SEC Filing — Avantax®

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avta-20230331

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, 2023


☐			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

Avantax, 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

AVTA

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 May 2, 2023, 38,588,090 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	32
Item 4.	Controls and Procedures	32

PART II . OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34

Signatures		35

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

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 industry;

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

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

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

•the impact of significant interest rate changes;

•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;

•political and economic conditions and events that directly or indirectly impact the wealth management industry;

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

•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”);

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

•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;

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

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

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

•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;

Avantax, Inc. | Q1 2023 Form 10-Q 3

•risks related to goodwill and acquired intangible asset impairment;

•our failure to realize the expected benefits of the sale of our former tax software business (the “TaxAct Sale”); and

•disruptions to our business and operations resulting from our compliance with the terms of the transition services agreement entered into in connection with the TaxAct Sale.

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, 2022, 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.

Avantax, Inc. | Q1 2023 Form 10-Q 4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AVANTAX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	144,955	$	263,928

Accounts receivable, net	25,671		24,117
Commissions and advisory fees receivable	21,115		20,679

Prepaid expenses and other current assets	19,754		15,027
Total current assets	211,495		323,751
Long-term assets:
Property, equipment, and software, net	51,996		53,041
Right-of-use assets, net	18,962		19,361
Goodwill, net	266,279		266,279
Acquired intangible assets, net	261,072		266,002

Other long-term assets	37,466		35,081
Total long-term assets	635,775		639,764
Total assets	$	847,270	$	963,515
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,319	$	7,531
Commissions and advisory fees payable	13,528		13,829
Accrued expenses and other current liabilities	111,569		111,212
Current deferred revenue	6,729		4,583
Current lease liabilities	5,160		5,139
Current portion of long-term debt	5,313		—
Total current liabilities	146,618		142,294
Long-term liabilities:
Long-term debt, net	157,680		—
Long-term lease liabilities	29,483		30,332
Deferred tax liabilities, net	21,013		20,819
Long-term deferred revenue	4,164		4,396
Other long-term liabilities	20,268		22,476
Total long-term liabilities	232,608		78,023
Total liabilities	379,226		220,317

Commitments and contingencies (Note 9)

Stockholders’ equity:
Common stock, par value $0.0001 per share—900,000 shares authorized; 43,234 shares issued and 39,095 shares outstanding as of March 31, 2023; 51,260 shares issued and 48,079 shares outstanding as of December 31, 2022	4		5
Additional paid-in capital	1,384,331		1,636,134
Accumulated deficit	(827,869)		(829,542)

Treasury stock, at cost—4,139 shares as of March 31, 2023 and 3,181 shares as of December 31, 2022	(88,422)		(63,399)
Total stockholders’ equity	468,044		743,198
Total liabilities and stockholders’ equity	$	847,270	$	963,515

See accompanying notes.

Avantax, Inc. | Q1 2023 Form 10-Q 5

AVANTAX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended March 31,
	2023		2022



Revenue	$	177,980	$	166,403
Operating expenses:



Cost of revenue	108,252		121,188
Engineering and technology	2,721		1,814
Sales and marketing	26,181		22,174
General and administrative	32,401		23,875
Acquisition and integration	122		1,666
Depreciation	3,588		2,443
Amortization of acquired intangible assets	6,338		6,631

Total operating expenses	179,603		179,791
Operating loss from continuing operations	(1,623)		(13,388)
Interest expense and other, net	894		(53)
Loss from continuing operations before income taxes	(729)		(13,441)
Income tax benefit	481		16,993
Income (loss) from continuing operations	(248)		3,552
Discontinued operations (Note 3)
Income from discontinued operations before gain on disposal and income taxes	—		50,643
Pre-tax gain on disposal	2,539		—
Income from discontinued operations before income taxes	2,539		50,643
Income tax expense	(618)		(19,575)
Income from discontinued operations	1,921		31,068
Net income	$	1,673	$	34,620

Basic net income (loss) per share:
Continuing operations	$	(0.01)	$	0.07
Discontinued operations	0.05		0.64
Basic net income per share	$	0.04	$	0.71
Diluted net income (loss) per share:
Continuing operations	$	(0.01)	$	0.07
Discontinued operations	0.05		0.63
Diluted net income per share	$	0.04	$	0.70
Weighted average shares outstanding:
Basic	44,645		48,513
Diluted	44,645		49,747

See accompanying notes.

Avantax, Inc. | Q1 2023 Form 10-Q 6

AVANTAX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited) (In thousands)



	Common stock			Additional paid-in capital		Accumulated deficit			Treasury stock
	Shares	Amount						Shares		Amount	Total
Balance as of December 31, 2022	51,260	$	5	$	1,636,134	$	(829,542)		3,181		$	(63,399)	$	743,198
Common stock issued pursuant to stock incentive and employee stock purchase plans	307	—		1,135		—			—		—		1,135
Stock repurchases	—	—		—		—			9,291		(279,562)		(279,562)
Retirement of common stock	(8,333)	(1)		(254,538)		—			(8,333)		254,539		—
Stock-based compensation	—	—		4,714		—			—		—		4,714
Tax payments from shares withheld for equity awards	—	—		(3,114)		—			—		—		(3,114)
Net income	—	—		—		1,673			—		—		1,673
Balance as of March 31, 2023	43,234	$	4	$	1,384,331	$	(827,869)		4,139		$	(88,422)	$	468,044



	Common stock			Additional paid-in capital		Accumulated deficit			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 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

See accompanying notes.

Avantax, Inc. | Q1 2023 Form 10-Q 7

AVANTAX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)


	Three Months Ended March 31,
	2023		2022
Operating activities:
Net income	$	1,673	$	34,620
Less: Income from discontinued operations, net of income taxes	1,921		31,068
Income (loss) from continuing operations	(248)		3,552
Adjustments to reconcile income (loss) from continuing operations to net cash from operating activities:
Depreciation and amortization of acquired intangible assets	9,926		9,074
Stock-based compensation	7,802		5,380
Change in the fair value of acquisition-related contingent consideration	—		1,700


Reduction of right-of-use lease assets	399		353
Deferred income taxes	194		(652)
Amortization of debt discount and issuance costs	153		—


Accretion of lease liabilities	479		514

Other non-cash items	1,891		1,101
Changes in operating assets and liabilities, net of acquisitions and disposals:

Accounts receivable, net	(1,543)		5,489
Commissions and advisory fees receivable	(436)		2,183

Prepaid expenses and other current assets	(4,381)		(4,280)
Other long-term assets	(3,337)		(3,354)
Accounts payable	(3,212)		(2,302)
Commissions and advisory fees payable	(301)		(2,553)
Lease liabilities	(1,307)		(1,229)
Deferred revenue	1,914		1,892
Accrued expenses and other current and long-term liabilities	(7,005)		(9,815)
Net cash provided by operating activities from continuing operations	988		7,053
Investing activities:
Purchases of property, equipment, and software	(2,543)		(3,846)

Asset acquisitions	(2,018)		(751)



Net cash used by investing activities from continuing operations	(4,561)		(4,597)
Financing activities:
Proceeds from credit facilities, net of debt discount and issuance costs	161,543		—
Payments on credit facilities	—		(453)
Acquisition-related fixed and contingent consideration payments	(223)		—

Stock repurchases	(276,953)		(30,537)



Proceeds from stock option exercises	1,135		96
Tax payments from shares withheld for equity awards	(3,114)		(1,569)
Net cash used by financing activities from continuing operations	(117,612)		(32,463)
Net cash used by continuing operations	(121,185)		(30,007)
Net cash provided by operating activities from discontinued operations	—		10,788
Net cash provided (used) by investing activities from discontinued operations	2,212		(885)
Net cash provided by financing activities from discontinued operations	—		—
Net cash provided by discontinued operations	2,212		9,903

Net decrease in cash and cash equivalents	(118,973)		(20,104)
Cash and cash equivalents, beginning of period	263,928		100,629
Cash and cash equivalents, end of period	$	144,955	$	80,525

Supplemental cash flow information:

Cash paid for income taxes	$	—	$	850
Cash paid for interest	$	108	$	7,107

See accompanying notes.

Avantax, Inc. | Q1 2023 Form 10-Q 8

AVANTAX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Description of the Business

Avantax, Inc. (the “Company,” “Avantax,” “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 integrated tax-focused wealth management services consist of the operations of Avantax Wealth Management and Avantax Planning Partners.

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.

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.

Divestiture of Tax Software Business

On October 31, 2022, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with TaxAct Holdings, Inc. (f/k/a Avantax Holdings, Inc.), a Delaware corporation and a direct subsidiary of Avantax, Franklin Cedar Bidco, LLC, a Delaware limited liability company (the “Buyer”), and, solely for purposes of certain provisions thereof, DS Admiral Bidco, LLC, a Delaware limited liability company, pursuant to which we sold our former tax software business to Buyer for an aggregate purchase price of $720.0 million in cash, subject to customary purchase price adjustments set forth in the Purchase Agreement (the “TaxAct Sale”). This transaction subsequently closed on December 19, 2022.

In accordance with ASC 205 (“ASC 205”), Presentation of Financial Statements, we determined that the sale of our tax software business represented a strategic shift that will have a major effect on our operations and financial results. As a result of the TaxAct Sale, the historical results of our former tax software business, and any adjustments to amounts previously reported in discontinued operations in a prior period (if applicable) have been reclassified as a discontinued operation and are excluded from continuing operations for all periods presented within the condensed consolidated financial statements.

Segments

Our Chief Executive Officer is our chief operating decision maker (“CODM”) and assesses performance and allocates resources on a consolidated basis. Given the similarities in economic characteristics between our operations and the common nature of the products, services, we currently operate in one reportable 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 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 accounting principles generally accepted in the United States (“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, 2022. Interim results are not necessarily indicative of results for a full year.

Avantax, Inc. | Q1 2023 Form 10-Q 9

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, 2022. There have been no significant changes in our significant accounting policies since December 31, 2022.

Note 3: Discontinued Operations

On October 31, 2022, we entered into the Purchase Agreement with the Buyer to sell our former tax software business for an aggregate purchase price of $720.0 million in cash, subject to customary purchase price adjustments set forth in the Purchase Agreement. The TaxAct Sale subsequently closed on December 19, 2022. This divestiture was considered part of our strategic shift to become a pure-play wealth management company and was determined to meet discontinued operations accounting criteria under ASC 205.

During the three months ended March 31, 2023, we finalized our previously estimated closing date working capital balance, resulting in an incremental pre-tax gain of $2.5 million which is included within “Pre-tax gain on disposal” in the condensed consolidated statements of operations.

The following table presents summarized information regarding certain components of income (in thousands):


	Three Months Ended March 31,
	2023		2022
Revenues	$	—	$	141,150
Operating expenses	—		82,719
Interest expense and other, net	—		(7,788)
Income from discontinued operations before gain on disposal and income taxes	—		50,643
Pre-tax gain on disposal	2,539		—
Income from discontinued operations before income taxes	2,539		50,643
Income tax expense	(618)		(19,575)
Income from discontinued operations	$	1,921	$	31,068

Note 4: Revenue Recognition

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

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


	Three Months Ended March 31,
	2023		2022
Recognized upon transaction:
Commission	$	18,801	$	20,624
Transaction and fee	933		1,244
Total revenue recognized upon transaction	$	19,734	$	21,868
Recognized over time:
Advisory	$	97,525	$	107,169
Commission	22,671		27,031
Asset-based	33,887		5,663
Transaction and fee	4,163		4,672
Total revenue recognized over time	$	158,246	$	144,535
Total revenue:
Advisory	$	97,525	$	107,169
Commission	41,472		47,655
Asset-based	33,887		5,663
Transaction and fee	5,096		5,916
Total revenue	$	177,980	$	166,403

Avantax, Inc. | Q1 2023 Form 10-Q 10

Note 5: Asset Acquisitions

During the three months ended March 31, 2023, we completed an acquisition that met the criteria to be accounted for as an asset acquisition. Total initial purchase consideration, including acquisition costs and fixed deferred payments, was $1.3 million. This purchase consideration was allocated to client relationship intangibles. Client 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 payable. As of March 31, 2023, the maximum future fixed and contingent payments associated with all prior asset acquisitions were $23.1 million, with specified payment dates from 2023 through 2027.

Note 6: Debt

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


	March 31, 2023		December 31, 2022
	Delayed Draw Term Loan Facility
Principal outstanding	$	170,000	$	—
Unamortized debt issuance costs	(5,682)		—
Unamortized debt discount	(1,325)		—
Net carrying value	$	162,993	$	—

In May 2017, we entered into a credit agreement (as the same has been amended, the “Credit Agreement”) with a syndicate of lenders, which provided for a term loan facility and a revolving line of credit (including a letter of credit sub-facility) for working capital, capital expenditures, and general business purposes. Subject to the terms of the Credit Agreement, we repaid the remaining principal amount outstanding under the Credit Agreement in connection with the TaxAct Sale in the fourth quarter of 2022.

On January 24, 2023 (the “Closing Date”), we entered into a restatement agreement (the “Amended and Restated Credit Agreement”), which amended and restated in its entirety our previous Credit Agreement. The Amended and Restated Credit Agreement provides for a new delayed draw term loan facility up to a maximum principal amount of $270.0 million (the “Delayed Draw Term Loan Facility”) and a revolving credit facility with a commitment amount of $50.0 million (the “Revolving Credit Facility”). We may borrow term loans under the Delayed Draw Term Loan Facility (the “Term Loans”) until January 24, 2024. The stated maturity date of the Delayed Draw Term Loan Facility and the Revolving Credit Facility is January 24, 2028 (the “Maturity Date”). The proceeds of any Term Loans may be used to fund shareholder distributions and for general corporate purposes. The proceeds of any loans under the Revolving Credit Facility may be used to finance working capital needs and for general corporate purposes. On February 24, 2023, we borrowed $170.0 million under the Delayed Draw Term Loan Facility.

We capitalized approximately $8.5 million of debt discount and issuance costs in connection with the Amended and Restated Credit Agreement. A portion of these costs were allocated to the Revolving Credit Facility and are included in other long-term assets on the Company’s condensed consolidated balance sheets.

As of March 31, 2023, we had $170.0 million in principal amount outstanding under the Delayed Draw Term Loan Facility and no amounts outstanding under the Revolving Credit Facility. As of March 31, 2023, $50.0 million was available for future borrowings under the Revolving Credit Facility, subject to customary terms and conditions. Subject to certain conditions set forth in the Amended and Restated Credit Agreement, we may borrow, prepay and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Maturity Date.

We are required to make quarterly principal amortization payments on the Delayed Draw Term Loan Facility on the last business day of each fiscal quarter, beginning with the last business day of June 2022. These payments will amortize in equal quarterly installments based on the following aggregate annual amounts (expressed as a percentage of the principal amount of Term Loans borrowed): 2.5% during the first year ended December 31, 2023, 5% during years two and three, 7.5% during year four, and 10% during year five. Any remaining Term Loans outstanding are due on the Maturity Date.

Avantax, Inc. | Q1 2023 Form 10-Q 11

Commencing with the first year ending December 31, 2023, we may be required to make annual prepayments on the Term Loans in an amount equal to a percentage of Excess Cash Flow (as defined in the Amended and Restated Credit Agreement). The percentage of Excess Cash Flow ranges from 0% to 50% depending on our Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We may voluntarily prepay the Term Loans in whole or in part without premium or penalty.

Subject to customary reference rate availability provisions, the borrowings under the Amended and Restated Credit Agreement will bear interest at a rate per annum equal to (i) the Term SOFR Rate (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) plus a margin ranging from 2.25% to 2.75% (which margin would be 2.75% as of the Closing Date), or (ii) a base rate based on the highest of the Wall Street Journal prime rate, the federal funds rate plus 0.50% and the Term SOFR (as defined in the Amended and Restated Credit Agreement, and which includes a 0.10% credit spread adjustment) rate plus 1.00%, in each case plus a margin ranging from 1.25% to 1.75% (which margin would be 1.75% as of the Closing Date). The margin is determined based on the Company’s Consolidated First Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement). We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility ranging from 0.35% to 0.45%. Interest is payable at the end of each interest period, typically quarterly.

The obligations of the Company under the Amended and Restated Credit Agreement are secured by a first-priority security interest in substantially all of the existing and future personal property of the Company and certain of its subsidiaries.

Pursuant to the Amended and Restated Credit Agreement, we shall not permit (i) the Consolidated Total Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) to exceed 4.00 to 1.00 between March 31, 2023 and June 30, 2024, or 3.75 to 1.00 between July 1, 2024 and the Maturity Date, (ii) the Consolidated Fixed Charge Coverage Ratio (as defined in the Amended and Restated Credit Agreement) to be less than 1.25 to 1.00 or (iii) Liquidity (as defined in the Amended and Restated Credit Agreement) on the last day of any fiscal quarter to be less than $50 million. The Company was in compliance with the debt covenants of the Amended and Restated Credit Agreement as of March 31, 2023.

Note 7: 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.

During the three months ended March 31, 2023, and in connection with the TaxAct Sale, we began subleasing a portion of our corporate headquarters in Dallas, Texas. This sublease was classified as an operating lease at inception, with sublease income recognized on a straight-line basis over the five-year sublease term.

Operating lease cost, net of sublease income, and cash paid on operating lease liabilities for the three months ended March 31, 2023 and 2022 were as follows (in thousands):


	Three Months Ended March 31,
	2023		2022
Fixed lease cost	$	962	$	973
Variable lease cost	408		402
Operating lease cost, before sublease income	1,370		1,375
Sublease income	(479)		(234)
Total operating lease cost, net of sublease income	$	891	$	1,141

Additional lease information:
Cash paid on operating lease liabilities	$	1,307	$	1,229

Avantax, Inc. | Q1 2023 Form 10-Q 12

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


	March 31, 2023			December 31, 2022
Right-of-use assets, net	$	18,962		$	19,361

Current lease liabilities	$	5,160		$	5,139
Long-term lease liabilities	29,483			30,332
Total operating lease liabilities	$	34,643		$	35,471

Weighted-average remaining lease term (in years)	9.2			9.4
Weighted-average discount rate	5.5		%	5.5		%

The maturities of our operating lease liabilities as of March 31, 2023 were as follows (in thousands):



Undiscounted cash flows:
Remainder of 2023	$	3,982
2024	5,184
2025	5,086
2026	4,256
2027	3,858
Thereafter	22,315
Total undiscounted cash flows	44,681
Imputed interest	(10,038)
Present value of cash flows	$	34,643

Note 8: Balance Sheet Components

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


	March 31, 2023		December 31, 2022
Prepaid expenses	$	12,406	$	7,857


Forgivable loans	5,837		5,951
Other current assets	1,511		1,219
Total prepaid expenses and other current assets	$	19,754	$	15,027

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


	March 31, 2023		December 31, 2022
Salaries and related benefit expenses	$	8,931	$	17,481



Accrued legal costs	899		1,102
Accrued vendor and advertising costs	2,947		2,726
Accrued taxes	88,035		85,965
Accrued fixed and variable acquisition consideration	287		897
Accrued cash-settled stock-based compensation	7,371		2,121
Other	3,099		920
Total accrued expenses and other current liabilities	$	111,569	$	111,212

Avantax, Inc. | Q1 2023 Form 10-Q 13

Other long-term liabilities consisted of the following (in thousands):


	March 31, 2023		December 31, 2022
Deferred compensation	$	9,988	$	7,974
Accrued cash-settled stock-based compensation	3,271		7,556
Accrued tax positions	3,952		3,616
Other	3,057		3,330
Other long-term liabilities	$	20,268	$	22,476

Note 9: Commitments and Contingencies

TaxAct Indemnification Obligations

In connection with the TaxAct Sale, we have certain indemnification obligations to the Buyer, TaxAct Holdings, Inc. and their respective affiliates and representatives with respect to certain losses actually incurred or suffered as a result of any claim, action, suit, or proceeding against such indemnitees arising out of or relating to the use by us or any of our affiliates in the tax software business of website tracking and analytics technologies prior to the closing of the TaxAct Sale. Such indemnification obligations terminate on December 19, 2027 and may not exceed $5.4 million ($1.0 million of which is allocable to the deductible under our insurance policies). We believe that we will be able to recover from our insurers all or a substantial portion of any payments made pursuant to such indemnification obligations. The current carrying amount of the liability for these indemnification obligations is approximately $1.0 million as of March 31, 2023 and is included within “Other long-term liabilities” on the condensed consolidated balance sheets.

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 it is both 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.

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, 2023.

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: 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.

Avantax, Inc. | Q1 2023 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, 2023		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	$	4,418	$	4,418	$	—	$	—

















Deferred compensation assets	10,448		10,448		—		—
Total assets at fair value	$	14,866	$	14,866	$	—	$	—


Deferred compensation liabilities	$	10,448	$	10,448	$	—	$	—
Total liabilities at fair value	$	10,448	$	10,448	$	—	$	—


			Fair value measurements at the reporting date using
	December 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	$	4,369	$	4,369	$	—	$	—
Deferred compensation assets	7,974		7,974		—		—
Total assets at fair value	$	12,343	$	12,343	$	—	$	—


Deferred compensation liabilities	$	7,974	$	7,974	$	—	$	—
Total liabilities at fair value	$	7,974	$	7,974	$	—	$	—

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 primarily included within “Other long-term assets” and “Other long-term liabilities,” respectively, on the condensed consolidated balance sheets.

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, 2023, the principal amount outstanding for our Delayed Draw Term Loan Facility was $170.0 million. The principal amount outstanding approximated its fair value as it is a variable rate instrument, and its applicable margin is consistent with current market conditions.

Avantax, Inc. | Q1 2023 Form 10-Q 15

Note 11: Stockholders' Equity

Capital Return Program

On January 27, 2023, we commenced a modified “Dutch Auction” tender offer (the “Tender Offer”) to purchase shares of our common stock for an aggregate purchase price of up to $250.0 million at a price per share not less than $27.00 and not greater than $31.00. The Tender Offer was in addition to, and separate from, the $200.0 million stock repurchase authorization discussed below. Upon the conclusion of the Tender Offer, we repurchased and subsequently retired approximately 8.3 million shares of our common stock at the purchase price of $30.00 per share, for aggregate cash consideration of $250.0 million. We incurred approximately $4.5 million for fees and expenses associated with the Tender Offer, including approximately $2.4 million for estimated excise taxes owed under the Inflation Reduction Act of 2022, which were recorded within stockholders’ equity.

Repurchased common stock that is subsequently retired is deducted from common stock for par value and from additional paid-in capital for the excess over par value. Direct costs incurred to repurchase common stock are included in the total cost of the shares.

Stock Repurchase Authorization

On December 19, 2022, we announced that our board of directors authorized the Company to repurchase up to $200.0 million of our common stock. This repurchase authorization does not obligate us to repurchase any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date.

For the three months ended March 31, 2023, we repurchased approximately 1.0 million shares of our common stock under the stock repurchase authorization for an aggregate purchase price of approximately $24.8 million. The remaining authorized amount under the stock repurchase authorization as of March 31, 2023, was approximately $175.2 million. For the three months ended March 31, 2022, we repurchased approximately 1.6 million shares of our common stock under our previous stock repurchase plan for an aggregate purchase price of approximately $30.5 million.

Between April 1, 2023 and May 5, 2023, we repurchased approximately 0.7 million shares of our common stock under the stock repurchase authorization for an aggregate purchase price of approximately $17.0 million. The remaining authorized amount under the stock repurchase authorization as of May 5, 2023, was approximately $158.2 million.

Note 12: 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,
	2023		2022
Interest expense	$	1,531	$	24
Amortization of debt issuance costs	128		—
Amortization of debt discount	25		—
Total interest expense	1,684		24
Interest income and other	(975)		29
Transition services agreement income	(1,603)		—



Interest expense and other, net	$	(894)	$	53

In connection with the TaxAct Sale, we entered into a transition services agreement with the Buyer pursuant to which we will provide the Buyer with certain transition services for an initial period ending on June 19, 2023. The income from this agreement is included in the table above and largely offsets the costs incurred to provide these transition services, which are included within our operating expenses.

Note 13: Income Taxes

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.

Avantax, Inc. | Q1 2023 Form 10-Q 16

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 an income tax benefit of $0.5 million and $17.0 million for the three months ended March 31, 2023, and 2022, respectively. Our effective income tax rate for the three months ended March 31, 2023 differed from the 21% statutory rate primarily due to non-deductible compensation and the effect of state taxes.

Our effective tax rate for the three months ended March 31, 2022 differed from the 21% statutory rate primarily due to the release in our valuation allowance and the effect of state income taxes.

Note 14: Net Income (Loss) Per Share

“Basic net income (loss) per share” is calculated using the weighted average number of common shares outstanding during the applicable period. “Diluted net income (loss) 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 RSUs 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 (loss) per share if their effect is antidilutive, including when we report a loss from continuing operations. Performance-based RSUs are considered contingently issuable shares and are excluded from the diluted weighted average common shares outstanding computation if the related performance-based criteria are not expected to be achieved as of the end of the reporting period.

The calculation of basic and diluted net income (loss) per share is as follows (in thousands, except per share amounts):


	Three Months Ended March 31,
	2023		2022
Numerator:
Income (loss) from continuing operations	$	(248)	$	3,552
Income from discontinued operations	1,921		31,068
Net income	$	1,673	$	34,620
Denominator:
Basic weighted average common shares outstanding	44,645		48,513
Dilutive potential common shares (1)	—		1,234
Diluted weighted average common shares outstanding	44,645		49,747
Basic net income (loss) per share:
Continuing operations	$	(0.01)	$	0.07
Discontinued operations	0.05		0.64
Basic net income per share:	$	0.04	$	0.71
Diluted net income (loss) per share:
Continuing operations	$	(0.01)	$	0.07
Discontinued operations	0.05		0.63
Diluted net income per share:	$	0.04	$	0.70
Shares excluded (1)	2,959		910

________________________

(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. For the three months ended March 31, 2023 all potential common shares were excluded from the calculation of diluted net income per share as their effect would have been anti-dilutive due to the loss from continuing operations.

Note 15: Subsequent Events

Between April 1, 2023 and May 5, 2023, we repurchased approximately 0.7 million shares of our common stock under our stock repurchase authorization for an aggregate purchase price of approximately $17.0 million. The

Avantax, Inc. | Q1 2023 Form 10-Q 17

remaining authorized amount under the stock repurchase authorization as of May 5, 2023, was approximately $158.2 million.

On April 7, 2023, we borrowed an additional $50.0 million under the Delayed Draw Term Loan Facility.

Avantax, Inc. | Q1 2023 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 our 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, 2022.

Overview

Avantax, Inc. (the “Company,” “Avantax,” “we,” “our,” or “us”), is a leading provider of integrated tax-focused wealth management services and platforms, 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. Our common stock is listed on the NASDAQ Global Select Market under the symbol “AVTA.” Our integrated tax-focused wealth management services consist of the operations of Avantax Wealth Management and Avantax Planning Partners.

Divestiture of Tax Software Business

In accordance with ASC 205, Presentation of Financial Statements, we determined that the sale of our tax software business represented a strategic shift that will have a major effect on our operations and financial results. As a result of the TaxAct Sale, the historical results of our former tax software business, and any adjustments to amounts previously reported in discontinued operations in a prior period (if applicable) have been reclassified as a discontinued operation and are excluded from continuing operations for all periods presented within the condensed consolidated financial statements.

Avantax, Inc. | Q1 2023 Form 10-Q 19

RESULTS OF OPERATIONS

Summary


($ in thousands)	Three Months Ended March 31,				Change
	2023		2022		$		%
Revenue	$	177,980	$	166,403	$	11,577	7.0	%
Operating expenses:
Cost of revenue	108,252		121,188		(12,936)		(10.7)	%
Engineering and technology	2,721		1,814		907		50.0	%
Sales and marketing	26,181		22,174		4,007		18.1	%
General and administrative	32,401		23,875		8,526		35.7	%
Acquisition and integration	122		1,666		(1,544)		(92.7)	%
Depreciation	3,588		2,443		1,145		46.9	%
Amortization of acquired intangible assets	6,338		6,631		(293)		(4.4)	%
Total operating expenses	179,603		179,791		(188)		(0.1)	%
Operating loss	(1,623)		(13,388)		11,765		87.9	%
Interest expense and other, net	894		(53)		947		1786.8	%
Loss from continuing operations before income taxes	(729)		(13,441)		12,712		94.6	%
Income tax benefit	481		16,993		(16,512)		(97.2)	%
Income (loss) from continuing operations	(248)		3,552		(3,800)		(107.0)	%
Discontinued operations
Income from discontinued operations before gain on disposal and income taxes	—		50,643		(50,643)		(100.0)	%
Pre-tax gain on disposal	2,539		—		2,539		N/A
Income from discontinued operations before income taxes	2,539		50,643		(48,104)		(95.0)	%
Income tax expense	(618)		(19,575)		18,957		96.8	%
Income from discontinued operations	1,921		31,068		(29,147)		(93.8)	%
Net income	$	1,673	$	34,620	$	(32,947)	(95.2)	%

For the three months ended March 31, 2023, compared to the three months ended March 31, 2022, net income decreased $32.9 million primarily due to the following factors:

•Income (loss) from continuing operations decreased $3.8 million primarily due to the following factors:

•Revenue increased $11.6 million primarily due to incremental cash sweep revenue generated from increases in the federal funds rate paired with the program’s structure that increases returns in a higher interest rate environment. This incremental revenue was partially offset by lower advisory and commission revenues caused by a decline in client assets year-over-year and reduced transaction activity.

•Cost of revenue declined $12.9 million primarily due to a reduction in financial professional commissions caused by lower advisory and commission revenues. This decline was offset by an increase in general and administrative expense for executive transition and transaction and reorganization related costs associated with the TaxAct Sale, coupled with incremental personnel costs.

•Income tax benefit decreased $16.5 million, primarily due to a reduction in our valuation allowance during the prior year associated with the utilization of net operating losses against prior period taxable income.

•Income from discontinued operations decreased $50.6 million primarily due to the completion of the TaxAct Sale on December 19, 2022. During the three months ended March 31, 2023 we recognized an incremental pre-tax gain on disposal of $2.5 million in connection with the finalization of our closing working capital balance.

Avantax, Inc. | Q1 2023 Form 10-Q 20

Sources of Revenue

Our 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	2023			2022			$		%
Financial professional-driven	Advisory	- Advisory asset levels	$	97,525		$	107,169		$	(9,644)	(9.0)	%
	Commission	- Transactions - Asset levels - Product mix	41,472			47,655			(6,183)		(13.0)	%
Other revenue	Asset-based	- Cash balances - Interest rates - Number of accounts - Client asset levels	33,887			5,663			28,224		498.4	%
	Transaction and fee	- Account activity - Number of financial professionals - Number of clients - Number of accounts	5,096			5,916			(820)		(13.9)	%
	Total revenue		$	177,980		$	166,403		$	11,577	7.0	%
	Total recurring revenue		$	157,628		$	143,737		$	13,891	9.7	%
	Recurring revenue rate		88.6		%	86.4		%

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)	March 31,				Change
	2023		2022		$		%
Client assets balances:
Total client assets	$	80,632,955	$	86,144,055	$	(5,511,100)	(6.4)	%