Document
BLUCORA, INC.Large Accelerated 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
        
FORM 10-Q
       

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019 
or
oTRANSITION 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)

Delaware91-1718107
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
6333 State Hwy 161, 4th Floor, Irving, Texas75038 
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (972) 870-6400
 
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 filerýAccelerated filero
Non-accelerated filer
o  
Smaller reporting companyo
Emerging growth companyo
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareBCORNASDAQ Global Select Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at
ClassMay 1, 2019
Common Stock, Par Value $0.000148,390,443 





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.
Trademarks, Trade Names and Service Marks
This report includes certain trademarks, trade names and service marks of Blucora, Inc. (referred to throughout this report as "Blucora," the "Company", "we," "us," or "our"), including Blucora, HD Vest and TaxAct. Each one of these trademarks, trade names or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights or (iv) a registered trademark or application for registration which we have been authorized by a third party to use.
Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, ™ or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. This report may also include additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names included in this report are, to our knowledge, the property of their respective owners.



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,“believe,“plan,“expect,“future,“intend,“may,“will,“should,“estimate,“predict,“potential,“continue,” and "could" or, in each case, their negative variables and similar expressions identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. These forward-looking statements include, but are not limited to, statements regarding:
our ability to effectively compete within our industry;
our ability to attract and retain customers, as well as our ability to provide strong customer service;
our ability to realize all of the anticipated benefits of the acquisition of 1st Global, as well as our ability to integrate the operations of 1st Global;
our future capital requirements and the availability of financing, if necessary;
our ability to meet our current and future debt service obligations, including our ability to maintain compliance with our debt covenants;
our ability to generate strong investment performance for our customers and the impact of the financial markets on our customers’ portfolios;
political and economic conditions and events that directly or indirectly impact the wealth management and tax preparation industries;
our ability to attract and retain productive financial advisors;
our ability to respond to rapid technological changes, including our ability to successfully release new products and services or improve upon existing products and services;
our expectations concerning the revenues we generate from fees associated with the financial products that we distribute;
our ability to manage leadership and employee transitions;
our ability to comply with regulations applicable to the wealth management and tax preparation industries, including increased costs associated with new or changing regulations;
our expectations concerning the benefits that may be derived from our new clearing platform and our investment advisory platform;
risks associated with the use and implementation of information technology and the effect of security breaches, computer viruses and computer hacking attacks;
our ability to comply with laws and regulations regarding privacy and protection of user data;
our ability to maintain our relationships with third party partners, providers, suppliers, vendors, distributors, contractors, financial institutions and licensing partners;
our beliefs and expectations regarding the seasonality of our business;
risks associated with litigation;
our ability to attract and retain qualified employees;
our assessments and estimates that determine our effective tax rate;
the impact of new or changing tax legislation on our business and our ability to attract and retain customers;
our ability to develop, establish and maintain strong brands;
our ability to protect our intellectual property and the impact of any claim that we have infringed on the intellectual property rights of others; and
our ability to effectively integrate companies or assets that we acquire.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors, many of which are beyond our control, that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as supplemented by those identified under Part II, Item 1A, "Risk Factors" and elsewhere in this report, as well as in the Company's other filings with the Securities and Exchange Commission. You should not rely on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to update any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31,
2019
December 31,
2018
ASSETS
Current assets:
Cash and cash equivalents$149,762 $84,524 
Cash segregated under federal or other regulations1,527 842 
Accounts receivable, net of allowance24,113 15,721 
Commissions receivable14,382 15,562 
Other receivables7,450 7,408 
Prepaid expenses and other current assets, net10,840 7,755 
Total current assets208,074 131,812 
Long-term assets:
Property and equipment, net12,322 12,389 
Right-of-use assets, net5,942 — 
Goodwill, net548,770 548,685 
Other intangible assets, net286,562 294,603 
Other long-term assets11,047 10,236 
Total long-term assets864,643 865,913 
Total assets$1,072,717 $997,725 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$10,230 $3,798 
Commissions and advisory fees payable13,655 15,199 
Accrued expenses and other current liabilities48,675 18,980 
Lease liabilities6,493 46 
Deferred revenue6,424 10,257 
Total current liabilities85,477 48,280 
Long-term liabilities:
Long-term debt, net260,570 260,390 
Deferred tax liability, net39,422 40,394 
Deferred revenue7,890 8,581 
Lease liabilities2,118 100 
Other long-term liabilities6,186 7,440 
Total long-term liabilities316,186 316,905 
Total liabilities401,663 365,185 
Redeemable noncontrolling interests2,517 24,945 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
48,255 and 48,044, respectively 5 5 
Additional paid-in capital1,570,026 1,569,725 
Accumulated deficit(901,155)(961,689)
Accumulated other comprehensive loss (339)(446)
Total stockholders’ equity668,537 607,595 
Total liabilities and stockholders’ equity$1,072,717 $997,725 
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
4


BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
 Three months ended March 31,
 2019 2018 
Revenue:
Wealth management services revenue$89,532 $92,082 
Tax preparation services revenue136,236 113,883 
Total revenue225,768 205,965 
Operating expenses:
Cost of revenue:
Wealth management services cost of revenue61,374 63,064 
Tax preparation services cost of revenue4,201 4,353 
Amortization of acquired technology 50 
Total cost of revenue65,575 67,467 
Engineering and technology6,529 5,131 
Sales and marketing55,572 55,253 
General and administrative18,874 14,866 
Depreciation1,061 1,915 
Amortization of other acquired intangible assets8,044 8,307 
Restructuring 289 
Total operating expenses155,655 153,228 
Operating income 70,113 52,737 
Other loss, net (3,958)(5,228)
Income before income taxes 66,155 47,509 
Income tax expense (3,985)(1,963)
Net income 62,170 45,546 
Net income attributable to noncontrolling interests  (205)
Net income attributable to Blucora, Inc. $62,170 $45,341 
Net income per share attributable to Blucora, Inc.: 
Basic$1.29 $0.97 
Diluted$1.25 $0.93 
Weighted average shares outstanding: 
Basic48,161 46,641 
Diluted49,542 48,665 
Other comprehensive income (loss): 
Net income$62,170 $45,546 
Foreign currency translation adjustment107 (137)
Other comprehensive income (loss)107 (137)
Comprehensive income 62,277 45,409 
Comprehensive income attributable to noncontrolling interests  (205)
Comprehensive income attributable to Blucora, Inc. $62,277 $45,204 
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
5


BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)

Redeemable Noncontrolling InterestsAdditional-
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
loss
Common stock
SharesAmountTotal
Balance as of December 31, 2017$18,033 46,367 $5 $1,555,560 $(1,014,174)$(4)$541,387 
Common stock issued for stock options and restricted stock units— 462 — 2,534 — — 2,534 
Common stock issued for employee stock purchase plan— — — 703 — — 703 
Other comprehensive loss— — — — — (137)(137)
Stock-based compensation— — — 2,958 — — 2,958 
Tax payments from shares withheld for equity awards— — — (1,493)— — (1,493)
Impact of adoption of new revenue recognition accounting standard— — — — 1,851 — 1,851 
Net income205 — — — 45,341 — 45,341 
Balance as of March 31, 2018$18,238 46,829 $5 $1,560,262 $(966,982)$(141)$593,144 

Redeemable Noncontrolling InterestsAdditional-
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
loss
Common stock
SharesAmountTotal
Balance as of December 31, 2018$24,945 48,044 $5 $1,569,725 $(961,689)$(446)$607,595 
Common stock issued for stock options and restricted stock units— 211 — 283 — — 283 
Other comprehensive income— — — — — 107 107 
Stock-based compensation— — — 2,443 — — 2,443 
Tax payments from shares withheld for equity awards— — — (2,425)— — (2,425)
Reclassification of mandatorily redeemable noncontrolling interests(22,428)— — — — — — 
Impact of adoption of new leases accounting standard— — — — (1,636)— (1,636)
Net income — — — 62,170 — $62,170 
Balance as of March 31, 2019$2,517 48,255 $5 $1,570,026 $(901,155)$(339)$668,537 
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
6


BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three months ended March 31,
 2019 2018 
Operating Activities:
Net income $62,170 $45,546 
Adjustments to reconcile net income to net cash from operating activities: 
Stock-based compensation2,443 2,955 
Depreciation and amortization of acquired intangible assets9,354 10,359 
Reduction of right-of-use lease assets904 — 
Deferred income taxes(972)(749)
Amortization of premium on investments, net, and debt issuance costs 172 202 
Accretion of debt discounts38 47 
Loss on debt extinguishment  776 
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable(8,395)(1,961)
Commissions receivable1,180 (240)
Other receivables(42)2,588 
Prepaid expenses and other current assets(3,085)(319)
Other long-term assets(841)(1,109)
Accounts payable6,432 3,290 
Commissions and advisory fees payable(1,544)(278)
Deferred revenue(4,524)(4,213)
Accrued expenses and other current and long-term liabilities6,946 556 
Net cash provided by operating activities 70,236 57,450 
Investing Activities:
Purchases of property and equipment(1,243)(940)
Net cash used by investing activities (1,243)(940)
Financing Activities:
Payments on credit facilities (40,000)
Proceeds from stock option exercises283 2,534 
Proceeds from issuance of stock through employee stock purchase plan 703 
Tax payments from shares withheld for equity awards(2,425)(1,493)
Contingent consideration payments for business acquisition(943)(1,313)
Net cash used by financing activities (3,085)(39,569)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash 15 (6)
Net increase in cash, cash equivalents, and restricted cash 65,923 16,935 
Cash, cash equivalents, and restricted cash, beginning of period85,366 62,311 
Cash, cash equivalents, and restricted cash, end of period$151,289 $79,246 
Cash paid for income taxes$1,031 $457 
Cash paid for interest$3,624 $4,188 
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
7


BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Description of the Business
Description of the business: Blucora, Inc. (the "Company," "Blucora," "we," "our," or "us") operates two businesses: a Wealth Management business and a digital Tax Preparation business. The Wealth Management business consists of 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 advisor), 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 is the HD Vest business, and the Tax Preparation segment, which is the TaxAct business.

Reclassification: The Company reclassified certain amounts on its consolidated balance sheets related to loans given to several HD Vest advisors and the Company's finance leases.
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, 2018. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents, and restricted cash: The following table presents cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):
March 31,December 31,
2019 2018 2018 
Cash and cash equivalents$149,762 $77,107 $84,524 
Cash segregated under federal or other regulations1,527 1,314 842 
Restricted cash included in "Prepaid expenses and other current assets, net"  275  
Restricted cash included in "Other long-term assets" 550  
Total cash, cash equivalents, and restricted cash $151,289 $79,246 $85,366 

Cash segregated under federal and other regulations is held in a separate bank account for the exclusive benefit of the Company’s Wealth Management customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking and lease arrangements.
Fair value of financial instruments: The Company measures its cash equivalents at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
8


Concentration of credit risk:  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.
For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.

Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs and ASCs not listed below were assessed and either were determined to not be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs and ASCs that impact the following areas:
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 was effective for fiscal years beginning after December 15, 2018, including the interim periods within those fiscal years. Early adoption of this ASU was 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. The adoption of this ASU had an insignificant impact on the Company's unaudited 2018 quarterly results for the three months ended March 31, 2018.
Leases (ASU 2016-02) - In February 2016, the FASB issued guidance codified in ASC 842, "Leases" ("ASC 842"), which supersedes the guidance in ASC 840 "Leases." Under ASC 842, lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) will be recognized on the balance sheet. Lease liabilities are measured as the present value of unpaid lease payments for operating leases where the Company is the lessee, and a corresponding right-of-use ("ROU") asset is recognized for the right to use the leased assets.
This guidance became effective on a modified retrospective basis-with various practical expedients related to leases that commenced before the effective date-for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Prior comparable periods are presented in accordance with accounting guidance under ASC 840 "Leases" and were not restated.
The Company adopted ASC 842 on January 1, 2019 for all open leases with a term greater than one year as of the adoption date, using the modified retrospective method of adoption with a cumulative effect adjustment to retained earnings. The Company elected the package of practical expedients, for which there is no requirement to reassess lease existence, classification and initial direct costs, the hindsight practical expedient, for which the Company used hindsight in determining certain lease terms, and the short-term lease expedient, for which the Company considered all open leases with a term greater than one year as of the adoption date. The adoption resulted in $6.6 million of additional operating lease assets, $9.1 million of additional operating lease liabilities, and a $1.6 million adjustment to the opening balance of retained earnings as a result of reevaluating certain of the Company's lease terms as of the adoption date. The Company also reclassified, upon adoption, $0.9 million of other lease-related balances to reduce the measurement of lease assets.
The Company's lease terms are comprised of contractual terms but may include extension or termination options reasonably assured to be exercised at lease inception, which are included in the recognition of ROU assets and lease liabilities. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations.
9


The Company’s leases are not complex; therefore, there were no significant assumptions or judgments made in applying the requirements of ASC 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and non-lease components, and the determination of the discount rates for the leases.
Measurement of Credit Losses (ASU 2016-13) - In June 2016, the FASB issued an ASU that requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including the interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
Note 3: 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 March 31,
2019 2018 
Revenue:
Wealth Management$89,532 $92,082 
Tax Preparation136,236 113,883 
Total revenue225,768 205,965 
Operating income (loss):
Wealth Management11,540 13,075 
Tax Preparation79,272 58,806 
Corporate-level activity(20,699)(19,144)
Total operating income70,113 52,737 
Other loss, net(3,958)(5,228)
Income tax expense(3,985)(1,963)
Net income$62,170 $45,546 
Revenues by major category within each segment are presented below (in thousands):
Three Months Ended March 31,
2019 2018 
Wealth Management:
Commission$37,160 $42,870 
Advisory39,757 39,301 
Asset-based9,693 7,172 
Transaction and fee2,922 2,739 
Total Wealth Management revenue$89,532 $92,082 
Tax Preparation:
Consumer$123,942 $101,912 
Professional12,294 11,971 
Total Tax Preparation revenue$136,236 $113,883 
10


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 purchases and sales of securities and various investment products by the Company's clients. The Company serves as the registered broker/dealer or insurance agent for those 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 Advisor. 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 is recognized ratably over the period in which services are provided.
Transaction and fee revenue - Transaction and fee revenue primarily includes support fees charged to advisors, 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 advisors, clients, and financial institutions, which are recognized as services are performed or as earned, as applicable.
Details of Wealth Management revenues are (in thousands):
Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
Recognized Upon Transaction Recognized Over Time Total Recognized Upon Transaction Recognized Over Time Total 
Commission revenue$15,684 $21,476 $37,160 $18,345 $24,525 $42,870 
Advisory revenue 39,757 39,757  39,301 39,301 
Asset-based revenue 9,693 9,693  7,172 7,172 
Transaction and fee revenue770 2,152 2,922 961 1,778 2,739 
Total$16,454 $73,078 $89,532 $19,306 $72,776 $92,082 

Tax Preparation revenue recognition: The Company derives revenue from the sale of Tax Preparation digital services, ancillary services, packaged tax preparation software, and arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer and audit defense. The Company’s Tax Preparation revenues are earned from customers primarily located in the United States.
11


Tax Preparation revenue details are as follows:

Consumer revenue - Consumer revenue includes revenue associated with the Company’s digital 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, gift cards and audit defense services.

Digital revenues include revenues associated with the Company’s digital 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, gift cards 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-user 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 (in thousands):
Three Months Ended March 31, 2019Three Months Ended March 31, 2018
Recognized Upon TransactionRecognized Over TimeTotalRecognized Upon TransactionRecognized Over TimeTotal
Consumer$123,015 $927 $123,942 $101,912 $ $101,912 
Professional10,842 1,452 12,294 10,396 1,575 11,971 
Total$133,857 $2,379 $136,236 $112,308 $1,575 $113,883 

Note 4: 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
 March 31, 2019Quoted 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
$23,317 $23,317 $ $ 
Total assets at fair value$23,317 $23,317 $ $ 
12


  Fair value measurements at the reporting date using
 December 31, 2018Quoted prices in
active markets
using identical 
assets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Cash equivalents: money market and other funds
$23,181 $23,181 $ $ 
Total assets at fair value$23,181 $23,181 $ $— 
Acquisition-related contingent consideration liability
$1,275 $ $ $1,275 
Total liabilities at fair value$1,275 $ $ $1,275 
A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
Acquisition-related contingent consideration liability:
Balance as of December 31, 2018$1,275 
Payment(1,331)
Foreign currency transaction loss 56 
Balance as of March 31, 2019$ 
Cash equivalents are classified within Level 1 of the fair value hierarchy because the Company values them utilizing quoted prices in active markets. Unrealized gains and losses are included in "Accumulated other comprehensive loss" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
Note 5: Debt
The Company’s debt consisted of the following as of the periods indicated in the table below (in thousands):
 March 31, 2019December 31, 2018
 Principal
amount
DiscountDebt issuance costsNet 
carrying
value
Principal
amount
DiscountDebt issuance costsNet 
carrying
value
Senior secured credit facilities
$265,000 $(932)$(3,498)$260,570 $265,000 $(970)$(3,640)$260,390 
Senior secured credit facilities: In May 2017, the Company entered into a credit agreement with a syndicate of lenders in order to provide a term loan and revolving line of credit for working capital, capital expenditures and general business purposes (the "Blucora senior secured credit facilities"). 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 on May 22, 2022 and May 22, 2024, respectively. Obligations under the Blucora senior secured credit facilities are guaranteed by certain of Blucora's subsidiaries and secured by 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 March 31, 2019, 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.
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 March 31, 2019, 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. 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.
13


As of March 31, 2019, the term loan facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions. 
See "Note 12: Subsequent Events" for a discussion of the Company's recent amendment to the Blucora senior secured credit facilities.
Note 6: 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 that became exercisable beginning in the first quarter of 2019 with respect to those 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, which occurred on March 1, 2019. 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 and call arrangements do not meet the definition of a derivative instrument as the put and call agreements do not provide for net settlement.
As of March 31, 2019, $22.4 million of put arrangements had been exercised, and those arrangements became mandatorily redeemable. The $22.4 million of exercised arrangements were included in "Accrued expenses and other current liabilities" on the consolidated balance sheets. As of March 31, 2019, put and call arrangements of $2.5 million had not been exercised. 
See "Note 12: Subsequent Events" for additional information.

Note 7: Commitments and Contingencies

Significant events since the year ended December 31, 2018, outside of the ordinary course of the Company’s business, include payment of the remaining SimpleTax acquisition-related contingent consideration liability and sublease income of $2.0 million primarily related to the sublease agreement for the Company's former headquarters in Bellevue, Washington. Additional information on the Company’s commitments and contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company is not currently party to any legal proceedings or claims for which it has incurred a liability on its consolidated balance sheets.
Note 8: Stockholders’ Equity
Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units ("RSUs"), and the Company’s employee stock purchase plan ("ESPP"), in the following on the consolidated statements of comprehensive income (in thousands):
 Three months ended March 31,
 2019 2018 
Cost of revenue$520 $256 
Engineering and technology176 210 
Sales and marketing(193)516 
General and administrative1,940 1,973 
Total$2,443 $2,955 
As of March 31, 2019, the Company had granted 436,000 RSUs and non-qualified stock options to certain HD Vest financial advisors. These advisors are considered non-employees. The RSUs and stock options fully vest three years from the date of grant. Following the Company's early adoption of ASU 2018-07, effective January 1, 2018, these grants are accounted for similarly to share-based payments granted to employees.
14


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 March 31,
 2019 2018 
Stock options exercised79 320 
RSUs vested132 106 
Shares purchased pursuant to ESPP 36 
Total211 462 

Note 9: Leases
The Company's leases are primarily related to office space. For the three months ended March 31, 2019, the Company recognized operating lease costs of approximately $1.0 million in "General and administrative" expense on the consolidated statements of comprehensive income. As of March 31, 2019, the Company's weighted-average remaining operating lease term was approximately 1.5 years, and its weighted-average operating lease discount rate was 5.3%.
The maturities of the Company's operating lease liabilities as of March 31, 2019 are below. The Company's finance lease liabilities as of March 31, 2019 were $0.1 million.
(in thousands, except percentages)
Undiscounted cash flows:
2019 (for the nine months remaining in 2019)$5,747 
20202,766 
2021306 
Total undiscounted cash flows8,819 
Imputed interest(343)
Present value of cash flows$8,476 
Short-term operating lease liabilities$6,446 
Long-term operating lease liabilities2,030 
Total operating lease liabilities$8,476 

Cash paid on operating lease liabilities was $0.9 million for the three months ended March 31, 2019. Lease liabilities from new ROU assets obtained during the three months ended March 31, 2019 were $0.2 million.

Note 10: Income Taxes
The Company recorded income tax expense of $4.0 million in the three months ended March 31, 2019. The Company's effective income tax rate differed from the 21% statutory rate in the three months ended March 31, 2019 primarily due to the
release of valuation allowances and the effect of state income taxes.
The Company recorded income tax expense of $2.0 million in the three months ended March 31, 2018. Income taxes differed from the 21% statutory rate in three months ended March 31, 2018, primarily due to the release of valuation allowances.
Note 11: Net Income Per Share
"Basic net income per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income per share" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and the vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.
15


The computation of basic and diluted net income per share attributable to Blucora, Inc. is as follows (in thousands):
 Three months ended March 31,
 2019 2018 
Numerator:
Income $62,170 $45,546 
Net income attributable to noncontrolling interests  (205)
Net income attributable to Blucora, Inc.$62,170 $45,341 
Denominator:
Weighted average common shares outstanding, basic48,161 46,641 
Dilutive potential common shares1,381 2,024 
Weighted average common shares outstanding, diluted49,542 48,665 
Net income per share attributable to Blucora, Inc.: 
Basic$1.29 $0.97 
Diluted$1.25 $0.93 
Shares excluded256 902 
Shares were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive.
Note 12: Subsequent Events
Amendment to Credit Facilities: Incurrence of Additional Term Loan: On May 6, 2019, the Company amended the Blucora senior secured credit facilities, in order to, among other things: (i) provide for a term loan increase in the aggregate principal amount of $125.0 million in the form of a fungible increase to, and on substantially the same terms as, the Company's existing senior secured term loan under the Blucora senior secured credit facilities, (ii) increase the total amount of the revolving credit facility under the Blucora senior secured credit facilities by $15.0 million to an aggregate of $65.0 million and (iii) appoint JPMorgan Chase Bank, N.A. as successor administrative agent and successor collateral agent under the Blucora senior secured credit facilities and related loan documents, as discussed above.
While the terms of the $125.0 million increase in the size of the Company's term loan are substantially the same as those under the existing term loan, including terms with respect to the interest rate, guarantees, prepayments, collateral and maturity date, the Company is required to make principal amortization payments on such $125.0 million portion of the term loan on a quarterly basis on the last business day of each March, June, September and December, beginning on December 31, 2019, in an amount equal to $312,500 (subject to reduction for prepayments), with the remaining principal amount of such portion due on the maturity date of May 22, 2024.
As described below, the proceeds of the increase in the term loan were used to fund a portion of the purchase price of the Company's acquisition of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”), as well as to pay the fees and expenses associated with entering into the amendment to the Blucora senior secured credit facilities.
Acquisition of 1st Global: On May 6, 2019, the Company closed its previously announced acquisition of all of the issued and outstanding common stock of 1st Global for a cash purchase price of $180.0 million. The purchase price is subject to customary adjustment as well as certain indemnity escrows, in each case as described more fully in the stock purchase agreement governing the acquisition. The purchase price was paid with a combination of (i) cash on hand and (ii) the proceeds from the $125.0 million increase in the term loan under the Blucora senior secured credit facilities.
1st Global is a tax-focused wealth management company that, as of March 31, 2019, served about 820 independent advisors with approximately $20.2 billion in total client assets and $9.8 billion in for-fee advisory assets.
Redeemable Noncontrolling Interests: In the second quarter of 2019, the put and call arrangements (see "Note 6: Redeemable Noncontrolling Interests") that were not exercised as of March 31, 2019 were exercised, and all of the arrangements were settled in cash for the total amount of $24.9 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1 of this report and the section titled "Cautionary Statement Regarding Forward-Looking
Statements" in this report, as well as with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Our Business
Blucora, Inc. (collectively, with its direct and indirect subsidiaries on a consolidated basis, the "Company," "Blucora," "we," "our" or "us") operates two businesses: a Wealth Management business and a digital Tax Preparation business.