AVANTAX, INC. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019


☐			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 N. State Hwy 161, 4th Floor, Irving, Texas			75038
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (972) 870-6400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

BCOR

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	ý	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ý No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


			Outstanding at
Class			July 31, 2019
Common Stock, Par Value $0.0001			48,852,487

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION			Page
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Unaudited Condensed Consolidated Statements of Stockholders' Equity	6
	Unaudited Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42

Signatures			43

Trademarks, Trade Names and Service Marks

This report includes certain trademarks, trade names and service marks of Blucora, Inc. (referred to throughout this report as "Blucora," the "Company," "we," "us," or "our"), including Blucora, HD Vest, 1st Global and TaxAct. Each one of these trademarks, trade names or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights or (iv) a registered trademark or application for registration which we have been authorized by a third party to use.

Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, ™ or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This report may also include additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names included in this report are, to our knowledge, the property of their respective owners.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report 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 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue,” and "could" or, in each case, their negative variables and similar expressions identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. These forward-looking statements include, but are not limited to, statements regarding:

•our ability to effectively compete within our industry;

•our ability to attract and retain customers, as well as our ability to provide strong customer service;

•our ability to realize all of the anticipated benefits of the acquisition of 1st Global, as well as our ability to integrate the operations of 1st Global;

•our future capital requirements and the availability of financing, if necessary;

•our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;

•our ability to generate strong investment performance for our customers and the impact of the financial markets on our customers’ portfolios;

•political and economic conditions and events that directly or indirectly impact the wealth management and tax preparation industries;

•our ability to attract and retain productive financial advisors;

•our ability to respond to rapid technological changes, including our ability to successfully release new products and services or improve upon existing products and services;

•our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;

•our ability to manage leadership and employee transitions;

•risks related to goodwill and other intangible asset impairment;

•our ability to comply with regulations applicable to the wealth management and tax preparation industries, including increased costs associated with new or changing regulations;

•our expectations concerning the benefits that may be derived from our clearing platform and our investment advisory platform;

•risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses and computer hacking attacks;

•our ability to comply with laws and regulations regarding privacy and protection of user data;

•our ability to maintain our relationships with third party partners, providers, suppliers, vendors, distributors, contractors, financial institutions and licensing partners;

•our beliefs and expectations regarding the seasonality of our business;

•risks associated with litigation;

•our ability to attract and retain qualified employees;

•our assessments and estimates that determine our effective tax rate;

•the impact of new or changing tax legislation on our business and our ability to attract and retain customers;

•our ability to develop, establish and maintain strong brands;

•our ability to protect our intellectual property and the impact of any claim that we have infringed on the intellectual property rights of others; and

•our ability to effectively integrate companies or assets that we acquire.

Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors, many of which are beyond our control, that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as supplemented by those identified under Part II, Item 1A, "Risk Factors" and elsewhere in this report, as well as in the Company's other filings with the Securities and Exchange Commission. You should not rely on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to update 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, except as required by law.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	June 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	109,606	$	84,524
Cash segregated under federal or other regulations	146		842

Accounts receivable, net of allowance	20,391		15,721
Commissions receivable	19,857		15,562
Other receivables	8,069		7,408
Prepaid expenses and other current assets, net	10,595		7,755

Total current assets	168,664		131,812
Long-term assets:
Property and equipment, net	15,090		12,389
Right-of-use assets, net	11,338		—
Goodwill, net	674,130		548,685
Other intangible assets, net	355,596		294,603


Other long-term assets	10,820		10,236
Total long-term assets	1,066,974		865,913
Total assets	$	1,235,638	$	997,725
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,945	$	3,798
Commissions and advisory fees payable	18,810		15,199
Accrued expenses and other current liabilities	43,429		18,980
Lease liabilities	7,168		46
Deferred revenue	4,158		10,257
Current portion of long-term debt, net	919		—


Total current liabilities	82,429		48,280
Long-term liabilities:
Long-term debt, net	381,579		260,390

Deferred tax liability, net	44,840		40,394
Deferred revenue	7,635		8,581

Lease liabilities	6,911		100
Other long-term liabilities	7,012		7,440
Total long-term liabilities	447,977		316,905
Total liabilities	530,406		365,185

Redeemable noncontrolling interests	—		24,945

Commitments and contingencies (Note 8)

Stockholders’ equity:
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
48,779 and 48,044, respectively	5		5
Additional paid-in capital	1,575,554		1,569,725
Accumulated deficit	(870,119)		(961,689)
Accumulated other comprehensive loss	(208)		(446)
Total stockholders’ equity	705,232		607,595
Total liabilities and stockholders’ equity	$	1,235,638	$	997,725

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)


	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Revenue:
Wealth management services revenue	$	127,831	$	92,015	$	217,363	$	184,097
Tax preparation services revenue	65,909		65,833		202,145		179,716
Total revenue	193,740		157,848		419,508		363,813
Operating expenses:
Cost of revenue:
Wealth management services cost of revenue	87,477		62,149		148,851		125,213
Tax preparation services cost of revenue	3,149		2,459		7,350		6,812
Amortization of acquired technology	—		49		—		99
Total cost of revenue	90,626		64,657		156,201		132,124
Engineering and technology	7,159		4,848		13,688		9,979
Sales and marketing	29,256		23,791		84,828		79,044
General and administrative	19,002		15,625		36,079		30,491
Acquisition and integration	9,183		—		10,980		—
Depreciation	1,315		993		2,376		2,908
Amortization of other acquired intangible assets	9,169		8,806		17,213		17,113

Restructuring	—		2		—		291
Total operating expenses	165,710		118,722		321,365		271,950
Operating income	28,030		39,126		98,143		91,863
Other loss, net	(5,118)		(2,759)		(9,076)		(7,987)
Income before income taxes	22,912		36,367		89,067		83,876
Income tax benefit (expense)	8,124		(907)		4,139		(2,870)


Net income	31,036		35,460		93,206		81,006
Net income attributable to noncontrolling interests	—		(222)		—		(427)
Net income attributable to Blucora, Inc.	$	31,036	$	35,238	$	93,206	$	80,579
Net income per share attributable to Blucora, Inc.:
Basic	$	0.64	$	0.75	$	1.93	$	1.72
Diluted	$	0.62	$	0.71	$	1.88	$	1.64




Weighted average shares outstanding:
Basic	48,555		47,221		48,358		46,931
Diluted	49,822		49,434		49,681		49,049
Other comprehensive income (loss):
Net income	$	31,036	$	35,460	$	93,206	$	81,006

Foreign currency translation adjustment	131		(112)		238		(249)



Other comprehensive income (loss)	131		(112)		238		(249)
Comprehensive income	31,167		35,348		93,444		80,757
Comprehensive income attributable to noncontrolling interests	—		(222)		—		(427)
Comprehensive income attributable to Blucora, Inc.	$	31,167	$	35,126	$	93,444	$	80,330

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except per share data)


	Redeemable Noncontrolling Interests							Additional- paid-in capital		Accumulated deficit		Accumulated other comprehensive loss
				Common stock
				Shares		Amount								Total
Balance as of December 31, 2018	$	24,945	48,044	$	5	$	1,569,725	$	(961,689)	$	(446)	$	607,595
Common stock issued for stock options and restricted stock units	—		211	—		283		—		—		283
Other comprehensive income	—		—	—		—		—		107		107
Stock-based compensation	—		—	—		2,443		—		—		2,443
Tax payments from shares withheld for equity awards	—		—	—		(2,425)		—		—		(2,425)
Reclassification of mandatorily redeemable noncontrolling interests	(22,428)		—	—		—		—		—		—
Impact of adoption of new leases accounting standard	—		—	—		—		(1,636)		—		(1,636)
Net income	—		—	—		—		62,170		—		62,170
Balance as of March 31, 2019	$	2,517	48,255	$	5	$	1,570,026	$	(901,155)	$	(339)	$	668,537
Common stock issued for stock options, restricted stock units and employee stock purchase plan	—		524	—		4,181		—		—		4,181
Other comprehensive income	—		—	—		—		—		131		131
Stock-based compensation	—		—	—		4,082		—		—		4,082
Tax payments from shares withheld for equity awards	—		—	—		(2,735)		—		—		(2,735)
Redemption of noncontrolling interests	(2,517)		—	—		—		—		—		—
Net income	—		—	—		—		31,036		—		31,036
Balance as of June 30, 2019	$	—	48,779	$	5	$	1,575,554	$	(870,119)	$	(208)	$	705,232


	Redeemable Noncontrolling Interests							Additional- paid-in capital		Accumulated deficit		Accumulated other comprehensive loss
				Common stock
				Shares		Amount								Total
Balance as of December 31, 2017	$	18,033	46,367	$	5	$	1,555,560	$	(1,014,174)	$	(4)	$	541,387
Common stock issued for stock options, restricted stock units and employee stock purchase plan	—		462	—		3,237		—		—		3,237
Other comprehensive loss	—		—	—		—		—		(137)		(137)
Stock-based compensation	—		—	—		2,958		—		—		2,958
Tax payments from shares withheld for equity awards	—		—	—		(1,493)		—		—		(1,493)
Impact of adoption of new revenue recognition accounting standard	—		—	—		—		1,851		—		1,851
Net income	205		—	—		—		45,341		—		45,341
Balance as of March 31, 2018	$	18,238	46,829	$	5	$	1,560,262	$	(966,982)	$	(141)	$	593,144
Common stock issued for stock options and restricted stock units	—		665	—		7,852		—		—		7,852
Other comprehensive loss	—		—	—		—		—		(112)		(112)
Stock-based compensation	—		—	—		4,033		—		—		4,033
Tax payments from shares withheld for equity awards	—		—	—		(2,735)		—		—		(2,735)
Net income	222		—	—		—		35,238		—		35,238
Balance as of June 30, 2018	$	18,460	47,494	$	5	$	1,569,412	$	(931,744)	$	(253)	$	637,420

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six months ended June 30,
	2019		2018
Operating Activities:
Net income	$	93,206	$	81,006


Adjustments to reconcile net income to net cash from operating activities:
Stock-based compensation	6,525		6,685
Depreciation and amortization of acquired intangible assets	20,185		20,338



Reduction of right-of-use lease assets	1,977		—
Deferred income taxes	4,446		(781)
Amortization of premium on investments, net, and debt issuance costs	547		487
Accretion of debt discounts	123		87
Loss on debt extinguishment	—		1,533





Other	260		—
Cash provided (used) by changes in operating assets and liabilities:

Accounts receivable	(3,217)		4,096
Commissions receivable	847		2
Other receivables	(661)		3,142
Prepaid expenses and other current assets	12,258		461
Other long-term assets	(355)		(764)
Accounts payable	(2,995)		59
Commissions and advisory fees payable	(663)		(655)
Lease liabilities	(2,066)		—
Deferred revenue	(24,760)		(5,746)
Accrued expenses and other current and long-term liabilities	(8,845)		(3,393)
Net cash provided by operating activities	96,812		106,557
Investing Activities:
Business acquisition, net of cash acquired	(164,461)		—
Purchases of property and equipment	(2,938)		(2,602)





Net cash used by investing activities	(167,399)		(2,602)
Financing Activities:

Proceeds from credit facilities	121,499		—
Payments on credit facilities	—		(80,000)




Payment of redeemable noncontrolling interests	(24,945)		—
Proceeds from stock option exercises	3,320		10,386
Proceeds from issuance of stock through employee stock purchase plan	1,144		704
Tax payments from shares withheld for equity awards	(5,160)		(4,229)
Contingent consideration payments for business acquisition	(943)		(1,315)
Net cash provided (used) by financing activities	94,915		(74,454)







Effect of exchange rate changes on cash, cash equivalents, and restricted cash	58		(30)
Net increase in cash, cash equivalents, and restricted cash	24,386		29,471
Cash, cash equivalents, and restricted cash, beginning of period	85,366		62,311
Cash, cash equivalents, and restricted cash, end of period	$	109,752	$	91,782




Cash paid for income taxes	$	2,566	$	767
Cash paid for interest	$	6,671	$	7,991

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of the Business

Description of the business: Blucora, Inc. (the "Company," "Blucora," "we," "our," or "us") operates two businesses: a Wealth Management business and a digital Tax Preparation business. The Wealth Management business consists of HD Vest ("HD Vest") and, since May 6, 2019, 1st Global ("1st Global"), collectively referred to as the "Wealth Management business" or the "Wealth Management segment". The Wealth Management business provides wealth management solutions for financial advisors and their clients. Specifically, the Wealth Management business 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. The Wealth Management business was founded to help tax and accounting professionals integrate financial services into their practices.

On May 6, 2019, the Company closed the Acquisition of all of the issued and outstanding common stock of 1st Global, (the "Acquisition"), a tax-focused wealth management company, for a cash purchase price of $180.0 million. The purchase price was paid with a combination of (i) cash on hand and (ii) the proceeds from a $125.0 million increase in the term loan under the company's credit agreement. See further discussion of the term loan increase in "Note 6: Debt."

The operations of 1st Global are included in the Company's operating results as part of the Wealth Management segment from the date of the Acquistion. See further discussion in "Note 3: Business Combinations."

The Tax Preparation business consists of the operations of 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").

Segments: The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment.

Reclassification: The Company reclassified approximately $0.7 million from long-term assets to current assets related to loans given to several HD Vest advisors on its December 31, 2018 consolidated balance sheet.

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 unaudited 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, 2018. 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):


	June 30,						December 31,
	2019		2018		2018
Cash and cash equivalents	$	109,606	$	89,840	$	84,524
Cash segregated under federal or other regulations	146		1,117		842
Restricted cash included in "Prepaid expenses and other current assets, net"	—		275		—
Restricted cash included in "Other long-term assets"	—		550		—
Total cash, cash equivalents, and restricted cash	$	109,752	$	91,782	$	85,366

Cash segregated under federal and other regulations is held in a separate bank account for the exclusive benefit of the Company’s Wealth Management 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 and lease arrangements.

Business combinations and intangible assets including goodwill: We account for business combinations using the acquisition method.

The 1st Global purchase price has been allocated to 1st Global’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values at the time of Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in the Company's financial statements. The most subjective areas include determining the fair value of the following:

•intangible assets, including the valuation methodology, estimations of future cash flows, discount rates, growth rates, as well as the estimated useful life of intangible assets;

•deferred tax assets and liabilities and uncertain tax positions, which are initially estimated as of the Acquisition date;

•property, plant and equipment; pre-existing liabilities or legal claims; and deferred revenue, each as may be applicable; and

•goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

The Company's assumptions and estimates are based upon comparable market data and information obtained from the Company's management and the management of 1st Global.

Fair value of financial instruments: The Company measures its cash equivalents 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.

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 and ASCs not listed below were assessed and either were determined to not be 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 and ASCs that impact the following areas:

Leases (ASU 2016-02) - In February 2016, the FASB issued guidance codified in ASC 842, "Leases" ("ASC 842"), which supersedes the guidance in ASC 840 "Leases." Under ASC 842, lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) will be recognized on the balance sheet. Lease liabilities are measured as the present value of unpaid lease payments for operating leases where the Company is the lessee, and a corresponding right-of-use ("ROU") asset is recognized for the right to use the leased assets.

This guidance became 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. Prior comparable periods are presented in accordance with accounting guidance under ASC 840 "Leases" and were not restated.

The Company adopted ASC 842 on January 1, 2019 for all open leases with a term greater than one year as of the adoption date, using the modified retrospective method of adoption with a cumulative effect adjustment to retained earnings. The Company elected the package of practical expedients, for which there is no requirement to reassess lease existence, classification and initial direct costs, the hindsight practical expedient, for which the Company used hindsight in determining certain lease terms, and the short-term lease expedient, for which the Company considered all open leases with a term greater than one year as of the adoption date. The adoption resulted in $6.6 million of additional operating lease assets, $9.1 million of additional operating lease liabilities, and a $1.6 million adjustment to the opening balance of retained earnings as a result of

reevaluating certain of the Company's lease terms as of the adoption date. The Company also reclassified, upon adoption, $0.9 million of other lease-related balances to reduce the measurement of lease assets.

The Company's lease terms are comprised of contractual terms but may include extension or termination options reasonably assured to be exercised at lease inception, which are included in the recognition of ROU assets and lease liabilities. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations.

The Company’s leases are not complex; therefore, there were no significant assumptions or judgments made in applying the requirements of ASC 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and non-lease components, and the determination of the discount rates for the leases.

Measurement of Credit Losses (ASU 2016-13) - In June 2016, the FASB issued an ASU that requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including the interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

Note 3: Business Combinations

On May 6, 2019, the Company closed the Acquisition of all of the issued and outstanding common stock of 1st Global for a cash purchase price of $180.0 million. The purchase price is subject to customary adjustment as well as certain indemnity escrows, in each case as described more fully in the stock purchase agreement governing the Acquisition. The purchase price has been allocated to 1st Global’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values at the time of acquisition. The preliminary fair values of assets acquired and liabilities assumed in the Acquisition were as follows (in thousands):


Tangible assets acquired, including cash of $12,389	$	37,153
Goodwill	125,277
Identified intangible assets	78,200
Contingent liability	(10,000)
Deferred revenues	(17,715)
Other current liabilities	(13,397)
Deferred tax liabilities and other	(19,518)
Total	$	180,000
Cash paid at acquisition date	$	176,850
Cash to be paid after acquisition date	3,150

The identified intangible assets were recognized as follows (in thousands):


	Estimated Fair Value		Weighted Average Estimated Useful Life (months)
Advisor relationships	$	70,800	144
Sponsor relationships	700		120
Developed technology	3,600		60
Trade name	3,100		60
Total identified intangible assets	$	78,200	137

For the three months ended June 30, 2019, the Company recognized amortization expense of approximately $1.1 million in "Amortization of other acquired intangible assets" on the consolidated statements of comprehensive income.

Goodwill consists largely of synergistic opportunities for both HD Vest and 1st Global, including increased scale, enhanced capabilities, and an integrated platform of brokerage, investment advisory and insurance services. Goodwill is not expected to be deductible for income tax purposes, and is reported in the Company's Wealth Management segment.

As part of the Acquisition, the Company assumed, and recorded as part of the opening balance sheet, a contingent liability related to a regulatory inquiry. While the inquiry is still on-going, the Company evaluated a range of possible losses and recorded a reserve of $10.0 million.

The Company retained $3.2 million of the purchase price, which is to be paid to either 1st Global or former employees of 1st Global within the twelve months following the Acquisition.

The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as, due to the recent timing of the Acquisition, the Company obtains additional information for those estimates during the measurement period (up to one year from the Acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.

The primary areas of the acquisition accounting that had not yet been finalized as of June 30, 2019 related to the fair value adjustments for fixed assets, lease obligations, intangible assets, certain contingent liability matters, deferred income taxes and residual goodwill.

The gross contractual amount of acquired accounts receivable, including commissions receivable, was $6.7 million. As an insignificant amount of these receivables was expected to be uncollectible, the acquired amount approximates fair value.

During the three and six months ended June 30, 2019, the Company incurred transaction costs of $4.7 million and $1.8 million, respectively, associated with the Acquisition, which were recognized in "General and administrative expense" on the consolidated statements of comprehensive income.

The operations of 1st Global are included in the Company's operating results as part of the Wealth Management segment from the date of Acquisition. From the date of Acquisition, 1st Global contributed approximately $29.0 million of revenue and $0.7 million of loss before income taxes to the Company.

Pro forma financial information of the 1st Global Acquisition:

The financial information in the table below summarizes the combined results of operations of Blucora and 1st Global, on a pro forma basis, for the period in which the Acquisition occurred and the prior reporting period as though the companies had been combined as of the beginning of each period presented. Pro forma adjustments have been made to include amortization expense on the definite-lived intangible assets identified in the Acquisition, debt-related expenses associated with the credit facility used to finance the Acquisition, and to remove Acquisition-related transaction costs. 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 (amounts in thousands):


	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Revenue	$	211,471	$	200,243	$	478,808	$	449,776
Net income	$	18,474	$	25,553	$	68,513	$	61,008

Note 4: Segment Information and Revenues

The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. 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 operations of 1st Global are included in the Company's operating results as part of the Wealth Management segment from the date of the Acquisition.

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 June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Revenue:
Wealth Management	$	127,831	$	92,015	$	217,363	$	184,097
Tax Preparation	65,909		65,833		202,145		179,716
Total revenue	193,740		157,848		419,508		363,813
Operating income (loss):
Wealth Management	16,979		12,954		28,519		26,029
Tax Preparation	41,368		44,121		120,640		102,927
Corporate-level activity	(30,317)		(17,949)		(51,016)		(37,093)
Total operating income	28,030		39,126		98,143		91,863
Other loss, net	(5,118)		(2,759)		(9,076)		(7,987)
Income tax benefit (expense)	8,124		(907)		4,139		(2,870)
Net income	$	31,036	$	35,460	$	93,206	$	81,006

Revenues by major category within each segment are presented below (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Wealth Management:
Commission	$	48,068	$	40,384	$	85,228	$	83,254
Advisory	61,410		40,058		101,167		79,359
Asset-based	13,219		7,306		22,912		14,478
Transaction and fee	5,134		4,267		8,056		7,006
Total Wealth Management revenue	$	127,831	$	92,015	$	217,363	$	184,097
Tax Preparation:
Consumer	$	62,686	$	63,137	$	186,628	$	165,049
Professional	3,223		2,696		15,517		14,667
Total Tax Preparation revenue	$	65,909	$	65,833	$	202,145	$	179,716

Wealth Management revenue recognition: Wealth Management revenue consists primarily of commission revenue, advisory revenue, asset-based revenue, and transaction and fee revenue. The Company's Wealth Management revenues are earned from customers primarily located in the United States.

Details of Wealth Management revenues are (in thousands):



	Three months ended June 30,
	2019										2018
	Recognized Upon Transaction		Recognized Over Time		Total		Recognized Upon Transaction		Recognized Over Time		Total
Commission revenue	$	20,469	$	27,599	$	48,068	$	15,919	$	24,465	$	40,384
Advisory revenue	—		61,410		61,410		—		40,058		40,058
Asset-based revenue	—		13,219		13,219		—		7,306		7,306
Transaction and fee revenue	800		4,334		5,134		1,036		3,231		4,267
Total	$	21,269	$	106,562	$	127,831	$	16,955	$	75,060	$	92,015


	Six months ended June 30,
	2019										2018
	Recognized Upon Transaction		Recognized Over Time		Total		Recognized Upon Transaction		Recognized Over Time		Total
Commission revenue	$	36,153	$	49,075	$	85,228	$	34,264	$	48,990	$	83,254
Advisory revenue	—		101,167		101,167		—		79,359		79,359
Asset-based revenue	—		22,912		22,912		—		14,478		14,478
Transaction and fee revenue	1,570		6,486		8,056		1,997		5,009		7,006
Total	$	37,723	$	179,640	$	217,363	$	36,261	$	147,836	$	184,097

Tax Preparation revenue recognition: The Company derives revenue from the sale of Tax Preparation digital services, ancillary services, packaged tax preparation software, and arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer and audit defense. The Company’s Tax Preparation revenues are earned from customers primarily located in the United States.

Details of Tax Preparation revenues are (in thousands):



	Three months ended June 30,
	2019										2018
	Recognized Upon Transaction		Recognized Over Time		Total		Recognized Upon Transaction		Recognized Over Time		Total
Consumer	$	62,057	$	629	$	62,686	$	63,137	$	—	$	63,137
Professional	2,459		764		3,223		1,919		777		2,696
Total	$	64,516	$	1,393	$	65,909	$	65,056	$	777	$	65,833


	Six months ended June 30,
	2019										2018
	Recognized Upon Transaction		Recognized Over Time		Total		Recognized Upon Transaction		Recognized Over Time		Total
Consumer	$	185,072	$	1,556	$	186,628	$	165,049	$	—	$	165,049
Professional	13,301		2,216		15,517		12,315		2,352		14,667
Total	$	198,373	$	3,772	$	202,145	$	177,364	$	2,352	$	179,716

Note 5: 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
	June 30, 2019		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	$	23,454	$	23,454	$	—	$	—

















Total assets at fair value	$	23,454	$	23,454	$	—	$	—


			Fair value measurements at the reporting date using
	December 31, 2018		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	$	23,181	$	23,181	$	—	$	—




















Total assets at fair value	$	23,181	$	23,181	$	—	$	—

Acquisition-related contingent consideration liability	$	1,275	$	—	$	—	$	1,275
Total liabilities at fair value	$	1,275	$	—	$	—	$	1,275

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, 2018	$	1,275

Payment	(1,331)

Foreign currency transaction loss	56
Balance as of June 30, 2019	$	—

Cash equivalents are classified within Level 1 of the fair value hierarchy because the Company values them utilizing quoted prices in active markets. Unrealized gains and losses are included in "Accumulated other comprehensive loss" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.

Note 6: Debt

The Company’s debt consisted of the following as of the periods indicated in the table below (in thousands):


	June 30, 2019														December 31, 2018
	Principal amount		Discount		Debt issuance costs		Net carrying value		Principal amount		Discount		Debt issuance costs		Net carrying value
Senior secured credit facilities	$	390,000	$	(1,472)	$	(6,030)	$	382,498	$	265,000	$	(970)	$	(3,640)	$	260,390

Senior secured credit facilities: In May 2017, the Company entered into a credit agreement with a syndicate of lenders in order to provide a term loan and revolving line of credit for working capital, capital expenditures and general business purposes (the "Blucora senior secured credit facilities"). Prior to May 2019, the Blucora senior secured credit facilities provided for up to $425.0 million of borrowings, consisting of a committed $50.0 million revolving credit facility (including a letter of credit

sub-facility) and a $375.0 million term loan facility. In May 2019, the Company amended the Blucora senior secured credit facilities, in order to, among other things: (i) provide for a term loan increase in the aggregate principal amount of $125.0 million in the form of a fungible increase to, and on substantially the same terms as, the Company's existing senior secured term loan under the Blucora senior secured credit facilities and (ii) increase the total amount of the revolving credit facility under the Blucora senior secured credit facilities by $15.0 million to an aggregate of $65.0 million.

The amended Blucora senior secured credit facilities provide for up to $565.0 million of borrowings, consisting of a committed $65.0 million revolving credit facility (including a letter of credit sub-facility) and a $500.0 million term loan facility that mature on May 22, 2022 and May 22, 2024, respectively. Obligations under the Blucora senior secured credit facilities are guaranteed by certain of Blucora's subsidiaries and secured by substantially all of the assets of the Company and certain of its subsidiaries.

The proceeds of the increase in the term loan were used to fund a portion of the purchase price of the Acquisition, as well as to pay the fees and expenses associated with entering into the amendment to the Blucora senior secured credit facilities.

The Blucora senior secured credit facilities include financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit facility agreement. As of June 30, 2019, the Company was in compliance with all of the financial and operating covenants under the credit facility agreement.

Commencing December 31, 2019, principal payments of the term loan are due on a quarterly basis in an amount equal to $312,500 (subject to reduction for prepayments), with the remaining principal amount due on the maturity date of May 22, 2024. The Company also has the right to prepay the term loan or outstanding amounts under the revolving credit facility without any premium or penalty (other than customary Eurodollar breakage costs). Prepayments on the term loan are subject to certain prepayment minimums. The Company may be required to make annual prepayments on the term loan in an amount equal to a percentage of excess cash flow of the Company during the applicable fiscal year from 0% to 50%, depending on the Consolidated First Lien Net Leverage Ratio (as defined in the credit facility agreement) for such fiscal year.

In November 2017, the credit facility agreement was amended in order to refinance and reprice the initial term loan. The interest rate on the the term loan is variable at the London Interbank Offered Rate, plus the applicable interest rate margin of 3.00% for Eurodollar Rate loans and 2.00% for ABR loans.

Depending on the Company’s Consolidated First Lien Net Leverage Ratio (as defined in the credit facility agreement), the applicable interest rate margin on the revolving credit facility is from 2.75% to 3.25% for Eurodollar Rate loans and 1.75% to 2.25% for ABR loans. Interest is payable at the end of each interest period. As of June 30, 2019, the Company had not borrowed any amounts under the revolving credit facility.

As of June 30, 2019, the term loan 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 7: Redeemable Noncontrolling Interests

In connection with the 2015 acquisition of HD Vest, the former management of HD Vest retained an ownership interest in that business. The Company was party to put and call arrangements that became exercisable beginning in the first quarter of 2019 with respect to those interests. These put and call arrangements allowed certain members of HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests for cash, respectively, within ninety days after the Company filed its Annual Report on Form 10-K for the year ended December 31, 2018, which occurred on March 1, 2019. All of these arrangements were settled in cash for $24.9 million in the second quarter of 2019.

Note 8: Commitments and Contingencies

Significant events since the year ended December 31, 2018, outside of the ordinary course of the Company’s business, include debt activity (as discussed further in "Note 6: Debt"), purchase commitments of approximately $3.0 million over the next year from 1st Global, and sublease income of $1.6 million primarily related to the sublease agreement for the Company's former headquarters in Bellevue, Washington. 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, 2018.

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. Aside from the contingent liability described in "Note 3: Business Combinations," the Company is not currently party to any legal proceedings or claims for which it has incurred a liability on its consolidated balance sheets.

Note 9: 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 following on the consolidated statements of comprehensive income (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Cost of revenue	$	896	$	271	$	1,416	$	527
Engineering and technology	156		202		332		412
Sales and marketing	180		702		(13)		1,218
General and administrative	2,850		2,555		4,790		4,528



Total	$	4,082	$	3,730	$	6,525	$	6,685

As of June 30, 2019, the Company had granted 801,986 RSUs and non-qualified stock options to certain Wealth Management business financial advisors. These advisors are considered non-employees. The RSUs and stock options fully vest three years from the date of grant. Following the Company's early adoption of ASU 2018-07, effective January 1, 2018, these grants are accounted for similarly to share-based payments granted to employees.

Total net shares issued to employees for stock options exercised, RSUs vested, and shares purchased pursuant in the Company's ESPP were as follows (in thousands):


	Three months ended June 30,			Six months ended June 30,
	2019	2018	2019	2018
Stock options exercised	399	552	478	872
RSUs vested	79	114	211	220
Shares purchased pursuant to ESPP	46	(1)	46	35
Total	524	665	735	1,127

Note 10: Leases

The Company's leases are primarily related to office space. For the three and six months ended June 30, 2019, the Company recognized operating lease costs of approximately $1.2 million and $2.3 million, respectively, in "General and administrative" expense on the consolidated statements of comprehensive income. For the three and six months ended June 30, 2018, the Company recognized rent expense of approximately $0.6 million and $1.2 million, respectively, in "General and administrative" expense on the consolidated statements of comprehensive income.

As of June 30, 2019, the Company's weighted-average remaining operating lease term was approximately 3.8 years, and its weighted-average operating lease discount rate was 5.4%.

The maturities of the Company's operating lease liabilities as of June 30, 2019 are below. The Company's finance lease liabilities as of June 30, 2019 were $0.1 million.


(in thousands, except percentages)
Undiscounted cash flows:
2019 (for the six months remaining in 2019)	$	5,218
2020	3,587
2021	1,136
2022	1,264
2023	1,292
2024	1,319
Thereafter	$	1,800
Total undiscounted cash flows	$	15,616
Imputed interest	(1,660)
Present value of cash flows	$	13,956

	June 30, 2019
Short-term operating lease liabilities	$	7,121
Long-term operating lease liabilities	6,835
Total operating lease liabilities	$	13,956

Cash paid on operating lease liabilities was $2.1 million for the six months ended June 30, 2019. Lease liabilities from new ROU assets obtained during the six months ended June 30, 2019 were $6.7 million, primarily due to the Acquisition. In the three months ended June 30, 2019, the Company signed a new office lease, which is expected to commence in 2020.

Note 11: Income Taxes

The Company recorded income tax benefit of $8.1 million and $4.1 million in the three and six months ended June 30, 2019, respectively. The Company's effective income tax rate differed from the 21% statutory rate in the three and six months ended June 30, 2019, primarily due to excess tax benefits related to stock-based compensation and the release of valuation allowances, offset by the effect of state income taxes, non-deductible compensation and acquisition costs. As part of the Acquisition, the Company recorded $78.2 million of intangible assets that resulted in an $11.6 million discrete change in the valuation allowance as intangible assets are not amortizable for tax purposes.

The Company recorded income tax expense of $0.9 million and $2.9 million in the three and six months ended June 30, 2018, respectively. Income taxes differed from the 21% statutory rate in three and six months ended June 30, 2018, primarily due to the release of valuation allowances and the effect of state income taxes.

Note 12: Net Income Per Share

"Basic net income per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income 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 the vesting of unvested RSUs.

The computation of basic and diluted net income per share attributable to Blucora, Inc. is as follows (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Numerator:
Income	$	31,036	$	35,460	$	93,206	$	81,006
Net income attributable to noncontrolling interests	—		(222)		—		(427)




Net income attributable to Blucora, Inc.	$	31,036	$	35,238	$	93,206	$	80,579
Denominator:
Weighted average common shares outstanding, basic	48,555		47,221		48,358		46,931
Dilutive potential common shares	1,267		2,213		1,323		2,118
Weighted average common shares outstanding, diluted	49,822		49,434		49,681		49,049
Net income per share attributable to Blucora, Inc.:
Basic	$	0.64	$	0.75	$	1.93	$	1.72
Diluted	$	0.62	$	0.71	$	1.88	$	1.64
Shares excluded	311		373		284		637

Shares were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1 of this report and the section titled "Cautionary Statement Regarding Forward-Looking Statements" in 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, 2018.

Our Business

Blucora, Inc. (collectively, with its direct and indirect subsidiaries on a consolidated basis, the "Company," "Blucora," "we," "our" or "us") operates two businesses: a Wealth Management business and a digital Tax Preparation business.

The Wealth Management business consists of HD Vest and 1st Global, (collectively, the "Wealth Management business" or the "Wealth Management segment"), the latter of which was acquired in May 2019 as further discussed below. HD Vest and 1st Global provide tax-focused wealth management solutions for financial advisors, Certified Public Accounting firms and their clients. Specifically, the Wealth Management business 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, and/or clients of their respective firms. The Wealth Management business helps tax and accounting professionals and firms integrate financial services into their practices. The Wealth Management business recruits independent tax professionals with, or within, established tax practices and offers specialized training and support, which allows them to join the the Wealth Management business platforms as independent financial advisors. The Wealth Management business generates revenue primarily through commissions, quarterly investment advisory fees based on total client assets and other fees.

The Tax Preparation business consists of the operations of TaxAct ("TaxAct," the "Tax Preparation business," or the "Tax Preparation segment"). TaxAct provides digital do-it-yourself tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its digital 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.

Recent Developments

Acquisition of 1st Global

On May 6, 2019, we closed the Acquisition of all of the issued and outstanding common stock of 1st Global, a tax-focused wealth management company, for a cash purchase price of $180.0 million. The purchase price was paid with a combination of (i) cash on hand and (ii) the proceeds from a $125.0 million increase in the term loan under the Blucora senior secured credit facilities. As a result of the Acquisition we expect to achieve costs savings and synergies as we integrate 1st Global into our business.

Amendment to Credit Facilities; Incurrence of Additional Term Loan

In May 2017, we entered into a credit agreement with a syndicate of lenders for the Blucora senior secured credit facilities. Prior to May 2019, the Blucora senior secured credit facilities provided for up to $425.0 million of borrowings, consisting of a committed $50.0 million revolving credit facility (including a letter of credit sub-facility) and a $375.0 million term loan facility. In May 2019, we amended the Blucora senior secured credit facilities, in order to, among other things: (i) provide for a term loan increase in the aggregate principal amount of $125.0 million in the form of a fungible increase to, and on substantially the same terms as, our existing senior secured term loan under the Blucora senior secured credit facilities and (ii) increase the total amount of the revolving credit facility under the Blucora senior secured credit facilities by $15.0 million to an aggregate of $65.0 million. See further discussion of the term loan increase in "Note 6: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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. We anticipate that the seasonal nature of the Tax Preparation business will continue in the foreseeable future.

RESULTS OF OPERATIONS

Summary


(In thousands, except percentages)	Three months ended June 30,										Six months ended June 30,
	2019		2018		Change		2019		2018		Change
Revenue	$	193,740	$	157,848	23	%	$	419,508	$	363,813	15	%
Operating income	$	28,030	$	39,126	(28)	%	$	98,143	$	91,863	7	%

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Revenue increased approximately $35.9 million due to an increase of $35.8 million in revenue related to our Wealth Management business and an increase of $0.1 million in revenue related to our Tax Preparation business, as discussed in the following "Segment Revenue/Operating Income" section.

Operating income decreased approximately $11.1 million, consisting of the $35.9 million increase in revenue that was offset by a $47.0 million increase in operating expenses. Key changes in operating expenses were:

•$31.8 million increase in the Wealth Management segment’s operating expenses (including approximately $26.8 million of operating expenses from 1st Global), primarily due to an increase in commissions and advisory fees paid to our financial advisors, which fluctuated in relation to the change in underlying commission and advisory revenues earned on client accounts.

•$2.8 million increase in the Tax Preparation segment’s operating expenses, primarily due to an increase in personnel costs supporting product development and an increase in software development expenses, partially offset by lower consulting expenses primarily related to strategic initiatives.

•$12.4 million increase in corporate-level expense activity, primarily related to acquisition and integration costs and an increase in consulting expenses.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Revenue increased approximately $55.7 million due to an increase of $22.4 million in revenue related to our Tax Preparation business and an increase of $33.3 million in revenue related to our Wealth Management business, as discussed in the following "Segment Revenue/Operating Income" section.

Operating income increased approximately $6.3 million, consisting of the $55.7 million increase in revenue that was offset by a $49.4 million increase in operating expenses. Key changes in operating expenses were:

•$30.8 million increase in the Wealth Management segment’s operating expenses (including approximately $26.8 million of operating expenses from 1st Global), primarily due to an increase in commissions and advisory fees paid to our financial advisors, which fluctuated in relation to the change in underlying commission and advisory revenues earned on client accounts.

•$4.7 million increase in the Tax Preparation segment’s operating expenses, primarily due to an increase in personnel costs supporting multiple functions and an increase in software expenses.

•$13.9 million increase in corporate-level expense activity, primarily related to acquisition and integration costs and an increase in consulting expenses.

SEGMENT REVENUE/OPERATING INCOME

The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the United States ("GAAP") and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 4: Segment Information and Revenues" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We have two reportable segments: Wealth Management and Tax Preparation. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, restructuring, other loss, net, and income taxes to segment operating results. Rather, we analyze such general and administrative costs separately under the heading "Corporate-level activity."

Wealth Management


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
Revenue	$	127,831		$	92,015		39	%	$	217,363		$	184,097		18	%
Operating income	$	16,979		$	12,954		31	%	$	28,519		$	26,029		10	%
Segment margin	13		%	14		%			13		%	14		%

The decrease in Wealth Management segment margin for the three months ended June 30, 2019 is primarily due to the impact of 1st Global, partially offset by higher advisory and asset-based revenues and a decrease in costs related to our 2018 clearing firm conversion. The decrease in Wealth Management segment margin for the six months ended June 30, 2019 is primarily due to the impact of 1st Global.

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 is as follows:

Sources of revenue


(In thousands, except percentages)								Three months ended June 30,																							Six months ended June 30,
	Sources of Revenue	Primary Drivers	2019					2018					Change				2019					2018					Change
Advisor-driven	Commission	- Transactions - Asset levels	$	48,068				$	40,384				19	%			$	85,228				$	83,254				2	%
		Advisory	- Advisory asset levels		61,410					40,058					53	%			101,167					79,359					27	%
Other revenue	Asset-based	- Cash balances - Interest rates - Number of accounts - Client asset levels	13,219					7,306					81	%			22,912					14,478					58	%
		Transaction and fee	- Account activity - Number of clients - Number of advisors - Number of accounts		5,134					4,267					20	%			8,056					7,006					15	%
	Total revenue				$	127,831				$	92,015				39	%			$	217,363				$	184,097				18	%
	Total recurring revenue				$	106,557				$	75,369				41	%			$	179,798				$	148,331				21	%
	Recurring revenue rate				83.4		%			81.9		%							82.7		%			80.6		%

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 fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, we believe recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.

Business metrics


(In thousands, except percentages and as otherwise indicated)	June 30,
	2019			2018			Change
Total Client Assets	$	67,602,006		$	45,016,993		50	%
Brokerage Assets	$	41,335,972		$	32,069,800		29	%
Advisory Assets	$	26,266,034		$	12,947,193		103	%
Percentage of Total Client Assets	38.9		%	28.8		%
Number of advisors (in ones)	4,225			3,709			14	%
Advisor-driven revenue per advisor	$	25.9		$	21.7		19	%

Total client assets ("total client assets") 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 total client assets service for a client’s assets, the value of the asset is only counted once in the total amount of

total client assets. Total client assets include advisory assets, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.

Advisory assets ("advisory assets") 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 advisory assets for each advisory client. These assets are not reported on the consolidated balance sheets.

Brokerage assets represents the difference between total client assets and advisory assets.

Total client assets acquired from 1st Global were approximately $20.0 billion.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Wealth Management revenue increased approximately $35.8 million as a result of the factors discussed in the category for each source of revenue below.

Wealth Management operating income increased approximately $4.0 million, due to a $35.8 million increase in revenue, offset by a $31.8 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to approximately $26.8 million of operating expenses from 1st Global, and an increase in commissions and advisory fees paid to our financial advisors, which fluctuated in relation to the change in underlying commission and advisory revenues earned on client accounts.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Wealth Management revenue increased approximately $33.3 million as a result of the factors discussed in the category for each source of revenue below.

Wealth Management operating income increased approximately $2.5 million, due to a $33.3 million increase in revenue, offset by a $30.8 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to approximately $26.8 million of operating expenses from 1st Global, and an increase in commissions and advisory fees paid to our financial advisors, which fluctuated in relation to the change in underlying commission and advisory revenues earned on client accounts.

Commission revenue: The Wealth Management segment generates 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, market volatility, interest rate fluctuations and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on certain mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by type of commission revenue, was as follows:


(In thousands, except percentages)	Three months ended June 30,										Six months ended June 30,
	2019		2018		Change		2019		2018		Change
By product category:
Mutual funds	$	23,437	$	22,329	5	%	$	42,678	$	45,293	(6)	%
Variable annuities	15,145		12,386		22	%	26,503		25,850		3	%
Insurance	4,299		3,064		40	%	8,029		6,451		24	%
General securities	5,187		2,605		99	%	8,018		5,660		42	%

Total commission revenue	$	48,068	$	40,384	19	%	$	85,228	$	83,254	2	%

By type of commission:
Sales-based	$	20,469	$	15,919	29	%	$	36,153	$	34,264	6	%
Trailing	27,599		24,465		13	%	49,075		48,990		—	%
Total commission revenue	$	48,068	$	40,384	19	%	$	85,228	$	83,254	2	%

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Sales-based commission revenue increased approximately $4.6 million, primarily due to approximately $4.3 million of sales-based commission revenue from 1st Global.

Trailing commission revenue increased approximately $3.1 million, primarily due to approximately $4.1 million of revenues from 1st Global, offset by lower trailing commission revenues due to changes in the market value of the underlying assets.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Sales-based commission revenue increased approximately $1.9 million, primarily due to approximately $4.3 million of sales-based commission revenue from 1st Global, partially offset by decreased activity in mutual funds and insurance securities.

Trailing commission revenue was comparable to the prior period, however the six months ended June 30, 2019 consisted of approximately $4.1 million of revenues from 1st Global, offset by lower trailing commission revenues due to changes in the market value of the underlying assets.

Advisory revenue: Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest or 1st Global is the Registered Investment Advisor (“RIA”) and is based on the value of advisory assets. 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 advisory assets was as follows:


(In thousands)	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Balance, beginning of the period	$	13,988,188	$	12,717,125	$	12,555,405	$	12,530,165
Net increase in new advisory assets	308,220		89,249		577,372		407,814
Inflows from the Acquisition	11,397,301		—		11,397,301		—
Market impact and other	572,325		140,819		1,735,956		9,214
Balance, end of the period	$	26,266,034	$	12,947,193	$	26,266,034	$	12,947,193
Quarterly average fee rate	44 bps		31 bps		38 bps		31 bps

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 due to advisory fees being billed in advance. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end advisory assets. For the three and six months ended June 30, 2019, the net increase in new advisory assets was largely due to the addition of new advisors and the timing of the Acquisition.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

The increase in advisory revenue of approximately $21.4 million (including approximately $17.6 million from 1st Global) is primarily due to the increase in the beginning-of-period advisory assets for the three months ended June 30, 2019 compared with three months ended June 30, 2018.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

The increase in advisory revenue of approximately $21.8 million (including approximately $17.6 million from 1st Global) is primarily due to the increase in the beginning-of-period advisory assets for the six months ended June 30, 2019 compared with six months ended June 30, 2018.

Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs and other asset-based revenues, primarily including margin revenues.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Asset-based revenue increased approximately $5.9 million (including approximately $2.4 million from 1st Global), primarily from higher cash sweep revenues following increases in interest rates and the impact of the 2018 clearing firm transition.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Asset-based revenue increased approximately $8.4 million (including approximately $2.4 million from 1st Global), primarily from higher cash sweep revenues following increases in interest rates and the impact of the 2018 clearing firm transition.

Transaction and fee revenue: Transaction and fee revenue primarily includes support fees charged to advisors, fees charged for executing certain transactions in client accounts, and other fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Transaction and fee revenues increased approximately $0.9 million (including approximately $0.6 of revenues from 1st Global), primarily from advisor fees.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Transaction and fee revenues increased approximately $1.1 million (including approximately $0.6 of revenues from 1st Global), primarily from advisor fees.

Tax Preparation


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
Revenue	$	65,909		$	65,833		—	%	$	202,145		$	179,716		12	%
Operating income	$	41,368		$	44,121		(6)	%	$	120,640		$	102,927		17	%
Segment margin	63		%	67		%			60		%	57		%

Tax Preparation revenue is derived primarily from the sale of tax preparation digital services, ancillary services, packaged tax preparation software, and arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer and audit defense.

We classify Tax Preparation revenue into two different categories: consumer revenue and professional revenue. Consumer revenue represents Tax Preparation revenue derived from products sold to customers and businesses primarily for the preparation of individual or business tax returns. Professional revenue represents Tax Preparation revenue derived from products sold to tax return preparers who utilize our offerings to service end-user customers.

Revenue by category was as follows:


(In thousands, except percentages)	Three months ended June 30,										Six months ended June 30,
	2019		2018		Change		2019		2018		Change
Consumer	$	62,686	$	63,137	(1)	%	$	186,628	$	165,049	13	%
Professional	3,223		2,696		20	%	15,517		14,667		6	%
Total revenue	$	65,909	$	65,833	—	%	$	202,145	$	179,716	12	%

We consider the volume of accepted federal tax e-files made through our software and digital services to be an important non-financial metric in measuring the performance of the consumer side of the Tax Preparation business. E-file metrics were as follows:


(In thousands, except percentages)	Six months ended June 30,							Tax seasons ended
	2019	Change		2018	2019	Change		2018
Consumer e-files	3,179	(17)	%	3,831	3,115	(17)	%	3,772

We participate in the Free File Alliance that is part of an IRS partnership that provides free electronic tax filing services to taxpayers meeting certain income-based guidelines. Approximately 163,000 Free File Alliance e-files are included within digital e-files above.

We measure our professional tax preparer customers using three metrics: the number of accepted federal tax e-files made through our software, the number of units sold, and the number of e-files per unit sold. We consider growth in these areas to be important in measuring the performance of the professional tax preparer side of the Tax Preparation business. These non-financial metrics were as follows:


(In thousands, except percentages and as otherwise indicated)	Six months ended June 30,												Tax seasons ended
		2019			Change		2018		2019			Change		2018
E-files	1,916		5	%		1,833		1,833		4	%		1,763
Units sold (ones)	20,583		—	%		20,637		20,502		—	%		20,588
E-files per unit sold (in ones)	93.1		5	%		88.8		89.4		4	%		85.6

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Tax Preparation revenue was comparable to the prior period.

Tax Preparation operating income decreased approximately $2.8 million due to an increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to an increase in personnel costs supporting product development and an increase in software development expenses, partially offset by lower consulting expenses primarily related to strategic initiatives.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Tax Preparation revenue increased approximately $22.4 million, primarily due to price increases and a shift in product mix toward higher-priced products. Revenue derived from professional tax preparers was comparable to the prior period. Revenue from ancillary services, primarily refund payment transfer, grew primarily as a result of price increases.

Tax Preparation operating income increased approximately $17.7 million due to an increase in revenues of approximately $22.4 million, offset by a $4.9 million increase in operating expenses. The increase in Tax Preparation segment operating expenses was primarily due to an increase in personnel costs supporting product development and an increase in software development expenses, partially offset by lower consulting expenses primarily related to strategic initiatives.

Corporate-Level Activity


(In thousands)	Three months ended June 30,										Six months ended June 30,
	2019		2018		Change		2019		2018		Change
Operating expenses	$	6,221	$	4,238	$	1,983	$	13,326	$	9,779	$	3,547
Stock-based compensation	4,082		3,730		352		6,525		6,685		(160)
Acquisition and integration costs	9,183		—		9,183		10,980		—		10,980
Depreciation	1,662		1,124		538		2,972		3,126		(154)
Amortization of acquired intangible assets	9,169		8,855		314		17,213		17,212		1

Restructuring	—		2		(2)		—		291		(291)
Total corporate-level activity	$	30,317	$	17,949	$	12,368	$	51,016	$	37,093	$	13,923

Certain corporate-level activity, including certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, and restructuring is not allocated to our segments.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Operating expenses included in corporate-level activity increased primarily due to increases in headcount.

Stock-based compensation was comparable to the prior period.

Acquisition and integration costs in 2019 are related to the Acquisition.

Depreciation expense increased primarily due to internally-developed software fixed assets capitalized in the fourth quarter of 2018.

Amortization expense increased primarily due to the impact of the Acquisition, partially offset by lower amortization due to the abandonment of certain software applications in the second quarter of 2018.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Operating expenses included in corporate-level activity increased primarily due to increases in headcount.

Stock-based compensation was comparable to the prior period.

Acquisition and integration costs in 2019 are related to the Acquisition.

Depreciation expense was comparable to the prior period.

Amortization expense was comparable to the prior period.

OPERATING EXPENSES

Cost of Revenue


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
Wealth Management services cost of revenue	$	87,477		$	62,149		$	25,328	$	148,851		$	125,213		$	23,638
Tax Preparation services cost of revenue	3,149			2,459			690		7,350			6,812			538
Amortization of acquired technology	—			49			(49)		—			99			(99)
Total cost of revenue	$	90,626		$	64,657		$	25,969	$	156,201		$	132,124		$	24,077
Percentage of revenue	47		%	41		%			37		%	36		%

We record the cost of revenue for sales of services when the related revenue is recognized. Cost of revenue consists of costs related to our Wealth Management and Tax Preparation businesses, which include commissions paid to financial advisors, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include technology project consulting fees), software support and maintenance, bandwidth and hosting costs, and depreciation. Cost of revenue also includes the amortization of acquired technology.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Wealth Management services cost of revenue increased primarily due to an increase in commissions and advisory fees paid to our financial advisors (including approximately $20.4 million of commissions paid to 1st Global advisors), which fluctuated in relation to the change in underlying commission and advisory revenues earned on client accounts.

Tax Preparation services cost of revenue increased primarily due to data center costs.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Tax Preparation services cost of revenue increased primarily due to data center costs.

Engineering and Technology


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
Engineering and technology	$	7,159		$	4,848		$	2,311	$	13,688		$	9,979		$	3,709
Percentage of revenue	4		%	3		%			3		%	3		%

Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, software support and maintenance, bandwidth and hosting, and professional services fees.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Engineering and technology expenses increased primarily due to higher headcount in our Tax Preparation business, higher software expenses and approximately $0.6 million of costs from 1st Global, offset by a decrease in costs related to our 2018 clearing firm conversion.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Sales and Marketing


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
Sales and marketing	$	29,256		$	23,791		$	5,465	$	84,828		$	79,044		$	5,784
Percentage of revenue	15		%	15		%			20		%	22		%

Sales and marketing expenses consist principally of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs) and the cost of temporary help and contractors for those engaged in marketing, selling, and sales support operations activities, as well as marketing expenses associated with our Wealth Management and Tax Preparation businesses (which primarily include television, radio, online, text, email, and sponsorship channels), and back office processing support expenses associated with our Wealth Management business (occupancy and general office expenses, regulatory fees, and license fees).

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Sales and marketing expenses increased primarily due to higher headcount and consulting efforts in our Tax Preparation business and approximately $3.3 million of costs from 1st Global.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Sales and marketing expenses increased primarily due to higher headcount and consulting efforts in our Tax Preparation business and approximately $3.3 million of costs from 1st Global.

General and Administrative


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
General and administrative	$	19,002		$	15,625		$	3,377	$	36,079		$	30,491		$	5,588
Percentage of revenue	10		%	10		%			9		%	8		%

General and administrative ("G&A") expenses consist primarily of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

G&A expenses increased primarily due to an increase in personnel costs primarily related to increases in headcount, a decrease in prior period consulting expenses primarily related to strategic initiatives, and approximately $2.5 million of costs from 1st Global.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Acquistion and Integration


(In thousands, except percentages)	Three months ended June 30,			Six months ended June 30,
	2019			2019
Employee-related expenses	$	2,613		$	2,830
Professional services	5,978			7,558
Other	592			592
Total	$	9,183		$	10,980
Percentage of revenue	5		%	3		%

Acquisition and integration expenses are related to the Acquisition, and primarily consist of employee-related expenses (benefits and other employee-related costs), professional services fees (which primarily includes consulting and legal fees), and other expenses, which primarily includes insurance expenses.

Depreciation and Amortization of Acquired Intangible Assets


(In thousands, except percentages)	Three months ended June 30,														Six months ended June 30,
	2019			2018			Change		2019			2018			Change
Depreciation	$	1,315		$	993		$	322	$	2,376		$	2,908		$	(532)
Amortization of acquired intangible assets	9,169			8,806			363		17,213			17,113			100
Total	$	10,484		$	9,799		$	685	$	19,589		$	20,021		$	(432)
Percentage of revenue	5		%	6		%			5		%	6		%

Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, and leasehold improvements not recognized in cost of revenue. Amortization of acquired intangible assets primarily includes the amortization of customer, advisor and sponsor relationships, which are amortized over their estimated lives. A portion of depreciation and amortization is included in segment operating expenses.

Three months ended June 30, 2019 compared with three months ended June 30, 2018

Depreciation expense increased primarily due to internally-developed software fixed assets capitalized in the fourth quarter of 2018.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

Depreciation expense decreased primarily due to the abandonment of certain internally-developed software fixed assets in the first quarter of 2018.

Amortization expense was comparable to the prior period.

Other Loss, Net


(In thousands)	Three months ended June 30,										Six months ended June 30,
	2019		2018		Change		2019		2018		Change
Interest income	$	(149)	$	(58)	$	(91)	$	(289)	$	(98)	$	(191)
Interest expense	4,770		3,847		923		8,546		8,028		518
Amortization of debt issuance costs	375		284		91		547		487		60
Accretion of debt discounts	85		40		45		123		87		36
Loss on debt extinguishment	—		758		(758)		—		1,534		(1,534)





Other	37		(2,112)		2,149		149		(2,051)		2,200
Other loss, net	$	5,118	$	2,759	$	2,359	$	9,076	$	7,987	$	1,089

Three months ended June 30, 2019 compared with three months ended June 30, 2018

The increase in interest expense relates to higher outstanding debt balances as a result of the $125.0 million increase in the term loan under the Blucora senior secured credit facilities in the second quarter of 2019. In the second quarter of 2018 we had a loss on debt extinguishment related to debt prepayments.

In the second quarter of 2018 we had a gain on the sale of an investment.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

The increase in interest expense relates to higher outstanding debt balances as a result of the $125.0 million increase in the term loan under the Blucora senior secured credit facilities in the second quarter of 2019. In the first and second quarters of 2018 we had a loss on debt extinguishment related to debt prepayments.

In the second quarter of 2018 we had a gain on the sale of an investment.

Income Taxes

We recorded income tax benefit of $8.1 million and $4.1 million in the three and six months ended June 30, 2019, respectively. Our effective income tax rate differed from the 21% statutory rate in 2019 primarily due to excess tax benefits related to stock-based compensation and the release of valuation allowances, offset by the effect of state income taxes, non-deductible compensation and acquisition costs. As part of the Acquisition, we recorded $78.2 million of intangible assets that resulted in an $11.6 million discrete change in the valuation allowance as intangible assets are not amortizable for tax purposes; this will create future taxable income to utilize a portion of our net operating losses.

We recorded income tax expense of $0.9 million and $2.9 million in the three and six months ended June 30, 2018, respectively. Our effective income tax rate differed from the 21% statutory rate in 2018 primarily due to the release of the current portion of valuation allowances.

Income tax expense for the three and six months ended June 30, 2019 differed from the comparable prior period, primarily due to the effect of state income taxes, excess tax benefits related to stock-based compensation, and acquisition and integration costs.

NON-GAAP FINANCIAL MEASURES

Adjusted EBITDA: We define Adjusted EBITDA as net income attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of stock-based compensation, depreciation and amortization of acquired intangible assets, restructuring, other loss, net, the impact of noncontrolling interests, acquisition and integration costs and income tax (benefit) expense. Restructuring costs relate to the relocation of our corporate headquarters that were completed in 2018. Acquisition and integration costs relate to the Acquisition.

We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income. Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of our Adjusted EBITDA to net income attributable to Blucora, Inc., which we believe to be the most comparable GAAP measure, is presented below:


(In thousands)	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Net income attributable to Blucora, Inc.	$	31,036	$	35,238	$	93,206	$	80,579
Stock-based compensation	4,082		3,730		6,525		6,685
Depreciation and amortization of acquired intangible assets	10,831		9,979		20,185		20,338
Restructuring	—		2		—		291
Other loss, net	5,118		2,759		9,076		7,987
Net income attributable to noncontrolling interests	—		222		—		427
Acquisition and integration costs	9,183		—		10,980		—
Income tax (benefit) expense	(8,124)		907		(4,139)		2,870


Adjusted EBITDA	$	52,126	$	52,837	$	135,833	$	119,177

Three months ended June 30, 2019 compared with three months ended June 30, 2018

The decrease in Adjusted EBITDA was primarily due to an increase in segment operating income of $4.0 million related to our Wealth Management segment, offset by a decrease in segment operating income of $2.8 million related to our Tax Preparation segment and an increase in corporate operating expenses of $2.0 million.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

The increase in Adjusted EBITDA was primarily due to an increase in segment operating income of $17.7 million related to our Tax Preparation segment and an increase in segment operating income of $2.5 million related to our Wealth Management segment, offset by an increase in corporate operating expenses of $3.5 million.

Non-GAAP net income: We define non-GAAP net income as net income attributable to Blucora, Inc., determined in accordance with GAAP, excluding the effects of stock-based compensation, amortization of acquired intangible assets, restructuring costs (described further under Adjusted EBITDA above), the impact of noncontrolling interests, acquisition and integration costs (described further under Adjusted EBITDA above), the related cash tax impact of those adjustments, and non-cash income taxes. We exclude the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these net operating losses will expire, if unutilized, between 2020 and 2024.

Non-GAAP net income per share: We define non-GAAP net income per share as non-GAAP net income divided by weighted average diluted share count.

We believe that non-GAAP net income and non-GAAP net income per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe that non-GAAP net income and non-GAAP net income per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP net income

and non-GAAP net income per share should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income and net income per share. Other companies may calculate non-GAAP net income and non-GAAP net income per share differently, and, therefore, our non-GAAP net income and non-GAAP net income per share may not be comparable to similarly titled measures of other companies. A reconciliation of our non-GAAP net income to net income attributable to Blucora, Inc. and non-GAAP net income per share to net income per share, which we believe to be the most comparable GAAP measures, is presented below:


(In thousands, except per share amounts)	Three months ended June 30,						Six months ended June 30,
	2019		2018		2019		2018
Net income attributable to Blucora, Inc.	$	31,036	$	35,238	$	93,206	$	80,579

Stock-based compensation	4,082		3,730		6,525		6,685
Amortization of acquired intangible assets	9,169		8,855		17,213		17,212







Restructuring	—		2		—		291
Impact of noncontrolling interests	—		222		—		427
Acquisition and integration costs	9,183		—		10,980		—
Cash tax impact of adjustments to GAAP net income	(771)		(903)		(1,182)		(1,216)
Non-cash income tax (benefit) expense	(11,317)		582		(8,166)		1,980
Non-GAAP net income	$	41,382	$	47,726	$	118,576	$	105,958
Per diluted share:
Net income attributable to Blucora, Inc.	$	0.62	$	0.71	$	1.88	$	1.64

Stock-based compensation	0.08		0.08		0.13		0.14
Amortization of acquired intangible assets	0.20		0.19		0.34		0.34







Restructuring	—		—		—		0.01
Impact of noncontrolling interests	—		0.00		0.00		0.01
Acquisition and integration costs	0.18		—		0.22		0.00
Cash tax impact of adjustments to GAAP net income	(0.02)		(0.02)		(0.02)		(0.02)
Non-cash income tax (benefit) expense	(0.23)		0.01		(0.16)		0.04
Non-GAAP net income per share	$	0.83	$	0.97	$	2.39	$	2.16
Weighted average shares outstanding used in computing per diluted share amounts	49,822		49,434		49,681		49,049

Three months ended June 30, 2019 compared with three months ended June 30, 2018

The decrease in non-GAAP net income was primarily due to an increase in segment operating income of $4.0 million related to our Wealth Management segment and a $0.8 million decrease in loss on debt extinguishment on the Blucora senior secured credit facilities, offset by a decrease in segment operating income of $2.8 million related to our Tax Preparation segment, a $2.0 million increase in corporate operating expenses not allocated to the segments and a $1.1 million increase in interest expense, amortization of debt issuance costs and accretion of debt discounts.

Six months ended June 30, 2019 compared with six months ended June 30, 2018

The increase in non-GAAP net income was primarily due to an increase in segment operating income of $17.7 million related to our Tax Preparation segment, an increase in segment operating income of $2.5 million related to our Wealth Management segment, a $1.5 million decrease in loss on debt extinguishment on the Blucora senior secured credit facilities, offset by a $0.6 million decrease in interest expense, amortization of debt issuance costs and accretion of debt discounts, and a $3.5 million increase in corporate operating expenses not allocated to the segments.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

Our principal source of liquidity is our cash and cash equivalents. As of June 30, 2019, we had cash and cash equivalents of approximately $109.6 million. Broker-dealer subsidiaries of our Wealth Management business operate in a highly regulated industry and are 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 operations of our Wealth Management business. As of June 30, 2019, our Wealth Management business met all capital adequacy requirements to which it was subject.

We generally invest our excess cash in high-quality marketable investments. These investments generally include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specific holdings can vary from period to period depending upon our cash requirements. We believe our financial instrument investments held at June 30, 2019 had minimal default risk and short-term maturities.

Historically, we have financed our operations primarily from cash provided by operating activities. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating, working capital, regulatory capital requirements of our broker-dealer subsidiaries, and capital expenditure requirements for at least the next 12 months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate, and we may be required to draw on our $65.0 million revolving credit facility to meet our capital requirements. For further discussion of the risks to our business related to liquidity, see the risk factor titled "Existing cash and cash equivalents, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, and the risk factors under the caption "Risks Related to our Financing Arrangements" in Part II, Item 1A in this Quarterly Report on Form 10-Q.

Use of Cash

We may use our cash and cash equivalents balance in the future on investment in our current businesses, for repayment of debt, for acquiring companies or assets that complement our Wealth Management and Tax Preparation businesses, for stock buybacks, for returning capital to stockholders, or for other utilization which we deem to be in the best interests of stockholders.

The Blucora senior secured credit facilities in the aggregate committed amount of $565.0 million consist of a committed $65.0 million revolving credit facility (including a letter of credit sub-facility), and a $500.0 million term loan facility. The final maturity dates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. In November 2017, the credit facility agreement was amended in order to refinance and reprice the initial term loan, such that the applicable interest rate margin is 3.00% for Eurodollar Rate loans and 2.00% for ABR loans. Depending on Blucora’s Consolidated First Lien Net Leverage Ratio (as defined in the credit facility agreement), the applicable interest rate margin on the revolving credit facility is from 2.75% to 3.25% for Eurodollar Rate loans and 1.75% to 2.25% for ABR loans. Obligations under the Blucora senior secured credit facilities are guaranteed by certain of Blucora's subsidiaries and secured by substantially all of the assets of Blucora and those subsidiaries.

The Blucora senior secured credit facilities include financial and operating covenants with respect to certain ratios, including a net leverage ratio, which are defined further in the credit facility agreement. We were in compliance with these covenants as of June 30, 2019. We have borrowed $500.0 million under the term loan and have made prepayments of $110.0 million towards the term loan since entering into the agreement, such that $390.0 million was outstanding under the term loan at June 30, 2019. We have not borrowed any amounts under the revolving credit loan and did not have any other debt outstanding. Commencing December 31, 2019, principal payments of the term loan are due on a quarterly basis in an amount equal to $312,500 (subject to reduction for prepayments), with the remaining principal amount due on the maturity date of May 22, 2024.

On July 2, 2015, TaxAct acquired SimpleTax, which included additional consideration of up to C$4.6 million (with C$ indicating Canadian dollars and amounting to approximately $3.7 million based on the acquisition-date exchange rate). The related payments were contingent upon product availability and revenue performance over a three-year period and were to be paid annually over that period. The third and final payment of $1.3 million was made in the first quarter of 2019.

In connection with our 2015 acquisition of HD Vest, former management of that business has retained an ownership interest in HD Vest. We were party to put and call arrangements that became exercisable beginning in the first quarter of 2019 with respect to these interests. These put and call arrangements allow certain members of HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests for cash, respectively, within ninety days after the Company filed its Annual Report on Form 10-K for the year ended December 31, 2018, which occurred on March 1, 2019. These arrangements were settled in cash for $24.9 million in the second quarter of 2019.

On March 19, 2019, we announced that our board of directors authorized a stock repurchase plan pursuant to which we may repurchase up to $100.0 million of our common stock. Pursuant to the plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares and may be suspended or discontinued at any time. As a result, we may not repurchase a material number of shares, or any shares at all, under our stock repurchase plan. In addition, any repurchases of our stock pursuant to the stock repurchase plan may materially reduce the amount of cash we have available and may not materially enhance the long-term value of our business or our stock.

On May 6, 2019, we completed the Acquisition, which was paid with a combination of (i) $55.0 million of cash on hand and (ii) the proceeds from a $125.0 million increase in the term loan under the Blucora senior secured credit facilities.

Contractual Obligations and Commitments

The material changes in our contractual obligations and commitments through the second quarter of 2019, outside of the ordinary course of our business, include debt activity (as described above under "Use of cash"), payment of the final portion of the SimpleTax acquisition-related contingent consideration liability, a new office lease, which is expected to commence in 2020, purchase commitments of approximately $3.0 million over the next year from 1st Global, and sublease income of $1.6 million, primarily related to the sublease of the Bellevue facility. 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, 2018.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

Cash Flows

Our cash flows were comprised of the following:


(In thousands)	Six months ended June 30,
	2019		2018
Net cash provided by operating activities	$	96,812	$	106,557
Net cash used by investing activities	(167,399)		(2,602)
Net cash provided (used) by financing activities	94,915		(74,454)


Effect of exchange rate changes on cash, cash equivalents, and restricted cash	58		(30)
Net increase in cash, cash equivalents, and restricted cash	$	24,386	$	29,471

Net cash from operating activities: Net cash from operating activities consists of income, offset by certain non-cash adjustments, and changes in our working capital.

Net cash provided by operating activities was $96.8 million and $106.6 million for the six months ended June 30, 2019 and 2018, respectively. The activity in the six months ended June 30, 2019 included a $(30.5) million working capital contribution and approximately $127.3 million of income (offset by non-cash adjustments). The working capital contribution was primarily driven by the Acquisition.

The activity in the six months ended June 30, 2018 included a $(2.8) million working capital contribution and approximately $109.4 million of income (offset by non-cash adjustments). The working capital contribution was primarily driven by accrued expenses and the impact of TaxAct's seasonality.

Net cash from investing activities: Net cash from investing activities primarily consists of cash outlays for business acquisitions, transactions (purchases of and proceeds from sales and maturities) related to our investments, and purchases of

property and equipment. Our investing activities can fluctuate from period-to-period primarily based upon the level of acquisition activity.

Net cash used by investing activities was $167.4 million and $2.6 million for the six months ended June 30, 2019 and 2018, respectively. The activity in the six months ended June 30, 2019 consisted of the Acquisition and approximately $2.9 million in purchases of property and equipment. The activity in the six months ended June 30, 2018 consisted of approximately $2.6 million in purchases of property and equipment.

Net cash from financing activities: Net cash from financing activities primarily consists of transactions related to the issuance of debt and stock. Our financing activities can fluctuate from period-to-period based upon our financing needs and market conditions that present favorable financing opportunities.

Net cash provided by financing activities was $94.9 million for the six months ended June 30, 2019 compared to net cash used by financing activities of $74.5 million for the six months ended June 30, 2018. The activity for the six months ended June 30, 2019 primarily consisted of $121.5 million of borrowings under the Blucora senior secured credit facilities and approximately $4.5 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan. These cash inflows were offset by $24.9 million to settle redeemable noncontrolling interests related to the 2015 acquisition of HD Vest, $5.2 million in tax payments from shares withheld for equity awards and $0.9 million in contingent consideration paid related to the 2015 acquisition of SimpleTax.

The activity for the six months ended June 30, 2018 primarily consisted of payments of $80.0 million towards the term loan under the Blucora senior secured credit facilities, $4.2 million in tax payments from shares withheld for equity awards, and $1.3 million in contingent consideration paid related to the 2015 acquisition of SimpleTax. These cash outflows were offset by approximately $11.1 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan.

Critical Accounting Policies and Estimates

Business Combinations

The application of the purchase method of accounting for business combinations requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are depreciated and those that are amortized from goodwill. Our estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be reasonable, and when appropriate, include assistance from independent third-party appraisal firms.

See the remainder of our critical accounting policies, estimates, and methodologies as described in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.

Recent Accounting Pronouncements

See "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risk during the six months ended June 30, 2019. We have borrowed $500.0 million under the term loan of the Blucora senior secured credit facilities, and as of June 30, 2019, we had $390.0 million outstanding. The interest rate on the term loan is variable at the London Interbank Offered Rate ("LIBOR"), subject to a floor of 1.00%, plus a margin of 3.00%. A hypothetical 100 basis point increase in LIBOR would result in a $3.9 million increase, based upon our June 30, 2019 principal amount, in our annual interest expense until the scheduled maturity date in 2024. For additional information, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934), the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e)) were effective as of June 30, 2019.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the second quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

Item 1A. Risk Factors

Our business and future results may be affected by a number of risks and uncertainties that should be considered carefully. In addition, this report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including the risks described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the risks set forth below.

The Company believes that there has been no material change in its risk factors as previously disclosed in the Form 10-K other than as set forth below. The occurrence of one or more of the events listed below could have a material adverse effect on the Company’s business, prospects, results of operations, reputation, financial condition, cash flows or ability to continue current operations without any direct or indirect impairment or disruption, which is referred to throughout these Risk Factors as a “Material Adverse Effect.”

RISKS ASSOCIATED WITH OUR BUSINESSES

We may fail to realize all of the anticipated benefits of the Acquisition of 1st Global or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating the operations of 1st Global.

Our ability to realize the anticipated benefits of the Acquisition of 1st Global will depend, to a large extent, on our ability to integrate 1st Global’s business with ours, which will be a complex, costly and time-consuming process. As a result, we have been devoting and will continue to devote significant management attention and resources to integrate our business practices and operations with those of 1st Global. The integration process may disrupt our business and, if implemented ineffectively, could restrict the realization of the full expected benefits of the Acquisition. The failure to meet the challenges involved in the integration process and to realize the anticipated benefits of the Acquisition could cause an interruption of, or a loss of momentum in, our operations and could result in a Material Adverse Effect.

As we integrate 1st Global’s business, we are likely to incur costs relating to selection and implementation of uniform procedures, systems, vendors and platforms for our Wealth Management business, as well as costs associated with exiting certain relationships and agreements. These costs could be material.

In addition, the integration of 1st Global’s business may result in material unanticipated problems, expenses, liabilities, competitive responses and loss of advisors, customers and other business relationships. Additional integration challenges could include:

•diversion of management’s and our employees' attention to integration matters;

•difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the Acquisition;

•difficulties in the integration of operations and systems, including the use of our new clearing platform;

•difficulties in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures;

•difficulties in keeping advisors and clients who may have changing products or services;

•difficulties in the assimilation of employees;

•difficulties in managing the expanded operations of a significantly larger and more complex company;

•challenges in attracting and retaining key personnel; and

•the impact of potential liabilities we may be inheriting from 1st Global.

Additionally, following the integration of 1st Global, we may also receive greater regulatory scrutiny and could incur additional compliance costs. Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could result in a Material Adverse Effect and result in us becoming subject to additional litigation.

In addition, even if 1st Global’s business is integrated successfully, the full anticipated benefits of the Acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that are anticipated. These benefits may not be

achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration process. All of these factors could cause reductions in our earnings per share, decrease or delay the expected accretive effect of the Acquisition and negatively impact the price of shares of our common stock. As a result, it cannot be assured that the Acquisition will result in the realization of the full anticipated benefits and potential synergies.

We have incurred significant transaction costs and will continue to incur integration costs, which could also be significant, in connection with the Acquisition of 1st Global that could cause a Material Adverse Effect.

We have incurred significant transaction costs in connection with the Acquisition of 1st Global, including payment of certain fees and expenses incurred in connection with the Acquisition and the financing of the Acquisition. In addition, we expect to incur additional integration costs, which could be significant. These costs could adversely affect our results of operations in the period in which such expenses are recorded or our cash flow in the period in which any related costs are actually paid.

If our goodwill or other intangible assets become impaired, we may be required to record a significant impairment charge, which could result in a Material Adverse Effect.

We are required to test goodwill for impairment at least annually or more frequently if there are indicators that the carrying amount of our goodwill and other intangible assets, which consist primarily of our advisor, customer and sponsor relationships, our technology and our trade names, exceed their carried value. For these impairment tests, we use various valuation methods to estimate the fair value of our goodwill and intangible assets. If the fair value of an asset is less than its carrying value, we would recognize an impairment charge for the difference. As of June 30, 2019, we had recorded a total of $674.1 million of goodwill and $355.6 million of other intangible assets.

It is possible that we could have an impairment charge for goodwill or other intangible assets in future periods if, among other things, (i) overall economic conditions in current or future years decline, (ii) business conditions or our strategies for a specific business unit or our trade names change from our current strategies or assumptions or (iii) we suffer from an event that impacts our reputation or brand. If we divest or discontinue businesses or products that we previously acquired, or if the value of those parts of our business become impaired, we also may need to evaluate the carrying value of our goodwill. Any such charges could negatively impact our operating results and could cause a Material Adverse Effect.

If we are unable to attract and retain productive advisors, our financial results will be negatively impacted.

Our Wealth Management business derives a large portion of its revenues from commissions and fees generated by its advisors. Our ability to attract and retain productive advisors has contributed significantly to our growth and success. If we fail to attract new advisors or to retain and motivate our advisors (including our HD Vest advisors or 1st Global's advisors), our business may suffer.

The market for productive advisors is highly competitive, and we devote significant resources to attracting and retaining the most qualified advisors. In attracting and retaining advisors, we compete directly with a variety of financial institutions such as wirehouses, regional broker-dealers, banks, insurance companies and other independent broker-dealers. Financial industry competitors are increasingly offering guaranteed contracts, upfront payments, and greater compensation to attract successful financial advisors. These can be important factors in a current advisor’s decision to leave us as well as in a prospective advisor’s decision to join us. We may also experience difficulty retaining advisors following the Acquisition as our HD Vest advisors and 1st Global advisors may not like the products or services we offer as a combined company, may not like our compensation structure or they may not like the combined business. There can be no assurance that we will be successful in our efforts to attract and retain the advisors needed to achieve our growth objectives.

Moreover, the costs associated with successfully attracting and retaining advisors could be significant, and there is no assurance that we will generate sufficient revenues from those advisors’ business to offset such costs. Designing and implementing new or modified compensation arrangements and equity structures to successfully attract and retain advisors is complicated. Changes to these arrangements could themselves cause instability within our existing investment teams and negatively impact our financial results and ability to grow. In addition, our compensation arrangements with our financial advisors are primarily commission-based, which we believe drives advisor performance and assists in attracting and retaining successful advisors. Our cost of revenue (which includes commissions paid to advisors) may fluctuate from quarter-to-quarter depending on the amount of commissions we are required to pay to our financial advisors, and if the amounts we are required to pay are different than our expectations, our operating results may be adversely impacted.

We have in the past issued and may in the future issue shares of common stock or other securities convertible into or exchangeable for shares of common stock to our advisors in order to attract and retain such individuals. In connection with the Acquisition of 1st Global, we issued a substantial number of equity awards to our HD Vest and 1st Global advisors. The issuance of additional shares of our common stock upon vesting or conversion of these awards may substantially dilute the ownership interests of our existing stockholders and reduce the number of shares of common stock available for issuance under our equity incentive plans.

In addition, the wealth management industry in general is experiencing a decline in the number of younger financial advisors entering the industry. We are not immune to that industry trend. If we are unable to replace advisors as they retire, or to assist retiring advisors with transitioning their practices to existing advisors, we could experience a decline in revenue and earnings.

In addition, as some of our advisors grow their advisory assets, they may decide to disassociate from us to establish their own RIAs and take customers and associated assets into those businesses. We seek to deter advisors from taking this route by continuously evaluating our technology, product offerings, and service, as well as our advisor compensation, fees, and pay-out policies, to ensure that we are competitive in the market and attractive to successful advisors. We may not be successful in dissuading such advisors from forming their own RIAs, which could cause a material volume of customer assets to leave our platform, which would reduce our revenues and could cause a Material Adverse Effect.

Our Wealth Management business is subject to extensive regulation, and failure to comply with these regulations could have a Material Adverse Effect.

Our Wealth Management business is heavily regulated by multiple agencies, including the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), state securities and insurance regulators, and other regulatory authorities. Failure to comply with these regulators’ laws, rules, and regulations could result in the restriction of the ongoing conduct or growth, or even liquidation of, parts of our business and otherwise cause a Material Adverse Effect. The regulatory environment in which our Wealth Management business operates is continually evolving, and the level of financial regulation to which we are subject has generally increased in recent years. Among the most significant regulatory changes affecting our Wealth Management business is the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which mandates broad changes in the supervision and regulations of the wealth management industry. Regulators implementing the Dodd-Frank Act have adopted, proposed to adopt, and may in the future adopt regulations that could impact the manner in which we will market products and services in our Wealth Management business, manage our Wealth Management business operations, and interact with regulators. In addition, the Trump Administration has initiated and in some cases completed a broad review of U.S. fiscal laws and regulations. If significant changes are enacted as a result of this review, they could negatively impact our Wealth Management business and cause a Material Adverse Effect.

On June 5, the SEC adopted Regulation Best Interest (“Reg. BI”), elevating the standard of care for broker-dealers from the current “suitability” requirement to a “best interest” standard when making a recommendation of any securities transaction to a retail customer. The “best interest” standard requires a broker-dealer to make recommendations without putting its financial interests ahead of the interests of a retail customer. The SEC also adopted Form CRS Relationship Summary (“Form CRS”), which requires registered investment advisers (“RIAs”) and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. In connection with adopting Reg. BI, the SEC added new record-making and recordkeeping rules. The compliance date for Reg. BI and the related rules is June 30, 2020.

Reg. BI heightens the standard of care for broker-dealers when making investment recommendations and would impose disclosure and policy and procedural obligations that could impact the compensation our Wealth Management business and its representatives receive for selling certain types of products, particularly those that offer different compensation across different share classes (such as mutual funds and variable annuities).

In addition, Reg. BI prohibits a broker-dealer and its associated persons from using the term “adviser” or “advisor” if the broker-dealer is not an RIA or the associated person is not a supervised person of an RIA. This prohibition may require us to change the titles of certain of our advisors, which could lead to confusion or distraction of management’s time and attention.

Reg. BI’s new standards of conduct and other requirements that heighten the duties of broker-dealers and investment advisers could result in additional compliance costs, lesser compensation, and management distraction, all of which could have a Material Adverse Effect on our business. Because our brokerage business comprises a significant portion of our business, our failure to successfully conform to these standards could negatively impact our results.

Legislatures and securities regulators in certain states in which we do business have enacted (or have considered enacting) their own standard of conduct rules for broker-dealers, insurance agents and investment advisers. To date, the States of Nevada, Connecticut, New Jersey and New York have passed legislation or proposed regulations of this sort. The requirements and scope of these state rules are not uniform. Accordingly, we may have to adopt different policies and procedures in different states, which could create added compliance, supervision and sales costs for our Wealth Management business. Should more states enact similar legislation or regulation, it could result in material additional compliance costs and could have a Material Adverse Effect.

Our Wealth Management business distributes its products and services through financial advisors who affiliate with us as independent contractors. There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not

introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our financial advisors as independent contractors. Although we believe we have properly classified our advisors as independent contractors, the IRS or other U.S. federal or state authorities or similar authorities may determine that we have misclassified our advisors as independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties, which could have a Material Adverse Effect on our business model, financial condition, and results of operations.

In addition, the SEC and FINRA have extensive rules and regulations with respect to capital requirements. As a registered broker-dealer, our Wealth Management business is subject to Rule 15c3-1 (the “Net Capital Rule”) under the Securities Exchange Act of 1934, as amended, and related requirements of self-regulatory organizations, which specify minimum capital requirements that are intended to ensure the general soundness and liquidity of broker-dealers. As a result of the Net Capital Rule, our ability to withdraw capital from our subsidiaries that comprise our Wealth Management business could be restricted, which in turn could limit our ability to repay debt, redeem or purchase shares of our outstanding stock, or pay dividends, which could have a Material Adverse Effect. A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business.

Our Wealth Management business offers products sponsored by third parties, including, but not limited to, mutual funds, insurance, annuities and alternative investments. These products are subject to complex regulations that change frequently. Although we have controls in place to facilitate compliance with such regulations, there can be no assurance that our interpretation of the regulations will be consistent with various regulators’ interpretations, that our procedures will be viewed as adequate by regulatory examiners, or that the operating subsidiaries will be deemed to be in compliance with regulatory requirements in all material respects. If products sold by our Wealth Management business do not perform as anticipated due to market factors or otherwise, or if product sponsors become insolvent or are otherwise unable to meet their obligations, this could result in material litigation and regulatory action against us. In addition, we could face liabilities for actual or alleged breaches of legal duties to customers with respect to the suitability of the financial products we make available in our open architecture product platform or the investment advice of our financial advisors.

RISKS RELATED TO OUR FINANCING ARRANGEMENTS

We have incurred a significant amount of indebtedness, which may materially and adversely affect our financial condition and future financial results.

We are party to the Blucora senior secured credit facilities, which consist of a term loan and revolving line of credit for future working capital, capital expenditures and general business purposes. As of June 30, 2019, we had $390.0 million of outstanding indebtedness under the term loan, and we had not borrowed any amounts under the revolving credit facility. The final maturity date of the term loan is May 22, 2024. Under the terms of the revolving credit facility, we may borrow up to $65.0 million.

Our level of indebtedness may materially and adversely affect our financial condition and future financial results by, among other things:

•increasing our vulnerability to downturns in our businesses, to competitive pressures, and to adverse economic and industry conditions;

•requiring the dedication of a portion of our expected cash from operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and complementary acquisitions;

•increasing our interest payment obligations in the event that interest rates rise; and

•limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.

The Blucora senior secured credit facilities impose certain restrictions on us, including restrictions on our ability to create liens, incur indebtedness and make investments. In addition, the Blucora senior secured credit facilities include covenants, the breach of which may cause the outstanding indebtedness to be declared immediately due and payable. This borrowing, and our ability to repay it, may also negatively impact our ability to obtain additional financing in the future and may affect the terms of any such financing.

In addition, we or our subsidiaries, may incur additional debt in the future. Any additional debt may result in risks similar to those discussed above or in other risks specific to the credit agreements entered into for those debts.

Our level of indebtedness has increased substantially as a result of the Acquisition of 1st Global.

We incurred approximately $125.0 million of additional indebtedness to fund a portion of the purchase price of the Acquisition of 1st Global. The increase in our indebtedness will have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. In addition, the amount of cash required to make principal and

interest payments on our outstanding debt has increased by approximately $8.0 million on an annual basis as a result of the increase in our indebtedness, and thus the demands on our cash resources are significantly greater than prior to the Acquisition. Our increased indebtedness may reduce funds available for capital expenditures, stock repurchases and other activities and may create competitive disadvantages for us relative to other companies with lower debt levels.

Ultimately, our ability to service our debt obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including our ability to achieve the expected benefits and cost savings from the Acquisition of 1st Global. There is no guarantee that we will be able to generate sufficient cash flow to pay our debt service obligations when due. If we are unable to meet our debt service obligations or we fail to comply with our financial and other restrictive covenants contained in the agreements governing our indebtedness, we may be required to refinance all or part of our debt, sell important strategic assets at unfavorable prices or borrow more money. We may not be able to, at any given time, refinance our debt, sell assets or borrow more money on terms acceptable to us or at all. Our inability to refinance our debt could result in a Material Adverse Effect.

OTHER RISKS

We cannot assure you we will repurchase any shares of our common stock pursuant to our stock repurchase plan.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table details our repurchases of common stock for the three months ended June 30, 2019:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) ⁽¹⁾



April 1, 2019 - April 30, 2019	—	—		—	$	100.0
May 1, 2019 - May 31, 2019	—	—		—	$	100.0
June 1, 2019 - June 30, 2019	—	—		—	$	100.0
Total	—	$	—	—

⁽¹⁾ On March 19, 2019, we announced that our board of directors authorized the repurchase of up to $100.0 million of our common stock. The authorization does not have a specified expiration date and no shares have been repurchased under this authorization.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit
Number

Exhibit Description

Form

Date of First Filing

Exhibit Number

Filed
Herewith

2.1#

Stock Purchase Agreement, dated as of March 18, 2019, by and among 1G Acquisitions, LLC, 1st Global, Inc., 1st Global Insurance Services, Inc., the sellers named therein and joinder sellers, SAB Representative, LLC, as the sellers’ representative, and Blucora, Inc., as guarantor

8-K

March 19, 2019

2.1

10.1

Second Amendment to Credit Agreement, dated May 6, 2019, among Blucora, Inc., as borrower, most of its direct and indirect domestic subsidiaries, as guarantors, and JPMorgan Chase Bank, N.A., as successor administrative agent and successor collateral agent, and each lender party to the Second Amendment

8-K

May 6, 2019

10.1

10.2

Blucora, Inc. Non-Employee Director Compensation Policy

10.3

Employment Agreement by and between Blucora, Inc. and Enrique Vasquez dated May 31, 2019

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exchange Act rules 13a-14(a) and 15d-14(a))

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exchange Act rules 13a-14(a) and 15d-14(a))

32.1*

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350)

32.2*

Certification of Principal Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350)

101

The following financial statements from the Company's 10-Q for the fiscal quarter ended June 30, 2019, formatted in inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements

# Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Blucora, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

* The certifications attached as Exhibits 32.1 and 32.2 are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Blucora, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			BLUCORA, INC.

			By:			/s/ Davinder Athwal
						Davinder Athwal Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer)

			Date:			August 8, 2019