SEC Filing — Avantax®

View:

Download DOC

Download PDF

Download XLS

Download XBRL

bcor-20220331

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 March 31, 2022


☐			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.)

3200 Olympus Blvd, Suite 100, Dallas, Texas 75019

(Address of principal executive offices) (Zip Code)

(972) 870-6400

(Registrant’s telephone number, including area code)

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 Section 13(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.

As of April 27, 2022, 47,247,539 shares of the registrant’s Common Stock were outstanding.

TABLE OF CONTENTS


PART I . FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets (Unaudited)	5
	Condensed Consolidated Statements of Operations (Unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

PART II . OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	40

Signatures		41

This report includes some of the trademarks, trade names, and service marks of Blucora, Inc. (referred to throughout this report as “Blucora,” the “Company,” “we,” “us,” or “our”), including Blucora, Avantax Wealth Management, Avantax Planning Partners, Avantax Retirement Plan Services, HD Vest, 1st Global, HKFS, 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 that 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.

References to our or our subsidiaries’ website addresses or the website addresses of third parties in this report do not constitute incorporation by reference of the information contained on such websites and should not be considered part of this report.

Blucora, Inc. | Q1 2022 Form 10-Q 2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “will,” “would,” “could,” “should,” “estimates,” “predicts,” “potential,” “continues,” “target,” “outlook,” and similar terms and expressions, but the absence of these words does not mean that the statement is not forward-looking. Actual results may differ significantly from management’s expectations due to various risks and uncertainties including, but not limited to:

•our ability to effectively compete within our industries;

•our ability to attract and retain financial professionals, employees, clients, and customers, as well as our ability to provide strong customer/client service;

•the impact of the COVID-19 pandemic on our results of operations and our business, including the impact of the resulting economic and market disruption, the extension of tax filing deadlines, and other related government actions;

•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;

•any downgrade of the Company’s credit ratings;

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

•the impact of new or changing legislation and regulations (or interpretations thereof) on our business, including our ability to successfully address and comply with such legislation and regulations (or interpretations thereof) and increased costs, reductions of revenue, and potential fines, penalties, or disgorgement to which we may be subject as a result thereof;

•risks, burdens, and costs, including fines, penalties, or disgorgement, associated with our business being subjected to regulatory inquiries, investigations, or initiatives, including those of the Financial Industry Regulatory Authority, Inc. and the Securities and Exchange Commission (the “SEC”);

•risks associated with legal proceedings, including litigation and regulatory proceedings;

•our ability to close, finance, and realize all of the anticipated benefits of acquisitions, as well as our ability to integrate the operations of recently acquired businesses, and the potential impact of such acquisitions on our existing indebtedness and leverage;

•our ability to retain employees and acquired client assets following acquisitions;

•any compromise of confidentiality, availability or integrity of information, including cyberattacks;

•our ability to manage leadership and employee transitions, including costs and time burdens on management and our board of directors related thereto;

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

•risks related to goodwill and acquired intangible asset impairment;

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

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

Blucora, Inc. | Q1 2022 Form 10-Q 3

•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, industry associations, and licensing partners, and our expectations regarding and reliance on the products, tools, platforms, systems, and services provided by these third parties;

•the seasonality of our business;

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

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

•the effects on our business of actions of activist stockholders.

Forward-looking statements are not guarantees of future performance and 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, 2021, as well as in our other filings with the SEC. All forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation and do not intend to update or revise any forward-looking statement to reflect new information, events, or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.

Blucora, Inc. | Q1 2022 Form 10-Q 4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUCORA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


	March 31, 2022		December 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	144,222	$	134,824

Accounts receivable, net	26,618		21,906
Commissions and advisory fees receivable	22,890		25,073

Prepaid expenses and other current assets	21,695		18,476
Total current assets	215,425		200,279
Long-term assets:
Property, equipment, and software, net	73,687		73,638
Right-of-use assets, net	20,113		20,466
Goodwill, net	454,821		454,821
Acquired intangible assets, net	296,894		302,289

Other long-term assets	23,019		20,450
Total long-term assets	868,534		871,664
Total assets	$	1,083,959	$	1,071,943
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,879	$	8,216
Commissions and advisory fees payable	15,387		17,940
Accrued expenses and other current liabilities	61,255		65,678
Current deferred revenue	8,459		13,180
Current lease liabilities	4,945		4,896
Current portion of long-term debt	1,812		1,812
Total current liabilities	115,737		111,722
Long-term liabilities:
Long-term debt, net	553,297		553,134
Long-term lease liabilities	32,504		33,267
Deferred tax liabilities, net	19,480		20,124
Long-term deferred revenue	5,090		5,322
Other long-term liabilities	8,978		6,752
Total long-term liabilities	619,349		618,599
Total liabilities	735,086		730,321

Commitments and contingencies (Note 9)

Stockholders’ equity:
Common stock, par value $0.0001 per share—900,000 shares authorized; 50,384 shares issued and 47,433 shares outstanding at March 31, 2022; 50,137 shares issued and 48,831 shares outstanding at December 31, 2021	5		5
Additional paid-in capital	1,622,973		1,619,805
Accumulated deficit	(1,215,169)		(1,249,789)

Treasury stock, at cost— 2,951 shares at March 31, 2022 and 1,306 shares at December 31, 2021	(58,936)		(28,399)
Total stockholders’ equity	348,873		341,622
Total liabilities and stockholders’ equity	$	1,083,959	$	1,071,943

See accompanying notes.

Blucora, Inc. | Q1 2022 Form 10-Q 5

BLUCORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (In thousands, except per share amounts)


	Three Months Ended March 31,
	2022		2021
Revenue:
Wealth Management	$	166,403	$	154,491
Tax Software	141,150		123,892
Total revenue	307,553		278,383
Operating expenses:
Cost of revenue:
Wealth Management	119,874		108,623
Tax Software	9,426		5,578
Total cost of revenue	129,300		114,201
Engineering and technology	8,504		7,128
Sales and marketing	84,403		77,562
General and administrative	29,075		24,685
Acquisition and integration	1,666		8,103
Depreciation	2,931		2,300
Amortization of acquired intangible assets	6,631		7,175

Total operating expenses	262,510		241,154
Operating income	45,043		37,229
Interest expense and other, net	(7,841)		(7,883)
Income before income taxes	37,202		29,346
Income tax expense	(2,582)		(1,700)
Net income	$	34,620	$	27,646

Net income per share:
Basic	$	0.71	$	0.57
Diluted	$	0.70	$	0.56
Weighted average shares outstanding:
Basic	48,513		48,261
Diluted	49,747		49,097

See accompanying notes.

Blucora, Inc. | Q1 2022 Form 10-Q 6

BLUCORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited) (In thousands)


				Additional paid-in capital		Accumulated deficit
	Common stock							Treasury stock
	Shares	Amount						Shares		Amount	Total
Balance as of December 31, 2021	50,137	$	5	$	1,619,805	$	(1,249,789)		1,306		$	(28,399)	$	341,622
Common stock issued pursuant to stock incentive plans and employee stock purchase plans	247	—		96		—			—		—		96
Stock repurchases	—	—		—		—			1,645		(30,537)		(30,537)
Stock-based compensation	—	—		4,641		—			—		—		4,641
Tax payments from shares withheld for equity awards	—	—		(1,569)		—			—		—		(1,569)
Net income	—	—		—		34,620			—		—		34,620
Balance as of March 31, 2022	50,384	$	5	$	1,622,973	$	(1,215,169)		2,951		$	(58,936)	$	348,873


				Additional paid-in capital		Accumulated deficit
	Common stock								Treasury stock
	Shares	Amount						Shares		Amount	Total
Balance as of December 31, 2020	49,483	$	5	$	1,598,230	$	(1,257,546)			1,306	$	(28,399)	$	312,290
Common stock issued pursuant to stock incentive plans and employee stock purchase plans	132	—		63		—				—	—		63
Stock-based compensation	—	—		5,520		—				—	—		5,520
Tax payments from shares withheld for equity awards	—	—		(865)		—				—	—		(865)

Net income	—	—		—		27,646				—	—		27,646
Balance as of March 31, 2021	49,615	$	5	$	1,602,948	$	(1,229,900)			1,306	$	(28,399)	$	344,654

See accompanying notes.

Blucora, Inc. | Q1 2022 Form 10-Q 7

BLUCORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Three Months Ended March 31,
	2022		2021
Operating activities:
Net income	$	34,620	$	27,646
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization of acquired intangible assets	11,305		10,418
Stock-based compensation	6,225		5,610
Change in the fair value of acquisition-related contingent consideration	1,700		6,300


Reduction of right-of-use lease assets	353		569
Deferred income taxes	(644)		(269)
Amortization of debt discount and issuance costs	681		640


Accretion of lease liabilities	514		514
Other non-cash items	1,101		(78)
Changes in operating assets and liabilities, net of acquisitions and disposals:

Accounts receivable, net	(4,647)		(11,541)
Commissions and advisory fees receivable	2,183		111

Prepaid expenses and other current assets	(2,741)		(1,163)
Other long-term assets	(3,363)		(828)
Accounts payable	15,663		12,729
Commissions and advisory fees payable	(2,553)		(259)
Lease liabilities	(1,229)		(172)
Deferred revenue	(4,953)		(7,250)
Accrued expenses and other current and long-term liabilities	(6,872)		10,745
Net cash provided by operating activities	47,343		53,722
Investing activities:
Purchases of property, equipment, and software	(4,731)		(8,598)


Asset acquisitions	(751)		(587)


Net cash used by investing activities	(5,482)		(9,185)
Financing activities:

Payments on credit facilities	(453)		(453)


Stock repurchases	(30,537)		—


Proceeds from stock option exercises	96		63

Tax payments from shares withheld for equity awards	(1,569)		(865)
Net cash used by financing activities	(32,463)		(1,255)








Net increase in cash, cash equivalents, and restricted cash	9,398		43,282
Cash, cash equivalents, and restricted cash, beginning of period	134,824		150,762
Cash, cash equivalents, and restricted cash, end of period	$	144,222	$	194,044

Supplemental cash flow information:

Cash paid for income taxes	$	850	$	—
Cash paid for interest	$	7,107	$	7,123

See accompanying notes.

Blucora, Inc. | Q1 2022 Form 10-Q 8

BLUCORA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of the Business

Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) operates two primary businesses: the Wealth Management business and the digital Tax Software business.

Wealth Management

Our Wealth Management business consists of the operations of Avantax Wealth Management and Avantax Planning Partners (collectively, the “Wealth Management business” or the “Wealth Management segment”).

Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, certified public accounting (“CPA”) firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to their clients.

Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services. Avantax Planning Partners formerly operated as Honkamp Krueger Financial Services, Inc. (“HKFS”). We acquired HKFS in July 2020 (the “HKFS Acquisition”) and subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference to Avantax Planning Partners in this Form 10-Q is inclusive of HKFS.

Tax Software

Our Tax Software business consists of the operations of TaxAct, Inc. (“TaxAct,” the “Tax Software business,” or the “Tax Software segment”) and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications.

Our Tax Software segment is highly seasonal with a significant portion of its annual revenue typically earned in the first two quarters of the fiscal year. During the third and fourth quarters of the fiscal year, the Tax Software segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.

As a result of the continued impact of the COVID-19 pandemic, the Internal Revenue Service (“IRS”) delayed the start of the tax year 2020 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021. In addition, the IRS further extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first quarter to the second quarter of 2021.

Segments

We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment.

Note 2: Summary of Significant Accounting Policies

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared by us under the rules and regulations of the SEC for interim financial reporting. These condensed consolidated financial

Blucora, Inc. | Q1 2022 Form 10-Q 9

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 condensed 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 conformity with United States generally accepted accounting principles (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021. Interim results are not necessarily indicative of results for a full year.

A summary of our significant accounting policies is included in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our significant accounting policies since December 31, 2021.

Note 3: Segment Information and Revenue

We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment. Our Chief Executive Officer is the 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.

We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.

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


	Three Months Ended March 31,
	2022		2021
Revenue:
Wealth Management	$	166,403	$	154,491
Tax Software	141,150		123,892
Total revenue	307,553		278,383
Operating income (loss):
Wealth Management	16,421		19,396
Tax Software	58,030		50,888
Corporate-level activity	(29,408)		(33,055)
Total operating income	45,043		37,229
Interest expense and other, net	(7,841)		(7,883)
Income before income taxes	37,202		29,346
Income tax expense	(2,582)		(1,700)
Net income	$	34,620	$	27,646

Blucora, Inc. | Q1 2022 Form 10-Q 10

Wealth Management Revenue Recognition

Wealth management revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue.

Revenues by major category within the Wealth Management segment and the timing of Wealth Management revenue recognition was as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Recognized upon transaction:
Commission	$	20,624	$	22,367
Transaction and fee	1,244		1,374
Total Wealth Management revenue recognized upon transaction	$	21,868	$	23,741
Recognized over time:
Advisory	$	107,169	$	91,119
Commission	27,031		30,167
Asset-based	5,663		5,329
Transaction and fee	4,672		4,135
Total Wealth Management revenue recognized over time	$	144,535	$	130,750
Total Wealth Management revenue:
Advisory	$	107,169	$	91,119
Commission	47,655		52,534
Asset-based	5,663		5,329
Transaction and fee	5,916		5,509
Total Wealth Management revenue	$	166,403	$	154,491

Tax Software Revenue Recognition

We generate Tax Software revenue from the sale of digital tax preparation services, packaged tax preparation software, ancillary services, and multiple element arrangements that may include a combination of these items.

Revenues by major category within the Tax Software segment and the timing of Tax Software revenue recognition was as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Recognized upon transaction:
Consumer	$	125,261	$	110,567
Professional	13,784		12,127
Total Tax Software revenue recognized upon transaction	$	139,045	$	122,694
Recognized over time:

Professional	$	2,105	$	1,198
Total Tax Software revenue recognized over time	$	2,105	$	1,198
Total Tax Software revenue:
Consumer	$	125,261	$	110,567
Professional	15,889		13,325
Total Tax Software revenue	$	141,150	$	123,892

Note 4: Asset Acquisitions

During the three months ended March 31, 2022, we completed acquisitions in our Wealth Management business that met the criteria to be accounted for as asset acquisitions. Total initial purchase consideration, including acquisition costs and fixed deferred payments, was $1.2 million. This purchase consideration was

Blucora, Inc. | Q1 2022 Form 10-Q 11

allocated to the acquired assets, primarily customer relationship intangibles. Customer relationship intangibles are amortized on a straight-line basis over an amortization period of 15 years.

We are subject to variable contingent consideration payments related to our asset acquisitions that are not recognized as a liability on our condensed consolidated balance sheets until all contingencies related to the achievement of future financial targets are resolved and the consideration is paid. As of March 31, 2022, the maximum future fixed and contingent payments associated with all prior asset acquisitions were $17.0 million, with specified payment dates from 2022 through 2026.

Note 5: Debt

Our debt consisted of the following as of the periods indicated in the table below (in thousands):


	March 31, 2022		December 31, 2021
	Senior Secured Credit Facility
Principal outstanding	$	560,891	$	561,344
Unamortized debt issuance costs	(3,047)		(3,371)
Unamortized debt discount	(2,735)		(3,027)
Net carrying value	$	555,109	$	554,946

In May 2017, we entered into a credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders that provides for a term loan facility (the “Term Loan”) and a revolving line of credit (including a letter of credit sub-facility) (the “Revolver”) for working capital, capital expenditures, and general business purposes (as amended, the “Senior Secured Credit Facility”). The Term Loan has a maturity date of May 22, 2024 (the “Term Loan Maturity Date”). On April 26, 2021, to ensure adequate liquidity and flexibility to support the Company’s growth, we entered into Amendment No. 5 to the Credit Agreement (the “Credit Agreement Amendment”). Pursuant to the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing $65.0 million Revolver and add $25.0 million of additional revolving credit commitments, for an aggregate principal amount of $90.0 million in revolving credit commitments (the “New Revolver”). The New Revolver has a maturity date of February 21, 2024 (the “New Revolver Maturity Date”).

The Company capitalized approximately $0.5 million of debt issuance costs paid in connection with the Credit Agreement Amendment, which are included in other long-term assets on the Company’s condensed consolidated balance sheets as part of the total deferred financing costs associated with the New Revolver.

As of March 31, 2022, the Senior Secured Credit Facility provided for up to $765.0 million of borrowings and consisted of a committed $90.0 million under the New Revolver and a $675.0 million Term Loan. As of March 31, 2022, we had $560.9 million in principal amount outstanding under the Term Loan and no amounts outstanding under the New Revolver. Based on aggregate loan commitments as of March 31, 2022, approximately $90.0 million was available for future borrowings under the Senior Secured Credit Facility, subject to customary terms and conditions.

The Company is required to make mandatory annual prepayments on the Term Loan in certain circumstances, including in the event that the Company generates Excess Cash Flow (as defined in the Credit Agreement) in a given fiscal year. The Credit Agreement permits the Company to voluntarily prepay the Term Loan without premium or penalty. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to approximately $0.5 million (subject to reduction for prepayments), with the remaining principal amount of the Term Loan due on the Term Loan Maturity Date.

The interest rate on the Term Loan is variable at the London Interbank Offered Rate (subject to a floor of 1.0%), plus the applicable interest rate margin of 4.0% for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0% for ABR Loans (as defined in the Credit Agreement). As of March 31, 2022, the applicable interest rate on the Term Loan was 5.0%. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0% to 2.5% for Eurodollar Rate Loans and 1.0% to 1.5% for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated First Lien Net

Blucora, Inc. | Q1 2022 Form 10-Q 12

Leverage Ratio that ranges from 0.35% to 0.4%. Interest is payable at the end of each interest period, typically quarterly.

Obligations under the Senior Secured Credit Facility are guaranteed by certain of the Company’s subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the acquisition of Avantax Planning Partners and certain other material subsidiaries). The Senior Secured Credit Facility includes financial and operating covenants (including a Consolidated Total Net Leverage Ratio), which are set forth in detail in the Credit Agreement.

Pursuant to the Credit Agreement Amendment, if the Company’s usage of the New Revolver exceeds 30% of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company shall not permit the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) to exceed (i) 4.75 to 1.00 for the period beginning on April 1, 2021 and ending on December 31, 2021, (ii) 4.25 to 1.00 for the period beginning on January 1, 2022 and ending on September 30, 2022, (iii) 4.00 to 1.00 for the period beginning on October 1, 2022 and ending on December 31, 2022, and (iv) 3.50 to 1.00 for the period beginning on January 1, 2023 and ending on February 21, 2024.

Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with the debt covenants of the Senior Secured Credit Facility as of March 31, 2022.

Note 6: Leases

Our leases are primarily related to office space and are classified as operating leases. Operating lease cost, net of sublease income, is recognized in “General and administrative” expense for those net costs related to leases used in our operations and within “Acquisition and integration” expense for those net costs related to an unoccupied lease assumed in a previous acquisition on the condensed consolidated statements of operations.

Operating lease cost, net of sublease income, and cash paid on operating lease liabilities for the three months ended March 31, 2022 and 2021 were as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Fixed lease cost	$	973	$	1,154
Variable lease cost	402		143
Operating lease cost, before sublease income	1,375		1,297
Sublease income	(234)		(116)
Total operating lease cost, net of sublease income	$	1,141	$	1,181

Additional lease information:
Cash paid on operating lease liabilities	$	1,229	$	217

Right-of-use assets and operating lease liabilities were recorded on the condensed consolidated balance sheets as follows (in thousands):


	March 31, 2022			December 31, 2021
Right-of-use assets, net	$	20,113		$	20,466

Current lease liabilities	$	4,945		$	4,896
Long-term lease liabilities	32,504			33,267
Total operating lease liabilities	$	37,449		$	38,163

Weighted-average remaining lease term (in years)	10.1			10.3
Weighted-average discount rate	5.4		%	5.4		%

Blucora, Inc. | Q1 2022 Form 10-Q 13

The maturities of our operating lease liabilities as of March 31, 2022 were as follows (in thousands):



Undiscounted cash flows:
Remainder of 2022	$	3,811
2023	5,172
2024	5,080
2025	5,013
2026	4,193
Thereafter	26,130
Total undiscounted cash flows	49,399
Imputed interest	(11,950)
Present value of cash flows	$	37,449

Note 7: Balance Sheet Components

Prepaid expenses and other current assets consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Prepaid expenses	$	16,213	$	13,138



Other current assets	5,482		5,338
Total prepaid expenses and other current assets	$	21,695	$	18,476

Accrued expenses and other current liabilities consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Salaries and related benefit expenses	$	10,518	$	26,417
HKFS Contingent Consideration liability (1)	30,000		28,300


Accrued legal costs	1,609		2,871
Accrued vendor and advertising costs	10,923		3,777
Accrued taxes	3,698		—
Other	4,507		4,313
Total accrued expenses and other current liabilities	$	61,255	$	65,678

__________________________

(1)For more information on the Company’s contingent liabilities, see "Note 9—Commitments and Contingencies."

Note 8: Fair Value Measurements

Certain of our assets and liabilities are carried at fair value and are valued using inputs that 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 our own assumptions.

Blucora, Inc. | Q1 2022 Form 10-Q 14

Assets and Liabilities Measured on a Recurring Basis

The fair value hierarchy of our financial assets and liabilities carried at estimated fair value and measured on a recurring basis were as follows (in thousands):


			Fair value measurements at the reporting date using
	March 31, 2022		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	$	4,294	$	4,294	$	—	$	—

















Deferred compensation assets	905		905		—		—
Total assets at fair value	$	5,199	$	5,199	$	—	$	—

HKFS Contingent Consideration liability	$	30,000	$	—	$	—	$	30,000
Deferred compensation liabilities	905		905		—		—
Total liabilities at fair value	$	30,905	$	905	$	—	$	30,000


			Fair value measurements at the reporting date using
	December 31, 2021		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	$	4,293	$	4,293	$	—	$	—
Total assets at fair value	$	4,293	$	4,293	$	—	$	—

HKFS Contingent Consideration liability	$	28,300	$	—	$	—	$	28,300
Total liabilities at fair value	$	28,300	$	—	$	—	$	28,300

Cash equivalents are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets.

We offer non-qualified deferred compensation plans to our executive officers, board of directors, and certain independent financial professionals. Participants in these plans direct the investment of their accounts among the available investment options, which are generally the same as those available under our 401(k) plan. We have elected to fund these obligations through a rabbi trust which mirrors the investment elections made by participants. The assets in the rabbi trust are held for the purpose of satisfying our obligations to participants, however, remain subject to the claims of our creditors in the event we become insolvent. Our obligations and corresponding investments held under these non-qualified deferred compensation plans primarily consist of money market and mutual funds and are classified within Level 1 of the fair value hierarchy because we value them utilizing quoted prices in active markets. These investments, and the corresponding deferred compensation liabilities, are included within “Other long-term assets” and “Other long-term liabilities”, respectively, on the condensed consolidated balance sheets.

The HKFS Contingent Consideration liability relates to post-closing earn-out payments resulting from the acquisition of Avantax Planning Partners, formerly “HKFS” (see “Note 9—Commitments and Contingencies”). Based on advisory asset levels and the achievement of performance goals for the first earn-out period, we made the full $30.0 million payment in the third quarter of 2021.

The estimated fair value of the portion of the HKFS Contingent Consideration liability related to the second earn-out period (calculated in accordance with the amended HKFS Purchase Agreement and based on estimated advisory asset levels as of June 30, 2022) was $30.0 million as of March 31, 2022 and is included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets. The estimated fair value of the second earn-out payment was determined using a Monte Carlo simulation model in a risk neutral framework with the underlying simulated variable of advisory asset levels and the related achievement of certain advisory asset growth levels. The Monte Carlo simulation model utilized Level 3 inputs, which included forecasted advisory asset levels as of June 30, 2022, a risk-adjusted discount rate (which reflects the risk in the advisory asset projection) of 12.2%, asset volatility of 24.6%, and a credit spread of 1.9%. Significant increases to the discount rate, asset volatility, or credit spread inputs would have resulted in a significantly lower fair value measurement, and a

Blucora, Inc. | Q1 2022 Form 10-Q 15

significant decrease to the forecasted advisory asset levels would have resulted in a significantly lower fair value measurement.

A roll forward of the HKFS Contingent Consideration liability is as follows (in thousands):


	HKFS Contingent Consideration liability



Balance as of December 31, 2020	$	35,900
HKFS Contingent Consideration first earn-out payment	(30,000)
Valuation change recognized as expense	22,400
Balance as of December 31, 2021	28,300
Valuation change recognized as expense	1,700
Balance as of March 31, 2022	$	30,000

Changes in the fair value of this contingent consideration are reflected in “Acquisition and integration” expense on the condensed consolidated statements of operations.

Fair Value of Financial Instruments

We consider the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, financial professional loans, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.

As of March 31, 2022, the Term Loan’s principal amount was $560.9 million, and the fair value of the Term Loan’s principal amount was $560.2 million. As of December 31, 2021, the Term Loan’s principal amount was $561.3 million, and the fair value of the Term Loan’s principal amount was $559.9 million. The fair value of the Term Loan’s principal amount was based on Level 2 inputs from a third-party market quotation.

Note 9: Commitments and Contingencies

HKFS Contingent Consideration Liability

On July 1, 2020, we closed the acquisition of Avantax Planning Partners, formerly “HKFS”, for an upfront cash purchase price of $104.4 million. The purchase price was subject to variable contingent consideration, or earn-out payments (the “HKFS Contingent Consideration”) totaling a maximum of $60.0 million.

The HKFS Contingent Consideration to be paid is determined based on advisory asset levels and the achievement of certain performance goals (i) for the period beginning July 1, 2020 and ending June 30, 2021 and (ii) for the period beginning July 1, 2021 and ending June 30, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative (as amended on April 7, 2020, June 30, 2020, and June 29, 2021) (the “HKFS Purchase Agreement”), the maximum aggregate amount that we would be required to pay for each earn-out period is $30.0 million. If the asset market values on the applicable measurement date fall below certain specified thresholds, no payment of consideration is owed to the Sellers for such period.

Based on advisory asset levels and the achievement of performance goals for the first earn-out period specified in the HKFS Purchase Agreement, we paid the full $30.0 million to the Sellers in the third quarter of 2021. The estimated fair value of the HKFS Contingent Consideration liability for the second earn-out period was $30.0 million as of March 31, 2022. For additional information on the valuation of the HKFS Contingent Consideration liability, see "Note 8—Fair Value Measurements."

Litigation

From time to time, we are subject to various legal proceedings, regulatory matters or fines, or claims that arise in the ordinary course of business. We accrue a liability when management believes that both it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although we believe that resolving such claims, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties.

Blucora, Inc. | Q1 2022 Form 10-Q 16

We are not currently a party to any such matters for which we have recognized a material liability on our condensed consolidated balance sheet as of March 31, 2022.

We have entered into indemnification agreements in the ordinary course of business with our officers and directors. Pursuant to these agreements, we may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to our obligations under these indemnification agreements and applicable Delaware law.

Note 10: Interest Expense and Other, Net

“Interest expense and other, net” on the condensed consolidated statements of operations consisted of the following (in thousands):


	Three Months Ended March 31,
	2022		2021
Interest expense	$	7,130	$	7,183
Amortization of debt issuance costs	389		363
Amortization of debt discount	292		277
Total interest expense	7,811		7,823
Interest income and other	30		60



Interest expense and other, net	$	7,841	$	7,883

Note 11: Income Taxes

For 2022, our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate does not include the effects of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

We recorded income tax expense of $2.6 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively. Our effective income tax rate for the three months ended March 31, 2022 and March 31, 2021 differed from the 21% statutory rate primarily due to the release of valuation allowances and the effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.

Note 12: Net Income (Loss) Per Share

“Basic net income per share” is calculated using the weighted average number of common shares outstanding during the applicable period. “Diluted net income per share” is calculated using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the applicable period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and the vesting of outstanding restricted stock units using the treasury stock method. Cash-settled restricted stock units are not settled in common shares and are therefore excluded from dilutive potential common shares. Dilutive potential common shares are excluded from the calculation of diluted net income per share if their effect is antidilutive. Certain of our performance-based restricted stock units are considered contingently issuable shares and are excluded from the diluted weighted average common shares outstanding computation because the related performance-based criteria were not achieved as of the end of the reporting period.

Blucora, Inc. | Q1 2022 Form 10-Q 17

The calculations of basic and diluted net income per share were as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Numerator:
Net income	$	34,620	$	27,646
Denominator:
Basic weighted average common shares outstanding	48,513		48,261
Dilutive potential common shares (1)	1,234		836
Diluted weighted average common shares outstanding	49,747		49,097
Net income per share:
Basic	$	0.71	$	0.57
Diluted	$	0.70	$	0.56
Shares excluded (1)	910		1,289

________________________

(1)Potential common shares were excluded from the calculation of diluted net income per share for these periods because their effect would have been anti-dilutive.

Blucora, Inc. | Q1 2022 Form 10-Q 18

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

The following discussion provides an analysis of the Company’s financial condition, cash flows, and results of operations from management’s perspective and should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included under Part I, Item 1 and the section titled “Cautionary Statement Regarding Forward-Looking Statements” in this Form 10-Q, as well as with our consolidated financial statements, accompanying notes thereto, and “Item 7. 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, 2021.

Overview

Blucora, Inc. (the “Company,” “Blucora,” “we,” “our,” or “us”) is a leading provider of integrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms. Our mission is to enable financial success by changing the way individuals and families plan and achieve their goals through tax-advantaged solutions. We conduct our operations through two primary businesses: (1) the Wealth Management business and (2) the Tax Software business. Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”

Wealth Management

Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is a leading U.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to their clients.

Tax Software

COVID-19 Pandemic

The extended COVID-19 pandemic has had a significant negative impact on the U.S. and global economy and caused substantial disruption in the U.S. and global securities markets, and as a result, has negatively impacted both our Wealth Management and Tax Software businesses.

In our Wealth Management business, the amount of cash sweep revenue we generate continues to be affected by the low interest rate environment. In response to the economic and market disruption associated with the COVID-19 pandemic, the Federal Reserve decreased the federal funds rate in 2020 and maintained a low-interest rate environment in 2021, causing a significant decline in cash sweep revenue. The Federal Reserve has signaled adjustments to monetary policy that would increase the federal funds rates, which we expect would positively impact cash sweep revenue. If the Federal Reserve does not increase, or further decreases, the federal funds rates, cash sweep revenue would continue to be negatively impacted.

Blucora, Inc. | Q1 2022 Form 10-Q 19

In our Tax Software segment, the typical seasonality of our Tax Software business has been affected by recent changes to tax filing deadlines. The Internal Revenue Service (“IRS”) delayed the start of the tax year 2020 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns from April 15, 2021 to May 17, 2021 as a result of the COVID-19 pandemic. In addition, the IRS extended the federal filing and payment deadline for Texas, Louisiana, and Oklahoma to June 15, 2021. Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion of Tax Software segment revenue that would typically have been expected to be earned in the first quarter to the second quarter of 2021. This change in seasonality caused significant fluctuations in our quarterly financial results and has affected the comparability of our financial results. As a result, the results of operations for the Tax Software segment are not as comparable for the three months ended March 31, 2022 and 2021 as they would have been in previous years.

For additional information on the effects of the COVID-19 pandemic on our results of operations for the selected periods, see “Results of Operations” below. For more information related to the COVID-19 pandemic and its impact to our businesses, see Part I, Item 1A and Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Blucora, Inc. | Q1 2022 Form 10-Q 20

RESULTS OF OPERATIONS

Summary


($ in thousands)	Three Months Ended March 31,				Change
	2022		2021		$		%
Revenue:
Wealth Management	$	166,403	$	154,491	$	11,912	7.7	%
Tax Software	141,150		123,892		17,258		13.9	%
Total revenue	307,553		278,383		29,170		10.5	%
Operating income (loss):
Wealth Management	16,421		19,396		(2,975)		(15.3)	%
Tax Software	58,030		50,888		7,142		14.0	%
Corporate-level activity	(29,408)		(33,055)		3,647		11.0	%
Total operating income	45,043		37,229		7,814		21.0	%
Interest expense and other, net	(7,841)		(7,883)		42		0.5	%
Income before income taxes	37,202		29,346		7,856		26.8	%
Income tax expense	(2,582)		(1,700)		(882)		(51.9)	%
Net income	$	34,620	$	27,646	$	6,974	25.2	%

For the three months ended March 31, 2022, compared to the three months ended March 31, 2021, net income increased $7.0 million primarily due to the following factors:

•Wealth Management segment operating income decreased $3.0 million primarily due to higher payout ratios to financial professionals and incremental personnel costs.

•Tax Software segment operating income increased $7.1 million primarily due to favorable increases in revenue per unit.

•Expenses within corporate-level activity decreased $3.6 million primarily due to reduced acquisition and integration costs.

•The Company recorded income tax expense of $2.6 million, an effective tax rate of 6.9%, for the three months ended March 31, 2022, compared to income tax expense of $1.7 million, an effective tax rate of 5.8%, for the three months ended March 31, 2021.

Blucora, Inc. | Q1 2022 Form 10-Q 21

SEGMENT REVENUE & OPERATING INCOME

The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the United States (“GAAP”) and include certain reconciling items attributable to our segments. We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Software segment. Segment information is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading “Corporate-level activity.” In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments.

Wealth Management


($ in thousands)	Three Months Ended March 31,						Change
	2022			2021			$		%
Revenue	$	166,403		$	154,491		$	11,912	7.7	%
Operating income	$	16,421		$	19,396		$	(2,975)	(15.3)	%
Segment margin	9.9		%	12.6		%

For the three months ended March 31, 2022, compared to the three months ended March 31, 2021, Wealth Management segment operating income decreased $3.0 million primarily due to the following factors:

•Wealth Management revenue increased $11.9 million primarily due to a $16.1 million increase in advisory revenue, partially offset by a $4.9 million decrease in commission revenue. The increase in advisory revenue was primarily from increased client asset levels compared to March 31, 2021. Commission revenue was negatively impacted by unfavorable transaction activity and volatility in global markets primarily as a result of Russia’s invasion of Ukraine and the measures taken in response, including sanctions imposed by governments.

•Wealth Management operating expenses increased $14.9 million primarily due to a $10.8 million increase in cost of revenue resulting from increased advisory fees and commissions paid, coupled with $4.1 million of incremental personnel costs. Increased payout ratios correlate with increased asset levels, the timing of certain quarterly billings relative to the market impacts from Russia’s invasion of Ukraine, and the exit of lower producing financial professionals who were concentrated at lower payout levels. Increased personnel costs reflect our strategic investments to drive growth through enhanced service capabilities that support our financial and tax professionals.

•Segment margin compression for the three months ended March 31, 2022, was primarily due to the increase in operating expenses discussed above, coupled with the impact of market volatility on our higher margin service offerings. For the remainder of the year, we expect to incur incremental travel and conference costs associated with reduced COVID-19 travel restrictions; however, we expect for segment margin to increase as a result of the recently announced increase in the federal funds rate.

Blucora, Inc. | Q1 2022 Form 10-Q 22

Sources of Revenue

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


($ in thousands)			Three Months Ended March 31,						Change
	Sources of Revenue	Primary Drivers	2022			2021			$		%
Financial professional-driven	Advisory	- Advisory asset levels	$	107,169		$	91,119		$	16,050	17.6	%
	Commission	- Transactions - Asset levels - Product mix	47,655			52,534			(4,879)		(9.3)	%
Other revenue	Asset-based	- Cash balances - Interest rates - Number of accounts - Client asset levels	5,663			5,329			334		6.3	%
	Transaction and fee	- Account activity - Number of financial professionals - Number of clients - Number of accounts	5,916			5,509			407		7.4	%
	Total revenue		$	166,403		$	154,491		$	11,912	7.7	%
	Total recurring revenue		$	143,737		$	130,755		$	12,982	9.9	%
	Recurring revenue rate		86.4		%	84.6		%

Recurring revenue consists of advisory fees, trailing commissions, fees from cash sweep programs, and certain transaction and fee revenue, all as described further under the headings “Advisory revenue,” “Commission revenue,” “Asset-based revenue,” and “Transaction and fee revenue,” respectively. Certain recurring revenues are associated with asset balances and fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, we believe recurring revenue is meaningful because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.

Business Metrics


($ in thousands)	Three Months Ended March 31,						Change
	2022			2021			$		%
Client assets balances:
Total client assets (1)	$	86,144,055		$	84,776,191		$	1,367,864	1.6	%
Brokerage assets (1)	$	45,222,763		$	48,001,320		$	(2,778,557)	(5.8)	%
Advisory assets (1)	$	40,921,292		$	36,774,871		$	4,146,421	11.3	%
Advisory assets as a percentage of total client assets	47.5		%	43.4		%

Number of financial professionals (in ones):
Independent financial professionals (2)	3,376			3,691			(315)		(8.5)	%
In-house/employee financial professionals (3)	33			27			6		22.2	%
Total number of financial professionals	3,409			3,718			(309)		(8.3)	%

Advisory and commission revenue per financial professional (4)	$	45.4		$	38.6		$	6.8	17.6	%