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 September 30, 2023
OR
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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 | ||||||||||||
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.
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 October 30, 2023, 36,811,784 shares of the registrant’s Common Stock were outstanding.
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
Condensed Consolidated Balance Sheets (Unaudited) | ||||||||
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) | ||||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
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. | Q3 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”);
•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;
•disruptions or adverse effects on our business prospects, financial condition, and results of operations caused by the proposed acquisition of the Company by Cetera;
•our inability to timely and successfully close the proposed acquisition of the Company by Cetera;
•provisions within our Agreement and Plan of Merger with Cetera that could discourage competing acquisition proposals from third parties or adversely affect future acquisition proposals in the event the proposed acquisition of the Company by Cetera is terminated; and
•our ability to mitigate and manage risks caused by yield curve, duration and interest rate fluctuations, and other macroeconomic factors upon our business and financing arrangements through derivative transactions pursuant to our recently implemented hedging policy.
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. | Q3 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)
| September 30, 2023 | December 31, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Commissions and advisory fees receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Property, equipment, and software, net | |||||||||||
| Right-of-use assets, net | |||||||||||
| Goodwill, net | |||||||||||
| Acquired intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Commissions and advisory fees payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current deferred revenue | |||||||||||
| Current lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net | |||||||||||
| Long-term lease liabilities | |||||||||||
| Deferred tax liabilities, net | |||||||||||
| Long-term deferred revenue | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 9) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ||||||||||
Treasury stock, at cost— | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes.
Avantax, Inc. | Q3 2023 Form 10-Q 5
AVANTAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Engineering and technology | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Acquisition and integration | ( | ( | ( | ||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of acquired intangible assets | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) from continuing operations | ( | ( | |||||||||||||||||||||
| Interest expense and other, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes | ( | ( | ( | ||||||||||||||||||||
| Income tax benefit (expense) | ( | ||||||||||||||||||||||
| Income (loss) from continuing operations | ( | ||||||||||||||||||||||
Discontinued operations (Note 3) | |||||||||||||||||||||||
| Income (loss) from discontinued operations before gain on disposal and income taxes | ( | ||||||||||||||||||||||
| Pre-tax gain on disposal | |||||||||||||||||||||||
| Income (loss) from discontinued operations before income taxes | ( | ||||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | |||||||||||||||||||||
| Income (loss) from discontinued operations | ( | ||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Basic net income (loss) per share: | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | $ | $ | ||||||||||||||||||
| Discontinued operations | ( | ||||||||||||||||||||||
| Basic net income (loss) per share | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Diluted net income (loss) per share: | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | $ | $ | ||||||||||||||||||
| Discontinued operations | ( | ||||||||||||||||||||||
| Diluted net income (loss) per share | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
See accompanying notes.
Avantax, Inc. | Q3 2023 Form 10-Q 6
AVANTAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) (In thousands)
| Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated deficit | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
See accompanying notes.
Avantax, Inc. | Q3 2023 Form 10-Q 7
| Accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated deficit | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to stock incentive and employee stock purchase plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax payments from shares withheld for equity awards | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
See accompanying notes.
Avantax, Inc. | Q3 2023 Form 10-Q 8
AVANTAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Less: Income from discontinued operations, net of income taxes | |||||||||||
| Income from continuing operations | |||||||||||
| Adjustments to reconcile income from continuing operations to net cash from operating activities: | |||||||||||
| Depreciation and amortization of acquired intangible assets | |||||||||||
| Stock-based compensation | |||||||||||
| Change in the fair value of acquisition-related contingent consideration | ( | ||||||||||
| Reduction of right-of-use lease assets | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Accretion of lease liabilities | |||||||||||
| Other non-cash items | |||||||||||
| Changes in operating assets and liabilities, net of acquisitions and disposals: | |||||||||||
| Accounts receivable, net | ( | ( | |||||||||
| Commissions and advisory fees receivable | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other long-term assets | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Commissions and advisory fees payable | ( | ||||||||||
| Lease liabilities | ( | ( | |||||||||
| Deferred revenue | ( | ( | |||||||||
| Accrued expenses and other current and long-term liabilities | ( | ( | |||||||||
| Net cash provided (used) by operating activities from continuing operations | ( | ||||||||||
| Investing activities: | |||||||||||
| Purchases of property, equipment, and software | ( | ( | |||||||||
| Asset acquisitions | ( | ( | |||||||||
| Net cash used by investing activities from continuing operations | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from credit facilities, net of debt discount and issuance costs | |||||||||||
| Payments on credit facilities | ( | ( | |||||||||
| Acquisition-related fixed and contingent consideration payments | ( | ( | |||||||||
| Stock repurchases | ( | ( | |||||||||
| Proceeds from issuance of stock through employee stock purchase plan | |||||||||||
| Proceeds from stock option exercises | |||||||||||
| Tax payments from shares withheld for equity awards | ( | ( | |||||||||
| Net cash used by financing activities from continuing operations | ( | ( | |||||||||
| Net cash used by continuing operations | ( | ( | |||||||||
| Net cash provided by operating activities from discontinued operations | |||||||||||
| Net cash provided (used) by investing activities from discontinued operations | ( | ||||||||||
| Net cash provided by financing activities from discontinued operations | |||||||||||
| Net cash provided by discontinued operations | |||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
See accompanying notes.
Avantax, Inc. | Q3 2023 Form 10-Q 9
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-intelligent wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting (“CPA”) firms. Our integrated tax-intelligent wealth management services consist of the operations of Avantax Wealth Management and Avantax Planning Partners.
Avantax Wealth Management provides tax-intelligent wealth management solutions for financial professionals, tax professionals, CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, which is a leading U.S. tax-focused independent broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries. 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-intelligent 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.
Merger Agreement
On September 9, 2023, Avantax entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Aretec Group, Inc., a Delaware corporation that does business as Cetera Holdings (“Parent”), and C2023 Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Acquisition Sub”) whereby Parent will acquire all of the issued and outstanding equity of Avantax in an all-cash transaction valuing Avantax at approximately $1.2 billion, inclusive of Avantax’s net debt. On the terms and subject to the conditions of the Merger Agreement, holders of shares of Avantax common stock (other than Excluded Shares and Dissenting Shares (each, as defined in the Merger Agreement)) will receive $26.00 per share in cash, without interest and less any required tax withholdings. Upon the closing of the transactions contemplated by the Merger Agreement, Avantax will operate as a privately-held company. The closing remains subject to customary closing conditions, including approval by Avantax’s stockholders. Avantax expects the closing to occur by the end of November 2023.
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 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 .
Avantax, Inc. | Q3 2023 Form 10-Q 10
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.
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. Other than below, there have been no significant changes in our significant accounting policies since December 31, 2022.
Derivative Financial Instruments
We primarily enter into derivative financial instruments as part of our strategy to manage our exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as an interest rate or index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. We do not enter into derivative instruments for any purpose other than hedging interest rate risk, and none of our derivative instruments are used for trading purposes.
We recognize derivatives as assets or liabilities on our consolidated balance sheets at their fair value in accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Currently, we have only designated derivative instruments as cash flow hedges. We may also enter into derivative contracts that are intended to economically hedge interest rate risk, even though hedge accounting does not apply, or we elect not to apply hedge accounting.
To qualify for hedge accounting, concurrent with the execution of a derivative contract, we formally document our risk management objective and strategy for undertaking the hedging transaction, how the hedging instrument is expected to hedge the designated risk related to the hedged item, and the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.
For derivatives designated as cash flow hedging instruments, changes in fair value are initially recorded net of tax in accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged transaction affects earnings. Additionally, changes in the fair value of amounts excluded from the assessment of effectiveness are recorded net of tax in accumulated other comprehensive income (loss) and recognized in earnings using a straight-line amortization method over the term of instrument. Changes in fair value for derivative contracts that do not qualify for hedge accounting (or for those that we elect to not apply hedge accounting), are immediately recognized within earnings. Realized and unrealized gains and losses for derivatives are presented in the statements of comprehensive income (loss) based on the nature and use of the instrument.
We prospectively discontinue hedge accounting if it is determined that the derivative is no longer effective in offsetting the designated risk of the hedged item, the derivative is terminated prior to maturity, or the occurrence of the forecasted transaction (for a cash flow hedge) is no longer probable. When hedge accounting for a cash flow hedge is discontinued, any subsequent changes in fair value of the derivative are recognized immediately in earnings. The cumulative unrealized gain or loss related to the discontinued hedge continues to be reported in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the same manner
Avantax, Inc. | Q3 2023 Form 10-Q 11
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 nine months ended September 30, 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 comprehensive income (loss).
The following table presents summarized information regarding certain components of income (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Interest expense and other, net | ( | ( | |||||||||||||||||||||
| Income (loss) from discontinued operations before gain on disposal and income taxes | ( | ||||||||||||||||||||||
| Pre-tax gain on disposal | |||||||||||||||||||||||
| Income (loss) from discontinued operations before income taxes | ( | ||||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | |||||||||||||||||||||
| Income (loss) from discontinued operations | $ | $ | ( | $ | $ | ||||||||||||||||||
Note 4: Revenue Recognition
Revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Recognized upon transaction: | |||||||||||||||||||||||
| Commission | $ | $ | $ | $ | |||||||||||||||||||
| Transaction and fee | |||||||||||||||||||||||
| Total revenue recognized upon transaction | $ | $ | $ | $ | |||||||||||||||||||
| Recognized over time: | |||||||||||||||||||||||
| Advisory | $ | $ | $ | $ | |||||||||||||||||||
| Commission | |||||||||||||||||||||||
| Asset-based | |||||||||||||||||||||||
| Transaction and fee | |||||||||||||||||||||||
| Total revenue recognized over time | $ | $ | $ | $ | |||||||||||||||||||
| Total revenue: | |||||||||||||||||||||||
| Advisory | $ | $ | $ | $ | |||||||||||||||||||
| Commission | |||||||||||||||||||||||
| Asset-based | |||||||||||||||||||||||
| Transaction and fee | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Avantax, Inc. | Q3 2023 Form 10-Q 12
Note 5: Asset Acquisitions
During the nine months ended September 30, 2023, we completed acquisitions that met the criteria to be accounted for as asset acquisitions. Total initial purchase consideration, including acquisition costs and fixed deferred payments, was $5.2 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.
Note 6: Debt
| September 30, 2023 | December 31, 2022 | ||||||||||
| Delayed Draw Term Loan Facility | |||||||||||
| Principal outstanding | $ | $ | |||||||||
| Unamortized debt issuance costs | ( | ||||||||||
| Unamortized debt discount | ( | ||||||||||
| Net carrying value | $ | $ | |||||||||
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. During the second quarter of 2023, we borrowed the remaining $100.0 million available 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 September 30, 2023, we had $266.6 million in principal amount outstanding under the Delayed Draw Term Loan Facility and no amounts outstanding under the Revolving Credit Facility. As of September 30, 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 2023. 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. | Q3 2023 Form 10-Q 13
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 September 30, 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 comprehensive income (loss).
During the nine months ended September 30, 2023, we began subleasing portions of our corporate headquarters in Dallas, Texas. These subleases were classified as operating leases at inception, with sublease income recognized on a straight-line basis over the five-year and ten-year respective sublease terms.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Fixed lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease cost | |||||||||||||||||||||||
| Operating lease cost, before sublease income | |||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||
| Total operating lease cost, net of sublease income | $ | $ | $ | $ | |||||||||||||||||||
| Additional lease information: | |||||||||||||||||||||||
| Cash paid on operating lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Lease liabilities obtained from new right-of-use assets | $ | $ | $ | $ | |||||||||||||||||||
Avantax, Inc. | Q3 2023 Form 10-Q 14
| September 30, 2023 | December 31, 2022 | ||||||||||
| Right-of-use assets, net | $ | $ | |||||||||
| Current lease liabilities | $ | $ | |||||||||
| Long-term lease liabilities | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Weighted-average remaining lease term (in years) | |||||||||||
| Weighted-average discount rate | % | % | |||||||||
| Undiscounted cash flows: | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total undiscounted cash flows | |||||
| Imputed interest | ( | ||||
| Present value of cash flows | $ | ||||
Note 8: Balance Sheet Components
| September 30, 2023 | December 31, 2022 | ||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Prepaid income taxes | |||||||||||
| Forgivable loans | |||||||||||
| Other current assets | |||||||||||
| Total prepaid expenses and other current assets | $ | $ | |||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Salaries and related benefit expenses | $ | $ | |||||||||
| Accrued legal costs | |||||||||||
| Accrued vendor and advertising costs | |||||||||||
| Accrued taxes | |||||||||||
| Accrued fixed and variable acquisition consideration | |||||||||||
| Accrued cash-settled stock-based compensation | |||||||||||
| Interest rate derivatives | |||||||||||
| Other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
Avantax, Inc. | Q3 2023 Form 10-Q 15
| September 30, 2023 | December 31, 2022 | ||||||||||
| Deferred compensation | $ | $ | |||||||||
| Accrued cash-settled stock-based compensation | |||||||||||
| Accrued tax positions | |||||||||||
| Interest rate derivatives | |||||||||||
| Other | |||||||||||
| Other long-term liabilities | $ | $ | |||||||||
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 applicable insurance policies will cover all or a substantial portion of any claims made by the Buyer under such indemnification obligations. The current carrying amount of the liability for these indemnification obligations is approximately $0.9 million as of September 30, 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 September 30, 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. | Q3 2023 Form 10-Q 16
Assets and Liabilities Measured on a Recurring Basis
| Fair value measurements at the reporting date using | |||||||||||||||||||||||
| September 30, 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 | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation assets | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate derivatives | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
| 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 | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation assets | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation liabilities | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
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.
We utilize a third-party pricing service to estimate the fair value of our derivative financial instruments. Fair value is estimated using industry standard valuation models that primarily rely on observable market inputs, including daily simple secured overnight financing rates (“SOFR”) overnight index swap rate curves, SOFR swap rate curves, and volatility. Credit valuation adjustments are incorporated in the fair values to reflect nonperformance risk for both the Company and our counterparties. Although we have determined that the majority of the inputs used to value these derivative instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads. We have determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, we have classified our derivative financial instruments in Level 2 of the fair value hierarchy.
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
Avantax, Inc. | Q3 2023 Form 10-Q 17
Note 11: Derivative Financial Instruments
We primarily enter into derivative financial instruments as part of our strategy to manage our exposure to changes in interest rates. Our objective in using interest rate derivatives is to reduce variability in the future cash flows we earn from our cash sweep program by limiting our exposure to changes in our contractually specified rate, which is primarily tied to the federal funds rate. To accomplish this objective, we currently utilize interest rate collar and interest rate cap derivative instruments. Our interest rate collar derivatives involve the payment of variable-rate amounts if interest rates rise above the cap strike rate on the contracts and receipts of fixed-rate amounts if interest rates fall below the floor strike rate on the contracts. Our interest rate cap derivatives involve the payment of variable-rate amounts if interest rates rise above the cap strike rate on the contracts. Our interest rate collar derivatives are designated and qualify as cash flow hedges, as defined in ASC 815. Our interest rate cap derivatives do not qualify for cash flow hedge accounting and are considered economic hedges. As of September 30, 2023, the total notional value of our interest rate derivatives represented approximately 65 % of the ending client cash balances in our cash sweep program.
We are exposed to credit risk in the event of nonperformance of counterparties for our derivative financial instruments. We manage concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and actively monitoring counterparty credit ratings. We also employ master netting arrangements which allow us to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative financial instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.
We recognize derivative financial instruments in the condensed consolidated financial statements at fair value regardless of the purpose or intent for holding the instruments. The following table presents the gross fair value of our derivative financial instruments as of September 30, 2023 and December 31, 2022 (in thousands):
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||||||||||||||||
| Derivatives designated as hedging instruments under ASC 815: | |||||||||||||||||||||||
Interest rate collars (1) | $ | $ | $ | $ | |||||||||||||||||||
| Total derivatives designated as hedging instruments under ASC 815 | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments under ASC 815: | |||||||||||||||||||||||
Interest rate caps (1) | |||||||||||||||||||||||
| Total derivatives not designated as hedging instruments under ASC 815 | |||||||||||||||||||||||
| Total derivatives | $ | $ | $ | $ | |||||||||||||||||||
Cash Flow Hedges of Interest Rate Risk
During the second quarter of 2023, we entered into two interest rate collar derivative contracts for a total notional value of $1.5 billion. Each contract is indexed to daily simple SOFR and is a combination of a purchased floor instrument with a strike rate of 2.5 % and a sold cap instrument with a strike rate of 5.5 %, both of which expire
Avantax, Inc. | Q3 2023 Form 10-Q 18
on May 31, 2026. The total cost for these interest rate collars was $15.3 million, which we elected to defer and will settle through monthly straight-line cash payments to the counterparties over the term of the instruments. This hedging strategy enables us to limit the downside risk of significant reductions to interest rates over the term of the instruments in exchange for capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
We designated these derivative instruments as cash flow hedges and determined that they are highly effective at achieving offsetting changes in cash flows attributable to interest rate fluctuations associated with our cash sweep program. The changes in fair value of the effective portion of these derivative instruments are initially recorded net of tax in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. These accumulated gains or losses are reclassified into “Revenue” (where the hedged transaction is recorded) on the condensed consolidated statements of comprehensive income (loss) when the hedged transaction affects earnings. We have elected to exclude the change in fair value of these derivative instruments attributable to the passage of time from the assessment of hedge effectiveness. Changes in the fair value of amounts excluded from the assessment of effectiveness are recorded net of tax in accumulated other comprehensive income (loss) and recognized as a reduction to “Revenue” on the condensed consolidated statements of comprehensive income (loss) using a straight-line amortization method over the term of the instruments.
| Gain (Loss) Recognized in OCI | Gain (Loss) Recognized in Income | ||||||||||||||||||||||||||||
| Three Months Ended | September 30, 2023 | September 30, 2022 | Location of Gain (Loss) Recognized in Income | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||
| Interest rate collars, net of tax | $ | ( | $ | Revenue | $ | ( | $ | ||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||
| Interest rate collars, net of tax | $ | ( | $ | Revenue | $ | ( | $ | ||||||||||||||||||||||
As of September 30, 2023, we estimate that $4.9 million of the deferred amounts recorded in accumulated other comprehensive income (loss) for our cash flow hedges will be reclassified into earnings within the next twelve months.
Gains and losses on our cash flow hedges are net of income tax benefit of $0.3 million and $4.2 million for the three and nine months ended September 30, 2023, respectively. Cash flows from these derivative instruments are included within operating activities in the condensed consolidated statements of cash flows, as our accounting policy is to present cash flows from hedging instruments in the same category as the item being hedged.
Economic Hedges of Interest Rate Risk
We also utilize interest rate cap derivatives to manage our economic exposure to interest rate movements which do not meet the hedge accounting requirements of ASC 815. During the second quarter of 2023, we sold two interest rate cap derivative contracts for a total notional value of $240.0 million. Each contract is indexed to daily simple SOFR, has a strike rate of 5.5 %, and expires on May 31, 2026. These interest rate caps were sold for a total premium of $1.2 million, which were deferred and will be settled by the counterparties through monthly straight-line cash payments over the term of the instruments. This hedging strategy enables us to offset a portion of the total cost of our interest rate collar derivatives by capping the amount of our future cash flows that may be received from our cash sweep program for the comparable notional amount hedged.
These derivative instruments are not designated for hedge accounting treatment, therefore, realized and unrealized gains or losses on the instruments are immediately recognized within “Interest expense and other, net” on the condensed consolidated statements of comprehensive income (loss). Cash flows from these derivative instruments are included within operating activities in the condensed consolidated statements of cash flows.
Avantax, Inc. | Q3 2023 Form 10-Q 19
| Gain (Loss) Recognized in Income | |||||||||||||||||
| Three Months Ended | Location of Gain (Loss) Recognized in Income | September 30, 2023 | September 30, 2022 | ||||||||||||||
| Interest rate caps | Interest expense and other, net | $ | $ | ||||||||||||||
| Nine Months Ended | |||||||||||||||||
| Interest rate caps | Interest expense and other, net | $ | ( | $ | |||||||||||||
Accumulated Other Comprehensive Income (Loss)
The table below presents a roll forward of the amounts included in accumulated other comprehensive income (loss), net of taxes, for the three and nine months ended September 30, 2023 (in thousands):
| Interest Rate Collars | Deferred Taxes | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ||||||||||||||
| Balance as of March 31, 2023 | |||||||||||||||||
| Changes in fair value | ( | ( | |||||||||||||||
| Reclassification to earnings | ( | ||||||||||||||||
| Balance as of June 30, 2023 | ( | ( | |||||||||||||||
| Changes in fair value | ( | ( | |||||||||||||||
| Reclassification to earnings | ( | ||||||||||||||||
| Balance as of September 30, 2023 | $ | ( | $ | $ | ( | ||||||||||||
Note 12: 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 September 30, 2023, we repurchased approximately 0.4 million shares of our common stock under the stock repurchase authorization for aggregate purchase consideration of approximately $9.1 million. For the nine months ended September 30, 2023, we repurchased approximately 3.5 million shares of
Avantax, Inc. | Q3 2023 Form 10-Q 20
our common stock under the stock repurchase authorization for aggregate purchase consideration of approximately $85.0 million. The remaining authorized amount under the stock repurchase authorization as of September 30, 2023, was approximately $115.0 million.
For the three months ended September 30, 2022, we did not repurchase any shares of our common stock under our previous stock repurchase plan. For the nine months ended September 30, 2022, we repurchased approximately 1.9 million shares of our common stock under our previous stock repurchase plan for aggregate purchase consideration of approximately $35.0 million.
Note 13: Interest Expense and Other, Net
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Interest expense | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt issuance costs | |||||||||||||||||||||||
| Amortization of debt discount | |||||||||||||||||||||||
| Total interest expense | |||||||||||||||||||||||
| Interest income and other | ( | ||||||||||||||||||||||
| Transition services agreement income | ( | ( | |||||||||||||||||||||
| Derivative losses (gains) - interest rate caps | ( | ||||||||||||||||||||||
| Interest expense and other, net | $ | $ | $ | $ | |||||||||||||||||||
Note 14: 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. 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 benefit of $1.1 million and income tax expense of $0.5 million for the three and nine months ended September 30, 2023, respectively. Our effective income tax rate for the three and nine months ended September 30, 2023 differed from the 21% statutory rate primarily due to non-deductible compensation and the effect of state taxes.
Note 15: Net Income 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
Avantax, Inc. | Q3 2023 Form 10-Q 21
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):