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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                   
 
FORM 10-Q
                  
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                     
Commission File Number: 000-25131
 
BLUCORA, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
91-1718107
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
10900 NE 8th Street, Suite 800
Bellevue, Washington
 
98004
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (425) 201-6100
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
 
ý
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Outstanding at
Class
 
July 21, 2016
Common Stock, Par Value $0.0001
 
41,516,521
 


Table of Contents

TABLE OF CONTENTS
Page
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,273

 
$
55,473

Cash segregated under federal or other regulations
2,025

 
3,557

Available-for-sale investments
7,821

 
11,301

Accounts receivable, net of allowance
6,474

 
7,884

Commissions receivable
14,808

 
16,328

Other receivables
4,947

 
24,407

Prepaid expenses and other current assets, net
5,192

 
10,062

Current assets of discontinued operations
157,251

 
211,663

Total current assets
272,791

 
340,675

Long-term assets:
 
 
 
Property and equipment, net
10,923

 
11,308

Goodwill, net
551,030

 
548,959

Other intangible assets, net
378,994

 
396,295

Other long-term assets
2,147

 
2,311

Total long-term assets
943,094

 
958,873

Total assets
$
1,215,885

 
$
1,299,548

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,198

 
$
4,689

Commissions and advisory fees payable
15,002

 
16,982

Accrued expenses and other current liabilities
12,282

 
13,006

Deferred revenue
6,157

 
11,521

Current portion of long-term debt, net
3,200

 
31,631

Current liabilities of discontinued operations
58,288

 
88,275

Total current liabilities
98,127

 
166,104

Long-term liabilities:
 
 
 
Long-term debt, net
326,252

 
353,850

Convertible senior notes, net
161,892

 
185,918

Deferred tax liability, net
89,197

 
103,520

Deferred revenue
3,009

 
1,902

Other long-term liabilities
10,976

 
10,932

Total long-term liabilities
591,326

 
656,122

Total liabilities
689,453

 
822,226

 
 
 
 
Redeemable noncontrolling interests
15,297

 
15,038

 
 
 
 
Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
 
 
 
41,495 and 40,954
4

 
4

Additional paid-in capital
1,530,701

 
1,490,405

Accumulated deficit
(1,019,376
)
 
(1,027,598
)
Accumulated other comprehensive loss
(194
)
 
(527
)
Total stockholders’ equity
511,135

 
462,284

Total liabilities and stockholders’ equity
$
1,215,885

 
$
1,299,548

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Wealth management services revenue
$
76,117

 
$

 
$
153,408

 
$

Tax preparation services revenue
43,991

 
30,900

 
132,465

 
111,968

Total revenue
120,108

 
30,900

 
285,873

 
111,968

Operating expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Wealth management services cost of revenue
51,023

 

 
103,292

 

Tax preparation services cost of revenue
2,023

 
1,373

 
5,230

 
3,510

Amortization of acquired technology
49

 
1,863

 
716

 
3,725

Total cost of revenue
53,095

 
3,236

 
109,238

 
7,235

Engineering and technology
3,959

 
1,130

 
8,254

 
2,220

Sales and marketing
19,913

 
7,693

 
63,750

 
40,711

General and administrative
11,508

 
7,653

 
24,261

 
14,799

Depreciation
963

 
356

 
1,938

 
707

Amortization of other acquired intangible assets
8,316

 
3,185

 
16,632

 
6,371

Total operating expenses
97,754

 
23,253

 
224,073

 
72,043

Operating income
22,354

 
7,647

 
61,800

 
39,925

Other loss, net
(10,916
)
 
(3,034
)
 
(18,430
)
 
(6,029
)
Income from continuing operations before income taxes
11,438

 
4,613

 
43,370

 
33,896

Income tax expense
(5,793
)
 
(2,202
)
 
(17,436
)
 
(12,070
)
Income from continuing operations
5,645

 
2,411

 
25,934

 
21,826

Discontinued operations, net of income taxes
(19,975
)
 
1,840

 
(17,453
)
 
5,525

Net income (loss)
(14,330
)
 
4,251

 
8,481

 
27,351

Net income attributable to noncontrolling interests
(115
)
 

 
(259
)
 

Net income (loss) attributable to Blucora, Inc.
$
(14,445
)
 
$
4,251

 
$
8,222

 
$
27,351

Net income (loss) per share attributable to Blucora, Inc. - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.06

 
$
0.62

 
$
0.53

Discontinued operations
(0.48
)
 
0.04

 
(0.42
)
 
0.14

Basic net income (loss) per share
$
(0.35
)
 
$
0.10

 
$
0.20

 
$
0.67

Net income (loss) per share attributable to Blucora, Inc. - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.06

 
$
0.61

 
$
0.52

Discontinued operations
(0.47
)
 
0.04

 
(0.41
)
 
0.13

Diluted net income (loss) per share
$
(0.34
)
 
$
0.10

 
$
0.20

 
$
0.65

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
41,405

 
40,918

 
41,288

 
40,953

Diluted
42,298

 
41,936

 
41,954

 
41,918

Other comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
$
(14,330
)
 
$
4,251

 
$
8,481

 
$
27,351

Unrealized gain (loss) on available-for-sale investments, net of tax
(1
)
 
(187
)
 
10

 
(260
)
Foreign currency translation adjustment
1

 

 
323

 

Reclassification adjustment for realized loss on available-for-sale investments, net of tax, included in net income as Other loss, net

 
376

 

 
417

Reclassification adjustment for other-than-temporary impairment loss on available-for-sale investments, included in net income as Other loss, net

 
964

 

 
964

Other comprehensive income

 
1,153

 
333

 
1,121

Comprehensive income (loss)
(14,330
)
 
5,404

 
8,814

 
28,472

Comprehensive income attributable to noncontrolling interests
(115
)
 

 
(259
)
 

Comprehensive income (loss) attributable to Blucora, Inc.
$
(14,445
)
 
$
5,404

 
$
8,555

 
$
28,472

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six months ended June 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net income
$
8,481

 
$
27,351

Less: Discontinued operations, net of income taxes
(17,453
)
 
5,525

Net income from continuing operations
25,934

 
21,826

Adjustments to reconcile net income from continuing operations to net cash from operating activities:
 
 
 
Stock-based compensation
7,252

 
3,900

Depreciation and amortization of acquired intangible assets
19,597

 
11,172

Excess tax benefits from stock-based award activity
(26,930
)
 
(27,565
)
Deferred income taxes
(8,806
)
 
(17,994
)
Amortization of premium on investments, net
155

 
902

Amortization of debt issuance costs
1,027

 
556

Accretion of debt discounts
2,500

 
1,898

Gain on debt extinguishment and modification expense
(2,846
)
 

Revaluation of acquisition-related contingent consideration liability
391

 

Other
13

 
58

Cash provided (used) by changes in operating assets and liabilities:
 
 
 
Cash segregated under federal or other regulations
1,532

 

Accounts receivable
1,395

 
103

Commissions receivable
1,520

 

Other receivables
19,460

 
1,099

Prepaid expenses and other current assets
4,870

 
3,319

Other long-term assets
95

 
16

Accounts payable
(1,491
)
 
1,264

Commissions and advisory fees payable
(1,980
)
 

Deferred revenue
(4,257
)
 
(930
)
Accrued expenses and other current and long-term liabilities
26,057

 
30,176

Net cash provided by operating activities from continuing operations
65,488

 
29,800

Investing Activities:
 
 
 
Business acquisition, net of cash acquired
(1,788
)
 

Purchases of property and equipment
(1,528
)
 
(625
)
Proceeds from sales of investments

 
14,000

Proceeds from maturities of investments
4,000

 
113,406

Purchases of investments
(659
)
 
(112,090
)
Net cash provided by investing activities from continuing operations
25

 
14,691

Financing Activities:
 
 
 
Repurchase of convertible notes
(20,667
)
 

Repayment of credit facilities
(60,000
)
 
(51,940
)
Stock repurchases

 
(5,521
)
Excess tax benefits from stock-based award activity
26,930

 
27,565

Proceeds from stock option exercises
1,142

 
2,093

Proceeds from issuance of stock through employee stock purchase plan
562

 
608

Tax payments from shares withheld for equity awards
(901
)
 
(934
)
Net cash used by financing activities from continuing operations
(52,934
)
 
(28,129
)
Net cash provided by continuing operations
12,579

 
16,362

 
 
 
 
Net cash provided by operating activities from discontinued operations
10,148

 
5,636

Net cash used by investing activities from discontinued operations
(970
)
 
(1,168
)
Net cash used by financing activities from discontinued operations
(2,950
)
 
(7,030
)
Net cash provided (used) by discontinued operations
6,228

 
(2,562
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(7
)
 

Net increase in cash and cash equivalents
18,800

 
13,800

Cash and cash equivalents, beginning of period
55,473

 
41,968

Cash and cash equivalents, end of period
$
74,273

 
$
55,768

 
 
 
 
Cash paid for income taxes from continuing operations
$
1,198

 
$
883

Cash paid for interest from continuing operations
$
17,616

 
$
4,612

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company and Basis of Presentation
Description of the business: Blucora, Inc. (the “Company” or “Blucora”) operates two primary businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (“HD Vest”), which the Company acquired on December 31, 2015. HD Vest is included in Blucora's results of operations beginning on January 1, 2016. HD Vest provides wealth management solutions for financial advisors. The Tax Preparation business consists of the operations of TaxAct, Inc. (“TaxAct”) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com.
The Company also operates an internet Search and Content business and an E-Commerce business. The Search and Content business operates through the InfoSpace LLC subsidiary (“InfoSpace”) and provides search services to users of its owned and operated and distribution partners’ web properties, as well as online content through HowStuffWorks (“HSW”). The E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”) and sells self-branded electronics and accessories to both consumers and businesses primarily through its website www.monoprice.com.
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market, referred to as the “Strategic Transformation.” The Strategic Transformation consists of the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest, which the Company acquired on December 31, 2015 (see "Note 3: Business Combinations"), and the intention to divest the Search and Content and E-Commerce businesses in mid-2016 (see "Note 4: Discontinued Operations"). Accordingly, the financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations.
On July 1, 2016, the Company signed an agreement with OpenMail LLC (OpenMail), under which OpenMail will acquire substantially all of the assets and assume certain specified liabilities of the Search and Content business for $45.0 million in cash, subject to a working capital adjustment at closing. The Company expects the transaction to close in the third quarter of 2016.
Segments: The Company has two reportable segments: the Wealth Management segment, which is the HD Vest business, and the Tax Preparation segment, which is the TaxAct business. The former Search and Content and E-Commerce segments are included in discontinued operations. Unless the context indicates otherwise, the Company uses the term “Wealth Management” to represent services sold through the HD Vest business, the term “Tax Preparation” to represent services and software sold through the TaxAct business, the term “Search and Content” to represent search and content services, and the term “E-Commerce” to represent products sold through the Monoprice business (see "Note 11: Segment Information").
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.
Reclassification: The Company reclassified certain amounts related to discontinued operations. See "Note 4: Discontinued Operations" for additional information.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingencies. Estimates include those used for impairment of goodwill and other intangible assets, useful lives of other intangible assets, acquisition accounting, valuation of investments, revenue recognition, the estimated allowance for sales returns and doubtful accounts, internally developed software, accrued contingencies, stock option valuation, and valuation allowance for deferred tax assets. Actual amounts may differ from estimates.
Net capital and regulatory requirements: The Company's subsidiary, HD Vest, operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of June 30, 2016, HD Vest met all capital adequacy requirements to which it was subject.

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Seasonality: Blucora’s Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue earned in the first four months of the Company’s fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue at relatively consistent levels.
Note 2: Summary of Significant Accounting Policies
Interim financial information: The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Interim results are not necessarily indicative of results for a full year.
Cash segregated under federal or other regulations: Cash segregated under federal and other regulations is held in a special bank account for the exclusive benefit of the Company’s wealth management customers.
Short-term investments: The Company principally invests its available cash in fixed-rate debt securities. Fixed-rate debt securities generally include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specific holdings can vary from period to period depending upon the Company's cash requirements. Such investments are included in "Cash and cash equivalents" and "Available-for-sale investments" on the consolidated balance sheets and reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive loss” on the consolidated balance sheets. Amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company reviews its available-for-sale investments for impairment and classifies the impairment of any individual available-for-sale investment as either temporary or other-than-temporary. The differentiating factors between temporary and other-than-temporary impairments are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. An impairment classified as temporary is recognized in “Accumulated other comprehensive loss” on the consolidated balance sheets. An impairment classified as other-than-temporary is recognized in “Other loss, net” on the consolidated statements of comprehensive income.
Business combinations and intangible assets including goodwill: The Company accounts for business combinations using the acquisition method. The acquisition-date fair value of total consideration includes cash and contingent consideration. Since the Company is contractually obligated to pay contingent consideration upon the achievement of specified objectives, a contingent consideration liability is recorded at the acquisition date. The Company reviews its assumptions related to the fair value of the contingent consideration liability each reporting period and, if there are material changes, revalues the contingent consideration liability based on the revised assumptions, until such contingency is satisfied through payment upon the achievement of the specified objectives. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.
Goodwill is calculated as the excess of the acquisition-date fair value of total consideration over the acquisition-date fair value of net assets, including the amount assigned to identifiable intangible assets, and is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Reporting units are consistent with reportable segments and include the former Search and Content and E-Commerce segments. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for advisor relationships which are amortized proportional to expected revenue. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable,

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commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cash equivalents and debt securities are classified within Level 2 of the fair value hierarchy because the Company values its cash equivalents and debt securities utilizing market observable inputs. The contingent consideration liability is related to the Company's acquisition of SimpleTax Software Inc. (“SimpleTax”) and is classified within Level 3 of the fair value hierarchy because the Company values the liability utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations, as disclosed in the accounting policy "Business combinations and intangible assets including goodwill."
Redeemable noncontrolling interests: Noncontrolling interests that are redeemable at the option of the holder and not solely within the control of the issuer are classified outside of stockholders' equity. In connection with the acquisition of HD Vest, management of that business has retained an ownership interest. The Company is party to put and call arrangements with respect to these interests. These put and call arrangements allow HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests, respectively. The put arrangements do not meet the definition of a derivative instrument as the put agreements do not provide for net settlement. To the extent that the redemption value of these interests exceeds the value determined by adjusting the carrying value for the subsidiary's attribution of net income (loss), the value of such interests is adjusted to the redemption value with a corresponding adjustment to additional paid-in capital.
Wealth management revenue recognition: Wealth management revenue consists primarily of commission revenue, advisory revenue, asset-based revenue, and transaction and fee revenue. Revenue is recognized in the periods in which the related services are performed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibilty is reasonably assured. Payments received by the Company in advance of the performance of service are deferred and recognized as revenue when earned.
The Company considers the nature of its contractual arrangements in determining whether to recognize certain types of wealth management revenue, primarily commission revenue and advisory revenue, on the basis of the gross amount billed or net amount retained after payments are made to providers of certain services related to the product or service offering. The main factors that the Company uses to determine whether to record revenue on a gross or net basis are whether:
the Company is primarily responsible for the service to the financial advisor and their client;
the Company has discretion in establishing fees paid by the client and fees due to the third-party service provider; and
the Company is involved in the determination of product or service specifications.
When client fees include a portion of charges that are paid to another party and the Company is primarily responsible for providing the service to the client, revenue is recognized on a gross basis in an amount equal to the fee paid by the client. The cost of revenue recognized is the amount due to the other party. In instances in which another party is primarily responsible for providing the service to the client, revenue is recognized in the net amount retained by the Company. The portion of the fees that are collected from the client by the Company and remitted to the other party are considered pass-through amounts and are not a component of revenue or cost of revenue.
Further details of wealth management revenue are as follows:
Commission revenue - Commissions represent amounts generated by HD Vest's financial advisors for their clients' purchases and sales of securities and various investment products. The Company generates two types of commissions: transaction-based sales commissions that occur at the point of sale, as well as trailing commissions for which the Company provides ongoing account support to clients of its financial advisors.
The Company records transaction-based sales commission revenue on a trade-date basis, which is when the Company's performance obligations in generating the commissions have been substantially completed. Trailing commission revenue is based on a percentage of the current market value of clients' investment holdings in trail-

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eligible assets and recognized over the period during which services are performed. Since trailing commission revenue is generally paid in arrears, the Company estimates it based on a number of factors, including stock market index levels and the amount of trailing commission revenues received in prior periods.
A substantial portion of commission revenue is ultimately paid to financial advisors. The Company records an estimate for transaction-based commissions payable based upon the payout rate of the financial advisor generating the accrued commission revenue. The Company records an estimate for trailing commissions payable based upon historical payout ratios. Such amounts are recorded as "Commissions and advisory fees payable" on the consolidated balance sheets and "Wealth management services cost of revenue" on the consolidated statements of comprehensive income.
Advisory revenue - Advisory revenue includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor (“RIA”). These fees are based on the value of assets within these advisory accounts. A substantial portion of these advisory fees are paid to the related financial advisor and these payments are classified as "Wealth management services cost of revenue" in the consolidated statements of comprehensive income.
Asset-based revenue - Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs and are recognized ratably over the period in which services are provided.
Transaction and fee revenue - The Company charges fees for executing certain transactions in client accounts. Transaction-related charges are recognized on a trade-date basis. Other fees relate to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions. Such fees are recognized as services are performed or as earned, as applicable.
Foreign currency: The financial position and operating results of the Company's foreign operations are consolidated using the local currency as the functional currency. Assets and liabilities recorded in local currencies are translated at the exchange rate on the balance sheet date, while revenues and expenses are translated at the average exchange rate for the applicable period. Translation adjustments resulting from this process are recorded in "Accumulated other comprehensive loss" on the consolidated balance sheets. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, are recorded in "Other loss, net" on the consolidated statements of comprehensive income.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.
In May 2014, the FASB issued guidance codified in ASC 606, “Revenue from Contracts with Customers,” which amends the guidance in former ASC 605 “Revenue Recognition.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital), will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Earlier adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued an ASU on employee share-based payment accounting, which primarily addresses the accounting for various tax-related items as well as the classification of tax-related items on the statement of cash flow. More

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specifically, excess tax benefits and deficiencies should be recognized as income tax expense or benefit in the income statement and recognized in the period generated regardless of whether the benefit reduces taxes payable in the same period. In addition, excess tax benefits and deficiencies should be classified as an operating activity in the statement of cash flow. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. Earlier adoption is permitted. The guidance related to the recognition of excess tax benefits and deficiencies in the income statement is effective on a prospective basis, and the guidance related to the timing of recognition is effective using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance is effective on a retrospective basis. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
Note 3: Business Combinations
HD Vest: On December 31, 2015 and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for $613.7 million, including cash acquired of $38.9 million and after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and is expected to be synergistic with TaxAct as a result of cross-selling opportunities and an expanded addressable market for both HD Vest and TaxAct. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The acquisition was funded by a combination of cash on hand and the new TaxAct - HD Vest 2015 credit facility, under which the Company borrowed $400.0 million (see "Note 7: Debt").
Valuations were as follows (in thousands):
 
Fair value
Tangible assets acquired, including cash acquired of $38,874
$
77,181

Liabilities assumed
(21,845
)
Identifiable net assets acquired
$
55,336

Fair value adjustments for intangible assets:
 
Advisor relationships
$
240,300

Sponsor relationships
16,500

Curriculum
800

Proprietary technology
13,600

Trade name
52,500

Fair value of intangible assets acquired
$
323,700

Purchase price allocation:
 
Cash paid
$
612,288

Plus: promissory note
6,400

Plus: noncontrolling interest
15,038

Less: escrow receivable
(20,000
)
Purchase price
613,726

Less: identifiable net assets acquired
(55,336
)
Less: fair value of intangible assets acquired
(323,700
)
Plus: deferred tax liability related to intangible assets
123,484

Excess of purchase price over net assets acquired, allocated to goodwill
$
358,174

The Company's estimates of the economic lives of the acquired intangible assets are 20 years for the advisor relationships, 18 years for the sponsor relationships, 4 years for the curriculum, 6 years for the proprietary technology, and the trade name is estimated to have an indefinite life. The Company originally estimated the economic life of the advisor relationships to be 14

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years, with the underlying intangible asset to be amortized on a straight-line basis. Upon further analysis, the Company revised the estimated economic life as indicated, with the underlying intangible asset to be amortized proportional to expected revenue. The difference in the two methodologies was not material to the first or second quarters of 2016. Goodwill consists largely of the increased cross-selling opportunities and expanded addressable markets for both HD Vest and TaxAct, neither of which apply for separate recognition, and is not expected to be deductible for income tax purposes. The primary areas of the acquisition accounting that are not yet finalized relate to income and non-income based taxes, certain contingent liability matters, indemnification assets, and residual goodwill.
The promissory note is with the President of HD Vest and will be paid over a three-year period. The current portion was recorded in "Current portion of long-term debt, net," and the long-term portion was recorded in "Long-term debt, net." The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value. See "Note 7: Debt" for additional information on the "Note payable, related party."
The Purchase Agreement dictated that the Company placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.
The gross contractual amount of accounts receivable, including commissions receivable, acquired was $21.6 million and has been substantially collected as of June 30, 2016.
During the last half of 2015, the Company incurred transaction costs of $11.0 million, which were recognized in "General and administrative expense," and $21.8 million in debt discount and issuance-related costs on the new credit facility.
Pro Forma Financial Information of the HD Vest Acquisition (unaudited):
The financial information in the table below summarizes the combined results of operations of Blucora and HD Vest on a pro forma basis, for the period in which the acquisition occurred as though the companies had been combined as of the beginning of that period. Pro forma adjustments have been made to include (a) amortization expense on the definite-lived intangible assets identified in this acquisition, debt-related expenses associated with the credit facility that was used to finance the acquisition, and estimated stock-based compensation related to Blucora share-based award grants to HD Vest employees; and to remove (b) acquisition-related transaction costs and debt-related expenses associated with HD Vest's previous debt facility, the latter of which was paid off and closed at the acquisition date. Income taxes also have been adjusted for the effect of these items. The following pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred at the beginning of the period presented (in thousands):
 
Three months ended June 30, 2015
 
Six months ended June 30, 2015
Revenue
$
111,734

 
$
269,597

Income from continuing operations
$
366

 
$
15,107

SimpleTax: On July 2, 2015, TaxAct acquired all of the equity of SimpleTax, a provider of online tax preparation services for individuals in Canada, for C$2.4 million (with C$ indicating Canadian dollars and amounting to approximately $1.9 million based on the acquisition-date exchange rate) in cash and additional consideration of up to C$4.6 million ($3.7 million) that is contingent upon product availability and revenue performance over a three-year period. The estimated fair value of the contingent consideration as of the acquisition date was C$4.1 million ($3.3 million). See "Note 6: Fair Value Measurements" for additional information related to the fair value measurement of the contingent consideration.
The acquisition of SimpleTax is strategic to TaxAct and intended to expand its operations. SimpleTax is included in the Tax Preparation segment. Intangible assets acquired amounted to approximately C$1.2 million ($0.9 million), consisting of customer relationships and proprietary technology both of which have finite lives. Identifiable net liabilities assumed were not material. Goodwill amounted to C$5.6 million ($4.5 million). Pro forma results of operations have not been presented because the effects of this acquisition were not material to the Company’s consolidated results of operations.

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Note 4: Discontinued Operations
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market, as more fully described in "Note 1: The Company and Basis of Presentation." The Strategic Transformation includes plans to divest the Search and Content and E-Commerce businesses. Financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses.
On July 1, 2016, the Company signed an agreement with OpenMail, under which OpenMail will acquire substantially all of the assets and assume certain specified liabilities of the Search and Content business for $45.0 million in cash, subject to a working capital adjustment at closing. The Company expects the transaction to close in the third quarter of 2016.
Summarized financial information for discontinued operations is as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Major classes of items in net income (loss):
 
 
 
 
 
 
 
Revenues
$
76,057

 
$
88,076

 
$
155,387

 
$
181,834

Operating expenses
(66,891
)
 
(83,547
)
 
(141,922
)
 
(170,876
)
Other loss, net
(197
)
 
(1,543
)
 
(429
)
 
(2,274
)
Income before income taxes
8,969

 
2,986

 
13,036

 
8,684

Loss on classification as held-for-sale before income taxes
(38,525
)
 

 
(38,525
)
 

Income (loss) from discontinued operations, before income taxes
(29,556
)
 
2,986

 
(25,489
)
 
8,684

Income tax benefit (expense)
9,581

 
(1,146
)
 
8,036

 
(3,159
)
Discontinued operations, net of income taxes
$
(19,975
)
 
$
1,840

 
$
(17,453
)
 
$
5,525

 
June 30,
2016
 
December 31,
2015
Major classes of assets and liabilities:
 
 
 
Cash
$
2,859

 
$
2,158

Accounts receivable, net of allowance
20,799

 
26,352

Inventories
32,434

 
43,480

Other current assets
2,935

 
3,182

Property and equipment, net
10,130

 
9,824

Goodwill, net
67,201

 
67,201

Other intangible assets, net
59,006

 
59,006

Other long-term assets
412

 
460

Loss on classification as held-for-sale
(38,525
)
 

Total assets of discontinued operations
$
157,251

 
$
211,663

 
 
 
 
Accounts payable
$
22,061

 
$
33,295

Other current liabilities
10,635

 
15,622

Debt (net of discount and including short-term and long-term portions)
18,000

 
25,000

Deferred tax liability, net
7,117

 
13,816

Other long-term liabilities
475

 
542

Total liabilities of discontinued operations
$
58,288

 
$
88,275

Assets and liabilities of discontinued operations are reported at the lower of carrying value or fair value less cost to sell. Fair value is determined by estimating the most likely sale price with a third-party buyer, which is a significant input not observable in the market and, therefore, classified in Level 3 of the fair value hierarchy.

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Debt is discussed further below in the related subsection of this note.
Business exit costs: In conjunction with the Strategic Transformation, the Company expects to incur business exit costs of approximately $4.5 million. Of this amount, $2.6 million has been recorded through June 30, 2016, with the vast majority of these costs recorded in discontinued operations. The remaining costs are contingent or accelerate upon the sale of the Search and Content and E-Commerce businesses and will be recorded or adjusted, as appropriate, at the time of sale. The following table summarizes the activity in the business exit cost liability (in thousands):
 
Employee-Related Costs
Balance at December 31, 2015
$
994

Charges
1,608

Payments
(1,633
)
Balance at June 30, 2016
$
969

Debt: The debt in discontinued operations consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Monoprice 2013 credit facility
$
18,000

 
$
25,000

On November 22, 2013, Monoprice entered into an agreement with a syndicate of lenders for the purposes of post-transaction financing of the Monoprice acquisition and providing future working capital flexibility for Monoprice. The credit facility consists of a $30.0 million revolving credit loan—which includes up to $5.0 million under a letter of credit and up to $5.0 million in swingline loans—and, until repaid in full in 2015 as discussed below, also consisted of a $40.0 million term loan. The final maturity date of the credit facility is November 22, 2018 but will become immediately due and payable upon the sale of Monoprice. Monoprice’s obligations under the credit facility are guaranteed by Monoprice Holdings, Inc. and are secured by the assets of the Monoprice business.
Monoprice initially borrowed $50.0 million under the credit facility, from both the revolving credit loan and the term loan, and had net repayment activity of $7.0 million and $12.0 million during the six months ended June 30, 2016 and 2015, respectively. Monoprice has the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $1.0 million or any whole multiple of $1.0 million in excess thereof (for swingline loans, the aggregate principal amount is not less than $0.1 million and any whole multiple of $0.1 million in excess thereof). In accordance with this provision, Monoprice repaid the outstanding amount under the term loan in full in 2015, which was included in the repayment activity for 2015 and resulted in the write-down of the remaining unamortized discount and debt issuance costs related to the term loan. Amounts remain outstanding under the revolving credit loan, which continues to be available to Monoprice through its final maturity date.
The interest rate is variable, based upon, at the election of Monoprice, either LIBOR plus a margin of between 2.75% and 3.25%, payable each interest period, or a variable rate plus a margin of between 1.75% and 2.25%, payable quarterly. In each case, the applicable margin within the range depends upon Monoprice’s ratio of leverage to EBITDA. The credit facility includes financial and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined further in the agreement. As of June 30, 2016, Monoprice was in compliance with all of the financial and operating covenants. As of June 30, 2016, the credit facility’s principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
Note 5: Goodwill and Other Intangible Assets
The following table presents goodwill by reportable segment (in thousands):
 
Wealth Management
 
Tax Preparation
 
Total
Balance at December 31, 2015
$
356,386

 
$
192,573

 
$
548,959

Purchase accounting adjustment
1,788

 

 
1,788

Foreign currency translation adjustment

 
283

 
283

Balance at June 30, 2016
$
358,174

 
$
192,856

 
$
551,030


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The purchase accounting adjustment related to the final working capital adjustment associated with the acquisition of HD Vest as described in "Note 3: Business Combinations."
Intangible assets other than goodwill consisted of the following (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Gross carrying amount
 
Accumulated
amortization
 
Net
 
Gross carrying amount
 
Accumulated
amortization
 
Net
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
101,701

 
$
(56,024
)
 
$
45,677

 
$
101,681

 
$
(49,664
)
 
$
52,017

Advisor relationships
240,300

 
(8,582
)
 
231,718

 
240,300

 

 
240,300

Sponsor relationships
16,500

 
(458
)
 
16,042

 
16,500

 

 
16,500

Curriculum
800

 
(100
)
 
700

 
800

 

 
800

Technology
43,986

 
(31,129
)
 
12,857

 
43,948

 
(29,270
)
 
14,678

Total definite-lived intangible assets
403,287

 
(96,293
)
 
306,994

 
403,229

 
(78,934
)
 
324,295

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade names
72,000

 

 
72,000

 
72,000

 

 
72,000

Total
$
475,287

 
$
(96,293
)
 
$
378,994

 
$
475,229

 
$
(78,934
)
 
$
396,295

Amortization expense was as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Statement of comprehensive income line items:
 
 
 
 
 
 
 
Cost of revenue
$
49

 
$
1,863

 
$
716

 
$
3,725

Amortization of other acquired intangible assets
8,316

 
3,185

 
16,632

 
6,371

Total
$
8,365

 
$
5,048

 
$
17,348

 
$
10,096

Expected amortization of definite-lived intangible assets held as of June 30, 2016 is as follows (in thousands):
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
Statement of comprehensive income line items:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
98

 
$
195

 
$
98

 
$

 
$

 
$

 
$
391

Amortization of other acquired intangible assets
16,608

 
33,173

 
32,864

 
32,627

 
20,274

 
171,057

 
306,603

Total
$
16,706

 
$
33,368

 
$
32,962

 
$
32,627

 
$
20,274

 
$
171,057

 
$
306,994

The weighted average amortization periods for definite-lived intangible assets are as follows: 43 months for customer relationships, 234 months for advisor relationships, 210 months for sponsor relationships, 42 months for curriculum, 65 months for technology, and 197 months for total definite-lived intangible assets.

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Note 6: Fair Value Measurements
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
 
 

Fair value measurements at the reporting date using
 
June 30, 2016

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

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)
Cash equivalents:







Money market and other funds
$
8,579


$


$
8,579


$

Time deposits
848




848



Total cash equivalents
9,427




9,427



Available-for-sale investments:
 

 

 

 
Debt securities:
 
 
 
 
 
 
 
U.S. government securities
7,513




7,513



Time deposits
308




308



Total debt securities
7,821

 

 
7,821

 

Total assets at fair value
$
17,248


$


$
17,248


$

 
 
 
 
 
 
 
 
Acquisition-related contingent consideration liability
$
3,550

 
$

 
$

 
$
3,550

Total liabilities at fair value
$
3,550

 
$

 
$

 
$
3,550

 
 
 
Fair value measurements at the reporting date using
 
December 31, 2015
 
Quoted prices in
active markets
using identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
Money market and other funds
$
5,410

 
$

 
$
5,410

 
$

Available-for-sale investments:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. government securities
11,301

 

 
11,301

 

Total assets at fair value
$
16,711

 
$

 
$
16,711

 
$

 
 
 
 
 
 
 
 
Acquisition-related contingent consideration liability
$
2,951

 
$

 
$

 
$
2,951

Total liabilities at fair value
$
2,951

 
$

 
$

 
$
2,951

The Company also had financial instruments that were not measured at fair value. See "Note 7: Debt" for details.
A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
Acquisition-related contingent consideration liability:
 
Balance at December 31, 2015
$
2,951

Revaluation
391

Foreign currency transaction loss
208

Balance at June 30, 2016
$
3,550

The contingent consideration liability is related to the Company's acquisition of SimpleTax (see "Note 3: Business Combinations"), and the related payments are expected to occur annually beginning in 2017 and continuing through 2019. As of June 30, 2016, the Company could be required to pay up to an undiscounted amount of $3.6 million. The Company has

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determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment (100%), and the discount rate (9%). A decrease in estimated revenues would decrease the fair value of the contingent consideration liability, while a decrease in the discount rate would increase the fair value of the contingent consideration liability. As of June 30, 2016, the Company recorded approximately $0.9 million in "Accrued expenses and other current liabilities" and $2.6 million in “Other long-term liabilities” on the consolidated balance sheets.
The contractual maturities of the debt securities classified as available-for-sale at June 30, 2016 and December 31, 2015 were less than one year.
The cost and fair value of available-for-sale investments were as follows (in thousands):
 
Amortized
cost
 
Gross unrealized
gains
 
Gross unrealized
losses
 
Fair
value
Balance at June 30, 2016
$
7,820

 
$
1

 
$

 
$
7,821

Balance at December 31, 2015
$
11,316

 
$

 
$
(15
)
 
$
11,301

The Company had non-recurring Level 3 fair value measurements in 2016 related to the repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.
Note 7: Debt
The Company’s debt consisted of the following (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
TaxAct - HD Vest 2015 credit facility
$
340,000

 
$
(9,722
)
 
$
(7,226
)
 
$
323,052

 
$
400,000

 
$
(12,000
)
 
$
(8,919
)
 
$
379,081

Convertible Senior Notes
172,859

 
(8,731
)
 
(2,236
)
 
161,892

 
201,250

 
(12,207
)
 
(3,125
)
 
185,918

Note payable, related party
6,400

 

 

 
6,400

 
6,400

 

 

 
6,400

Total debt
$
519,259

 
$
(18,453
)
 
$
(9,462
)
 
$
491,344

 
$
607,650

 
$
(24,207
)
 
$
(12,044
)
 
$
571,399

TaxAct - HD Vest 2015 credit facility: On December 31, 2015, TaxAct and HD Vest entered into an agreement with a syndicate of lenders for the purposes of financing the HD Vest acquisition and providing future working capital flexibility for TaxAct and HD Vest. The credit facility consists of a $25.0 million revolving credit loan--which includes a letter of credit and swingline loans--and a $400.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are December 31, 2020 and December 31, 2022, respectively. Obligations under the credit facility are guaranteed by TaxAct Holdings, Inc. and HD Vest Holdings, Inc. and are secured by the equity of the TaxAct and HD Vest businesses. While Blucora is not a party to the agreement, it has guaranteed the obligations of TaxAct and HD Vest under the credit facility, secured by its equity in TaxAct Holdings, Inc.
TaxAct and HD Vest initially borrowed $400.0 million under the term loan and had repayment activity of $60.0 million during the six months ended June 30, 2016. Principal payments on the term loan are payable quarterly and will be between 0.625% and 1.875% of outstanding principal, depending upon TaxAct and HD Vest's combined net leverage of EBITDA ratio. The interest rate on the term loan is variable at the London Interbank Offered Rate (“LIBOR”), subject to a floor of 1.00%, plus a margin of 6.00%, payable at the end of each interest period.
TaxAct and HD Vest may borrow under the revolving credit loan in an aggregate principal amount not less than $2.0 million or any whole multiple of $1.0 million in excess thereof (for swingline loans, the aggregate principal amount is not less than $0.5 million or any whole multiple of $0.1 million in excess thereof). Principal payments on the revolving credit loan are payable at maturity. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 5.00%. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 5.00%. In each case, the applicable margin within the range depends upon TaxAct and HD Vest's combined net leverage to EBITDA ratio over the previous four quarters. Interest is payable at the end of each interest period.

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TaxAct and HD Vest have the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $5.0 million or any whole multiple of $1.0 million in excess thereof, except for prepayments through December 31, 2016 which carry a premium of 1.00% of the total principal amount outstanding just prior to prepayment. In accordance with this provision, TaxAct and HD Vest prepaid a portion of the credit facility during the six months ended June 30, 2016, which was included in the repayment activity for 2016 and resulted in the write-down of a portion of the unamortized discount and debt issuance costs. The write-down of the unamortized discount and debt issuance costs were recorded in "Other loss, net" on the consolidated statements of comprehensive income.
The credit facility includes financial and operating covenants, including a net leverage to EBITDA ratio, which are defined further in the agreement. As of June 30, 2016, TaxAct and HD Vest were in compliance with all of the financial and operating covenants.
As of June 30, 2016, the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
Convertible Senior Notes: On March 15, 2013, the Company issued $201.25 million aggregate principal amount of its Convertible Senior Notes (the “Notes”), inclusive of the underwriters’ exercise in full of their over-allotment option of $26.25 million. The Notes mature on April 1, 2019, unless earlier purchased, redeemed, or converted in accordance with the terms, and bear interest at a rate of 4.25% per year, payable semi-annually in arrears beginning on October 1, 2013. The Company received net proceeds from the offering of approximately $194.8 million after adjusting for debt issuance costs, including the underwriting discount.
The Notes were issued under an indenture dated March 15, 2013 (the “Indenture”) by and between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. There are no financial or operating covenants relating to the Notes.
Beginning July 1, 2013 and prior to the close of business on September 28, 2018, holders may convert all or a portion of the Notes at their option, in multiples of $1,000 principal amount, under the following circumstances:
 
During any fiscal quarter commencing July 1, 2013, if the last reported sale price of the Company’s common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day. As of June 30, 2016, the Notes were not convertible.
During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of the Company’s common stock and the conversion rate on each trading day.
If the Company calls any or all of the Notes for redemption.
Upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets.
The convertibility of the Notes is determined at the end of each reporting period. If the Notes are determined to be convertible, they remain convertible until the end of the subsequent quarter and are classified in "Current liabilities" on the balance sheet; otherwise, they are classified in "Long-term liabilities." Depending upon the price of the Company’s common stock or the trading price of the Notes within the reporting period, pursuant to the first two criteria listed above, the Notes could be convertible during one reporting period but not convertible during a comparable reporting period.
On or after October 1, 2018 and until the close of business on March 28, 2019, holders may convert their Notes, in multiples of $1,000 principal amount, at the option of the holder.
The conversion ratio for the Notes is initially 0.0461723, equivalent to an initial conversion price of approximately $21.66 per share of the Company’s common stock. The conversion ratio is subject to customary adjustment for certain events as described in the Indenture.

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At the time the Company issued the Notes, the Company was only permitted to settle conversions with shares of its common stock. The Company received shareholder approval at its annual meeting in May 2013 to allow for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. The Company’s intention is to satisfy conversion of the Notes with cash for the principal amount of the debt and shares of common stock for any related conversion premium. The Company expects to have the liquidity to satisfy conversion of the Notes' principal for cash based upon cash on hand, net cash flows from operations, and cash available through the credit facility.
Beginning April 6, 2016, the Company may, at its option, redeem for cash all or part of the Notes plus accrued and unpaid interest. If the Company undergoes a fundamental change (as described in the Indenture), holders may require the Company to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. However, if a fundamental change occurs and a holder elects to convert the Notes, the Company will, under certain circumstances, increase the applicable conversion rate for the Notes surrendered for conversion by a number of additional shares of common stock based on the date on which the fundamental change occurs or becomes effective and the price paid per share of the Company’s common stock in the fundamental change as specified in the Indenture. The Strategic Transformation does not qualify as a fundamental change under the Indenture.
The Notes are unsecured and unsubordinated obligations of the Company and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not subordinated. The Notes are effectively junior in right of payment to any of the Company’s secured indebtedness (to the extent of the value of assets securing such indebtedness) and structurally junior to all existing and future indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries. The Indenture does not limit the amount of debt that the Company or its subsidiaries may incur.
The Notes may be settled in a combination of cash or shares of common stock given the flexible settlement option. As a result, the Notes contain liability and equity components, which were bifurcated and accounted for separately. The liability component of the Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at a 6.5% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the Notes, resulting in the initial recognition of $22.3 million as the debt discount recorded in additional paid-in capital for the Notes. The carrying amount of the Notes is being accreted to the principal amount over the remaining term to maturity, and the Company is recording corresponding interest expense. The Company incurred debt issuance costs of $6.4 million related to the Notes and allocated $5.7 million to the liability component of the Notes. These costs are being amortized to interest expense over the six-year term of the Notes or the date of conversion, if any.
During the six months ended June 30, 2016, the Company repurchased $28.4 million of the Notes' principal for cash of $20.7 million. The Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
The following table sets forth total interest expense related to the Notes (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Contractual interest expense (Cash)
$
1,837

 
$
2,139

 
$
3,946

 
$
4,277

Amortization of debt issuance costs (Non-cash)
226

 
245

 
473

 
486

Accretion of debt discount (Non-cash)
885

 
958

 
1,848

 
1,898

Total interest expense
$
2,948

 
$
3,342

 
$
6,267

 
$
6,661

Effective interest rate of the liability component
7.32
%
 
7.32
%
 
7.32
%
 
7.32
%
The fair value of the principal amount of the Notes as of June 30, 2016 was $154.8 million, based on the last quoted active trading price, a Level 1 fair value measurement, as of that date.

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Note payable, related party:  The note payable is with the President of HD Vest and arose in connection with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The President of HD Vest sold a portion of his shares to the Company in exchange for the note. See "Note 3: Business Combinations" for additional information on the acquisition of HD Vest. The note will be paid over a three-year period, with 50% paid in year one, 40% paid in year two, and 10% paid in year three. The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value.
Note 8: Redeemable Noncontrolling Interests
A reconciliation of redeemable noncontrolling interests is as follows (in thousands):
Balance at December 31, 2015
$
15,038

Net income attributable to noncontrolling interests
259

Balance at June 30, 2016
$
15,297

The redemption amount at June 30, 2016 was $10.7 million.
Note 9: Commitments and Contingencies
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, to the contractual obligations and commitments specified in "Note 9: Commitments and Contingencies" in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
On March 5, 2015, Remigius Shatas filed a shareholder derivative action against Andrew Snyder, a director of the Company, certain companies affiliated with Mr. Snyder, as well as nominal defendant Blucora, in the Superior Court of the State of Washington in and for King County.  Although the Company is a nominal defendant, the plaintiff purports to bring the action on behalf of the Company and thus does not seek monetary damages from the Company.  Instead, the plaintiff alleges improper use of inside information in certain sales of the Company's common stock and seeks to recover from Andrew Snyder and those companies affiliated with Mr. Snyder profits resulting from those allegedly improper sales. On May 15, 2015, the court granted the Company's motion to dismiss the Complaint based on the plaintiffs’ failure to file this matter in the proper court. Subsequently, the plaintiff moved for reconsideration of the Superior Court's decision to grant the motion to dismiss, and on June 5, 2015, that motion for reconsideration was denied.  On June 30, 2015, the plaintiff filed a Notice of Appeal with the Superior Court, indicating plaintiff's intention to appeal to the Washington Court of Appeals, Division I. On September 14, 2015, the plaintiff filed a motion with the Washington Court of Appeals to add an additional plaintiff, which the court subsequently denied on October 19, 2015.  In connection with the appeal, the Company filed a motion to dismiss the appeal on the grounds that plaintiff lacked standing at all points relevant the lawsuit.  The appeal and the Company’s motion have been fully-briefed and were argued before the Washington Court of Appeals on April 11, 2016.  The Company awaits the court’s decision.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors and may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.

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Note 10: Stockholders’ Equity
Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units (“RSUs”), and the Company’s employee stock purchase plan (“ESPP”), in the consolidated statements of comprehensive income (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Cost of revenue
$
23

 
$
19

 
$
65

 
$
48

Engineering and technology
322

 
91

 
733

 
224

Sales and marketing
426

 
185

 
1,027

 
380

General and administrative
2,252

 
1,700

 
5,427

 
3,248

Total in continuing operations
3,023

 
1,995

 
7,252

 
3,900

Discontinued operations
1,170

 
1,353

 
2,741

 
2,147

Total
$
4,193

 
$
3,348

 
$
9,993

 
$
6,047

Total excluded and capitalized as part of internal-use software
$

 
$
45

 
$

 
$
61

Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options exercised
15

 
49

 
140

 
220

RSUs vested
235

 
111

 
324

 
169

Shares purchased pursuant to ESPP

 

 
77

 
52

Total
250

 
160

 
541

 
441

Stock repurchase program: In February 2013, the Company’s Board of Directors approved a stock repurchase program whereby the Company could purchase its common stock in open-market transactions. The repurchase period concluded in May 2016. Repurchased shares were retired and resumed the status of authorized but unissued shares of common stock. During the six months ended June 30, 2016, the Company purchased no shares. During the six months ended June 30, 2015, the Company purchased 0.4 million shares at a total cost of approximately $5.5 million and an average price of $14.55 per share, exclusive of purchase and administrative costs.
Note 11: Segment Information
The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The Wealth Management segment consists of the HD Vest business, which was acquired on December 31, 2015. HD Vest is included in Blucora's results of operations beginning on January 1, 2016. As a result of the Strategic Transformation and planned divestitures of the Search and Content and E-Commerce segments, those former segments are included in discontinued operations. The Company’s chief executive officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
The Company does not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, and amortization of acquired intangible assets to the reportable segments. Such amounts are reflected in the table under the heading "Corporate-level activity." In addition, the Company does not allocate other loss, net and income taxes to the reportable segments. The Company does not account for, and does not report to management, its assets or capital expenditures by segment other than goodwill and intangible assets used for impairment analysis purposes.

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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,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Wealth Management
$
76,117

 
$

 
$
153,408

 
$

Tax Preparation
43,991

 
30,900

 
132,465

 
111,968

Total revenue
120,108

 
30,900

 
285,873

 
111,968

Operating income:
 
 
 
 
 
 
 
Wealth Management
9,924

 

 
20,830

 

Tax Preparation
29,796

 
19,890

 
77,369

 
64,035

Corporate-level activity
(17,366
)
 
(12,243
)
 
(36,399
)
 
(24,110
)
Total operating income
22,354

 
7,647

 
61,800

 
39,925

Other loss, net
(10,916
)
 
(3,034
)
 
(18,430
)
 
(6,029
)
Income tax expense
(5,793
)
 
(2,202
)
 
(17,436
)
 
(12,070
)
Discontinued operations, net of income taxes
(19,975
)
 
1,840

 
(17,453
)
 
5,525

Net income (loss)
$
(14,330
)
 
$
4,251

 
$
8,481

 
$
27,351

Note 12: Net Income (Loss) Per Share
Basic net income (loss) per share” is computed using the weighted average number of common shares outstanding during the period. “Diluted net income (loss) per share” is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options, vesting of unvested RSUs, and conversion or maturity of the Notes. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.

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The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
5,645

 
$
2,411

 
$
25,934

 
$
21,826

Net income attributable to noncontrolling interests
(115
)
 

 
(259
)
 

Income from continuing operations attributable to Blucora, Inc.
5,530

 
2,411

 
25,675

 
21,826

Income (loss) from discontinued operations attributable to Blucora, Inc.
(19,975
)
 
1,840

 
(17,453
)
 
5,525

Net income (loss) attributable to Blucora, Inc.
$
(14,445
)
 
$
4,251

 
$
8,222

 
$
27,351

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
41,405

 
40,918

 
41,288

 
40,953

Dilutive potential common shares
893

 
1,018

 
666

 
965

Weighted average common shares outstanding, diluted
42,298

 
41,936

 
41,954

 
41,918

Net income (loss) per share attributable to Blucora, Inc. - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.06

 
$
0.62

 
$
0.53

Discontinued operations
(0.48
)
 
0.04

 
(0.42
)
 
0.14

Basic net income (loss) per share
$
(0.35
)
 
$
0.10

 
$
0.20

 
$
0.67

Net income (loss) per share attributable to Blucora, Inc. - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.06

 
$
0.61

 
$
0.52

Discontinued operations
(0.47
)
 
0.04

 
(0.41
)
 
0.13

Diluted net income (loss) per share
$
(0.34
)
 
$
0.10

 
$
0.20

 
$
0.65

Shares excluded
7,524

 
2,914

 
7,648

 
2,825

Shares excluded primarily related to stock options with an exercise price greater than the average price during the applicable periods.
As more fully discussed in "Note 7: Debt," in March 2013, the Company issued the Notes, which are convertible and mature in April 2019. In May 2013, the Company received shareholder approval for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. The Company intends, upon conversion or maturity of the Notes, to settle the principal in cash and satisfy any conversion premium by issuing shares of its common stock. The Company expects to have the liquidity to satisfy conversion of the Notes' principal for cash based upon cash on hand, net cash flows from operations, and cash available through the credit facility. As a result, the Company only includes the impact of the premium feature in its dilutive potential common shares when the average stock price during the quarter exceeds the conversion price of the Notes, which did not occur during the three months ended June 30, 2016 and 2015.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "anticipate," "believe," "plan," "project," "expect," "future," "intend," "may," "will," "should," "estimate," "predict," "potential," "continue," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our "Strategic Transformation"; and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, “Risk Factors,” and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Overview
Blucora (the “Company,” “Blucora,” or “we”) operates two primary businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (“HD Vest”), which we acquired on December 31, 2015. HD Vest is included in Blucora's results of operations as of January 1, 2016. HD Vest provides wealth management solutions for financial advisors. The Tax Preparation business consists of the operations of TaxAct, Inc. (“TaxAct”) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals.
Blucora also operates an internet Search and Content business and an E-Commerce business. The Search and Content business operates through the InfoSpace LLC subsidiary (“InfoSpace”) and provides search services to users of our owned and operated and distribution partners' web properties, as well as online content through HowStuffWorks (“HSW”). The E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”) and sells self-branded electronics and accessories to both consumers and businesses. See further information regarding these businesses under "Strategic Transformation" below.
Strategic Transformation
On October 14, 2015, we announced our plans to focus on the technology-enabled financial solutions market, which we refer to as the “Strategic Transformation.” The Strategic Transformation consists of our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest, which we acquired on December 31, 2015, and our intention to divest our Search and Content and E-Commerce businesses. The transformation will, among other things, result in fewer support requirements and, therefore, reduced corporate operating expenses. We also expect our capital allocation priority in the near-term to be to pay down debt, which includes using all of the net divestiture proceeds from the sale of the Search and Content business and at least 50% of the net divestiture proceeds from the sale of the E-Commerce business to pay down the new TaxAct - HD Vest 2015 credit facility. The elements of our Strategic Transformation are described in more detail below. For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Acquisition: On December 31, 2015, we acquired HD Vest for $613.7 million, including cash acquired of $38.9 million and after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and is expected to be synergistic with TaxAct as a result of cross-selling opportunities and an expanded addressable market for both HD Vest and TaxAct. The acquisition was funded by a combination of cash on hand and the new TaxAct - HD Vest 2015 credit facility, under which we borrowed $400.0 million. During the last half of 2015, we incurred transaction costs of $11.0 million.
See "Note 3: Business Combinations" and "Note 7: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on the HD Vest acquisition and the new credit facility, respectively.

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Business divestitures and chief executive officer change: On October 14, 2015, we announced plans to divest the Search and Content and E-Commerce businesses. Accordingly, our financial condition, results of operations, and cash flows reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Unless otherwise specified, disclosures in "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflect continuing operations.
On July 1, 2016, we signed an agreement with OpenMail LLC (OpenMail), under which OpenMail will acquire substantially all of the assets and assume certain specified liabilities of the Search and Content business for $45.0 million in cash, subject to a working capital adjustment at closing. We expect the transaction to close in the third quarter of 2016 and intend to use the proceeds to pay down debt.
We expect to incur business exit costs of approximately $4.5 million. Of this amount, $2.6 million has been recorded through June 30, 2016, with the vast majority of these costs recorded in discontinued operations. The remaining costs are contingent or accelerate upon the sale of the Search and Content and E-Commerce businesses and will be recorded or adjusted, as appropriate, at the time of sale.
See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on discontinued operations.
On October 14, 2015, we also announced the departure of our former chief executive officer. His departure became effective March 31, 2016. In conjunction with such announcement, we recorded $1.8 million of separation-related costs, most of which were pursuant to the former chief executive officer's employment agreement and paid in April 2016. On March 12, 2016, our Board of Directors appointed our new chief executive officer, effective April 4, 2016.
Our Continuing Businesses
Wealth Management
The HD Vest business provides wealth management solutions for financial advisors. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory, and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management, and other fees.
HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. The company primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest's specialist model provides an open-architecture investment platform and technology tools to help financial advisors identify investment opportunities for their clients, while the long-standing tax advisory relationships provide a large client base of possible investment clients. This results in an experienced and stable network of financial advisors, who have multiple revenue-generating options to diversify their earnings sources.
Our Wealth Management business is subject to certain additional financial industry regulations and supervision, including by the SEC, FINRA, state securities and insurance regulators, and other regulatory authorities. For additional information regarding the potential impact of governmental regulation on our operations and results, see the Risk Factor "Increased government regulation of our business may harm our operating results" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Tax Preparation
Our TaxAct business provides digital tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com.
We have four offerings for consumers for tax year 2015: a "free" federal and state edition that handles simple returns; a "basic" offering that contains all of the features of the free federal edition in addition to import capabilities, taxpayer phone support, and return preparation assistance tools; a "plus" offering that contains all of the basic offering features in addition to tools to maximize credits and deductions, and enhanced reporting; and a "premium" offering that contains all of the plus offering features in addition to tools for self-employed individuals to maximize credits and deductions. For the latter three offerings, state returns can be filed through the separately-sold state edition. We also have an offering for small business owners. TaxAct's offerings come with a price lock guarantee, whereby the price at the start of the tax return filing process

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holds until the return is filed, rather than pricing the offering at the time that the tax return is filed. In addition to these core offerings, TaxAct also offers ancillary services such as refund payment transfer, data archive services, audit defense, stored value cards, and other add-on services.
TaxAct’s professional tax preparer software allows professional tax preparers to file individual and business returns for their clients. TaxAct offers flexible pricing and packaging options that help tax professionals save money by paying only for what they need.
Acquisitions
On December 31, 2015, we acquired HD Vest, as described further under "Strategic Transformation" above. HD Vest is included in Blucora's results of operations as of January 1, 2016. Accordingly, the results discussed below were impacted by the timing of this acquisition, in which 2016 includes a full year of results as compared to no results in 2015.
On July 2, 2015, TaxAct acquired SimpleTax Software Inc. (“SimpleTax”), a provider of online tax preparation services for individuals in Canada through its website www.simpletax.ca, for C$2.4 million (with C$ indicating Canadian dollars and amounting to approximately $1.9 million based on the acquisition-date exchange rate) in cash and additional consideration of up to C$4.6 million ($3.7 million) that is contingent upon product availability and revenue performance over a three-year period. SimpleTax is included in our financial results beginning on July 2, 2015.
Seasonality
Our Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue at relatively consistent levels.
Comparability
We reclassified certain amounts related to discontinued operations. See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.
RESULTS OF OPERATIONS
Summary
(In thousands, except percentages)
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Percentage
Change
 
2016
 
2015
 
Percentage
Change
Revenue
$
120,108

 
$
30,900

 
289
%
 
$
285,873

 
$
111,968

 
155
%
Operating income
$
22,354

 
$
7,647

 
192
%
 
$
61,800

 
$
39,925

 
55
%
Three months ended June 30, 2016 compared with three months ended June 30, 2015
Total revenues increased approximately $89.2 million due to increases of $76.1 million and $13.1 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively.
Operating income increased approximately $14.7 million, consisting of the $89.2 million increase in revenue and offset by a $74.5 million increase in operating expenses. Key changes in operating expenses were:
 
$66.2 million increase in the Wealth Management segment’s operating expenses due to the timing of the HD Vest acquisition.
$3.2 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher spending on marketing campaigns for the current tax season, higher personnel expenses resulting from overall increased headcount, higher data center costs mostly related to third-party technology fees (software support and maintenance, bandwidth and hosting, and professional services), and higher third-party costs associated with additional features in the current year offerings.

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$5.1 million increase in corporate-level expense activity, primarily due to higher amortization expense related to HD Vest acquisition-related intangible assets, higher stock-based compensation mainly related to a net increase in stock award grants (including to HD Vest employees), higher depreciation expense mainly related to HD Vest fixed assets, and the revaluation of the contingent consideration liability related to the SimpleTax acquisition, offset by lower amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Segment results are discussed in the next section.
Six months ended June 30, 2016 compared with six months ended June 30, 2015
Total revenues increased approximately $173.9 million due to increases of $153.4 million and $20.5 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively.
Operating income increased approximately $21.9 million, consisting of the $173.9 million increase in revenue and offset by a $152.0 million increase in operating expenses. Key changes in operating expenses were:
 
$132.6 million increase in the Wealth Management segment’s operating expenses due to the timing of the HD Vest acquisition.
$7.2 million increase in the Tax Preparation segment’s operating expenses, primarily due to the same factors described above that impacted the quarterly period.
$12.3 million increase in corporate-level expense activity, primarily due to the same factors described above that impacted the quarterly period.
Segment results are discussed in the next section.
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. (“GAAP”) and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition-related costs, depreciation, amortization of acquired intangible assets, other loss, net, and income taxes to segment operating results. We analyze these separately.
Following the acquisition of HD Vest and the discontinued operations treatment of Search and Content and E-Commerce, we determined that we have two reportable segments: Wealth Management and Tax Preparation.
Wealth Management
On December 31, 2015, we acquired HD Vest, a provider of wealth management solutions for financial advisors. HD Vest is included in Blucora's results of operations as of January 1, 2016.
(In thousands, except percentages)
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
Revenue
$
76,117

 
$
153,408

Operating income
$
9,924

 
$
20,830

Segment margin
13
%
 
14
%
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. A summary of our sources of revenue and business metrics are as follows.

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Sources of revenue
(In thousands)
Three months ended June 30,
 
Six months ended June 30,
 
Sources of Revenue
Primary Drivers
2016
 
2016
Advisor-driven

Commission
- Transactions
- Asset levels
$
35,252

 
$
72,108

Advisory
- Advisory asset levels
31,522

 
63,054

Other revenue
Asset-based
- Cash balances
- Interest rates
- Number of accounts
- Client asset levels
5,395

 
11,213

Transaction and fee
- Account activity
- Number of clients
- Number of advisors
- Number of accounts
3,948

 
7,033

 
Total revenue
$
76,117

 
$
153,408

 
Total recurring revenue
$
61,160

 
$
121,229

 
Recurring revenue rate
80.3
%
 
79.0
%
Recurring revenue consists of trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commission revenue, Advisory revenue, Asset-based revenue, and Transaction and fee revenue, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
(In thousands, except percentages and as otherwise indicated)
June 30, 2016
Total Assets Under Administration ("AUA")
$
37,233,522

Advisory Assets Under Management ("AUM")
$
9,814,232

Percentage of total AUA
26.4
%
Number of advisors (in ones)
4,561

Commission revenue: We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period to period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:
(In thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
By product category:
 
 
 
Mutual funds
$
19,786

 
$
38,825

Variable annuities
10,690

 
23,330

Insurance
2,373

 
5,147

General securities
2,403

 
4,806

Total commission revenue
$
35,252

 
$
72,108

 
 
 
 
By sales-based and trailing:
 
 
 
Sales-based
$
14,306

 
$
30,778

Trailing
20,946

 
41,330

Total commission revenue
$
35,252

 
$
72,108


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Advisory revenue: Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor (“RIA”) and is based on the value of advisory assets under management. 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 under management was as follows:
(In thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
Balance, beginning of the period
$
9,592,025

 
$
9,692,244

Net increase (decrease) in new advisory assets
11,070

 
(133,339
)
Market impact and other
211,137

 
255,327

Balance, end of the period
$
9,814,232

 
$
9,814,232

Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end advisory assets under management.
Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs.
Transaction and fee revenue: Transaction and fee revenue primarily includes fees for executing certain transactions in client accounts and fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.
Tax Preparation
(In thousands, except percentages)
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
Percentage
Change
 
2016
 
2015
 
Percentage
Change
Revenue
$
43,991

 
$
30,900

 
42
%
 
$
132,465

 
$
111,968

 
18
%
Operating income
$
29,796

 
$
19,890

 
50
%
 
$
77,369

 
$
64,035

 
21
%
Segment margin
68
%
 
64
%
 
 
 
58