SEC Filing | Blucora

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2019


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

For the transition period from to

Commission File Number: 000-25131

BLUCORA, INC.

(Exact name of registrant as specified in its charter)


Delaware			91-1718107
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
6333 N. State Hwy 161, 4th Floor, Irving, Texas			75038
(Address of principal executive offices)			(Zip Code)

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

BCOR

NASDAQ Global Select Market

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

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

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


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

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

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

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


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

TABLE OF CONTENTS


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

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

Signatures			43

Trademarks, Trade Names and Service Marks

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

•our ability to effectively compete within our industry;

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

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

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

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

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

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

•our ability to attract and retain productive financial advisors;

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

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

•our ability to manage leadership and employee transitions;

•risks related to goodwill and other intangible asset impairment;

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

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

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

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

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

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

•risks associated with litigation;

•our ability to attract and retain qualified employees;

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

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

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

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

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


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

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

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


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


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

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

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

Redeemable noncontrolling interests	—		24,945

Commitments and contingencies (Note 8)

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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)


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

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


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




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

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



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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except per share data)


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


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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


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


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



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





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

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





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

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




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







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




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

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

BLUCORA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of the Business

Description of the business: Blucora, Inc. (the "Company," "Blucora," "we," "our," or "us") operates two businesses: a Wealth Management business and a digital Tax Preparation business. The Wealth Management business consists of HD Vest ("HD Vest") and, since May 6, 2019, 1st Global ("1st Global"), collectively referred to as the "Wealth Management business" or the "Wealth Management segment". The Wealth Management business provides wealth management solutions for financial advisors and their clients. Specifically, the Wealth Management business provides an integrated platform of brokerage, investment advisory and insurance services to assist in making each financial advisor a financial service center for his/her clients. The Wealth Management business was founded to help tax and accounting professionals integrate financial services into their practices.

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

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

The Tax Preparation business consists of the operations of TaxAct, and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the "Tax Preparation business" or the "Tax Preparation segment").

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

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

Note 2: Summary of Significant Accounting Policies

Interim financial information: The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Interim results are not necessarily indicative of results for a full year.

Cash, cash equivalents, and restricted cash: The following table presents cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):


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

Cash segregated under federal and other regulations is held in a separate bank account for the exclusive benefit of the Company’s Wealth Management customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking and lease arrangements.

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

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

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

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

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

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

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

Fair value of financial instruments: The Company measures its cash equivalents at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.

Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.

For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.

Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.

Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs and ASCs not listed below were assessed and either were determined to not be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating, or has adopted, ASUs and ASCs that impact the following areas:

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

This guidance became effective on a modified retrospective basis-with various practical expedients related to leases that commenced before the effective date-for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Prior comparable periods are presented in accordance with accounting guidance under ASC 840 "Leases" and were not restated.

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

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

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

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

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

Note 3: Business Combinations

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


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

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


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

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

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

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

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

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

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

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

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

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

Pro forma financial information of the 1st Global Acquisition:

The financial information in the table below summarizes the combined results of operations of Blucora and 1st Global, on a pro forma basis, for the period in which the Acquisition occurred and the prior reporting period as though the companies had been combined as of the beginning of each period presented. Pro forma adjustments have been made to include amortization expense on the definite-lived intangible assets identified in the Acquisition, debt-related expenses associated with the credit facility used to finance the Acquisition, and to remove Acquisition-related transaction costs. Income taxes also have been adjusted for the effect of these items. The following pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the Acquisition occurred at the beginning of the period presented (amounts in thousands):


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

Note 4: Segment Information and Revenues

The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The Company’s Chief Executive Officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance. The operations of 1st Global are included in the Company's operating results as part of the Wealth Management segment from the date of the Acquisition.

Information on reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):


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

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


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

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

Details of Wealth Management revenues are (in thousands):



	Three months ended June 30,
	2019									2018
	Recognized Upon Transaction		Recognized Over Time		Total		Recognized Upon Transaction		Recognized Over Time	Total
Commission revenue	$	20,469	$	27,599	$	48,068	$	15,919