$
(1,681
)
 
$
(4,727
)
 
$
346,792

 
$
436,059

 
$
(14,037
)
 
$
(7,065
)
 
$
414,957

Senior secured credit facility: On May 22, 2017, Blucora entered into an agreement with a syndicate of lenders for the purposes of refinancing the credit facility previously entered into in 2015 for the purposes of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"), redeeming its Convertible Senior Notes that were outstanding at the time (the "Notes"), and providing future working capital and capital expenditure flexibility. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments under the TaxAct - HD Vest revolving credit facility were terminated. The Blucora senior secured credit facility consists of a committed $50.0 million revolving credit loan, which includes a letter of credit sub-facility, and a $375.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. Obligations under the credit facility are guaranteed by certain of Blucora's subsidiaries and secured by the assets of Blucora and those subsidiaries.
Blucora borrowed $375.0 million under the term loan when it entered into the senior secured credit facility. Principal payments on the term loan are payable quarterly in an amount equal to 0.25% of the initial outstanding principal. The interest rate on the term loan is variable at the London Interbank Offered Rate ("LIBOR"), subject to a floor of 1.00%, plus a margin

- 12 -

of 3.75%, payable at the end of each interest period. Through September 30, 2017, Blucora has made prepayments of $25.0 million towards the term loan.
Blucora may borrow under the revolving credit loan in an aggregate principal amount not less than $2.0 million or any whole multiple of $1.0 million in excess thereof. Principal payments on the revolving credit loan are payable at maturity. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 3.00%. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 3.00%. In each case, the applicable margin within the range depends upon Blucora's Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement for the credit facility) over the previous four quarters. Interest is payable at the end of each interest period. Blucora has not borrowed any amounts under the revolving credit loan.
Blucora has the right to permanently reduce and/or prepay, without premium or penalty (other than customary LIBOR breakage costs), the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $5.0 million ($2.0 million in the case of prepayments) or any whole multiple of $1.0 million in excess thereof, except for prepayments through November 22, 2017, which require a prepayment of a premium equal to 1.00% of the total principal amount prepaid. Beginning on December 31, 2018, Blucora will be required to make annual prepayments if certain levels of cash flow are achieved.
The credit facility includes financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit agreement. As of September 30, 2017, Blucora was in compliance with all of the financial and operating covenants.
As of September 30, 2017, the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
In connection with the refinancing, the Company performed an analysis by creditor and determined that the refinancing qualified as an extinguishment. As a result, the Company recognized a loss on debt extinguishment during the three months ended June 30, 2017, which was recorded in "Other loss, net" on the consolidated statements of comprehensive income and consisted of the following (in thousands):
Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility
$
9,593

Loss on debt extinguishment - Convertible Senior Notes
6,715

Total loss on debt extinguishment
$
16,308

The amount for the TaxAct - HD Vest 2015 credit facility included the write-off of the remaining unamortized discount and debt issuance costs. For the Notes, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
TaxAct - HD Vest 2015 credit facility: The Company had repayment activity of $64.0 million and $105.0 million during the nine months ended September 30, 2017 and 2016, respectively. These repayments resulted in the acceleration of a portion of the unamortized discount and debt issuance costs, which were recorded in "Other loss, net" on the consolidated statements of comprehensive income.
Convertible Senior Notes: In June 2017, the Company redeemed almost all of the outstanding Notes for cash with proceeds from the senior secured credit facility.
During the nine months ended September 30, 2016, the Company repurchased $28.4 million of the Notes for cash of $20.7 million. Similar to the analysis performed for the Notes that were redeemed in June 2017, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.

- 13 -

The following table sets forth total interest expense, prior to the refinancing, related to the Notes (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Contractual interest expense (Cash)
$
—

 
$
1,836

 
$
3,141

 
$
5,782

Amortization of debt issuance costs (Non-cash)
—

 
231

 
401

 
704

Accretion of debt discount (Non-cash)
—

 
901

 
1,567

 
2,749

Total interest expense
$
—

 
$
2,968

 
$
5,109

 
$
9,235

Note payable, related party:  The note payable is with the former President of HD Vest and arose in connection with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The former President of HD Vest sold a portion of his shares to the Company in exchange for the note. The note will be paid over a three-year period, with 50% paid in year one ($3.2 million was paid in December 2016), 40% paid in year two, and 10% paid in year three. The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value.
Note 8: Redeemable Noncontrolling Interests
A reconciliation of redeemable noncontrolling interests is as follows (in thousands):
Balance as of December 31, 2016
$
15,696

Net income attributable to noncontrolling interests
466

Balance as of September 30, 2017
$
16,162

The redemption amount at September 30, 2017 was $12.4 million.

Note 9: Commitments and Contingencies

Significant events during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of $3.8 million primarily related to the sublease agreement for the Bellevue facility (as discussed further in "Note 5: Restructuring"), purchase commitments with a vendor to provide cloud computation services of $11.3 million over the next four years, and a commitment to switch to a new clearing firm provider that has been selected by the Company by the third quarter of 2018. Additional information on the Company’s Commitments and Contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
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. The 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 December 12, 2016, a shareholder derivative action was filed by Jeffrey Tilden against the Company, as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Blucora Board of Directors, in the Superior Court of the State of California in and for the County of San Francisco. The complaint asserts claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint asserts a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserts a claim for insider trading against Mr. Snyder, a former officer of the Company, and certain companies affiliated with Mr. Snyder. The derivative action does not seek monetary damages from the Company. The complaint seeks corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.

- 14 -

On March 10, 2017, the Company filed a motion to dismiss for improper venue as a result of a forum selection provision in the Company’s bylaws that required the plaintiff to file his derivative fiduciary duty claims in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the Company's motion to dismiss. The case has been stayed by the Court until November 22, 2017, after which the case will be dismissed without further order of the Court.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 10: Stockholders’ 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,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
$
412

 
$
52

 
$
546

 
$
117

Engineering and technology
225

 
434

 
734

 
1,167

Sales and marketing
529

 
661

 
1,801

 
1,688

General and administrative
1,966

 
2,217

 
5,353

 
7,644

Restructuring
97

 
—

 
1,078

 
—

Total in continuing operations
3,229

 
3,364

 
9,512

 
10,616

Discontinued operations
—

 
(727
)
 
—

 
2,014

Total
$
3,229

 
$
2,637

 
$
9,512

 
$
12,630

In the second quarter of 2017, the Company granted 350,000 non-qualified stock options to certain HD Vest financial advisors, who are considered non-employees. These stock options vest fully three years from the date of grant. The Company used the Black-Scholes-Merton valuation method to calculate stock-based compensation, using assumptions for the risk-free interest rate, expected dividend yield, expected volatility, and expected life under the same methodology that is used for employee grants. Since these are non-employee grants, stock-based compensation expense will be remeasured at the end of each quarter. For the three and nine months ended September 30, 2017, stock-based compensation expense for these non-employees was $0.4 million and $0.5 million, respectively, and was recorded in "Cost of revenue" on the consolidated statements of comprehensive income.
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock options exercised
1,243

 
—

 
3,651

 
140

RSUs vested
91

 
102

 
442

 
426

Shares purchased pursuant to ESPP
62

 
114

 
138

 
191

Total
1,396

 
216

 
4,231

 
757

Note 11: Segment Information
The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The former Search and Content and E-Commerce 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.


- 15 -

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,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Wealth Management
$
86,809

 
$
80,088

 
$
254,772

 
$
233,496

Tax Preparation
3,362

 
3,149

 
156,936

 
135,614

Total revenue
90,171

 
83,237

 
411,708

 
369,110

Operating income (loss):
 
 
 
 
 
 
 
Wealth Management
12,425

 
11,628

 
36,684

 
32,458

Tax Preparation
(6,238
)
 
(4,382
)
 
83,410

 
72,987

Corporate-level activity
(17,513
)
 
(17,754
)
 
(57,536
)
 
(54,153
)
Total operating income (loss)
(11,326
)
 
(10,508
)
 
62,558

 
51,292

Other loss, net
(5,241
)
 
(11,453
)
 
(39,149
)
 
(29,883
)
Income tax benefit (expense)
(166
)
 
8,537

 
(5,952
)
 
(8,899
)
Discontinued operations, net of income taxes
—

 
(40,528
)
 
—

 
(57,981
)
Net income (loss)
$
(16,733
)
 
$
(53,952
)
 
$
17,457

 
$
(45,471
)
Revenues by major category within each segment are presented below (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Wealth Management:
 
 
 
 
 
 
 
Commission
$
39,432

 
$
38,962

 
$
117,181

 
$
111,070

Advisory
37,588

 
32,705

 
107,078

 
95,759

Asset-based
6,526

 
5,476

 
19,276

 
16,689

Transaction and fee
3,263

 
2,945

 
11,237

 
9,978

Total Wealth Management revenue
$
86,809

 
$
80,088

 
$
254,772

 
$
233,496

Tax Preparation:
 
 
 
 
 
 
 
Consumer
$
3,149

 
$
2,950

 
$
143,239

 
$
122,678

Professional
213

 
199

 
13,697

 
12,936

Total Tax Preparation revenue
$
3,362

 
$
3,149

 
$
156,936

 
$
135,614

Note 12: Net Income (Loss) Per Share
"Basic net income (loss) per share" 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 and vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.

- 16 -

The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(16,733
)
 
$
(13,424
)
 
$
17,457

 
$
12,510

Net income attributable to noncontrolling interests
(164
)
 
(167
)
 
(466
)
 
(426
)
Income (loss) from continuing operations attributable to Blucora, Inc.
(16,897
)
 
(13,591
)
 
16,991

 
12,084

Loss from discontinued operations attributable to Blucora, Inc.
—

 
(40,528
)
 
—

 
(57,981
)
Net income (loss) attributable to Blucora, Inc.
$
(16,897
)
 
$
(54,119
)
 
$
16,991

 
$
(45,897
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
45,459

 
41,635

 
43,749

 
41,404

Dilutive potential common shares
—

 
—

 
3,064

 
925

Weighted average common shares outstanding, diluted
45,459

 
41,635

 
46,813

 
42,329

Net income (loss) per share attributable to Blucora, Inc. - basic:
 
 
 
 
 
 
Continuing operations
$
(0.37
)
 
$
(0.33
)
 
$
0.39

 
$
0.29

Discontinued operations
—

 
(0.97
)
 
—

 
(1.40
)
Basic net income (loss) per share
$
(0.37
)
 
$
(1.30
)
 
$
0.39

 
$
(1.11
)
Net income (loss) per share attributable to Blucora, Inc. - diluted:
 
 
 
 
 
 
Continuing operations
$
(0.37
)
 
$
(0.33
)
 
$
0.36

 
$
0.29

Discontinued operations
—

 
(0.97
)
 
—

 
(1.37
)
Diluted net income (loss) per share
$
(0.37
)
 
$
(1.30
)
 
$
0.36

 
$
(1.08
)
Shares excluded
5,798

 
10,246

 
1,160

 
6,317

Shares excluded primarily related to the anti-dilutive effect of a net loss (for the three months ended September 30, 2017 and 2016), and stock options with an exercise price greater than the average price during the applicable periods.
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," "could," "would,""estimate," "predict," "potential," "continue," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our "Strategic Transformation;" and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, "Risk Factors," and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included under Part 1 Item 1 of this report, as well as with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.

- 17 -

Our Business
Blucora (the "Company," "Blucora," or "we") operates two businesses: a Wealth Management business and an online Tax Preparation business.
The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (collectively referred to as "HD Vest" or the "Wealth Management Business"). HD Vest provides wealth management solutions for financial advisors and their clients. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management and other fees.
The Tax Preparation business consists of the operations of TaxAct, Inc. (collectively referred to as "TaxAct" or the "Tax Preparation business"). TaxAct provides digital do-it-yourself ("DDIY") tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com. The TaxAct website and the information contained therein or connected thereto is not intended to be incorporated by reference into this Report.
Strategic Transformation
On October 14, 2015, we announced our plans to acquire HD Vest and focus on the technology-enabled financial solutions market (the "Strategic Transformation"). The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary ("InfoSpace") and our E-Commerce business that consisted of the operations of Monoprice, Inc. ("Monoprice") in 2016. As part of the Strategic Transformation and our model of operating as "One Company", we announced on October 27, 2016 plans to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The transformation is intended to drive efficiencies and improve operational effectiveness.
In connection with the relocation of our corporate headquarters, we have incurred restructuring costs of approximately $6.6 million. These costs are recorded within corporate-level activity for segment purposes. See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information. We also have incurred costs that do not qualify for restructuring classification, such as recruiting and overlap in personnel expenses as we transition positions to Texas ("Strategic Transformation Costs"). The restructuring is now substantially complete and it is expected to be completed by early 2018.
For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.
Seasonality
Our Tax Preparation business is highly seasonal, with a significant portion of its annual revenue earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation business typically reports losses in its operating income because revenue from the business is minimal while core operating expenses continue.
Comparability
We reclassified certain amounts on our consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.

- 18 -

RESULTS OF OPERATIONS
Summary
(In thousands, except percentages)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
Percentage
Change
 
2017
 
2016
 
Percentage
Change
Revenue
$
90,171

 
$
83,237

 
8
%
 
$
411,708

 
$
369,110

 
12
%
Operating income (loss)
$
(11,326
)
 
$
(10,508
)
 
8
%
 
$
62,558

 
$
51,292

 
22
%
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Revenue increased approximately $6.9 million due to increases of $6.7 million and $0.2 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating loss increased approximately $0.8 million, consisting of the $6.9 million increase in revenue and offset by an $7.8 million increase in operating expenses. Key changes in operating expenses were:
 
•
$5.9 million increase in the Wealth Management segment’s operating expenses primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.
•
$2.1 million increase in the Tax Preparation segment’s operating expenses primarily due to higher maintenance fees, development costs and personnel expenses resulting from overall increased headcount supporting most functions.
•
$0.2 million decrease in corporate-level expense activity primarily due to changes in headcount across most functions.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Revenue increased approximately $42.6 million due to increases of $21.3 million and $21.3 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating income increased approximately $11.3 million, consisting of the $42.6 million increase in revenue and offset by a $31.3 million increase in operating expenses. Key changes in operating expenses were:
 
•
$17.1 million increase in the Wealth Management segment’s operating expenses due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.
•
$10.9 million increase in the Tax Preparation segment’s operating expenses primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, increases in growth initiative investments, and higher personnel expenses resulting from overall increased headcount supporting most functions.
•
$3.4 million increase in corporate-level expense activity primarily due to Strategic Transformation Costs and increased headcount supporting most functions, partially offset by lower stock-based compensation costs due to fewer grants in the current year and higher expense recognized in the prior year related to HD Vest grants in 2016, partially offset by activity within our Tax Preparation business due to prior forfeitures.

SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. ("GAAP") and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial

- 19 -

Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We have two reportable segments: Wealth Management and Tax Preparation. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, restructuring, other loss, net, and income taxes to segment operating results. We analyze these separately.
Wealth Management
(In thousands, except percentages)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
Percentage
Change
 
2017
 
2016
 
Percentage
Change
Revenue
$
86,809

 
$
80,088

 
8
%
 
$
254,772

 
$
233,496

 
9
%
Operating income
$
12,425

 
$
11,628

 
7
%
 
$
36,684

 
$
32,458

 
13
%
Segment margin
14
%
 
15
%
 
 
 
14
%
 
14
%
 


Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position and operating performance. A summary of our sources of revenue and business metrics are as follows:
Sources of revenue
(In thousands, except percentages)
Three months ended September 30,
 
Nine months ended September 30,
 
Sources of Revenue
Primary Drivers
2017
 
2016
 
Percentage
Change
 
2017
 
2016
 
Percentage
Change
Advisor-driven

Commission
- Transactions
- Asset levels
$
39,432

 
$
38,962

 
1
%
 
$
117,181

 
$
111,070

 
6
%
Advisory
- Advisory asset levels
37,588

 
32,705

 
15
%
 
107,078

 
95,759

 
12
%
Other revenue
Asset-based
- Cash balances
- Interest rates
- Number of accounts
- Client asset levels
6,526

 
5,476

 
19
%
 
19,276

 
16,689

 
16
%
Transaction and fee
- Account activity
- Number of clients
- Number of advisors
- Number of accounts
3,263

 
2,945

 
11
%
 
11,237

 
9,978

 
13
%
 
Total revenue
$
86,809

 
$
80,088

 
8
%
 
$
254,772

 
$
233,496

 
9
%
 
Total recurring revenue
$
70,539

 
$
62,543

 
13
%
 
$
203,417

 
$
183,772

 
11
%
 
Recurring revenue rate
81.3
%
 
78.1
%
 
 
 
79.8
%
 
78.7
%
 
 
Recurring revenue consists of trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commission revenue, Advisory revenue, Asset-based revenue, and Transaction and fee revenue, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
(In thousands, except percentages and as otherwise indicated)
September 30,
 
2017
 
2016
 
Percentage
Change
Total Assets Under Administration ("AUA")
$
42,696,862

 
$
38,482,620

 
11
 %
Advisory Assets Under Management ("AUM")
$
11,984,320

 
$
10,204,448

 
17
 %
Percentage of total AUA
28.1
%
 
26.5
%
 

Number of advisors (in ones)
4,392

 
4,568

 
(4
)%
Advisor-driven revenue per advisor
$
17.5

 
$
15.7

 
11
 %


- 20 -

Total assets under administration ("AUA") includes assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUA service for a client’s assets, the value of the asset is only counted once in the total amount of AUA. AUA assets include Advisory Assets under Management, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.

Advisory assets under management ("AUM") includes external client assets for which we provide investment advisory and management services, typically as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee based on the value of the AUM for each advisory client. These assets are not reported on the consolidated balance sheets.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Wealth Management revenue increased approximately $6.7 million as discussed by each source of revenue below.
Wealth Management operating income increased approximately $0.8 million, consisting of the $6.7 million increase in revenue and offset by a $5.9 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Wealth Management revenue increased approximately $21.3 million as discussed by each source of revenue below.
Wealth Management operating income increased approximately $4.2 million, consisting of the $21.3 million increase in revenue and offset by an $17.1 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and higher net personnel expenses as we continue to standardize employee benefits across our businesses.
Commission revenue: We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment, 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, except percentages)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
Percentage
Change
 
2017
 
2016
 
Percentage
Change
By product category:
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
$
21,128

 
$
20,196

 
5
 %
 
$
62,371

 
$
59,021

 
6
%
Variable annuities
12,879

 
12,395

 
4
 %
 
36,820

 
35,725

 
3
%
Insurance
3,037

 
3,689

 
(18
)%
 
9,715

 
8,836

 
10
%
General securities
2,388

 
2,682

 
(11
)%
 
8,275

 
7,488

 
11
%
Total commission revenue
$
39,432

 
$
38,962

 
1
 %
 
$
117,181

 
$
111,070

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
By sales-based and trailing:
 
 
 
 
 
 
 
 
 
 
 
Sales-based
$
15,590

 
$
16,925

 
(8
)%
 
$
49,190

 
$
47,703

 
3
%
Trailing
23,842

 
22,037

 
8
 %
 
67,991

 
63,367

 
7
%
Total commission revenue
$
39,432

 
$
38,962

 
1
 %
 
$
117,181

 
$
111,070

 
6
%

- 21 -

Three months ended September 30, 2017 compared with three months ended September 30, 2016
Sales-based commission revenue decreased approximately $1.3 million primarily due to decreased activity in mutual funds, variable annuities, insurance and general securities resulting from overall market performance and portfolio rebalancings. General securities include equities, exchange-traded funds, bonds and alternative investments.
Trailing commission revenue increased approximately $1.8 million and reflects an increase in the market value of the underlying assets and, to a lesser extent, the impact of new investments.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Sales-based commission revenue increased approximately $1.5 million primarily due to increased activity in mutual funds, insurance and general securities resulting from overall market performance, portfolio rebalancings, product availability and segment refocusing, partially offset by decreased activity in variable annuities.
Trailing commission revenue increased approximately $4.6 million and reflects an increase in the market value of the underlying assets and the impact of new investments.
Advisory revenue: Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor ("RIA") and is based on the value of AUM. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in the following three-month period. The majority of our accounts are billed in advance using values as of the last business day of the prior calendar quarter.
The activity within our AUM was as follows:
(In thousands)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Balance, beginning of the period
$
11,551,288

 
$
9,814,232

 
$
10,397,071

 
$
9,692,244

Net increase (decrease) in new advisory assets
94,408

 
131,982

 
613,848

 
(1,357
)
Market impact and other
338,624

 
258,234

 
973,401

 
513,561

Balance, end of the period
$
11,984,320

 
$
10,204,448

 
$
11,984,320

 
$
10,204,448

Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end AUM.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
The increase in advisory revenue of approximately $4.9 million is primarily due to the increase in the beginning-of-period AUM for the three months ended September 30, 2017 compared with three months ended September 30, 2016, and the conversion of AUA to fee-based AUM.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
The increase in advisory revenue of approximately $11.3 million is consistent with the increase in the beginning-of-period AUM for the nine months ended September 30, 2017 compared with nine months ended September 30, 2016, and the conversion of AUA to fee-based AUM.
Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Asset-based revenue increased $1.1 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.

- 22 -

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Asset-based revenue increased $2.6 million, primarily from higher cash sweep revenues following increases in interest rates. In the current interest rate environment, and through our current clearing provider, we will not benefit from any future interest rate increases.
Transaction and fee revenue: Transaction and fee revenue primarily includes fees for executing certain transactions in client accounts and fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.
Three months ended September 30, 2017 compared with three months ended September 30, 2016
Transaction and fee revenue increased approximately $0.3 million primarily related to advisor fee increases.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
Transaction and fee revenue increased approximately $1.3 million primarily related to advisor fee increases.
Tax Preparation