10-K 1 d634729d10k.htm 10-K 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

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

 

For the fiscal year ended December 31, 2013

 

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)

 

(IRS Employer

Identification No.)

 

10900 NE 8th Street, Suite 800, Bellevue, Washington 98004

(Address of principal executive offices) (Zip code)

 

Registrant’s telephone number, including area code:

(425) 201-6100

 

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

 

Title of each class   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

(Title of Class)

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  ¨

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  x

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. Yes  x  No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

Large accelerated filer x  

  Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨
    (Do not check if a smaller reporting company)  

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

The aggregate market value of the Common Stock held by non-affiliates of the registrant outstanding as of June 30, 2013, based upon the closing price of Common Stock on June 30, 2013 as reported on the NASDAQ Global Select Market, was $722.3 million. Common Stock held by each officer and director (or his or her affiliate) has been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 21, 2014, 42,187,983 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the definitive proxy statement to be filed by the registrant in connection with the 2014 Annual Meeting of Stockholders (the “Proxy Statement”).


Table of Contents

TABLE OF CONTENTS

 

Part I

    

Item 1.

  Business      3   

Item 1A.

  Risk Factors      9   

Item 1B.

  Unresolved Staff Comments      29   

Item 2.

  Properties      29   

Item 3.

  Legal Proceedings      29   

Item 4.

  Mine Safety Disclosures      29   

Part II

    

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     30   

Item 6.

  Selected Financial Data      31   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      59   

Item 8.

  Financial Statements and Supplementary Data      60   

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      101   

Item 9A.

  Controls and Procedures      101   

Item 9B.

  Other Information      103   

Part III

    

Item 10.

  Directors, Executive Officers and Corporate Governance      104   

Item 11.

  Executive Compensation      104   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     104   

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      104   

Item 14.

  Principal Accounting Fees and Services      104   

Part IV

    

Item 15.

  Exhibits, Financial Statement Schedules      105   

Signatures

  

 

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This report contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipate,“believe,“plan,“expect,“future,“intend,“may,“will,“should,“estimate,“predict,“potential,“continue,” and similar expressions identify forward-looking statements, but the absence of these words does not mean that the statement is not forward-looking. These forward-looking statements include, but are not limited to, statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our plans to expand, develop, or acquire particular operations or businesses; and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.

 

Forward-looking statements 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, those identified under Item 1A, “Risk Factors,” and elsewhere in this report. You should not rely on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We do not undertake any obligation to update any forward-looking statement to reflect new information, events, or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.

 

PART I

 

ITEM 1. Business

 

Overview

 

Blucora, Inc. (the “Company,” “Blucora,” or “we”) was founded in 1996 and incorporated in the state of Delaware. The Company was named InfoSpace, Inc. prior to a name change in June 2012. Our principal corporate office is located in Bellevue, Washington. Our common stock is listed on the NASDAQ Global Select Market under the symbol “BCOR.”

 

Blucora, Inc. operates a diverse group of Internet businesses. Our search business, InfoSpace, provides search services to distribution partners’ web properties as well as to its owned and operated web properties. Our tax preparation business consists of the operations of TaxACT, Inc. (“TaxACT”), which we acquired on January 31, 2012, and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. Our e-commerce business consists of the operations of Monoprice, Inc. (“Monoprice”), which we acquired on August 22, 2013, and provides self-branded electronics and accessories to both consumers and businesses.

 

Following the acquisitions of TaxACT and Monoprice, we determined that we have three reporting segments: Search, Tax Preparation, and E-Commerce. Our Search segment is the InfoSpace business, our Tax Preparation segment is the TaxACT business, and our E-Commerce segment is the Monoprice business. Unless the context indicates otherwise, we use the term “Search” to represent the Infospace business, we use the term “Tax Preparation” to represent services and products sold through the TaxACT business, and we use the term “E-Commerce” to represent products sold through the Monoprice business.

 

See “Note 2: Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for additional information on our Search, Tax Preparation, and E-Commerce businesses and revenues. See “Note 12: Segment Information” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for information regarding revenues, operating income, and assets for each of our segments.

 

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Search Business

 

Our InfoSpace search business primarily offers search services through the web properties of its distribution partners, which are generally private-labeled and customized to address the unique requirements of each distribution partner. The search business also distributes aggregated search content through its owned and operated websites, such as Dogpile.com and WebCrawler.com. Our search revenue primarily is derived from search content providers who provide paid search links for display as part of our search services. From these content providers, whom we refer to as our Search Customers, we license rights to certain search products and services, including both non-paid and paid search links. We receive revenues from our Search Customers when an end user of our web search services clicks on a paid search link that is provided by that Search Customer and displayed on one of our owned and operated web properties or displayed on the web property of one of our search distribution partners. Revenues are recognized in the period in which such paid clicks occur and are based on the amounts earned and remitted to us by our Search Customers for such clicks.

 

Our main Search Customer agreements are with Google and Yahoo!. We derive a significant portion of our Search revenue from Google, and we expect this concentration to continue in the foreseeable future. Google accounted for 88% of our total Search revenues in 2013. If either of these Search Customers reduce or eliminate the services provided to us or our distribution partners, or if either is unwilling to pay amounts owed to us, it could materially harm our business and financial results. Our agreement with Yahoo! runs through December 31, 2014. We recently renewed our agreement with Google, which now runs through March 31, 2017, and may be extended for an additional year upon the mutual agreement of both parties. Both Google and Yahoo! have requirements and guidelines regarding, and reserve certain rights of approval over, the use and distribution of their respective search products and services. Both Google and Yahoo! may modify certain requirements and guidelines of their agreements with us at their discretion, and even when unmodified, we occasionally disagree with our Search Customers on interpretations of these requirements and guidelines. If Google or Yahoo! believe that we or our search distribution partners have failed to meet the requirements and guidelines of the Search Customer agreements, they may suspend or terminate our or our distribution partners’ use and distribution of their search products and services, with or without notice, and in the event of certain violations, may terminate their agreements with us. We and our distribution partners have limited rights to cure breaches of the requirements and guidelines.

 

Our partners for distribution of our online search services include software application providers, web portals, and internet service providers. Traffic from our largest distribution partners generates a significant percentage of our search revenue. In 2013, 33% of our Search revenue was generated by traffic from the web properties operated by our top five distribution partners, and this percentage was 47% in both 2012 and 2011. Our agreements with our distribution partners typically renew annually. In addition, our agreements with some of our distribution partners are not exclusive, meaning that they have the right to shift some or all of the search traffic that they send to us to our competitors.

 

Our primary focus for the Search business is on improving the search services offered to our end users, growing our end users, maintaining our current distribution partners, and adding new distribution partners for our search services.

 

Tax Preparation Business

 

Our TaxACT business consists of an online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. TaxACT generates revenue primarily through its online service at www.taxact.com. The TaxACT business’s basic federal tax preparation online software service is “free for everyone,” meaning that any taxpayer can use the services to e-file his or her federal income return without paying for upgraded services and may do so for every form that the IRS allows to be e-filed. This free offer differentiates TaxACT's offerings from many of its competitors who limit their free software and/or services offerings to certain categories of customers or certain forms. The TaxACT business

 

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generates revenue from a percentage of these “free” users who purchase a state form or choose to upgrade for a fee to the Deluxe or Ultimate product, which includes additional support, tools, or state forms in the case of the Ultimate offering. In addition, revenue is generated from the sale of ancillary services, which include, among other things, tax preparation support services, data archive services, bank or reloadable pre-paid debit card services, and additional e-filing services. TaxACT is the recognized value player in the digital do-it-yourself space, offering comparable software and/or services at a lower cost to the end user compared to larger competitors. This, coupled with its “free for everyone” offer, provides TaxACT a valuable marketing position. TaxACT’s professional tax preparer software allows professional tax preparers to file individual returns for their clients. Revenue from professional tax preparers historically has constituted a relatively small percentage of the TaxACT business’s overall revenue and requires relatively modest incremental development costs as the basic software is substantially similar to the consumer-facing software and online service.

 

Our primary focus for the TaxACT business is on enhancements to the customer experience for our tax preparation services and products, including expanding our product offerings, retaining current tax preparation customers, and attracting new customers.

 

E-Commerce Business

 

Our E-Commerce business, Monoprice, is an online retailer of self-branded electronics and accessories to both consumers and businesses. Monoprice offers its products for sale through the www.monoprice.com website, where the majority of our E-Commerce revenue is derived, and fulfills those orders from our warehouse in Rancho Cucamonga, California. We also sell our products through distributor, reseller, and marketplace agreements. Monoprice has built a well-respected consumer brand by delivering products with premium quality on par with well-known national brands, selling these products at prices far below the prices for those well-known brands, and providing top-tier service and rapid product delivery. The Monoprice website showcases 14 product categories and over 5,800 individual products. Monoprice has developed an efficient product cost structure that is enabled by a direct import supply chain solution that eliminates traditional layers of mark-ups imposed by intermediaries. Consumers are able to access and purchase products 24 hours a day from the convenience of a computer or a mobile device. Monoprice’s team of customer service representatives assists customers primarily by online chat or email. Nearly all sales are to customers located in the United States.

 

Our primary focus for the E-Commerce business is on increasing the number of orders through existing and new consumer and business customers, product category expansion and diversification, revenue expansion into new geographic areas, and continuing to build brand recognition by providing unparalleled value and exceptional customer experience.

 

Business Strategy

 

In addition to the strategies for growth outlined above for each of our business segments, an important component of Blucora's strategy for future growth is to acquire new technology businesses. In the ordinary course of business, we are continuously engaged in various stages of diligence, discussion, and negotiation with acquisition targets, including companies and assets that complement our existing businesses, as well as companies and assets that are unrelated to our existing businesses. Potential acquisitions may be material to our business, financial condition, and results of operations.

 

Research and Development

 

We believe that our technology is essential to expand and enhance our products and services and maintain their attractiveness and competitiveness. Research and development expenses were $7.3 million in 2013, $6.1 million in 2012, and $4.1 million in 2011. These amounts exclude any amounts spent by the TaxACT and Monoprice businesses on research and development prior to our acquisition of those businesses.

 

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Intellectual Property

 

Our success depends significantly upon our technology and intellectual property rights. To protect our rights and the value of our corporate brands and reputation, we rely on a combination of domain name registrations, confidentiality and intellectual property assignment agreements with employees and third parties, protective contractual provisions, and laws regarding copyrights, patents, trademarks, and trade secrets. We hold multiple issued patents and registered trademarks in the United States and in various foreign countries and have applied for additional patents and trademarks. We may not be successful in obtaining issuance or registration for these applications or in maintaining existing patents and trademarks. In addition, issued patents and registered marks may not provide us with any competitive advantages. We may be unable to adequately or cost-effectively protect or enforce our intellectual property rights, and failure to do so could weaken our competitive position and negatively impact our business and financial results. If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, re-engineer our products, engage in expensive and time-consuming litigation, or stop marketing and licensing our products. See the section entitled “Risk Factors” in Part I Item 1A of this report for additional information regarding protecting and enforcing intellectual property rights by us and third parties against us.

 

Competition

 

We face intense competition in all markets in which our businesses operate. Many of our competitors or potential competitors have substantially greater financial, technical, and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, better access to vendors, or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies, develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their products and services than we can. In addition, we may face increasing competition for market share from new startups, mobile providers, and social media sites and applications. For our businesses to be successful, we must be competitive in some or all of the specific competitive factors in the Search, Tax Preparation, and E-Commerce markets that are described below.

 

Search Competition

 

In the online search market, we face competition for various elements of our search business from multiple sources, including our Search Customers. In particular, Google, Yahoo!, and Bing (Microsoft) collectively control a significant majority of the consumer-facing online search market serviced by our owned and operated sites and those of our distribution partners. Each of these three companies provides search results to our search services in addition to competing for internet users. Our distribution partners also compete with us for internet users. We also compete with our Search Customers and other content providers for contracts with new and existing distribution partners. We believe that the primary competitive factors in the market for online search services are:

 

   

the ability to continue to meet the evolving information, content, and service demands of Internet users and our distribution partners;

 

   

the ability to offer our distribution partners competitive rates and comprehensive search and advertising content;

 

   

the cost-effectiveness, reliability, and security of the search applications and services;

 

   

the ability to attract Internet users to search services in a cost effective way;

 

   

the ability to provide and support products or services, such as embedded search browsers, default search provider settings within the search browsers, or downloadable applications, that may displace competing search services; and

 

   

the ability to develop innovative products and services that enhance the appearance and utility of search services, both to Internet users and to current and potential distribution partners.

 

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Tax Preparation Competition

 

Our Tax Preparation business operates in a very competitive marketplace. There are many competing software products and online services, including two competitors who have a significant percentage of the software and online service market: Intuit’s TurboTax and H&R Block's products and services. Our Tax Preparation business must also compete with alternate methods of tax preparation, including “pencil and paper” do-it-yourself return preparation by individual filers and storefront tax preparation services, including both local tax preparers and large chains such as H&R Block, Liberty, and Jackson Hewitt. Finally, our Tax Preparation business faces the risk that state or federal taxing agencies will offer software or systems to provide direct access for individual filers that will reduce the need for TaxACT’s software and services. We believe that the primary competitive factors in the market for tax preparation software and services are:

 

   

the ability to continue to offer software and services that have quality and ease-of-use that are compelling to consumers;

 

   

the ability to market the software and services in a cost effective way;

 

   

the ability to offer ancillary services that are attractive to users; and

 

   

the ability to develop the software and services at a low enough cost to be able to offer them at a competitive price point.

 

E-Commerce Competition

 

Our E-Commerce business operates in a very competitive marketplace with low barriers to entry. Our competitors that offer similar products include existing well-known brands, including online e-commerce sites and offline retail stores, as well as new entrants to the e-commerce market. We believe that the primary competitive factors in the market for our E-Commerce business are:

 

   

product quality and selection;

 

   

brand loyalty;

 

   

price;

 

   

customer service;

 

   

shopping convenience;

 

   

website organization and load speed; and

 

   

order processing, fulfillment and delivery time.

 

Governmental Regulation

 

We face increasing governmental regulation in all of our businesses. U.S. and foreign governments have adopted, or may in the future adopt, applicable laws and regulations addressing issues such as consumer protection, user privacy, security, pricing, age verification, content, taxation, intellectual property, advertising, and product and services quality. These or other laws or regulations that may be enacted in the future could have adverse effects on our business, including higher regulatory compliance costs, limitations on our ability to provide some services in some states or countries, and liabilities that might be incurred through lawsuits or regulatory penalties. See the section entitled “Risk Factors” in Part I Item 1A of this report for additional information regarding the potential impact of governmental regulation on our operations and results.

 

Seasonality

 

Revenue from our Tax Preparation business is highly seasonal, with the significant majority of its annual revenue earned in the first four months of our fiscal year. Revenue from our E-Commerce business also is

 

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seasonal, with revenues historically being the lowest in the second quarter, a period that does not include consumer back-to-school or holiday-related spending. We anticipate that these seasonal effects will continue in the foreseeable future.

 

Employees

 

As of December 31, 2013, we had 450 full-time employees. None of our employees are represented by a labor union, and we consider employee relations to be positive. There is significant competition for qualified personnel in the industries in which we operate, particularly for software development and other technical staff. We believe that our future success will depend in part on our continued ability to hire and retain qualified personnel.

 

Acquisitions and Dispositions

 

As noted above, on August 22, 2013, we acquired Monoprice. On January 31, 2012, we acquired TaxACT, and TaxACT acquired Balance Financial, Inc. (“Balance Financial”) on October 4, 2013. We disposed of our Mercantila e-commerce business on June 22, 2011. For further detail on our acquisition and disposition of these businesses, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II Item 7 of this report.

 

Company Internet Site and Availability of SEC Filings

 

Our corporate website is located at www.blucora.com. We make available on that site, as soon as reasonably practicable, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those filings and other reports filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). Our SEC filings, as well as our Code of Conduct and Ethics and other corporate governance documents, can be found in the Investor Relations section of our site and are available free of charge. Information on our website is not part of this Annual Report on Form 10-K. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

 

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ITEM 1A. Risk Factors

 

RISKS COMMON TO ALL OF OUR BUSINESSES

 

Future revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products and services.

 

The online service, software, and e-commerce industries are characterized by rapidly changing technology, evolving industry standards, and frequent new product introductions. Our competitors in the Search, Tax Preparation, and E-Commerce segments offer new and enhanced products and services every year, and customer expectations change as a result. We must successfully innovate and develop new products and features to meet changing customer needs and expectations. We will need to devote significant resources to continue to develop our skills, tools, and capabilities to capitalize on existing and emerging technologies. Our inability to successfully introduce new and enhanced products and services on a timely basis could harm our business and financial results.

 

Our products and services have historically been provided through desktop computers, but the number of people who access similar products and services through mobile devices, such as smartphones and tablets, has increased dramatically in the past few years. We have limited experience to date in developing products and services for users of these alternative devices, and the versions of our products and services developed for these devices may not be compelling to users. As new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices, and we may need to devote significant resources to the creation, support, and maintenance of such offerings. If we are slow to develop products and services that are compatible with these alternative devices, particularly if we cannot do so as quickly as our competitors, we will fail to maintain or grow our share of the markets in which we compete. In addition, such new products and services may not succeed in the marketplace, resulting in lost market share, wasted development costs, and damage to our brands.

 

Our business depends on our strong reputation and the value of our brands.

 

Developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future products and services and is an important element in attracting new customers. Adverse publicity (whether or not justified) relating to events or activities attributed to our businesses, our employees, our vendors, or our partners may tarnish our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce demand for our products and services and have an adverse effect on our future financial results. Such damage also would require additional resources to rebuild our reputation and restore the value of the brands.

 

Our website and transaction management software, data center systems, or the systems of third-party co-location facilities and cloud service providers could fail or become unavailable, which could harm our reputation and result in a loss of revenues and current or potential customers.

 

Any system interruptions that result in the unavailability or unreliability of our websites, transaction processing systems, or network infrastructure could reduce our revenue and impair our ability to properly process transactions. We use internally developed and third-party systems, including cloud computing and storage systems, for our online services and certain aspects of transaction processing. Some of our systems are relatively new and untested, and thus may be subject to failure or unreliability. Any system unavailability or unreliability may cause unanticipated system disruptions, slower response times, degradation in customer satisfaction, additional expense, or delays in reporting accurate financial information.

 

Our data centers and cloud service could be susceptible to damage or disruption, which could have a material adverse effect on our business. Our Search and E-Commerce businesses rely on third-party co-location facilities and cloud service providers. Although these third party services provide some redundancy, not all of our systems and operations have backup redundancy. Our TaxACT business has a disaster recovery center that we built in late 2012 and have tested, but if the primary data center fails and the disaster recovery center fails to fully restore the failed environments, our TaxACT business will suffer, particularly if such interruption occurs during the “tax season.”

 

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Our systems and operations, and those of our third-party service providers, could be damaged or interrupted by fire, flood, earthquakes, other natural disasters, power loss, telecommunications failure, internet breakdown, break-in, human error, software bugs, hardware failures, malicious attacks, computer viruses, computer denial of service attacks, terrorist attacks, or other events beyond our control. Such damage or interruption may affect internal and external systems that we rely upon to provide our services, take and fulfill customer orders, handle customer service requests, and host other products and services. During the period in which services are unavailable, we will be unable or severely limited in our ability to generate revenues, and we may also be exposed to liability from those third parties to whom we provide services. We could face significant losses as a result of these events, and our business interruption insurance may not be adequate to compensate us for all potential losses. For these reasons, our business and financial results could be materially harmed if our systems and operations are damaged or interrupted.

 

If the volume of traffic to our infrastructure increases substantially, we must respond in a timely fashion by expanding our systems, which may entail upgrading our technology, transaction processing systems, and network infrastructure. Our ability to support our expansion and upgrade requirements may be constrained due to our business demands or constraints of our third-party co-location facility providers and cloud service providers. Due to the number of our customers and the services that we offer, we could experience periodic capacity constraints that may cause temporary unanticipated system disruptions, slower response times and lower levels of customer service, and limit our ability to develop, offer, or release new or enhanced products and services. Our business could be harmed if we are unable to accurately project the rate or timing of increases, if any, in the use of our services, or we fail to adequately expand and upgrade our systems and infrastructure to accommodate these increases.

 

The security measures we have implemented to secure confidential and personal information may be breached, and such a breach may pose risks to the uninterrupted operation of our systems, expose us to mitigation costs, litigation, potential investigation and penalties by authorities, potential claims by persons whose information was disclosed, and damage our reputation.

 

Our networks and those from our third-party service providers may be vulnerable to unauthorized access by hackers, rogue employees or contractors, computer viruses, and other disruptive problems. A person who is able to circumvent security measures could misappropriate proprietary information or personal information or cause interruptions in our operations. Unauthorized access to, or abuse of, this information could result in significant harm to our business.

 

We collect and retain certain sensitive personal data. Our TaxACT business collects, uses, and retains large amounts of customer personal and financial information, including information regarding income, family members, credit cards, tax returns, bank accounts, social security numbers, and healthcare. Our search services receive, retain, and transmit certain personal information about our website visitors. Subscribers to some of our search services are required to provide information that may be considered to be personally identifiable or private information. Our E-Commerce business and its partners collect and retain certain information regarding its customers, including certain payment information, purchase information, e-mail addresses, and shipping addresses.

 

We are subject to laws, regulations, and industry rules relating to the collection, use, and security of user data. We expect regulation in this area to increase. As a result of such new regulation, our current data protection policies and practices may not be sufficient and may require modification. New regulations may also impose burdens that may require notification to customers or employees of a security breach, restrict our use of personal information, and hinder our ability to acquire new customers or market to existing customers. As our business continues to expand to new industry segments that may be more highly regulated for privacy and data security, our compliance requirements and costs may increase. We have incurred, and may continue to incur, significant expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards, and contractual obligations.

 

A major breach of our systems or those of our third-party service providers may have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced customer demand for

 

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our services, harm to our reputation and brands, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process customer credit card orders or tax returns. We may detect, or receive notices from customers or public or private agencies that they have detected, vulnerabilities in our servers, our software or third-party software components that are distributed with our products. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, and we may not be able to discover or remediate such security vulnerabilities before they are exploited. In addition, hackers develop and deploy viruses, worms and other malicious software programs that may attack our offerings. Although we deploy network and application security measures, internal control measures, and physical security procedures to safeguard our systems, there can be no assurance that a security breach, intrusion, loss or theft of personal information will not occur, which may harm our business, customer reputation and future financial results and may require us to expend significant resources to address these problems, including notification under data privacy regulations.

 

We rely on the infrastructure of the Internet over which we have no control and the failure of which could substantially undermine our operations.

 

The success of our Search, Tax Preparation, and E-Commerce businesses depends on the maintenance and expansion of the infrastructure of the Internet. In particular, we rely on other companies to maintain reliable network systems that provide adequate speed, data capacity, and security. As the Internet continues to experience growth in the number of users, frequency of use, and amount of data transmitted, the segments of the internet infrastructure that we rely on may be unable to support the demands placed upon it. The failure of any parts of the internet infrastructure that we rely on, even for a short period of time, would substantially undermine our operations and would have a material adverse effect on our business and financial results.

 

We regularly consider acquisition opportunities, and our financial and operating results may suffer if we are unsuccessful in completing any such acquisitions on favorable terms.

 

An important component of our strategy for future growth is to acquire new technologies and businesses. We may seek to acquire companies or assets that complement our existing businesses. We may also consider acquisitions of companies and assets that are not related to search, tax preparation, or e-commerce. We regularly explore such opportunities in the ordinary course of our business, and potential acquisition targets range in size from relatively small to a size comparable to our own, and, therefore, may be material to our business, financial condition, and results of operations. There can be no guarantee that any of the opportunities that we evaluate will result in the purchase by us of any business or asset being evaluated, or that if acquired, we will be able to successfully integrate such acquisition.

 

If we are successful in our pursuit of any acquisition opportunities, we intend to use available cash, debt and/or equity financings, and/or other capital or ownership structures designed to diversify our capital sources and attract a competitive cost of capital, all of which may change our leverage profile. There are a number of factors that impact our ability to succeed in acquiring the companies and assets we identify, including competition for these companies and assets, sometimes from larger or better-funded competitors. As a result, our success in completing acquisitions is not guaranteed. Our expectation is that, to the extent we are successful, any acquisitions will be additive to our business, taking into account potential benefits of diversification or operational synergies. However, these new business additions and acquisitions involve a number of risks and may not achieve our expectations; and, therefore, we could be adversely affected by any such new business additions or acquisitions. There can be no assurance that the short or long-term value of any business or technology that we develop or acquire will be equal to the value of the cash and other consideration that we paid or expenses we incurred.

 

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Our financial and operating results may suffer if we are unsuccessful in integrating acquisitions we may complete, and any new businesses or technologies may not be complementary to our current operations or leverage our current infrastructure and operational experience.

 

Even if we are successful in identifying and completing acquisitions of new businesses or technologies, the process of integrating such new businesses and technologies involves numerous risks that could materially and adversely affect our results of operations or stock price, including:

 

   

expenses related to the acquisition process, both for consummated and unconsummated transactions, and impairment charges to goodwill and other intangible assets related to certain acquisitions;

 

   

diversion of management’s or other key personnel’s attention from current operations and other business concerns and potential strain on financial and managerial controls and reporting systems and procedures;

 

   

disruption of our ongoing business or the ongoing acquired business, including impairment of existing relationships with the employees, distributors, suppliers, or customers of our existing businesses or those of the acquired companies;

 

   

difficulties in assimilating the operations, products, technology, information systems, and management and other personnel of acquired companies that result in unanticipated allocation of resources, costs, or delays;

 

   

the dilutive effect on earnings per share as a result of issuances of stock, incurring operating losses, and the amortization of intangible assets for the acquired business;

 

   

stock volatility due to the perceived value of the acquired business by investors;

 

   

any debt incurred to finance acquisitions would increase costs, may increase volatility in our stock price, and could accelerate a decline in stockholder equity in the event of poor financial performance;

 

   

diversion of capital from other uses;

 

   

failure to achieve the anticipated benefits of the acquisitions in a timely manner, or at all;

 

   

difficulties in acquiring foreign companies, including risks related to integrating operations across different cultures and languages, currency risks, and the particular economic, political, and regulatory risks associated with specific countries; and

 

   

adverse outcome of litigation matters or other contingent liabilities assumed in or arising out of the acquisitions.

 

Developing or acquiring a business or technology, and then integrating it with our other operations, will be complex, time consuming, and expensive. The successful integration of an acquisition requires, among other things, that we: retain key personnel; maintain and support preexisting supplier, distribution, and customer relationships; and integrate accounting and support functions. The complexity of the technologies and operations being integrated and the disparate corporate cultures and/or industries being combined, may increase the difficulties of integrating an acquired technology or business. If our integration of acquired or internally developed technologies or businesses, including our recent acquisitions of the Monoprice business, is not successful, we may experience adverse financial or competitive effects.

 

Our stock price has been highly volatile and such volatility may continue.

 

The trading price of our common stock has been highly volatile. Between January 1, 2012 and December 31, 2013, our stock price ranged from $10.98 to $29.82. On February 21, 2014, the closing price of our common stock was $19.80. Our stock price could decline or fluctuate significantly in response to many factors, including the other risks discussed in this report and the following:

 

   

actual or anticipated variations in quarterly and annual results of operations;

 

   

announcements of significant acquisitions, dispositions, charges, changes in or loss of material contracts and relationships, or other business developments by us, our partners, or our competitors;

 

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conditions or trends in the search services, tax preparation, or e-commerce markets;

 

   

changes in general conditions in the U.S. and global economies or financial markets;

 

   

announcements of technological innovations or new services by us or our competitors;

 

   

changes in financial estimates or recommendations by securities analysts;

 

   

disclosures of any accounting issues, such as restatements or material weaknesses in internal control over financial reporting;

 

   

equity issuances resulting in the dilution of stockholders;

 

   

the adoption of new regulations or accounting standards; and

 

   

announcements or publicity relating to litigation or governmental enforcement actions.

 

In addition, the market for technology company securities has experienced extreme price and volume fluctuations, and our stock has been particularly susceptible to such fluctuations. Often, class action litigation has been instituted against companies after periods of volatility in the price of such companies’ stock. If such litigation were to be instituted against us, even if we were to prevail, it could result in substantial cost and diversion of management’s attention and resources.

 

Our financial results may fluctuate, which could cause our stock price to be volatile or decline.

 

Our financial results have varied on a quarterly basis and are likely to continue to fluctuate in the future. These fluctuations could cause our stock price to be volatile or decline. Many factors could cause our quarterly results to fluctuate materially, including but not limited to:

 

   

changes or potential changes in our relationships with Google or Yahoo! or future significant Search Customers, such as the effects of changes to their requirements or guidelines or their measurement of the quality of traffic that we send to their advertiser networks, and any resulting loss or reduction of content that we can use or provide to our distribution partners;

 

   

the loss, termination, or reduction in scope of key search distribution relationships as a result of, for example, distribution partners licensing content directly from content providers, or any suspension by our Search Customers (particularly Google) of the right to use or distribute content on the web properties of our distribution partners;

 

   

the inability of any of our businesses to meet our expectations;

 

   

the extreme seasonality of our TaxACT business and the resulting large quarterly fluctuations in our revenues;

 

   

the success or failure of our strategic initiatives and our ability to implement those initiatives in a cost effective manner;

 

   

the mix of search services revenue generated by our owned and operated web properties versus our distribution partners’ web properties;

 

   

the mix of revenues generated by existing businesses, or other businesses we develop or acquire;

 

   

our, and our distribution partners’, ability to attract and retain quality traffic for our search services;

 

   

gains or losses driven by mark to market fair value accounting;

 

   

litigation expenses and settlement costs;

 

   

expenses incurred in finding, negotiating, consummating, and integrating acquisitions;

 

   

variable demand for our services, rapidly evolving technologies and markets, and consumer preferences;

 

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any restructuring charges we may incur;

 

   

any economic downturn, which may lead to lower online advertising revenue from advertisers on our Search business, lower acceptance rates on premium products and services offered by our Tax Preparation business, and reduced sales for our E-Commerce business;

 

   

new court rulings, or the adoption of new laws, rules, or regulations, that adversely affect our ability to acquire content and distribute our search services, that adversely affect our tax preparation products and services, or that otherwise increase our potential liability or compliance costs;

 

   

impairment in the value of long-lived assets or the value of acquired assets, including goodwill, core technology, and acquired contracts and relationships; and

 

   

the effect of changes in accounting principles or standards or in our accounting treatment of revenues or expenses.

 

For these reasons, among others, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors and financial results volatility could make us less attractive to investors, either of which could cause the trading price of our stock to decline.

 

We sold $201.25 million of Convertible Senior Notes in 2013, which may impact our financial results, result in the dilution of existing stockholders, and restrict our ability to take advantage of future opportunities.

 

In March 2013, we sold $201.25 million aggregate principal amount of 4.25% Convertible Senior Notes (the “Notes”) due 2019. The accounting for the Notes will result in our having to recognize interest expense significantly more than the stated interest rate of the Notes and may result in volatility to our financial results. Upon issuance of the Notes, we were required to establish a separate initial value for the conversion option and bifurcate this value from the value attributable to the balance of the Notes, or the debt component. As a result, for accounting purposes, we were required to treat the Notes as having been issued with a discount to their face principal amount, which is referred to as debt discount. We are accreting the debt discount to interest expense ratably over the term of the Notes, which results in an effective interest rate in our consolidated statement of comprehensive income that is in excess of the stated coupon rate of the Notes. This will reduce our earnings and could adversely affect the price at which our common stock trades, but will have no effect on the amount of cash interest paid to holders or on our cash flows.

 

Our intent is to settle conversions of the Notes with cash for the principal amount of the debt and shares of common stock for any related conversion premium. Shares associated with the conversion premium will be included in diluted earnings per share when the average stock price exceeds the conversion price of the Notes and could adversely affect our diluted earnings per share and the price at which our common stock trades.

 

The conditional conversion feature of the Notes, if triggered, and the requirement to repurchase the Notes upon a fundamental change may adversely affect our financial condition and financial results. In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If we undergo a fundamental change, (as described in the applicable Indenture), subject to certain conditions, holders of the Notes may require us to repurchase for cash all or part of their Notes at a price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest.

 

The payment of the interest and the repayment of principal at maturity, conversion, or under a fundamental change, will require the use of a substantial amount of our cash, and if such cash is not available, we may be required to sell other assets or enter into alternate financing arrangements at terms that may or may not be desirable. The existence of the Notes and the obligations we incurred by issuing them may restrict our ability to take advantage of certain future opportunities, such as engaging in future debt or equity financing activities, which may reduce or impair our ability to acquire new businesses or invest in our existing businesses.

 

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We incurred debt in connection with our acquisitions of the Monoprice and TaxACT businesses, and may incur future debt related to other acquisitions, which may adversely affect our financial condition and future financial results.

 

In November 2013, Monoprice incurred debt as part of our acquisition of Monoprice’s business, of which $50.0 million remained outstanding as of December 31, 2013. In addition, TaxACT incurred debt as part of our acquisition of TaxACT’s business, which was refinanced with a new credit agreement on August 30, 2013 and of which $71.4 million remained outstanding as of December 31, 2013. Both are non-recourse debts that are guaranteed by Monoprice Holdings, Inc. and TaxACT Holdings, Inc., respectively, both of which are Blucora’s direct subsidiaries. These debts may adversely affect our financial condition and future financial results by, among other things:

 

   

increasing Monoprice’s or TaxACT’s vulnerability to downturns in their businesses, to competitive pressures, and to adverse economic and industry conditions;

 

   

requiring the dedication of a portion of our expected cash from Monoprice’s and TaxACT’s operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions;

 

   

requiring cash infusions from Blucora to Monoprice or TaxACT if either or both are unable to meet their payment or other obligations under the applicable credit facilities;

 

   

increasing our interest payment obligations in the event that interest rates rise dramatically; and

 

   

limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.

 

These credit facilities impose restrictions on Monoprice and TaxACT, including restrictions on their ability to create liens on their assets and on our ability to incur indebtedness, and require Monoprice and TaxACT to maintain compliance with specified financial ratios. Their ability to comply with these ratios may be affected by events beyond their control. In addition, these credit facilities include covenants, the breach of which may cause the outstanding indebtedness to be declared immediately due and payable. These debts, and our ability to repay them, may also negatively impact our ability to obtain additional financing in the future and may affect the terms of any such financing.

 

We or our subsidiaries may incur additional debt in the future to finance additional acquisitions or for other purposes. Such debt may result in risks similar to those discussed above related to the Monoprice and TaxACT debts, or in other risks specific to the credit agreements entered into for those debts.

 

Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for servicing debt, working capital and capital expenditures.

 

Although we believe that existing cash and cash equivalents, short-term investments, and cash generated from operations will be sufficient to meet our anticipated cash needs for servicing debt, working capital, and capital expenditures for at least the next 12 months, the underlying levels of revenues and expenses that we project may not prove to be accurate. In March 2013, we sold $201.25 million aggregate principal amount of 4.25% Convertible Senior Notes due 2019. In addition, as of December 31, 2013, Monoprice and TaxACT had $50.0 million and $71.4 million outstanding, respectively, under the credit agreements entered into in November 2013 and August 2013, respectively. Servicing these debts will require the dedication of a portion of our expected cash flow from operations, thereby reducing the amount of our cash flow available for other purposes. In addition, our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our businesses may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our

 

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indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

 

In addition, we evaluate acquisitions of businesses, products, or technologies from time to time. Any such transactions, if completed, may use a significant portion of our cash balances and marketable investments. If we are unable to liquidate our investments when we need liquidity for acquisitions or for other business purposes, we may need to change or postpone such acquisitions or find alternative financing for such acquisitions. We may seek additional funding through public or private financings, through sales of equity, or through other arrangements. Our ability to raise funds may be adversely affected by a number of factors, including factors beyond our control, such as economic conditions in the markets in which we operate and increased uncertainty in the financial, capital, and credit markets. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, we may be unable, or delayed in our ability, to develop or enhance our products or services, take advantage of business opportunities, or respond to competitive pressures, any of which could harm our business.

 

If others claim that our services infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our services, engage in expensive and time-consuming litigation, or stop marketing and licensing our services.

 

Companies and individuals with rights relating to the technology and consumer electronics industries have frequently resorted to litigation regarding intellectual property rights. In some cases, the ownership or scope of an entity’s or person’s rights is unclear and may also change over time, including through changes in U.S. or international intellectual property laws or regulations or through court decisions or decisions by agencies or regulatory boards that manage such rights. These parties have in the past, and may in the future, make claims against us alleging infringement of patents, copyrights, trademarks, trade secrets, or other intellectual property or proprietary rights, or alleging unfair competition or violations of privacy or publicity rights. Responding to any such claims could be time-consuming, result in costly litigation, divert management’s attention, cause product or service release delays, require us to remove or redesign our products or services, require us to pay damages for infringement, or require us to enter into royalty or licensing agreements. Our technology, services, and products may not be able to withstand any third-party claims or rights against their use. If a successful claim of infringement was made against us and we could not develop non-infringing technology or content, or license the infringed or similar technology or content on a timely and cost-effective basis, our business could suffer.

 

We do not regularly conduct patent searches to determine whether the technology used in our products or services infringes patents held by third parties. Patent searches may not return every issued patent or patent application that may be deemed relevant to a particular product or service. It is therefore difficult to determine, with any level of certainty, whether a particular product or service may be construed as infringing a current or future U.S. or foreign patent.

 

We rely heavily on our technology and intellectual property, but we may be unable to adequately or cost-effectively protect or enforce our intellectual property rights, thus weakening our competitive position and negatively impacting our business and financial results. We may have to litigate to enforce our intellectual property rights, which can be time consuming, expensive, and difficult to predict.

 

To protect our rights in our services and technology, we rely on a combination of copyright and trademark laws, patents, trade secrets, confidentiality agreements with employees and third parties, and protective contractual provisions. We also rely on laws pertaining to trademarks and domain names to protect the value of our corporate brands and reputation. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our services or technology, obtain and use information, marks, or technology that we regard as proprietary, or otherwise violate or infringe our intellectual property rights. In addition, it is possible that others could independently develop substantially equivalent intellectual property. If we do not effectively protect

 

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our intellectual property, or if others independently develop substantially equivalent intellectual property, our competitive position could be weakened.

 

Effectively policing the unauthorized use of our services and technology is time-consuming and costly, and the steps taken by us may not prevent misappropriation of our technology or other proprietary assets. The efforts we have taken to protect our proprietary rights may not be sufficient or effective, and unauthorized parties may obtain and use information, marks, or technology that we regard as proprietary, copy aspects of our services, or use similar marks or domain names. In some cases, the ownership or scope of an entity’s or person’s rights is unclear and may also change over time, including through changes in U.S. or international intellectual property laws or regulations or through court decisions or decisions by agencies or regulatory boards that manage such rights. Our intellectual property may be subject to even greater risk in foreign jurisdictions, as protection is not sought or obtained in every country in which our services and technology are available and it is often more difficult and costly to obtain, register, or enforce our rights in foreign jurisdictions.

 

We may have to litigate to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of others’ proprietary rights, which are sometimes not clear or may change. Litigation can be time consuming and expensive, and the outcome can be difficult to predict.

 

Legislation and regulation may impact our business operations, restrict our opportunities, increase our costs, and create potential liability.

 

All of our businesses are subject to laws and regulations relating to how they conduct their operations and we anticipate that additional applicable laws and regulations will be enacted in the future. Many of these laws and regulations restrict the operations and opportunities of our businesses and result in compliance costs. In addition, interpretations of these laws and regulations are not always clear, and failure to comply with them in the manner that a government regulator or court interprets could result in liability. For example, all of our businesses have privacy compliance obligations, and any failure by us to comply with our posted privacy policies, Federal Trade Commission (“FTC”) requirements, or other privacy-related laws and regulations could result in proceedings by the FTC or others, including potential class action litigation, which could potentially have an adverse effect on our business, results of operations, and financial condition. Additional applicable legal and regulatory requirements for each of our businesses are discussed below under the sections of these Risk Factors that are specific to those businesses. It is not possible to predict whether or when additional applicable legislation or regulation may be adopted and certain proposals, if adopted, could materially and adversely affect our business. Our failure or inability to comply with applicable laws and regulations could materially impact our operations and financial results.

 

Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our shares to decline.

 

We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire us, even if a change of control would be beneficial to our existing stockholders. For example, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder. In addition, our certificate of incorporation and bylaws contain provisions that may discourage, delay, or prevent a third party from acquiring us without the consent of our board of directors, even if doing so would be beneficial to our stockholders. Provisions of our charter documents that could have an anti-takeover effect include:

 

   

the classification of our board of directors into three groups so that directors serve staggered three-year terms, which may make it difficult for a potential acquirer to gain control of our board of directors;

 

   

the requirement for supermajority approval by stockholders for certain business combinations;

 

   

the ability of our board of directors to authorize the issuance of shares of undesignated preferred stock without a vote by stockholders;

 

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the ability of our board of directors to amend or repeal our bylaws;

 

   

limitations on the removal of directors;

 

   

limitations on stockholders’ ability to call special stockholder meetings;

 

   

advance notice requirements for nominating candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

   

certain restrictions in our charter on transfers of our common stock designed to preserve our federal net operating loss carryforwards (“NOLs”).

 

At our 2009 annual meeting, our stockholders approved an amendment to our certificate of incorporation that restricts any person or entity from attempting to transfer our stock, without prior permission from the Board of Directors, to the extent that such transfer would (i) create or result in an individual or entity becoming a five-percent stockholder of our stock, or (ii) increase the stock ownership percentage of any existing five-percent stockholder. This amendment provides that any transfer that violates its provisions shall be null and void and would require the purported transferee to, upon our demand, transfer the shares that exceed the five percent limit to an agent designated by us for the purpose of conducting a sale of such excess shares. This provision in our certificate of incorporation may make the acquisition of Blucora more expensive to the acquirer and could significantly delay, discourage, or prevent third parties from acquiring Blucora without the approval of our board of directors.

 

If there is a change in our ownership within the meaning of Section 382 of the Internal Revenue Code, our ability to use our NOLs may be severely limited or potentially eliminated.

 

As of December 31, 2013, we had NOLs of $643.3 million that will expire primarily over a seven to eleven year period. If we were to have a change of ownership within the meaning of Section 382 of the Internal Revenue Code (defined as a cumulative change of 50 percentage points or more in the ownership positions of certain stockholders owning five percent or more of a company’s common stock over a three-year rolling period), then under certain conditions, the amount of NOLs we could use in any one year could be limited to an amount equal to our market capitalization, net of substantial non-business assets, at the time of the ownership change multiplied by the federal long-term tax exempt rate. Our certificate of incorporation imposes certain limited transfer restrictions on our common stock that we expect will assist us in preventing a change of ownership and preserving our NOLs, but there can be no assurance that these restrictions will be sufficient. In addition, other restrictions on our ability to use the NOLs may be triggered by a merger or acquisition, depending on the structure of such a transaction. It is our intention to limit the potential impact of these restrictions, but there can be no guarantee that such efforts will be successful. If we are unable to use our NOLs before they expire, or if the use of this tax benefit is severely limited or eliminated, there could be a material reduction in the amount of after-tax income and cash flow from operations, and it could have an effect on our ability to engage in certain transactions.

 

If we are unable to hire, retain, and motivate highly qualified employees, including our key employees, we may not be able to successfully manage our business.

 

Our future success depends on our ability to identify, attract, hire, retain, and motivate highly skilled management, technical, sales and marketing, and corporate development personnel. Qualified personnel with experience relevant to our businesses are scarce and competition to recruit them is intense. If we fail to successfully hire and retain a sufficient number of highly qualified employees, we may have difficulties in supporting or expanding our businesses. Realignments of resources, reductions in workforce, or other operational decisions have created and could continue to create an unstable work environment and may have a negative effect on our ability to hire, retain, and motivate employees.

 

Our business and operations are substantially dependent on the performance of our key employees. Changes of management or key employees may cause disruption to our operations, which may materially and adversely affect our business and financial results or delay achievement of our business objectives. In addition, if we lose

 

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the services of one or more key employees and are unable to recruit and retain a suitable successor, we may not be able to successfully and timely manage our business or achieve our business objectives. For example, the success of our Search business is partially dependent on key personnel who have long-term relationships with our Search Customers and distribution partners. There can be no assurance that any retention program we initiate will be successful at retaining employees, including key employees.

 

Like many technology companies, we use stock options, restricted stock units, and other equity-based awards to recruit and retain senior level employees. With respect to those employees to whom we issue such equity-based awards, we face a significant challenge in retaining them if the value of equity-based awards in aggregate or individually is either not deemed by the employee to be substantial enough or deemed so substantial that the employee leaves after their equity-based awards vest. If our stock price does not increase significantly above the exercise prices of our options, we may need to issue new equity-based awards in order to motivate and retain our executives. We may undertake or seek stockholder approval to undertake other equity-based programs to retain our employees, which may be viewed as dilutive to our stockholders or may increase our compensation costs. Additionally, there can be no assurance that any such programs, or any other incentive programs, we undertake will be successful in motivating and retaining our employees.

 

Restructuring and streamlining our business, including implementing reductions in workforce, discretionary spending, and other expense reductions, may harm our business.

 

We have in the past and may in the future find it advisable to take measures to streamline operations and reduce expenses, including, without limitation, reducing our workforce or discontinuing products or businesses. Such measures may place significant strains on our management and employees, and could impair our development, marketing, sales, and customer support efforts. We may also incur liabilities from these measures, including liabilities from early termination or assignment of contracts, potential failure to meet obligations due to loss of employees or resources, and resulting litigation. Such effects from restructuring and streamlining could have a negative impact on our business and financial results.

 

RISKS RELATED TO OUR SEARCH BUSINESS

 

We may be unable to compete successfully in the search market.

 

We face intense competition in the search market. Many of our competitors have substantially greater financial, technical, and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, better access to vendors, or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies, develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies and changes in content provider and distribution partner requirements more quickly, achieve greater economies of scale, and devote greater resources to the marketing and sale of their products and services than we can. Some of the companies that we compete with in the search market are currently Search Customers of ours, the loss of any of which could harm our business. In addition, we may face increasing competition for search market share from new search startups, mobile search providers, and social media sites and applications. If we are unable to match or exceed our competitors’ marketing reach and customer service experience, our business may not be successful. Because of these competitive factors and due to our relatively small size and financial resources, we may be unable to compete successfully in the search market and, to the extent that these competitive factors apply to other markets that we pursue, in such other markets.

 

Most of our search services revenue is attributable to Google, and the loss of, or a payment dispute with, Google or any other significant Search Customer would harm our business and financial results.

 

If Google, Yahoo!, or any future significant Search Customer were to substantially reduce or eliminate the content it provides to us or to our distribution partners, our business results could materially suffer if we are

 

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unable to establish and maintain new Search Customer relationships, or expand our remaining Search Customer relationships, to replace the lost or disputed revenue. Google accounted for approximately 66% of our total Company revenues in 2013. Yahoo! remains an important partner and contributes to our value proposition as a metasearch provider, but Yahoo!’s percentage of our revenue generally has declined over the course of the past several years, and now constitutes a much less significant source of revenue than Google. We continue to believe that if our Google relationship ended or was impaired, we could replace a portion of the lost revenue with revenue from Yahoo!, but because of the increased importance of Google to our Search operations, and its position as the overwhelming market leader in the search industry, these two Search Customers are no longer interchangeable. In addition, Yahoo! has entered into an agreement with Microsoft’s Bing search service, under which Bing provides all of Yahoo!’s algorithmic search results and some of its paid search results. If Yahoo! cannot maintain an agreement with Bing on favorable terms, or if Bing is unable to adequately perform its obligations to Yahoo!, then Yahoo!’s ability to provide us with algorithmic and paid search results may be impaired. If a Search Customer is unwilling to pay us amounts that it owes us, or if it disputes amounts it owes us or has previously paid to us for any reason (including for the reasons described in the risk factors below), our business and financial results could materially suffer.

 

The success of our Search business depends on our ability to negotiate extensions of our Search Customer agreements on favorable terms. We recently renewed our agreement with Google, which now runs to March 31, 2017. Our agreement with Yahoo! also recently renewed and now runs to December 31, 2014. If we cannot negotiate extensions of our current agreements or new agreements on favorable terms (including revenue share rates, our continued ability to offer combined search results or advertisements from different partners as part of our metasearch service, and other operational aspects of our search services), the financial results of our Search business will suffer.

 

We may be unable to successfully compete in the search market as the market shifts to mobile search.

 

Our Search business, and that of most of our distribution partners, is primarily based on searches conducted from browsers and other applications on desktop and laptop computers. As mobile phones, tablets, and other mobile devices increase in popularity, functionality, and usage, mobile searches will constitute an increasing percentage of the search market. Because our Search business has been primarily focused on the desktop and laptop markets, we may have less experience and capability in offering and monetizing mobile search services than our competitors. In addition, because we rely on our Search Customers to provide us with search results and advertisements, our ability to innovate for mobile search and to expand in that market is dependent on the cooperation of, and collaboration with, those Search Customers. Under the terms of our new agreement with Google, which takes effect on April 1, 2014, we will not be offering Google's AdSense for Search on our mobile search services, and this change will require us to increase usage of our other current advertising solutions for mobile and/or find additional mobile advertising solutions and partners. If we cannot develop services and partners that allow us to sufficiently innovate for the mobile search market and if our mobile advertising solutions monetize at a significantly lower level than our desktop advertising solutions, our ability to participate in the market shift to mobile search will be impaired, which will likely have a material adverse effect on our Search business and its financial results.

 

Failure by us or our search distribution partners to comply with the guidelines promulgated by Google and Yahoo! may cause that Search Customer to temporarily or permanently suspend the use of its content or terminate its agreement with us, or may require us to modify or terminate certain distribution relationships.

 

If we or our search distribution partners fail to meet the guidelines promulgated by Google or Yahoo! for the use of their content, we may not be able to continue to use their content or provide the content to such distribution partners. Our agreements with Google and Yahoo! give them the ability to suspend the use and the distribution of their content for non-compliance with their requirements and guidelines and, in the case of breaches of certain other provisions of their agreements, to terminate their agreements with us immediately, regardless of whether such breaches could be cured.

 

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The terms of the Search Customer agreements with Google and Yahoo! and the related guidelines are subject to differing interpretations by the parties. Google and Yahoo! have in the past suspended, and may in the future, suspend their content provided to our websites and the websites of our distribution partners, without notice, when they believe that we or our distribution partners are not in compliance with their guidelines or are in breach of the terms of their agreements. During such suspension we will not receive any revenue from any property of ours or a distribution partner that is affected by the suspended content, and the loss of such revenue could harm our business and financial results.

 

Additionally, as our business evolves, we expect that the guidelines of Google and Yahoo!, as well as the parties’ interpretations of compliance, breach, and sufficient justification for suspension of use of content will change. Both Yahoo! and Google regularly change their guidelines and requirements, both as part of our renegotiation of our agreements with them and generally as they manage their networks of distribution partners. These changes in the guidelines and any changes in the parties’ interpretations of those guidelines may result in restrictions on our use of the Google and Yahoo! search services, and may require us to terminate our agreement with distribution partners or forego entering into agreements with distribution partners. The loss or reduction of content that we can use or make available to our distribution partners as a result of suspension, termination, or modification of distribution or Search Customer agreements could have a material adverse effect on our business and financial results.

 

Restrictions on our ability, and the ability of our search distribution partners, to distribute, market, or offer search-related applications, products, and services may impact our financial results.

 

A significant portion of our Search revenue is dependent on business models that can be negatively impacted by changes in policies or technology. For example, many of our Search distribution partners distribute applications, extensions, or toolbars that are monetized through the search services that we provide. Our Search Customers require that such applications, extensions, or toolbars, and the distribution of those applications, extensions, or toolbars, comply with certain guidelines. Our Search Customers can and do modify these guidelines from time to time, and recent modifications of these guidelines may impact the distribution of applications, extensions, or toolbars that drive traffic and revenue to our search services. In addition, our Search Customers’ guidelines have in the past, and may in the future, negatively affected our ability, and the ability of our Search distribution partners, to drive traffic to our Search services through the use of online marketing.

 

Further, certain third parties have introduced, and can be expected to continue to introduce, new or updated technologies, applications, and policies that may interfere with the ability of users of search services provided directly by us or by our Search distribution partners to access those services. For example third parties have introduced technologies and applications (including new and enhanced web browsers) that prevent users from downloading the extensions or toolbars provided by some of our Search partners. Those applications may also have features and policies that interfere with the functionality of search boxes embedded within extensions and toolbars and the maintenance of home page and other settings previously selected by users.

 

Any changes in technologies, applications, and policies that restrict the distribution, marketing, and offering of search-related applications, extensions, toolbars, products, and services may impact our operating and financial results.

 

A substantial portion of our search services revenue is dependent on our relationships with a small number of distribution partners, the loss of which could have a material adverse effect on our business and financial results.

 

We rely on our relationships with search distribution partners, including Internet service providers, web portals, and software application providers, for distribution of our search services. Approximately 62% of our total revenues for 2013 came from searches conducted by end users on the web properties of our search distribution partners, and approximately 25% of our total revenues for the year came from searches conducted by end users on

 

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the web properties of our top five distribution partners. Our agreements with many of our distribution partners come up for renewal in 2014, and some of our distributors have the right to immediately terminate their agreements in the event of certain breaches or events. There can be no assurance that these relationships will continue or will be renewed on terms that are as favorable as current terms. If we are unable to maintain relationships with our distribution partners on favorable terms, our business and financial results could be materially adversely affected.

 

A significant percentage of our Search business’s revenue is generated by our distribution partner network. Given the nature of our relationships with our distribution partners, we have limited insight into the methods that our partners use to drive search traffic, which may result in unanticipated volatility in our financial results.

 

We operate a distribution partner network of greater than 100 distribution partners, which generates the majority of our Search revenue. We have contractual relationships with each partner in the network, but many of these relationships are not exclusive and may not provide us with the ability to have full insight into the methods that our partners use to drive search traffic or their business models. As a result, partners can vary their traffic serviced by our search services, and we may not be able to foresee or control this variation. Additionally, our ability to grow our revenue depends on both our ability to attract new distribution partners and retain existing distribution partners and on our partners’ ability to acquire and retain new users that use our search services. For example, a distribution partner may increase or decrease marketing initiatives in ways that we did not predict, and if that partner’s traffic is significantly correlated to marketing, such increase or decrease in marketing may result in a significant increase or decrease in search traffic. Without full insight into a partner’s business model and related revenue drivers, our ability to accurately predict the traffic driven, and revenue generated, by that partner is limited, in part, to historical patterns. The historical revenue patterns of partners may not be consistent with actual and forecasted results due to unknown factors that impact the partner’s business model and/or any related changes to such model.

 

If advertisers perceive that they are not receiving quality traffic to their sites through their paid-per-click advertisements, they may reduce or eliminate their advertising through the Internet, which could have a negative material impact on our business and financial results.

 

Most of our revenue from our Search business is based on the number of clicks on paid search results that are served on our web properties or those of our distribution partners. Each time a user clicks on a paid search result, the Search Customer that provided the paid search result receives a fee from the advertiser who paid for the click and the Search Customer pays us a portion of that fee. If the click originated from one of our distribution partners’ web properties, we share a portion of the fee we receive with such partner. If an advertiser receives what it perceives to be poor quality traffic, meaning that the advertiser’s objectives are not met for a sufficient percentage of clicks for which it pays, the advertiser may reduce or eliminate its advertisements through the Search Customer that provided the commercial search result to us. This leads to a loss of revenue for our Search Customers and consequently lower fees paid to us. Also, if a Search Customer perceives that the traffic originating from one of our web properties or the web property of a distribution partner is of poor quality, the Search Customer may discount the amount it charged all advertisers whose paid click advertisements appeared on such website or web property, and accordingly may reduce the amount it pays us. The Search Customer may also suspend or terminate our ability to provide its content through such websites or web properties if such activities are not modified to satisfy the Search Customer’s concerns.

 

Poor quality traffic may be a result of invalid click activity. Such invalid click activity occurs, for example, when a person or automated click generation program clicks on a commercial search result to generate fees for the web property displaying the commercial search result rather than to view the webpage underlying the commercial search result. Some of this invalid click activity is referred to as “click fraud.” When such invalid click activity is detected, the Search Customer may not charge the advertiser or may refund the fee paid by the advertiser for such invalid clicks. If the invalid click activity originated from one of our distribution partners’ web properties or our owned and operated properties, such non-charge or refund of the fees paid by the

 

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advertisers in turn reduces the amount of fees the Search Customer pays us. Initiatives we undertake to improve the quality of the traffic that we send to our Search Customers may not be successful and, even if successful, may result in loss of revenue in a given reporting period.

 

We may be subject to liability for our use or distribution of information that we gather or receive from third parties and indemnity protections or insurance coverage may be inadequate to cover such liability.

 

Our search services obtain content and commerce information from third parties and link users, either directly through our own websites or indirectly through the web properties of our distribution partners, to third-party webpages and content in response to search queries and other requests. These services could expose us to legal liability from claims relating to such third-party content and sites, the manner in which these services are distributed and displayed by us or our distribution partners, or how the content provided by our Search Customers was obtained or provided by our Search Customers. This could subject us to legal liability for such things as defamation, negligence, intellectual property infringement, violation of privacy or publicity rights, and product or service liability, among others. Laws or regulations of certain jurisdictions may also deem some content illegal, which also may expose us to liability. Regardless of the legal merits of any such claims, they could result in costly litigation, be time consuming to defend, and divert management’s attention and resources. If there was a determination that we had violated third-party rights or applicable law, we could incur substantial monetary liability, be required to enter into costly royalty or licensing arrangements (if available), or be required to change our business practices. We are also subject to laws and regulations, both in the United States and abroad, regarding the collection and use of end user information and search related data. If we do not comply with these laws and regulations, we may be exposed to legal liability.

 

Although the agreements by which we obtain content contain indemnity provisions, these provisions may not cover a particular claim or type of claim or the party giving the indemnity may not have the financial resources to cover the claim. Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made against us. In addition, we may also have an obligation to indemnify and hold harmless certain of our Search Customers or distribution partners from damages they suffer for such violations under our contracts with them. Implementing measures to reduce our exposure to such claims could require us to expend substantial resources and limit the attractiveness of our services. As a result, these claims could result in material harm to our business. Any liability that we incur as a result of content we receive from third parties could harm our financial results.

 

Governmental regulation and the application of existing laws may slow business growth, increase our costs of doing business, and create potential liability.

 

The growth and development of the Internet has led to new laws and regulations, as well as the application of existing laws to the Internet, in both the U.S. and foreign jurisdictions. Application of these laws can be unclear. For example, it is unclear how many existing laws regulating or requiring licenses for certain businesses (such as gambling, online auctions, distribution of pharmaceuticals, alcohol, tobacco, firearms, insurance, securities brokerage, or legal services) apply to search services, online advertising, and our business. The costs of complying or failure to comply with these laws and regulations could limit our ability to operate in our market (including limiting our ability to distribute our services; conduct targeted advertising; collect, use, or transfer user information; or comply with new data security requirements), expose us to compliance costs and substantial liability, and result in costly and time-consuming litigation. It is impossible to predict whether or when any new legislation may be adopted or existing legislation or regulatory requirements will be deemed applicable to us, any of which could materially and adversely affect our business.

 

The FTC has recommended that search engine providers delineate paid-ranking search results from non-paid results. To the extent that we are required to modify presentation of search results as a result of specific regulations or requirements that may be issued in the future by the FTC or other state or federal agencies or legislative bodies with respect to the nature of such delineation or other aspects of advertising in connection with

 

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search services, revenue from the affected search engines could be negatively impacted. Addressing these regulations may require us to develop additional technology or otherwise expend significant time and expense.

 

Due to the nature of the Internet, it is possible that the governments of states and foreign countries might attempt to regulate Internet transmissions, through data protection laws amongst others, or institute proceedings for violations of their laws. We might unintentionally violate such laws, such laws may be modified, and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) could increase the costs of regulatory compliance for us or force us to change our business practices.

 

RISKS RELATED TO OUR TAX PREPARATION BUSINESS

 

The tax preparation market is very competitive, and failure to effectively compete will adversely affect our financial results.

 

Our TaxACT business operates in a very competitive marketplace. There are many competing software products and online services, including two competitors who have a significant percentage of the software and online service market: Intuit’s TurboTax and H&R Block’s products and services. Our TaxACT business must also compete with alternate methods of tax preparation, including “pencil and paper” do-it-yourself return preparation by individual filers and storefront tax preparation services, including both local tax preparers and large chains such as H&R Block, Liberty, and Jackson Hewitt. Finally, our TaxACT business faces the risk that state or federal taxing agencies will offer software or systems to provide direct access for individual filers that will reduce the need for TaxACT’s software and services. Our financial results will suffer if we cannot continue to offer software and services that have quality and ease-of-use that are compelling to consumers; market the software and services in a cost effective way; offer ancillary services that are attractive to users; and develop the software and services at a low enough cost to be able to offer them at a competitive price point.

 

The seasonality of our Tax Preparation business requires a precise development and release schedule and any delays or issues with accuracy or quality may damage our reputation and harm our future financial results.

 

Our tax preparation software and online service must be ready to launch in final form near the beginning of each calendar year to take advantage of the full tax season. We must update the code for our software and service each year to account for annual changes in tax laws and regulations. Delayed and unpredictable changes to federal and state tax laws and regulations can cause an already tight development cycle to become even more challenging. We must develop our code on a precise schedule that both incorporates all such changes and ensures that the software and service are accurate. If we are unable to meet this precise schedule and we launch our software and service late, we risk losing customers to our competitors. If we cannot develop our software with a high degree of accuracy and quality, we risk errors in the tax returns that are generated. Such errors could result in loss of reputation, lower customer retention, or legal fees and payouts related to the warranty on our software and service.

 

The hosting, collection, use, and retention of personal customer information and data by our TaxACT business create risk that may harm our business.

 

Our TaxACT business collects, uses, and retains large amounts of customer personal and financial information, including information regarding income, family members, credit cards, tax returns, bank accounts, social security numbers, and healthcare. Some of this personal customer information is held by third-party vendors that process certain transactions. In addition, as many of our products and services are web-based, the amount of data we store for our users on our servers (including personal information) has been increasing and will continue to increase as we further evolve our businesses. We and our vendors use security technologies to protect transactions and personal information and use security and business controls to limit access and use of personal information. However, individuals or third parties, including rogue employees, contractors, temporary workers, vendors, business partners, or hackers, may be able to circumvent these security and business measures.

 

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In addition, our clients may access our online tax preparation services from their computers and mobile devices, install and use our tax preparation software on their computers and mobile devices, and access online banking services from their computers and mobile devices. Because our business model relies on our clients’ use of their own personal computers, mobile devices, and the Internet, computer viruses and other attacks on our clients’ personal computer systems and mobile devices could create losses for our clients even without any breach in the security of our systems, and could thereby harm our business and our reputation.

 

If we are unable to develop, manage, and maintain critical third party business relationships for our TaxACT business, it may be adversely affected.

 

Our TaxACT business is dependent on the strength of our business relationships and our ability to continue to develop, maintain, and leverage new and existing relationships. We rely on various third party partners, including software and service providers, suppliers, vendors, distributors, contractors, financial institutions, licensing partners, among others, in many areas of this business to deliver our services and products. In certain instances, the products or services provided through these third party relationships may be difficult to replace or substitute, depending on the level of integration of the third party’s products or services into, or with, our offerings and/or the general availability of such third party’s products and services. In addition, there may be few or no alternative third party providers or vendors in the market. The failure of third parties to provide acceptable and high quality products, services, and technologies or to update their products, services, and technologies may result in a disruption to our business operations, which may reduce our revenues and profits, cause us to lose customers, and damage our reputation. Alternative arrangements and services may not be available to us on commercially reasonable terms or we may experience business interruptions upon a transition to an alternative partner.

 

In particular, our TaxACT business has relationships with banks, credit unions or other financial institutions, both as customers and as suppliers of certain critical services we offer to our other customers. If any of these institutions fail, consolidate, stop providing certain services, or institute cost-cutting efforts, our results may suffer and we may be unable to offer those services to our customers.

 

We may be unable to effectively adapt to changing government regulations relating to tax preparation, which may harm our operating results.

 

The tax preparation industry is heavily regulated at the state and federal level, and is frequently subject to significant new and revised laws and regulations. The application of these laws and regulations to our businesses is often unclear and compliance with these regulations may involve significant costs or require changes to our business practices. Any changes to our business practices that result from a change to laws or regulations, or from any change in the interpretation of a law or regulation (for example due to a court ruling or an administrative ruling or interpretation), may result in a negative impact on our operating results. We are also required to comply with a variety of IRS and state revenue agency standards in order to successfully operate our tax preparation and electronic filing services. Changes in these requirements, including the required use of specific technologies or technology standards, may significantly increase the costs of providing those services to our customers and may prevent us from delivering a quality product to our customers in a timely manner.

 

In order to meet regulatory standards, we may be required to increase investment in compliance and auditing functions or new technologies. In addition, government authorities may enact other laws, rules or regulations that place new burdens or restrictions on our business or determine that our operations are directly subject to existing rules or regulations, such as requirements related to data collection, use, transmission, retention, processing and security, which may make our business more costly, less efficient or impossible to conduct, and may require us to modify our current or future products or services, which may harm our future financial results.

 

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Restrictions on our ability to offer certain financial products related to our tax preparation services may harm our financial results.

 

We offer certain financial products related to our tax preparation software and services, and we generate some of our Tax Preparation segment revenue from such products. These products include prepaid debit cards on which a tax filer may receive his or her tax return and the ability of certain of our users to have the fees for our services deducted from their tax return. Any regulation of these products by state or federal governments, or any competing products offered by state and federal tax collection agencies could impact our revenue from these financial products. In addition, litigation brought by consumers or state or federal agencies relating to these products may result in additional restrictions on the offering of these products. To the extent that any additional restrictions on our tax preparation related financial products restrict our ability to offer such products, our financial results may suffer.

 

Unanticipated changes in income tax rates, deduction types, or the taxation structure may adversely affect our TaxACT business.

 

Changes in the way that the state and federal governments structure their taxation regimes may affect our results. The introduction of a simplified or flattened taxation structure may make our services less necessary or attractive to individual filers. We also face risk from the possibility of increased complexity in taxation structures, which may encourage some of our customers to seek professional tax advice instead of using our software or services. In the event that such changes to tax structures cause us to lose market share, our results may suffer.

 

If our TaxACT business fails to process transactions effectively or fails to adequately protect against disputed or potential fraudulent activities, our revenue and earnings may be harmed.

 

Our TaxACT business processes a significant volume and dollar value of transactions on a daily basis. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that fraudulent activity may affect our services. In addition to any direct damages and fines that any such problems may create, which may be substantial, a loss of confidence in our controls may seriously harm our business and damage our brand. The systems supporting our business are comprised of multiple technology platforms that are difficult to scale. If we are unable to effectively manage our systems and processes we may be unable to process customer data in an accurate, reliable, and timely manner, which may harm our business.

 

RISKS RELATED TO OUR E-COMMERCE BUSINESS

 

The electronics and accessories market is highly competitive, and failure to effectively compete will adversely affect our financial results.

 

The electronics and accessories market in which our Monoprice business sells products is highly competitive. All of Monoprice’s products face competition from many sellers of similar products, some of which are much larger and well-known than Monoprice. We attempt to offer products that provide similar quality and technology as those offered by our competitors, but at a lower price, and we attempt to do so with customer service and support that equals or exceeds that of many of our competitors. Many of our competitors have significant competitive advantages over us that may adversely affect our ability to successfully compete on price, quality, technology, service, or support, including larger scale, advanced research facilities, extensive experience in the industry, proprietary intellectual property, greater financial resources, more advanced and extensive supply chain and distribution capacity, better service and support capability, and stronger relationships with suppliers and resellers. If we are unable to successfully compete on price, quality, technology, service, or support, we may not be able to attract and retain customers.

 

We also face competition in attracting the attention of customers in a cost-effective manner. Many of our competitors have better brand recognition, have stronger distribution networks, and spend significantly more than

 

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us on marketing efforts. Our financial results depend on our ability to effectively attract customers at a cost that allows us to continue to offer low prices and maintain our margins, and if our efforts are not effective and cost-efficient, our financial results will suffer.

 

If we fail to accurately forecast customer demand, our inventory may either exceed demand or be insufficient to meet demand, which could harm our financial results.

 

We rely on our supplier network to manufacture our products, and as a result, we must forecast demand for our products well in advance of the sale of those products when placing orders from our suppliers. If our orders exceed eventual demand, we will have excess inventory, which will increase our inventory carrying costs, may increase risk that those products will become obsolete prior to sale, and may result in write-offs and/or significant price reductions of that inventory. If our orders are insufficient to meet demand, we may not be able to adequately replace that inventory to meet all customer orders in a timely manner, resulting in back-orders, potential lost sales, and negative customer experiences. Significant failure to accurately forecast customer demand may thus impact our short- and long-term financial results.

 

Our ability to be competitive depends on our ability to introduce new and updated products with sufficient speed to satisfy customers and thus maintain and grow our market share.

 

The electronics and accessories market is subject to frequent new product introductions, rapid advancements in technology, changes in industry standards, and evolving consumer preferences. Many of our electronics and accessories have short life cycles and/or must be updated frequently. Our future success depends on our ability to develop, introduce, and deliver on a timely basis, and in sufficient quantity, new products and enhancements to current products. The success of any new product or any update to a current product will depend on several factors, including our ability to:

 

   

Accurately predict features that are compelling to customers;

 

   

Acquire or develop technology to incorporate those features in our products;

 

   

Ensure that the design of products is appealing to consumers;

 

   

Arrange for the manufacture and delivery of a sufficient amount of the products on a timely and cost-effective basis; and

 

   

Ensure that the products are of sufficient quality to maintain customer satisfaction.

 

If we cannot successfully execute on the above factors, our offerings may not match customer demand, with the result that our inventory may become obsolete, we may not be able to maintain or grow sales, our reputation may suffer, and we may be unable to attract and retain customers.

 

Our ability to maintain and grow market share depends on our ability to offer quality products at price well below the average market price for such products.

 

We attempt to offer electronics and accessories at a price below our competitors’ prices for similar products, while still maintaining similar quality. Our ability to continue to offer quality products at lower prices depends on our ability to adequately source such products at sufficient quality, quantity, and cost and on our ability to keep other operating expenses proportionally low. Because prices for electronics and accessories tend to decline over time, our continued success will depend on our ability to offer some of our products at even lower prices in the future and on our ability to identify new products or product categories that we can offer at similar low prices. If we cannot continue to offer current products, and introduce new products, at such quality, quantity, and low cost, we will be unable to maintain or grow our revenues and our financial results will suffer.

 

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We depend on international third-party manufacturers to supply our electronics and accessories and risks related to the manufacture and shipping of our products could adversely affect our operations and financial results.

 

We outsource most of the manufacturing of our electronics and accessories to suppliers in Asia. We rely on the performance of these suppliers, and any problems with such performance could result in cost overruns, delayed deliveries, shortages, poor quality control, intellectual property issues (both theft of our intellectual property and infringement by our suppliers of the intellectual property of others), and compliance issues. Performance problems by our suppliers could result from many events, including the following: suppliers’ willful or unintentional breach of supply agreements; their failure to comply with applicable laws and regulations; labor unrest at their facilities; civil unrest; natural or human disasters at production or shipping facilities; equipment or other facility failures; their inability to acquire sufficient quantities or qualities of components or raw materials at expected prices; infrastructure problems in their countries (e.g., power or transportation infrastructure problems); their bankruptcy, insolvency, or other financial problems; and requests or requirements by their other customers that may conflict with our requirements. In addition, because most of our products are shipped from Asia, we face risks related to such shipping, including performance failures by our shipping partners and those of our suppliers, natural disasters, shipping equipment failure, and export and import regulation compliance issues.

 

The performance of our manufacturers, suppliers, and shippers is largely outside of our control. As the result of any performance failures, we may lose sales, or we may be required to adjust product designs, change production schedules, or develop suitable alternative contract manufacturers, suppliers, or shippers, which could result in delays in the delivery of products to our customers and/or increased costs. Any such delays, disruptions, or quality problems could adversely impact our ability to sell our products, harm our reputation, impair our customer relationships, and adversely affect our operations and financial results.

 

Our electronics and accessories could experience quality or safety defects that could result in damage to our reputation, require us to provide replacement products, or cause us to institute product recalls.

 

We expect that all of our electronics and accessories will meet or exceed all applicable standards for quality and safety. We monitor and attempt to address any quality or safety issues during the design and manufacturing processes, but some problems or defects may not be identified until after introduction and shipment of products to consumers. Resolving such problems or defects may result in increased costs related to production and shipment of replacement parts or products, increased customer support requirements, and redesign and manufacture or products. If we are unable to fix defects in a timely manner or adequately address quality control issues, our relationships with our customers may be impaired, our reputation may suffer, and we may lose customers. If the problems or defects result in a significant safety hazard, we may be forced to institute a product recall, resulting in negative publicity, loss of reputation, administrative costs, distraction of personnel from regular duties, and recall, refund, and replacement expenses. In addition, such product recalls may result in disputes with suppliers and customers or lead to adverse proceedings such as arbitration or litigation, which can be costly and expensive.

 

Product liability claims or regulatory actions could adversely affect our financial results or harm our reputation.

 

As the seller of consumer products, we face the possibility that there will be claims for losses or injuries caused by some of our products. In addition to the risk of substantial monetary judgments and penalties that could have a material effect on our financial condition and results of operations, product liability claims or regulatory actions could result in negative publicity that could harm our reputation in the marketplace. We also could be required to recall and possibly discontinue the sale of possible defective or unsafe products, which could result in adverse publicity and significant expenses. Although we maintain product liability insurance coverage, potential product liability claims may exceed the amount of coverage or could be excluded under the terms of the policy.

 

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If our products or operations, or those of our suppliers fail to comply with domestic and international government regulations, or if these regulations result in restrictions on our business, our results could be negatively impacted.

 

Our products and operations, and the operations of our suppliers and partners, must comply with various domestic and international laws, regulations, and standards, which are complicated and subject to interpretation. Failure by us or our partners to comply with existing or evolving laws or regulations, including export and import restrictions and barriers, or to obtain domestic or foreign regulatory approvals or certificates on a timely basis could result in restrictions on our operations or in our inability to obtain or sell certain products, with the result that our business may be adversely impacted.

 

We require that all of our suppliers comply with our design and product content specifications, ethical and human rights requirements, applicable laws (including product safety, security, labor, and environmental laws), and otherwise be certified as meeting our supplier code of conduct. While we do conduct a monitoring program to attempt to ensure compliance by our suppliers, our program cannot ensure 100% compliance. Any failure by our suppliers to comply with our supplier code of conduct, or with any other applicable standard, law, or regulation, could result in our inability or unwillingness to continue working with that supplier, additional monitor costs, and/or negative publicity and damage to our brand and reputation.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

Our principal corporate office is located in Bellevue, Washington, as are the operations for our Infospace business. We provide some data center services for our search operations from a third-party co-location facility located in Tukwila, Washington. The headquarters and data center facility for our TaxACT business are in Cedar Rapids, Iowa, and we have a disaster recovery center for our TaxACT business in Waukee, Iowa. The headquarters for our E-Commerce business is in Rancho Cucamonga, California. All of our facilities are leased. We believe our properties are suitable and adequate for our present and anticipated near-term needs.

 

ITEM 3. Legal Proceedings

 

See “Note 9: Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for information regarding legal proceedings.

 

ITEM 4. Mine Safety Disclosures

 

None.

 

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PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market for Our Common Stock

 

Our common stock trades on the NASDAQ Global Select Market under the symbol “BCOR.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market.

 

     High      Low  

Fiscal year ended December 31, 2013:

     

First Quarter

   $ 16.56       $ 14.44   

Second Quarter

   $ 19.11       $ 14.45   

Third Quarter

   $ 23.61       $ 19.12   

Fourth Quarter

   $ 29.82       $ 22.60   

Fiscal year ended December 31, 2012:

     

First Quarter

   $ 13.68       $ 10.99   

Second Quarter

   $ 13.45       $ 10.98   

Third Quarter

   $ 18.25       $ 12.07   

Fourth Quarter

   $ 18.24       $ 14.09   

 

On February 21, 2014, the last reported sale price for our common stock on the NASDAQ Global Select Market was $19.80 per share.

 

Holders

 

As of February 21, 2014, there were 445 holders of record of our common stock. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers, and other financial institutions.

 

Dividends

 

There were no dividends paid in 2013, 2012, or 2011. We currently intend to retain our earnings to finance future growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

Share Repurchases

 

See “Note 10: Stockholder’s Equity” of the Notes to Consolidated Financial Statements for additional information regarding the Company’s stock repurchase program. Share repurchase activity during the fourth quarter 2013 was as follows (in thousands, except per share data):

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid
per Share
     Total Number of
Shares  Purchased as
Part of Publicly

Announced Plans
or Programs
     Approximate Dollar Value
of Shares that May Yet be

Purchased under the Plans
or Programs
 

October 1 – 31, 2013

     —          —          —          —    

November 1 – 30, 2013

     —          —          —          —    

December 1 – 31, 2013

     226       $ 28.66         226       $ 40,010   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     226       $ 28.66         226       $ 40,010   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Unregistered Sales of Equity Securities

 

On November 21, 2013, we issued and sold 1.0 million shares of Common Stock to Cambridge Information Group I LLC (“CIG”) and CIG Equity Partners LLC, an entity managed by CIG, upon exercise of a warrant (the “Warrant”) originally issued to CIG in August 2011, for the aggregate exercise price of $9.62 million, which was paid in cash. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933.

 

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ITEM 6. Selected Financial Data

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II Item 7, our consolidated financial statements and notes thereto in Part II Item 8, and other financial information included elsewhere in this report. The selected consolidated statements of operations data and the consolidated balance sheet data are derived from our audited consolidated financial statements.

 

     Years ended December 31,  
     2013 (5)     2012 (4)     2011     2010     2009  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenues:

          

Services revenue

   $ 519,677      $ 406,919      $ 228,813      $ 214,343      $ 207,646   

Product revenue

     54,303        —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     573,980        406,919        228,813        214,343        207,646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     74,449        44,205        21,479        2,751        9,616   

Other income (loss), net (1)

     (29,623     (6,677     (1,246     15,247        (2,032
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     44,826        37,528        20,233        17,998        7,584   

Income tax benefit (expense) (1) (2)

     (20,427     (15,002     11,288        (8,725     (181
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     24,399        22,526        31,521        9,273        7,403   

Discontinued operations (3):

          

Loss from discontinued operations, net of taxes

     —         —         (2,253     (4,593     —    

Loss on sale of discontinued operations, net of taxes

     —         —         (7,674     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 24,399      $ 22,526      $ 21,594      $ 4,680      $ 7,403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income per share - Basic:

          

Income from continuing operations

   $ 0.59      $ 0.56      $ 0.83      $ 0.26      $ 0.21   

Loss from discontinued operations

     —         —         (0.06     (0.13     —    

Loss on sale of discontinued operations

     —         —         (0.20     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 0.59      $ 0.56      $ 0.57      $ 0.13      $ 0.21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used in computing basic income per share

     41,201        40,279        37,954        35,886        34,983   

Income per share - Diluted:

          

Income from continuing operations

   $ 0.56      $ 0.54      $ 0.82      $ 0.25      $ 0.21   

Loss from discontinued operations

     —         —         (0.06     (0.12     —    

Loss on sale of discontinued operations

     —         —         (0.20     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 0.56      $ 0.54      $ 0.56      $ 0.13      $ 0.21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used in computing diluted income per share

     43,480        41,672        38,621        36,829        35,431   

 

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     As of December 31,  
     2013      2012      2011      2010      2009  
     (in thousands)  

Consolidated Balance Sheet Data:

              

Cash, cash equivalents, short-term and long-term investments

   $ 333,705       $ 162,288       $ 293,551       $ 253,736       $ 226,397   

Working capital

     320,888         144,385         281,873         242,440         219,475   

Total assets

     978,030         585,293         395,139         352,720         322,216   

Total long-term liabilities (6)

     174,587         102,155         837         955         1,514   

Total stockholders’ equity

     514,070         415,450         355,105         301,771         279,835   

 

(1)   For a discussion of activity in 2011 through 2013, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II Item 7. In 2010, we recorded a $19.0 million net gain on a litigation settlement. The net gain allowed us to use a portion of our net operating loss carryforwards resulting in a net income tax expense of $6.6 million. In 2009, we recorded other-than-temporary impairment charges of $5.4 million.
(2)   In 2011, we recorded a reversal of $18.9 million of the valuation allowance related to our deferred tax assets.
(3)   We completed the sale of Mercantila on June 22, 2011. The operating results of this business have been presented as discontinued operations for 2011 and 2010.
(4)   On January 31, 2012, we acquired TaxACT, which generated $62.1 million of revenue in 2012.
(5)   On August 22, 2013, we acquired Monoprice, which generated $54.3 million of revenue in 2013.
(6)   During 2013, Monoprice entered into a credit facility agreement, and TaxACT entered into a new credit facility agreement (to replace the one entered into in 2012). These arrangements had total outstanding balances, net of any discounts and including any short-term portion, of $49.7 million and $71.4 million, respectively, as of December 31, 2013. During 2012, TaxACT entered into a credit facility agreement, under which $73.9 million, net of discount and including the short-term portion, was outstanding as of December 31, 2012. During 2013, the Monoprice acquisition resulted in a $27.7 million deferred tax liability related to intangible assets.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis in conjunction with the Selected Consolidated Financial Data and our consolidated financial statements and notes thereto included elsewhere in this report.

 

Introduction

 

Blucora operates a portfolio of leading internet businesses: an internet search business, an online tax preparation business, and an e-commerce business. The Search business, InfoSpace, provides search services to distribution partners’ web properties as well as to our owned and operated properties. The Tax Preparation business consists of the operations of TaxACT, which we acquired on January 31, 2012, and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. The E-Commerce business consists of the operations of Monoprice, which we acquired on August 22, 2013, and provides self-branded electronics and accessories to both consumers and businesses.

 

Our Businesses

 

Search

 

The majority of our revenues are generated by our Search segment. The InfoSpace search business primarily offers search services through the web properties of its distribution partners, which are generally private-labeled and customized to address the unique requirements of each distribution partner. The search business also distributes aggregated search content through its owned and operated websites, such as Dogpile.com and WebCrawler.com. Our search revenue primarily is derived from search content providers who provide paid search links for display as part of our search services. From these content providers, whom we refer to as our Search Customers, we license rights to certain search products and services, including both non-paid and paid search links. We receive revenues from our Search Customers when an end user of our web search services clicks on a paid search link that is provided by that Search Customer and displayed on one of our owned and operated web properties or displayed on the web property of one of our search distribution partners. Revenues are recognized in the period in which such paid clicks occur and are based on the amounts earned and remitted to us by our Search Customers for such clicks. Our main Search Customer agreements are with Google and Yahoo!. We derive a significant portion of our revenue from Google, and we expect this concentration to continue in the foreseeable future. For the year ended December 31, 2013, Search revenue from Google accounted for approximately 88% of our Search segment revenue and 66% of our total revenue.

 

Tax Preparation

 

Our TaxACT business consists of an online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. TaxACT generates revenue primarily through its online service at www.taxact.com. The TaxACT business's basic federal tax preparation online software service is "free for everyone," meaning that any taxpayer can use the services to e-file his or her federal income tax return without paying for upgraded services and may do so for every form that the IRS allows to be e-filed. This free offer differentiates TaxACT's offerings from many of its competitors who limit their free software and/or services offerings to certain categories of customers or certain forms. The TaxACT business generates revenue from a percentage of these "free" users who purchase a state form or choose to upgrade for a fee to the Deluxe or Ultimate product, which includes additional support, tools, or state forms in the case of the Ultimate offering. In addition, revenue is generated from the sale of ancillary services, which include, among other things, tax preparation support services, data archive services, bank and/or reloadable pre-paid debit card services, and additional e-filing services. TaxACT is the recognized value player in the digital do-it-yourself space, offering comparable software and/or services at a lower cost to the end user compared to larger competitors. This, coupled with its “free for everyone” offer, provides TaxACT a valuable marketing position. TaxACT's professional tax preparer software allows professional tax preparers to file individual returns for their clients. Revenue from professional tax preparers historically has constituted a relatively small percentage of the

 

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TaxACT business's overall revenue and requires relatively modest incremental development costs as the basic software is substantially similar to the consumer-facing software and online service.

 

On October 4, 2013, TaxACT acquired Balance Financial, a provider of web and mobile-based financial management software through its website www.balancefinancial.com.

 

E-Commerce

 

Our E-Commerce business, Monoprice, is an online retailer of self-branded electronics and accessories to both consumers and businesses. Monoprice offers its products for sale through the www.monoprice.com website, where the majority of our E-Commerce revenue is derived, and fulfills those orders from our warehouse in Rancho Cucamonga, California. We also sell our products through distributor, reseller, and marketplace agreements. Monoprice has built a well-respected consumer brand by delivering products with premium quality on par with well-known national brands, selling these products at prices far below the prices for those well-known brands, and providing top-tier service and rapid product delivery. The Monoprice website showcases 14 product categories and over 5,800 individual products. Monoprice has developed an efficient product cost structure that is enabled by a direct import supply chain solution that eliminates traditional layers of mark-ups imposed by intermediaries. Consumers are able to access and purchase products 24 hours a day from the convenience of a computer or a mobile device. Monoprice's team of customer service representatives assists customers primarily by online chat or email. Nearly all sales are to customers located in the United States.

 

Acquisitions and Dispositions

 

Monoprice:    On August 22, 2013, we acquired Monoprice for $182.9 million in cash, after a $0.4 million working capital adjustment in the fourth quarter of 2013. Monoprice is included in our financial results from August 22, 2013, the acquisition date, through December 31, 2013.

 

TaxACT:    On January 31, 2012, we acquired TaxACT for $287.5 million in cash, less certain transaction expenses, and subject to certain specified working capital adjustments. TaxACT is included in our financial results from January 31, 2012, the acquisition date, through December 31, 2013. Accordingly, the results discussed below were impacted by the timing of this acquisition, in which 2013 included twelve months of results while 2012 included eleven months. In addition, on October 4, 2013, TaxACT acquired Balance Financial.

 

Mercantila:    We sold Mercantila, Inc., an e-commerce company, to Zoo Stores, Inc. on June 22, 2011 for $0.3 million upon completion of the sale plus the right to receive additional consideration of up to $3.0 million contingent on liquidity or other events.

 

Seasonality

 

Our Tax Preparation segment is highly seasonal, with the significant majority of its annual revenue earned in the first four months of our 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 at relatively consistent levels. Revenue from our E-Commerce segment also is seasonal, with revenues historically being the lowest in the second quarter, a period that does not include consumer back-to-school or holiday-related spending. We anticipate that these seasonal effects will continue in the foreseeable future.

 

Comparability

 

We revised certain amounts for the year ended December 31, 2012 from the amounts previously reported in that period’s annual report on Form 10-K. We reclassified credit card fees previously reported in “Services cost of revenue” to “Sales and marketing” expense. The reclassification had no effect on our reported revenues, operating income, or cash flows for the year ended December 31, 2012. The comparable amount in 2011 was not material and, as a result, was not reclassified. Refer to “Note 1: The Company and Basis of Presentation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

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RESULTS OF OPERATIONS

 

Summary

 

(In thousands, except percentages)

   Years ended December 31,  
     2013      Percentage
Change
    2012      Percentage
Change
    2011  

Services revenue

   $ 519,677         28   $ 406,919         78   $ 228,813   

Product revenue, net

   $ 54,303         100     —          —          —    

Total revenues

   $ 573,980         41   $ 406,919         78   $ 228,813   

Operating income

   $ 74,449         68   $ 44,205         106   $ 21,479   

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

Total revenues increased $167.1 million due to an increase of $83.7 million in revenue related to our Search business driven by increases in revenue from distribution partners and owned and operated web properties, an increase of $29.1 million in our Tax Preparation business primarily due to the timing of the acquisition and, to a lesser extent, revenue growth in 2013, and the addition of $54.3 million in product revenue related to Monoprice.

 

Operating income increased $30.2 million due to the $167.1 million increase in revenue, partially offset by a $136.9 million increase in operating expenses. Key changes in operating expenses were:

 

   

$63.3 million increase in the Search segment’s operating expenses primarily as a result of higher Search distribution revenue in that segment and the resulting revenue share to our distribution partners and spending on our online marketing.

 

   

$18.6 million increase in the Tax Preparation segment’s operating expenses primarily due to the timing of the TaxACT acquisition.

 

   

$49.3 million increase in the E-Commerce segment’s operating expenses due to the acquisition of Monoprice in 2013.

 

   

$5.7 million increase in corporate-level expense activity, primarily as a result of amortization expense associated with the acquisitions of Monoprice and TaxACT and higher personnel expenses due to increased headcount to support operations. This was offset by lower stock-based compensation due to $5.2 million in expense recognized in 2012 related to the modification of the Warrant and the vesting of non-employee stock options upon completion of the TaxACT acquisition (for further detail on both items see “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report).

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Total revenues increased $178.1 million due to an increase of $116.0 million in revenue related to our Search business primarily due to growth in revenue from distribution partners and the addition of $62.1 million of revenue related to our acquisition of TaxACT.

 

Operating income increased $22.7 million due to the $178.1 million increase in revenue, partially offset by a $155.4 million increase in operating expenses. Key changes in operating expenses were:

 

   

$100.0 million increase in the Search segment’s operating expenses primarily as a result of higher Search revenue generated from distribution partners in that segment and the resulting revenue share to our distribution partners.

 

   

$32.1 million increase in the Tax Preparation segment’s operating expenses due to the acquisition of TaxACT in 2012.

 

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$23.3 million increase in corporate-level expense activity, primarily as a result of increased stock-based compensation and amortization expense associated with the TaxACT acquisition.

 

SEGMENT REVENUE/OPERATING INCOME

 

The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. (“GAAP”) and include certain reconciling items attributable to each of the segments. Segment information appearing in “Note 12: Segment Information” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of intangible assets, other loss, net, and income tax expense to segment operating results. We analyzed these separately.

 

Following the acquisitions of TaxACT and Monoprice, we determined that we have three reportable segments: Search, Tax Preparation, and E-Commerce.

 

Search

 

(In thousands, except percentages)

   Years Ended December 31,  
     2013     Percentage
Change
    2012     Percentage
Change
    2011  

Revenue

   $ 428,464        24   $ 344,814        51   $ 228,813   

Operating income

   $ 82,504        33   $ 62,185        35   $ 46,206   

Segment margin

     19       18       20

 

Search revenue:    Our ability to increase search revenue is dependent on our ability to attract and retain distribution partners and users of our owned and operated properties, which relies on providing a satisfying end user experience. In addition, providing an attractive monetization proposition, as well as support and service, for distribution partners, continues to be a key driver in our ability to grow distribution revenue.

 

Search operating income:    Because we share revenue with our distribution partners, the Search segment’s cost of revenue will increase if search services revenue generated through our distribution partners’ web properties increases. The cost of revenue also can be impacted by the mix of revenue generated by our distribution partners. In addition, we manage our online marketing by projecting a desired return on our marketing expenditures and attempting to market according to that projected return.

 

The following table presents our Search revenue by source and as a percentage of total Search revenue (in thousands, except for percentages):

 

    Years ended December 31,  
    2013     Percent of
Revenue
    2012     Percent of
Revenue
    2011     Percent of
Revenue
 

Revenue from existing distribution partners (launched prior to the then-current year)

  $ 321,954        75   $ 265,709        77   $ 169,745        75

Revenue from new distribution partners (launched during the then-current year)

    34,332        8     38,272        11     11,808        5
 

 

 

     

 

 

     

 

 

   

Revenue from distribution partners

    356,286        83     303,981        88     181,553        80

Revenue from owned and operated properties

    72,178        17     40,833        12     47,260        20
 

 

 

     

 

 

     

 

 

   

Total Search revenue

  $ 428,464        $ 344,814        $ 228,813     
 

 

 

     

 

 

     

 

 

   

 

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Year ended December 31, 2013 compared with year ended December 31, 2012

 

Search revenue increased $83.7 million primarily due to revenue generated by our distribution partners which increased by $52.3 million, or 17%, driven by a $56.2 million increase in revenue from existing partners (defined in table above). The increase in revenue from existing partners was offset by a $3.9 million decrease in revenue from new partners (defined in table above). We generated 33% and 47% of our search revenue through our top five distribution partners in 2013 and 2012, respectively. The web properties of our top five distribution partners for 2013 generated 42% of our search revenue in 2012. Further contributing to the increase was a $31.3 million, or 77%, increase in Search revenue generated from our owned and operated properties. The increase was primarily due to continued investment in online marketing to drive end users to our owned and operated properties.

 

Search operating income increased $20.3 million primarily due to the increase in revenue, offset by an increase of $63.3 million in operating expenses. Search services cost of revenue increased $35.7 million, or 15%, primarily driven by the increase in distribution revenue and the resulting revenue share to our distribution partners. The remaining increase in Search segment operating expenses was primarily due to a $26.7 million increase in spending on our online marketing, a $0.9 million increase in data center operations primarily related to moving the data center, and a $0.7 million increase in sales and marketing personnel expenses in support of our continued marketing initiatives.

 

Beginning on April 1, 2014, we will no longer display advertisements provided by Google’s AdSense for Search for search traffic that originates from mobile and tablet devices. For this mobile and tablet traffic, we instead intend to display mobile advertisements from other sources, including Yahoo!’s ad network. While the impact of this change is limited to a relatively small subset of our current Search business and may be offset partially by the alternative advertising sources, we expect this change will result in slowing of our Search revenue growth rate in 2014.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Search revenue increased $116.0 million primarily due to revenue generated by our distribution partners which increased by $122.5 million, or 67%, driven by a $96.0 million increase in revenue from existing partners and by a $26.5 million increase in revenue from new partners. We generated 47% of our search revenue through our top five distribution partners in both 2012 and 2011. The web properties of our top five distribution partners for 2012 generated 46% of our search services revenue in 2011. Offsetting the increase was a $6.5 million, or 14%, decrease in Search revenue generated from our owned and operated properties. This decrease was primarily a result of the expected attrition in the installed user base from our 2010 acquisition of Make The Web Better, resulting in fewer paid clicks.

 

Search operating income increased $16.0 million primarily due to the increase in revenue, offset by an increase of $100.0 million in operating expenses. Search services cost of revenue increased $101.2 million, or 70%, primarily driven by the increase in distribution revenue and the resulting revenue share to our distribution partners. Offsetting the increase in Search services cost of revenue was a net decrease in the remaining operating expenses associated with the Search segment, primarily driven by a $0.6 million decrease in business taxes.

 

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Tax Preparation

 

The Tax Preparation segment was new in 2012 due to our acquisition of TaxACT. Unless otherwise indicated, figures for the year ended December 31, 2012 reflect the results from January 31, 2012, the acquisition date, through December 31, 2012.

 

(In thousands, except percentages)

   Years ended December 31,  
     2013     Percentage
Change
    2012  

Revenue

   $ 91,213        47   $ 62,105   

Operating income

   $ 40,599        35   $ 30,052   

Segment margin

     45       48

 

Our ability to generate tax preparation revenue is largely driven by our ability to acquire new users of the service, retain existing users, and upsell users to paid products and services. We also generate revenue through the professional tax preparer software that we sell to professional tax preparers who use it to prepare and file individual returns for their clients. Revenue from the professional tax preparation product is derived in two ways: from per-unit licensing fees for the software and from amounts that we charge to e-file through the software. Revenue from professional tax preparers historically has constituted a relatively small percentage of the overall revenue for the TaxACT business.

 

We measure our individual tax preparation customers using the number of accepted federal tax e-filings made through our software and services. We refer to such tax filings as “e-files.” We consider growth in the number of e-files to be the most important non-financial metric in measuring the performance of the tax preparation business. Overall revenue is driven more by growth in e-files than by growth in revenue per user, which historically has grown modestly, because we have not made significant pricing adjustments. Because we acquired the TaxACT business on January 31, 2012, during the course of the 2012 tax season, we believe that presenting e-file metrics covering the same time periods as the financial results presented (and comparable period) would be misleading. Accordingly, we are presenting these metrics for e-filings made during each tax season's filing year through the end of the calendar year as follows (in thousands, except percentages):

 

     Years ended December 31,  
     2013      Percentage
Change
    2012      Percentage
Change
    2011  

TaxACT desktop e-files

     282        6     267         0     267   

TaxACT online e-files

     5,037        8     4,661         9     4,295   

TaxACT sub-total e-files

     5,319        8     4,928         8     4,562   

TaxACT Free File Alliance e-files (1)

     155        -7     167         -9     183   

TaxACT total e-files (2)

     5,474        7     5,095         7     4,745   

 

(1)   Free File Alliance e-files are provided as part of an IRS partnership that provides free electronic tax filing services to taxpayers meeting certain guidelines, based on income.
(2)   We redefined e-files in our Form 10-Q for the quarter ended March 31, 2013 to exclude e-filed extensions as we believe this is a more accurate metric in evaluating performance of the Tax Preparation segment. The figures set forth above for 2012 and 2013 reflect this change.

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

Tax Preparation revenue increased $29.1 million primarily due to the timing of the TaxACT acquisition. In addition, consumer tax preparation revenue increased in 2013 due to an increase in e-filings for the year.

 

Tax Preparation operating income increased $10.5 million primarily due to the increase in revenue, offset by an increase of $18.6 million in operating expenses that primarily were related to the timing of the TaxACT acquisition. The increase in operating expenses was amplified further by the fact that a relatively high percentage

 

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of tax season advertising occurs in January, a month that was included in 2013 results but not in 2012 results due to the timing of the TaxACT acquisition. In addition, personnel expenses increased mainly due to higher headcount supporting sales and marketing and general and administrative functions, while data center expenses grew primarily to support our online service offerings. These operating expense increases were offset by a $2.4 million decrease in Tax Preparation services cost of revenue primarily related to decreased bank service fees on our bank card product and royalties.

 

E-Commerce

 

The E-Commerce segment was new in 2013 due to our acquisition of Monoprice. Unless otherwise indicated, figures for the year ended December 31, 2013 reflect the results from August 22, 2013, the acquisition date, through December 31, 2013.

 

(In thousands, except percentages)

   Year ended
December 31,
2013
 

Revenue

   $ 54,303   

Operating income

   $ 4,967   

Segment margin

     9

 

The E-Commerce segment generates revenue by importing and selling self-branded consumer electronics and accessories for both consumers and businesses. Substantially all of our products are sold via the internet at www.monoprice.com. E-Commerce revenue growth largely is driven by our ability to increase the number of orders to new and existing consumer and business customers. Because we acquired the Monoprice business during the course of the year, we believe that presenting the percentage increase in the number of orders covering the same time period as the financial results presented (and comparable period) would not accurately reflect segment results of operations. Accordingly, we are presenting this metric for the entire calendar year and the comparable prior period as follows:

 

     Years ended
December 31,
 
       2013         2012    

Order Number Growth

     15     13

 

Our gross profit consists of net sales less the cost of sales. Our cost of sales includes the product cost, outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence. Shipping charges to receive products from our suppliers are included in our inventory and recognized as cost of revenues upon sale of products to our customers. Our gross profit margin has been consistent historically, and we expect it to continue to remain consistent based primarily on our efficient product cost structure enabled by a direct import supply solution.

 

The remaining operating expenses primarily consist of personnel expenses (which include salaries, stock-based compensation, benefits, and other employee-related costs) related to personnel engaged in sales and marketing (including fulfillment which includes purchasing, customer and technical support, receiving, inspection, and warehouse functions) and general and administrative activities, as well as marketing costs, credit card fees, temporary help, contractors, and facility costs.

 

The pro forma segment margin, excluding the impacts of purchase accounting, for fiscal year 2013 and 2012 was 12% and 11%, respectively.

 

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Corporate-Level Activity

 

(In thousands)

   Years ended December 31,  
     2013      Change     2012      Change     2011  

Operating expenses

   $ 13,829       $ 2,031      $ 11,798       $ 2,215      $ 9,583   

Stock-based compensation

     11,527         (1,696     13,223         5,535        7,688   

Depreciation

     4,476         664        3,812         (1,049     4,861   

Amortization of intangible assets

     23,789         4,590        19,199         16,604        2,595   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total corporate-level activity

   $ 53,621       $ 5,589      $ 48,032       $ 23,305      $ 24,727   

 

Certain corporate-level activity is not allocated to our segments, including certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, and amortization of intangible assets. For further detail, refer to segment information appearing in “Note 12: Segment Information” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

Operating expenses included in corporate-level activity increased primarily due to a $1.5 million increase in personnel expenses mainly related to increased headcount to support operations.

 

Stock-based compensation decreased primarily due to $5.2 million in expense recognized in 2012 related to the modification of the Warrant and the vesting of non-employee stock options upon completion of the TaxACT acquisition, offset by expense of $0.5 million in 2013 related to stock options that vested upon completion of the Monoprice acquisition (for further detail on both items see “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) as well as higher expense in 2013 related to increased equity award activity, including the issuance of equity awards to Monoprice employees.

 

Depreciation increased due to depreciation expense on fixed assets attributable to Monoprice.

 

Amortization of intangible assets increased primarily due to amortization expense related to intangibles acquired as part of the Monoprice acquisition and, to a lesser extent, amortization expense related to TaxACT intangibles due to the timing of the TaxACT acquisition.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Operating expenses included in corporate-level activity increased primarily due to a $1.4 million increase in personnel expenses mainly related to increased headcount to support operations and a combined increase of $0.9 million in professional service fees mainly related to the TaxACT acquisition, contractor fees to augment our staff, and public relations fees.

 

Stock-based compensation increased primarily due to expenses of $4.3 million and $0.9 million recorded in the first quarter of 2012 related to the modification of the Warrant and the vesting of non-employee stock options, respectively, upon completion of the TaxACT acquisition. Stock-based compensation of $1.9 million was recorded in 2011 related to the Warrant issuance. For further detail see “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. The remaining difference is primarily due to stock-based compensation associated with grants to TaxACT employees subsequent to the acquisition.

 

Depreciation decreased primarily due to a decrease in depreciation associated with the data center.

 

Amortization of intangible assets increased primarily due to amortization expense of $18.4 million related to TaxACT intangibles acquired, offset by a $1.8 million decrease in amortization expense associated with our installed code base technology for Make The Web Better (which we acquired in 2010), which is amortized proportional to expected revenue.

 

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OPERATING EXPENSES

 

Cost of Revenues

 

(In thousands, except percentages)

   Years Ended December 31,  
     2013     Change      2012     Change      2011  

Services cost of revenue

   $ 302,279      $ 36,334       $ 265,945      $ 110,983       $ 154,962   

Product cost of revenue

     38,181        38,181         —         —          —    
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total cost of revenues

   $ 340,460      $ 74,515       $ 265,945      $ 110,983       $ 154,962   

Percentage of revenues

     59        65        68

 

We record the cost of revenues for services and products when the related revenue is recognized. Services cost of revenue consists of costs related to Search and Tax Preparation segments, which includes revenue sharing arrangements with our distribution partners, usage-based content fees, royalties, and bank product service fees. In addition, services cost of revenue includes costs associated with the operation of the data centers that serve our Search and Tax Preparation businesses, which include personnel expenses (including salaries, stock-based compensation, benefits, and other employee-related costs), depreciation, and amortization of intangibles. Product cost of revenue consists of costs related to our E-Commerce segment, which includes product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence.

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

Services cost of revenue increased primarily due to increased Search services cost of revenue of $35.7 million driven by the increase in revenue generated from distribution partners and the resulting revenue share to our distribution partners, $2.8 million increase in data center operations primarily due to the timing of the TaxACT acquisition and higher personnel expenses from increased headcount to support our online service offering, and, to a lesser extent, increased data center expenses related to the migration of the Search data center to the cloud in 2013. These increases were offset by a $2.4 million decrease in Tax Preparation services cost of revenue primarily related to decreased bank service fees on our bank card product and royalties.

 

Product cost of revenue represents costs related to Monoprice.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Services cost of revenue increased primarily due to increased Search services cost of revenue of $101.2 million driven by the increase in revenue generated from distribution partners and the resulting revenue share to our distribution partners, in addition to increases in Tax Preparation services cost of revenue of $3.2 million and data center operations of $2.5 million, related to the TaxACT acquisition. In addition, amortization expense increased $5.0 million of which $6.8 million related to TaxACT intangibles acquired, offset by a $1.8 million decrease in amortization expense associated with our installed code base technology for Make The Web Better which is amortized proportional to expected revenue. The above increases were offset by a $1.0 million decrease in depreciation expense related to the Search data center.

 

Engineering and Technology

 

(In thousands, except percentages)

   Years ended December 31,  
     2013     Change      2012     Change      2011  

Engineering and technology

   $ 11,682      $ 1,713       $ 9,969      $ 2,811       $ 7,158   

Percentage of revenues

     2        3        3

 

Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, including personnel expenses (which include salaries, stock-based compensation,

 

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benefits, and other employee-related costs), as well as the cost of temporary help and contractors to augment our staffing, software support and maintenance, bandwidth and hosting, and professional service fees.

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

Engineering and technology expenses increased, of which $1.4 million was attributable to Monoprice, the majority of which was personnel-related.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Engineering and technology expenses increased primarily due to a $2.5 million increase in personnel expenses attributable to TaxACT.

 

Sales and Marketing

 

(In thousands, except percentages)

   Years ended December 31,  
     2013     Change      2012     Change      2011  

Sales and marketing

   $ 98,682      $ 53,038       $ 45,644      $ 24,134       $ 21,510   

Percentage of revenues

     17        11        9

 

Sales and marketing expenses consist principally of marketing expenses associated with our TaxACT and Monoprice websites (which include television, radio, online display, text, and email channels), our owned and operated web search properties (which consist of traffic acquisition, including our online marketing fees paid to search engines to drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel expenses (which include salaries, stock-based compensation, benefits, and other employee-related costs) for personnel engaged in marketing and selling activities, and fulfillment expenses primarily associated with our E-Commerce business. Fulfillment expenses include direct operating expenses (including personnel) relating to our purchasing, customer and technical support, receiving, inspection and warehouse functions, as well as the cost of temporary help and contractors, and credit card processing fees.

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

Sales and marketing expenses increased primarily due to a $44.3 million increase in marketing expenses, a $6.0 million increase in personnel expenses, and a $2.2 million increase in credit card processing fees. The increase in marketing expenses was driven by increased online marketing by our Search segment, the timing of the TaxACT acquisition further amplified by the fact that a relatively high percentage of tax season marketing occurs in January, a month that was included in 2013 results but not in 2012 results, and, to a lesser extent, the sales and marketing expense of Monoprice. Personnel expenses increased primarily due to Monoprice and, to a lesser extent, increased headcount in support of our Search and Tax Preparation businesses. Lastly, the increase in credit card processing fees was primarily attributable to Monoprice and, to a lesser extent, the timing of the TaxACT acquisition.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Sales and marketing expenses increased primarily due to a $17.5 million increase in marketing expenses, a $3.2 million increase in personnel expenses, and a $1.5 million increase in credit card processing fees, mainly attributable to TaxACT. In addition, personnel expenses increased $1.3 million primarily due to increased headcount as well as bonuses due to revenue generated by our distribution partners.

 

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General and Administrative

 

(In thousands, except percentages)

   Years ended December 31,  
     2013     Change      2012     Change      2011  

General and administrative

   $ 29,847      $ 2,429       $ 27,418      $ 5,876       $ 21,542   

Percentage of revenues

     5        7        9

 

General and administrative (“G&A”) expenses consist primarily of personnel expenses (which include salaries, stock-based compensation, benefits, and other employee-related costs), as well as the cost of temporary help and contractors to augment our staffing, professional service fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, and taxes and insurance expenses.

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

G&A expenses increased primarily due to a $0.5 million increase in personnel expenses, consisting of a $2.9 million increase in salaries, benefits, and other employee-related costs attributable to increased corporate and TaxACT headcount in the current year to support operations as well as increased headcount with the Monoprice acquisition, offset by a $2.4 million net decrease in stock-based compensation. The $2.4 million net decrease in stock-based compensation included $5.2 million in expense recognized in 2012 related to the modification of the Warrant and the vesting of non-employee stock options upon completion of the TaxACT acquisition, offset by expense of $0.5 million in 2013 related to stock options that vested upon completion of the Monoprice acquisition (for further detail on both items see “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) as well as higher expense in 2013 related to increased equity award activity, including the issuance of equity awards to Monoprice employees. The remaining increase in G&A expenses related to non-personnel expenses attributable to Monoprice, increases in professional services, and, to a lesser extent, non-personnel expenses attributable to TaxACT due to the timing of the TaxACT acquisition.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

G&A expenses increased primarily due to a $5.4 million increase in personnel expenses attributable to increased stock-based compensation of $3.3 million, consisting of $4.3 million and $0.9 million recorded in the first quarter of 2012 related to modification of the Warrant and the vesting of non-employee stock options, respectively, due to the TaxACT acquisition. Stock-based compensation of $1.9 million was recorded in 2011 related to the Warrant issuance. For further detail see “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. The remaining increase in personnel expenses was primarily due to a $1.2 million increase in personnel costs related to the TaxACT acquisition and a $0.9 million increase in salaries and benefits due to an increase in headcount and bonus related expenses.

 

Depreciation and Amortization of Intangible Assets

 

(In thousands, except percentages)

   Years ended December 31,  
     2013     Change      2012     Change     2011  

Depreciation

   $ 2,739      $ 620       $ 2,119      $ (43   $ 2,162   

Amortization of intangible assets

     16,121        4,502         11,619        11,619        —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total depreciation and amortization of intangible assets

   $ 18,860      $ 5,122       $ 13,738      $ 11,576      $ 2,162   

Percentage of revenues

     3        3       1

 

Depreciation of property and equipment includes depreciation of computer equipment and software, office equipment and furniture, and leasehold improvements not recognized in cost of revenues. Amortization of definite-lived intangible assets primarily includes the amortization of customer relationships, which are amortized over their estimated lives.

 

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Year ended December 31, 2013 compared with year ended December 31, 2012

 

Depreciation increased due to depreciation expense on fixed assets attributable to Monoprice.

 

Amortization of intangible assets increased primarily due to amortization expense related to intangibles acquired as part of the Monoprice acquisition and, to a lesser extent, amortization expense related to TaxACT intangibles due to the timing of the TaxACT acquisition.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

Amortization of intangible assets increased due to the amortization of intangible assets acquired as part of the TaxACT acquisition.

 

Other Loss, Net

 

(In thousands)

   Years ended December 31,  
     2013     Change     2012     Change     2011  

Interest income

   $ (300   $ (169   $ (131   $ 238      $ (369

Interest expense

     9,463        5,941        3,522        3,522        —    

Amortization of debt issuance costs

     1,108        288        820        820        —    

Accretion of debt discounts

     2,838        2,513        325        325        —    

Loss on debt extinguishment and modification expense

     1,593        1,593        —         —         —    

Loss on derivative instrument

     11,652        9,306        2,346        2,346        —    

Impairment of equity investment in privately-held company

     3,711        3,711        —         —         —    

Increase (decrease) in fair value of earn-out contingent liability

     (300 )     (300     —         (3,000     3,000   

Gain on contingency resolution

     —         —         —         1,500        (1,500

Other

     (142     63        (205     (320     115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other loss, net

   $ 29,623      $ 22,946      $ 6,677      $ 5,431      $ 1,246   

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

The increases in interest expense, amortization of debt issuance costs, and accretion of debt discounts were primarily related to the Monoprice credit facility entered into on November 22, 2013 and the Convertible Senior Notes issued on March 15, 2013, offset by slight decreases in the same categories related to the TaxACT credit facilities.

 

Loss on debt extinguishment and modification expense was related to the refinancing of the TaxACT credit facility on more favorable terms.

 

On November 21, 2013, the Warrant was exercised to purchase 1.0 million shares of Blucora common stock. The increase in the fair value of the Warrant, driven primarily by an increase in the value of our common stock, during 2013 through the exercise date was $11.7 million, resulting in a loss on derivative instrument. Refer to “Note 5: Fair Value Measurements,” “Note 7: Derivative Instruments and Hedging Activities,” and “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report for more information.

 

In 2013, in connection with a review of our equity method investments for other-than-temporary impairment, we determined that our equity investment in a privately-held company had experienced an other-than-temporary decline in value, due to recurring losses from operations, significant personnel reductions, and a change in the underlying business model. Accordingly, we wrote down the $3.7 million carrying value of the investment to zero, resulting in a loss.

 

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Year ended December 31, 2012 compared with year ended December 31, 2011

 

Interest expense, amortization of debt issuance costs, and accretion of debt discounts related to the 2012 credit facility entered into by TaxACT to finance the TaxACT acquisition. The loss on derivative instrument related to the increase in the fair value of the Warrant, which was classified as a derivative instrument subsequent to its modification triggered on the date of the TaxACT acquisition on January 31, 2012 (see “Note 11: Stock-Based Compensation” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report).

 

The financial performance of Make The Web Better, acquired on April 1, 2010, was greater than expected. As a result, the fair value of the related contingent consideration increased, and an additional charge of $3.0 million was recorded in 2011. Also in 2011, we recorded a gain of $1.5 million related to the resolution of a contingent liability.

 

Income Taxes

 

During 2013, we recorded an income tax expense on continuing operations of $20.4 million. Income tax differed from the taxes at the statutory rates primarily due to the non-deductible loss on the Warrant derivative (see “Note 10: Stockholders’ Equity” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) and an increase in the valuation allowance against deferred tax assets that were capital in nature.

 

During 2012, we recorded an income tax expense on continuing operations of $15.0 million. Income tax differed from the taxes at the statutory rates primarily due to the non-deductible loss on the Warrant derivative and non-deductible stock-based compensation.

 

During 2011, we recorded an income tax benefit on continuing operations of $11.3 million. Income tax differed from the taxes at the statutory rates primarily due to a release of the valuation allowance against deferred tax assets not attributable to stock-based compensation.

 

At December 31, 2013, we had gross temporary differences representing future tax deductions of $709.2 million, primarily comprised of $643.3 million of net operating loss carryforwards, which represented deferred tax assets. We applied a valuation allowance against the net operating loss carryforwards and certain other deferred tax assets. If, in the future, we determine that the realization of any additional portion of the deferred tax assets is more likely than not to be realized, we will record a benefit to the income statement or additional paid-in-capital, as appropriate.

 

Loss from Discontinued Operations and Loss on Sale of Discontinued Operations

 

On June 22, 2011, we sold our Mercantila e-commerce business to Zoo Stores, Inc. The results of operations from that business are reflected as discontinued operations for all periods presented (in thousands):

 

     Year ended
December 31,
2011
 

Revenue from discontinued operations

   $ 16,894   
  

 

 

 

Loss from discontinued operations before taxes

   $ (3,506

Income tax benefit

     1,253   
  

 

 

 

Loss from discontinued operations, net of taxes

   $ (2,253
  

 

 

 

Loss on sale of discontinued operations, net of an income tax benefit of $5,092

   $ (7,674
  

 

 

 

 

Loss from discontinued operations includes previously unallocated depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to Mercantila.

 

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NON-GAAP FINANCIAL MEASURES

 

Adjusted EBITDA:    We define Adjusted EBITDA as net income, determined in accordance with GAAP, excluding the effects of discontinued operations (which includes loss from discontinued operations and loss on sale of discontinued operations, both net of taxes), income taxes, depreciation, amortization of intangible assets, stock-based compensation, and other loss, net (which primarily includes items such as interest income, interest expense, amortization of debt issuance costs, accretion of debt discount, losses on debt extinguishment and modification expense, gains or losses on derivative instrument, other-than-temporary impairment losses on equity investments, and adjustments to the fair values of contingent liabilities related to business combinations).

 

We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income. Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of our Adjusted EBITDA to net income, which we believe to be the most comparable GAAP measure, is presented below (in thousands):

 

     Years ended December 31,  
     2013      2012      2011  

Net income

   $ 24,399       $ 22,526       $ 21,594   

Discontinued operations

     —          —          9,927   

Depreciation and amortization of intangible assets

     28,265         23,011         7,456   

Stock-based compensation

     11,527         13,223         7,688   

Other loss, net

     29,623         6,677         1,246   

Income tax (benefit) expense

     20,427         15,002         (11,288
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 114,241       $ 80,439       $ 36,623   
  

 

 

    

 

 

    

 

 

 

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

The increase in Adjusted EBITDA was due to increases in segment operating income of $20.3 million and $10.5 million related to our Search and Tax Preparation segments, respectively, driven by growth in the Search segment and the timing of the TaxACT acquisition, as well as segment operating income of $5.0 million for our E-Commerce segment which was new in 2013 due to the Monoprice acquisition. Offsetting the increases in segment operating income was a $1.5 million increase in corporate personnel expenses not allocated to the segments mainly related to increased headcount to support operations.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

The increase in Adjusted EBITDA was due to an increase in segment operating income of $16.0 million related to our Search segment, driven by growth in that segment, as well as segment operating income of $30.1 million for our Tax Preparation segment which was new in 2012 due to the TaxACT acquisition. Offsetting the increases in segment operating income was a $1.4 million increase in corporate personnel expenses not allocated to the segments mainly related to increased headcount to support operations and a combined increase of $0.9 million in professional service fees mainly related to the TaxACT acquisition, contractor fees to augment our staff, and public relations expenses.

 

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Non-GAAP net income:    We define non-GAAP net income differently for this report than we have defined it in the past, due to the refinance of the 2012 credit facility and impairment of equity investment in a privately-held company. For this report, we define non-GAAP net income as net income, determined in accordance with GAAP, excluding the effects of discontinued operations (which includes loss from discontinued operations and loss on sale of discontinued operations, both net of taxes), stock-based compensation, amortization of acquired intangible assets, accretion of debt discount on the Convertible Senior Notes, loss on debt extinguishment and modification expense, gains or losses on derivative instrument, other-than-temporary impairment losses on equity investment, the related cash tax impact of those adjustments, and non-cash income taxes from continuing operations. Non-cash income tax expense represents a reduction to cash taxes payable associated with the utilization of deferred tax assets, which primarily consist of U.S. federal net operating losses. The majority of these deferred tax assets will expire, if unutilized, between 2020 and 2024. Our new definition of non-GAAP net income does not impact presentation of this non-GAAP financial measure for prior periods.

 

We believe that non-GAAP net income and non-GAAP net income per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or have not been, or are not expected to be, settled in cash. Additionally, we believe non-GAAP net income and non-GAAP net income per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP net income should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income. Other companies may calculate non-GAAP net income differently, and, therefore, our non-GAAP net income may not be comparable to similarly titled measures of other companies. A reconciliation of our non-GAAP net income to net income, which we believe to be the most comparable GAAP measure, is presented below (in thousands, except per share amounts):

 

     Years ended December 31,  
     2013     2012     2011  

Net income

   $ 24,399      $ 22,526      $ 21,594   

Discontinued operations

     —         —         9,927   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     24,399        22,526        31,521   

Stock-based compensation

     11,527        13,223        7,688   

Amortization of acquired intangible assets

     23,789        19,199        2,595   

Accretion of debt discount on Convertible Senior Notes

     2,674        —         —    

Loss on derivative instrument

     11,652        2,346        —    

Impairment of equity investment in privately-held company

     3,711        —         —    

Loss on debt extinguishment and modification expense

     1,593        —         —    

Cash tax impact of adjustments to GAAP net income

     (189     (93     (40

Non-cash income tax (benefit) expense from continuing operations

     18,538        13,559        (13,000
  

 

 

   

 

 

   

 

 

 

Non-GAAP net income

   $ 97,694      $ 70,760      $ 28,764   
  

 

 

   

 

 

   

 

 

 

 

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     Years ended December 31,  
     2013      2012      2011  

Income from continuing operations - diluted

   $ 0.56       $ 0.54       $ 0.82   

Stock-based compensation - diluted

     0.26         0.32         0.19   

Amortization of acquired intangible assets - diluted

     0.55         0.46         0.07   

Accretion of debt discount on Convertible Senior Notes - diluted

     0.06         —          —    

Loss on derivative instrument - diluted

     0.27         0.06         —    

Impairment of equity investment in privately-held company - diluted

     0.09         —          —    

Loss on debt extinguishment and modification expense - diluted

     0.03         —          —    

Cash tax impact of adjustments to GAAP net income - diluted

     0.00         0.00         0.00   

Non-cash income tax (benefit) expense from continuing operations - diluted

     0.43         0.32         (0.34
  

 

 

    

 

 

    

 

 

 

Non-GAAP net income per share - diluted

   $ 2.25       $ 1.70       $ 0.74   
  

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding used in computing non-GAAP diluted net income per share and its components

     43,480         41,672         38,621   
  

 

 

    

 

 

    

 

 

 

 

Year ended December 31, 2013 compared with year ended December 31, 2012

 

The increase in non-GAAP net income was primarily due to a $20.3 million and $10.5 million increase in Search and Tax Preparation segment income, respectively, driven by growth in the Search segment and the timing of the TaxACT acquisition, as well as $5.0 million in segment operating income for our new E-Commerce segment due to the Monoprice acquisition. Offsetting the increases in segment operating income was an $8.7 million increase in interest expense and associated debt costs related to the Monoprice credit facility entered into in November 2013 and the Convertible Senior Notes issued in March 2013, partially offset by decreased interest expense and associated debt costs on TaxACT’s credit facilities, and a $1.5 million increase in corporate personnel expenses not allocated to the segments primarily related to increased headcount to support operations.

 

Year ended December 31, 2012 compared with year ended December 31, 2011

 

The increase in non-GAAP net income was primarily due to a $16.0 million and $30.1 million increase in Search and Tax Preparation segment income, respectively, driven by growth in the Search segment and the TaxACT acquisition. In addition, there was a decrease in data center asset depreciation of $1.0 million and a 2011 charge of $3.0 million related to the increase in the fair value of contingent consideration associated with the greater than expected financial performance of Make The Web Better. Offsetting the increases in segment operating income was a $4.6 million increase in interest expense and associated debt costs related to the TaxACT 2012 credit facility, a gain of $1.5 million related to the resolution of a contingent liability in 2011, a $1.4 million increase in corporate personnel expenses not allocated to the segments primarily related to increased headcount to support operations, and a $0.9 million combined increase in professional service fees mainly related to the TaxACT acquisition, contractor fees to augment our staff, and public relations expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, Cash Equivalents, and Short-Term Investments

 

Our principal source of liquidity is our cash, cash equivalents, and short-term investments. As of December 31, 2013, we had cash and marketable investments of $333.7 million, consisting of cash and cash equivalents of $130.2 million and available-for-sale short-term investments of $203.5 million. We generally invest our excess cash in high quality marketable investments. These investments include securities issued by U.S. government agencies, commercial paper, money market funds, municipal bonds, and time deposits. All of our financial instrument investments held at December 31, 2013 had minimal default risk and short-term maturities.

 

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We have financed our operations primarily from cash provided by operating activities. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating, working capital, and capital expenditure requirements for at least the next 12 months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate. For further discussion of the risks to our business related to liquidity, see the paragraph in our Risk Factors (Part I Item 1A of this report) under the heading “Existing cash and cash equivalents, short-term investments, and cash generated from operations may not be sufficient to meet our anticipated cash needs for working capital and capital expenditures.”

 

Use of Cash

 

We may use our cash, cash equivalents, and short-term investments balance in the future on investment in our current businesses, in acquiring new businesses or assets, for repayment of debt, or for stock repurchases. Such businesses or assets may not be related to Search, Tax Preparation, or E-Commerce, and such acquisitions will result in further transaction-related costs. We currently are focused on the following areas: improving the search services and tax preparation services and products offered to our end users, maintaining our current search distribution partners and tax preparation customers, adding new search distribution partners and tax preparation customers, expanding our tax preparation product offerings, increasing the number of e-commerce orders through existing and new consumer and business customers, e-commerce product category expansion and diversification, e-commerce revenue expansion into new geographic areas, continuing to build our e-commerce brand recognition, and seeking opportunities to use our resources to acquire and integrate new businesses and assets. Within our Search, Tax Preparation, and E-Commerce businesses, engineering, operations, and product management personnel remain paramount to our ability to enhance our current technology, increase our distribution network and customer reach for the Search business, deliver high quality tax preparation services for the Tax Preparation business, and provide superior product value and customer service for the E-Commerce business. As a result, we expect to continue to invest in our workforce and research and development operations.

 

On August 22, 2013, we acquired Monoprice for $182.9 million in cash. The acquisition of Monoprice was funded from our available cash. On November 22, 2013, Monoprice entered into a $70.0 million credit facility agreement for the purposes of post-transaction financing of the Monoprice acquisition and providing future working capital flexibility for Monoprice. The final maturity date of the credit facility is November 22, 2018. The interest rate is variable, based upon choices from which Monoprice elects. The credit facility includes financial and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined further in the agreement. We were in compliance with these covenants as of December 31, 2013. Monoprice initially borrowed $50.0 million under the credit facility, receiving net proceeds of approximately $49.3 million. For further detail, see “Note 8: Debt” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

On March 15, 2013, we issued $201.25 million principal amount of 4.25% Convertible Senior Notes (the “Notes”). The Notes are due April 1, 2019, unless earlier purchased, redeemed, or converted in accordance with their terms. The Notes bear interest at a rate of 4.25% per year, payable semi-annually on April 1 and October 1 of each year beginning on October 1, 2013. We received net proceeds from the offering of approximately $194.8 million. There are no financial or operating covenants relating to the Notes. As of May 2013, we are permitted to settle any conversion obligation under the Convertible Senior Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. We intend to satisfy any conversion premium by issuing shares of our common stock. For further detail, see “Note 8: Debt” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

On January 31, 2012, we acquired TaxACT for $287.5 million in cash. The TaxACT acquisition was funded from our cash reserves and from the net proceeds of borrowings under a $105.0 million credit facility. TaxACT initially borrowed $100.0 million under this credit facility, receiving net proceeds of approximately $96.7 million. During 2012, we repaid $25.5 million. In April 2013, we repaid an additional $10.0 million of the

 

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debt outstanding. On August 30, 2013, TaxACT refinanced its obligations under the original credit facility for the purpose of obtaining more favorable terms. The new credit facility consists of a $100.0 million revolving credit commitment that reduces to $90.0 million on August 30, 2014, to $80.0 million on August 30, 2015, and to $70.0 million on August 30, 2016. The final maturity date of the new credit facility is August 30, 2018. The interest rate is variable, based upon choices from which TaxACT elects. The new credit facility includes financial and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined further in the agreement, as well as certain restrictions on TaxACT’s payments to the Company. We were in compliance with these covenants as of December 31, 2013. TaxACT borrowed approximately $71.4 million under the new credit facility, of which $65.4 million was used to pay off the previous credit facility and $6.0 million was an additional draw in October 2013. For further detail, see “Note 8: Debt” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

Pursuant to a stock repurchase program approved by our board of directors, we may purchase up to $50.0 million of our common stock in open-market transactions through February 6, 2015. During the year ended December 31, 2013, we purchased 417,159 shares of our common stock in open market transactions at a total cost of $10.0 million. As of December 31, 2013, we may repurchase an additional $40.0 million of our common stock under our repurchase program. For further detail, see “Note 10: Stockholders’ Equity” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

Contractual Obligations and Commitments

 

Our contractual obligations and commitments are as follows for years ending December 31 (in thousands):

 

    2014     2015     2016     2017     2018     Thereafter     Total  

Operating lease commitments

  $ 2,687      $ 2,413      $ 1,894      $ 1,933      $ 1,783      $ 2,546      $ 13,256   

Purchase commitments

    646        437        92        62        —         —         1,237   

Debt commitments

    8,000        8,000        8,000        8,000        89,384        201,250        322,634   

Interest on Convertible Senior Notes

    8,553        8,553        8,553        8,553        8,553        4,277        47,042   

Escrow for acquisition-related indemnifications

    —         735        —         —         —         —         735   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19,886      $ 20,138      $ 18,539      $ 18,548      $ 99,720      $ 208,073      $ 384,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For further detail see “Note 9: Commitments and Contingencies” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

Off-balance Sheet Arrangements

 

We have no off-balance sheet arrangements other than operating leases.

 

Unrecognized Tax Benefits

 

The above table does not reflect unrecognized tax benefits of approximately $0.6 million, the timing of which is uncertain. For additional discussion on unrecognized tax benefits see "Note 14: Income Taxes" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

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Cash Flows

 

Our cash flows were comprised of the following (in thousands):

 

     Years ended December 31,  
     2013     2012     2011  

Net cash provided by operating activities

   $ 95,056      $ 48,831      $ 25,263   

Net cash used by investing activities

     (303,693     (165,073     (115,473

Net cash provided by financing activities

     270,584        102,623        23,256   

Net cash used by discontinued operations

     —         —         (6,794
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 61,947      $ (13,619   $ (73,748
  

 

 

   

 

 

   

 

 

 

 

Net cash from operating activities:    Net cash from operating activities consists of net income, offset by certain non-cash adjustments, and changes in our working capital.

 

Net cash provided by operating activities was $95.1 million, $48.8 million, and $25.3 million for the years ended December 31, 2013, 2012, and 2011, respectively. The activity in 2013 included $48.3 million of net income (offset by non-cash adjustments) and a $46.7 million working capital contribution. The working capital contribution continued to be driven by accrued expenses and the impact of excess tax benefits from stock-based activity primarily due to utilizing equity net operating loss carryforwards from prior years. The contribution from deferred revenue was attributable to TaxACT revenue arrangements. The amounts from accounts receivable and accounts payable reflected balances assumed in the Monoprice acquisition and higher Search distribution revenue and the resulting revenue share to our distribution partners.

 

The activity in 2012 included $30.3 million of net income (offset by non-cash adjustments) and an $18.5 million working capital contribution. The working capital contribution was driven by accrued expenses and the impact of excess tax benefits from stock-based activity. The contribution from deferred revenue was attributable mainly to TaxACT revenue arrangements. While amounts from accounts receivable and accounts payable were influenced by higher Search distribution revenue and the resulting revenue share to our distribution partners, these were offset by balances assumed in the TaxACT acquisition.

 

The activity in 2011 included $28.0 million of net income (offset by non-cash adjustments) and a working capital reduction of $2.7 million. The amounts from accounts receivable and accounts payable (net of accrued expenses) were influenced by higher Search distribution revenue and the resulting revenue share to our distribution partner.

 

Net cash from investing activities:    Net cash from investing activities primarily consists of cash outlays for business acquisitions, transactions (purchases, as well as proceeds from sales and maturities) related to our investments, and purchases of property and equipment. Our investing activities tend to fluctuate from period to period primarily based upon the level of acquisition activity.

 

Net cash used by investing activities was $303.7 million, $165.1 million, and $115.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. The activity in 2013 primarily consisted of the acquisitions of Monoprice and Balance Financial for a combined $185.0 million (net of cash acquired of $2.8 million) and net cash outlays on our available-for-sale investments of $112.5 million. The activity in 2012 primarily consisted of the acquisition of TaxACT for $279.4 million (net of cash acquired of $8.1 million) offset by net cash inflows on our available-for-sale investments of $117.8 million. The activity in 2011 primarily consisted of net cash outlays on our available-for-sale investments of $113.4 million.

 

Net cash from financing activities:    Net cash from financing activities primarily consists of transactions related to the issuance of debt and stock. Our financing activities tend to fluctuate from period to period based

 

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upon our financing needs due to the level of acquisition activity and market conditions that present favorable financing opportunities.

 

Net cash provided by financing activities was $270.6 million, $102.6 million, and $23.3 million for the years ended December 31, 2013, 2012, and 2011, respectively. The activity for 2013 primarily consisted of $250.1 million in combined net proceeds from the Convertible Senior Notes, Monoprice credit facility, and TaxACT 2013 credit facility, $29.4 million in excess tax benefits from stock-based activity primarily due to utilizing equity net operating loss carryforwards from prior years, and $13.5 million in combined proceeds from the issuance of common stock related to stock option exercises, the employee stock purchase plan, and the Warrant exercise. These cash inflows were offset by a $10.0 million payment on the TaxACT 2012 credit facility and stock repurchases of $10.0 million.

 

The activity for 2012 primarily consisted of $96.7 million in net proceeds from the TaxACT 2012 credit facility, $23.0 million in excess tax benefits from stock-based activity primarily due to utilizing equity net operating loss carryforwards from prior years, and $9.7 million in combined proceeds from the issuance of common stock related to stock option exercises and the employee stock purchase plan. These cash inflows were offset by a $25.5 million payment on the TaxACT 2012 credit facility.

 

The activity for 2011primarily consisted of $24.4 million in combined proceeds from the issuance of common stock related to stock option exercises, the employee stock purchase plan, and a stock sale agreement (for further detail see Note 10: “Stockholders’ Equity” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report) and $1.3 million in excess tax benefits generated by stock-based award activity.

 

Net cash used by discontinued operations:    Net cash used by operating activities attributable to discontinued operations in 2011 was $6.8 million and was related to the sale of Mercantila to Zoo Stores, Inc. on June 22, 2011.

 

Critical Accounting Policies and Estimates

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the disclosures included elsewhere in this Annual Report on Form 10-K, is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingencies. In some cases, we could have reasonably used different accounting policies and estimates.

 

The SEC has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of the company’s financial condition and results of operations and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, current conditions, and on various other assumptions that we believe to be reasonable under the circumstances and, based on information available to us at that time, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identify and assess our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We also have other accounting policies that involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see “Note 2: Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

Search services revenue recognition:    The majority of our revenues are generated from our web search services. The Search business does not generate its own search content for its web search services but instead

 

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aggregates search content from a number of content providers. Some of these content providers, such as Google and Yahoo!, pay us to distribute their content, and those providers are referred to as “Search Customers”. We generate search services revenue when an end user of such services clicks on a paid search link provided by a Search Customer and displayed on a distribution partners’ web property or on one of our owned and operated web properties. The Search Customer that provided the paid search link receives a fee from the advertiser who paid for the click and the Search Customer pays us a portion of that fee. Revenue is recognized in the period in which the services are provided (i.e., when a paid search occurs) and is based on the amounts earned by and ultimately remitted to us. This revenue is recorded in the Search segment.

 

Under our agreements with our Search Customers and our distribution partners, we are the primary obligor, separately negotiate each revenue or unit pricing contract independent of any revenue sharing arrangements, and assume the credit risk for amounts invoiced to our Search Customers. For search services, we determine the paid search results, content, and information directed to our owned and operated websites and our distribution partners’ web properties.

 

We earn revenue from our Search Customers by providing paid search results generated from our owned and operated web properties and from our distribution partners’ web properties based on separately negotiated and agreed-upon terms with each distribution partner. Consequently, we record search services revenue on a gross basis.

 

Tax preparation revenue recognition:    We derive service revenue from the sale of tax preparation online services, ancillary service offerings, packaged tax preparation software, and multiple element arrangements that may include a combination of these items. Ancillary service offerings include tax preparation support services, data archive services, bank or reloadable pre-paid debit card services, e-filing services, and other value-added services. This revenue is recorded in the Tax Preparation segment.

 

Our Tax Preparation segment revenue consists primarily of hosted tax preparation online services, tax preparation support services, data archive services, and e-filing services. We recognize revenue from these services as the services are performed and the four revenue recognition criteria as described in “Note 2: Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report are met.

 

We recognize revenue from the sale of our packaged software when legal title transfers. This is generally when our customers download the software from the Web or when the software ships.

 

The bank or reloadable prepaid debit card services are offered to taxpayers as an option to receive their tax refunds in the form of a prepaid bank card or to have the fees for the software and/or services purchased by the customers deducted from their refunds. Other value-added service revenue consists of revenue from revenue sharing and royalty arrangements with third party partners. Revenue for these transactions is recognized when the four revenue recognition criteria described above are met; for some arrangements that is upon filing and for other arrangements that is upon our determination of when collectability is probable.

 

For software and/or services that consist of multiple elements, we must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of vendor-specific objective evidence (“VSOE”) of fair value if available, third-party evidence (“TPE”) of fair value if VSOE is not available, and estimated selling price (“ESP”) if neither VSOE nor TPE is available; and (3) allocate the total price among the various elements based on the relative selling price method. Once we have allocated the total price among the various elements, we recognize revenue when the revenue recognition criteria described above are met for each element.

 

VSOE generally exists when we sell the deliverable separately. When VSOE cannot be established, we attempt to establish a selling price for each element based on TPE. TPE is determined based on competitor prices

 

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for similar deliverables when sold separately. When we are unable to establish selling price using VSOE or TPE, we use ESP in our allocation of arrangement consideration. ESP is the estimated price at which we would sell the software or service if it were sold on a stand-alone basis. We determine ESP for the software or service by considering multiple factors including, but not limited to, historical stand-alone sales, pricing practices, market conditions, competitive landscape, internal costs, and gross margin objectives.

 

In some situations, we receive advance payments from our customers. We defer revenue associated with these advance payments and recognize the allocated consideration for each element when we ship the software or perform the services, as appropriate. Advance payments related to data archive services are deferred and recognized over the related contractual term.

 

E-Commerce revenue recognition:    We derive product revenue from online sales of self-branded electronics and accessories to both consumers and businesses. We recognize product revenue from product sales when all four revenue recognition criteria, as outlined in “Note 2: Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report, have been met. Because we either (i) have a general practice of refunding customer losses for products damaged while in-transit despite selling terms indicating title transfers at the point of shipment or (ii) have FOB-destination shipping terms specifically set out in certain arrangements, delivery is deemed to have occurred at the point in time when the product is received by the customer. All amounts billed to a customer in a sale transaction related to shipping and handling, if any, represents revenues earned for the goods provided, and these amounts have been classified as “Product revenue”. Costs related to such shipping and handling billings are classified as “Product cost of revenue”.

 

We provide our customers with a thirty-day right of return. Return allowances, which reduce revenue, are estimated using historical experience.

 

Cost of revenues:    We record the cost of revenues for sales of products and services when the related revenue is recognized. “Services cost of revenue” consists of costs related to revenue sharing arrangements with our distribution partners, usage-based content fees, certain costs associated with the operation of our data centers that serve our Search and Tax Preparation businesses, including amortization of intangible assets, depreciation, personnel expenses (which include salaries, benefits, stock-based compensation, and other employee-related costs), bandwidth costs, bank service fees, and royalties. “Product cost of revenue” includes product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence. Shipping charges to receive products from our suppliers are included in inventory and recognized as product cost of revenue upon sale of products to customers.

 

Sales and marketing expenses:    Sales and marketing expenses consist principally of marketing expenses associated with our TaxACT and Monoprice websites (which include the following channels: television, radio, online display and text, and email), our owned and operated web search properties (which consist of traffic acquisition, including our online marketing, which includes fees paid to search engines to drive traffic to an owned and operated website, agency fees, brand promotion expense and market research expense), personnel costs (which include salaries, benefits, other employee-related costs, and stock-based compensation) for personnel engaged in marketing and selling activities, and fulfillment expenses primarily associated with our E-Commerce business. Fulfillment includes direct operating expenses (including personnel costs) relating to our purchasing, customer and technical support, receiving, inspection and warehouse functions, as well as the cost of temporary help and contractors, and credit card processing fees.

 

Stock-based compensation:    We measure stock-based compensation at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award using the straight-line method. We recognize stock-based compensation over the vesting period for each separately vesting portion of a share-based award as if they were individual share-based awards. We estimate forfeitures at the time of grant and revise those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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Calculating stock-based compensation relies upon certain assumptions, including the expected term of the stock-based awards, expected stock price volatility, expected interest rate, number and types of stock-based awards, and the pre-vesting forfeiture rate. If we use different assumptions due to changes in our business or other factors, our stock-based compensation could vary materially in the future.

 

Income taxes:    We account for income taxes under the asset and liability method, under which deferred tax assets, including net operating loss carryforwards, and liabilities are determined based on temporary differences between the book and tax bases of assets and liabilities. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of the deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of the deferred tax assets, including the recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available for tax reporting purposes, and other relevant factors. There is a wide range of possible judgments relating to the valuation of our deferred tax assets.

 

For additional information about the realization of our deferred tax assets and our valuation allowance, see “Note 14: Income Taxes” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. For additional information about our net operating loss carryforwards, see the Risk Factor “If there is a change in our ownership within the meaning of Section 382 of the Internal Revenue Code, our ability to use our NOLs may be severely limited or potentially eliminated” in Part I Item 1A of this report. For additional information about expectations of future taxable income, see the Risk Factor “Our financial results may fluctuate, which could cause our stock price to be volatile or decline” in Part I Item 1A of this report.

 

Supplier concentration risk:    A material part of Monoprice’s business is dependent on two vendors. During the period from August 22, 2013, the date of the acquisition, to December 31, 2013, these unrelated vendors accounted for $6.7 million or 19% of Monoprice’s inventory purchases and at December 31, 2013 accounted for $2.4 million or 20% of Monoprice’s related accounts payable.

 

Inventories: Inventories, consisting of merchandise available for sale in the E-Commerce business, are accounted for using the first-in-first-out (“FIFO”) method of accounting and are valued at the lower of cost or market. Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.

 

Business combinations and intangible assets including goodwill:    We account for business combinations using the acquisition method, and, accordingly, the identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. Goodwill is calculated as the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for the installed code base technology which is amortized proportional to expected revenue. 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.

 

Goodwill and intangible assets:    We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change to indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The fair value of the reporting units is estimated using discounted cash flows. Forecasts of future cash flows are based on best estimates of future net sales and operating expenses.

 

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Intangible assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable.

 

Impairment losses are recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

 

In the dynamic search, tax preparation and e-commerce industries, there is significant uncertainty about the future. Unforeseen events such as market disruptions and deterioration of the macroeconomic environment, or internal challenges such as reorganizations, employee and management turnover, operational cash flows, and other trends that could have material negative impacts on our key assumptions in determining fair values, could lead to a decision to impair goodwill and/or intangible assets in future periods.

 

Equity method investments:    We currently hold equity securities and warrants to purchase equity securities in companies whose securities are not publicly traded. The equity method is used to account for investments in these companies, if the investment provides us with the ability to exercise significant influence over operating and financial policies of the investees. We record our proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investment may have experienced a decline in value. See “Note 13: Other Loss, Net" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

Debt issuance costs and debt discounts:    Debt issuance costs and debt discounts are deferred and amortized as interest expense under the effective interest method over the contractual term of the related debt, adjusted for prepayments in the case of our credit facilities.

 

Debt issuance costs related to the Convertible Senior Notes issued in 2013 were allocated to the liability and equity components of the instrument. The debt issuance costs allocated to the liability component are amortized to interest expense through the earlier of the maturity date of the Notes or the date of conversion, if any. The debt issuance costs allocated to the equity component of the Notes were recorded as an offset to “Additional paid-in capital.”

 

Derivative instruments and hedging:    We recognize derivative instruments as either assets or liabilities at their fair value. We record changes in the fair value of the derivative instruments as gains or losses either in “Other loss, net” on the consolidated statements of comprehensive income or in “Accumulated other comprehensive loss” on the consolidated balance sheets.

 

Regarding hedging, the Company used a derivative financial instrument in the form of an interest rate swap agreement for the purpose of minimizing exposure to changes in interest rates, until the swap was terminated at break-even on September 10, 2013. The Company had no other swap agreements outstanding as of December 31, 2013. This swap agreement was accounted for as a cash flow hedge and changes in the fair value of the hedge instrument were included in “Other comprehensive income (loss).” The hedge was perfectly effective through termination, and no ineffectiveness was recorded to “Other loss, net” in the consolidated statements of comprehensive income.

 

Recent Accounting Pronouncements

 

See “Note 2: Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

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Quarterly Results of Operations (Unaudited)

 

The following table presents a summary of our unaudited consolidated results of operations for the eight quarters ended December 31, 2013. The information for each of these quarters has been prepared on a basis consistent with our annual audited consolidated financial statements. You should read this information in conjunction with our consolidated financial statements and notes thereto in Part II Item 8. The operating results for any quarter are not necessarily indicative of results for any future period.

 

    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
    (in thousands except per share data)  

Revenues:

               

Services revenue

  $ 115,696      $ 100,883      $ 92,870      $ 97,470      $ 165,338      $ 117,181      $ 109,491      $ 127,667   

Product revenue, net

    —         —         —         —         —         —         14,630        39,673   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    115,696        100,883        92,870        97,470        165,338        117,181        124,121        167,340   

Operating expenses:

               

Cost of revenues:

               

Services cost of revenue

    58,676        63,714        69,918        73,637        76,987        69,352        72,935        83,005   

Product cost of revenue

    —         —         —         —         —         —         10,622        27,559   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    58,676        63,714        69,918        73,637        76,987        69,352        83,557        110,564   

Engineering and technology

    2,573        2,448        2,410        2,538        2,538        2,508        2,905        3,731   

Sales and marketing

    20,314        9,382        7,796        8,152        38,484        14,695        18,230        27,273   

General and administrative

    11,066        5,356        5,283        5,713        6,384        6,557        8,421        8,485   

Depreciation

    535        532        560        492        517        524        697        1,001   

Amortization of intangible assets

    2,113        3,168        3,169        3,169        3,169        3,168        4,184        5,600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    95,277        84,600        89,136        93,701        128,079        96,804        117,994        156,654   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    20,419        16,283        3,734        3,769        37,259        20,377        6,127        10,686   

Other income (loss), net

    (1,555     (930     (5,196     1,004        (1,005     (6,304     (13,118     (9,196
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    18,864        15,353        (1,462     4,773        36,254        14,073        (6,991     1,490   

Income tax benefit (expense)

    (7,458     (5,655     (936     (953     (12,646     (5,667     510        (2,624
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 11,406      $ 9,698      $ (2,398   $ 3,820      $ 23,608      $ 8,406      $ (6,481   $ (1,134
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per share:

               

Basic

  $ 0.29      $ 0.24      $ (0.06   $ 0.09      $ 0.58      $ 0.20      $ (0.16   $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.28      $ 0.23      $ (0.06   $ 0.04      $ 0.53      $ 0.20      $ (0.16   $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

               

Basic

    39,692        40,116        40,511        40,789        40,911        41,050        41,088        41,566   

Diluted

    40,978        41,245        40,511        42,411        44,294        42,724        41,088        41,566   

 

57


Table of Contents
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 

Revenues:

               

Services revenue

    100.0     100.0     100.0     100.0     100.0     100.0     88.2     76.3

Product revenue, net

    —         —         —         —          —         —         11.8        23.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0   

Operating expenses:

               

Cost of revenues:

               

Services cost of revenue

    50.7        63.3        75.3        75.5        46.6        59.2        58.8        49.6   

Product cost of revenue

    —         —         —         —          —         —         8.5        16.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    50.7        63.3        75.3        75.5        46.6        59.2        67.3        66.1   

Engineering and technology

    2.2        2.4        2.6        2.5        1.5        2.1        2.3        2.2   

Sales and marketing

    17.6        9.2        8.3        8.4        23.3        12.6        14.7        16.3   

General and administrative

    9.6        5.3        5.7        5.9        3.9        5.6        6.8        5.1   

Depreciation

    0.5        0.5        0.6        0.5        0.3        0.4        0.6        0.6   

Amortization of intangible assets

    1.8        3.1        3.4        3.3        1.9        2.7        3.4        3.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    82.4        83.8        95.9        96.1        77.5        82.6        95.1        93.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    17.6        16.2        4.1        3.9        22.5        17.4        4.9        6.4   

Other income (loss), net

    (1.3     (1.0     (5.7     1.0        (0.6     (5.4     (10.5     (5.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    16.3        15.2        (1.6     4.9        21.9        12.0        (5.6     0.9   

Income tax benefit (expense)

    (6.4     (5.6     (1.0     (1.0     (7.6     (4.8     0.4        (1.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    9.9     9.6     (2.6 )%      3.9     14.3     7.2     (5.2 )%      (0.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to financial market risks, including changes in the market values of our debt investments and interest rates.

 

Financial market risk:    We do not invest in financial instruments or their derivatives for trading or speculative purposes. By policy, we limit our credit exposure to any one issuer, other than securities issued by the U.S. federal government and its agencies, and do not have any derivative instruments in our investment portfolio. The three primary goals that guide our investment decisions, with the first being the most important, are: preserve capital, maintain ease of conversion into immediate liquidity, and achieve a rate of return over a pre-determined benchmark. Our investment portfolio at December 31, 2013 included debt instruments issued by the U.S. federal government and its agencies, publicly-held corporations, municipalities, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S. federal government. As of December 31, 2013, we invested exclusively in debt instruments with minimal default risk and maturity dates of less than one year from the end of any of our quarterly accounting periods. We consider the market value, default, and liquidity risks of our investments to be low at December 31, 2013.

 

Interest rate risk:    As of December 31, 2013, all of the debt securities that we held were fixed-rate earning instruments that carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. At December 31, 2013, our cash equivalent balances of $55.5 million were primarily held in commercial paper and taxable municipal bonds, and our short-term investment balances of $203.5 million were primarily held in U.S. government securities and taxable municipal bonds. We consider the interest rate risk for our cash equivalent and marketable fixed-income securities held at December 31, 2013 to be low. For further detail on our cash equivalent and short-term investment holdings, please see “Note 5: Fair Value Measurements” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report.

 

In addition, as of December 31, 2013, we have $121.4 million of debt outstanding under the Monoprice and TaxACT 2013 credit facilities, which carries a degree of interest rate risk. These debts have a floating portion of their interest rates tied to the London Interbank Offered Rate (“LIBOR”). For further information on our outstanding debt, see “Note 8: Debt” of the Notes to Consolidated Financial Statements in Part II Item 8 of this report. A hypothetical 100 basis point increase in LIBOR on December 31, 2013 would result in a $4.9 million increase in our interest expense until the scheduled maturity dates in 2018.

 

The following table provides information about our cash equivalent and marketable fixed-income securities as of December 31, 2013, including principal cash flows for 2014 and thereafter and the related weighted average interest rates. The change in fair values during 2013 was less than $0.1 million for our cash equivalent and marketable fixed-income securities and was recorded in other comprehensive income. Principal amounts and weighted average interest rates by expected year of maturity are as follows (in thousands, except percentages):

 

     2014     Thereafter      Total     Fair Value  

U.S. government securities

   $ 64,385         0.15     —          —        $ 64,385         0.15   $ 64,514   

Commercial paper

     32,500         0.14     —          —          32,500         0.14     32,495   

Money market funds

     9,391         0.00     —          —          9,391         0.00     9,391   

Time deposits

     10,374         0.33     —          —          10,374         0.33     10,379   

Taxable municipal bonds

     139,875         0.32     —          —          139,875         0.32     142,205   
  

 

 

      

 

 

       

 

 

      

 

 

 

Cash equivalents and marketable fixed-income securities

   $ 256,525           —           $ 256,525         $ 258,984   
  

 

 

      

 

 

       

 

 

      

 

 

 

 

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Table of Contents
ITEM 8. Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

BLUCORA, Inc.

   Page  

Report of Independent Registered Public Accounting Firm

     61   

Consolidated Balance Sheets

     63   

Consolidated Statements of Comprehensive Income

     64   

Consolidated Statements of Stockholders’ Equity

     65   

Consolidated Statements of Cash Flows

     66   

Notes to Consolidated Financial Statements

     67   

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Blucora, Inc.

 

We have audited the accompanying consolidated balance sheets of Blucora, Inc. as of December 31, 2013 and 2012 and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blucora, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Blucora, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 27, 2014 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

 

Seattle, Washington

February 27, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Blucora, Inc.

Bellevue, Washington

 

We have audited the accompanying consolidated statements of comprehensive income, stockholders’ equity, and cash flows of Blucora, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of Blucora, Inc. and its subsidiaries’ operations and their cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ DELOITTE & TOUCHE LLP

 

Seattle, Washington

March 9, 2012 (March 7, 2013 as to the 2011

amounts in Note 12)

 

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Table of Contents

BLUCORA, INC.

 

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)

 

     December 31,  
     2013     2012  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 130,225      $ 68,278   

Short-term investments, available-for-sale

     203,480        94,010   

Accounts receivable, net of allowance of $62 and $10

     48,081        34,932   

Other receivables

     8,292        3,942   

Inventories

     28,826        —    

Prepaid expenses and other current assets, net

     9,774        10,911   
  

 

 

   

 

 

 

Total current assets

     428,678        212,073   

Property and equipment, net

     16,108        7,533   

Goodwill

     348,957        230,290   

Other intangible assets, net

     178,064        132,815   

Other long-term assets

     6,223        2,582   
  

 

 

   

 

 

 

Total assets

   $ 978,030      $ 585,293   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 61,268      $ 37,687   

Accrued expenses and other current liabilities

     31,109        13,280   

Deferred revenue

     7,510        3,157   

Short-term portion of long-term debt, net

     7,903        4,590   

Convertible senior notes, net

     181,583        —    

Derivative instruments

     —         8,974   
  

 

 

   

 

 

 

Total current liabilities

     289,373        67,688   

Long-term liabilities:

    

Long-term debt, net

     113,193        69,278   

Deferred tax liability, net

     56,861        29,333   

Deferred revenue

     1,814        1,319   

Other long-term liabilities

     2,719        2,225   
  

 

 

   

 

 

 

Total long-term liabilities

     174,587        102,155   
  

 

 

   

 

 

 

Total liabilities

     463,960        169,843   

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

    

Common stock, par value $.0001—authorized, 900,000 shares; issued and outstanding, 42,083 and 40,832 shares

     4        4   

Additional paid-in capital

     1,466,043        1,392,098   

Accumulated deficit

     (951,977     (976,376

Accumulated other comprehensive loss

     —         (276
  

 

 

   

 

 

 

Total stockholders’ equity

     514,070        415,450   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 978,030      $ 585,293   
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

BLUCORA, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

 

     Years ended December 31,  
     2013     2012     2011  

Revenues:

      

Services revenue

   $ 519,677      $ 406,919      $ 228,813   

Product revenue, net

     54,303        —         —    
  

 

 

   

 

 

   

 

 

 

Total revenues

     573,980        406,919        228,813   

Operating expenses:

      

Cost of revenues:

      

Services cost of revenue

     302,279        265,945        154,962   

Product cost of revenue

     38,181        —         —    
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     340,460        265,945        154,962   

Engineering and technology

     11,682        9,969        7,158   

Sales and marketing

     98,682        45,644        21,510   

General and administrative

     29,847        27,418        21,542   

Depreciation

     2,739        2,119        2,162   

Amortization of intangible assets

     16,121        11,619        —    
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     499,531        362,714        207,334   
  

 

 

   

 

 

   

 

 

 

Operating income

     74,449        44,205        21,479   

Other loss, net

     (29,623     (6,677     (1,246
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     44,826        37,528        20,233   

Income tax benefit (expense)

     (20,427     (15,002     11,288   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     24,399        22,526        31,521   

Discontinued operations:

      

Loss from discontinued operations, net of taxes

     —         —         (2,253

Loss on sale of discontinued operations, net of taxes

     —         —         (7,674
  

 

 

   

 

 

   

 

 

 

Net income

   $ 24,399      $ 22,526      $ 21,594   
  

 

 

   

 

 

   

 

 

 

Income per share—Basic:

      

Income from continuing operations

   $ 0.59      $ 0.56      $ 0.83   

Loss from discontinued operations

     —         —         (0.06

Loss on sale of discontinued operations

     —         —         (0.20
  

 

 

   

 

 

   

 

 

 

Basic net income per share

   $ 0.59      $ 0.56      $ 0.57   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used in computing basic income per share

     41,201        40,279        37,954   

Income per share—Diluted:

      

Income from continuing operations

   $ 0.56      $ 0.54      $ 0.82   

Loss from discontinued operations

     —         —         (0.06

Loss on sale of discontinued operations

     —         —         (0.20
  

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 0.56      $ 0.54      $ 0.56   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used in computing diluted income per share

     43,480        41,672        38,621   

Other comprehensive income:

      

Net income

   $ 24,399      $ 22,526      $ 21,594   

Unrealized gain (loss) on available-for-sale investments

     11        (16     34   

Unrealized gain (loss) on derivative instrument

     266        (266     —    

Reclassification adjustment for realized gains on available-for-sale investments included in net income

     (1     (26     —    
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     276        (308     34   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 24,675      $ 22,218      $ 21,628   
  

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

BLUCORA, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

    Common stock     Additional-
paid-in

capital
    Accumulated
deficit
    Accumulated
other
comprehensive
income
       
    Shares     Amount           Total  

Balance, December 31, 2010

    36,089      $ 4      $ 1,322,265      $ (1,020,496   $ (2   $ 301,771   

Common stock issued for stock options and restricted stock units

    2,627        —          17,121        —          —          17,121   

Common stock issued for employee stock purchase plan

    54        —          377        —          —          377   

Sale of common stock

    764        —          7,000        —          —          7,000   

Other comprehensive income

    —          —          —          —          34        34   

Tax effect of equity compensation

    —          —          1,260        —          —          1,260   

Stock-based compensation

    —          —          7,734        —          —          7,734   

Taxes paid on stock issued for equity awards

    —          —          (1,786     —          —          (1,786

Net income

    —          —          —          21,594        —          21,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    39,534        4        1,353,971        (998,902     32        355,105   

Common stock issued for stock options and restricted stock units

    1,236        —          9,025        —          —          9,025   

Common stock issued for employee stock purchase plan

    62        —          601        —          —          601   

Other comprehensive loss

    —          —          —          —          (308     (308

Tax effect of equity compensation

    —          —          22,693        —          —          22,693   

Stock-based compensation

    —          —          13,344        —          —          13,344   

Taxes paid on stock issued for equity awards

    —          —          (1,318     —          —          (1,318

Reclassification of equity award to liability award

    —          —          (6,218     —            (6,218

Net income

    —          —          —          22,526        —          22,526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

    40,832        4        1,392,098        (976,376     (276     415,450   

Common stock issued for stock options and restricted stock units

    584        —          2,841        —          —          2,841   

Common stock issued for employee stock purchase plan

    85        —          1,065        —          —          1,065   

Common stock issued upon Warrant exercise

    1,000        —          9,620        —