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, 2020

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

Blucora, Inc.

(Exact name of registrant as specified in its charter)

Delaware	91-1718107
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3200 Olympus Blvd, Suite 100, Dallas, Texas 75019

(Address of principal executive offices) (Zip Code)

(972) 870-6400

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	BCOR	NASDAQ Global Select Market

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

As of November 2, 2020, 48,043,723 shares of the registrant’s Common Stock were outstanding.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION		Page
Item 1.	Financial Statements	5
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Unaudited Condensed Consolidated Statements of Stockholders' Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
Signatures		57

This report includes some of the trademarks, trade names, and service marks of Blucora, Inc. (referred to throughout this report as “Blucora,” the “Company,” “we,” “us,” or “our”), including Blucora, Avantax Wealth Management, HD Vest, 1st Global, HKFS, TaxAct, Tax-Smart Investing, Capital Gains Analyzer, Tax-Loss Harvester, and Social Security Planner. 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 document.

Blucora, Inc. | Q3 2020 Form 10-Q 2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

•the impact of the coronavirus pandemic on our results of operations and our business, including the impact of the resulting economic and market disruption, the extension of tax filing deadlines, and other related relief;

•our ability to effectively compete within our industry;

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

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

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

•downgrade of the Company’s credit ratings;

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

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

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

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

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

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

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

•the compromising of confidentiality, availability or integrity of information, including cyberattacks;

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

•risks related to goodwill and other intangible asset impairment;

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

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

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

Blucora, Inc. | Q3 2020 Form 10-Q 3

•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;

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

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

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

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, 2019, as supplemented by those identified under Part II, Item 1A, “Risk Factors” and elsewhere in this Form 10-Q, as well as in our other filings with the SEC. All forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation and do not intend to update or revise any forward-looking statement to reflect new information, events, or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.

Blucora, Inc. | Q3 2020 Form 10-Q 4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	151,166	$	80,820
Cash segregated under federal or other regulations	203		5,630
Accounts receivable, net of allowance	12,191		16,266
Commissions receivable	22,656		21,176
Other receivables	5,811		2,902
Prepaid expenses and other current assets, net	9,428		12,349
Total current assets	201,455		139,143
Long-term assets:
Property and equipment, net	53,940		18,706
Right-of-use assets, net	24,028		10,151
Goodwill, net	449,221		662,375
Other intangible assets, net	331,014		290,211
Deferred tax asset, net	—		9,997
Other long-term assets	4,093		6,989
Total long-term assets	862,296		998,429
Total assets	$	1,063,751	$	1,137,572
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,464	$	10,969
Commissions and advisory fees payable	16,893		19,905
Accrued expenses and other current liabilities	42,815		36,144
Deferred revenue—current	4,281		12,014
Lease liabilities—current	1,552		3,272
Current portion of long-term debt, net	1,782		11,228
Total current liabilities	73,787		93,532
Long-term liabilities:
Long-term debt, net	552,417		381,485
Deferred tax liability, net	12,802		—
Deferred revenue—long-term	6,478		7,172
Lease liabilities—long-term	36,973		5,916
Other long-term liabilities	22,150		5,952
Total long-term liabilities	630,820		400,525
Total liabilities	704,607		494,057
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, par value $0.0001 per share—900,000 authorized shares; 49,350 shares issued and 48,044 shares outstanding at September 30, 2020; 49,059 shares issued and 47,753 shares outstanding at December 31, 2019	5		5
Additional paid-in capital	1,594,384		1,586,972
Accumulated deficit	(1,206,846)		(914,791)
Accumulated other comprehensive loss	—		(272)
Treasury stock, at cost—1,306 shares at September 30, 2020 and December 31, 2019	(28,399)		(28,399)
Total stockholders’ equity	359,144		643,515
Total liabilities and stockholders’ equity	$	1,063,751	$	1,137,572

See accompanying notes to unaudited condensed consolidated financial statements.

Blucora, Inc. | Q3 2020 Form 10-Q 5

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Revenue:
Wealth management services revenue	$	135,932	$	145,428	$	396,805	$	362,791
Tax preparation services revenue	39,421		3,588		202,990		205,733
Total revenue	175,353		149,016		599,795		568,524
Operating expenses:
Cost of revenue:
Wealth management services cost of revenue	96,122		102,030		282,332		250,881
Tax preparation services cost of revenue	2,692		1,633		9,759		8,983
Total cost of revenue	98,814		103,663		292,091		259,864
Engineering and technology	6,007		8,635		21,899		22,323
Sales and marketing	31,018		19,976		150,785		104,804
General and administrative	18,605		19,642		63,533		55,721
Acquisition and integration	10,276		6,759		18,782		17,739
Depreciation	1,874		1,470		5,345		3,846
Amortization of other acquired intangible assets	7,746		10,082		22,167		27,295
Impairment of goodwill and an intangible asset	—		50,900		270,625		50,900
Total operating expenses	174,340		221,127		845,227		542,492
Operating income (loss)	1,013		(72,111)		(245,432)		26,032
Other loss, net	(11,963)		(2,606)		(23,386)		(11,682)
Income (loss) before income taxes	(10,950)		(74,717)		(268,818)		14,350
Income tax benefit (expense)	(15,256)		12,331		(23,237)		16,470
Net income (loss) attributable to Blucora, Inc.	$	(26,206)	$	(62,386)	$	(292,055)	$	30,820
Net income (loss) per share attributable to Blucora, Inc.:
Basic	$	(0.55)	$	(1.28)	$	(6.09)	$	0.64
Diluted	$	(0.55)	$	(1.28)	$	(6.09)	$	0.62
Weighted average shares outstanding:
Basic	48,039		48,652		47,936		48,456
Diluted	48,039		48,652		47,936		49,596
Comprehensive income (loss):
Net income (loss)	$	(26,206)	$	(62,386)	$	(292,055)	$	30,820
Other comprehensive income (loss)	—		(64)		272		174
Comprehensive income (loss) attributable to Blucora, Inc.	$	(26,206)	$	(62,450)	$	(291,783)	$	30,994

See accompanying notes to unaudited condensed consolidated financial statements.

Blucora, Inc. | Q3 2020 Form 10-Q 6

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

	Redeemable Noncontrolling Interests					Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive loss
			Common stock									Treasury stock
			Shares	Amount								Shares	Amount		Total
Balance as of December 31, 2019	$	—	49,059	$	5	$	1,586,972	$	(914,791)	$	(272)	(1,306)	$	(28,399)	$	643,515
Common stock issued for stock options and restricted stock units	—		89	—		—		—		—		—	—		—
Stock-based compensation	—		—	—		(1,201)		—		—		—	—		(1,201)
Tax payments from shares withheld for equity awards	—		—	—		(917)		—		—		—	—		(917)
Cumulative translation adjustment	—		—	—		—		—		272		—	—		272
Net loss	—		—	—		—		(315,494)		—		—	—		(315,494)
Balance as of March 31, 2020	$	—	49,148	$	5	$	1,584,854	$	(1,230,285)	$	—	(1,306)	$	(28,399)	$	326,175
Common stock issued for stock options, restricted stock units, and employee stock purchase plan	—		192	—		1,226		—		—		—	—		1,226
Stock-based compensation	—		—	—		3,904		—		—		—	—		3,904
Tax payments from shares withheld for equity awards	—		—	—		(89)		—		—		—	—		(89)
Net income	—		—	—		—		49,645		—		—	—		49,645
Balance as of June 30, 2020	$	—	49,340	$	5	$	1,589,895	$	(1,180,640)	$	—	(1,306)	$	(28,399)	$	380,861
Common stock issued for stock options and restricted stock units	—		10	—		—		—		—		—	—		—
Stock-based compensation	—		—	—		4,517		—		—		—	—		4,517
Tax payments from shares withheld for equity awards	—		—	—		(28)		—		—		—	—		(28)
Net loss	—		—	—		—		(26,206)		—		—	—		(26,206)
Balance as of September 30, 2020	$	—	49,350	$	5	$	1,594,384	$	(1,206,846)	$	—	(1,306)	$	(28,399)	$	359,144

Blucora, Inc. | Q3 2020 Form 10-Q 7

	Redeemable Noncontrolling Interests		Common stock			Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive loss		Treasury stock
			Shares	Amount								Shares	Amount		Total
Balance as of December 31, 2018	$	24,945	48,044	$	5	$	1,569,725	$	(961,689)	$	(446)	—	$	—	$	607,595
Common stock issued for stock options and restricted stock units	—		211	—		283		—		—		—	—		283
Stock-based compensation	—		—	—		2,443		—		—		—	—		2,443
Tax payments from shares withheld for equity awards	—		—	—		(2,425)		—		—		—	—		(2,425)
Reclassification of mandatorily redeemable noncontrolling interests	(22,428)		—	—		—		—		—		—	—		—
Impact of adoption of new leases accounting standard	—		—	—		—		(1,636)		—		—	—		(1,636)
Cumulative translation adjustment	—		—	—		—		—		107		—	—		107
Net income	—		—	—		—		62,170		—		—	—		62,170
Balance as of March 31, 2019	$	2,517	48,255	$	5	$	1,570,026	$	(901,155)	$	(339)	—	$	—	$	668,537
Common stock issued for stock options, restricted stock units, and employee stock purchase plan	—		524	—		4,181		—		—		—	—		4,181
Stock-based compensation	—		—	—		4,082		—		—		—	—		4,082
Tax payments from shares withheld for equity awards	—		—	—		(2,735)		—		—		—	—		(2,735)
Redemption of noncontrolling interests	(2,517)		—	—		—		—		—		—	—		—
Cumulative translation adjustment	—		—	—		—		—		131		—	—		131
Net income	—		—	—		—		31,036		—		—	—		31,036
Balance as of June 30, 2019	$	—	48,779	$	5	$	1,575,554	$	(870,119)	$	(208)	—	$	—	$	705,232
Common stock issued for stock options and restricted stock units	—		116	—		491		—		—		—	—		491
Stock-based compensation	—		—	—		4,639		—		—		—	—		4,639
Tax payments from shares withheld for equity awards	—		—	—		(348)		—		—		—	—		(348)
Stock repurchases	—		—	—		—		—		—		(561)	(12,718)		(12,718)
Cumulative translation adjustment	—		—	—		—		—		(64)		—	—		(64)
Net income (loss)	—		—	—		—		(62,386)		—		—	—		(62,386)
Balance as of September 30, 2019	$	—	48,895	$	5	$	1,580,336	$	(932,505)	$	(272)	(561)	$	(12,718)	$	634,846

See accompanying notes to unaudited condensed consolidated financial statements.

Blucora, Inc. | Q3 2020 Form 10-Q 8

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine months ended September 30,
	2020		2019
Operating activities:
Net income (loss)	$	(292,055)	$	30,820
Adjustments to reconcile net income (loss) to net cash from operating activities:
Stock-based compensation	7,220		11,164
Depreciation and amortization of acquired intangible assets	29,619		32,078
Impairment of goodwill and an intangible asset	270,625		50,900
Reduction of right-of-use lease assets	8,335		3,117
Deferred income taxes	23,199		(23,343)
Amortization of debt issuance costs	1,006		848
Accretion of debt discounts	414		189
Gain on sale of a business	(349)		(3,256)
Change in fair value of acquisition-related contingent consideration	(1,000)		—
Accretion of lease liability	1,413		460
Other	984		48
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable	12,267		352
Commissions receivable	(1,480)		(19)
Other receivables	(2,909)		(18)
Prepaid expenses and other current assets	2,555		13,828
Other long-term assets	2,763		497
Accounts payable	(7,018)		(2,346)
Commissions and advisory fees payable	(3,012)		(602)
Lease liabilities	(3,568)		(3,371)
Deferred revenue	(8,582)		(21,694)
Accrued expenses and other current and long-term liabilities	(5,113)		6,595
Net cash provided by operating activities	35,314		96,247
Investing activities:
Business acquisition, net of cash acquired	(102,425)		(166,561)
Purchases of property and equipment	(28,711)		(6,887)
Proceeds from sale of a business, net of cash	349		7,467
Net cash used by investing activities	(130,787)		(165,981)
Financing activities:
Proceeds from credit facilities	226,278		121,489
Payments on credit facilities	(66,078)		—
Stock repurchases	—		(11,968)
Payment of redeemable noncontrolling interests	—		(24,945)
Proceeds from stock option exercises	25		3,811
Proceeds from issuance of stock through employee stock purchase plan	1,201		1,144
Tax payments from shares withheld for equity awards	(1,034)		(5,508)
Contingent consideration payments for business acquisition	—		(943)
Net cash provided by financing activities	160,392		83,080
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	—		38
Net increase in cash, cash equivalents, and restricted cash	64,919		13,384
Cash, cash equivalents, and restricted cash, beginning of period	86,450		85,366
Cash, cash equivalents, and restricted cash, end of period	$	151,369	$	98,750
Supplemental cash flow information:
Accrued stock repurchases	$	—	$	750
Cash paid for income taxes	$	1,657	$	3,154
Cash paid for interest	$	16,994	$	13,901
Non-cash investing activities:
Purchases of property and equipment through leasehold incentives (investing)	$	9,726	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

Blucora, Inc. | Q3 2020 Form 10-Q 9

BLUCORA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of the Business

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

Wealth Management

The Wealth Management business consists of the operations of Avantax Wealth Management (“Avantax”) and HKFS (defined below) (collectively, the “Wealth Management business” or the “Wealth Management segment”).

Avantax provides tax-focused wealth management solutions for financial professionals, tax preparers, certified public accounting firms, and their clients. Avantax offers its services through its registered broker-dealer, registered investment advisor (“RIA”), and insurance agency subsidiaries and is the largest U.S. tax-focused independent broker-dealer. Avantax works with a nationwide network of financial professionals that operate as independent contractors. Avantax provides these financial professionals with an integrated platform of technical, practice, and product support tools to assist in making each financial professional a comprehensive financial service center for his or her clients. Avantax formerly operated under the HD Vest and 1st Global brands prior to the rebranding of the Wealth Management business to Avantax Wealth Management in 2019.

On July 1, 2020, we acquired all of the issued and outstanding common stock of Honkamp Krueger Financial Services, Inc. (“HKFS,” and such acquisition, the “HKFS Acquisition”). HKFS operates as a captive, or employee-based, RIA and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic planning and financial advisory services. The operations of HKFS are included in operating results as part of the Wealth Management segment from the date of the HKFS Acquisition. For additional information, see "Note 3—Acquisitions."

Tax Preparation

The Tax Preparation business consists of the operations of TaxAct, Inc. (“TaxAct,” the “Tax Preparation business,” or the “Tax Preparation segment”) and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com.

The Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue typically earned in the first four months of the fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue. In March 2020 and as a result of the coronavirus pandemic, the Internal Revenue Service (“IRS”) extended the filing deadline for federal tax returns from April 15, 2020 to July 15, 2020. This filing extension resulted in the shifting of a significant portion of Tax Preparation segment revenue that is usually earned in the first and second quarters of 2020 to the third quarter of 2020. In addition, sales and marketing expenses were elevated for the nine months ended September 30, 2020.

Segments

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

Note 2: Summary of Significant Accounting Policies

Interim financial information

The accompanying condensed consolidated financial statements have been prepared by us under the rules and regulations of the Securities and Exchange Commission (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 consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in conformity with United States generally accepted accounting principles (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These

Blucora, Inc. | Q3 2020 Form 10-Q 10

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, 2019. Interim results are not necessarily indicative of results for a full year.

Cash, cash equivalents, and restricted cash

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

	September 30, 2020		December 31, 2019
Cash and cash equivalents	$	151,166	$	80,820
Cash segregated under federal or other regulations	203		5,630
Total cash, cash equivalents, and restricted cash	$	151,369	$	86,450

We generally invest our available cash in high-quality marketable investments, which primarily consist of investments in money market funds invested in securities issued by agencies of the U.S. government. We may invest, from time-to-time, in other vehicles, such as debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly held corporations, as well as commercial paper and insured time deposits with commercial banks. Specific holdings can vary from period to period depending upon our cash requirements. Such investments are reported at fair value on the consolidated balance sheets.

Cash segregated under federal and other regulations is held in a separate bank account for the exclusive benefit of our Wealth Management business clients and is considered restricted cash.

Business combinations

We account for business combinations using the acquisition method.

Under the acquisition method, the purchase price of the HKFS Acquisition has been allocated to HKFS’s acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the HKFS Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The most subjective areas of the acquisition accounting method included determining the fair value of the following:

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

•contingent consideration, including the valuation methodology, estimates of future advisory asset levels, discount rates, growth rates, and volatility levels; and

•goodwill, as measured as the excess of consideration transferred over the acquisition date fair value of the assets acquired, including the amount assigned to identifiable intangible assets, and the liabilities assumed.

Our assumptions and estimates are based upon comparable market data and information obtained from the management of HKFS.

Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Our reporting units are consistent with our reportable segments, and accordingly, the goodwill acquired from HKFS was assigned to the Wealth Management reporting unit. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Recently adopted accounting pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”). We consider the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either

Blucora, Inc. | Q3 2020 Form 10-Q 11

not applicable or are expected to have minimal impact on our consolidated financial position and results of operations. We have recently adopted the ASUs described below.

Measurement of Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes how entities account for credit losses of financial assets measured at amortized cost. ASU 2016-13 requires financial assets measured at amortized cost to be presented on the balance sheet at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. ASU 2016-13 replaces the previous “incurred loss” model with a “current expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including the interim periods within those fiscal years. Entities must apply ASU 2016-13 using a modified-retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which ASU 2016-13 is effective.

We adopted ASU 2016-13 effective January 1, 2020. Our financial assets within the scope of ASU 2016-13 primarily consisted of our commissions receivable and accounts receivable. While we have implemented the current expected credit loss model and assessed the impact of this new model on our in-scope financial assets, the adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements and did not result in a cumulative-effect adjustment to retained earnings as of January 1, 2020.

Goodwill. In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating the previously applicable step two from the goodwill impairment test. Under the amended guidance of ASU 2017-04, when required to test goodwill for recoverability, an entity will perform its goodwill impairment test by comparing the fair value of the reporting unit to its carrying value and recognizing an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and entities must apply ASU 2017-04 on a prospective basis.

We adopted ASU 2017-04 effective January 1, 2020 and applied this new guidance to the goodwill impairment test we performed as of March 31, 2020. For more information on this impairment test, see “Note 5—Goodwill and Other Intangible Assets.”

Note 3: Acquisitions

HKFS Acquisition

On July 1, 2020, we closed the HKFS Acquisition for an upfront cash purchase price of $104.4 million, which was paid with a portion of the proceeds from the $175.0 million increase in the Term Loan (as defined in "Note 6—Debt"). The purchase price is subject to customary adjustment and two potential post-closing earn-out payments (the “HKFS Contingent Consideration”) by us.

The amount of the HKFS Contingent Consideration is determined based on advisory asset levels and the achievement of certain performance goals (i) for the period beginning on July 1, 2020 and ending on July 1, 2021 and (ii) for the period beginning on July 1, 2021 and ending on July 1, 2022. Pursuant to the Stock Purchase Agreement, dated as of January 6, 2020, by and among the Company, HKFS, the selling stockholders named therein (the “Sellers”), and JRD Seller Representative, LLC, as the Sellers’ representative, as amended, the maximum aggregate amount that we would be required to pay for each earn-out period is $30.0 million, provided that any unearned amounts during the first earn-out period may also be earned during the second earn-out period. If the asset values on the applicable measurement date fall below certain specified thresholds, we would not be required to make any earn-out payment to the Sellers for such period. On the HKFS Acquisition date, the fair value of the HKFS Contingent Consideration was $27.6 million. We recorded the short-term and long-term portions of the HKFS Contingent Consideration in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, on the consolidated balance sheet. Subsequent to the HKFS Acquisition date, the HKFS Contingent Consideration is remeasured to an estimated fair value at each reporting date until the contingency is resolved. As of September 30, 2020, the fair value of the HKFS Contingent Consideration was $26.6 million. Changes in estimated fair value are recognized in “Acquisition and integration” expenses on the condensed consolidated

Blucora, Inc. | Q3 2020 Form 10-Q 12

statements of comprehensive income (loss) in the period in which they occur. For additional information on the HKFS Contingent Consideration, see "Note 9—Fair Value Measurements."

The purchase price of the HKFS Acquisition was allocated to HKFS’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values at the time of the HKFS Acquisition. The preliminary fair value of assets acquired and liabilities assumed in the HKFS Acquisition were as follows (in thousands):

	Purchase Price Allocation at HKFS Acquisition Date
Assets acquired:
Tangible assets acquired, including cash of $1,980 (1)	15,517
Identifiable intangible assets	62,970
Goodwill	58,137
Liabilities assumed	(5,134)
Total assets acquired and liabilities assumed	$	131,490
Cash paid at HKFS Acquisition date	$	104,404
Adjustment receivable	(514)
HKFS Contingent Consideration	27,600
Total purchase price	$	131,490

__________________________

(1)Included in tangible assets acquired were accounts receivable of $7.8 million, which primarily consisted of advisory fees receivable. As an insignificant amount of these receivables was expected to be uncollectible, the acquired amount approximates the fair value of the accounts receivable.

The identifiable intangible assets were as follows (in thousands, except as otherwise indicated):

	Estimated Fair Value		Accumulated Amortization through September 30, 2020		Useful Life at HKFS Acquisition Date (in months)
Customer relationships	$	58,400	$	973	180
CPA firm relationships	4,070		68		180
Trade name	500		42		36
Total identified intangible assets	$	62,970	$	1,083	179

For both the three and nine months ended September 30, 2020, we recognized amortization expenses related to acquired intangible assets of HKFS of $1.1 million in “Amortization of other acquired intangible assets” on the consolidated statements of comprehensive income (loss).

The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill in the amount of $58.1 million. Goodwill consists largely of the cost, revenue, and marketing synergies expected from incorporating HKFS into our existing Wealth Management business. These synergies include, but are not limited to, increased scale, enhanced capabilities, and an integrated platform. All of the acquired goodwill recognized is expected to be deductible for income tax purposes.

The preliminary estimates of the net assets acquired were based upon preliminary calculations and valuations. Due to the recent timing of the HKFS Acquisition, those estimates and assumptions are subject to change as we obtain additional information for those estimates during the measurement period (up to one year from the HKFS Acquisition date).

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We have incurred inception-to-date transaction costs related to the HKFS Acquisition of $10.6 million, of which $4.7 million and $7.5 million were recognized for the three and nine months ended September 30, 2020, respectively. In addition, we have incurred inception-to-date integration costs of $1.7 million, of which $0.8 million and $1.7 million were recognized for the three and nine months ended September 30, 2020, respectively. In addition, we recognized a $1.0 million gain related to the fair value change of the HKFS Contingent Consideration liability for the three and nine months ended September 30, 2020. These transaction and integration costs were recognized as “Acquisition and integration” expense on the consolidated statements of comprehensive income (loss).

The operations of HKFS are included in operating results as part of the Wealth Management segment from the date of the HKFS Acquisition. From the date of the HKFS Acquisition, HKFS contributed $9.2 million of revenue and $2.0 million of income before income taxes to our consolidated results.

Pro forma financial information of the HKFS Acquisition

The financial information in the table below summarizes the combined results of operations of Blucora and HKFS, on a pro forma basis, for the three and nine months ended September 30, 2020 and 2019. The pro forma results are presented as if the HKFS Acquisition had occurred on January 1, 2019 and includes adjustments for amortization expense on the definite-lived intangible assets identified in the HKFS Acquisition, debt-related expenses associated with the Term Loan increase used to finance the HKFS Acquisition, acquisition and integration costs related to the HKFS Acquisition, the removal of historic interest expense for debt issuances of HKFS that were not assumed in the HKFS Acquisition, and the reduction of historic cost of revenue associated with fee-sharing arrangements that did not continue after the HKFS Acquisition. In addition, income taxes were also adjusted for the pro forma results of the combined entity.

The following pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the HKFS Acquisition occurred on January 1, 2019 (amounts in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Revenue	$	175,353	$	157,358	$	615,934	$	592,375
Net income (loss)	(18,114)		(63,510)		(282,551)		18,761

1st Global Acquisition

On May 6, 2019, we closed the acquisition of all of the issued and outstanding common stock of 1st Global, Inc. and 1st Global Insurance Services, Inc. (together, “1st Global”), a tax-focused wealth management company, for a cash purchase price of $180.0 million (the “1st Global Acquisition”). The operations of 1st Global are included in our operating results as part of the Wealth Management segment from the date of the 1st Global Acquisition.

The purchase price was allocated to 1st Global’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values at the time of the 1st Global Acquisition.

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The fair values of assets acquired and liabilities assumed in the 1st Global Acquisition were as follows (in thousands):

	Purchase Price Allocation at December 31, 2019		Purchase Price Allocation Adjustments Since December 31, 2019		Final Purchase Price Allocation
Assets acquired:
Tangible assets acquired, including cash of $12,389	$	38,413	$	—	$	38,413
Goodwill	117,792		(666)		117,126
Identifiable intangible assets	83,980		—		83,980
Liabilities assumed:
Contingent liability	(11,052)		—		(11,052)
Deferred revenues	(17,715)		—		(17,715)
Other current liabilities	(12,956)		281		(12,675)
Deferred tax liabilities, net	(18,462)		385		(18,077)
Total assets acquired and liabilities assumed	$	180,000	$	—	$	180,000

Subsequent to December 31, 2019, we adjusted the fair values of goodwill, other current liabilities, and deferred tax liabilities, net, due to the pre-acquisition 1st Global tax returns that were filed in the first quarter of 2020. As one year has elapsed since the 1st Global Acquisition date, the measurement period for the 1st Global Acquisition has ended, and the purchase price allocation is considered final.

As part of the 1st Global Acquisition, we assumed a contingent liability related to a regulatory inquiry and recorded the contingent liability as part of the opening balance sheet. While the inquiry is still on-going, we evaluated a range of possible losses, resulting in a contingent liability reserve balance (including accrued interest) of $11.3 million at September 30, 2020.

Note 4: Segment Information and Revenues

We have two reportable segments: (1) the Wealth Management segment and (2) the Tax Preparation segment. Our Chief Executive Officer is the chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.

We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of intangible assets, acquisition and integration costs, executive transition costs, headquarters relocation costs, or impairment of goodwill and an intangible asset to the reportable segments. Such amounts are reflected in the table below under the heading “Corporate-level activity.” In addition, we do not allocate other loss, net, or income taxes to the reportable segments. We do not report assets or capital expenditures by segment to the chief operating decision maker.

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

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Revenue:
Wealth Management	$	135,932	$	145,428	$	396,805	$	362,791
Tax Preparation	39,421		3,588		202,990		205,733
Total revenue	175,353		149,016		599,795		568,524
Operating income (loss):
Wealth Management	17,498		20,631		51,827		49,150
Tax Preparation	16,234		(12,075)		60,646		108,565
Corporate-level activity	(32,719)		(80,667)		(357,905)		(131,683)
Total operating income (loss)	1,013		(72,111)		(245,432)		26,032
Other loss, net	(11,963)		(2,606)		(23,386)		(11,682)
Income tax benefit (expense)	(15,256)		12,331		(23,237)		16,470
Net income (loss) attributable to Blucora, Inc.	$	(26,206)	$	(62,386)	$	(292,055)	$	30,820

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

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Wealth Management:
Advisory	$	82,612	$	75,579	$	227,672	$	176,746
Commission	44,921		52,623		135,337		137,851
Asset-based	4,351		13,618		18,911		36,530
Transaction and fee	4,048		3,608		14,885		11,664
Total Wealth Management revenue	$	135,932	$	145,428	$	396,805	$	362,791
Tax Preparation:
Consumer	$	38,482	$	4,280	$	186,724	$	190,908
Professional	939		(692)		16,266		14,825
Total Tax Preparation revenue	$	39,421	$	3,588	$	202,990	$	205,733

Wealth Management revenue recognition

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