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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                   
 
FORM 10-Q
                  
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                     
Commission File Number: 000-25131
 
BLUCORA, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
91-1718107
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
6333 State Hwy 161, 4th Floor, Irving, Texas
75038
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (972) 870-6000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o  
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Outstanding at
Class
October 24, 2018
Common Stock, Par Value $0.0001
47,970,272
 


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,“believe,“plan,“expect,“future,“intend,“may,“will,“should,“estimate,“predict,“potential,“continue,” and similar expressions identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. These forward-looking statements include, but are not limited to, statements regarding:
our ability to effectively implement our future business plans and growth strategy, including our ability to achieve the anticipated benefits of our Strategic Transformation (as defined in this Quarterly Report on Form 10-Q);
our ability to effectively compete within our industry;
our ability to attract and retain customers and productive financial advisors, as well as our ability to provide strong service to both;
our future capital requirements and the availability of financing, if necessary;
our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
our ability to generate strong investment performance for our customers and the impact of the financial markets on our customers’ portfolios and investment behavior;
political and economic conditions and changes and events that directly or indirectly impact the wealth management and tax preparation industries;
our ability to respond to rapid technological changes, including our ability to successfully release new products and services or improve upon existing products and services;
our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;
our ability to comply with regulations applicable to the wealth management and tax preparation industries, including increased costs associated with new or changing regulations;
our ability to achieve the expected benefits from our new clearing platform and investment advisory platform;
risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses and computer hacking attacks;
our ability to comply with laws and regulations regarding privacy and protection of user data;
our ability to maintain our relationships with third party partners, providers, suppliers, vendors, distributors, contractors, financial institutions and licensing partners;
our beliefs and expectations regarding the seasonality of our business;
risks associated with litigation;
our ability to attract and retain qualified employees;
our assessments and estimates that determine our effective tax rate;
the impact of new or changing tax legislation on our business and our ability to attract and retain customers;
our ability to develop, establish and maintain strong brands;
our ability to protect our intellectual property and the impact of any claim that we have infringed on the intellectual property rights of others; and
our ability to effectively integrate companies or assets that we acquire.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as supplemented by the those identified under Part II, Item 1A, "Risk Factors" and elsewhere in this report, as well as in the Company's other filings with the Securities and Exchange Commission. You should not rely on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to update any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.


Table of Contents


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
88,274

 
$
59,965

Cash segregated under federal or other regulations
317

 
1,371

Accounts receivable, net of allowance
6,056

 
10,694

Commissions receivable
16,762

 
16,822

Other receivables
626

 
3,180

Prepaid expenses and other current assets, net
5,571

 
7,365

Total current assets
117,606

 
99,397

Long-term assets:
 
 
 
Property and equipment, net
11,111

 
9,831

Goodwill, net
548,915

 
549,037

Other intangible assets, net
302,715

 
328,205

Other long-term assets
15,363

 
15,201

Total long-term assets
878,104

 
902,274

Total assets
$
995,710

 
$
1,001,671

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,158

 
$
4,413

Commissions and advisory fees payable
15,186

 
17,813

Accrued expenses and other current liabilities
16,473

 
19,577

Deferred revenue
5,997

 
9,953

Total current liabilities
39,814

 
51,756

Long-term liabilities:
 
 
 
Long-term debt, net
260,208

 
338,081

Deferred tax liability, net
42,356

 
43,433

Deferred revenue
500

 
804

Other long-term liabilities
6,923

 
8,177

Total long-term liabilities
309,987

 
390,495

Total liabilities
349,801

 
442,251

 
 
 
 
Redeemable noncontrolling interests
22,224

 
18,033

 
 
 
 
Commitments and contingencies (Note 8)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
 
 
 
47,816 and 46,366, respectively
5

 
5

Additional paid-in capital
1,569,539

 
1,555,560

Accumulated deficit
(945,708
)
 
(1,014,174
)
Accumulated other comprehensive loss
(151
)
 
(4
)
Total stockholders’ equity
623,685

 
541,387

Total liabilities and stockholders’ equity
$
995,710

 
$
1,001,671

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Wealth management services revenue
$
91,887

 
$
86,809

 
$
275,984

 
$
254,772

Tax preparation services revenue
3,498

 
3,362

 
183,214

 
156,936

Total revenue
95,385

 
90,171

 
459,198

 
411,708

Operating expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Wealth management services cost of revenue
62,313

 
59,607

 
187,526

 
172,444

Tax preparation services cost of revenue
1,370

 
1,314

 
8,182

 
7,543

Amortization of acquired technology

 
50

 
99

 
145

Total cost of revenue
63,683

 
60,971

 
195,807

 
180,132

Engineering and technology
4,246

 
5,051

 
14,225

 
14,041

Sales and marketing
15,675

 
13,680

 
94,719

 
84,974

General and administrative
13,404

 
12,207

 
43,895

 
39,405

Depreciation
798

 
867

 
3,706

 
2,680

Amortization of other acquired intangible assets
8,271

 
8,615

 
25,384

 
25,192

Restructuring

 
106

 
291

 
2,726

Total operating expenses
106,077

 
101,497

 
378,027

 
349,150

Operating income (loss)
(10,692
)
 
(11,326
)
 
81,171

 
62,558

Other loss, net
(3,863
)
 
(5,241
)
 
(11,850
)
 
(39,149
)
Income (loss) before income taxes
(14,555
)
 
(16,567
)
 
69,321

 
23,409

Income tax benefit (expense)
818

 
(166
)
 
(2,052
)
 
(5,952
)
Net income (loss)
(13,737
)
 
(16,733
)
 
67,269

 
17,457

Net income attributable to noncontrolling interests
(227
)
 
(164
)
 
(654
)
 
(466
)
Net income (loss) attributable to Blucora, Inc.
$
(13,964
)
 
$
(16,897
)
 
$
66,615

 
$
16,991

Net income (loss) per share attributable to Blucora, Inc.*:
Basic
$
(0.37
)
 
$
(0.37
)
 
$
1.34

 
$
0.39

Diluted
$
(0.37
)
 
$
(0.37
)
 
$
1.28

 
$
0.36

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
47,712

 
45,459

 
47,191

 
43,749

Diluted
47,712

 
45,459

 
49,292

 
46,813

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(13,737
)
 
$
(16,733
)
 
$
67,269

 
$
17,457

Unrealized gain on available-for-sale investments, net of tax

 

 

 
1

Foreign currency translation adjustment
102

 
223

 
(147
)
 
413

Other comprehensive income (loss)
102

 
223

 
(147
)
 
414

Comprehensive income (loss)
(13,635
)
 
(16,510
)
 
67,122

 
17,871

Comprehensive income attributable to noncontrolling interests
(227
)
 
(164
)
 
(654
)
 
(466
)
Comprehensive income (loss) attributable to Blucora, Inc.
$
(13,862
)
 
$
(16,674
)
 
$
66,468

 
$
17,405

* The 2018 net income (loss) per share amounts include the noncontrolling interest redemption impact discussed further in "Note 7: Redeemable Noncontrolling Interests" and in "Note 11: Net Income (Loss) Per Share."
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine months ended September 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net income
$
67,269

 
$
17,457

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Stock-based compensation
9,559

 
8,434

Depreciation and amortization of acquired intangible assets
29,539

 
28,553

Restructuring (non-cash)

 
1,499

Deferred income taxes
(1,073
)
 
(473
)
Amortization of premium on investments, net, and debt issuance costs
659

 
901

Accretion of debt discounts
125

 
1,893

Loss on debt extinguishment
1,534

 
19,764

Cash provided (used) by changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,636

 
3,259

Commissions receivable
60

 
(288
)
Other receivables
3,149

 
2,384

Prepaid expenses and other current assets
1,369

 
1,720

Other long-term assets
(902
)
 
432

Accounts payable
(2,255
)
 
(1,375
)
Commissions and advisory fees payable
(2,627
)
 
(23
)
Deferred revenue
(2,411
)
 
(5,856
)
Accrued expenses and other current and long-term liabilities
(3,048
)
 
949

Net cash provided by operating activities
105,583

 
79,230

Investing Activities:
 
 
 
Purchases of property and equipment
(5,340
)
 
(3,809
)
Proceeds from sales of investments

 
249

Proceeds from maturities of investments

 
7,252

Purchases of investments

 
(409
)
Net cash provided (used) by investing activities
(5,340
)
 
3,283

Financing Activities:
 
 
 
Proceeds from credit facilities

 
367,212

Payments on convertible notes

 
(172,827
)
Payments on credit facilities
(80,000
)
 
(285,000
)
Proceeds from stock option exercises
11,738

 
38,228

Proceeds from issuance of stock through employee stock purchase plan
1,608

 
1,428

Tax payments from shares withheld for equity awards
(5,983
)
 
(6,744
)
Contingent consideration payments for business acquisition
(1,315
)
 
(946
)
Net cash used by financing activities
(73,952
)
 
(58,649
)
Net cash provided by continuing operations
26,291

 
23,864

 
 
 
 
Net cash provided by investing activities from discontinued operations

 
1,028

Net cash provided by discontinued operations

 
1,028

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(11
)
 
86

Net increase in cash, cash equivalents, and restricted cash
26,280

 
24,978

Cash, cash equivalents, and restricted cash, beginning of period
62,311

 
54,868

Cash, cash equivalents, and restricted cash, end of period
$
88,591

 
$
79,846

Non-cash investing and financing activities from continuing operations:
 
 
 
 
 
 
 
Cash paid for income taxes
$
1,096

 
$
1,013

Cash paid for interest
$
11,573

 
$
14,205

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Description of the Business
Description of the business: Blucora, Inc. (the "Company" or "Blucora") operates two businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries ("HD Vest"). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), H.D. Vest Advisory Services, Inc. (a registered investment adviser), and H.D. Vest Insurance Agency, LLC (an insurance broker) (collectively referred to as the "Wealth Management business" or the "Wealth Management segment"). The Tax Preparation business consists of the operations of TaxAct, Inc. and its subsidiary ("TaxAct") and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the "Tax Preparation business" or the "Tax Preparation segment").
Segments: The Company has two reportable segments: the Wealth Management segment, which consists of the HD Vest business, and the Tax Preparation segment, which consists of the TaxAct business.
Note 2: Summary of Significant Accounting Policies
Interim financial information: The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents, and restricted cash: The following table presents cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):
 
September 30,
 
December 31,
 
2018
 
2017
 
2017
Cash and cash equivalents
$
88,274

 
$
78,558

 
$
59,965

Cash segregated under federal or other regulations
317

 
313

 
1,371

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

 
425

 
425

Restricted cash included in "Other long-term assets"

 
550

 
550

Total cash, cash equivalents, and restricted cash
$
88,591

 
$
79,846

 
$
62,311



Cash segregated under federal and other regulations is held in a separate bank account for the exclusive benefit of the Company’s Wealth Management customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking and lease arrangements.
Fair value of financial instruments: The Company measures its cash equivalents and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.

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Table of Contents

Cash equivalents are classified within Level 2 (see "Note 5: Fair Value Measurements") of the fair value hierarchy because the Company values them utilizing market observable inputs. Unrealized gains and losses are included in "Accumulated other comprehensive loss" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company has a contingent consideration liability that is related to the Company's 2015 acquisition of SimpleTax Software Inc. ("SimpleTax"). The Company's contingent consideration liability is classified within Level 3 (see "Note 5: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes. The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations.
Concentration of credit risk:  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.
For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas.
Property and equipment, net: In the first quarter of 2018, the Company determined that certain of its internally-developed software fixed assets would not be used for as long as previously estimated and recognized $1.1 million of depreciation expense after shortening the estimated useful lives of those assets.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs that impact the following areas:
Share-Based Payments (ASU 2018-07) - In June 2018, the FASB issued an ASU that requires companies to account for share-based payments granted to non-employees similarly to share-based payments granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Early adoption of this ASU is permitted. In the third quarter of 2018, the Company decided to early adopt the requirements of the new standard effective January 1, 2018, utilizing the alternative adoption method.

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Table of Contents

The adoption of this ASU had a $0.3 million cumulative effect on the Company's unaudited 2018 quarterly results, with a corresponding adjustment to additional paid-in capital:
 
First Quarter
 
Second Quarter
 
Reported
 
Recast
 
Reported
 
Recast
Income statement data:
 
 
 
 
 
 
 
Wealth management services cost of revenue
$
63,067

 
$
63,064

 
$
62,452

 
$
62,149

Operating income (loss)
52,734

 
52,737

 
38,823

 
39,126

Net income (loss)
45,543

 
45,546

 
35,157

 
35,460

Net income (loss) attributable to Blucora, Inc.
45,338

 
45,341

 
34,935

 
35,238

 
 
 
 
 
 
 
 
Net income (loss) per share attributable to Blucora, Inc.
 
 
 
 
 
 
 
Basic
$
0.97

 
$
0.97

 
$
0.74

 
$
0.75

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
46,641

 
46,641

 
47,221

 
47,221


Revenue recognition (ASC 606) - In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), 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 by using a five-step process. 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.
The Company adopted the requirements of the new standard on January 1, 2018, utilizing the modified retrospective transition method. Upon adoption, the Company recognized a $1.8 million cumulative effect as an adjustment to the opening balance of retained earnings and deferred revenues on the consolidated balance sheets.
As a result of the adoption of ASC 606, the Company now recognizes certain licensing fees on a net basis, which reduced both transaction and fee revenues and operating expenses by $0.4 million and $1.3 million, respectively, for the three and nine months ended September 30, 2018, on the consolidated statements of comprehensive income. Had the Company not adopted ASC 606, total revenues for the three and nine months ended September 30, 2018 would have been $0.7 million and $2.6 million, respectively, higher than reported on the consolidated statements of comprehensive income.
Pursuant to the modified retrospective transition method, prior periods were not retrospectively adjusted, and the Company does not disclose the value of unsatisfied performance obligations for contracts with original expected durations of one year or less.
Leases (ASU 2016-02) - In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or more, will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. Based upon the Company's current lease obligations, the Company expects that the adoption of this ASU will result in between $8.0 million and $12.0 million of additional right of use assets and lease liabilities recognized on the consolidated balance sheets upon adoption on January 1, 2019.
Measurement of Credit Losses (ASU 2016-13) - In June 2016, the FASB issued an ASU that requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including the interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

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Table of Contents

Note 3: Segment Information and Revenues
The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The Company’s Chief Executive Officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
Information on reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Wealth Management
$
91,887

 
$
86,809

 
$
275,984

 
$
254,772

Tax Preparation
3,498

 
3,362

 
183,214

 
156,936

Total revenue
95,385

 
90,171

 
459,198

 
411,708

Operating income (loss):
 
 
 
 
 
 
 
Wealth Management
12,891

 
12,425

 
38,920

 
36,684

Tax Preparation
(6,936
)
 
(6,238
)
 
95,991

 
83,410

Corporate-level activity
(16,647
)
 
(17,513
)
 
(53,740
)
 
(57,536
)
Total operating income
(10,692
)
 
(11,326
)
 
81,171

 
62,558

Other loss, net
(3,863
)
 
(5,241
)
 
(11,850
)
 
(39,149
)
Income tax benefit (expense)
818

 
(166
)
 
(2,052
)
 
(5,952
)
Net income
$
(13,737
)
 
$
(16,733
)
 
$
67,269

 
$
17,457


Revenues by major category within each segment are presented below (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Wealth Management:
 
 
 
 
 
 
 
Commission
$
41,015

 
$
39,432

 
$
124,269

 
$
117,181

Advisory
41,443

 
37,588

 
120,802

 
107,078

Asset-based
6,979

 
6,526

 
21,457

 
19,276

Transaction and fee
2,450

 
3,263

 
9,456

 
11,237

Total Wealth Management revenue
$
91,887

 
$
86,809

 
$
275,984

 
$
254,772

Tax Preparation:
 
 
 
 
 
 
 
Consumer
$
3,246

 
$
3,149

 
$
168,295

 
$
143,239

Professional
252

 
213

 
14,919

 
13,697

Total Tax Preparation revenue
$
3,498

 
$
3,362

 
$
183,214

 
$
156,936


See "Note 2: Summary of Significant Accounting Policies" for a discussion of the new revenue recognition standard, ASC 606, adopted by the Company on January 1, 2018.
Wealth Management revenue recognition: Wealth Management revenue consists primarily of commission revenue, advisory revenue, asset-based revenue, and transaction and fee revenue. The Company's Wealth Management revenues are earned from customers primarily located in the United States.
Wealth management revenue details are as follows:
Commission revenue - Commission revenue represents amounts generated by the Company's clients' purchases and sales of securities and various investment products. The Company serves as the registered broker/dealer or insurance agent for those

10

Table of Contents

trades. The Company generates two types of commission revenues: transaction-based sales commissions that occur on the trade date, which is when the Company's performance obligations have been substantially completed, and trailing commissions, which are paid to the Company (typically in arrears on a quarterly basis) based on the clients' account balance, rather than a per-transaction fee.
Advisory revenue - Advisory revenue includes fees charged to clients in advisory accounts where the Company is the Registered Investment Adviser. These fees are based on the value of assets within these advisory accounts. Advisory revenues are deferred and recognized ratably over the period (typically quarterly) in which the performance obligations, which are defined in ASC 606 as promises to transfer goods or services, have been completed.
Asset-based revenue - Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs and other asset-based revenues, primarily including margin revenues, and are recognized ratably over the period in which services are provided.
Transaction and fee revenue - Transaction and fee revenue primarily includes support fees charged to advisers, which are recognized over time as advisory services are provided, fees charged for executing certain transactions in client accounts, which are recognized on a trade-date basis, and other fees related to services provided and other account charges as generally outlined in agreements with financial advisers, clients, and financial institutions, which are recognized as services are performed or as earned, as applicable.
Details of Wealth Management revenues are:
Wealth Management Segment Revenues
 
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Recognized Upon Transaction
 
Recognized Over Time
 
Total
 
Recognized Upon Transaction
 
Recognized Over Time
 
Total
Commission revenue
$
16,929

 
$
24,086

 
$
41,015

 
$
51,193

 
$
73,076

 
$
124,269

Advisory revenue

 
41,443

 
41,443

 

 
120,802

 
120,802

Asset-based revenue

 
6,979

 
6,979

 

 
21,457

 
21,457

Transaction and fee revenue
576

 
1,874

 
2,450

 
2,573

 
6,883

 
9,456

Total
$
17,505

 
$
74,382

 
$
91,887

 
$
53,766

 
$
222,218

 
$
275,984


Tax Preparation revenue recognition: The Company derives revenue from the sale of Tax Preparation online services, ancillary services, packaged tax preparation software, and arrangements that may include a combination of these items. Ancillary services include Tax Preparation support services, e-filing services, bank or reloadable pre-paid debit card services, and other value-added services, including enhanced tax and Wealth Management services through HD Vest. The Company’s Tax Preparation revenues are earned from customers primarily located in the United States.

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Table of Contents

Tax Preparation revenue details are as follows:
Consumer revenue - Consumer revenue includes revenue associated with the Company’s online software products, downloadable or shipped desktop software products, add-on services such as refund payment transfer services, bank or reloadable pre-paid debit card services and audit defense services.
Online revenues include revenues associated with the Company’s online software products sold to customers and businesses primarily for the preparation of individual or business tax returns, and are generally recognized when customers and businesses complete and file returns.
Desktop revenues primarily include revenues from all downloadable or shipped software products and are generally recognized when customers download the software or when the software ships.
Add-on services are revenues related to services such as refund payment transfer services, bank or reloadable pre-paid debit card services and audit defense services, and are generally recognized as customers complete and file returns.
Professional revenue - Professional revenues include revenues associated with the Company’s desktop software products sold to tax return preparers who utilize the Company’s offerings to service end customers and are generally recognized when customers download the software or when the software ships. Professional customers have the option to elect an unlimited e-filing package or a pay-per-return package. As the unlimited e-filing package can be re-used, those revenues are recognized over an estimated filing timeline. Revenues from the pay-per-return package are recognized when customers complete and file returns.
Details of Tax Preparation revenues are:
Tax Preparation Segment Revenues
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Recognized Upon Transaction
 
Recognized Over Time
 
Total
 
Recognized Upon Transaction
 
Recognized Over Time
 
Total
Consumer
 
$
3,246

 
$

 
$
3,246

 
$
168,295

 
$

 
$
168,295

Professional
 
182

 
70

 
252

 
12,497

 
2,422

 
14,919

Total
 
$
3,428

 
$
70

 
$
3,498

 
$
180,792

 
$
2,422

 
$
183,214



Note 4: Restructuring
The following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of the Company's corporate headquarters to Irving, Texas:
 
Employee-Related Termination Costs
 
Contract Termination Costs
 
Total
Balance as of December 31, 2017
$
1,202

 
$
681

 
1,883

Restructuring charges
291

 

 
291

Payments
(1,202
)
 
(212
)
 
(1,414
)
Balance as of September 30, 2018
$
291

 
$
469

 
$
760


Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that were paid at termination dates throughout 2018. Contract termination costs were incurred in connection with the Company's previous headquarters' operating lease.
Additional information on the Company's restructuring can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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Table of Contents

Note 5: Fair Value Measurements
In accordance with ASC 820, "Fair Value Measurements and Disclosures," certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
 
 

Fair value measurements at the reporting date using
 
September 30, 2018

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

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)
Cash equivalents: money market and other funds
$
23,055


$


$
23,055


$

Total assets at fair value
$
23,055


$


$
23,055


$

Acquisition-related contingent consideration liability
$
1,346

 
$

 
$

 
$
1,346

Total liabilities at fair value
$
1,346

 
$

 
$

 
$
1,346


 
 
 
Fair value measurements at the reporting date using
 
December 31, 2017
 
Quoted prices in
active markets
using identical 
assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Cash equivalents: money market and other funds
$
10,857

 
$

 
$
10,857

 
$

Total assets at fair value
$
10,857

 
$

 
$
10,857

 
$

Acquisition-related contingent consideration liability
$
2,689

 
$

 
$

 
$
2,689

Total liabilities at fair value
$
2,689

 
$

 
$

 
$
2,689


A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
Acquisition-related contingent consideration liability:
 
Balance as of December 31, 2017
$
2,689

Payment
(1,315
)
Foreign currency transaction gain
(28
)
Balance as of September 30, 2018
$
1,346


The contingent consideration liability is related to the Company's 2015 acquisition of SimpleTax, and the related payments that began in 2017 and are expected to continue annually through 2019. As of September 30, 2018, the Company could be required to pay up to an additional undiscounted aggregate amount of $1.3 million. This liability is included within Level 3 of the fair value hierarchy because the Company values it utilizing 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 SimpleTax revenues, the probability of payment (100%), and the discount rate (9%). A decrease in estimated SimpleTax revenues or an increase in the discount rate would decrease the
fair value of the contingent consideration liability. As of September 30, 2018, the contingent consideration liability was included in "Accrued expenses and other current liabilities" on the consolidated balance sheets.

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Note 6: Debt
The Company’s debt consisted of the following as of the periods indicated in the table below (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
Senior secured credit facility
$
265,000

 
$
(1,008
)
 
$
(3,784
)
 
$
260,208

 
$
345,000

 
$
(1,455
)
 
$
(5,464
)
 
$
338,081


Senior secured credit facility: In May 2017, the Company entered into a credit agreement with a syndicate of lenders in order to provide a term loan and revolving line of credit for working capital, capital expenditures and general business purposes (the "Blucora senior secured credit facilities"). The Blucora senior secured credit facilities provide for up to $425.0 million of borrowings, consisting of a committed $50.0 million revolving credit facility (including a letter of credit sub-facility) and a $375.0 million term loan facility that mature in May 22, 2022 and May 22, 2024, respectively. Obligations under the Blucora senior secured credit facilities are guaranteed by certain of Blucora's subsidiaries and secured by the assets of the Company and its subsidiaries. The Blucora senior secured credit facilities include financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit facility agreement. As of September 30, 2018, the Company was in compliance with all of the financial and operating covenants under the credit facility agreement.
Principal payments on the term loan are payable quarterly in an amount equal to 0.25% of the initial outstanding principal. In November 2017, the credit facility agreement was amended in order to refinance and reprice the initial term loan, such that the applicable interest rate margin is 3.00% for Eurodollar Rate loans and 2.00% for ABR loans. During the nine months ended September 30, 2018, the Company made prepayments of $80.0 million towards the term loan.
Depending on the Company’s Consolidated First Lien Net Leverage Ratio (as defined in the credit facility agreement), the applicable interest rate margin on the revolving credit facility is from 2.75% to 3.00% for Eurodollar Rate loans and 1.75% to 2.00% for ABR loans. Interest is payable at the end of each interest period. As of September 30, 2018 the Company had not borrowed any amounts under the revolving credit facility.
The Company also has the right to prepay the term loan or outstanding amounts under the revolving credit facility without any premium or penalty (other than customary Eurodollar breakage costs). Prepayments on the term loan are subject to certain prepayment minimums. Beginning with the fiscal year ending December 31, 2018, the Company may be required to make annual prepayments on the term loan in an amount equal to a percentage of excess cash flow of the Company during the applicable fiscal year from 0% to 50%, depending on the Consolidated First Lien Net Leverage Ratio (as defined in the credit facility agreement) for such fiscal year.
As of September 30, 2018, the term loan facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
Note 7: Redeemable Noncontrolling Interests
In connection with the 2015 acquisition of HD Vest, the former management of HD Vest retained an ownership interest in that business. The Company is party to put and call arrangements, exercisable beginning in the first quarter of 2019, with respect to these interests. These put and call arrangements allow certain members of HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests, respectively. These arrangements can be settled for cash within ninety days after the Company files its Annual Report on Form 10-K for the year ended December 31, 2018. The redemption value of the arrangements is based upon several factors, including, among others, the Company's implied enterprise value, implied equity value and certain financial performance measures of the Company. 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; this occurred in the third quarter of 2018 and the Company recorded an adjustment of approximately $3.5 million.

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Table of Contents

A reconciliation of equity attributable to noncontrolling interests and Blucora, Inc. is as follows (in thousands):
 
Redeemable Noncontrolling Interests
 
Blucora, Inc.
Balance as of December 31, 2017
$
18,033

 
$
541,387

Common stock issued for stock options and restricted stock units

 
12,332

Common stock issued for employee stock purchase plan

 
1,608

Other comprehensive income (loss)

 
(147
)
Stock-based compensation

 
9,559

Tax payments from shares withheld for equity awards

 
(5,983
)
Impact of adoption of new accounting guidance related to revenue recognition

 
1,851

Net income
654

 
66,615

Adjustment of redeemable noncontrolling interests to redemption value
3,537

 
(3,537
)
Balance as of September 30, 2018
$
22,224

 
$
623,685


The redemption amount of noncontrolling interests at September 30, 2018 was $22.2 million.

Note 8: Commitments and Contingencies

Significant events since the year ended December 31, 2017, outside of the ordinary course of the Company’s business, include debt activity (as discussed further in "Note 6: Debt"), payment of a portion of the SimpleTax acquisition-related contingent consideration liability (as discussed further in "Note 5: Fair Value Measurements"), and estimated sublease income of $2.6 million primarily related to the sublease agreement for the Company's former headquarters in Bellevue, Washington. Additional information on the Company’s commitments and contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
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 December 12, 2016, a shareholder derivative action was filed by Jeffrey Tilden against the Company, as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Company's Board of Directors, in the Superior Court of the State of California in and for the County of San Francisco. The complaint asserted claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint asserted a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserted a claim for insider trading against Mr. Snyder, a former director of the Company, and certain companies affiliated with Mr. Snyder. The derivative action did not seek monetary damages from the Company. The complaint sought corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.
On March 10, 2017, the Company filed a motion to dismiss for improper venue as a result of a forum selection provision in the Company’s bylaws that required the plaintiff to file his derivative fiduciary duty claims in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the Company's motion to dismiss. The case was stayed by the Court until November 22, 2017 so that Tilden could file a complaint in Delaware, after which the case was dismissed without further order of the Court.
On November 21, 2017, Tilden filed a shareholder derivative action in the Delaware Court of Chancery asserting the same claims against the same defendants and seeking the same relief as the San Francisco Superior Court lawsuit. On January 31, 2018, the Company filed a motion to dismiss the Delaware complaint, and a hearing on the motion was held on July 11, 2018. The motion to dismiss was granted on October 26, 2018, and the case has been dismissed with prejudice and without leave to amend.

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Table of Contents

The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 9: Stockholders’ Equity
Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units ("RSUs"), and the Company’s employee stock purchase plan ("ESPP"), in the consolidated statements of comprehensive income (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenue
$
413

 
$
412

 
$
940

 
$
546

Engineering and technology
178

 
225

 
590

 
734

Sales and marketing
617

 
529

 
1,835

 
1,801

General and administrative
1,666

 
1,966

 
6,194

 
5,353

Restructuring

 
97

 

 
1,078

Total
$
2,874

 
$
3,229

 
$
9,559

 
$
9,512


In the third quarter of 2018, the Company granted 86,000 restricted stock units to certain HD Vest financial advisors. In the second quarter of 2017, the Company granted 350,000 non-qualified stock options to certain HD Vest financial advisors. These advisors are considered non-employees. The restricted stock units and stock options fully vest three years from the date of grant. Following the Company's early adoption of ASU 2018-07, effective January 1, 2018, these grants are accounted for similarly to share-based payments granted to employees. For the three and nine months ended September 30, 2018, stock-based compensation expense for these non-employees was $0.4 million and $0.9 million, respectively, and was recorded in "Wealth management services cost of revenue" on the consolidated statements of comprehensive income.
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock options exercised
188

 
1,243

 
1,060

 
3,651

RSUs vested
90

 
91

 
310

 
442

Shares purchased pursuant to ESPP
45

 
62

 
80

 
138

Total
323

 
1,396

 
1,450

 
4,231


Note 10: Income Taxes
The Company recorded income tax (benefit) expense of $(0.8) million and $2.1 million in the three and nine months ended September 30, 2018, respectively. The Company's effective income tax rate differed from the 21% statutory rate in 2018 primarily due to the recognition of previously reserved net operating losses to offset current income tax expense, and the effect of state income taxes.
The Company recorded income tax expense of $0.2 million and $6.0 million in the three and nine months ended September 30, 2017, respectively. Income taxes differed from the 35% statutory rate in 2017 primarily due to the recognition of previously reserved net operating losses to offset current income tax expense, and the effect of state income taxes.
The Tax Cuts and Jobs Act (the “Tax Legislation”) was enacted on December 22, 2017, reducing the U.S. corporate federal income tax rate to 21% from 35%. The Company applied the guidance in Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, when accounting for the enactment date effects of the Tax Legislation. In 2017, the Company provisionally remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.

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Table of Contents

Subsequent to the date of this Quarterly Report on Form 10-Q, the Company finalized its analysis of the Tax Legislation when it filed the Company’s 2017 federal income tax return with the Internal Revenue Service. This final analysis did not result in the recognition of any significant measurement period adjustments or give rise to new deferred tax amounts.
Note 11: Net Income (Loss) Per Share
"Basic net income (loss) per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income (loss) per share" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and the vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive. The redemption value adjustment of the Company's redeemable noncontrolling interest is deducted from income (loss) (as discussed further in "Note 7: Redeemable Noncontrolling Interests").
The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Income (loss)
$
(13,737
)
 
$
(16,733
)
 
$
67,269

 
$
17,457

Net income attributable to noncontrolling interests
(227
)
 
(164
)
 
(654
)
 
(466
)
Adjustment of redeemable noncontrolling interest*
(3,537
)
 

 
(3,537
)
 

Net income (loss) attributable to Blucora, Inc. shareholders after adjustment of redeemable noncontrolling interest
(17,501
)
 
(16,897
)
 
63,078

 
16,991

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
47,712

 
45,459

 
47,191

 
43,749

Dilutive potential common shares

 

 
2,101

 
3,064

Weighted average common shares outstanding, diluted
47,712

 
45,459

 
49,292

 
46,813

Net income (loss) per share attributable to Blucora, Inc.:
 
 
 
 
 
 
Basic
$
(0.37
)
 
$
(0.37
)
 
$
1.34

 
$
0.39

Diluted
$
(0.37
)
 
$
(0.37
)
 
$
1.28

 
$
0.36

Shares excluded